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TMI Blog2008 (5) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... e had not brought on record any material to prove the commercial expediency for the investment. 3. That the order of the ld. CIT(A)-1, Kanpur being erroneous in law and on facts be vacated and the order of the AO be restored. 3. The facts of the case are that assessee company is engaged in the business of housing development and building construction. During the year under consideration, a company named M/s Graceful Properties Ltd. was amalgamated to the assessee company with effect from 1.4.2003 as per order dated 30.1.2004 of Hon'ble High Court of Calcutta. All the assets and liabilities were merged and accounted for in the books of account of the assessee. Thereafter following six companies also merged with the assessee company with effect from 1.10.2003 as per order dated 18.3.2005 of Hon'ble High Court of Allahabad: 1. M/s Shilpi Builders Ltd. 2. M/s Ratan Apartments Pvt. Ltd. 3. M/s Khua Builders Pvt. Ltd. 4. M/s Prasanna Hotels Pvt. Ltd. 5. M/s Ratan Ashish Industries Ltd. 6. M/s Ratan MRI Centre Pvt. Ltd. 4. While examining the consolidated balance sheet of the assessee company, the AO noted that following investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany M/s Graceful Properties Ltd. has since been accounted for in the assessee company during the year and there is no existence of the merged company after the' amalgamation, the investment in share has to be treated as the investment of the company as on the date of amalgamation and afterwards. (iv) Had the assessee made payment to the hank instead of making investment in the shares of M/s Raj Ratan Castings Pvt. Ltd., the assessee could have saved the expenditure on account of payment of interest to the banks and others. 7. Thus, rejecting the explanation of the assessee, the AO disallowed the claim of financial charges to the extent of Rs. 34,94,373/-. 8. The ld. CIT(A) deleted the addition referring to the decision of the Hon'ble Supreme Court in the case of S.A Builders v. CIT 158 Taxman 74, Board Circular No. 14 of 2001, 252 ITR 65. He held that the claim of assessee is allowable as a business expenditure as it was inclined on grounds of commercial expediency. In this regard, we refer to para 9 of the ld. CIT(A)'s order as under: 9. In the light of above, the facts of the present case are required to he examined. The facts are that out of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elying on the decision of ITAT SMC Mumbai Bench in the case of Shree Shyamkamal Finance & Leasing Co. (P) Ltd. v. ITO 21 SOT 42. According to learned A.R for the assessee if there is no income earned which is exempt then expenditure in relation thereto could not be disallowed and it could be allowed under normal business income. 11. In the rejoinder, the ld. DR submitted that for the purposes of disallowance Under Section 14A, it is not necessary that income should be actually earned. According to him, the heading of that section is "Expenditure incurred in relation to income not includible in total income". He emphasized on the word "includible" which means that it is not necessary to earn income for the purposes of allowing or disallowing claim of expenditure. He also submitted that as per matching principle, expenditure relating to exempted income has to be separately accounted for and it has to be debited in that account and the net income from that head alone should be considered for exemption. 12. We have considered the rival submissions and perused the material on record. In our considered view, the only issue involved in this case is whether expenditure incurred on borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artly taxable. Where expenditure is incurred out of the common kitty, common management is utilized, common salary is paid for managing the business, whose income is taxable and also for managing income which is exempt Under Section 10(33)/115O or otherwise, under any other provision of the Act then the question would arise as to how much expenditure could be relatable to exempted income. In the present case, the figure of financial charges incurred on funds invested in shares for earning dividend is ascertained and actually incurred. Therefore, question of any estimate in this regard does not arise or question of doubting as to whether expenditure was actually incurred or not also does not arise. Once expenditure is actually incurred then the only question that remains to be (sic) whether it can be allowed against other business income if no dividend income is earned. 