TaxTMI 
TaxTMI 
2024 (8) TMI 1371
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....f the Income Tax Act, 1961 [Act] would be liable to be restricted to the extent of exempt income earned during the year. 4. As would be evident from a reading of the judgment handed down by the Tribunal, it has while upholding the view taken by the Commissioner of Income Tax, (Appeals) [CIT(A)] followed the principles which had been enunciated by this Court in Principal Commissioner of Income-Tax vs. Caraf Builders and Constructions PVT. Ltd 2018 SCC Online Del 12876. 5. In Caraf Builders, the Court upon a due appreciation of the scheme underlying Section 14A had held that the disallowance of expenditure under the aforenoted provision would not only be restricted to the exempt income earned during that year, any disallowance even if computed in accordance with Rule 8D of the Income Tax Rules, 1962 [Rules] cannot exceed the exempt income earned in that year. The aforesaid position emerges from a reading of Paras 25 and 26 of the report and which are extracted hereinbelow:- "25. Total exempt income earned by the respondent-assessee in this year was Rs. 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should....
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....2014 - (2015) 4 ITR-OL 246 (P&H) made reference to two earlier decisions of the same court in CIT v. Hero Cycles Limited (2010) 323 ITR 518 (P&H) and CIT v. Winsome Textile Industries Limited (2009) 319 ITR 204 (P&H) to hold that section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. (2014) 223 Taxman 130 (Guj) ; (2015) 372 ITR 97 (Guj). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, CIT v. Shivam Motors (P.) Ltd. decided on May 5, 2014. In the said decision it has been held: "As regards the second question, section 14A of the Act provides that for the purposes of computing the total income under the 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 the Act. Hence, what section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had ....
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.... under clause (ii) of rule 8D(2) of the Rules." 6. Both Mr. Kumar and Mr. Maratha, learned counsels who appeared in support of these appeals have essentially questioned the apportionment of expenditure incurred on a purported reading of Section 14A to submit that irrespective of whether any exempt income is earned or not in a particular fiscal year, there can be no bifurcation of expenditure and that the Tribunal has clearly erred in taking the view which stands embodied in its orders impugned before us in these appeals. 7. According to Mr. Kumar, the incurring of expenditure is liable to be viewed as being totally disconnected or at least its recognition not being dependent upon the actual earning of a return on investment or any exempt income accruing in that year. According to learned counsel, the bifurcation of expenditure is thus wholly unwarranted. 8. While and undoubtedly Caraf Builders binds this Court having been rendered by a Coordinate Bench, since elaborate submissions were addressed by learned counsels on the question which stands raised, we had proceeded to hear the appeals on merit. 9. In order to appreciate the challenge which stands raised, it would, ho....
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....in relation to any income which does not form part of total income under the Act. By virtue of Finance Act 2006, sub-sections (2) and (3) came to be added to the principal provision. The last amendment came to be introduced by virtue of Finance Act, 2022 [2022 Act] and which saw the addition of an Explanation to Section 14A. 12. The provision as it exists presently is reproduced hereinbelow:- "[14A. Expenditure incurred in relation to income not includible in total income.-[(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.] [(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 t....
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....a deduction. The mischief which Section 14A sought to address stands eloquently spelt out in the Memorandum which had explained the provisions of the 2001 Act while noting that assessees were claiming deductions in respect of expenditure incurred in relation to exempt income. It was noted that as a result of the above, assessees were being able to derive a double benefit and thus not only deriving income which was otherwise claimed as exempt from taxation, but additionally claiming deductions with respect to the expenditure incurred in relation thereto. It was thus noted that the tax incentive made available by way of exemption of certain categories of income was being used to reduce the tax payable even on non-exempt income. It was to overcome the aforesaid lacuna that Section 14A came to be introduced. 16. One of the earliest decisions of the Supreme Court which lucidly explained the objectives underlying Section 14A was the one rendered in Commissioner of Income Tax vs. Walfort Share and Stock Brokers Private Ltd. 2010 SCC Online SC 671. In Walfort, the Supreme Court explained the scheme of Section 14A in the following terms:- "28. In this batch of cases, we are requ....
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....der 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. The theory of apportionment of expenditures between taxa....
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....-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." 17. As is manifest from the aforequoted passage, the Supreme Court enunciated the objective of Section 14A being that expenses incurred can only be allowed to the extent that they relate to the earning of taxable income. The introduction of Section 14A was further explained as being driven by the legislative intent of attending to situations where expenditure incurred in earning exempt income was also being claimed against income which was otherwise exigible to tax. The Supreme Court explained that....
