2007-VIL-328-ITAT-MUM

Equivalent Citation: [2008] 21 SOT 42 (MUM.) (SMC)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 15 (MUM.) OF 2006

Date: 15.10.2007

SHREE SHYAMKAMAL FINANCE & LEASING CO. (P.) LTD.

Vs

INCOME-TAX OFFICER 8(3) 1, MUMBAI

BENCH

K.P.T. THANGAL, J.

JUDGMENT

1. This appeal by the assessee pertains to assessment year 2002-03.

2. The only effective ground of objection by the assessee is directed against the order of the CIT(A) in disallowing interest expenditure of Rs. 16,35,493 resorting to provisions of section 14A of the Income-tax Act. According to the assessee CIT(A) erred in law as well as on facts in appreciating the facts that the assessee did not have any dividend income during the year under consideration and therefore provisions of section 14A did not apply to the assessee.

3. Facts leading to the dispute briefly are as under :

3.1 Assessee filed the return declaring loss of Rs. 13,22,494 on 23-10-2002 accompanied by audited copies of Profit and Loss Account and Balance Sheet, computation of income, etc. Assessee is engaged in the business of finance and investment in equity shares. While framing the assessment order Assessing Officer noticed that assessee paid interest amounting to Rs. 16,35,493 against unsecured loan of Rs. 1,75,44,902. This unsecured loan was seen as investment in acquiring unquoted shares of subsidiary company M/s. India Finance & Construction Co. Pvt. Ltd. (IFCCPL). Assessee invested Rs. 1,60,00,000 in acquiring 20,000 equity shares of above mentioned subsidiary company, IFCCPL of Rs. 1,000 each, Rs. 800 paid up. During the year under consideration assessees has no dividend income from the investment. Assessee credited interest of Rs. 1,67,000 from M/s. IFCCPL as loan. Assessee was asked, when there was no income from investment and if any income accrues at all as dividend which is exempt from income, then why not the disallowance of interest of loan acquiring such investment be made under section 14A. Assessee submitted that assessee has not claimed any income exempted. Hence, 14A could not be applied. It was submitted that for the year under consideration assessee was showing a loss of Rs. 13,22,494 mainly due to interest payment on loans taken. Assessee has taken additional loan of Rs. 47,00,000 to meet the first call of Rs. 50,00,000 made by the company in which assessee has already invested an amount to the tune of Rs. 10,00,000. Since the company in which the assessee invested the amount has incurred loss, assessee has not received any dividend. Consequently assessee has only a loss. It was further submitted that during the year under review assessee paid interest to the tune of Rs. 16,35,493 but assessee limited its loss to Rs. 13,22,494 by making money by way of earning interest and some income by profit on sale of investment/shares.

3.2 Assessing Officer noticed that assessee has mainly taken loan from the Directors, Anilkumar Agarwal and Mrs. Arati Agarwal and paid interest @ 12 per cent amounting to Rs. 14,28,063 and Rs. 2,07,490. Assessing Officer, from the above facts noticed that the direct source of investment in acquiring shares of M/s. IFCCPL was an unsecured loan from the Directors only. The claim of the assessee was disallowed by the Assessing Officer vide para 3.3, 3.4 and 3.5 of his order observing as under :—

"3.3 The very fact that this has been shown as investment leads to conclusion that if the investment is sold, then any profit/gain arising out of such sale should be capital gain only. Even the interest payment becomes capital in nature because of no enabling provision in the Income-tax Act, 1961. As stated by assessee, if assessee is in the business of investment, investments should be in stock-in-trade and as stated earlier, the same need not have been reflected separately in the balance sheet under the head ‘Investments’ and the same should have been reflected under ‘Current Assets’ or sub-head under ‘Inventories’. The fact that assessee has reflected investments separately show that the investments of the assessee are pure investments and not stock in trade. The right provision to be invoked in this regard is section 14A of the Act read with section opening sentence of 10 and provision of section 10(33) and also provision of section 115-O of the Act. The section 14A the Income-tax Act states that no deduction will be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under Income-tax Act, 1961. The dividend from domestic company is specifically excluded from the total, income of the recipient under section 10(33) of the Act. It has been confessed by the assessee itself that the company has not received any dividend. It is noted that preconditions of invoked provisions of section 14A of the Act are that expenditure should be related to income and such income should not form part of the total income under this Act. Thus, the provision of section 14A are unambiguous inasmuch as it provides for the disallowance of any expenditure related to income which does not form part of the total income of the recipient. As pointed out above, there is no dispute that quantum of interest on borrowings of Rs. 1,75,44,902 is relatable to investment shares. Further, the fact that income from such investments does not form part of the total income of the recipient also cannot be disputed.