15. The argument of learned A.R. for the assessee that if no dividend income is earned then entire expenditure relatable thereto and incurred could not be disallowed and can be allowed against other business income is not acceptable. In fact the principle profounded by learned A.R for the assessee is clearly against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure shall be deductible only if any income is made or earned. Interest on moneys borrowed for investment in shares which had not yielded any dividend is admissible as a deduction under Section 57(iii). The assessee was a major shareholder of a company which was referred to the BIFR and declared a sick industry. The assessee borrowed moneys from S and D and invested them in the company to rehabilitate it under the BIFR scheme (sic) to (sic) dividend therefrom, but the assessee did not receive any dividend from the company. The assessee claimed deduction of a sum of Rs. 60,00,000 as interest on borrowals. The claim was rejected by the Assessing Officer but accepted by the Tribunal. On appeal to the High Court: Held, that the Tribunal was right in holding that the deduction under Section 57(iii) of the Act should be allowed of the interest paid on funds borrowed and given as interest-free loan. 17. The Hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody MANU/SC/0211/1978, held that Section 57(iii) requires that expenditure must be made out wholly and exclusively for the purposes of making or earning income. It is the purpose which is rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Eastern Investments Ltd. v. CIT MANU/SC/0037/1951, where interpreting the corresponding provision in Section 12(2) of the Indian I.T. Act. 1922, which was ipsissima verba in the same terms as Section 57(iii). Bose J., speaking on behalf of the court, observed: It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned. It is indeed difficult to see how, after this observation of the court, there can be any scope for controversy in regard to the interpretation of Section 57(iii). 18. Similar view was taken by the Hon'ble Allahabad High Court in the case of Chhail Behari Lal v. CIT MANU/UP/0257/1960, and Hon'ble Bombay High Court in Ormerods v. CIT MANU/MH/0196/1958 and Calcutta High Court in the case of Model Manufacturing Co. P Ltd. CIT v. MANU/WB/0200/1978. As earlier as in 1938, the House of Lords in the case of Hughes (Inspector of Taxes) v. Bank of New Zealand 6 ITR 636 also expressed the view that even if expenditure is unremunerative it is entitled for proper deduction if it is wholly an exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at the dak of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting. Therefore, hook profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited (see Keshav Mills Ltd. v. CIT MANU/SC/0038/1953), Therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses) Under the mercantile system of accounting, this matching is required to he done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable income.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r against other taxable income. Again the words "does not form part of the total income" cannot be said to be related to actual physical forming part of total income but relates to the eligibility of the income as per provisions of the Act to be includible in the total income. Thus, Section 14A speaks of the nature and quality of income includible in the total income and not the actual inclusion of such income in the total income. 24. If certain interpretation gives absurd result, it has to be rejected. The view of Id AR that unless there is some income only then expenditure against such income would be disallowable is apparently absurd and not acceptable. For example, if an assessee has earned Rs. 1000/- as dividend income then entire expenditure in earning that income would be set off against it and the balance loss (where expenditure is more than Rs. 1000/-) would not be allowable against other income which is taxable. Whereas if an assessee does not earn any income from dividend then entire expenditure relating thereto becomes a loss and can be set off against other taxable income. In other words, merely because the assessee docs not earn anything his entire expenditure in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held to be conditional upon the making or earning of the income. 25. it has been held by Hon'ble Calcutta High Court in the case of Calcutta Electric Supply Corporation v. CIT MANU/WB/0229/1989, that it is a well settled principle of interpretation of statute that construction of a statutory provision leading to absurd result should be avoided. It has also been held by the ITAT Calcutta Bench in the case of ACIT v. Balrampur Chini Mills Ltd. MANU/IK/5003/2007 that rational construction must prevail over literal interpretation if the latter leads to absurd results. The Hon'ble Supreme Court also profounded the same proposition in the case of Oxford University Press v. CIT MANU/SC/0052/2001, wherein the Hon'ble Justice Y.K. Sabharwal said that interpretation of statutory provision granting exemption which does not stand the lest of rationality and will lead to absurd results cannot be accepted. 26. In fact, dividend income is assessable under a distinct head. The income therefrom is separately taxable Under Section 56(2)(i). Therefore, computation of dividend income has to be carried out as per the provisions contained in Chapter IV under the head 'F' - Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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