Lally Motors India Pvt. Ltd, Jalandhar V. The Principal Commissioner of income Tax-2, Jalandhar

ITA 218/ASR/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7977 (ITAT-AMRITSAR)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 15-01-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 25-04-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: BHAWANI SHANKAR
• Keywords: Business income; Business expenditure; Principle of natural justice; Earning of tax free income; Question of law; Competent authority; Assessment record; Capital expenditure
• Section: 143(3); 14A; 37(1); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I.T.A. NO. 218(ASR)/2017 AS SESSMENT YEAR: 2012-13 LALLY MOTORS INDIA (P.) LTD., CIVIL LINES, JALANDHAR. [PAN: AABCL4446M] VS. THE PRINCIPAL COMMISSIONER OF INCOME TAX-2, JALANDHAR. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. SAMEER BHATIA ( ADV.) RESPONDENT BY: SH. BHAWANI SHANKAR (D. R.) DATE OF HEARING: 15.01.2018 DATE OF PRONOUNCEMENT: 12.04.2018 ORDER PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE AGITATING THE ORD ER BY THE PR. COMMISSIONER OF INCOME TAX-2, JALANDHAR ('PR. CIT' FOR SHORT, OR THE COMPETENT AUTHORITY) DATED 29.03.2017, DIRECTING A REVISION O F THE ASSESSEES ASSESSMENT U/S. 143(3) OF THE INCOME TAX ('THE ACT' HEREINAFTER) FO R ASSESSMENT YEAR (AY) 2012- 13 VIDE ORDER DATED 31.12.2014. 2. THE QUESTION ARISING IN THE INSTANT APPEAL IS IF THE PROVISION OF SECTION 263 OF THE ACT STANDS RIGHTLY INVOKED IN THE FACTS AND CIR CUMSTANCES OF THE CASE. ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSI NG OFFICER (AO) DURING THE COURSE OF ASSESSMENT PROCEEDINGS QUERIED THE ASSESS EE ON THE APPLICABILITY OF SECTION 14A IN VIEW OF INVESTMENT IN SHARES (IN GAU TAM IRON MILLS PVT. LTD., AT RS. 3.02 CRORE, AS ON 31.03.2012 - THE YEAR-END.) THE A SSESSEE REPLIED BY STATING THAT IT HAD NOT EARNED ANY INCOME BY WAY OF DIVIDEND ON THE SAID SHARES, FOR SECTION 14A OF THE ACT TO APPLY. RELIANCE WAS PLACED ON THE DEC ISION IN CHEMINVEST LTD . (IN ITA NO. 794/2014, DATED 02/9/2015) BY THE HONBLE D ELHI HIGH COURT. TWO, IT HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO THE SAI D INVESTMENT IN SHARES, SO THAT SECTION 14A WOULD EVEN OTHERWISE NOT APPLY. THE AO COMPLETED THE ASSESSMENT ACCEPTING THE ASSESSEES CONTENTIONS. THE LD. PR. C IT, SUBSEQUENTLY OBSERVED THE FOLLOWING FACTS ON A PERUSAL OF THE ASSESSEES BALA NCE-SHEET, FORMING PART OF THE ASSESSMENT RECORD (REFER PARA 3 OF THE IMPUGNED ORD ER): 3. I HAVE CONSIDERED THE FACTS OF THE CASE AND THE PROVISIONS OF THE LAW WITH REGARD TO THE SECTION 263 OF THE INCOME TAX ACT, 1961. ON PER USAL OF THE BALANCE SHEET OF THE ASSESSEE THE FOLLOWING FACTS ARE NOTE WORTHY:- (A) THE ASSESSEE HAS NEGATIVE NET WORTH OF RS. 7.7 CROR ES AS ON 31.03.2012 AND RS. 1.6 CRORES ON 31.03.2011. (B) THE BORROWED FUNDS OF THE ASSESSEE AS ON 31.03.201 2 ARE ROUGHLY RS. 11 CRORE; ON WHICH INTEREST OF RS. 3.59 CRORES HAS BEEN DEBIT ED IN THE PROFIT & LOSS ACCOUNT. (C) FURTHER, THE ASSESSEE HAS DEBITED ADMINISTRATIVE E XPENSES OF RS. 2.36 CRORE IN ITS PROFIT & LOSS ACCOUNT. (D) THE TOTAL INVESTMENT IN THE SHARES OF M/S GAUTAM I RON MILLS PVT. LTD., AS ON 31.03.2012, IS RS. 3.07 CRORES, CONSTITUTING THE 97 % OF THE SHARE CAPITAL OF THE COMPANY. THE ASSESSEE WAS ACCORDINGLY SHOW CAUSED BY HIM IN THE MATTER U/S. 263, TO WHICH IT SUBMITTED LIKEWISE, I.E., AS IN THE ASSESSMENT P ROCEEDINGS. THE LD. PR. CIT WAS, HOWEVER, NOT IMPRESSED. CIRCULAR NO. 5/2014 BY THE BOARD, REPRODUCED AT PARA 3.5 OF HIS ORDER, HAD IN NO UNCERTAIN TERMS CLARIFIED T HAT SECTION 14A WOULD APPLY EVEN IF THE NO TAX-EXEMPT INCOME (I.E., INCOME NOT FORMI NG PART OF THE TOTAL INCOME) HAD ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 3 IN FACT BEEN EARNED, I.E., AS LONG AS EXPENDITURE I S INCURRED FOR EARNING SUCH INCOME. THE SAID CIRCULAR, BINDING ON THE A.O., WAS IN FACT NOT BROUGHT TO THE NOTICE OF THE HON'BLE COURT, SO THAT THE DECISION WOULD REQUIRE R ECONSIDERATION, BEING EVEN OTHERWISE NOT BINDING ON THE A.O. FURTHER, THE FIRM HAS NEGATIVE NET WORTH DURING THE RELEVANT YEAR, SO THAT THE ENTIRE INVESTMENT ST ANDS FINANCED BY BORROWED CAPITAL AND, BESIDES, ADMINISTRATIVE EXPENDITURE IN THE SUM OF RS.2.36 CRORES HAD BEEN INCURRED BY THE ASSESSEE. THE CONTENTION THAT NO EX PENDITURE HAD BEEN INCURRED QUA THE INVESTMENT IN SHARES WAS THEREFORE NOT ACCEPTAB LE. EXPLANATION 2 TO SECTION 263, INSERTED BY FINANCE ACT, 2015 W.E.F. 01.06.201 5, DEEMS THAT AN ORDER BY THE AO, PASSED, IN THE OPINION OF THE PRINCIPAL COMMISS IONER OR COMMISSIONER, NOT IN ACCORDANCE WITH ANY ORDER, DIRECTIONS OR INSTRUCTIO NS ISSUED BY THE BOARD U/S. 119 OF THE ACT, IS ERRONEOUS IN-SO-FAR AS IT IS PREJUDI CIAL TO THE INTEREST OF THE REVENUE. THE ASSESSEES ARGUMENT THAT THE INVESTMENT UNDER R EFERENCE WAS STRATEGIC RAISED BEFORE HIM FOR THE FIRST TIME, WAS MET BY THE LD. P R. CIT WITH REFERENCE TO THE DECISION BY THE TRIBUNAL IN VOLTECH ENGINEERS PVT. LTD. V. DY. CIT [2017] 49 CCH 0488 (CHENNAI). HE, ACCORDINGLY, SET ASIDE THE ASSE SSMENT TO THE LIMITED EXTENT OF EXAMINATION OF THE ISSUE OF DISALLOWANCE U/S. 14A QUA THE INVESTMENT IN SHARES IN GAUTAM IRON MILLS PVT. LTD. AFRESH, AND IN LIGHT OF THE BOARD CIRCULAR 5/2014 (PARA 4 OF THE IMPUGNED ORDER). AGGRIEVED, THE ASSESSEE I S IN APPEAL. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 4.1 OUR FIRST OBSERVATION IN THE MATTER IS A COMPLE TE ABSENCE OF ANY EXAMINATION BY THE A.O. QUA THE ASPECT OF INCURRING OF EXPENDITURE BY THE ASSE SSEE-COMPANY IN RELATION TO THE INVESTMENT/S YIELDING (OR LIABLE TO YIELD) TAX-EXEMPT INCOME, WHICH, IN-SO-FAR AS IT RELATES TO THE INVESTMENT IN GAUTAM IRON MILLS PVT. LTD., IS APPARENT FROM A BARE BROWSE OF THE ASSESSEES FINAL ACCOUNTS , I.E., THE BALANCE-SHEET AND PROFIT AND LOSS ACCOUNT FOR THE RELEVANT YEAR. INCU RRING SUCH EXPENDITURE IS A SINE ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 4 QUA NON FOR THE INVOCATION OF SECTION 14A, THE PREMISE OF WHICH IS TO DETERMINE CORRECTLY THE INCOME CHARGEABLE TO TAX, I.E., THE I NCOME FORMING PART OF THE TOTAL INCOME, RETURNED BY THE ASSESSEE AT RS. 130.16 LACS . THE ASSESSEE, NEITHER BEFORE THE LD. PR.CIT NOR BEFORE US DISPUTES THE FACTUAL O BSERVATIONS BY THE COMPETENT AUTHORITY, MADE, AS STATED WITH REFERENCE TO THE AS SESSEES FINAL ACCOUNTS, FORMING PART OF THE RECORD (REFER PARA 3 ABOVE). HOW COULD THEN, WE WONDER, THE INFERENCE OF THE INVESTMENT IN SHARES BEING FINANCED BY BORRO WED FUNDS BE DISPUTED; THE ASSESSEE HAVING NO POSITIVE CAPITAL AND, IN FACT, T HROUGHOUT THE YEAR, SO THAT ITS ENTIRE ASSETS, INCLUDING THE SHARES UNDER REFERENCE , AS IS APPARENT, ARE FINANCED BY BORROWED CAPITAL, OUTSTANDING AT NEARLY RS. 1100 LA CS AS ON 31/3/2012, AND ON WHICH IT HAS ADMITTEDLY INCURRED INTEREST EXPENDITU RE AT RS. 359 LACS. HOW WOULD IT MATTER IF THE INVESTEE COMPANY HAS, AS CLAIMED, NOT UNDERTAKEN ANY BUSINESS DURING THE RELEVANT YEAR, OR IS A DEFUNCT COMPANY (ON WHIC H THE AO HAS ISSUED NO FINDING). NO SUCH CONTENTIONS, I.E., QUA THE INVESTEE COMPANY BEING DEFUNCT, STANDS RAISED BEFORE US. A DEFUNCT COMPANY, ASSUMING SO, D OES NOT IMPLY AN ASSET-LESS COMPANY, FOR ITS SHARE TO HAVE NO VALUE AT ALL. TH E LOSS OF VALUE, NOT BOOKED IN AUDITED ACCOUNTS, CANNOT BE TAKEN COGNIZANCE OF. TH E SAME IS EVEN OTHERWISE A CAPITAL LOSS, SO THAT INTEREST IN ITS RESPECT WOULD NOT BE DEDUCTIBLE IN COMPUTING BUSINESS INCOME. THE ONLY CONSIDERATION RELEVANT, A S WE SEE IT, IS IF THE ASSESSEE- COMPANY HAS INCURRED INTEREST EXPENDITURE IN RELATI ON TO THE SAID INVESTMENT. THE ADMINISTRATION EXPENDITURE, INCURRED AT RS. 2.36 CR ., ATTRIBUTABLE TO THE SAID INVESTMENT, I.E., IF ANY, CANNOT BE INFERRED FROM T HE FACE OF THE FINAL ACCOUNTS, WHICH ASPECT WOULD REQUIRE FACTUAL VERIFICATION. AB SENCE OF INQUIRY, WHERE REQUIRED AND WARRANTED IN THE FACTS AND CIRCUMSTANC ES OF THE CASE, IS A VALID BASIS FOR INVOCATION OF SECTION 263, I.E., FOR EXERCISING REVISIONARY JURISDICTION, AS PER THE SETTLED LAW IN-AS-MUCH AS IT REFLECTS NON APPLICATI ON OF MIND. THE APEX COURT IN MALABAR INDUSTRIAL CO. LTD. VS. CIT [2000] 243 ITR 83 (SC) LAID DOWN A FOUR-WAY ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 5 TEST FOR ORDERS BEING ERRONEOUS IN-SO-FAR AS THEY A RE PREJUDICIAL TO THE INTEREST OF THE REVENUE, LIABLE FOR REVISION, VIZ. INCORRECT APPLIC ATION OF LAW; WRONG ASSUMPTION OF FACT/S; NON-OBSERVANCE OF THE PRINCIPLES OF NATURAL JUSTICE; AND LACK OF INQUIRY. DECADES EARLIER, THE HONBLE DELHI HIGH COURT IN GEE VEE ENTERPRISES VS. CIT (ADDL.) [1975] 99 ITR 375 (DEL), FOLLOWING TWO DECISIONS B Y THE APEX COURT, EXPLAINED THE PROPOSITION THUS: IT IS NOT NECESSARY FOR THE COMMISSIONER TO MAKE F URTHER INQUIRIES BEFORE CANCELLING THE ASSESSMENT ORDER OF THE INCOME-TAX O FFICER. THE COMMISSIONER CAN REGARD THE ORDER AS ERRONEOUS ON THE GROUND THA T IN THE CIRCUMSTANCES OF THE CASE THE INCOME-TAX OFFICER SHOULD HAVE MADE FU RTHER INQUIRIES BEFORE ACCEPTING THE STATEMENTS MADE BY THE ASSESSEE IN HI S RETURN. THE REASON IS OBVIOUS. THE POSITION AND FUNCTION OF THE INCOME-TA X OFFICER IS VERY DIFFERENT FROM THAT OF A CIVIL COURT. THE STATEMENTS MADE IN A PLEADING PROVED BY THE MINIMUM AMOUNT OF EVIDENCE MAY BE ADOPTED BY A CIVI L COURT IN THE ABSENCE OF ANY REBUTTAL. THE CIVIL COURT IS NEUTRAL. IT SIM PLY GIVES DECISION ON THE