TaxTMI 
TaxTMI 
2008 (10) TMI 383
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.... is, therefore, incidental to trading in shares?" as well as to dispose of the appeal on merits. 2. Subsequently, the Hon'ble President vide order dated 17-10-2007 has directed the Bench to dispose of the following appeals also : Sr. No. ITA No. Appellant Respondent State 1. ITA No. M/s. ITO, Ward 3(3), Delhi 183/Delhi/2005 Cheminvest New Delhi Ltd., New Delhi 2. ITA No. 2048/ M/s. DCIT, Circle Delhi Delhi/2005 Cheminvest 3(1), New Delhi Ltd., New Delhi 3. ITA No. 1372/ M/s. Maxopp ACIT, Circle 6(1), Delhi Delhi/2005 Investment Ltd. New Delhi 3. The facts in the case of M/s. Daga Capital Management Pvt. Ltd. are hereby narrated. The assessee-company was engaged in the business of dealing in shares in the year under consideration which declared loss of Rs. 12,87,780. It was noted by the Assessing Officer that assessee had claimed expenditure by way of interest amounting to Rs. 9,58,325 on borrowed funds while computing the income as well as the ....
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.... object of the assessee was to deal in shares and securities as was apparent from the Memorandum of Association, (ii) no adverse inference could be drawn merely from the fact that investments in the shares and securities was shown in the Balance Sheet under the head 'Investments', (iii) the Assessing Officer himself had accepted the loss in the share dealing amounting to Rs. 2,86,240, (iv) the assessee had always shown the business profit and never claimed as capital receipts either on long-term or on short-term basis. In view of the same, it was claimed that interest payment was allowable under section 36(1)(iii) of the Act and consequently no part of it can be disallowed under section 14A of the Act. 5. The learned CIT(A) held that the assessee was dealer in shares and securities considering (i) the object stated in Memorandum of Association, (ii) the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 wherein it has been held that entries made in the books of account is not determinative of the nature of the transaction, (iii) the fact that Assessing Officer himself accepted the fact of share trading and the loss arising ....
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....f Delhi Bench of the Tribunal in the case of Ever Plus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 wherein it was held that even if the main activity of the company was to make investments in holding company for retaining control over the group companies, the disallowance under section 14A can be made irrespective of the fact that dividend earnings were only incidental in nature. On the other hand, the assessee had relied on the decision of Delhi Bench of the Tribunal in the case of Vidyut Investments v. ITO [2006] 10 SOT 284 wherein it was held that when shares are held as stock-in-trade with the object of trading in shares, and dividend income earning was only incidental in nature no part of the expenses could be disallowed under section 14A of the Act. In view of such difference of opinion, the Bench recommended the constitution of a Special Bench to decide the question mentioned in para 1 above. It is in the above circumstances that Hon'ble President has constituted the Special Bench to decide the said question as well as to dispose of the appeal. 7. The facts relating to the appeals of M/s. Cheminvest Ltd., New Delhi, are these. The assessee is an investment com....
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....e, the dividend income was only incidental to such acquisition of shares. Consequently, no disallowance could be made under section 14A of the Act. However, the Assessing Officer applied the provisions of section 14A of the Act and made disallowance of Rs. 67,74,175 on pro rata basis. Finally, the total income was determined at Rs. 1,41,69,420. On appeal, the learned CIT(A) upheld the action of the Assessing Officer under section 14A of the Act. Aggrieved by the same, the assessee is in appeal before the Tribunal. 9. The learned Departmental Representative initially invited our attention to the Memorandum explaining the provisions in the Finance Bill, 2001 by which section 14A was proposed to be inserted in the Income-tax Act, 1961 ('the Act') to indicate that the intention of the Legislature was to allow the expenditure to the extent they are relatable to earning of taxable income. Then it was submitted by him that provisions of section 14A was inserted in the Act by way of abundant caution in lieu of the law already existed. Thus, it was pleaded that purposive construction should be applied which is also known as 'mischief rule' as described in Heydon's case. Thus, four aspect....
