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TMI Blog2024 (8) TMI 1371X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome is not set off against income which is otherwise taxable. It is this basic tenet which constrains one to bifurcate and apportion the expenditure which may be claimed by an assessee. Right from Walfort, all judgments rendered in the context of Section 14A and noticed hereinabove, have consistently spoken of apportionment of expenditure and the imperatives of an enquiry to identify whether the expenditure which is claimed is not in relation to exempt income. The expenditure which can be legitimately claimed by an assessee as deductible can only be that which has been expended to earn taxable income. The assessee is not permitted to avail of a dual benefit of firstly claiming the income as being exempt and thereafter seeking to set off the expenditure incurred in connection therewith against income which is taxable. This if countenanced would clearly lead to the taxable income and which is exigible to the levy of tax under the Act being further reduced. As we read Section 14A, it becomes apparent expenditure is liable to be excluded from consideration only if the assessee is found to have earned exempt income and the expenditure pertains to that income. Absent any income which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. Accordingly, and for all the aforesaid reasons, we uphold the view taken by the Tribunal and dismiss the instant appeals. - HON'BLE MR. JUSTICE YASHWANT VARMA AND HON'BLE MR. JUSTICE RAVINDER DUDEJA For the Appellant Through: Mr. Abhishek Maratha, Sr. SC alongwith Mr. Parth Semiwal, Mr. Apoorv Agarwal, Jr. SCs. with Ms. Nupur Sharma, Mr. Manav Goyal, Mr. Gaurav Singh, Ms. Muskaan and Mr. Bhanukaran Singh Jodha, Advs. Mr. Sanjay Kumar, SSC with Ms. Esha, Adv. For the Respondent Through: None. JUDGMENT YASHWANT VARMA, J. (Oral) CM APPL. 40581-82/2024 in ITA 362/2024 1. Bearing in mind the disclosures made, the delay in filing and refiling the appeal is condoned. 2. The applications shall stand disposed of. ITA 362/2024 384/2024 3. These two appeals although assailing separate judgments rendered by the Income Tax Appellate Tribunal [ITAT] were heard together since both questioned the view expressed by the Tribunal that a disallowance under Section 14A of the Income Tax Act, 1961 [Act] would be liable to be restricted to the extent of exempt income earned during the year. 4. As would be evident from a reading of the judgment handed down by the Tribunal, it has while uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould then be considered as incurred in respect of other income which is to be treated as part of the total income. xxxx xxxx xxxx 10. The decision of the Delhi High Court in Holcim India Pvt. Ltd. (supra) had referred to the issue whether disallowance of expenditure under section 14A of the Act would be made even when no exempt income in the form of dividend was earned in the year, and it was observed: xxxx xxxx xxxx '14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in CIT v. Lakhani Marketing Incl. ITA No. 970 of 2008, decided on April 2, 2014 (2015) 4 ITR-OL 246 (P H) made reference to two earlier decisions of the same court in CIT v. Hero Cycles Limited (2010) 323 ITR 518 (P H) and CIT v. Winsome Textile Industries Limited (2009) 319 ITR 204 (P H) to hold that section 14A cannot be invoked when no exempt income was earned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. (supra) was followed and elaborated in Cheminvest Ltd. (supra). 26. There is another error made by the Assessing Officer in computing the disallowance under clause (ii) of rule 8D (2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ITA No. 615 of 2014, ACB India Ltd. v. Asst. CIT decided on March 24, 2015 (2015) 374 ITR 108 (Delhi), has held that only average value of the entire investment that does not form part of the total income is the factor which could be covered by the numerical B for computing disallowance under clause (ii) of rule 8D(2) of the Rules. 6. Both Mr. Kumar and Mr. Maratha, learned counsels who appeared in support of these appeals have essentially questioned the apportionment of expenditure incurred on a purported reading of Section 14A to submit that irrespective of whether any exempt income is earned or not in a particular fisca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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. 11. As the provision originally existed, it provided that no deduction would be allowed in respect of expenditure incurred by the assessee in relation to any income which does not form part of total income under the Act. By virtue of Finance Act 2006, sub-sections (2) and (3) came to be added to the principal provision. The last amendment came to be introduced by virtue of Finance Act, 2022 [2022 Act] and which saw the addition of an Explanation to Section 14A. 12. The provision as it exists presently is reproduced hereinbelow:- [14A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is spoken of is thus in respect of income which is specified in Section 10 and which stands placed in Chapter III of the Act. Section 14A, on the other hand, is placed in Chapter IV and which contains various provisions relating to computation of total income. Both sub-sections (1) and (2) of Section 14A, use the expression income which does not form part of the total income in conjunction with the expenditure that may be incurred by an assessee in relation thereto. The two expressions noted above are coupled together by the phrase in relation to . 15. The Section thus clearly appears to suggest that expenditure which is relatable to income which would ultimately not form part of total income or be exempt cannot be claimed as a deduction. The mischief which Section 14A sought to address stands eloquently spelt out in the Memorandum which had explained the provisions of the 2001 Act while noting that assessees were claiming deductions in respect of expenditure incurred in relation to exempt income. It was noted that as a result of the above, assessees were being able to derive a double benefit and thus not only deriving income which was otherwise claimed as exempt from taxation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section I4A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. 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. