TaxTMI 
TaxTMI 
2003 (5) TMI 198
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.... Rs. 21,51,38,978 as reflected in Schedule 'C' of the Balance-sheet. During the year the investments have been shown at Rs. 11,24,21,048 as reflected in Schedule 'E' of the Balance-sheet. The assessee had debited a sum of Rs. 3,69,36,637 as interest including interest on inter-corporate deposits, loans and dividends. The assessee had shown dividend income to the tune of Rs. 41,38,924 which was primarily dividend earned on long term investments and claimed as exempted under section 10(33) of the Act. The Assessing Officer required the assessee to give break-up of the costs relating to earning of dividend income and to explain as to why the costs related to earning of exempted dividend should not be disallowed. It was explained by the assessee that no cost could be apportioned for earning dividend income inasmuch as the assessee in course of business activities had borrowed funds from time to time and incurred interest expenditure on such borrowings which were utilised for the purpose of its business activities and the interest paid thereon is deductible under section 36(1)(iii) of the Act. It was explained by the assessee that primary object of borrowing was essentially for the purp....
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..... exempted dividend." 4. Being aggrieved the assessee preferred appeal before the CIT(A) who deleted the disallowance of interest of Rs. 19,14,940 by taking in view the decision of various courts wherein it was held that where borrowed money is utilised for the purchase of shares and dealing in shares is one of the business activities of the assessee then the interest expenditure incurred on the money borrowed for the purpose of purchase of shares is deductible under section 36(1)(iii) and cannot be apportioned as relatable to dividend income and also taking in view the decision that the interest expenditure incurred in relation to indivisible business activity comprising of dealing in various activities cannot be identified relatable to any independent business activity. Hence the department is in appeal. 5. The ld. D.R. has submitted that the Assessing Officer was justified in disallowing proportionate interest of Rs. 19,14,940 as relatable to earning of exempted dividend income as the shares were held by the assessee as investment, and as such the proportionate interest is to be treated as incurred in relation to earning of dividend income. He has made a reference to the n....
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....xpenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." 9. A new section 14A in Chapter IV of the Income-tax Act, 1961 was inserted by the Finance Act, 2001, with retrospective effect from 1-4-1962. The Circular No.14 of 2001, dated 22-11-2001 issued by the CBDT and the purpose for which the amendment was made has explained the substance of section 14A in the following words: - "25. No deduction for expenditure incurred in respect of exempt income against taxable income. 25.1 Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income, This in effect means that the tax incentive given by way of exemptions to certain categories of income, is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principals of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is als....
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...., 2001, a new section namely 14A was inserted in the Income-tax Act retrospectively with effect from 1st April, 1962 to clarify the intention of the Legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income-tax Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. 23.2 Through Finance Act, 2002, a proviso to section 14A has been inserted so as to clarify that the Assessing Officer shall not reassess the cases 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. 23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001 received the assent of the President of India." 10. Dividend income is exempt in view of section 10(33) inserted from 1 st April, 1998, by Finance Act, 1997. The ....
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....rovision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon." 11. A closer look at the provisions contained in section 10(33) and section 115-O of the Act makes it abundantly clear that income by way of dividend referred to in section 115-O shall not be included in computing the total income of a previous year of any person. Section 115-O, which has been inserted by the Finance Act; 1997 provides the provision relating to tax on distributed profits by way of dividends of domestic companies. Sub-section (5) of section 115-O further states that no deduction under any other provisions of the Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) of section 115-O or the tax thereon. The liability to pay additional tax on dividends declared and paid by the domestic company under section 115-O of the Act is notwithstanding anything contained in any other provisions of the I.T. Act and is subject to the provisions of section 115-O. The section 115-O(1) beginning with the expression "notwithstanding anything ....