BASIS OF THE PLEADING AND EVIDENCE WHICH COMES BEFORE IT. THE INCOME-TAX OFFICER IS NOT ONLY AN ADJUDICATOR BUT ALSO AN INVESTIGATOR. H E CANNOT REMAIN PASSIVE IN THE FACE OF A RETURN WHICH IS APPARENTLY IN ORDER B UT CALLS FOR FURTHER INQUIRY. IT IS HIS DUTY TO ASCERTAIN THE TRUTH OF THE FACTS STATED IN THE RETURN WHEN THE CIRCUMSTANCES OF THE CASE ARE SUCH AS TO PROVOKE AN INQUIRY. IT IS BECAUSE IT IS INCUMBENT ON THE INCOME-TAX OFFICER TO FURTHER INVESTIGATE T HE FACTS STATED IN THE RETURN WHEN CIRCUMSTANCES WOULD MADE SUCH AN IN QUIRY PRUDENT THAT THE WORD ERRONEOUS IN SECTION 263 INCLUDES THE FAILUR E TO MAKE SUCH AN ENQUIRY. THE ORDER BECOMES ERRONEOUS BECAUSE SUCH AN INQUIRY HAS NOT BEEN MADE AND NOT BECAUSE THERE IS ANYTHING WRONG WITH THE ORDER IF ALL THE FACTS STATED THEREIN ARE ASSUMED TO BE CORRECT. THE PRINCIPLE IS WELL-ESTABLISHED, AND LACK OF INQU IRY RENDERS AN ORDER ERRONEOUS IN- SO-FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. CASE LAW IN THE MATTER IS LEGION, RENDERED IN DIFFERENT FACT SITUATIONS: CIT (ADDL.) VS. MUKUR CORPORATION [1978] 111 ITR 312 (GUJ); SWARUP VEGETABLE PRODUCTS VS. CIT [1991] 187 ITR 412 (ALL); TARAJAN TEA CO. (P.) LTD. VS. CIT [1994] 205 ITR 45 (GAU); CIT VS. ACTIVE TRADERS (P.) LTD. [1995] 214 ITR 583 (CAL); CIT VS. MAHAVAR TRADERS [1996] 220 ITR 167 (MP); K.A. RAMASWAMY CHETTIAR VS. CIT [1996] 220 ITR 657 ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 6 (MAD); MOFUSSIL WAREHOUSE & TRADING CO. LTD. VS. CIT [1999] 238 ITR 867 (MAD); CIT VS. EXPORT HOUSE [2002] 256 ITR 603 (P&H ) ; CIT VS. ARUNABEN SUMANKUMAR [2003] 259 ITR 386 (GUJ); PT . LASHKARI RAM VS. CIT [2005] 272 ITR 309 (ALL); CIT VS. DEEPAK KUMAR GARG [2008] 299 ITR 435 (MP); CIT VS. TOYOTA MOTOR CORPN. [2008] 306 ITR 49 (DEL) (AFFIRMED BY THE APEX COURT , VIDE ITS JUDGMENT AT [2008] 306 ITR 52 (SC)). (ALSO REFER: RAJALAKSHMI MILLS LTD. V. ITO [2009] 121 ITD 343 (CH.)(SB)). 4.2 THE SECOND, EQUALLY RELEVANT, ASPECT OF THE MAT TER IS IF THE PROVISION COULD BE INVOKED IN THE ABSENCE OF ANY TAX-EXEMPT INCOME. TO WARD THIS, WHILE THE LD. PR.CIT RELIES ON THE BOARD CIRCULAR 5/2014, THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUNSEL, WAS DURING HEARING AT PAINS TO EMPHASIZE THAT THE SAME STANDS SINCE TORN APART BY THE HON'BLE HIGH COURTS, SO THAT IT IS BEREFT OF ANY VALUE. ON BEING ASKED IF THE SAME HAD BEEN SET ASID E OR STAYED BY ANY HIGH COURT, HE WOULD THOUGH ADMIT OF IT BEING NOT THE CASE. TH E QUESTION IS NOT WHICH OF THE TWO IS CORRECT (VIEW) OR MORE CORRECT, BUT IF SAME IS BINDING ON THE A.O. AS AN ASSESSING AUTHORITY. THE REASON IS SIMPLE. THE A.O. , DESPITE AN ORDER BY THE REVISIONARY AUTHORITY DIRECTING HIM TO DO SO, CANNO T PASS AN ORDER CONSISTENT WITH THE BOARD CIRCULAR WHERE THE SAME HAS BEEN STRUCK D OWN BY A COMPETENT COURT, UNLESS, OF COURSE, THE SAME STANDS, AT THE SAME TIM E, UPHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT. IN FACT, EVEN A DECISION BY THE SAID COURT (OR BY THE HON'BLE APEX COURT) CONTRARY TO THE DICTUM OF THE S AID CIRCULAR, I.E., WITHOUT IT BEING STAYED OR STRUCK DOWN BY ANY COURT, SHALL HAV E SAME EFFECT, SO THAT THE SAID CIRCULAR WOULD IN THAT CASE LOOSE ITS BINDING FORCE ON THE AO. FURTHER, A DECISION BY A NON-JURISDICTIONAL HIGH COURT SHALL NOT HAVE T HE SAME AFFECT IN-AS-MUCH AS THE SAME IS NOT BINDING ON THE AO (REFER: SURESH DESAI & ASS. V. CIT [1998] 230 ITR 912 (DEL); GEOFFERY MANNERS & CO. LTD. V. CIT [1996] 221 ITR 695 (BOM); CIT V . ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 7 THANE ELECTRICITY SUPPLY LTD. [1994] 206 ITR 797 (BOM); PATIL VIJAYAKUMAR V. UNION OF INDIA [1985] 151 ITR 48 (KAR)). NO SUCH DECISION BY EITH ER THE HONBLE JURISDICTIONAL HIGH COURT OR THE HONBLE APEX COURT HAS BEEN BROUGHT TO OUR NOTICE. THE MOOT QUESTION THEREFORE IS IF THE SAID CIRCULAR IS IN CONFORMITY WITH THE LAW. SECTION 14A, IMMEDIATELY SUCCEEDS SECTION 14 THE FIRST SECTION OF CHAPTER IV OF THE ACT, ENUMERATING THE HEADS OF INCOME UNDE R WHICH ALL INCOME, SUBJECT TO THE OTHER PROVISIONS OF THE ACT, IS TO BE CLASSIFIE D FOR THE PURPOSE OF COMPUTATION OF TOTAL INCOME, INTRODUCED BY FINANCE ACT, 2001 W.R.E .F. 01.04.1962 (SINCE RENUMBERED AS 14A (1)), READS AS UNDER: EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER , NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPEN DITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. [EMPHASIS, SUPPLIED] THE ISSUE IS IF SECTION 14A(1) WOULD STAND ATTRACTE D EVEN IF SUCH INCOME, I.E., INCOME NOT INCLUDIBLE IN THE TOTAL INCOME, IS NOT A CTUALLY EARNED, OF COURSE, SUBJECT TO EXPENDITURE RELATABLE TO SUCH INCOME HAVING BEEN INCURRED. THE 