TaxTMI 
TaxTMI 
2011 (11) TMI 30
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome Tax Act, 1961. Eleven (11) of these have been filed by assessees and ten (10) by the revenue. Eight of these appeals - four by assessees and four by the revenue -- have been admitted and questions have been framed in them. The other appeals were tagged along therewith. It was, however, clearly understood by all the counsel appearing on both sides that the appeals which had not been formally admitted would be deemed to have been admitted for hearing and it was on this basis that arguments were addressed. All these appeals are concerned with section 14A of the Income Tax Act, 1961 and Rule 8D of the Income Tax Rules, 1962. In particular, we are called upon to examine as to whether interest paid on funds borrowed for investing in shares of operating companies for acquiring and retaining a controlling interest therein is allowable under section 36(1)(iii) and is not hit by section 14A of the Income tax Act, 1961. And, consequently, we are also required to examine the retrospective applicability of the sub-sections (2) & (3) of the said section 14A and of the said Rule 8D to the assessment years in question which range from 1998-99 to 2005-06. Questions 2. Since, across these ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....78,90,430/-. The assessee had received the following incomes: - 1. Interest on loans advanced Rs. 1,94,70,181 2. Dividend received Rs. 49,90,860 3. Profit on sale of shares Rs. 1,49,285 The aforesaid dividend of Rs. 49,90,860/- was received on the shares of Max India Ltd, held by the assessee as "trading assets". By an order dated 27/08/2004, the assessing officer, invoking section 14A of the said act, apportioned the said interest expenditure in the ratio of investment in shares of Max India Ltd, on which dividend was received, to the principal amount of unsecured loans, which worked out to Rs. 67,74,175/-. However, the assessing officer restricted the disallowance under section 14A of the said act to Rs. 49,90,860/-, being the amount of dividend received. On appeal, the CIT (A), by the order dated 12/01/2005, upheld the order of the assessing officer. Thereafter, the case of the assessee was heard by a Special Bench constituted in the case of Daga Capital Management (P) Ltd. The Special Bench of the Tribunal held that the expenditure claimed was hit by the provisions of section 14A of the said Act. Pursuant to the majority decision of the S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 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." 9. Then, by the Finance Act, 2006, Section 14A was numbered as sub-section (1) thereof and after sub-section (1) as so numbered, the following sub-sections were inserted, with effect from 01/04/2007:- "(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-s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- 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 whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv) which says that any expenditure laid out or expended wholly an exclusively for the purpose of such business shall be deducted as an allowance. The mandate of section 10(2) (xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the act is not a relevant circumstance." (Emphasis supplied) 13. In Rajasthan State warehousing Corporation (supra), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian bank Ltd: 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd (supra) laid down the following principles:- "(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction admissible under the respective head wheth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven by way of exemptions to certain categories of income is being used to reduce also the tax payable on the nonexempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income -tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years." 16. As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC), the insertion of section 14 A with retrospective effect reflect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the total income could not be allowed against other income includable in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A." (emphasis supplied) Analysis of section 14A 18. Sub-section (1) of section 14A clearly stipulates that for the purposes of computing total income under Chapter IV (Computation of Total Income), 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 the said Act. A lot of emphasis was laid on the expressions "incurred" and "in relation to". It was contended by Mr Ajay Vohra, who appeared....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Supreme Court was concerned with the interpretation of a constitutional provision dealing with the jurisdiction of courts, inter alia, concerning any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of the Constitution relating to a treaty, agreement, covenant, engagement, sanad or other similar instrument which was entered into or executed before the commencement of the Constitution by any Ruler of an Indian State and to which the Government of the Dominion of India or any of its predecessor governments was a party and which is or has been continued in operation after such commencement. In the present appeals we are not concerned with a provision of the Constitution and that too dealing with the jurisdiction of a court. Secondly, what needs to be emphasised is that in the very same paragraph 134, the Supreme Court observed that the meaning of a word or expression used in the Constitution often is coloured by the context in which it occurs and that the simpler and more common the word or expression, the more meanings and shades of meaning it has. The Supreme Court further held that it is the duty of the court to det....