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....override the general provisions of law like section 36(1)(iii) or section 57, etc. Therefore, even though the expenditure may be allowable under section 36(1)(iii) or section 57 of the Act, it would still be disallowable under section 14A of the Act if it is found that expenditure related to the income which does not form part of the total income. (b)that expression 'in relation to' used by the Legislature in section 14A is of the widest amplitude and is much wider and broader than the other expressions 'attributable to' and 'derived from'. The Legislature was aware of the other expressions and deliberately ignored the same and used the wider expression 'in relation to'. Therefore, such expression neither can be interpreted in a narrower sense nor the same can be read down since the power of reading down the Statute is available only to the High Courts and Supreme Court of India. Since the expression 'in relation to' has been used in the widest sense, it must mean both the direct and indirect, related, associated, having some connection which is either proximate or distant but not remote and not the strict test of Causa Causans which means immediate and effective source. In supp....
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....Tribunal decisions namely Kanu Metals Pvt. Ltd. [ITA No. 7211/Mum./03, order dated 30-5-2008], Mohan T. Adwani Finance Pvt. Ltd. [ITA No. 1060/Mum./2003] and Mechintosh Finance Estates (P.) Ltd. [ITA No. 5615/Mum./2002]. (f )that the decision of the Tribunal in the case of S.G. Invest- ments and Industries Ltd. reported in 89 ITD 44 (Cal.) is an authority for the proposition that the words used in section 14A are wider than, the words used in section 57(iii) and consequently the expenditure in relation to exempted income has to be disallowed even though such expenditure may be allowable in other sections. Reference is also made to other decisions of the Tribunal namely, K.V. Trading Company [ITA No. 924 of 2003 (Cal.)]. (g)that the provisions of sub-sections (2) and (3) of section 14A are merely procedural and clarificatory in nature and therefore, would apply with retrospective effect. Reliance is placed on the various decisions of the Tribunal, namely, Mohanlal M. Shah v. Dy. CIT reported in 111 TTJ 886 (Mum.), ACIT v. City Corp. Finance India Ltd. reported in 108 ITD 457 (Mum.), DCIT v. Seksaria Biswan Sugar Factory Ltd. reported in 14 SOT 66 (Mum.), DCIT v. Smita Conducto....
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....rt in the cases of Rajasthan Warehousing Ltd. 242 ITR 450 and in the case of Rajendra Prasad Moody 115 ITR 519 (SC) were rendered with reference to the language employed in sections 36, 37, 56 and 57 which is quite different from the language used in section 14A of the Act and therefore those decisions cannot be considered in interpreting the provisions of section 14A. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Baroda Distributors Pvt. Ltd. 155 ITR 120 wherein it was observed "It is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation, which might have been placed on an earlier statutory provision which is not only couched different language but is also structurally different." In view of these observations, it has been submitted that the judgment of Hon'ble Bombay High Court in the case of Emrald Company Ltd. 284 ITR 586 and the decision of the Tribunal in the case of Claridges Investment and Finance Pvt. Ltd. 18 SOT 390 would not help the case of the assessee." 12. Mr. Vipul Joshi, learned counsel for the assessee, has submitted before us that the question referred to the Special Bench is i....
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....dingly, in the case of dealer in shares and securities, the expenditure incurred has a dominant and immediate connection with the profits arising on the sale of such shares and securities and the connection, if any, with the dividend income is only incidental one. Consequently, no disallowance can be made in such cases merely because the assessee has earned some dividend income in a casual manner. He also relied on the decisions of the Hon'ble Bombay High Court in the case of CIT v. Emrald Co. Ltd. [2006] 284 ITR 586 as well as in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203 wherein it has been held that in the case of dealer in shares the expenditure is incurred in relation to the profits on the sale of shares and not with reference to the dividend income. 13. The learned Counsel, Mr. K.C. Patel, has appeared on behalf of the intervener i.e., Mandalia Group. He took us through the circulars issued by the CBDT to clarify the scope of section 14A. Then it has been pointed out that the disallowance, if any, has to be made in accordance with the prescribed manner. He drew our attention to rule 8B which has been inserted by Income-tax (Fifth ....
