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TMI Blog2003 (5) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... in Schedule 'C' of the Balance-sheet. During the year the investments have been shown at Rs. 11,24,21,048 as reflected in Schedule 'E' of the Balance-sheet. The assessee had debited a sum of Rs. 3,69,36,637 as interest including interest on inter-corporate deposits, loans and dividends. The assessee had shown dividend income to the tune of Rs. 41,38,924 which was primarily dividend earned on long term investments and claimed as exempted under section 10(33) of the Act. The Assessing Officer required the assessee to give break-up of the costs relating to earning of dividend income and to explain as to why the costs related to earning of exempted dividend should not be disallowed. It was explained by the assessee that no cost could be apportioned for earning dividend income inasmuch as the assessee in course of business activities had borrowed funds from time to time and incurred interest expenditure on such borrowings which were utilised for the purpose of its business activities and the interest paid thereon is deductible under section 36(1)(iii) of the Act. It was explained by the assessee that primary object of borrowing was essentially for the purpose of business and due to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table to dividend income and also taking in view the decision that the interest expenditure incurred in relation to indivisible business activity comprising of dealing in various activities cannot be identified relatable to any independent business activity. Hence the department is in appeal. 5. The ld. D.R. has submitted that the Assessing Officer was justified in disallowing proportionate interest of Rs. 19,14,940 as relatable to earning of exempted dividend income as the shares were held by the assessee as investment, and as such the proportionate interest is to be treated as incurred in relation to earning of dividend income. He has made a reference to the newly inserted sections 14A and 115-O of the Act in support of his contentions. 6. The ld. counsel for the assessee, on the other hand, has contended that as the assessee has borrowed capital for the purpose of its business and has paid interest thereon, the interest expenditure incurred on such borrowings is fully allowable as deduction under section 36(1)(iii) of the Act, and such deduction is not dependent on whether the resultant profit is taxable or not. He further submitted that it would be incorrect to say that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income, This in effect means that the tax incentive given by way of exemptions to certain categories of income, is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principals 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. 25.2 Through Finance Act, 2001, a new section 14A has been inserted 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. 25.3 Vide Circular No. 11/2001 dated 23rd July, 2001, a direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14A has been inserted so as to clarify that the Assessing Officer shall not reassess the cases 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. 23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001 received the assent of the President of India." 10. Dividend income is exempt in view of section 10(33) inserted from 1 st April, 1998, by Finance Act, 1997. The exemption of dividend from inclusion in the total income is coupled with section 115-O requiring the company to pay tax. The section 10(33) (as applicable for the asst. year 1998-99) and section 115-O reads as follows: 10(33): "10. In computing the total income of a previous year of a person, any income falling within any of the following clauses shall not be included (33) any income by way of dividends, referred to in section 115-O" However the said clause (33) as inserted by the Finance Act, 1997, w.e.f. 1-4-1998 was later substituted by a new clause by the Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies. Sub-section (5) of section 115-O further states that no deduction under any other provisions of the Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) of section 115-O or the tax thereon. The liability to pay additional tax on dividends declared and paid by the domestic company under section 115-O of the Act is notwithstanding anything contained in any other provisions of the I.T. Act and is subject to the provisions of section 115-O. The section 115-O(1) beginning with the expression "notwithstanding anything contained in any other provisions of this Act" is to give the provisions of section 115-O(1) in case of conflict, an overriding effect over any other provisions of the I.T. Act, 1961. It is thus clear that section 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-section (5) of section 115-O has made it clear that no deduction under any other provisions of I.T. Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged to tax under section 115-O(1) or the tax thereon. Thus, this sub-section has restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose for acquisition of the shares was to earn income from the dividends thereof and the Tribunal was, therefore, right in holding that the interest was deductible under section 57 against its income from other sources. The word "purpose" in section 57 cannot mean the motive for a transaction; much less can it mean the ulterior motive or ulterior object of the transaction." (ii) CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) "The plain natural construction of the language of section 57(iii) of the Income-tax Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned. Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, in the facts and circumstances of this case, the portion of interest paid on moneys borrowed is not allowable against dividend income, which is now exempted from income-tax, as the interest expenditure incurred by the assessee-company in respect of capital/funds borrowed by it for the purpose of making investment in shares/securities represents the interest expenditure incurred by the assessee for the purpose of its business activity and accordingly the same is allowable under section 36(1)(iii) of the Act, even though the resultant profit or income from such investment in the form of dividend is exempt from tax under section 10(33) of the Act. This view or the contention of the assessee, in our considered opinion, is now devoid of any merit particularly in the light of insertion of new sections 14A and 115-O of the Act. It is now immaterial whether the shares are held as stock-in-trade or an investment portfolio as an integral part of business or are held as investment as such from the point of allowability of deduction for expenditure incurred in relation to dividend income which do not form part of the total income by virtue of section 10(33) of the Act. The reasons are hereu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable income and others do not, the entire expenditure is a permissible deduction without any apportionment. The crux of this school of thought is that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of the expenditure cannot be made. In this connection the following decisions are noteworthy to be mentioned: - (a) Indian Bank Ltd.'s case. (b) Maharashtra Sugar Mills Ltd. s case. (c) Punjab State Co-operative Supply & Marketing Federation Ltd. v. CIT[1981] 128 ITR 189 (Punj. & Har.). (d) Rajasthan State Warehousing Corpn.'s case. The general principle laid down in these cases has been summarised by the Hon'ble Supreme Court vide its decision delivered on 23-2-2000 in the case of Rajasthan State Warehousing Corpn. as follows: - '(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible 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., different house properties or