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 TO TAL INCOME) BY CLAIMING EXPENDITURE INCURRED IN EARNING TAX-EXEMPT INCOME A GAINST 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. SURE LY, IN THAT EVENT I.E., EXPENDITURE RELATING TO EARNING TAX-EXEMPT INCOME H AVING BEEN INCURRED, IT WOULD ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 8 BECOME IRRELEVANT IF THE EXEMPT INCOME HAS ACTUALLY MATERIALIZED OR NOT, SO THAT THE DISALLOWANCE OF THE SAID EXPENDITURE U/S. 14A WOULD ENSUE. THE SAME THEREFORE IS ONLY A CONTINUATION OF CIRCULAR 14 OF 2001, TAKING THE PREMISE OF SECTION 14A TO ITS LOGICAL CONCLUSION. AND WHICH IS TO APPLY THE BASIC PRINCIPLE OF TAXATION, I.E., THAT IT IS ONLY THE NET INCOME - TAXABLE OR NON-TAXABLE, I. E., NET OF ALL EXPENDITURE INCURRED FOR EARNING THE SAME, THAT COULD BE SUBJECT TO TAX OR, AS THE CASE MAY BE, EXEMPT FROM TAX. THE LATTER CIRCULAR, WHICH IS AGAIN IN CO NSONANCE WITH THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BILL, 2001 (IN TRODUCING SECTION 14A) AS WELL AS THE NOTES TO THE CLAUSES PRESENTED ALONG WITH TH E SAID BILL, HAS BEEN NOTED WITH APPROVAL BY THE HON'BLE APEX COURT IN CIT V. WALFORT SHARE & STOCK BROKERS P. LTD . [2010] 326 ITR 1 (SC), HOLDING AS UNDER: (PGS. 15 -16) THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EF FECT IS THE SERIOUS ATTEMPT ON THE PART OF PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPEC T OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCU LAR NO. 14 OF 2001 DATED NOVEMBER 22, 2001). IN OTHER WORDS, SECTION 14A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABL E TO THE EARNING OF TAXABLE INCOME . IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE O F SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAM E TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITH OUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOME S ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CE RTAIN PROVISIONS OF THE ACT. THE ISSUE, THUS, CONSIDERED IN PERSPECTIVE, IS NOT IF THE INCOME NOT FORMING THE PART OF THE TOTAL INCOME (THE TAX-EXEMPT INCOME) IS EARN ED OR NOT, BUT IF EXPENDITURE RELATABLE TO SUCH INCOME HAS BEEN INCURRED. IF SUCH EXPENDITURE STANDS INCURRED, SECTION 14A(1) BECOMES APPLICABLE. WITH REGARD TO T HE SCOPE OF THE RELATABLE ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 9 EXPENDITURE, THE APEX COURT CLARIFIED THE SAME WITH REFERENCE TO ANY EXPENDITURE ENUMERATED IN SECTIONS 15 TO 59 (PARA 17, PGS. 16-1 7 OF THE REPORTS). THE QUESTION IS SIMPLE. IF TAXABLE INCOME (I.E., INCOME FORMING PART OF THE TOTAL INCOME) IS TO BE ADDED AT NET OF RELATABLE EXPENDITURE, HOW COULD IT BE OTHERWISE FOR THE TAX-EXEMPT INCOME? RATHER, IF NOT SO CONSIDERED, NOT ONLY WOUL D IT VIOLATE THE BASIC PRINCIPLE OF TAXATION, IT WOULD DEFEAT THE VERY PURPOSE OF SE CTION 14A, AS EXPENDITURE RELATABLE TO TAX-EXEMPT INCOME, WHERE NOT EARNED, W OULD GET CHARGED AGAINST TAXABLE INCOME. THE ACTUAL EARNING OF INCOME - TAXA BLE OR NOT TAXABLE, AS IS APPARENT, AND AS WE SHALL PRESENTLY SEE, IS IRRELEV ANT FOR THE ADMISSIBILITY OF SUCH EXPENDITURE AGAINST THE RELEVANT INCOME. THE AFORE-REFERRED DECISION BY THE APEX COURT STAND S FOLLOWED AND EXPLAINED AT LENGTH IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM), CULLING OUT THE PRINCIPLES LAID DOWN THEREIN , AS UNDER: (PARA 31, PGS. 98-99) 31. THE FOLLOWING PRINCIPLES WOULD EMERGE FROM S. 14A AND THE DECISION IN WALFORT (SUPRA): (A) THE MANDATE OF S. 14A IS TO PREVENT CLAIMS FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE; (B) SEC. 14A(1) IS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED ; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS W IDENED BY S. 14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITURE BETWEEN TAXAB LE AND NON-TAXABLE INCOME OF AN INDIVISIBLE BUSINESS; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET I NCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSES OF S. 14A AND EXPENSES TOWARDS NON-TAXABLE INCOME MUST BE EXCLUDED; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTA BLISHED - WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME - A DISALLOWANCE HAS TO BE EFFECTED. ALL EXP ENDITURE INCURRED IN RELATION TO ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 10 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DISALLOWED UNDER S. 14A. INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS BROADLY ADVERTED TO AS EXEMPT INCOM E AS AN ABBREVIATED APPELLATION. (EMPHASIS, OURS) CONTINUING FURTHER, WITH SPECIFIC REFERENCE TO THE APPORTIONMENT OF EXPENDITURE IN RELATION TO THE INCOME NOT FORMING P ART OF THE TOTAL INCOME, IT WOULD BE RELEVANT TO REPRODUCE FROM THE EXTRACTED PART OF THE DECISION IN WALFORT SHARE & STOCK BROKERS P. LTD . (SUPRA), AS UNDER, TO WHICH DECISION ABUNDANT REF ERENCE STANDS MADE BY THE HONBLE COURT: (PARA 51, PGS. 10 6-107) 51. WE HAVE ALSO BEEN FORTIFIED IN THE CONCLUSION WHICH WE HAVE DRAWN, BY THE JUDGMENT OF THE SUPREME COURT IN WALFORT (SUPRA). THE SUPREME COURT HAS IN THE FOLLOWING OBSERVATION EXPRESSLY HELD THAT SINCE DIV IDEND INCOME DOES NOT FORM PART OF THE TOTAL INCOME, THE EXPENDITURE THAT IS INCURRED IN THE EARNING OF SUCH INCOME CANNOT BE ALLOWED EVEN THOUGH IT IS OF A NATURE SPE CIFIED IN SS. 15 TO 59 : 'IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN SS. 