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....y it does not cover a case where securities are held on trading account and not as investment. 15. Mr. Ajay Vora, the learned Counsel for the assessee namely, M/s. Cheminvest Ltd. and M/s. Maxopp Investments Ltd. has not disputed the legal contention of the learned Sr. D.R. that provisions of section 14A of the Act has overriding effect over the other computational provisions relating to other heads. However, it has been submitted that on the facts of the case, no disallowance can be made in the cases of above assessees. It has been submitted that both these assessees are promoters of Max India Ltd. engaged in diverse business activities which are also listed in the Stock Exchange. It is further submitted that both the assessees are engaged in the business of holding investments in shares of listed companies, namely, Max India Ltd. and Gaylord Impex Ltd. as well as other companies which are not listed. Our attention was drawn to page Nos. 140 to 142 to point out that investment in shares of Max India Ltd. and Gaylord Impex Ltd. are shown as investment in quoted shares while investments in the shares of other companies are shown as investments in unquoted shares. It is further po....
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.... held that the expression 'in relation to' would mean direct connection or association between the expenditure incurred and the income which is not taxable. He also placed reliance on other decisions of the Tribunal namely, Asstt. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi) 369 and Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi). However, it was submitted that it is the intention/motive of the assessee at the time when the expenditure is incurred which is relevant for establishing the dominant and immediate connection between the expenditure incurred and the income earned by the assessee. If the earning of tax free income is merely incidental then it cannot be said that dominant and immediate connection existed between the expenditure incurred and the earning of tax free dividend income. According to him, in the case of these assessees, there cannot be any motive/intention to earn the dividend income since the dominant motive/intention is to earn the taxable income on the sale of shares. Reliance has been placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Sutlej Cotton Mills [1975] 100 ITR 706 and the decision of the Hon'ble Bombay High Court in th....
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....s Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess 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." 18. The scheme of the Act shows that total income of assessee is to be computed under various heads of income specified in section 14....
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....elating to' appearing in Article 363 of the Constitution of India. Their Lordships, in para 135 of the judgment, held that such expression means 'provisions having a dominant and immediate connection with'. It was also held that it does not mean merely having a reference to. 20. It is the settled legal position that if a word or an expression has been judicially defined by the court then it should be presumed that the Legislature was well aware of such meaning while enacting an enactment and consequently, such word or expression in the enactment should be understood in the same sense in which it was judicially defined. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 wherein it was observed as under: "It is well-settled that where the Legislature uses a legal term which has received judicial interpretation, the courts must assume that the term has been used in the sense in which it has been judicially interpreted." Similar view was taken by the Apex Court in the case of Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 by observing as under: "When words acquire a particular meaning or sense because of....
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....dominant and immediate connection exists between the expenditure incurred and the taxable income and consequently, no disallowance under section 14A can be made even where some tax-free income is received incidentally. On the other hand, if the expenditure is incurred mainly with a view to earn the tax-free income then it can be said, that the dominant and immediate connection exists between the expenditure incurred and in the tax-free income and consequently disallowance under section 14A can be made even though some taxable income may arise incidentally. 24. However, there may also be cases where the expenditure may be incurred with a view to earn tax-free as well as taxable income simultaneously from an indivisible activity. Reference can be made to the decision of Hon'ble Supreme Court in the case of Maharashtra Sugar Mills. Ltd. (supra) where the assessee was carrying on the composite business of growing sugarcane and manufacturing sugar therefrom. The assessee claimed deduction in respect of managing agency commission paid by it but the Assessing Officer partly disallowed the same on the ground that part of such expenditure related to management of sugarcane cultivation in....