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....dividend income does not form part of total income chargeable to tax. To find out the answer to the question whether interest paid on borrowed monies far acquiring the shares held as investment can be construed as an expenditure laid out or expended wholly and exclusively for the purpose of making or earning dividend, we may refer to the following decisions; - (i) CIT v. Model Mfg. Co. (P.) Ltd. [1980] 122 ITR 767 (Cal.) wherein it was held- "that though the ultimate or ulterior motive of the assessee might have been to confer controlling interest either to itself or to NK and TK, the immediate purpose for acquisition of the shares was to earn income from the dividends thereof and the Tribunal was, therefore, right in holding that the interest was deductible under section 57 against its income from other sources. The word "purpose" in section 57 cannot mean the motive for a transaction; much less can it mean the ulterior motive or ulterior object of the transaction." (ii) CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) "The plain natural construction of the language of section 57(iii) of the Income-tax Act, 1961, irresistibly leads to the conclusion that to bring a....
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....nvestment portfolio as an integral part of the business is allowable in its entirety under section 36(1)(iii) of the Act, which states that the deduction for the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession shall be allowed in computing the business income referred to in section 28 of the Act, and that any portion of that interest is not to be allocated as against income from dividends, though it is assessable under the head "Income from other sources". In the similar line, the ld. counsel for the assessee has put forward his arguments to contend that, in the facts and circumstances of this case, the portion of interest paid on moneys borrowed is not allowable against dividend income, which is now exempted from income-tax, as the interest expenditure incurred by the assessee-company in respect of capital/funds borrowed by it for the purpose of making investment in shares/securities represents the interest expenditure incurred by the assessee for the purpose of its business activity and accordingly the same is allowable under section 36(1)(iii) of the Act, even though the resultant profit or income from such investment in t....
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....visions of sections 56 and 57 it still forms part of the business income of the assessee. On similar line, the decisions in following cases are also being referred to: - (a) CIT v. Tingri Tea Co. Ltd. [1971] 79 ITR 294 (Cal.). (b) Seth Banarsi Das Gupta v. CIT[1977] 106 ITR 559 (All.). (c) Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC). (d) Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 (Guj.). (e) CIT v. D.G. Goenka [1981] 129 ITR 260 (Bom.). 16. It was further held by various courts that where an assessee is carrying on one indivisible business in various ventures and some among them yield taxable income and others do not, the entire expenditure is a permissible deduction without any apportionment. The crux of this school of thought is that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of the expenditure cannot be made. In this connection the following decisions are noteworthy to be mentioned: - (a) Indian Bank Ltd.'s case. (b) Maharashtra Sugar Mills Ltd. s case. (c) Punjab State Co-operative Supply & Marketing Federation Ltd. v. CIT[1981] 128 ITR 189 (Punj. & Har.). (d)....
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....g into consideration the language used the memorandums and the Notes on clauses it appears- (i) Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act; (ii) There are cases where deductions have been claimed in respect of such exempt income, which means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income; (iii) The act of debiting the expenses incurred to earn the exempt income against taxable income is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed; (iv) Therefore, the exemption is also in respect of the net income; (v) Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income; (vi) Section 14A was, therefore, inserted so as to clarify the said intention of the Legislature since the inception of the Income-tax Act, 1961 and to set the existing controversy on this issue at rest and not to unsettle th....
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....ot form part of the total income under the Act" also in section 14A of the Act. The expression "in relation to" used by the Legislature in newly inserted section 14A of the Act is a broader expression having regard to the object behind the introduction of the provisions of section 14A, which is inserted with an object (i) to disallow expenditure incurred in respect of exempt income against taxable income, (ii) to allow the expenses incurred only to the extent they are relatable to the earning of taxable income and (iii) to allow the exemption in respect of the net income. The expression "in relation to" used in section 14A of the Act has both direct significance as well as indirect significance having regard to the context in which it is used. It can also be gathered from the memorandum explaining the provisions of section 14A stating that in the absence of any such provision like that of section 14A the expenditure incurred in respect of exempt income was being claimed against taxable income though the Legislature had no such intention since the inception of the Income-tax Act, 1961. The amendment by inserting section 14A was thus made retrospective with effect from 1-4-1962, and ....