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....nded 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 (2000) 242 ITR 450 (SC), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) laid down the following principles (455 of 242 ITR): "(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxabl....
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....rovision retrospective makes it clear that Parliament wanted that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen the finalised assessments prior to the assessment year beginning on April 1, 2001. Furthermore, as observed by the Supreme Court in Walfort (2010) 326 ITR 1 (SC), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it as associated or related expenditure would also not be permitted to be debited against other taxable income. 25. We are of the view that the expression "in relation to", appearing in section 14A of the said Act, cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows: "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of....
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....come, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest-bearing loan from the bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from the tax net. There is no quarrel up to this extent. 4. However, in these appeals, the question has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as "stock-in-trade". However, incidentally income was also generated in the form of dividends as well. On this basis, the assessees contend that the dominant intention for purchasing the share wa....
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....expenditure which is made directly and for the object of earning exempt income (in the present appeals dividend income) could be disallowed under section 14A of the Act. If the dominant and main objective of spending was not the earning of "exempt" income then, the expenditure could not be disallowed under section 14A of the Act provided it was otherwise allowable under sections 15 to 59 of the said Act. 21. The High Court, however, did not agree with the aforesaid propositions advanced by the learned counsel for the assessees which according to it was mired by several difficulties. Distinguishing the case law cited by the assessees where the expression "in relation to" was interpreted by this court, as not applicable in the present context, the High Court, instead, referred to the judgment in the case of Doypack Systems Pvt. Ltd. v. Union of India* wherein this court has held that expressions "pertaining to", "in relation to" and "arising out of" used in the deeming provisions, are used in an expansive sense. It also referred to the judgment of this court in CIT v. Walfort Share and Stock Brokers P. Ltd.** wherein this court has held that the basic principle of taxation i....
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.... to" in the given scenario, viz., where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee-company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee-company. Other cases are those where the shares of investee-company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. 43. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in o....
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....cept the opinion of the Punjab and Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee-company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee-companies have to fail and are, therefore, dismissed." 22. As would be evident from the aforesaid conclusions rendered in Maxopp, it was found that Section 14A is clearly concerned with an identification and attribution of expenditure with reference to exempt income which otherwise would not form part of total income. It was thus explained that where the income of an assesse has both taxable and non-taxable elements, it would be the principle of apportionment of expenditure relating to non-taxable income which would have to be identified. The view expressed by this High Court was ultimately affirmed. 23. It is the aforenoted fundamental precepts underlying Section 14A as propounded by the Supreme Court in the decisions noticed hereinabove whic....
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....id statutory amendment would apply to the assessment years in questions is an issue which we propose to dwell upon in the subsequent parts of this decision. 26. Our view on the imperatives of apportionment and the identification of expenditure with reference to exempt income is further fortified not only from a plain reading of Section 14A (2) which alludes to income which does not form part of total income, but also Rule 8D and which is the machinery provision for determination of the amount of expenditure incurred in relation to exempt income. 27. Rule 8D again speaks of expenditure incurred in relation to exempt income. This becomes evident from a reading of that provision which is reproduced hereinbelow:- "8D. (1) Where the Assessing Officer, having regard 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 ....
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.... submission, the Division Bench of our Court had held as follows:- "4. Learned counsel for the petitioner also submits that in view of the amendment made by the Finance Act, 2022 to section 14A of the Act by inserting a non obstante clause and an explanation after the proviso, a change in law has been brought about and consequently, the judgments relied upon by the authorities below including IL&FS Energy Development Co. Ltd. {supra) are no longer good law. The amendment to Section 14A of the Act is reproduced hereinbelow: - "Amendment of section 14A-In section 14A of the Income-tax Act, - (a) in sub-section (1), for the words "For the purposes of, the words "Notwithstanding anything to the contrary contained in this Act, for the purposes of shall be substituted; (b) after the proviso, the following Explanation shall be inserted, namely: - Explanation.-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Aet, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has ....
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....However, the respondents have urged the point before us. 10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 I FR 314 (Gauhati)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318)„..it is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has {sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand.' 11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165: (2000) 241 ITR 312]. These decisions are thus authorities for the propositi....
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....h by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3. '5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India. 5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years.' 16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless, affords a reasonable construction of it, and there is no reason why we should not adopt it. 17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied i....
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.... (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law, it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". 18. There was and is no ambiguity in the main provision of section 9 (1) (ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, "income payable for service rendered in India". 19. When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating ret....