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....ant and immediate connection is the condition precedent for invoking the provisions of section 14A of the Act, in our opinion, the mere receipt of dividend income incidentally in the case of dealer in shares would not be sufficient for invoking the provisions of section 14A of the Act. 26. However, on facts, there may be instances where even a dealer in shares may choose to acquire shares with the main object of earning dividend income. In various cases, it has been seen that the shares/securities are purchased only with a view to earn dividend income despite knowing well in advance that there would be loss on the sale of such shares/securities, for example, Unit Trust of India usually notifies a date for declaration of dividend. In such cases, market price of units rises abnormally before the notified date and falls also abnormally after the notified date. Even in such situation, the assessee buys units at a high price before the notified date, receives the tax free dividend and then sells the units shortly thereafter at a loss. Reference can be made to the case of Walfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB) where such facts existed. The dividend inco....
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....3) can be made even if sub-section (1) does not apply, in our opinion, sub-sections (2) and (3) being procedural provisions cannot control the substantive provisions of sub-section (1) of section 14A. Sub-sections (2) and (3) would apply only when sub-section (1) applies to the facts of the case. If the Assessing Officer finds that there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income then only the provisions of sub-sections (2) and (3) would come into play and not otherwise. We hold accordingly. 28. In view of the above discussion, it is held that in case of dealer in shares no disallowance under section 14A of the Act can be made merely because some dividend is received incidentally unless it is established that there was dominant and immediate connection between the acquisition of shares and the earning of dividend income. Consequently, the referred question is answered in negative and in favour of the assessee. 29. Coming to the merits of the appeal in the case of Daga Capital Management Pvt. Ltd., we find that assessee was engaged in the business of purchase and sale of shares and securities which ....
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....ing investment in shares of two companies apart from making investments in unquoted shares on capital account. 31. The learned Counsel for the assessee, Mr. Ajay Vora, has raised a plea that investment in shares of Max India Ltd. and Gaylord Impex Ltd. was made with a view to have controlling interest in these two companies. Such plea was never raised either before the Assessing Officer or the learned CIT(A). The only explanation before the lower authorities was that assessee was an investment company engaged in the business of dealing in shares and securities. We have also gone through the Memorandum of Association of M/s. Cheminvest Ltd. The object clause permits the assessee to carry on the business of an investment company and to buy, underwrite, invest in, acquire, hold and deal in shares, stocks, debentures, etc. This also suggests that assessee was authorised to carry on the business as an investment company. The mere fact that the assessee was one of the promoters of the above two companies, would not lead to the conclusion that the only purpose for acquiring the shares was to have controlling interest. There is nothing on record to hold that investment in shares of thes....
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....2 Rs. 2,06,16,696 2002-03 Rs. 61,80,206 2003-04 Nil Note : The factual position in the case of Maxopp Investments Ltd. is almost similar to the case of Cheminvest Ltd. 33. On the basis of the above factual details, it is clear that motive/intention of the assessee was to acquire and hold the shares on long-term basis as an investment company. So the dominant intention is not to sell the shares on regular basis. Since the intention of the assessee is not to sell the shares of these companies in the near future, in our opinion, it cannot be said that there is any dominant and immediate connection between the interest paid and the taxable profits on the sale of shares. The chart given above reveals that only one transaction of insignificant quantity of shares was made. On the other hand, the enormous dividend income has been accrued and received by the assessee every year. In the case of investment companies, the main purpose of investment is to earn the maximum dividend income. There is no other motive or intention in case of investment companies. Therefore, we are of the view that there did not exist any dominant and immediate connection between the interest pai....
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....Act, is only incidental to the holding of shares and accordingly no disallowance be made under section 14A. In order to appreciate the rival submissions qua the instant controversy, it is relevant to extract section 14A, which is as under :- "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : [Pr....
