TaxTMI 
TaxTMI 
2007 (2) TMI 363
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....arning the dividend." 2. Briefly stated, the facts of the case are that the assessee was engaged in the business of trading in iron and steel parts during the previous year relevant to the assessment year under appeal. The assessee acquired 7,45,000 shares at the rate of Rs. 10 per share of M/s. Spectra Industries Ltd., a sister concern of the assessee. The Assessing Officer noticed that the assessee had made the aforesaid investment in shares in order to earn dividend which was exempt from tax under section 10(33) of the Income-tax Act. The Assessing Officer further observed that the assessee had debited interest payments of Rs. 10,43,491 to the P & L Account. He also found that the assessee had borrowed huge money and paid substantial interest to others and that it had given substantial amount of Rs. 74,50,000 for purchasing the shares and earning the dividend thereon. He therefore proceeded to examined the issue in terms of provisions of section14A of the Income-tax Act and accordingly issued a notice to the assessee. In reply, the assessee submitted that it had made investment in shares of the sister concern for earning business profits and not for earning dividend income. The....
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....to be assessed as income from other sources under section 56 of the Income-tax Act. Ld. CIT(A) has recorded a categorical finding that the assessee has failed to discharge his onus that interest paid on borrowings was used exclusively for the purposes of its business. He has also recorded a finding that interest bearing funds have been diverted for making investment in shares of the sister concern. 4. Deductions otherwise admissible under section 36(1)(iii) and section 57(iii) are now subject to the provisions of section 14A. Therefore, the applicability of the provisions of section 14A has to be examined first. If the expenses are not hit by section 14A(1), their deductibility has then to be considered under section 36(1)(iii) or 57(iii). 5. We shall therefore turn to section 14A, which prohibits deduction 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. Sub-sections (2) and (3) have been inserted in section 14A of the Income-tax Act by the Finance Act, 2006. Sub-section (2) provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income whic....
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....t expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income. This is also achieved by the matching principle of accountancy. In Taparia Tools Ltd. v. Joint CIT [2003] 260 ITR 1021 (Bom.), the Hon'ble jurisdictional High Court has explained the matching principle as under : "The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date 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, book 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. 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 resourc....
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....deduction by operation of section 14A. In Dy. CIT v. SG Investments & Industries Ltd. [2004] 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income-tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. [1993] 200 ITR 488, the Calcutta Bench of the Tribunal has also held that 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....
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....o on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately." In Halsubury's Law of England (Fourth edition, Vol. 23, paragraph 29), referring to the machinery provisions, it is stated : "It is important to distinguish between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the charge and the levying and collection of the tax in respect of the charge so imposed. Machinery provisions do not impose a charge or extend or restrict a charge elsewhere clearly imposed." In Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC), Hon'ble Mr. Justice Shah observed: "Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained. . . . This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secu....
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....throughout the rest of the career of the suit. There are two exceptions to the application of this rule, viz., (1) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect; and (2) when the court to which appeal lay at the commencement of the suit stands abolished [See Garikapatti Veeraya v. N. Subbiah Choudhry [1957] SCR 488; AIR 1957 SC 540, and Colonial Sugar Refinning Co. Ltd. v. Irving [1905] AC 369 (PC)]." Halsbury's Laws of England (Fourth edition, Vol. 44, paragraph 925) states: "The presumption against retrospection does not apply to legislation concerned merely with matters of procedure or of evidence; on the contrary, provisions of that nature are to be construed as retrospective unless there is a clear indication that such was not the intention of Parliament." All the aforesaid observations have been cited, with approval, by the Hon'ble Supreme Court in CWT v. Sharvan Kumar Swarup & Sons [1994] 210 ITR 886 . 10. In view of the aforesaid, we hold that the provisions for quantification of disallowance as contained in sub-sections (2) and (3) of section 14A are procedural and therefore apply to all pending matters. It....