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME COU LD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX.' HAVING OBSERVED THUS, THE SUPREME COURT HELD THAT T HE THEORY APPORTIONING EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME HAS NOW, IN PRINCIPLE, BEEN WIDENED UNDER S. 14A. HENCE, FOR THE REASONS THAT W E HAVE INDICATED EARLIER, WE HOLD THAT INCOME FROM DIVIDEND ON SHARES IS, IN THE HANDS OF THE RECIPIENT SHAREHOLDER, INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HENCE, S. 14A WOULD APPLY AND THE EXPENDITURE INCURRED IN EARNING SUCH INCOME WOULD HAVE TO BE DISALLOWED. INCOME FROM MUTUAL FUND STANDS ON TH E SAME FOOTING. (EMPHASIS, OURS) CONTINUING OUR DISCUSSION, HOW, ONE MAY ASK, COULD THE EXPENDITURE INCURRED IN EARNING TAX-EXEMPT INCOME STAND ALTERED , EITHER IN NATURE OR IN QUANTUM, DEPENDING ON THE QUANTUM OF THE TAX-EXEMPT INCOME, WHICH COULD THEREFORE BE NIL. THE EXPENDITURE IS INCURRED TO PR ODUCE OR GENERATE OR IN ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 11 ANTICIPATION OF, INCOME, WHETHER TAXABLE OR NON-TAX ABLE. IN FACT, THE CLASSIFICATION AS TO TAX STATUS (I.E., TAXABLE OR NON-TAXABLE) HAS NOTHING TO DO WITH THE INCOME GENERATING PROCESS; AN INCOME BEING, AS A MATTER OF FISCAL INCENTIVE, BEING GRANTED TAX-EXEMPT STATUS, VIZ. AGRICULTURAL INCOME, UNDER THE ACT, FOR THE TIME BEING. AN INCOME EXEMPT AS PER THE EXTANT LAW MAY NOT BE SO E ARLIER OR IN FACT EVEN IN FUTURE; THE LAW WITNESSING A VARIATION IN THIS RESPECT FROM TIME TO TIME. THE QUANTUM OF INCOME THAT MAY ARISE IS HOWEVER, LARGELY, UNCERTAI N, AND WHICH MAY BE HIGHER OR LOWER (INCLUDING NIL) THAN THE VOLUME OF THE EXPEND ITURE INCURRED. IT IS THE LATTER CASE WHICH RESULTS IN THE PHENOMENON OF LOSS', WHI CH COULD THUS BE ACROSS BOTH THE CATEGORIES OF INCOME, I.E., TAX-EXEMPT AND TAXABLE. THE FACT OF THE HAVING INCURRED EXPENDITURE FOR EARNING INCOME TAX-EXEMPT (OR NON -EXEMPT), WHICH IS LARGELY A QUESTION OF FACT, WOULD THUS REMAIN, AND NOT UNDERG O ANY CHANGE, IRRESPECTIVE OF WHETHER IT HAS RESULTED IN ANY INCOME (OF EITHER GE NRE), OR IN A SUM LOWER THAN THE EXPENDITURE INCURRED TOWARD THE SAME. THE PRINCIPLE IS WELL-SETTLED, REPRESENTING A FUNDAMENTAL CONCEPT OF TAXATION, I.E., THE ALLOWABI LITY (OR OTHERWISE) OF AN EXPENDITURE WOULD NOT DEPEND UPON WHETHER IT HAS IN FACT RESULTED IN AN INCOME, I.E., POSITIVE INCOME, WHICH IS IN ANY CASE A MATTE R SUBSEQUENT, AND THAT THE MERE FACT THAT EXPENDITURE STANDS INCURRED FOR THE PURPO SE IS SUFFICIENT FOR ITS ADMISSIBILITY, EXPLAINED BY THE APEX COURT IN CIT V. RAJENDRA PRASAD MODY [1978] 115 ITR 519 (SC). THE APEX COURT WAS IN THAT CASE EXAMINING THE TRUE INTERPRETATION OF SECTION 57(III), WHICH EMPLOYED T HE WORDS ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OU T OR EXPENDED FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME, THE QUESTION OF LAW RAISED BEFORE IT READING AS UNDER: WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, INTEREST ON MONEY BORROWED FOR INVESTMENT IN SHARES WHICH HA D NOT YIELDED ANY DIVIDEND IS ADMISSIBLE UNDER S. 57(III) ? ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 12 THE REVENUES CONTENTION WAS THAT THE WORDS OF S. 5 7(III) BEING NARROWER, CONTRASTING THEM WITH THE LANGUAGE OF SECTION 37(1) , WHICH ALLOWED ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS OR PROFESSION IN COMPUTING BUSINESS INCOME , THE MAKING OR EARNING OF INCOME WAS A SINE QUA NON TO THE ADMISSIBILITY OF THE EXPENDITURE U/S. 57(II I). AND, THEREFORE, WHERE NO INCOME RESULTED, NO EXPENDITURE WOULD BE DEDUCTIBLE . THE APEX COURT, AFTER A REVIEW OF THE JUDICIAL PRECEDEN TS, WHICH IT CITED WITH ABUNDANCE, ALSO REPRODUCING THERE-FROM, REJECTED TH E REVENUES CONTENTION, STATING THAT THE PLAIN AND NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE S ECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE (PG. 522 OF THE REPORTS). ANY OTHER INTERPRETATION, TO OUR MIND , WOULD NOT MEET THE TEST OF EQUITY AND BE LIABLE TO BE REGARDED AS ARBITRARY. T HE APEX COURT