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....he monies borrowed for the purchase of securities whose interest was tax free. 7. Almost a similar issue was raised before the Hon'ble Apex Court in the case of Maharashtra Sugar Mills Ltd. (supra) in which the assessee-company owned extensive lands on which it grew sugarcane and used the sugarcane for the manufacture of sugar in its factory. The assessee-company was managed by managing agents who were paid remuneration in accordance with the agreement entered into between the assessee-company and the managing agents. The managing agents were entitled to commission at Rs. 4.86 lakhs which was claimed as deduction. The Income-tax Officer disallowed a sum of Rs. 1.26 lakhs on the ground that the same related to the commission of the managing agents for managing the sugarcane cultivation part of the business. The Tribunal as well as High Court deleted the addition by observing that it was one single indivisible business. The Hon'ble Supreme Court observed that the entire managing agency commission was expended for the purpose of the business carried on by the assessee and was allowable in entirety notwithstanding the fact that the income from a part of that business was not exigibl....
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....d three judgments of the Hon'ble Apex Court along with several other judgments laying down the similar proposition, it transpires that the opinion of the judiciary was that the deductibility of the expenditure was to be viewed with reference to the relevant provisions of the Act allowing such deduction, notwithstanding the fact that the resultant income so produced is taxable or exempt. It was further elaborated in Rajasthan State Warehousing Corpn.'s case (supra) that if the two businesses producing taxable and exempt income can be bifurcated and do not constitute one indivisible business, then the apportionment of expenditure is permissible, but if the entire business was composite and indivisible, then no disallowance of the expenditure relatable to the exempt business could be made. 10. It was pursuant to the judgment in Rajasthan State Warehousing Corpn.'s case (supra) rendered on 23-2-2000 and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962. At this juncture it would be appropriate to note down the intention behind the insertion of this section which is coming u....
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....ncome 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 to 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 It is also being clarified that the assessments where the proceedings have become final before 1-4-2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act. 25.4 This amendment takes effect retrospectively from 1-4-1962, and accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years." 12. On a cursory look at the Memorandum explaining the provision in the Finance Bill as well as the aforenoted Circular, it becomes abundantly clear that the Legislature clarified its inte....
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....ation to income which does not form part of the total income. The contrary view expressed by the Hon'ble Courts on this issue is, therefore, to be regarded as no more relevant and binding and that too since the commencement of the Act, as has been clarified by the Circular. 16. With this background in mind, we will take up certain issues, one by one that have been raised before us for decision. A. Whether section 14A has overriding effect over all other sections allowing deductions 17.1 The learned Counsel for the assessee contended that section 14A would have no application to income chargeable under the head "Business income". He submitted that the disallowance of interest has been wrongly made by considering the applicability of section 14A, whereas the correct section allowing deduction is 36(1)(iii) as per which the amount of interest paid in respect of capital borrowed for the purposes of business or profession is to be allowed as deduction. The learned A.R. further submitted that though the dividend income falls under the head 'Income from other sources', but in view of the fact that the shares were held as stock-in-trade, such income would also be considered as 'Bu....
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.... containing two sections viz., 14 and 14A. Section 14 specifies that all income shall be classified under the heads 'Salaries', 'Income from house property', 'Profits and gains of business or profession', 'Capital gain' and 'Income from other sources' except as otherwise provided. The head of income "Interest on securities" has been omitted by the Finance Act, 1988 with effect from 1-4-1989. The only other section in the first sub-chapter is 14A, which starts with the words "for the purpose of computing the total income under this Chapter". It, therefore, emerges that section 14A has been inserted to have applicability over all the heads of income. The residence of this section in the first sub-chapter, viz., "Heads of income", clearly demonstrates that it has been made applicable to all the head of income. If the intention of the Legislature had been to restrict its application to the expenditure under the heads other than "business income", then it would have been placed under the relevant sub-chapter instead of the first sub-chapter, which, in turn, refers to all the heads of income. We, therefore, hold that the expenses deductible under the head 'Business income' are not immune....