3.4 Further, if strict liberal construction leads to an absurd result i.e., result not intended to the sub-served, by object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from strict liberal construction, then that construction should be preferred to the strict construction. In case, if it is taken that no interest can be disallowed as assessee has not earned any income which is not includible in the total income of the assessee, this interpretation can lead to absurd result, in the sense if assessee has been in receipt of even Rs. 100 of dividend income, the entire interest would be disallowable as expenditure related to income which does not form part of the total income. In other words, the interest would be allowable in the hands of assessee who is not in receipt of dividend income and interest would be disallowed in the hands of assessee who is in receipt of dividend income, however, paltry it might be. Thus the interpretation which would create unfair, irrational, unreasonable inferences should be avoided and statutory provision should be salvaged by giving meaningful interpretation. Since the above interpretation leads to anomaly and unintended result, the intent Legislature has to be followed and construed strictly which clearly says that no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of the total income under the Income-tax Act. As dividend income from domestic companies is specifically excluded from the total income of the recipient under clause 10(33) of the Income-tax Act, the expenditure relatable to such income should be disallowed in computing the total income of the assessee irrespective of the fact the income which does not form part of the total income is earned or not.

3.5 Further assessee’s contention during the discussion is that interest paid on the borrowals utilized for the purpose of investments is not exclusively for earning dividend but also for capital appreciation, since gains arising from such sale is taxable and the interest paid on such borrowals should be allowed. This contention of the assessee is also not acceptable in view of the fact capital gains are dealt with in sections 45 to 55A of the Income-tax Act, 1961. The aforesaid provision of the Act do not leave any scope of deduction on interest of borrowings for acquiring capital assets. Further there is no provision under the head ‘Income from capital gains’ for admissibility of interest payments made on the loan taken for the purchase of shares. The cost of acquisition of the asset and any expenditure incurred wholly and exclusively in connection with transfer of capital asset alone are deductible from the value of consideration received or accruing as a result of transfer of capital assets as per the explicit provision of section 48. Further under his head i.e., ‘Capital gains’ there is no provision whereby deduction of interest can be allowed similar to section 57(iii) which states that income chargeable under the head ‘Income from other sources’ shall be computed after making deduction for any expenditure (not being in the nature of the capital expenditure) made out of expended wholly and exclusively for the purpose of making or earning income."

Aggrieved by the above order assessee approached the first appellate authority.

4. It was submitted before the CIT(A) that the Assessing Officer failed to appreciate that expenditure incurred by the assessee cannot be disallowed under section 14A of the Income-tax Act, 1961 as the assessee has no income which does not form part of the total income during the year under consideration. Assessee relied upon the decision of the Tribunal’s Mumbai Bench in the case of Jt. CIT v. Holland Equipment Co. B.V. [2005] 3 SOT 810 wherein the Tribunal held that no disallowance can be made under section 14A if there is no income which is not to be included in the total income of the assessee. In this the Tribunal held that section 14A applies only when some or any part of the income is to be included in the total income and the expenditure relating to that part of the accepted income can be disallowed and not otherwise. Assessee has also relied upon the decision of the Tribunal in the case of V.C. Nannapaneni v. Asstt. CIT [2005] 94 ITD 309 (Hyd.) wherein it was held that section 14A of the Act applies only when income received or receivable does not form part of the total taxable income. It was submitted that for the year under consideration the assessee is not having any dividend income or any other exempt income under any of the sections of the Income-tax Act. However, the then CIT(A) did not accept assessee’s contention. The claim of the assessee was rejected by the CIT(A) observing as under :—

"It is thus seen that the above case is also on different footing in the case of appellant, it can be said that applicant has Nil income from dividend which is exempt under section 10(33) of the Income-tax Act. In view of above discussion, contentions of AR are rejected. Without prejudice to the above, it may be mentioned here that in point No. 6 of statement of facts filed with the appeal memo in Form No. 35, appellant has mentioned as under :

‘(6) The Appellant have incurred interest expenditure amounting to Rs. 16,35,493 on the unsecured loans of Rs. 1,75,44,902 out of which Rs. 1,60,00,000 have been invested in acquiring the controlling interest by way of acquiring 20,000 equity shares, of M/s. India Finance and Construction Company Pvt. Ltd. (IFCCPL) having face value of Rs. 1,000 per equity share and the paid up value of Rs. 800 per equity share’.

From the above facts, it comes out that appellant has made investment of Rs. 1.60 crore for acquiring the controlling interest in M/s. IFCCPL. Deduction of interest expenses is not allowable if assessee purchased shares for acquiring controlling interest. In this respect, reliance is placed on the following decisions:

(i )Indian Shaving Products Ltd. v. CIT [2004] 265 ITR 250 (Raj.)

(ii )CIT v. Amritaben R. Shah [1999] 238 ITR 777 (Bom.).

In view of above discussion, contentions of AR are rejected and it is held that Assessing Officer was right in disallowing interest of Rs. 16,35,493 under section 14A of the Income-tax Act."