IN FACT POINTED OUT TO THE ODDITY OF THE SITUATION ARISING OUT OF THE R EVENUES ARGUMENT, GIVING AN EXAMPLE (AT PAGE 522-523 OF THE REPORTS) WHERE AN E XPENDITURE OF RS.1,000/- (SAY) WOULD NOT BE DEDUCTIBLE IF NO INCOME WAS EARNED, WH ILE WOULD GET ALLOWED EVEN IF RE. 1 WAS EARNED, RESULTING IN A LOSS OF RS.999 UND ER THE HEAD INCOME FROM OTHER SOURCES. THIS IS ALSO INASMUCH AS THE EXPENDITUR E HAS NOT RESULTED IN ANY DIVIDEND INCOME, THE ASSESSEES ARGUMENT OR CLAIM I N THE INSTANT CASE AND, THUS, LIABLE TO BE OUSTED WITH EQUAL FORCE, EVEN AS THE W ORDS EMPLOYED IN SECTION 57(III) WHICH IN ANY CASE HAD TO BE HEEDED TO, WERE INDEE D NARROWER THAN THE SCOPE OF THE WORDS EMPLOYED IN SECTION 14A, AND WHICH HAVE B EEN INTERPRETED BY THE HON'BLE COURTS AS IMPLYING ANY EXPENDITURE, DIRECT OR INDIRECT, WHICH HAS A PROXIMATE NEXUS WITH OR IS ATTRIBUTABLE TO THE INCO ME UNDER REFERENCE. GOING BY THE EXAMPLE OF THE PRESENT CASE, IF INTEREST EXPENDITUR E IS INCURRED FOR ACQUIRING AND HOLDING THE SHARES, IT WOULD BE SO - A MATTER OF FA CT, AND IT WOULD MATTER LITTLE WHETHER DIVIDEND INCOME, OR IN WHATEVER SUM, STANDS EARNED. IF IT STANDS INCURRED, ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 13 IT IS SO, EVEN IF AND IRRESPECTIVE THAT NO DIVIDEND THEREON HAS BEEN DECLARED AND, THUS, EARNED. THIS MAY BE DESPITE THE RELEVANT COMP ANY HAVING EARNED ADEQUATE PROFITS TO BE ABLE TO DECLARE DIVIDEND, BEING ESSEN TIALLY A MATTER OF BUSINESS POLICY AND PREROGATIVE OF THE MANAGEMENT. EXPENDITURE BY W AY OF INTEREST HAS, IN EITHER CASE, I.E., THE DIVIDEND BEING DECLARED OR NOT, BEEN INCURRED IN EARNING THAT INCOME , THAT IS, IN RELATION TO THAT INCOME AND, THEREFORE, WOULD REQUIRE BEING DETERMINED AND EXCLUDED, BEING IN RELATION TO INCOME NOT FORMI NG A PART OF THE TOTAL INCOME. AS AFORE-NOTED, THIS ASPECT STANDS AMPLY EXPLAINED IN RAJENDRA PRASAD MODY (SUPRA), POINTING TO THE ODDITY THAT ARISES WHEN EX PENDITURE IS RECOGNIZED ONLY WHEN IT PRODUCES A POSITIVE GROSS INCOME. ONE MAY P AUSE HERE TO NOTE THAT INTEREST SHALL FALL EITHER U/S. 36(1)(III) OR U/S. 57(III), I.E., FALL WITHIN SECTIONS 15 TO 59, WHERE THE INCOME UNDER REFERENCE (VIZ. DIVIDEND INCOME) W AS TO BE CONSIDERED AS OTHERWISE ASSESSABLE AS EITHER BUSINESS INCOME OR AS INCOME FROM OTHER SOURCES. THE PRINCIPLE INFORMING THE LEGISLATION OF SECTION 14A, OR ITS INSERTION ON THE STATUTE-BOOK, WHICH THE CIRCULARS BY THE BOARD HAVE SOUGHT TO EXPLAIN AND IMPRESS UPON, STANDS UPHELD BY THE HON'BLE APEX COURT AS WE LL AS BY THE HON'BLE COURTS, EXPLAINING AND FOLLOWING ITS DECISION, ALSO UPHOLD ING THE CONSTITUTIONALITY OF R. 8D, PRESCRIBING THE METHOD AND PROCEDURE FOR APPORT IONMENT OF EXPENSES. THE PRINCIPLE, I.E., OF ONLY THE NET INCOME BEING LIABL E TO TAX AND, THEREFORE, THE INCOME WHICH IS NOT LIABLE TO TAX - IS WELL-SETTLED, AND I N FACT BASIC TO THE TAXING STATUTES FOR THE TAXING OF INCOME, AND DOES NOT ADMIT OF TWO VIEWS . THIS ALSO EXPLAINS IT BEING MADE APPLICABLE W.R.E.F. 01/4/1962, I.E., FROM THE DATE THE ACT ITSELF COMES INTO EFFECT. SECTION 14A, AS MAY NOW BE CLEAR, IS TOWARD PROVIDING THE LEGISLATIVE FRAMEWORK FOR OPERATIONALIZING THE SAID PRINCIPLE B Y WAY OF APPORTIONMENT OF THE RELEVANT EXPENDITURE, I.E., BETWEEN TAXABLE OR NON- TAXABLE INCOME/S, WHICH ASSUMES PARTICULAR SIGNIFICANCE WHERE INCURRED FOR AN UNDIV ISIBLE BUSINESS. WHY, DIRECT EXPENDITURE IN RELATION TO TAX-EXEMPT INCOME, AS AG RICULTURE INCOME (SAY), WOULD ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 14 GET EXCLUDED FOR BEING ALLOWED AS DEDUCTION IN COMP UTING TAXABLE INCOME EVEN IN THE ABSENCE OF SECTION 14A, I.E., ON THE BASIS OF P RINCIPLE OF NET INCOME, I.E., NET OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME, AS LIABLE TO TAX (OR TO BE EXCLUDED IN COMPUTING THE TAXABLE INCOME), AS EXPLAINED BY T HE TRIBUNAL IN PER ITS DECISION IN ITO V. DAGA CAPITAL MANAGEMENT PVT. LTD. [2009] 312 ITR (AT) 1 (MUM) (SB); DAMANI ESTATES & FINANCE (P.) LTD. [2013] 25 ITR (TRIB) 683 (MUM); D. H. SECURITIES (P.) LTD. V. DY. CIT [2013] 31 ITR (TRIB) 381 (MUM), TO CITE SOME. HOW COULD, ONE MAY ASK, THE AGRICULTURE EXPENDITURE INC URRED FOR AGRICULTURAL ACTIVITY, BE CLAIMED OR ALLOWED AGAINST TAXABLE (AS, SAY, BUS INESS) INCOME. THIS IS AS THERE IS NO QUESTION OF APPORTIONMENT OF SUCH EXPENDITURE, W HICH ARISES ONLY IN THE CASE OF INDIRECT EXPENDITURE, WHICH COULD BE EITHER INTERES T OR ANY OTHER, VIZ. ADMINISTRATIVE EXPENDITURE. REFERENCE IN THIS REGARD MAY FINALLY BE MADE TO THE RECENT DECISION BY THE HONBLE APEX COURT IN MAXOPP INVESTMENT LTD. & ORS. V. CIT (IN CA NOS. 104- 109 OF 2015, DATED FEBRUARY 12, 2018 / COPY ON RECO RD). FOR OUR PURPOSES, PARA 3 OF