different securities, etc. and income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed; (iv) Therefore, the exemption is also in respect of the net income; (v) Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income; (vi) Section 14A was, therefore, inserted so as to clarify the said intention of the Legislature since the inception of the Income-tax Act, 1961 and to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Legislature not to allow the deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act, against the taxable income. The Legislature has further clarified its intention that the expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income, The Legislature has, therefore, made an attempt to curb the practice used to reduce the tax payable on the nonexempt income by debiting the expenses incurred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cance as well as indirect significance having regard to the context in which it is used. It can also be gathered from the memorandum explaining the provisions of section 14A stating that in the absence of any such provision like that of section 14A the expenditure incurred in respect of exempt income was being claimed against taxable income though the Legislature had no such intention since the inception of the Income-tax Act, 1961. The amendment by inserting section 14A was thus made retrospective with effect from 1-4-1962, and the Legislature has stepped in and declared that the expenditure incurred in relation to exempt income shall not be allowed for the purpose of computing the total income under Chapter IV of the Act. The mandate of the provisions of section 14A is very clear. It desires to curb the practice to claim deduction of the expenses incurred in relation to exempt income against taxable income and at the same time to avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Viewed in the light of the object behind the introduction of the provisions of section 14A and the scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) (P.) Ltd. v. Union of India [1985] 155 ITR 120, while dealing with section 80AA of the Act has held that the deduction under section 80M is to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. Section 80AA, which provided that the deduction under section 80M was to be computed with reference to the net dividend income and not gross dividend income, was, in its retrospective operation, was held merely declaratory of the law as it always had been since April 1, 1968 by the Supreme Court in that case of Distributors (Baroda) (P.) Ltd. and as such no complaint can be validly made against the retrospective operation of the section on the ground that it enhances the tax burden of the assessee and, therefore, infringes the fundamental right of the assessee under Article 19(1)(g) of the Constitution of India. On the parity of reasoning as given in Distributors (Baroda) (P.) Ltd.'s case holding section 80AA, in its retrospective operation, merely declaratory at the law as it always had been since 1 st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in section 14 could not arise and consequently the same would not form part of total income. If any income is not a part of total income, the expenditure/ deduction though of a nature specified in sections 15 to 59 but related to the income not forming part or total income could not be allowed or considered against other income includible in the total income for the purpose of chargeability to tax. There could be no such intention of the Legislature and a scheme of the Act to allow deductions related to income not forming part of the total income, against the income includible in the total income and chargeable to tax. The expression "for the purpose of charge of income- tax and computation of total income used in section 14 amply clarifies the intention of the Legislature and the scheme of the I.T. Act, 1961. 21. The theory of apportionment of the expenditures between taxable income and non-taxable income has, in principle, been accepted by various courts even before the insertion of section 14A of the Act provided it is shown that the activities undertaken or the business carried on constitute distinct, separate and divisible one as approved by the latest decision of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le income and at the same to grant exemption on gross amount of exempted income. 22. On considering the various decisions of courts and the position of law as has been emerged out there from and considering the totality of the discussion made above there is no doubt in saying that in case where the monies are borrowed for the purchase of shares to be held as investments the interest on borrowings has to be considered and allowed as deduction while computing the income from dividend. In other words, the interest on borrowings, in such cases, is to be treated as expenditure relatable to the earning of dividend income. The whole dispute lies in cases where the monies are borrowed for purchase of shares to be held as stock-in-trade and interest on borrowings is claimed as business expenditure under section 36(1)(iii). In later cases, the dividend income arising from the shares held as stock-in-trade would amount to business income notwithstanding the fact that they are otherwise assessable under different heads by virtue of specific provisions of the Act, and as such it would be contended that interest paid on the monies borrowed which were utilised for the purchase of shares to be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which exemption under section 10(33) is to be allowed. Relief by way of exemption is to be given only on the net amount of the dividend, i.e. after deducting from the gross dividend the expenditures incurred in relation thereto. The interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as an expenditure incurred in relation to dividend income. 23. While construing the meaning of and interpreting the provisions of section 14A of the Act as given by us above, we have borne in our mind the well-settled principles of interpretation of statutes which, for the sake of brevity, are not elaborately discussed here but are summarised as below: (i) The statute has to be read in conformity with the clear and basic legislative intent behind the enactment. (ii) Where the language is clear, the intention of the Legislature is to be gathered from the language used. (iii) The intention of the Legislature can also be gathered from its Memorandum explaining the statute. (iv) The expressions or words used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee-company was engaged in the business of dealing in papers and was also an investment company. There is no dispute that the assessee-company had borrowed funds from time to time for the purpose of its business activities including the activities of acquiring of shares. It is not the assessee company's case that the shares were acquired not out of borrowed funds. The assessee-company's case is only that as the shares were acquired in the course of its business activities, and the funds were borrowed for the purpose of its various indivisible business activities, the entire amount of interest expenditure incurred by the assessee-company is deductible under section 36(1)(iii) of the Act without any apportionment against the dividend income earned from shares so acquired. To decide the issue, we find it appropriate to see at the first stage as to whether the shares acquired by the assessee-company were held as investment or trading assets. We have carefully perused the relevant profit & loss account computation of total income and copies of assessment orders/intimation for the immediate preceding assessment years 1993-94 to 1997-98 and find that the assessee has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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