Aggrieved by the above order assessee is in appeal before the Tribunal.

5. The learned counsel for the assessee submitted that there is no dispute that for the year under consideration assessee has not received any dividend income. Hence, section 14A does not apply in the instant case of the assessee. Counsel further submitted that assessee is not claiming any exemption under section 10 or sub-sections, therefore applicability of section 10 does not arise. The learned counsel invited my attention to the head note to section 14A which reads as "Expenditure incurred in relation to income not includible in total income". The scope of total income is to be found out from section 5. The total income of any previous year of a person, who is a resident, includes all income from whatever sources derived. Hence the counsel submitted that as far as assessee is concerned no taxable income/dividend accrued for the year under consideration. None of the clause of section 5 has been satisfied as far as assessee is concerned. The learned counsel further submitted that no income deemed to be received so as to attract section 7. No income deemed to be accrued or arose to the assessee in India within the scope of section 9. In short, Counsel submitted that none of the following sections, i.e., section 5, 6, 7, 8 or 9 apply to the case of the assessee. Counsel submitted that as far as assessee is concerned section 5 will apply but subject to section 10(33) as it stood prior to omission of clause (33) with effect from 1-1-2003. Chapter III mentions income which do not form part of total income.

6. Counsel further submitted that section 14A deals with expenditure of certain income which are not includible in the total income of the assessee. In such a case wherein income is not includible in the total income and if the assessee claims expenditure has been incurred on such income which is not includible in the total income of the assessee, counsel submitted, such claim of deduction shall not be allowed.

7. Section 10, counsel submitted, speaks of income which shall not be included while computing the taxable income of the assessee. Section 10(33), as it stood then at relevant point of time, refers to any income by way of: (i) dividend referred to in section 115-O; (ii) income received in respect of units from the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); or (iii) income received in respect of the units of a mutual fund specified under clause (23D). Section 115-O was introduced into the statute book with effect from 1-6-1997 consequent on shifting of tax liability on dividend from shareholders of companies by way of additional tax on distributed income.

8. In the instant case of the assessee, counsel submitted that, even according to the Assessing Officer there is no dividend income. It is mentioned in para 3.3 on page 5 of his order. Assessing Officer records "Further, the fact that income from such investments does not form part of total income of the recipients also cannot be disputed." Assessee is only disputing the finding given in part 3.4, particularly the observation as under :

"As dividend income from domestic companies is specifically excluded from the total income of the recipient under section 10(33) of the IT Act the expenditure relatable to such income should be disallowed in computing the total income of the assessee, irrespective of the fact the income which does not form part of the total income is earned or not."

9. Assessee is disputing this observation of the Assessing Officer and submits that only if income is received from that part of the exempted income then only the expenditure could be disallowed which is attributable to this exempted income. In support of the above contention the learned counsel for the assessee brought my attention to the decision of the Tribunal in the case of Birla Group of Holdings Ltd. v. Dy. CIT [IT Appeal No. 2891 (Mum.) of 2004, dated 31-10-2006]. In this case the following two issues were agitated before the Tribunal :

"1.The learned CIT(A) erred in upholding the disallowance of Rs. 4,12,57,221 being the net interest paid under section 14A of the Income-tax Act, 1961. Under the facts and circumstances of the matter, she ought not have upheld the said disallowance of Rs. 4,12,57,221.

2.The learned CIT(A) erred in upholding the disallowance of Rs. 60,220 being the administrative & other expenses under section 14A of the Act. Under the facts and circumstances of the matter she ought not to have upheld the said disallowance of Rs. 60,220."

10. After discussing the issue in detail the Tribunal found that the assessee was having income exempted under section 10(33) of the Income-tax Act and also some other income, i.e., it expended certain amount being interest paid on such borrowings for the purpose of investment in shares, dividend from which was exempted under section 10(33) of the Income-tax Act and also certain other investments in foreign companies, dividend of which was not governed by the provisions of section 115-O and hence it was not exempted under section 10(33). The Tribunal remanded the matter back to the file of Assessing Officer to find out the extent of investment and expenditure and to allow exempted part and to disallow the non-exempted part. In view of the above the counsel submitted that only if there is dividend income which is within the scope of section 115-O only such portion cannot be allowed. In the instance case, counsel submitted, there is no dividend income at all. Hence there is no case question of any disallowance. Particularly the counsel stressed on the following findings of the Tribunal. "In view of the facts that the income from such investments is not amenable to tax, the interest on such borrowings utilized for making investments in the units of growth fund is not allowable as an expenditure in view of the provisions of section 14A of the Income-tax Act". For the same proposition counsel relied upon the decisions of the Hyderabad Bench in the case of V.C. Nannapaneni (supra) and Tribunal Mumbai Bench’s decision in the case of Jt. Holland Equipment Co. B.V. (supra). In this case the Tribunal held that section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to exempted income can be disallowed and not otherwise.

