2006-VIL-350-ITAT-

Equivalent Citation: [2007] 111 TTJ 886, [2007] 105 ITD 669 (MUM.)

Income Tax Appellate Tribunal BOMBAY

IT APPEAL NO. 3169 (MUM.) OF 2004

Date: 30.08.2006

MOHANANLAL M. SHAH.

Vs

DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE - 11, MUMBAI.

BENCH

Member(s)  : K. K. BOLIYA., MS. SUSHMA CHOWLA.

JUDGMENT

Ms. Sushma Chawla, Judicial Member.- This appeal by the assessee is against the order of CIT(A), Central-III, Mumbai dated 23-10-2002 relating to assessment year 1999-2000 against the order under section 143(3) of the Income-tax Act, 1961.

2. The assessee has raised the following grounds of appeal:

"1. Disallowance of interest:

(a) The Ld. CIT(A) erred in law and on facts in upholding the order of the Assessing Officer for disallowing interest of Rs. 2,81,889 while assessing the total income by wrongly applying the provisions of section 14A of the Act.

(b)(i) Your appellant submits that the said interest was paid on borrowings made for investments in shares and debentures.

(ii) Your appellant further submits that the interest represented an expenditure incurred for the purposes of earning dividend and earning profits on sale of shares.

(c) Your appellant pleads that the said interest be allowed as a deduction.

2. Interest under sections 234B and 234C

(a) The Ld. CIT(A) once again erred in confirming the levy of interest under sections 234B and 234C, which was levied by the learned Assessing Officer without giving any opportunity of hearing and was levied without passing any speaking orders to that effect.

(b) Your appellant submits that he has paid interest as per law and that no opportunity of hearing was given before levy of interest.

(c) Your appellant pleads that the interest should be deleted."

3. Shri Pradeep Kapasi, learned counsel appeared for the assessee and Shri Sunil Kumar Singh, Departmental Representative appeared for the revenue and put forward their contentions.

4. The brief facts of the case are that the assessee had claimed deduction of interest which is paid on borrowings made for investment in shares and debentures. The claim of the assessee was that the borrowings have been made with effect from financial year 1993-94 onwards for the purpose of investment in shares and debentures and no fresh borrowings had been made for such investment during the year under consideration. The interest paid on such borrowings was being claimed as a deduction out of income received from dividend from year to year and the same was being allowed as a deduction. The assessee also borrowed funds for making investment in property and interest thereon was claimed as a deduction. The Assessing Officer while completing the assessment and invoking the provisions of section 14A of the Income-tax Act disallowed the claim of interest relating to investments which do not yield taxable income and accordingly disallowed interest of Rs. 3,22,189. Before the CIT(A), the assessee claimed that the interest on borrowings made on investments in shares and debentures is allowable as the same was consistently being allowed in the earlier years against the dividend income earned by the assessee, although the dividend income is exempt during the year under consideration. With regard to the interest on funds borrowed for investment in house property, the assessee claimed that the same was fully deductible under the provisions of section 24(1) of the Income-tax Act. The claim of the assessee, with regard to the interest paid on borrowings for investment in house property amounting to Rs. 40,300 was allowed by the CIT(A) and the balance disallowance of interest of Rs. 2,81,889, in view of the provisions of section 14A of the Income-tax Act was confirmed by the CIT(A). The assessee is aggrieved and hence this appeal.

5. The learned AR for the assessee submitted that the borrowings for acquiring the shares were made in 1993 and the interest on such borrowings was claimed and allowed as a deduction from year to year. The claim of interest was also allowed to the assessee in assessment year 1998-99 by way of an order under section 143(3) of the Income-tax Act, though the order is a non-speaking order. The dividend income, which was taxable in earlier years was exempted from tax under the provisions of section 10(33) of the Income-tax Act, by way of subsequent legislations. The exemption provided under section 10(33) of the Income-tax Act does not make it exempt from income. The learned AR further stated that section 14A of the Income-tax Act was introduced subsequently but with retrospective operation and the provisions of the said section applies to only such income which do not form part of total income. Reliance was placed on the decision of Hon'ble Calcutta High Court in Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709. The learned AR for the assessee further placed reliance on the under-mentioned decisions:

(i) Mafatlal Holdings Ltd. v. Asstt. CIT [2004] 85 TTJ (Mum.) 821

(ii) Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (Ahd.)

