TaxTMI 
TaxTMI 
2010 (11) TMI 183
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.... within the time period of limitation that one of the directors Mr. Nakul Jagjivan who is key managerial person. Being NRI, his presence in the country is occasional based on work priorities. Before filing the appeal, the impugned order of the CIT(A) was to be examined, analyzed and required to be discussed with the said Director Mr. Nakul Jaggin who is staying abroad. Thus, the delay has been occurred due to the reason of non availability of one of the directors which is a bonafide, non intentional or not deliberate. It has been prayed that the delay of 67 days in filing the appeal may be condoned. 5. On the other hand, the learned DR has vehemently opposed the condonation of delay. 6. After considering the relevant record, facts and circumstance of the case as well as the reasons explained by the assessee, we find that the assessee has explained the sufficient reasons for non-filing of the appeal within time. 7. It is settled law that while condoning the delay, the court should take a lenient view. It is always a question whether the explanation and reasons for delay was bonafide or was merely devise to cover an ulterior purpose such as laches on the part of the litigant....
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....tly crediting in the D-mat account. Thus, the assessee submitted that there is no question of incurring any expenditure on earning of the dividend income as the same is directly credited in the D-mat account. The assessee also submitted that assessee's share holder's funds are Rs. 27,94,34,833.43 while the investment, at the most is Rs. 27,06,64,720.10 which is less than the share holder's funds. Therefore, there is no question of disallowance of interest since the investment has been made out of the share holder's funds. The assessee further submitted that the assessee's is also dealing in trading in share business and in the year under consideration the assessee has shown the income in the share business to the extent of Rs. 34,43,57,863.70. On the basis of this contention, the assessee submitted that since assessee is dealing in trading in shares, the question of disallowance of interest does not arise. The assessee submitted that if there is any money borrowed for the business purposes, the same has to be allowed u/s 36(1)(iii) of the Act. 11. The AO, after going through the above submissions of the assessee vide letter dated 27.10.2006 again called upon the assessee to prod....
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....ition, the assessee submitted that it has not only paid the loan but also redeemed the preference shares. The assessee submitted that during the year under consideration, it earned the profit of Rs. 28,35,16,379, therefore the assessee was able to repay the loan as well as redeem the preference shares of Rs. 6 crores. 15. The AO was not satisfied with the explanation given by the assessee. The AO also observed that the assessee failed to produce substantial evidence in support of its contention. Therefore, he disallowed the interest paid on proportionate basis. He also disallowed the administrative, other expenses and financial charges on proportionate basis by considering the fact that for managing the investment portfolio the assessee must have incurred certain portion of those expenses debited to the profit and loss account. Therefore, the AO computed the proportionate disallowance u/s 14A as under : "It is seen from the balance sheet that as on the balance sheet date the own capital of the company is at Rs. 27,94,34,833 and total borrowings is at Rs. 52,90,70,980 It is also seen from the P and L account that the assessee has incurred total interest expense of Rs. 6,01,89,....
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....he total disallowance u/s 14A of the Act, comes to Rs. 2,15,85,350 which is nothing but the sum of Rs. 2,01,50,172 disallowed out of interest payment and Rs. 14,35,178 disallowed out of administrative and other expenses and financial charges. " 16. On appeal, the CIT(A) held as under : "3.3 I have gone through the arguments and submissions of the ld. AR as well as the contents of the impugned assessment order I do not find any merit in the arguments and submissions of the ld. AR that there should not be any disallowance u/s 14A. There as various judgments in respect of applicability of section 14A with reference to dividend income. In case of Citicorp Finance (India) Ltd. 300 ITR 398, the Hon. ITAT, Mumbai observed that a company's investment decisions being complex in nature, require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. The application of funds has there own inherent cost. Complex financial decisions require higher managerial skills and consequent high corporate expense. On the basis of these arguments, it was held that the AO must apportion....
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.... the assessing officer has made disallowance u/s 14A at Rs. 21,585,350 on the basis given by him at pages 10-11 of the assessment order. In brief, he has worked out in an arbitrary manner the estimated interest on proportionate borrowed funds allegedly employed in purchase of shares. The learned AR submitted that, in this manner, the AO has worked out the interest disallowable u/s 14A at Rs. 20,150,172. Similarly, on proportionate basis he has attributed administrative and other expenses to the extent dividend income at Rs. 1,435,178. The total disallowance u/s 14A thus made by the assessing officer is Rs. 21,585,350. On assessee's appeal learned CIT(A) has directed the assessing officer to recompute the disallowance u/s 14A keeping in view the principles laid down in Rule 8D of IT Rules. 18. The first and foremost contention of the assessee in this appeal is that no disallowance out of interest expenditure incurred by the assessee can be made u/s 14A. Assessment year under consideration is assessment year 2004-05. As held by Hon. Bombay high court in the case of Godrej and Boyce Manufacturing Co. Ltd. Mumbai (234 DTR 1), the provisions of section 14A(2) and Rule 8D cannot be ap....
