TaxTMI 
TaxTMI 
2010 (10) TMI 386
X X X X Extracts X X X X
X X X X Extracts X X X X
....cumstances of the case, the provisions of section 14A are applicable when the dividend was received by the assessee on the shares which were acquired in the course of assessee's business and income from which is taxable; ii) whether the provisions of Rule 8D are applicable in the case of the assessee. . 4. Issue No. 1 regarding applicability of the provisions of section 14A of the Act. During the year the assessee has earned income from the dividend of Rs. 60,30,372/- which is exempt as claimed under section 10 of the Act . The AO noticed that the assessee has not allocated any expenditure as regard for earning of this tax free income. The assessee contended before the AO that no expenses have been incurred to earn the exempt income. The AO did not accept the contention of the assessee. Accordingly the AO by following the decision of this Tribunal in the case of ACIT V/s Citicorp Finance (India) Ltd (108 ITD 457) (Mum) as well as the other orders i) DCIT V/s SG Investments and Industries Ltd (89 ITD 44) Kolkata ii) CIT V/s United General Trust 200 ITR 148 (SC), iii)Manmohan Lal M Shah V/s DCIT 105 IED 669 and the decision of the Hon. Supreme Court in the case of CIT V/s Uni....
X X X X Extracts X X X X
X X X X Extracts X X X X
....form the bank was not for the purposes of acquiring shares with the object of earning dividends on those shares, but the object of the borrowings was to purchase shares for the purpose of the assessee's business namely buying and selling of shares and securities with a view to earning profits. The object of the borrowing thus was not for making or earning dividend income. The learned AR then referred the memorandum explaining the provisions of Finance Bill 2001 whereby the amendment was brought and section 14A was introduced in the statute and submitted that the legislature intent in bringing the section 14A was to curb the practice of claiming the expenditure incurred for earning the exempt income. Therefore as per the object behind the provisions, the expenditures incurred can be al lowed only to the extent they are eligible to earning the taxable income. The ld AR has also refer red the decision of the Hon. Supreme Court in the case of CIT V/s Wall fort Share and Stock Brokers Pvt. Ltd (2010) 326 ITR 1 (SC) and the decision of the jurisdictional High Court in the case of Godrej and Boyce Mfg Co. Ltd V/s Dy CIT (2010) 43 DTR 177 (Bom.). The ld. AR while concluding his argument ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isions of section 14A are attracted when the assessee has earned the income which is not included in the total income irrespective of the fact whether such exempt income desired by the assessee or incidental, when the assessee has claimed such income as exempt u/s 10. Dividend is not in the hand of the assessee, therefore, the intent of the assessee is not material for applying the provisions of section 14A. He has further contended that the jurisdictional High Court in the case of Godrej and Boyce Mfg Co. Ltd V/s Dy CIT (supra) has observed, in the paragraph 24, the principle emerges from section 14A in view of the decision of the Hon. Supreme Court in the case of CIT V/s Wallfort Share and Stock Brokers Pvt. Ltd (supra). He has relied upon the orders of the authorities below. 11. We have considered the rival contentions and relevant record. It is not disputed by the assessee that the expenditure which was not incurred for the earning of the exempt income by the AO are not incur red for the purchase and sale of the shares. The main contention of the assessee is that the said expenditure incurred for the purposes of business activity and therefore no part of the same can be attrib....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not "expenditure incurred" in terms of Section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of Section 14A. For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay- back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for is allowance, 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 expenditur....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 non-taxable income, it is impermissible to apportion the expenditure between that which was laid out for the earning of taxable as opposed to non-taxable income; (ii) The effect of Section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of Section 14A where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred on earning nontaxable income could not be allowed as a deduction as against the taxable income. As a result of the enactment of Section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and indivisible business, which results in the earning of taxable and non....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ected. 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. C.2 A plain and grammatical construction does not lead to absurdity: 14. It is clear from the above decision of the honourable 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 income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of the expenditure which is incurred in relation to the income which form the part of the total income should be allowed. The expenditure incurred in relation to the income which does not form part of the total income has to be disallowed. The Hon'ble High Court further observed that section 14A has implicit within it a notion of apportionment. Even prior to the amendment whereby the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he year under consideration in this case. At the same time, as we have noted, Section 14A(1) would have to be given effect to. The principle underlying Section 14A(1) is that no deduction can be claimed in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. The dividend income earned by the assessee for Assessment Year 200203 does not form part of the total income in view of the provisions of Section 10(33) as they then stood. Hence, the expenditure which has been incurred in relation to the earning of that income would have to be apportioned and disallowed. Even if Rule 8D has no application to Assessment Year 200203 the Assessing Officer would be duty bound to compute the extent of the disallowance by the application of a reasonable method having regard to all the facts and circumstances of the case. In order to facilitate this exercise, an order of remand to the Assessing Officer would be necessary. 70. However, it has been urged on behalf of the assessee that there is no factual basis for making a disallowance in view of the findings recorded by the Tribunal for Assessment Years 1998-99, 1999-00 and 2001-02. Hen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. Even if the assessee has utilized its own funds for making 43(1991) 192 ITR 165. 44(2009) 313 ITR 340 (Bom). 45 (2008) 298 ITR 298 (SC). investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine. Whether or not any expenditure was incurred by the assessee in relation to the earning of nontaxable income falls within the domain of the Assessing Officer. The basis on which the Tribunal had come to its decision for Assessment Years 1998-99, 1999-00 and 2001-02 would not conclude that question. 72. .......... a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been 47(1997) 224 I....