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.... from the question raised before the Hon'ble Supreme Court that Their Lordships were to decide the deductibility of interest under section 36(1)(iii) and no issue qua the applicability of section 14A was ever raised before it. As against that we are concerned in the present appeals about the applicability of section 14A to the deductions otherwise available under the provisions of the Act. 17.6 Here we are reminded of the maxim GENERALIA SPECIALIBUS NON DEROGANT which means that the general things do not derogate from special. In other words, it implies that the special provisions override the general provision. If there are two conflicting provisions in the same section or clause, the special provision will prevail as the same is excluded from the general provision. To put it still differently, if a specific provision is made on a certain subject-matter, that matter is excluded from the general provision. The Hon'ble jurisdictional High Court in the case of Forbes Forbes Campbell & Co. Ltd. v. CIT [1994] 206 ITR 495 (Bom.) has quoted this maxim with approval. This maxim has also been applied by the Hon'ble Madras High Court in the case of CIT v. Copes Vulcen Inc. [1987] 167 ITR....
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.... is bereft of any force and deserves the fate of dismissal. Since the provisions of section 14A are special in nature and deal with the disallowance of expenditure in relation to exempt income, all such expenses cannot be allowed as deduction if these relate to the exempt income notwithstanding the fact that there are separate provisions for allowing such deduction. B. Sub-sections (2) and (3) of section 14A - Whether Retrospective or Prospective 18.1 We have reproduced sub-sections (2) and (3) of section 14A in an earlier part of this order, which were inserted by the Finance Act, 2006 with effect from 1-4-2007. The issue of their prospective or retrospective applicability has been hotly argued before us. Whereas the assessee is claiming that these sub-sections were inserted with effect from 1-4-2007 and hence will not be applicable to the assessment year in question, the learned D.R. has opposed the assessee's contention by submitting that these sub-sections are merely clarificatory in nature and provide the procedure for computing the disallowance of the expenditure and hence should be considered as retrospectively inserted. 18.2 In order to properly appreciate the pres....
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....on already settled. Thus, it is only in a case where the amendment is clarificatory, procedural or declaratory that such provision is applied in respect of matters relating to periods prior to the date of introduction of the provision, even in the absence of express language to that effect. This principle of interpretation of statutes is fairly settled by several judgments including the case of S. Subash v. CIT [2001] 248 ITR 512 (Mad.). From the enunciation of law in this case, it is clearly borne out that a procedural, clarificatory or declaratory provision is always considered as retrospective and presumed to be applicable to the period anterior as well as posterior to the amendment. This view has been taken by the Hon'ble Supreme Court in several judgments including H.H. Sir Rama Varma v. CIT [1994] 205 ITR 433 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625. Similar view has been reiterated in CIT v. Shelly Products [2003] 261 ITR 367 (SC) in which it has been held that the clarifactory provision inserted to clarify the law so as to remove the doubt, is retrospective even if it is stated to be applicable from a particular assessment year. 18.4 The learned Counsel for t....
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....Act, 1984 with effect from 1-4-1985 which provided that where an individual is a partner in a firm on behalf, or for the benefit or any other person any interest paid by the firm to such individual otherwise than partner in a representative capacity, shall not be taken into consideration for the purpose of this clause. When the applicability of Explanation 2 was taken to the Courts, the Hon'ble Supreme Court in the case of Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 , came to the conclusion that Explanation 2 to section 40(b) is declaratory in nature and is available for the period interior to 1-4-1985. Similar view was reiterated by the Hon'ble Apex Court in the case of Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753 . However certain contrary observations were made in the case of Rashik Lal & Co. v. CIT [1998] 229 ITR 458 (SC) as to the operation of Explanation 2. Again the matter was considered by the Hon'ble Supreme Court in CIT v. Kanji Shivji & Co. [2000] 242 ITR 124 in which all the earlier three judgments were considered. It was finally held that Explanation 2 to section 40(b) is declaratory and hence retrospective in operation. The observations in the case o....
