TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 794
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.....02 crore, as on 31.03.2012 - the year-end.) The assessee replied by stating that it had not earned any income by way of dividend on the said shares, for section 14A of the Act to apply. Reliance was placed on the decision in Cheminvest Ltd. (in ITA No. 794/2014, dated 02/9/2015) by the Hon'ble Delhi High Court. Two, it had not incurred any expenditure in relation to the said investment in shares, so that section 14A would even otherwise not apply. The AO completed the assessment accepting the assessee's contentions. The ld. Pr. CIT, subsequently observed the following facts on a perusal of the assessee's balance-sheet, forming part of the assessment record (refer para 3 of the impugned order): "3. I have considered the facts of the case and the provisions of the law with regard to the section 263 of the Income Tax Act, 1961. On perusal of the balance sheet of the assessee the following facts are note worthy:- (a) The assessee has negative net worth of Rs. 7.7 crores as on 31.03.2012 and Rs. 1.6 crores on 31.03.2011. (b) The borrowed funds of the assessee as on 31.03.2012 are roughly Rs. 11 crore; on which interest of Rs. 3.59 crores has been debited in the profit & loss ac....
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....y examination by the A.O. qua the aspect of incurring of expenditure by the assessee-company in relation to the investment/s yielding (or liable to yield) tax-exempt income, which, in-so-far as it relates to the investment in Gautam Iron Mills Pvt. Ltd., is apparent from a bare browse of the assessee's final accounts, i.e., the balance-sheet and profit and loss account for the relevant year. Incurring such expenditure is a sine qua non for the invocation of section 14A, the premise of which is to determine correctly the income chargeable to tax, i.e., the income forming part of the total income, returned by the assessee at Rs. 130.16 lacs. The assessee, neither before the ld. Pr.CIT nor before us disputes the factual observations by the competent authority, made, as stated with reference to the assessee's final accounts, forming part of the record (refer para 3 above). How could then, we wonder, the inference of the investment in shares being financed by borrowed funds be disputed; the assessee having no positive capital and, in fact, throughout the year, so that its entire assets, including the shares under reference, as is apparent, are financed by borrowed capital, outstanding a....
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....the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word "erroneous' in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.' The principle is well-established, and lack of inquiry renders an order erroneous inso- far as it is prejudicial to the interest of the Revenue. Case law in the matter is legion, rendered in different fact situations: CIT ....
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....206 ITR 797 (Bom); Patil Vijayakumar v. Union of India [1985] 151 ITR 48 (Kar)). No such decision by either the Hon'ble jurisdictional High Court or the Hon'ble Apex Court has been brought to our notice. The moot question therefore is if the said Circular is in conformity with the law. Section 14A, immediately succeeds section 14 - the first section of Chapter IV of the Act, enumerating the heads of income under which all income, subject to the other provisions of the Act, is to be classified for the purpose of computation of total income, introduced by Finance Act, 2001 w.r.e.f. 01.04.1962 (since renumbered as 14A (1)), reads as under: 'Expenditure incurred in relation to income not includible in total income 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.' [emphasis, supplied]_ The issue is if section 14A(1) would stand attracted even if such income, i.e., income not includible in the total income, is not actually earned, of course, subject to expenditure relatable to such income hav....
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.... income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act.' The issue, thus, considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not, but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. With regard to the scope of the relatable expenditure, the Apex Court clarified the same with reference to any expenditure enumerated in sections 15 to 59 (para 17, pgs. 16-17 of the Reports). The question is simple. If taxable income (i.e., income forming part of the total income) is to be added at net of relatable expenditure, how could it be otherwise for the tax-exempt income? Rather, if not so considered, not only would it violate the basic principle of taxation, it would defeat the very purpose of section 14A, as expenditure rel....