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....tal income under the Act. On reading these sections we find that the intention of the Legislature is to allow deductions, in computing the total income, under Chapter VI-A of the Act from the gross total income, only that part of income which is computed in accordance with the provisions of the Act and is included in the gross total income. What these sections mean is that the net income computed in the manner provided by the provisions of the Act and included in the gross total income alone be taken into account for computing the deductions available under Chapter VI-A of the Act. A larger Bench of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, while dealing with section 80AA of the Act has held that the deduction under section 80M is to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. Section 80AA, which provided that the deduction under section 80M was to be computed with reference to the net dividend income and not gross dividend incom....
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....y the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are to be allowed only with reference to income which is brought under one of the heads in section 14 and is chargeable to tax only. In other words, computation of total income under one or more of the sections from section 15 to section 59 is to be made only for the purpose of chargeability to tax. The income is to be brought under one of the heads in section 14 and can be charged to tax only if it is so chargeable under the provisions of the Act. Where there being no income chargeable to tax under the Act, the question to bring the same under any of the five heads of income specified in section 14 could not arise and consequently the same would not form part of total income. If any income is not a part of total income, the expenditure/ deduction though of a nature specified in sections 15 to 59 but related to the income not forming part or total income could not be allowed or considered against other income includible in the total income for the purpose of chargeability to tax. There could be no such intention of the Legislature and a scheme of the Act to allow deductions related to i....
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....t income has now become widened in view of the clarification given by way of insertion of section 14A in Chapter IV of the Act. The view expressed by Madras High Court in the case of Chemical Holdings Ltd. in our considered view, have thus become more strengthened and appears to be more correct and sound law in the light of specific provisions contained in section 14A, which, in its retrospective operation, is merely declaratory of the law as it was always since the inception of the Act inasmuch as having regard to the scheme of the Act and basic principles of taxation it could never be intention of the Legislature to allow expenses incurred to earn the exempt income against taxable income and at the same to grant exemption on gross amount of exempted income. 22. On considering the various decisions of courts and the position of law as has been emerged out there from and considering the totality of the discussion made above there is no doubt in saying that in case where the monies are borrowed for the purchase of shares to be held as investments the interest on borrowings has to be considered and allowed as deduction while computing the income from dividend. In other words, the ....
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....paid on the amount borrowed for investing in shares for which dividend is earned as expenditure in relation to his business under section 36(1)(iii) of the Act. It is common knowledge that no dividend could be earned without making investments as the dividend could have been earned only after investments are made. When it is found that investment in shares are made out of borrowed capital, it is then not understood as to why the interest paid on such borrowings should not be regarded as expenditure incurred in relation to earning of dividend income. The amount of such interest is, therefore, required to be deducted from dividend income before computing the amount of the dividend on which exemption under section 10(33) is to be allowed. Relief by way of exemption is to be given only on the net amount of the dividend, i.e. after deducting from the gross dividend the expenditures incurred in relation thereto. The interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as an expenditure incurred in....
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....application under section 256(2) of the Act made by the Revenue shall be deemed to have been allowed, a reference made, and answered the question in favour of the Department. The effect of this judgment is thus that the proportionate management expenses are to be deducted from the gross dividend for the purpose of the relief under section 80M. The decision of Supreme Court in Distributors (Baroda) (P.) Ltd.'s case was applied in this case. 25. Having said so, we now proceed to appreciate the facts and circumstances of the case in hand with a view to decide the question that falls before us for our adjudication. As unfolded from the assessment order and from the submission of the assessee, it is found that the assessee-company was engaged in the business of dealing in papers and was also an investment company. There is no dispute that the assessee-company had borrowed funds from time to time for the purpose of its business activities including the activities of acquiring of shares. It is not the assessee company's case that the shares were acquired not out of borrowed funds. The assessee-company's case is only that as the shares were acquired in the course of its business activit....