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....ncome. Thus the procedure for determining the expenditure incurred by the assessee in relation to exempt income shall apply in both the situations, that is, where the assessee makes a claim that a particular expenditure is incurred in relation to exempt income with which the Assessing Officer is not satisfied and also where the assessee claims that no expenditure has been incurred by him in relation to the exempt income. The procedure for determining the amount of expenditure incurred in relation to the exempt income is to be worked out 'in accordance with such method as may be prescribed'. The method for such computation has been, in turn, prescribed in rule 8D. On going through these two sub-sections, it is clearly noticed that the purpose of these two sub-sections is to determine the amount of expenditure incurred in relation to the exempt income. We are unable to find out any substantive liability imposed by the Legislature through these sub-sections (2) and (3). These sub-sections simply lay down the procedure and mechanism for working out the expenditure in relation to income which is exempt from tax. Rule 8D has been enshrined to the Income-tax Rules, 1962 which prescribes t....
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....dend income. Such dividend income incidentally arose out of the shareholding by the assessee as stock-in-trade. Since the main purpose of the assessee in acquiring the shares was to earn profit by its trading which was taxable under the Act, the incidental income resulting by way of dividend from such shareholding could not be considered for making any disallowance of the expenditure under section 14A. It was asserted that what is relevant to consider is the object of incurring the expenditure. If such object is for earning exempt income then the disallowance is rightly called for under section 14A. If however it is for earning taxable income then no disallowance can be made, even if the assessee had incidentally earned some income which is exempt from tax. The learned A.R. relied on the judgment of the Hon'ble Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra ) for contending that the expression "in relation to" as used in section 14A should be considered to mean having "a dominant and immediate connection with the subject and any indirect connection was ruled out". In the light of this judgment it was stated that section 14A....
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....14A speaks about making disallowance of expenditure which has resulted into exempt income. The language of sub-section (1) of section 14A clearly provides that no deduction shall be allowed "in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act". On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. What is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. If the view point of the learned A.R. is accepted then it would mean putting the cart in front of the horse and redrafting sub-section (1) of section 14A. On going through sub-section (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. It is clearly borne out from rule 8D as has been discussed infra....
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....eclaration under the Presidential order dated 6-9-1970 derecognizing the Rulers as unconstitutional. The Union of India contended, inter alia, that Articles 291 and 362 of the Constitution did not invest the petitioner and the other Rulers with any enforceable right as the recognition of the Rulers under Article 366(22) was a matter of State Policy and the President was competent to pass the order. Thus, the question before the Hon'ble Supreme Court was to examine if it had the jurisdiction in examining the aforenoted three Articles viz., 291, 362 and 366(22). In that context the expression "relating to" came up for consideration when the Union of India contended that the jurisdiction of the Court was barred as the dispute relating to enforcement interpretation or approach of any treaty etc., was barred from the Court's jurisdiction. After examining the issue in detail, the Hon'ble Supreme Court, by the majority judgment, came to conclusion that the expression "relating to" should mean a direct and immediate connection with the subject-matter. It was, therefore, held that the Court had jurisdiction to examine Articles 291, 362 and 366(22) insofar as the dispute in question was conc....
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.... enactment cannot be bodily lifted and fitted into an another altogether different enactment. The Hon'ble Supreme Court in the case of CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174 has held that "the meaning assigned to a particular word in a particu- lar statute cannot be imported to a word used in a different statute. . . . The same word, if read in context of one provision of the Act, may mean or convey one meaning and another in a different context." From the above enunciation of the law by the Hon'ble Apex Court, it is patent that while giving meaning to a particular word in one section, there is no authority for importing and adopting the meaning of that word in some other parts of the same Act or in a different enactment. 23.5 With this background in mind, we go to the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra) relied upon by the learned A.R. for canvassing his point that the expression 'in relation to' as used in section 14A should be used in a narrow sense. From the narration of the facts of this case, it is observed that the expression "relating to" discussed in this case has been used by the Hon'ble Supreme Cour....
