TaxTMI 
TaxTMI 
TaxTMI 
2024 (8) TMI 1371
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....he 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 be enhanced from Rs. 75.89 crores to Rs. 144.52 crores. Upper disallowance as he....
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....010) 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 not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked ou....
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.... 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, however, be apposite to notice the following salient facts at the outset. Section 14A came to be introduced in the statute book by virtue of Finance Act, 2001 [The 2001....
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....ent 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 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 to....
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....urred 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 required to decide three distinct points which are as follows: (i) Whether "return of investment" or "cost recovery" would fall within the expression "expenditure incurred" in section 14A? (ii) Impact of section 94 (7) with effect from 1 -4-2002 on t....
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....y 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 taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of w....
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....nditure" 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 Section 14A was driven by the aim of the Legislature to curb the practice of claiming deduction of expenses incurred even in relation to exempt income. 18. Section 14A and its ambit again arose for the consideration of this Court in Maxopp Investment Limited vs. Commissioner of....
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....t 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 taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible ; and (iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable ....
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.... 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 expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act." 26. That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or conne....
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....nterest-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 was not to earn dividends income but control of the business in the company in which shares were invested or for the purpose of trading in the shares as a business activity, etc. In this backdrop, the issue is as to whether the expenditure incurred can be treated as expenditure "in relation to income" i.e. dividend income which does not form part of the total income. To put it differently, is the domin....
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....rt, 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 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, its associated or related expenditure would also not be permitted to be debited against other taxable income. 22. Likewise, explaining the meaning of "expenditure incurred", the High Court agreed that this expression ....
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.... (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 order to gain control of the investee-company. However, that does not appear to be a relevant factor in determining the issue at hand. The fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind section 14A of the Ac....
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....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 which find resonance in Caraf Builders. The said decision correctly identifies the fundamental principle being of ensuring that expenditure incurred in the course of earning exempt income is not set off against income which is otherwise taxable. It is this basic tenet which constrains one to bifurcate and apportion the expenditure which may be claimed by an assessee. Right from Walfort, all judgments rendered in the context of Section 14A and noticed hereinabove, have consistently spoken....
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....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 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; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total inco....
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....on 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 not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income." 5. However, a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reprod....
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....ch 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 proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years. 12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9 (1) (ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: 'Explanation-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (а) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by ....
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....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 is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1....