Gopika N. Vaishnav, Ahmedabad V. The Income Tax Officer, ward- 11(4), Ahmedabad

ITA 2753/AHD/2004

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7782 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 04-06-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 14-09-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N S DAYAM; DR JAYANT JHAVERIDR
• Assessee Lawyers: SAKAR SHARMAAR
• Keywords: Business income; Business expenditure; Earning of tax free income; Proportionate interest; Capital expenditure; Capital Gains
• Section: 14A; 143(1); 201; 143(2); 208

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD C BENCH (BEFORE SHRI MAHAVIR SINGH, JM, AND A.N.PAHUJA, AM ) ITA.NO.2753/AHD/2004 [ASSTT.YEAR : 2001-2002] GOPIKA N. VAISHNAV 11, SHASHI COLONY, VIVRO HOUSE GROUND FLOOR, OPP: SUVIDHA SHOPPING CENTRE, PALDI, AHMEDABAD. [PAN:ACPPV9548B] VS. ITO, WARD-11(4) AHMEDABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SAKAR SHARMA,AR REVENUE BY : SHRI N.S.DAYAM & DR. JAYANT JHAVERI,DR O R D E R AN PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATED 23.07.2004 OF THE LD. CIT(A)-XVII, AHMEDABAD, RAIS ES THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN CON FIRMING THE DISALLOWANCE OF INTEREST OF RS.2,70,465/- U/S.36(1) (III) OF THE ACT WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CAS E. THE ALTERNATIVE GROUND THAT DEDUCTION IS ALLOWABLE U/S.57 IS ALSO N OT CONSIDERED. YOUR APPELLANT SEEKS DEDUCTION OF INTEREST SO DISALLOWED AGAINST THE INCOMES EARNED WHICH HAS BEEN DISALLOWED BY THE AO AND CONFIRMED BY THE LD.CIT(A.). THE APPELLANT CRAVES PERMISSION TO ADD, ALTER, AMEND OR WITHDRAW ANY GROUND OR GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF HEARING OF THE APPEAL. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE TH AT RETURN DECLARING INCOME OF RS.5,33,672/- FILED ON 30.10.2001 BY THE ASSESSEE, DERIVING INCOME ON ACCOUNT OF SALARY FROM M/S VIVRO FINANACIAL SERV ICES PVT. LTD., CAPITAL GAINS, BUSINESS AND OTHER SOURCES, AFTER BEING PROC ESSED U/S 143(1) OF THE INCOME-TAX ACT,1961[HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTED FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 22-10-2003. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE WAS ENGAGED IN PROJECT CO NSULTANCY AND HAD SHOWN RECEIPTS OF RS.7,50,000/-. THE PROFIT AND LOSS ACCO UNT OF M/S.ROVIK CONSULTANCY, PROPRIETARY CONCERN OF THE ASSESSEE RE VEALED THAT THE ASSESSEE CLAIMED DEDUCTION FOR INTEREST OF RS.2,70,465/-. T O A QUERY BY THE AO, IT WAS CONTENDED THAT IN THE PRECEDING YEAR THE ASSESSEE BORROWED FUNDS FROM M/S ITA.NO.2753/AHD/2004 -2- KRISHNA FINANCE FOR PURCHASING SHARES OF M/S.VIVRO FINANCIAL SERVICES PVT. LTD. ,IN WHICH THE ASSESSEE IS DIRECTOR. THE DIVID END RECEIVED FROM THE SAID COMPANY WAS CLAIMED EXEMPT U/S 10(33) OF THE ACT. THE AO WAS OF THE OPINION THAT INTEREST ON BORROWED FUNDS UTILIZED FO R ACQUIRING SHARES IN A CLOSELY HELD COMPANY WAS NOT A BUSINESS EXPENDITURE , AS IT WAS UTILIZED FOR EARNING DIVIDEND INCOME, CLAIMED TO BE EXEMPT. TO A FURTHER QUERY BY THE AO, THE ASSESSEE EXPLAINED THAT INVESTMENT IN THE C LOSELY HELD COMPANY WAS A BUSINESS OBLIGATION AND THEREFORE, INTEREST ON BO RROWED FUNDS FOR MAKING INVESTMENT IN THE COMPANY WAS BUSINESS EXPENDITURE. TOTAL HOLDING OF HER FAMILY IN THE SAID COMPANY WAS MORE THAN 94% AND TH E AFFAIRS OF THE COMPANY WERE BEING LOOKED AFTER BY THE ASSESSEE AND HER HUSBAND. IT WAS POINTED OUT THAT BY VIRTUE OF HER SHARE HOLDING, SH E ENJOYED RENT FREE PROPERTY FOR HER BUSINESS AND THEREFORE INTEREST ON BORROWED FUNDS FOR THE PURPOSE OF MAKING INVESTMENT WITH THE AFORESAID COMPANY WAS BU SINESS EXPENDITURE. HOWEVER, THE AO REJECTED THESE CONTENTIONS OF THE A SSESSEE, THERE BEING NO EVIDENCE THAT THE ASSESSEE WAS REQUIRED TO INVEST IN THE SHARES OF THE SAID COMPANY IN ORDER TO ENJOY RENT FREE ACCOMMODATION. ACCORDING TO THE AO, THE INTENTION OF INVESTMENT WAS NOT FOR BUSINESS PURPOS E BUT TO CONTROL THE SAID COMPANY. THEREFORE , THE AO DISALLOWED THE AFORESAI D AMOUNT OF INTEREST. 3. ON APPEAL, THE ASSESSEE SUBMITTED THAT SHE WAS E NGAGED IN CONSULTANCY BUSINESS THROUGH HER PROPRIETARY CONCER N AND ALSO THROUGH THE PRIVATE LIMITED COMPANY IN ORDER TO PROMOTE THE COM PANY TO GET REGISTRATION AS CATEGORY-I MERCHANT BANKERS FROM SEBI. THE ASSESSE E BORROWED FUNDS FOR THE PURPOSE OF ACQUIRING CONTROLLING STAKES IN THE SAID COMPANY AND PAID INTEREST THEREON. RELIANCE WAS PLACED ON THE DECIS ION OF THE TRIBUNAL IN THE CASE OF DCIT VS. S.G.INVESTMENT, 89 ITD 44. IN THE LIGHT OF THESE SUBMISSIONS, THE LEARNED CIT(A) UPHELD THE FINDINGS OF THE AO IN FOLLOWING TERMS: I HAVE CONSIDERED THE SUBMISSIONS OF THE ID. AUTHO RISED REPRESENTATIVE AND HAVE ALSO PERUSED THE ABOVE REFE RRED JUDGMENT, A COPY OF WHICH WAS FILED BEFORE ME. THERE IS NO DOUB TING THE FACT THAT THE EXPENDITURE ON INTEREST WAS INCURRED IN RELATIO N TO INCOME NOT ITA.NO.2753/AHD/2004 -3- INCLUDIBLE IN THE TOTAL INCOME AS PER SECTION 14A R WS 36(L)(III) AND 10(33). THE OTHER BENEFITS MENTIONED BY THE APPELLA NT, LIKE GETTING RENT FREE ACCOMMODATION