THE JUDGMENT IS OF PRIME RELEVANCE, AND WHICH WE REPRODUCE AS UNDER: 3. THOUGH, IT IS CLEAR FROM THE PLAIN LANGUAGE OF THE AFORESAID PROVISION THAT NO DEDUCTION IS TO BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE EFFECT WHEREOF IS THAT IF CERTAIN INCOME IS EARNED WHICH IS NOT TO BE INCLUDED WHILE COMPUTING TOTAL INCOME, ANY EXPENDITURE INCURRED TO EARN THAT INCOME IS ALSO NOT ALLOWED AS A DEDUCTION. IT IS WELL KNOWN THAT TAX I S LEVIABLE ON THE NET INCOME. NET INCOME IS ARRIVED AT AFTER DEDUCTING THE EXPENDITURE INCURRED IN EARNING THAT INCOME . THEREFORE, FROM THE GROSS INCOME, EXPENDITURE INCURRED TO EARN THAT INCOME IS ALLOWED AS A DEDUCTION AND THEREAFTER TAX IS LE VIED ON THE NET INCOME. THE PURPOSE BEHIND SECTION 14A OF THE ACT, BY NOT P ERMITTING DEDUCTION OF THE EXPENDITURE INCURRED IN RELATION TO INCOME, WHICH D OES NOT FORM PART OF TOTAL INCOME, IS TO ENSURE THAT THE ASSESSEE DOES NOT GET DOUBLE BENEFIT. ONCE A PARTICULAR INCOME ITSELF IS NOT TO BE INCLUDED IN THE TOTAL IN COME AND IS EXEMPTED FROM TAX, THERE IS NO REASONABLE BASIS FOR GIVING BENEFIT OF DEDUCTION OF THE EXPENDITURE INCURRED IN EARNING SUCH AN INCOME . FOR EXAMPLE, INCOME IN THE FORM OF DIVIDEND ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 15 EARNED ON SHARES HELD IN A COMPANY IS NOT TAXABLE. IF A PERSON TAKES INTEREST BEARING LOAN FROM THE BANK AND INVESTS THAT LOAN IN SHARES/ STOCKS, DIVIDEND EARNED THEREFROM IS NOT TAXABLE. NORMALLY, INTEREST PAID O N THE LOAN WOULD BE EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME. SUCH AN INTER EST WOULD NOT BE ALLOWED AS DEDUCTION AS IT IS AN EXPENDITURE INCURRED IN RELAT ION TO DIVIDEND INCOME WHICH ITSELF IS SPARED FROM TAX NET. THERE IS NO QUARREL UPTO THIS EXTENT . (EMPHASIS, OURS) THE PRINCIPLE BEHIND SECTION 14A AND ITS APPLICABIL ITY, AND TOWARD WHICH THE HONBLE COURT CITES AN EXAMPLE - WHICH IS THE SAME AS THAT OBTAINS IN THE PRESENT CASE, IS SO WELL ESTABLISHED THAT THE APEX COURT IT SELF FINDS THE SAME AS SETTLED AND NOT DISPUTED. THE APPLICABILITY OF SEC. 14A DOES NO T HINGE ON THE ACTUAL EARNING OF THE TAX-EXEMPT INCOME. REFERENCE FOR THE PURPOSE MA Y BE MADE TO THE MAJORITY OF VIEW IN DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) (AT PARA 8 OF THE JUDGMENT), NOTED WITH THE APPROVAL BY HON'BLE APEX COURT, AS W ELL AS THE ARGUMENTS MADE BEFORE THE HON'BLE HIGH COURT, PLEADING THAT THE AC TUAL EARNING OF DIVIDEND INCOME WAS IMMATERIAL IN-AS-MUCH AS THE RELATABLE EXPENDIT URE WOULD REMAIN THE SAME (AT PARA 30 OF THE JUDGMENT), AND WHICH THE HONBLE COU RT FOUND AS SO, NOTING THAT IT WOULD BE EARNED BY A QUIRK OF FATE WHERE SHARES ARE HELD AS STOCK-IN-TRADE, WHILE WOULD STAND TO BE EARNED WHENEVER DIVIDEND IS DECLA RED ON SHARES HELD AS INVESTMENT - AS IN THE PRESENT CASE, AS IN EITHER C ASE, SECTION 14A GETS ATTRACTED (PARA 40) . THE DISPUTE IN THAT CASE WAS WITH REGARD TO THE S COPE OF THE WORDS IN RELATION THERETO OCCURRING IN SECTION 14A(1) AS WE LL AS THE RELEVANCE OF THE OBJECT FOR WHICH THE INVESTMENT YIELDING (OR LIABLE TO YIE LD) TAX-EXEMPT INCOME IS MADE, ON WHICH THERE WAS VARIANCE BETWEEN DIFFERENT HIGH COURTS. THE WORDS IN RELATION THERETO WERE CLARIFIED TO BE ACCORDED AN EXPANSIVE MEANING SO AS TO SUB-SERVE THE LEGISLATIVE INTENT BEHIND SEC. 14A, AND THE THEORY OF PREDOMINANT OBJECT HAD NO PLACE IN THE SCHEME OF S. 14A. ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 16 5. IN SUM THE PRINCIPLE THAT IT IS THE NET INCOME, I.E., NET OF EXPENDITURE RELATABLE THERETO, WHICH IS SUBJECT TO TAX AND, CORRESPONDING LY, NOT LIABLE TO TAX, I.E., WHERE IT DOES NOT FORM PART OF THE TOTAL INCOME, IS WELL EST ABLISHED. EQUALLY WELL SETTLED IS THE PRINCIPLE THAT ONCE AN INCOME IS LIABLE (OR NOT LIABLE) TO TAX, ALL EXPENDITURE RELATABLE THERETO IS TO BE RECKONED, AND IT MATTERS LITTLE THAT THE SAID EXPENDITURE HAS INDEED RESULTED IN A POSITIVE INCOME, OR IN WHATEVE R SUM. IT IS IN FACT THIS, I.E., THE EXPENDITURE BEING HIGHER THAN THE GROSS INCOME, WHI CH COULD BE NIL, THAT LEADS TO THE PHENOMENON OF LOSS, WHICH COULD THEREFORE BE AC ROSS BOTH THE CATEGORIES INCOME, I.E., TAXABLE OR NON-TAXABLE, BEING ESSENTI ALLY A MATTER OF FACT. THE INTERPRETATION OF THE WORDS FOR EARNING SUCH INCOM E STANDS ALREADY SETTLED BY THE APEX COURT IN RAJENDRA PRASAD MODY (SUPRA). TO THEREFORE RECOGNIZE RELATABLE EXPENDITURE WHERE IT FRUCTIFIES IN A POSITIVE INCOM E IS MISCONCEIVED. IT IS, IT MAY BE APPRECIATED, THE QUALITY OF THE EXPENDITURE THAT DE TERMINES ITS DEDUCTIBILITY AND NOT ITS QUANTUM OR EFFECT, I.E., WHERE IT STANDS INCURR ED FOR THE STATED PURPOSE. GIVEN THE PREMISE OF SECTION 14A, I.E., TO EXCLUDE INCOME NOT FORMING PART