TaxTMI 
TaxTMI 
2025 (12) TMI 1230
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....for the appellant are in respect of Section 14A of the Act. Suffice to state that during the relevant Assessment Year 2011-12, the Assessee has earned Rs.50,000/- on divided income, which has been reflected under the head "other income" in the P&L account. The A.O. disallowed an amount of Rs.14,12,51,908/- under Section 14A of the Act. The CIT(A) has determined the disallowance @ 0.5% of the average investment. Aggrieved by the same, the Revenue filed appeal before the Tribunal against the deletion of disallowance to the tune of Rs.6,71,96,859/- by the CIT(A) and also by the assessee for upholding disallowance of Rs.89,32,232/-. The Tribunal after noting the submissions of the departmental representative on behalf of the appellant has sated the following: "a. Section 14A of the Income-tax Act, 1961 ('Act') was in to the Income Tax Act, 1961 vide Finance Act 2001, with retrospective application from 1.4.1962. It provides for disallowance of expenditure in relation to income not "includible" in total income. Over a period of time, there have been several cases decided on this issue by various High Courts. CBDT issued a Circular no. 5/2014 on 11th February 2014, clar....
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....ated by the language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 80 read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income." The issue therefore, is If sect/o. 14A (1) would stand attracted even If such income, I.e., Income not includible In the total Income, Is not actually earned, subject to expenditure relatable to such income having been Incurred. The CBDT Circular 5/2014, after explaining the rationale of the provision of section 14A (with reference to Circular 14 of 2001), i.e., to curb the practice of reducing the tax liability on taxable income (i.e. income forming part of the total Income) by claiming expenditure incurred in earning tax-exempt Income against taxable Income, goes on to state that the legislative Intent Is that the expenditure relatable to earning such income shall have to be considered for disallowance. In that event i.e expenditure relating to earning tax-exempt income having been incurred, it would....
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....f expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. The decision by the Apex Court in the case of GIT v. Walfort Shard & Stock Brokers (P.) Ltd. (supra) stands followed in Godrej & Boyce Mfg. Co. Ltd. V. Dy. CIT [2017] 81 taxmann.com 111 (SC) where the Hon'ble Supreme Court, while considering whether deduction of expenditure incurred, in earning dividend income which is not includible in the total income of the Assessee by virtue of the provisions of Section 10(33) of the Income Tax Act, 1961 as in force during the Assessment Year i.e. 2002-2003, was admissible or otherwise, made the following observations: "32. A brief reference to the decision of this Court in Walfort Share and Stock Brokers (P.) Ltd. (supra) may now be made, if only, to make the discussion complete. In Walfort Share and Stock Brokers (P.) Ltd.(supra) the issue involved was: "whether in a dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act?" "33. While ans....
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....ircumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)?" The revenue's contention in the above case was that 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 rejected the revenue's contention, and held., 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 and therefore, the interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii). The ratio decidendi of the judgment of Hon'ble Supreme Court in CIT v. Rajendra Prasad Moody (supra) can be applied to say, by the same analogy, that the expenditure incurred to earn an exempt income is subject to its admissibility in accordance with the provisions of the Income Tax Ac t, 1961 including those of section 14A irrespective of whether there is a receipt or income or not during the year under consideration. In sum, the pr....
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....t is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel up to this extent." "32. In the first instance, it needs to be recognized that as per section 14A(1) of the Act, deduction of that expenditure Is not to be allowed which has been incurred by the assessee "In relation to Income which does not form part of the total Income under this Act". Axlomatlcally, It is that expenditure alone which has been incurred In relation to the income which is (not) Includible In total Income that has to be disallowed. 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." The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into....
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....ssage whereof Is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "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. ....................................... The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." "35. The Delhi High Court, therefore, correctly observed that prior to Introduction of Section 14A of the Act, the law was that when an assessee had a composite and Indivisible business which had elements of both taxable and non-taxable Income, the entire expenditure In respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable Income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not onl....
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....on 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares Is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessee as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits ....
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....p doubts in the interpretation of an existing legislation. As a general rule, such clarificatory amendments are considered to have a retrospective effect. This applies even if such amendments are made applicable from a prospective date in the Finance Bill (See Justice GP Singh's Principles of Statutory Interpretation and CIT v. Vatika Town ship (P) Ltd [2014] 49 taxmann. com 249 (SC). In the case of Vatika Township (P) Ltd (supra), the Hon'bie Supreme Court discussed the general principles concerning retrospectively, an extract of which is as under: "A legislation, be it a statutory Act or a statutory rule or a statutory Notification, may physically consists of words printed on papers. However, conceptually It' is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work offiction/nonfiction or even in a judgment of a Court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the....
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....ive retrospective effect. It is my humble submission therefore alongwith the aforesaid Judgments of Hon'bie Supreme Court which constitute an authority in law on the issue whether an expenditure incurred in relation to a tax-exempt income attracts 'disallowance u/s 14A irrespective of whether such tax-exempt income has been earned during the year or not or earned incidentally with business income, the Finance Biii 2022 has sought to put matters at rest by laying down in no uncertain terms and in a crystal dear manner the dominant intention of the statute. The, same intention which was sought to be redressed by the CBDT vide Circular no.5/2014 dated 11/02/2014. For the sake of repetition, it is stressed again that the intention of the statute is that expense disallowance under the said section shall apply and shall be deemed to have always applied even in a case where the exempt income has not accrued or arisen or has not been received during a' particular year. It does not talk about income earned during a particular year but income earned under the Income Tax Act. Most importantly the clarification has not modified accrued rights or imposed obligations or impo....