FROM THE COMPANY, WERE ONLY INCI DENTAL. I ALSO AGREE WITH THE ASSESSING OFFICER THAT THERE WAS NO BUSINESS OBLIGATION ON THE PART OF THE APPELLANT TO INVEST IN THE SAID COMPANY AND SINCE THE INVESTMENT IN THE FORM OF SHARES IS NOT BEING REFLE CTED IN THE APPELLANT'S BALANCE SHEET, I AM OF THE CONSIDERED VIEW THAT INT EREST ON BORROWED FUNDS UTILIZED FOR ACQUIRING SHARES IN A CLOSELY HE LD COMPANY WAS NOT A BUSINESS EXPENDITURE SINCE IT WAS UTILIZED FOR EARN ING DIVIDEND INCOME WHICH WAS EXEMPT U/S 10(33). THE HON'BLE ITAT, KOLK ATTA'S DECISION REFERRED TO BY THE APPELLANT ALSO DOES NOT HELP THE APPELLANT SINCE THE SAID DECISION TALKS OF PROPORTIONATE INTEREST PAID ON SUCH BORROWINGS, IF THE SAME ARE UTILIZED PARTLY FOR ACQUISITION OF SHA RES AND PARTLY FOR OTHER INDIVISIBLE BUSINESS ACTIVITY. IN THE INSTANT CASE, THE ENTIRE AMOUNT OF BORROWED FUND HAS BEEN UTILIZED FOR INVESTMENT IN S HARES AND IN VIEW OF SPECIFIC PROVISIONS OF SECTION 14A, INTEREST CLAIME D THEREON CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. DISALLOWANCE ON TH IS ACCOUNT IS, THEREFORE, CONFIRMED. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US. THE LD. AR ON BEHALF OF THE ASSESSEE WHILE REITERATING THEIR CONTENTIONS BEFORE THE LD. CIT(A) CONTENDED THAT M/S.VIVRO FINANCIAL SERVICES PVT. LTD. IS ENGA GED IN THE SPECTRUM OF ACTIVITIES SUCH AS SEBI REGISTERED CATEGORY-I MERCH ANT BANKERS, UNDERWRITING, CONSULTANCY ETC. AND THEREFORE, IT WAS BENEFICIAL F OR THE ASSESSEE TO CONDUCT CONSULTANCY BUSINESS IN THEIR ASSOCIATION SO THAT T HEY COULD EXPLOIT LARGE BUSINESS RELATIONS MAINTAINED WITH INDUSTRIAL AND B USINESS HOUSES. THE COMPANY HAD HELPED HER IN CARRYING OUT HER OWN BUSI NESS ACTIVITIES FOR WHICH SHE WAS NOT PAYING ANY RENT. RELYING ON THE DECISI ONS IN THE CASE OF CIT VS. RAJEEVA LOCHAN KANORIA, 208 ITR 616(CAL.),CIT VS. C OTTON FABRICS LTD.,131 ITR 99(GUJ), RAMCHANDAR SHIVNARAYAN VS. CIT, 111 IT R 263 (SC), P.KRISHNA MENON VS. CIT(SC), 35 ITR 48, DAIL INVESTMENT LD. V S. DCIT, 73 TTJ 22, ACIT VS. LAXMI AGENTS PVT. LTD., 125 ITR 227 (GUJ) AND CIT VS. AMALGAMATIONS P. LTD., 108 ITR 895(MAD.), THE LEARN ED AR ON BEHALF OF THE ASSESSEE CONTENDED THAT INTEREST ON BORROWED FUNDS UTILIZED FOR THE PURPOSE OF ACQUISITION OF SHARES IN THE COMPANY, WAS ADMISS IBLE U/S 36(1)(III) OF THE ACT. 5. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT BORROWED FUNDS WERE NOT UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE. THE ASSESSEE HAD ITA.NO.2753/AHD/2004 -4- INVESTED IN SHARES OF VIVRO FINANCIAL SERVICES PVT. LTD. AND IS DERIVING SALARY FROM THE COMPANY. SINCE THE ASSESSEE DID NOT DERIV E ANY INCOME UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS OR PROFESSI ON WITH THE SAID INVESTMENT, ACCORDINGLY, THE ASSESSEE IS NOT ENTITLED TO ANY DE DUCTION U/S 36(1)(III) OF THE ACT. MOREOVER, EVEN THE PROVISIONS OF SECTION 14A A RE NOT ATTRACTED, FUNDS HAVING BEEN UTILIZED FOR NON-BUSINESS PURPOSE AND N OT FOR MAKING OR EARNING ANY INCOME, THE LD. DR ADDED, WHILE REFERRING TO VA RIOUS JUDICIAL PRONOUNCEMENTS. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS & GONE T HROUGH THE FACTS OF THE CASE BEFORE THE AO AND THE LD. CIT(A), NOT AN IOTA OF EVIDENCE WAS SUBMITTED THAT INVESTMENT IN SHARES OF THE COMPANY WAS MADE F OR ENJOYING RENT FREE ACCOMMODATION OR FOR ANY OTHER PURPOSE OF BUSINESS OF CONSULTANCY CARRIED ON BY THE ASSESSEE. EVEN BEFORE US, THE LD. AR DID NOT PLACE ANY SUCH EVIDENCE. THE AO WAS OF THE OPINION ONLY BECAUSE OF HER SHAREHOLDING, SHE WAS A DIRECTOR IN THE COMPANY AND THUS, INTENTION B EHIND THE INVESTMENT WAS TO GET HOLD OVER THE COMPANY. IN THE STATEMENT OF F ACTS FILED ALONG WITH THE APPEAL, THE ASSESSEE MENTIONED THAT SHE WAS EXECUTI VE DIRECTOR OF THE COMPANY AND IN ORDER TO GET THE REGISTRATION AS CAT EGORY-1 MERCHANT BANKERS FROM SEBI, SHE BORROWED FUNDS FOR ACQUIRING CONTROL LING STAKES IN THE COMPANY. UNDISPUTEDLY, THE ASSESSEE CONCEDED BEFORE THE LD. CIT(A) THAT BORROWED FUNDS WERE UTILIZED FOR ACQUIRING CONTROLL ING STAKES IN THE AFORESAID COMPANY M/S. VIVRO FINANCIAL SERVICES PVT. LTD. .TH E LD. AR VEHEMENTLY ARGUED THAT EXPENDITURE ON ACCOUNT OF INTEREST INCU RRED BY THE ASSESSEE WAS ALLOWABLE U/D 36(1)(III) OF THE ACT AND CITED A NUM BER OF DECISIONS IN HIS SUPPORT. FIRST SUCH DECISION IS IN THE CASE OF RAJE EVA LOCHAN KANORIA(SUPRA). IN THE SAID CASE , THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF REHABILITATING AND FINANCING THE CONTROLLED COMPANIES. BOTH FINANC ING AND ACQUISITION OF SHARES WERE IN THE COURSE OF THE ASSESSEE'S ACTIVIT Y OF MANAGING AND REHABILITATING CONTROLLED COMPANIES. THE REVENUE DI D NOT CHALLENGE AS PERVERSE THE FINDING OF THE TRIBUNAL THAT THE ASSES SEE'S BUSINESS ACTIVITY CONSISTED OF ACQUIRING SHARES FOR MANAGING, CONTROL LING AND REHABILITATING DIFFERENT COMPANIES LISTED BY THE ASSESSING OFFICER . SINCE THE INVESTMENT IN ITA.NO.2753/AHD/2004 -5- SHARES WAS CLEARLY CONNECTED WITH THE BUSINESS OPER ATIONS OF THE ASSESSEE, THE ITAT CONCLUDED THAT INTEREST PAID ON MONEYS BOR ROWED FOR PURCHASE OF SHARES FOR ACQUIRING CONTROLLING