(iii) P. Jayantilal & Co. (P.) Ltd. v. Dy. CIT [2005] 97 TTJ (Mum.) 100.

The learned AR for the assessee made an alternate claim of allowing the aforesaid interest as part of cost of investment and not as cost of improvement to the asset. Reliance was further placed on the under-mentioned decisions for the abovesaid propositions:

(i) CIT v. Mithlesh Kumar [1973] 92 ITR 9 (Delhi)

(ii) Addl. CIT v. K.S. Gupta [1979] 119 ITR 372 (AP)

(iii) CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.).

The learned DR for the revenue vehemently argued that with the retrospective introduction of section 14A of the Income-tax Act, the provision of law is clear that while computing the income of the person, no deduction of expenditure incurred for earnings exempt income is to be allowed.

6. We have heard the rival submissions and perused the records. Under Chapter IV of the Income-tax Act, heads of income are provided as enumerated in section 14 of the Income-tax Act. Section 14 of the Income-tax Act provides the heads of income, which are chargeable to tax while computing the income of the assessee. Separate heads of income have been provided for computing the income under each head independently and separately and the heads of income are as under:

A - Salaries

14[***]

C - Income from house property

D - Profits and gains of business or profession

E - Capital gains

F - Income from other sources.

Section 14A of the Income-tax Act was inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962, which provided as under: Section 14A- For the purpose 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:

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess 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.  Section 2(24) defines income which in addition to all the other incomes also includes dividend as per clause (ii) to section 2(24) of the Income-tax Act. Section 2(45) defines total income as total amount of income referred to in section 5 and computed in the manner laid down in this Act. Section 10 of the Income-tax Act specifies the incomes which shall not be included in total income. Section 10(33) provides that income received by way of dividend as referred to in section 115-O of the Income-tax Act are exempt from tax. Section 115-O of the Income-tax Act talks of tax on distributed profits of domestic companies. In other words, the dividend distributed by domestic companies is not taxable in the hands of the recipient, i.e., the shareholder of the domestic company by virtue of provisions of section 10(33) of the Income-tax Act, but tax is charged on distribution of such profits by way of dividend on the domestic companies, as per the provisions of section 115-O of the Income-tax Act. In other words, tax is charged on the distributor of income and no tax is charged in the hands of the recipient by virtue of section 10(33) of the Income-tax Act.

7. Section 14A inserted by Finance Act, 2001 with retrospective effect from 1-4-1962 provides for disallowance of expenditure in relation to income which does not form part of total income. In view of the provisions of section 14A, while allowing the claim of the expenditure, it is to be seen whether the aforesaid expenditure is relatable to any income forming part of total income assessable in the hands of the assessee.

8. In the facts of the present case before us, the assessee had invested borrowed funds for the purchase of shares in the domestic companies in the previous year. The interest paid on such borrowings was claimed and allowed as a deduction against the dividend income earned by the assessee from year to year. By virtue of insertion of section 10(33) with effect from 1-4-1998 by Finance Act, 1997 such dividend income received by the assessee became exempt. During the year under consideration, the assessee had claimed the interest paid on the borrowed funds as a deduction though the dividend income was exempt. The issue before us was considered at length by the Ahmedabad Bench of Tribunal in Harish Krishnakant Bhatt's case (relied on by Learned AR for the assessee). The Tribunal after considering the issue of the dividend not being taxable and the insertion of the provision of section 14A had held as under:

"There was no dispute that the interest payment in the instant case, was an expenditure incurred for making or earning income from dividend. In view of the provisions of section 10(33), there was also no dispute that dividend received by the assessee did not form part of its total income. That being so, the provisions of section 14A providing for disallowance of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act, would come into play. Apparently, therefore, the expenses incurred by the assessee in relation to such dividend income could not be allowed as a deduction in computing the income of the assessee under Chapter IV of the Act, namely, under the five heads stated therein for computation of total income."