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....tributable to" has been employed in various sections including Explanation 6 to section 43(6), section 44AC prior to its omission and section 10(23B). The expression "in relation to" has also been used in various sections apart from section 14A, such as sections 36(1)(ix), 35(2AB). The phrase "relating to" has been used again in several sections including 36(1)(vii), 28(ii )(c). The phrase "wholly and exclusively for the purposes of" has been used in sections 37 and 57(iii). On going through the use of the above and other similar expressions in different parts of the Act, it is clearly borne out that these are not used interchangeably. The Legislature is fully conscious of employment of appropriate expression depending upon its intent of expanding or contracting the scope of the section. Wherever it intends to give a wider meaning, it uses the phrase like "in relation to" or "attributable to" etc. However, where the scope is to be restricted, it uses the suitable phrase such as "directly relatable to" or "wholly and exclusively for the purposes of", which narrows its ambit. We have noted above that the meaning of a word or phrase can be viewed only in reference to the context in wh....
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....ticular income or receipt, an amount computed in accordance with the following formula, namely:- A x B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii)an amount equal to one half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account....
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....posited in the bank from where the interest income results, in such a situation the relation between the interest paid by the assessee on the borrowed funds for the purchase of shares with the dividend income is dominant and immediate, being that of the first degree but the relation of such interest paid with the interest income earned on the amount invested in the bank, would be of second degree, being indirect and non-immediate. We, therefore, do not find any force in this submission. 23.9 The learned Counsel for the assessee while inviting our attention to rule 8D(2)(ii) contended that it refers to the "value of investment". On this analogy it was urged that section 14A along with this rule cannot have any application where the shares are held as stock-in-trade. The sum and substance of his submissions was that this section would apply only when the shares are held as 'Investment'. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "St....
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....tiate before the authorities that the assessees were not used for agricultural operations and that in fact they were being used for business purposes, there was no question of grant of depreciation thereon. Similarly, on account of gratuity, bonus, etc., the Tribunal also held that the assessee could not bring any evidence on record to show that the staff was engaged in its business operations and not in its agricultural operations. The Tribunal was correct in holding that section 14A would apply since substantial income was generated out of agricultural activity from the farm." 23.12 On going through the above judgment two things are noticeable viz., first the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the assessee and secondly, the apportionment of the expenses is permissible for making disallowance under section 14A. No contrary judgment of any other High Court on this point has been pointed out. In the light of the fact that there is a cleavage of opinion amongst the Benches of the Tribunal and there is no other judgment either of the Hon'ble Supreme Court or of any other High Court, this judgment of t....
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.... main business activity or incidentally. There may be a difference in classification of such income under one head or the other. But no special treatment is envisaged for the main or incidental income under the Act. There is no provision in the Act, which exempts a particular income from taxation simply on the ground that it is an incidental income. What is material to consider is the nature of income and not it being major or subsidiary. Moreover dividend is exempt irrespective of whether it is earned by the assessee from the shares held as investment or as stock-in-trade. The instruction of sub-section (1) is unexceptional in the sense that if there is any exempt income, the disallowance of the expenditure under section 14A in relation to such income has to automatically follow. There is absolutely no indication much less the reference in the language of section that could even remotely suggest that the disallowance is not contemplated in respect of incidental income, which is otherwise exempt from tax in the same manner as is the main income. We have already repelled the contention raised on behalf of the assessee that the object of the expenditure is to be viewed as a determina....
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....ard or soft. Turning to the language of section 14A, we observe that the disallowance is contemplated in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income under this Act. When the language of section is clear and does not admit of any doubt whatsoever, we are bound to interpret it literally. It is trite law that so long as there is no ambiguity in the statutory language, resort to in interpretive process to unfold the Legislative intent becomes impermissible. Taxing statute has to be strictly construed and nothing can be read in it as has been held by the Hon'ble Supreme Court in several cases including Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36 . In Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) also it was held that 'while interpreting a statute legislative intention must be found in the words used by the Legislature itself; legislative casus omissus cannot be supplied interpretative process except in case of clear necessity and when reason for it is found in the four corners of the statute itself'. Coming back to our case, we note t....