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TMI Blog2017 (6) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been incurred in relation to tax free income. The proximity cause of disallowance u/s 14A is its relationship with the tax exempt income. Wherever the expenses incurred has no relationship with the income not includible in the total income, there cannot be any occasion to invoke the provision for making the disallowance u/s 14A of the Act. Thus it can be concluded that at best further disallowance of ₹ 28,815/-, as agreed by the assessee, can be made. Thus, this ground of the assessee is partly allowed. Reworking of disallowance towards administrative expenses of ₹ 50,000/-, ad-hoc basis is concerned, during hearing the Ld. counsel for the assessee, claimed that no long term capital gain was earned by the assessee. The Ld. Assessing Officer made disallowance of ₹ 1 lakh on account of salary, printing and stationary, bank charges and general expenses, which were reduced to ₹ 50,000/- by the Ld. Commissioner of Income Tax (Appeal). Considering the totality of facts and the circumstances narrated before us, the disallowance on account of administrative expenses is reduced to ₹ 25,000/- as against ₹ 50,000/-, sustained by the Ld. Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was made by the assessee, thus, the disallowance was rightly made. 2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is engaged in the business of ship breaking, manufacturing of industrial gases, finance and investment in shares, declares income of ₹ 83,83,737/-. Subsequently, revised return was filed by the assessee to give effect of amalgamation of Haryana Industrial Gases Pvt. Ltd. and M/s Inducto Techno Casting Pvt. Ltd. with the assessee company, reflecting total income of ₹ 2,88,23,630/-. While doing so the Ld. Assessing Officer made disallowance of ₹ 1,81,880/- u/s 14A of the Act. As per the assessee, evidence of owning the sufficient funds was produced before the Assessing Officer, thus, there was no presumption that investment were made out of borrowed funds. The Ld. Commissioner of Income Tax (Appeal) upheld the addition. 2.2. The assessee preferred appeal before the Tribunal, wherein, vide order dated 09/09/2010, the matter was sent back to the file of the Assessing Officer to decide the quantum disallowance u/s 14A of the Act, in the light of the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Then, by the Finance Act, 2006, Section 14A was numbered as sub-section (1) thereof and after sub-section (1) as so numbered, the following sub-sections were inserted, with effect from 01/04/2007:- (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv) which says that any expenditure laid out or expended wholly an exclusively for the purpose of such business shall be deducted as an allowance. The mandate of section 10(2) (xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the act is not a relevant circumstance. 2.8. In Rajasthan State warehousing Corporation (supra), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian bank Ltd: 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd (supra) laid down the following principles:- (i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction admissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income - tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years. 2.11. As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC), the insertion of section 14 A with retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of the total income could not be allowed against other income includable in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A. (emphasis supplied) 2.13. Sub-section (1) of section 14A clearly stipulates that for the purposes of computing total income under Chapter IV (Computation of Total Income), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the said Act. A lot of emphasis was laid on the expressions incurred and in relation to . It was contended by ld. counsel, who appeared on behalf of the assesses, that the word incurred must be taken literally in the sense that the expenditure must have actually taken place. Moreover, the expenditure must also have taken place in relation to income which does not form part of total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. 2.17. We are of the view that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under section 14A. While we agree that the expression expenditure incurred refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the actual expenditure that is in contemplation under section 14A(1) of the Act is the actual expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the Act. 2.18. So far as, scope of Sub-section (2) of Section 14A of the Act, is concerned, it provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. 2.19. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is such method as may be prescribed . By virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. 2.21. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139- 140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of subsection (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured and unsecured loans during the period and incurred interest expenses of ₹ 24,41,879/-. It has been further observed that the assessee has not shown any interest income. The Ld. Commissioner of Income Tax (Appeal) has further observed that the transaction with related parties, contained in schedule-15 of the audited accounts, the assessee paid interest to HSDPL on loan transaction of ₹ 13.75 crores during the relevant period and made fresh investment of ₹ 1.53 crores. The crux of arguemtn of Ld. DR and observation of the Ld. Commissioner of Income Tax (Appeal) claims that there is diversion of borrowed funds, by the assessee, for non-business purposes, including investment in shares cannot be ruled out, therefore proportionate interest out of total interest expenditure of ₹ 24,41,879/-, attributable to such investment were disallowed, which works out of ₹ 2,71,715/-. Thus, the disallowance of interest expenditure u/s 14A was restricted to ₹ 2,71,715/- as against ₹ 18,73,981/-, determined by the Assessing Officer. We have perused the revised balance sheet as on 31/03/2006, wherein, in the current year, the share capital of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth by the CIT(A) and Tribunal-Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal) and East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) relied on. 2.26. Likewise, Hon'ble jurisdictional High Court in HDFC Bank Ltd. (supra) also held as under:- Section 14A of the Act would be inapplicable. However this was also disregarded by the impugned order on the ground that this Court did not entertain an appeal of the Revenue from the order of the Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law. (Para18) That if appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of High Court. (Para24) It is in the above view, that High Court set aside the impugned order of the Tribunal dated 23rd September, 2015 in its entirety and restore the issue to the Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the Tribunal to disregard the binding decisions of High Court, the grounds indicated in the impugned order which are not at all sustainable. (Para25) 2.27. In the light of the above decisions from Hon'ble jurisdictional High Court, it can be concluded that since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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