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....ction 14A should be actually incurred and so incurred with a view to producing non-taxable income. Further more, hon. Bombay High Court in the case of CIT v. General Insurance Corporation of India Ltd. 254 ITR 203 (Bom.) held that the expenditure that is not directly relatable to earning of dividend income cannot be deducted from deduction u/s 80M. Again in the case of CIT v. Central Bank of India 264 ITR 522 (Bom.) a case of investment in shares and not trading in shares hon. Bombay high Court has held that only actual interest paid on earning dividend is deductible and estimated proportionate expenditure is not deductible from gross dividend while working out deduction under section 80M. Reference in this regard was also made to the decision of the ITAT Calcutta in the case of Shaw Wallace and Co. Ltd. 80 ITD 158 (Cal.) and judgment of MP High Court in the case of State Bank of Indore v. CIT 275 ITR 23 (MP) also. 22. In view of the arguments as made in the foregoing paragraphs the learned AR of the assessee submitted that there cannot be any disallowance u/s14A even partially of the expenditure relating to buying and selling of shares as attributable to dividend received in th....
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....tantive provisions of sub section (1) of section 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Consequently, dehors the provisions of sections (2) and (3) of section 14A and Rule 8D, the Assessing Officer was entitled to determine by the application of a reasonable method what quantum of the expenditure incurred by the assessee would have to be disallowed on the ground that it was incurred in relation to the earning of income which does not form part of the total income under the Act. Undoubtedly in determining what would constitute a reasonable method for effecting the disallowance, the Assessing Officer would have to give due regard to all the facts and circumstances of the case. The change which is brought about by the insertion of sub sections (2) and (3) into section 14A by the Finance Act of 2006 with effect from 1 April 2007 is that in a situation where the Assessing Officer is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the nontaxable income, the Assessing Officer would have....
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....to the extent they are relatable to the earning of taxable income. The object and scheme of section 14A has been discussed by the Hon. Supreme Court, High Courts and this Tribunal on various occasions. Some of the relevant decisions in which this issue has been considered and analysed are discussed as under : M/s. Walfort Share & Stock Brokers P. Ltd. 326 ITR 1 (SC) "56.5 This amendment will take effect from 1st April, 2002, and will accordingly, apply in relation to the assessment year 2002-2003 and subsequent years. The main issue involved in this batch of cases is whether in dividend stripping transaction (alleged to be colourable device by the Department) the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under section 10(33), disallowable under section 14A of the Act? According to the Department, the differential amount between the purchase and sale price of the units constituted "expenditure incurred" by the assessee for earning tax-free income, hence, liable to be disallowed under section 14A. As a result of the dividend pay-out, according to the Department, the NAV of the mutual fund, which was Rs. 17.23 per u....
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....s 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 for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/ deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. ....
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.... 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, therefore, section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of section 14A. The next point which arises for determination is whether the "loss" pertaining to exempted income was deductible against the chargeable income. In other words, whether the loss in the sale of units could be disallowed on the ground that the impugned transaction was a transaction of dividend stripping. The AO in the present case has disallowed the loss of Rs. 1,82,12,862 on the sale of 40% tax-free units of the mutual fund. The AO held that the assesse....
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....arry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra). Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of section 94(7). The object of section 94(7) is to curb the short term losses. Applying section 94(7) in a case for the assessment year(s) falling after 1.4.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, losses over and above the amount of the dividend received would still be allowed from which it follows that the Parliament has not treated the dividend stripping transaction as sham or bogus. It has not treated the entire loss as fictitious or only a fiscal loss. After 1.4.2002, losses over and above the dividend received will not be ignored under section 94(7). If the argument of the Department is to be accepted, it would mean that before 1.4.2002 th....