OF THE TOTAL INCOME IN COMPUTING THE TOTAL INCOME, WITH A VIEW TO DETERMINE THE LATTER CORRECTLY, AND THE TWO PRINCIPLES AFORE-REFERRED, T HE PROPOSITION UNDER REFERENCE, I.E., TO EXCLUDE ALL EXPENDITURE RELATABLE TO THE E ARNING OF INCOME NOT FORMING PART OF THE TOTAL INCOME, IRRESPECTIVE OF ITS QUANTUM, B ECOMES AXIOMATIC, EVEN AS NOTED BY THE HON'BLE APEX COURT IN MAXOPP INVESTMENT LTD . (SUPRA). PARA 32 THEREOF READS AS UNDER: 32. IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNIZ ED THAT AS PER SECTION 14A(1) OF THE ACT, DEDUCTION OF THAT EXPENDITURE IS NOT TO BE ALL OWED WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. AXIOMATICALLY , IT IS THAT EXPENDITURE ALONE WHICH HAS BEEN INCUR RED IN RELATION TO THE INCOME WHICH IS (NOT) INCLUDIBLE IN TOTAL INCOME THAT HAS TO BE DISALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSA L CONNECTION WITH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELATED TO THE ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 17 INCOME THAT IS EXEMPTED FROM TAX, AND SUCH EXPENDIT URE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFERENTLY, SUCH E XPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME W HICH IS TO BE TREATED AS PART OF THE TOTAL INCOME. WHERE, ONE WONDERS, THEN, IS THE SCOPE FOR TWO VIEW S. RELYING EXTENSIVELY ON ITS DECISION IN WALFORT SHARE & STOCK BROKERS P. LTD . (SUPRA), THE APEX COURT UPHELD THE THEORY OF APPORTIONMENT, DISCOUNTENANCING THE T HEORY OF PREDOMINANT OBJECT. THE UNCERTAINTY OF EARNING THE DIVIDEND INCOME, OR OF IT BEING EARNED INCIDENTALLY, WAS ALSO NOTED BY IT, THOUGH TO NO MOMENT. IT WAS I MMATERIAL IF DIVIDEND INCOME WAS ACTUALLY EARNED OR NOT, WHICH, RATHER, MAY BE A CONSIDERATION WHERE THE SHARES, AS IN THE PRESENT CASE, ARE HELD TO RETAIN CONTROL OVER THE INVESTEE COMPANY, I.E., FOR STRATEGIC REASONS, AS WAS THE CASE WITH REGARD TO T HE INVESTMENT BY MAXOPP INVESTMENT LTD . ONE OF THE ASSESSEES IN THAT CASE. THE RELATED EXPENDITURE HAS TO BE RECKONED ON AN EXPANSIVE BASIS, I.E., AS ATTRIBU TABLE THERETO. THE CONSTITUTIONALITY OF R.8D, PROVIDING FOR RULES OF A PPORTIONMENT OF BOTH DIRECT AND INDIRECT EXPENDITURE, STANDS ALREADY UPHELD BY THE HONBLE HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA). EARLIER, IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2017] 394 ITR 449 (SC), WITH REFERENCE TO THE LANG UAGE OF SECTION 14A, THE TITLE OF WHICH IS ITSELF CLARIFICATORY, THE APEX COURT CL ARIFIED THAT INCOME MUST NOT BE INCLUDIBLE IN THE TOTAL INCOME, SO THAT ONCE THIS CONDITION IS SATISFIED, THE EXPENDITURE INCURRED IN EARNING THE SAME CANNOT BE ALLOWED TO BE DEDUCTED. THE AO IN THE PRESENT CASE HAS CLEARLY FAILED TO APPLY THE LAW IN THE MATTER, WHICH GETS REITERATED TIME AND AGAIN BY THE HON'BLE APEX COURT . DECISION 6. IN VIEW OF THE FOREGOING, WE FIND NO MERIT IN TH E ASSESSEES CASE. WE, ACCORDINGLY, UPHOLD THE IMPUGNED ORDER, BOTH ON THE ASPECT OF LACK OF INQUIRY BY THE ASSESSING AUTHORITY, AS WELL AS HIS NON-OBSERVA NCE OF THE BOARD CIRCULAR ITA NO.218 (ASR)/2017(AY 2012-13) LALLY M OTORS INDIA P. LTD. V. PR.CIT 18 5/2014, WHICH WE HAVE FOUND TO BE IN CONSONANCE WIT H THE LAW AS EXPLAINED BY THE APEX COURT. THE IMPUGNED ORDER BEING AFTER THE DATE OF AMENDMENT (BY WAY OF EXPLANATION 2 ) TO SECTION 263, I.E., 01.06.2015, THE SAME IS AN EQUALLY VALID GROUND FOR THE EXERCISE OF REVISIONARY POWER U/S. 263. IT IS THIS POWER, I.E., TO DEEM AN ORDER AS ERRONEOUS IN-SO-FOR AS IT IS PREJUDICIAL T O THE INTERESTS OF THE REVENUE, THAT STANDS CONFERRED W.E.F. 01.06.2015. THAT IS, THE LA W, W.E.F. 01.06.2015, DEEMS AN ORDER AS SO, WHERE ANY OF THE CIRCUMSTANCES SPECIFI ED IS, IN THE OPINION OF THE COMPETENT AUTHORITY, SATISFIED. IT HAS NOTHING TO D O WITH THE DATE OF THE PASSING OF THE ORDER DEEMED ERRONEOUS, OR THE YEAR TO WHICH IT PERTAINS. BEING A PART OF THE PROCEDURAL LAW, THE PROVISION SHALL HAVE EFFECT FRO M 01/06/2015 (ALSO REFER CWT V. SHARVAN KUMAR SWARUP & SONS [1994] 210 ITR 886 (SC)). RATHER, AS WE FIND ON A PERUSAL OF THE CITED DECISIONS BY THE APEX COURT SE TTLING THE LAW IN THE MATTER, THE ASSESSMENT DOES NOT REPRESENT A CORRECT APPLICATION OF THE LAW, FURNISHING ONE MORE GROUND, ALBEIT PARI MATERIA , FOR THE ASSESSMENT BEING LIABLE FOR REVISION U/S. 263. WE DECIDE ACCORDINGLY. 7. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 12 .04.2018 SD/- SD/- (N. K. CHOUDHRY) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 12.04.2018 /GP/SR. PS. COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: LALLY MOTORS INDIA P. LTD., J ALANDHAR (2) THE PR.CIT-2, JALANDHAR (3) THE CIT-2, JALANDHAR (4) THE CIT, CONCERNED (5) THE SR. DR, I.T.A.T. TRUE COPY BY ORDER