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stoms or to the value of goods for the purposes of assessment". The Supreme Court was of the view that the key was to be found in the words "for purposes of assessment". It held that where the appeal involved the determination of any question which had a relation to the rate of customs duty for the purposes of assessment, that appeal must be heard by a Special Bench. It further held that, similarly, where the appeal involved the determination of any question which had a relation to the value of goods for the purposes of assessment, that appeal must also be heard by a Special Bench. In this context the Supreme Court observed as under: - "The phrase "relation to" is, ordinarily, of wide import but, in the context of its use in the said expression in section 129C, it must be read as meaning a direct and proximate relationship to the rate of duty and to the value of goods for the purposes of assessment." This decision also makes it clear that the expression "in relation to" is, ordinarily, of wide import. In the normal course, the said expression would have an expansive meaning unless, of course, the context would otherwise suggest. 24. We do not agree with the submission of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reme Court made it very clear that 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 heads of income and is chargeable to tax. The Supreme Court further clarified that if an income like dividend income is not part of the total income, the expenditure/deduction related to such income, though of the nature specified in sections 15 to 59, cannot be allowed against other income which is includable in the total income for the purpose of chargeability to tax. "expenditure incurred" 26. It was contended by the learned counsel for the assessees that the words "expenditure incurred" as appearing in section 14A(1) clearly mean that there must be actual expenditure. Of course, the actual expenditure must be for earning the exempt income. We have already pointed out above, that we do not subscribe to the narrow interpretation sought to given to the words "in relation to" which the learned counsel for the assessees are espousing. Thus, we will have to consider the argument of the asssessees in respect of the expression "expenditure incurred" in the context of the expenditure being in conne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggreg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2008 which was notified by the Central Board of Direct Taxes by its notification No.45/2008 dated 24/03/2008. 33. Dr Rakesh Gupta, the learned counsel, who had appeared for some of the assessees, submitted that Section 295 of the said Act empowered the Central Board of Direct Taxes to make rules for the whole or any part of India for carrying out the purpose of the said Act. He referred to sub-section (4) of Section 295 and submitted that the power to make rules conferred on the Central Board of Direct Taxes included the power to give retrospective effect, from a date not earlier than the date of the commencement of the said Act, to the rules or any of them and, unless the contrary was permitted (whether expressly or by necessary implication), no retrospective effect was to be given to any rule so as to prejudicially affect the interests of the assessees. He further submitted that Rule 8D was inserted in the said rules, but the Central Board of Direct Taxes did not make it retrospective. He submitted that whenever the CBDT felt it necessary to introduce a rule with retrospective effect, it did so by making the rule expressly retrospective. As an example, he referred to Rule 11EA....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." 38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of subsection (2) and it clearly indicated that it would be applicable "from the assessment year 2007-08 onwards". 39. It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression "such method....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A." So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incuured in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able to the assessment years prior to 2008-2009, the assessing officers would now have to follow the steps outlined in paragraph 42 above. Revenue's appeals 46. The appeals filed by the revenue are disposed of as below:- ITA No. 77/2009 [CIT v. HCL Perot Systems Ltd](AY 2000-01) ITA No. 139/2009 [CIT v. HCL Perot Systems Ltd](AY 2001-02) The Tribunal did not sustain the disallowance made by the Assessing Officer under Section 14 A and directed the Assessing Officer to re-compute the disallowance in terms of the method of working given by the assessee. The revenue is aggrieved inasmuch as the Tribunal did not direct the Assessing Officer to re-compute the disallowance in terms of Rule 8D read with sub-sections (2) & (3) of section 14A. While Rule 8D would be inapplicable, the assessing officer would now have to follow the steps outlined in paragraph 42 above. ITA No.57/2008 [CIT v. Vou Investment Pvt Ltd](AY 1998-99) The Tribunal deleted the disallowance under section 14A by holding that the earning of dividend was merely incidental to holding of shares and that the Assessing Officer had also failed to pinpoint the expenditure actually incurred in r....