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....f exempt income. It occurs only when the sale takes place. Section 14A comes in when there is claim for deduction of an expenditure whereas section 94(7) comes in when there is claim for allowance for the business loss. We may reiterate that one must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc. while interpreting the scheme of the Act. Before concluding, one aspect concerning Para 12 of Accounting Standard AS-13 relied upon by the Revenue needs to be highlighted. Para 12 indicates that interest/ dividends received on investments are generally regarded as return on investment and not return of investment. It is only in certain circumstances where the purchase price includes the right to receive crystallized and accrued dividends/ interest, that have already accrued and become due for payment before the date of purchase of the units, that the same has got to be reduced from the purchase cost of the investment. A mere receipt of dividend subsequent to purchase of units, on the basis of a person holding units at the time of declaration of dividend on the record date, cannot go to offset the cost of acquisition of the units. Therefore, AS-1....
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....isallowed under section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation." 29. The Hon. High Court has further observed and summarized the conclusion in paragraph 43 as under : "A Summation of our conclusions on the interpretation of the provisions: 43. In order to conclude the discussion on this aspect of the case, we would proceed to recapitulate our conclusions. (i) Section 14A was enacted by Parliament in order to overcome the judgments of the Supreme Court in the case of Indian bank, Maharashtra Sugar and Rajasthan Warehousing Corporation in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and nontaxable income, it is impermissible to apportion the expenditure between that which was laid out for the earning of taxable as opposed to nontaxable income; (ii) The effect of section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of section14A where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and nontaxable income, t....
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............. (xi) ............. (xii) ............. (xiii) Income from dividend and similarly, income from mutual funds do not form part of the total income under section 10(33).The expenditure incurred in relation to earning such income cannot be allowed under section 14A; (xiv) In order to determine the quantum of the disallowance, there must be a proximate relationship between the expenditure and the income which does not form part of the total income. Once such a proximate relationship exists, the disallowance has to be effected. All expenditure incurred in the earning of income which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court in Walfort and it would not be permissible to restrict the provisions of section 14A by an artificial method of interpretation..." 30. It is clear from the above decision of the hon'ble jurisdictional High Court that the expenditure incurred on the earning of the non taxable income should not be allowed as deduction against the taxable income. Even in the case of composite/indivisible business which results the earning of both taxable and non taxable ....
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....sallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination." 31. As relied upon by the learned AR the Delhi Bench of the Tribunal in the case of ACIT v. Eicher Ltd. reported in (2006) TTJ (Del) 369 elaborately discussed this issue in paragraphs 14,15, 20, 21 and 22 as under : "14. Section 14A gives the AO the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the language of....
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....ows that it is the duty of the AO to pin point such expenditure on the basis of the material on record. 16.... 17.... 18.... 19... 20. Section 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the revenue both judicially as well as statutorily as noted above. Now s. 14A as explained by the Memorandum explaining the provisions of the Finance bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. Obviously, the decision which the finance bill sought to nullify are those in the case of Indian Bank (supra), Maharashtra Sugar Mills Ltd. (supra) and Rajasthan State Warehousing Corp. (supra) Both the memorandum explaining the Finance Bill and the section as enacted say that only where the expenditure has been actually incurred by the assessee in relation to the exempt income, can the AO refuse to allow deduction in respect of the same. To the extent the earlier judgments hel....
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....ourt proceeded to hold that the view that they have taken is not in conflict with the decision of Supreme Court in Distributors (Baroda) (P.) Ltd.'s case (supra) Indeed, we may make it clear that in case, if the taxing authorities or assessee as the case may be is able to prove or show that a particular amount was actually incurred has got to be deduced from gross dividend income and then the same is to be taken into consideration under section 80M (underlining, italicized in print ours). It was further observed that since in the case before the High Court "the taxing authorities have not taken into consideration the actual expenditure incurred by an assessee while earning the dividend but has only proceeded to take notional expenditure, the same cannot be held to be sustainable in law "and that" it is not in accordance with the view even taken by Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) underlining, italicized in print ours. Two aspects stand out, on a perusal of the above judgments. First, that the High Court have not authorized the disallowance of any notional expenditure (as against actual expenditure) to reduce the income in respect of which dedu....
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....l by holding that the language employed by section 14A is very wide and includes every expenditure irrespective of the head under which it is claimed. The tribunal further proceeded to hold and we are respectfully in agreement with the same that the burden under section 14A is on the revenue to prove that interest paid by the assessee on borrowed funds related to the acquisition of shares yielding tax-free income. In paragraph 61, the tribunal further held that the words "in relation to" appearing in the section would include any expenditure which is proved (by the revenue) to have nexus directly or indirectly with the utilization of the funds for earning tax-free income. The question whether it was the duty of the AO to prove on the basis of material on record that the assessee actually incurred expenditure in relation to the exempted income did not precisely arise before the tribunal nor has it been decided specifically. However, it seem to us that the decision could be construed as holding, albeit immediately that only actual expenditure incurred in relation to exempted income can be disallowed, because the tribunal in terms held that the onus is on the revenue to prove that int....