INTEREST COULD NOT BE DISALLOWED IN COMPUTING THE BUSINESS INCOME OF THE ASSESSEE AND THAT THE AS SESSEE WAS ENTITLED TO DEDUCTION IN RESPECT OF INTEREST PAID ON BORROWED M ONEYS UNDER SECTION 36(1)(III) OF THE ACT. HONBLE HIGH COURT UPHELD TH ESE FINDINGS OF THE ITAT. THE ITAT ALSO HELD THAT THE VARIOUS RECEIPTS INCLUDING BORROWINGS WERE CREDITED TO ONE COMMON FUND AND THE ASSESSEE WAS MAKING DISBURS EMENT OF FUNDS FOR DIFFERENT PURPOSES OUT OF SUCH COMMON FUND. ACCORDI NG TO THE TRIBUNAL, IT WAS NOT POSSIBLE TO CO-RELATE ANY PARTICULAR BORROWING TO ANY PARTICULAR INVESTMENTS. FOR THIS REASON ALSO, THE TRIBUNAL FE LT THAT NO DISALLOWANCE COULD BE MADE. HOWEVER, IN THE CASE UNDER CONSIDERATION SUCH ARE NOT THE FACTS. THE ASSESSEE IS CARRYING ON ONLY CONSULTANCY WORK. THERE IS NO EVIDENCE ON RECORD THAT THE ASSESSEE WAS ENGAGED IN THE BUSINES S OF REHABILITATING AND FINANCING THE CONTROLLED COMPANIES. IN FACT , THER E IS NOTHING TO SUGGEST THAT AMOUNT BORROWED HAD BEEN UTILIZED IN HER CONSULTAN CY BUSINESS NOR EVEN THAT CONSULTANCY INCOME SHOWN BY THE ASSESSEE FOR THE YE AR UNDER CONSIDERATION WAS EARNED WITH THE USE OF SUCH BORROWED FUNDS. THE REFORE, THE RELIANCE ON THE AFORESAID DECISION IS TOTALLY MISPLACED. 6.1 IN THE NEXT TWO DECISIONS REFERRED TO BY THE LD. AR IN THE CASE OF COTTON FABRICS LTD.& LAXMI AGENTS PVT. LTD., (SUPRA), THE ASSESSEE THEREIN WAS A DEALER IN SHARES AND ALSO EARNED DIVIDEND INCOME. T HE DISPUTE IN THESE CASES WAS AS TO WHETHER THE ENTIRE AMOUNT OF INTEREST PAI D BY THE ASSESSEE ON MONEY BORROWED ON OVERDRAFT AND EMPLOYED IN THE BUS INESS OF DEALING IN SHARES HAS TO BE DEDUCTED IN ARRIVING AT THE PROFIT S OR LOSS UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS' OR A PART THEREOF S HOULD BE APPORTIONED AND ALLOWED AGAINST THE INCOME ASSESSABLE AS DIVIDEND U NDER THE HEAD 'OTHER SOURCES'? HONBLE HIGH COURT UPHELD THE FINDINGS OF THE ITAT THAT NO DEDUCTION IS TO BE MADE BY WAY OF INTEREST PAID IN RESPECT OF THE INCOME FROM DIVIDENDS BECAUSE THE INTEREST IS PAID BY THE ASSES SEE-COMPANY FOR THE PURPOSE OF CARRYING ON ITS BUSINESS OF DEALING IN S HARES AND THE ENTIRE INTEREST IS DEDUCTIBLE UNDER S. 36(1)(III) OF THE ACT. INTER ALIA, THE HONBLE HIGH COURT ITA.NO.2753/AHD/2004 -6- RELIED ON THEIR DECISION IN LAXMI AGENTS PVT. LTD.( SUPRA) IN THE CASE OF COTTON FABRICS LTD., IN THE CASE UNDER CONSIDERATION , TH E ASSESSEE IS NOT A DEALER IN SHARES NOR THERE IS ANY EVIDENCE THAT BORROWED FUND S HAVE BEEN UTILIZED BY THE ASSESSEE IN HER CONSULTANCY BUSINESS. THUS, REL IANCE ON THESE TWO DECISIONS IS ALSO MISPLACED. 