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....that is incurred in the earning of such income cannot be allowed even though it is of a nature specified in ss. 15 to 59 : "If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in ss. 15 to 59 but related to the income not forming part of the total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax." Having observed thus, the Supreme Court held that the theory apportioning expenditure between taxable and non-taxable income has now, in principle, been widened under s. 14A. Hence, for the reasons that we have indicated earlier, we hold that income from dividend on shares is, in the hands of the recipient shareholder, income which does not form part of the total income. Hence, s. 14A would apply and the expenditure incurred in earning such income would have to be disallowed. Income from mutual fund stands on the same footing.' (emphasis, ours) Continuing our discussion, how, one may ask, could the expenditure incurred in earning tax-exempt income stand altered, either in nature or in quantum, depending on the quantum of the tax-exempt inc....
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....sion in computing business income, the making or earning of income was a sine qua non to the admissibility of the expenditure u/s. 57(iii). And, therefore, where no income resulted, no expenditure would be deductible. The Apex Court, after a review of the judicial precedents, which it cited with abundance, also reproducing there-from, rejected the Revenue's contention, stating that the plain and natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure (pg. 522 of the Reports). Any other interpretation, to our mind, would not meet the test of equity and be liable to be regarded as arbitrary. The Apex Court in fact pointed out to the oddity of the situation arising out of the Revenue's argument, giving an example (at page 522-523 of the Reports) where an expenditure of Rs. 1,000/- (say) would not be deductible if no income was earned, while would get allowed even if Re. 1 was earned, resulting in a loss of Rs. 999 under the head "Income from other sources". This is also - inasmuch as the expenditure has not resulted....
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....axing of income, and does not admit of two views. This also explains it being made applicable w.r.e.f. 01/4/1962, i.e., from the date the Act itself comes into effect. Section 14A, as may now be clear, is toward providing the legislative framework for operationalizing the said principle by way of apportionment of the relevant expenditure, i.e., between taxable or non-taxable income/s, which assumes particular significance where incurred for an undivisible business. Why, direct expenditure in relation to tax-exempt income, as agriculture income (say), would get excluded for being allowed as deduction in computing taxable income even in the absence of section 14A, i.e., on the basis of principle of net income, i.e., net of expenditure incurred in relation to such income, as liable to tax (or to be excluded in computing the taxable income), as explained by the Tribunal in per its decision in ITO v. Daga Capital Management Pvt. Ltd. [2009] 312 ITR (AT) 1 (Mum) (SB); Damani Estates & Finance (P.) Ltd. [2013] 25 ITR (Trib) 683 (Mum); D. H. Securities (P.) Ltd. v. Dy. CIT [2013] 31 ITR (Trib) 381 (Mum), to cite some. How could, one may ask, the agriculture expenditure incurred for agricul....
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....example - which is the same as that obtains in the present case, is so well established that the Apex Court itself finds the same as settled and not disputed. The applicability of sec. 14A does not hinge on the actual earning of the tax-exempt income. Reference for the purpose may be made to the majority of view in Daga Capital Management Pvt. Ltd. (supra) (at para 8 of the Judgment), noted with the approval by Hon'ble Apex Court, as well as the arguments made before the Hon'ble High Court, pleading that the actual earning of dividend income was immaterial in-as-much as the relatable expenditure would remain the same (at para 30 of the Judgment), and which the Hon'ble Court found as so, noting that it would be earned by a quirk of fate where shares are held as 'stock-in-trade', while would stand to be earned whenever dividend is declared on shares held as investment - as in the present case, as in either case, section 14A gets attracted (para 40). The dispute in that case was with regard to the scope of the words 'in relation thereto' occurring in section 14A(1) as well as the relevance of the object for which the investment yielding (or liable to yield) tax-exempt income i....
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.... If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.' Where, one wonders, then, is the scope for two views. Relying extensively on its decision in Walfort Share & Stock Brokers P. Ltd. (supra), the Apex Court upheld the theory of apportionment, discountenancing the theory of predominant object. The uncertainty of earning the dividend income, or of it being earned incidentally, was also noted by it, though to no moment. It was immaterial if dividend income was actually earned or not, which, rather, may be a consideration where the shares, as in the present case, are held to retain control over the investee company, i.e., for strategic reasons, as was the case with regard to the investment by Maxopp Investment Ltd. - one of the assessees in that case. The related expenditure has to be reckoned on an expansive basis, i.e., as attributab....