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.... "business" and since the shares have been purchased out of borrowed funds, the interest on such borrowings is allowable under section 36(1)(iii) as it is incurred for the purpose of his business section 36(1)(iii) reads as follows : "Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) ** ** ** (ii) ** ** ** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Explanation.-Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; Section 28 sets out what income shall be chargeable to income tax under the head "profit and gains of business or profession" 10. Clause (iii) of section 36(1) makes allowance in respect of interest paid on capital borrowed for the purposes of business or profession. The dividend earned on such shares is assesse....
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.... the case of Distributors (Baroda) (P.) Ltd. (supra) is distinguishable on facts as that case was limited to the question whether deduction under section 80M was available with respect to the gross or net amount of dividend in a case where the assessee was an investment company and not a trader dealing in shares. It may be noted that the principle laid down in Distributors (Baroda) (P.) Ltd. (supra) wherein the Supreme Court construed the expression such income by way of dividend in s 80M as dividend included in the gross income which would be the dividend computed in accordance with the provisions of the Act that is, the net dividend, has been incorporated in the Act by s 80AA which has now been omitted w.e.f 1st April, 1998. 18. In the case on hand, the interest on the overdraft and the expenses are related to the business of trading in shares and ought to be allowed as computed income under the head "business". The said expenses cannot be once again be deducted from the dividend income for the limited purposes of computing the deduction under section 80M of the Act. There is no statutory provisions requiring the AO to deduct the same expenses under two different heads of inco....
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....ade such dividend income is not intended at the time of purchases of such shares and accordingly there is no live connection between the expenditure incurred and dividend income. The similar view was taken by the The Hon. Kerala High Court in the case of CIT v. Smt.Leena Ramchandranan M/s Homfit, in ITA No. 1784 of 2009, order dated 14.6.2010 has held as under : "4. On facts we find that the interest paid by the assessee during the previous year for the funds borrowed for acquisition of shares in the company was at the rate of 24% p.a. and the total interest paid in the accounting year alone is as much as Rs. 17,44,310. It is on record that assessee had received only a dividend income of Rs.3 lakhs and no other benefit is derived from the company for the business carried on by it. The disallowance prohibited under section 14A is expenditure incurred for earning any income which does not constitute total income of the assessee. In other words, any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. Dividend income is exempt under section 10(33) of the Income Tax Act and so much so, dividend earned by the assessee on the....
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.... we hold that the Tribunal in principle rightly held that the utilisation of borrowed funds for acquisition of shares will not entitle the assessee for claiming deduction of interest paid on such borrowed funds. However, we hold that the Tribunal was not justified in allowing the claim in excess of Rs.2 lakhs. For the same reasoning applied by the Tribunal, the assessee is not entitled to deduction of any amount towards interest paid on funds borrowed by way of fixed deposits taken for acquisition of shares in the company, which helped the assessee only to earn some dividend. Consequently we allow the appeal by reversing the order of the Tribunal and by restoring the disallowance confirmed in first appeal." 36. As held by the Hon. Jurisdictional High Court in the case of Godrej and Boyee Manufacturing Co. Ltd Mumbai (supra), section 14A is implicit within it a notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible business which receives taxable and non-taxable income. However, the principle of apportionment is applicable only in the cases where it is not possible to determine the actual expenditure incurred "in relation to" the inco....
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....ive expenses u/s 14A : The AO disallowed the administrative expenditures on the basis of the ratio of the taxable income and dividend income. At the outset the basis of apportionment is absolutely wrong, unreasonable and inappropriate because the expenditure does not depend on the profit or loss arising from the business activity. It is to be noted that if the basis of apportionment of expenditure is taken as income than in case of no income or loss no expenditure can be assigned to the said activity. Therefore the proper and reasonable basis should be the turnover or volume of transaction, frequency and nature of the transaction/activity. In case of transaction of purchase and sale of share and securities the reasonable basis for apportionment of the administrative expenditure among the different activities should be the volume and nature of the transaction under different activities of business. There cannot be a parity or equal basis for apportionment of the administrative expenses between the delivery based transaction and non-delivery based transaction as well as trading and investment activities. Undisputedly the labour hours and other overhead expenses will be less in cas....