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not expenditure incurred in terms of section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of section 14A. For attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, section 14A cannot be invoked. In our view, return of investment cannot be construed to mean expenditure and if it is construed to mean expenditure in the sense of physical spending still the expenditure was not such as could be claimed as an allowance against the profits of the relevant accounting year under sections 30 to 37 of the Act and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of the statute as they stand. If the allowance claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Section 10 (2) says that profits under section 10 (1) in respect 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. (emphasis supplied) 13. In Rajasthan State Warehousing Corporation (2000) 242 ITR 450 (SC), the Supreme Court after, inter alia, considering its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A of the said Act. The context does not suggest that a narrow meaning ought to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act, 2001, with retrospective effect from April 1, 1962. In other words, it was the intention of Parliament that it should appear in the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that Parliament wanted that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen the finalised assessments prior to the assessment year beginning on April 1, 2001. Furthermore, as observed by the Supreme Court in Walfort (2010) 326 ITR 1 (SC), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting 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 14-A 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 div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the assessees, in this behalf, was 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 income. Further, the expression in relation to implies that there must be a direct and proximate connection with the subject matter. In other words, only that actual expenditure which is made directly and for the object of earning exempt income (in the present appeals dividend income) could be disallowed under section 14A of the Act. If the dominant and main objective of spending was not the earning of exempt income then, the expenditure could not be disallowed under section 14A of the Act provided it was otherwise allowable under sections 15 to 59 of the said Act. 21. The High Court, however, did not agree with the aforesaid propositions advanced by the learned counsel for the assessees which according to it was mired by several difficulties. Distinguishing the case law cited by the assessees where the expression in relation to was interpreted by this court, as not applicable in the present context, the High Court, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 42. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words in relation to in the given scenario, viz., where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee-company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee-company. Other cases are those where the shares of investee-company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. 43. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance (Amendment) Act, 2001 but also made It retrospective, i.e., 1962 when the Income-tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum Explaining the Provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of the Punjab and Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee-company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee-companies have to fail and are, therefore, dismissed. 22. As would be evident from the aforesaid conclusions rendered in Maxopp, it was found that Section 14A is clearly concerned with an identification and attribution of expenditure with reference to exempt income which otherwise would not form part of total income. It was thus explained that where the income of an assesse has both taxable and non-taxable elements, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer disqualification under Section 14A. 25. We are conscious of the Explanation which has come to be inserted in Section 14A and which now seeks to assert that the provision would apply irrespective of whether exempt income had arisen, accrued or had been received in the previous year. However, the extent to which the said statutory amendment would apply to the assessment years in questions is an issue which we propose to dwell upon in the subsequent parts of this decision. 26. Our view on the imperatives of apportionment and the identification of expenditure with reference to exempt income is further fortified not only from a plain reading of Section 14A (2) which alludes to income which does not form part of total income, but also Rule 8D and which is the machinery provision for determination of the amount of expenditure incurred in relation to exempt income. 27. Rule 8D again speaks of expenditure incurred in relation to exempt income. This becomes evident from a reading of that provision which is reproduced hereinbelow:- 8D. (1) 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants in light of the judgment of the Court rendered in Principal Commissioner of Income Tax vs. Era infrastructure (India) Ltd [2022] SCC Online Del 2157: (2022) 327 CTR 489. 32. While negating an identical submission, the Division Bench of our Court had held as follows:- 4. Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including IL FS Energy Development Co. Ltd. {supra) are no longer good law. The amendment to Section 14A of the Act is reproduced hereinbelow: Amendment of section 14A-In section 14A of the Income-tax Act, (a) in sub-section (1), for the words For the purposes of, the words Notwithstanding anything to the contrary contained in this Act, for the purposes of shall be substituted; (b) after the proviso, the following Explanation shall be inserted, namely: Explanation .-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Aet, the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us. 10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 I FR 314 (Gauhati)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318) ..it is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has {sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. 11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165: (2000) 241 ITR 312] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. 5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India. 5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years. 16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless, affords a reasonable construction of it, and there is no reason why we should not adopt it. 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law, it is not presumed to be retrospective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts . 18. There was and is no ambiguity in the main provision of section 9 (1) (ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word earned had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income arising or accruing in India . The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, income payable for service rendered in India . 19. When the Explanation seeks to give an artificial meaning to earned in India and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively. 8. Consequently, this Court is of the view that the amendment of section 14A, which is for remova ..... X X X X Extracts X X X X X X X X Extracts X X X X
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