11. Replying to the above, the learned counsel for the assessee submitted that section 14A defines the character of the expenditure. If once the character is discussed and settled where the expenditure incurred is not includible in total income whether in that particular year the assessee earned income from that exempted source or not, the expenditure cannot be disallowed. In support of the above view he relied on the decision in the case of Everplus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi).

12. The learned DR submitted that it is not necessary that dividend alone be treated under section 14A. Even the capital appreciation falls within the scope of section 14A. Hence it is not necessary under section 10(33) to apply section 14A. Section 14A does not speak of any other sections. It is independent. Hence, he submitted that, the order of the revenue authorities may be confirmed.

13. In reply to the above the learned counsel submitted that the words in the section is specific. It does not support what the DR is arguing. It speaks in present it is very clear. Counsel submitted that the section talks of the expenditure incurred in relation to income not includible in the total income.

14. Hearing the rival submissions I am of the view that the order of the revenue authorities is liable to be reversed.

15. Section 14A inserted by the Finance Act, 2001 provided that 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. The scope and effect of the provision is explained by the Board in Circular No. 14/01, dated 12-12-2001. Board found that there have been cases where deduction have been claimed in respect of certain incomes which are not includible while computing the total income as they were exempted under various provisions of the Act. This in effect means that the tax incentives given by way of exemptions to certain categories of income were being used to reduce the tax payable on the non-exempted income by debiting the expenditure incurred to earn the exempted income against the taxable income. So as to prevent this practice section 14A was introduced. By virtue of this section now no deduction should be allowed in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act.

16. The stand of the revenue is that whether there is actual exempted income or not during the year under consideration, since the assessee had incurred expenditure for making investment in that exempted income this expenditure cannot be allowed.

17. In the instant case, assessee had made certain investment in shares though no dividend has been received. By virtue of section 10(33) dividend income referred to in section 115-O does not form part of the total income. Section 115-O is a special provision related to tax on distributed profit of domestic companies. Section 115-O is not in tandum with section 10(33). The additional tax under section 115-O become leviable in the hands of the company if such dividend is exempted in the hands of the shareholders. If the assessee earned income which is not includible in the total income, in that case the expenditure could be disallowed under section 14A because it speaks of expenditure incurred by the assessee in relation to income which does not form part of the total income. In other words assessee has earned income which forms part of the total income.

18. Section 14A was inserted by the Finance Act, 2001. This section seeks to provide that no deduction shall be made in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Original section 14A as introduced with retrospective from 1-4-1962 reads as under :—

"14A. Expenditure incurred in relation to income not includible in total income. - 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." [Emphasis supplied]

19. The proviso was inserted by the Finance Act, 2002 with retrospective effect from 11-5-2001 which reads as under :—

"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."

20. By virtue of this insertion the Legislature made it clear that even though section 14A is retrospective in operation from 1-4-1962 onwards the Assessing Officer shall not reassess the case under section 147 or pass an order enhancing the assessment or reduce a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before 1-4-2001. Reading of section 14A makes it clear that while computing the income under Chapter IV deduction will not be allowed with regard to expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Income-tax Act. In other words, expenditure incurred by the assessee in relation to income which forms part of the total income for the year under consideration only can be disallowed. Otherwise the wording ‘does not form part of the total income’ becomes otiose. Income is computed for each year. Income should form part of the total taxable income under consideration so as to get taxed and not otherwise.

21. Tribunal’s Mumbai Bench, in the case of Holland Equipment Co. BV (supra) held as under :—

"Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to exempted income can be disallowed and not otherwise. Since in the instant case, the entire income was found to be taxable, no disallowance could be made under section 14A."

22. Coming to the decision relied by the learned DR in the case of Everplus Securities & Finance Ltd. (supra), the case does not support the view canvassed by the learned DR. This was the case wherein actually dividend income was earned. The question was in such a situation if the interest bearing fund invested in shares which yielded dividend income Assessing Officer can disallow interest paid on such loans by invoking section 14A? In the instant case of the assessee the admitted position is that there is no dividend income earned.

23. In view of the above facts this ground by the assessee is allowed.

24. Assessee has taken an additional ground that interest expenses of Rs. 16,35,493 be treated as capital expenditure incurred towards acquiring controlling interest in subsidiary company.

25. It is the case of the assessee that recently the Tribunal, in the case of Birla Group of Holdings Ltd. (supra), held that the interest expenses cannot be added to the costs of investments of which the direction to that effect was made in the assessment order. Assessee has produced a copy of the order of the Tribunal referred to above. Assessing Officer while giving effect to the order of the Tribunal may keep this decision in mind and the additional ground may be dealt with accordingly in the light of the decision referred to above.

26. In the result, appeal by the assessee is allowed in part for statistical purpose.

 

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