Regarding the claim of deduction of interest paid on borrowed funds utilized for investment in shares, it was held by Ahmedabad Tribunal as under:

"...It was, thus, clear that when the dividend is not taxable at all, the interest pertaining to that would also not be allowable because there is no taxable income of the assessee against which such interest can be allowed. The another way to consider the issue might be that if interest is allowable, it would be allowable against dividend income and the net dividend income after allowing that alone would be excluded from total income under section 10(33). Section 14A was inserted to clarify this intention of the Legislature to set the existing controversy on this issue at rest. With regard to chargeability of additional tax on companies distributing dividend, it was further held by Ahmedabad Tribunal as under:

"...The first contention of the assessee was that the dividend had been assessed in the case of the company and, therefore, section 14A did not apply. Income-tax is a levy on a person and not on the income though it is charged in respect of total income this is evident from the charging section 4. Thus, the income-tax as well as levy of additional income-tax is a tax in respect of total income and it is levied on a person. It is, thus, a personal tax levied on a person on his total income. Section 115-O levies the additional tax on the company and it would be the additional tax within the meaning of and mentioned in section 4.

...Therefore, the amount declared or distributed or paid by way of dividend had not suffered any tax in the hands of the assessee. It was fully exempted in his hand by virtue of section 10(33). Even otherwise the company and shareholder are two different entities and tax paid or payable by the company is not the tax paid or payable by the assessee shareholder."

The Ahmedabad Bench of Tribunal concluded by holding that income being exempt from tax, no part of expenditure attributable to earning of such exempted income was to be allowed after the insertion of section 14A and it was held: Section 14A provides for disallowance of expenditure in relation to income which does not form part of the total income. It is assessee's own total income that is to be seen for applying the provisions of section 14A and not that of somebody else. Admittedly by virtue of section 10(33) dividend income is not includible/included in total income of an assessee shareholder. In other words by virtue of section 10(33) it does not form part of the total income of shareholder and, therefore, the expenditure incurred by the shareholder in earning that income would not be allowable. The issue of allowability of expenditure in past was also considered by Ahmedabad Bench of Tribunal and it was held as under:

...The second issue made out by the assessee was that when the shares were purchased and the assessee incurred liability to pay interest, the dividend was forming part of assessee's total income chargeable to tax. It became non-includible only with effect from the assessment year 1998-99 and since the expenditure was incurred for earning taxable income at that time, it would not change its character by subsequent event. There was no force in this contention of the assessee as well because the interest liability is recurring liability of the expenditure of revenue nature from year to year starting from the date of acquisition of shares onwards. In the instant case before us, it is an admitted position that the borrowed money was utilized for the purpose of investment in shares, from which dividend income is received, which is exempt from tax. In view of the decision of Ahmedabad Bench in the case of Harish Krishnakant Bhatt, the expenditure being interest paid on such borrowings utilized for the purpose of investment in shares is not to be allowed as an expenditure in view of the provisions of section 14A of the Income-tax Act. Though, the learned AR for the assessee had during the course of argument relied upon the aforesaid decision but on the perusal of the same it transpires that the said decision is against the assessee, but does cover the total legal position raised in the instant appeal before us. The learned AR for the assessee had also relied upon the decision of Mumbai Bench in Mafatlal Holdings Ltd.'s case, which has been considered by the Ahmedabad Bench of Tribunal and the reliance on P. Jayantilal & Co. (P.) Ltd.'s case is misplaced.

9. The alternate claim of the assessee to allow the interest paid on borrowings for investment in shares as part of its cost of acquisition has also been considered and deliberated upon by the Ahmedabad Bench and it is held as under:

"...The expenditure of interest on borrowed capital up to the date of sale or up to the date of purchase of shares could at best be said to be capital expenditure and could be allowed as a deduction while computing the income from capital gains in the year of sale but once the shares had been acquired, the interest pertaining to the period after acquisition would be revenue expenditure and allowable under section 57 of the Income-tax Act, while computing the income of the assessee from dividend in view of the decision of Hon'ble Supreme Court in the case of Rajendra Prasad Mody [1978] 115 ITR 519. In these circumstances, the expenditure would not be allowable at all to the assessee even while computing the income under the head 'Capital gains' and on the theory of 'indivisibility of source of income' as contended by the assessee."

10. In view of the above, we hold that the interest paid on borrowed funds utilized for the purpose of investment in shares is not to be allowed as either an expenditure or as part of cost of acquisition of the shares in view of the provisions of section 14A of the Act. The appeal of the assessee is rejected.

11. In the result, the appeal filed by the assessee is dismissed.

 

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