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TMI Blog2024 (3) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. As the dividend income from the two companies is not taxable and in that scenario the expenditure incurred on interest paid on funds borrowed in respect of investment in shares of two operating companies is hit by Section 14A of the Act inasmuch as the dividend received on such shares does not form part of the total income. We do not find any infirmity in the findings arrived at by the ITAT, the question of law is answered in affirmative. - K. R. SHRIRAM DR. NEELA GOKHALE, JJ. For the Appellant : Mr. Mahesh K. Mehta. For the Respondents Mr. Suresh Kumar. ORAL JUDGMENT (PER K.R. SHRIRAM, J.) : 1. This petition relates to Assessment Year 1998-1999. The short point in the matter is allowability of interest of Rs. 36,88,866/- paid on borrowed amount. 2. Assessee, i.e., appellant, is a Chartered Accountant by qualification and decided to switch profession to become a stock broker. Therefore, in 1987 he acquired membership card of the Bombay Stock Exchange. In 1994 appellant also acquired membership of National Stock Exchange. Appellant admittedly had also borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of a private limited company in which the assessee has invested have been held as investment and not as stock-in-trade. Another most important feature is that a shares of a private limited company cannot be traded in the open market and thus these shares held by the assessee cannot be treated as stock-in-trade. Hence, the question of allowing the interest paid on the loan for acquiring the shares which is not stock-in- trade of the assessee as business expenditure u/s 36(1) (ii) does not arise. Hence, the disallowance of interest amounting to Rs. 36,86,866/- is confirmed. 4. Unhappy with this finding of the CIT(A), appellant/assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT dismissed the appeal by an order dated 22nd October 2003, which is impugned in this appeal, by holding that the borrowed capital was invested primarily in shares of assessee s own group companies from which assessee did not receive any income and there is nothing on record to indicate how such investment was subservient to the business of assessee and that assessee failed to demonstrate how the borrowed funds were utilised for the purposes of business. The ITAT also pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. In other words, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 8. The question that arose before the Apex Court in Maxopp Investment Ltd. (Supra) was whether expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by Section 14A of the Act inasmuch as the dividend received on such shares does not form part of the total income. Assessee contended that the dominant intention for purchasing the share was not to earn dividends income but control of the business in the company in which shares were invested or for the purpose of trading in the shares as a business activity etc. In this backdrop, the issue was as to whether the expenditure incurred can be treated as expenditure in relation to income , i.e., dividend income, which does not form part of the total income. All the cases before the Apex Court pertain to dividend income, whether it was for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the expenditures incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent. xxxxxxxxxxxxxxx 4. However, in these appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the learned counsel appearing for the assessees, the legislative intention behind inserting Section 14A in this statute was to exclude both, viz. the receipts which are exempt under the provisions of the Act as well as expenditure actually incurred in relation thereto from entering into the computation of assessable income, so as to remove the double benefit to the assessee (i) in the form of exempt income, on which no tax is leviable; and (ii) providing deduction in respect of expenditure actually incurred which directly resulted in the earning of exempt income by the assessee. xxxxxxxxxxxxxxx 31. We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above. 32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word in relation to the income that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxx xxx xxx The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A. 35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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