TaxTMI 
TaxTMI 
2010 (9) TMI 1183
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....e of ₹ 60,27,520 as dividend from shares of M/s. Dhampur Sugar Mills, but claimed it as exempt from total income offered for taxation. The AO asked the assessee to provide details of exempt income from dividend income alongwith details of expenses incurred on realizing dividend income. In compliance to that, the assessee submitted that any expenditure in respect of dividend income earned during the year had not been incurred. The contention of the assessee was examined by the AO with relevant audited books of account and other details. He did not accept the contention of the assessee by observing that the expenditure reflected in Profit and Loss Account under various heads envisaged the portion of expenditure incurred in relation to the income which was not directly attributable to any particular income or receipt. He, therefore, rejected the claim of the assessee that no expenditure had been incurred in relation to the dividend income. The AO made the disallowance of ₹ 13,91,511 by observing as under : "… the disallowance of proportionate expenses for earning of dividend income is calculated with formula as under : 1. A x B/C where A = Amount of average ex....
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.... respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.' Thus, the addition could have been made only in respect of the expenditure which had a relation to the income which did not form part of the total income during the year. However, the Ld. Addl. CIT has failed to establish the nexus of the expenditure incurred by the company with the exempted income (dividend) and has made an addition of ₹ 13,91,511 to the total income. The detailed break up of the expenses ₹ 13,91,511 disallowed is as under, as per the copy of the Profit & Loss Account enclosed herewith: Salary Rs. 3,14,997 Interest Rs. 7,61,314 Repairs Rs. 54,588 Travelling Rs. 84,859 Postage Expenses Rs. 11,596 Stationery Rs. 9,498 Audit fee Rs. 7,857 Professional fee Rs. 40,360 Bad debts written off Rs. 10,804 Miscellaneous expenses Rs. 10,040 Bank charges Rs. 13,600 13,19,513 it would be noticed by Your Honour that none of the expenses were directly related to the earning of the dividend income. Further, the appellant had surrendered an amount of ₹ 76,087/- at the time of furnishing the return out....
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....rmula, the Ld. Addl. CIT has made addition even in respect of those investments from which the appellant did not earn any income during the year which is beyond the legislative intention." 4. The ld.CIT(A), after considering the submissions of the assessee, observed that the assessee received income from dividends of ₹ 60,27,520 during the year out of investment in shares of Dhampur Sugar Mills Ltd. The investment involved was ₹ 15,46,74,008. According to the ld.CIT(A), the assessee did not have any other income which was taxable from the said investment and therefore, the precise quantum of expenditure in the form of interest and other expenses, such as, repairs and maintenance of office, stationery, staff and miscellaneous expenses etc. was not determinable. In such facts and circumstances of the case, the AO had determined the quantum of expenditure related to the earning of exempt income in accordance with the method prescribed in Rule 8D of the I.T.Rules, 1962. The ld.CIT(A) pointed out that the disallowance of claim of expenses which were related to the income not includible in the total income of the assessee was of ₹ 13,91,511 and the disallowance as....
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....lation 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." 8.1 From the above provisions it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is....
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....) 132 : (2000) 242 ITR 450 (SC) that in the case of a composite and indivisible business which resulted in taxable and non-taxable income, it was impermissible for the AO to apportion the expenditure incurred in relation to such business as between the earning of taxable and nontaxable income. Sub-sec. (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words "expenditure incurred" in s. 14A refer to expenditure on rent, tax, salary, interest etc. in respect of which allowances are provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. The Memorandum Explaining the Provisions of the Finance Bill of 2006 recognizes that the existing provisions of s. 14A ....
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....egislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 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. The change which is brought about by the insertion of sub-ss (2) and (3) into S. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the fir....