6.2 IN THE CASE OF RAMCHANDAR SHIVNARAYAN (SUP RA) RELIED ON BY THE ASSESSEE, THE ISSUE WAS ALTOGETHER DIFFERENT . IN THAT CASE THE ASSESSEE WAS A REGISTERED FIRM CARRYING ON BUSINESS IN GOLD, SIL VER AND GUNNIES AND ALSO DERIVES INCOME FROM INVESTMENT IN GOVERNMENT SECURI TIES. IT RETURNED A LOSS AFTER CLAIMING A LOSS OF RS. 30,000 ON ACCOUNT OF T HEFT BY SOME STRANGERS. THE ASSESSEE CLAIMED IT AS DEDUCTION BUT THE INCOME-TAX OFFICER REJECTED THE CLAIM. HONBLE SUPREME COURT HELD THAT THE LOSS WAS DIRECTLY CONNECTED WITH THE BUSINESS OPERATION AND WAS INCIDENTAL TO THE CA RRYING ON OF THE BUSINESS OF PURCHASE OF GOVERNMENT SECURITIES TO EARN PROFIT . BUT SUCH ARE NOT THE FACTS NOR THE ISSUE, IN THE CASE UNDER CONSIDERATION. THE LD. AR DID NOT EVEN MENTION AS TO HOW THIS DECISION HELPS THE ASSESSEE . THEREFORE , RELIANCE ON THIS DECISION IS ALSO MISPLACED. 6.3 LIKE WISE ,FACTS AND ISSUES IN THE THREE DEC ISIONS IN THE CASE OF AMALGAMATIONS P. LTD.,P KRISHNA MENON & DAIL INVEST MENT LD (SUPRA) WERE ALTOGETHER DIFFERENT AND HAVE NO PARALLEL WITH THE FACTS OBTAINING IN THE CASE UNDER CONSIDERATION. AFTER GOING THROUGH THESE DECI SIONS, WE ARE OF THE OPINION, THESE DECISIONS ARE NOT OF ANY ASSISTANCE TO THE ASSESSEE, ESPECIALLY WHEN THERE NOTHING TO SUGGEST THAT BORROWED FUNDS HAD INDEED BEEN UTILIZED BY THE ASSESSEE IN EARNING INCOME FROM CONSULTANCY WORK . 6.4 IN VIEW OF THE FOREGOING, WE ARE OF THE OPINI ON THAT THE ASSESSEE IS NOT ENTITLED TO ANY DEDUCTION U/S 36(1)(III) OF THE ACT . 7. ADVERTING NOW TO THE ALTERNATE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 57 OF THE ACT. FOR THE CLAIM UNDER THIS SECTION, THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE ANY SUBMISSIONS BEFORE US. U NDISPUTEDLY, THE ASSESSEE CONCEDED BEFORE THE LD. CIT(A) THAT BORRO WED FUNDS WERE UTILIZED ITA.NO.2753/AHD/2004 -7- FOR ACQUIRING CONTROLLING STAKES IN THE AFORESAID COMPANY M/S. VIVRO FINANCIAL SERVICES PVT. LTD. . APPARENTLY, THE INVESTMENT IN SHARES OF THE AFORESAID COMPANY WAS MADE NOT FOR THE SOLE PURPOSE OF MAKING OR EARNING ANY DIVIDEND INCOME. THE CLAUSE (III) OF SECTION 57 PR OVIDES THAT IN COMPUTING INCOME UNDER THE HEAD 'INCOME FROM OTHER SOURCES' D EDUCTION IS TO BE MADE IN RESPECT OF EXPENDITURE INCURRED WHOLLY AND EXCLU SIVELY FOR MAKING OR EARNING SUCH INCOME PROVIDED THE EXPENDITURE IS NOT IN THE NATURE OF CAPITAL EXPENDITURE. SECTION 57(III) OF THE ACT, SO FAR AS RELEVANT, AS IT STOOD AT THE MATERIAL TIME, READS AS UNDER : '57. DEDUCTIONS.---THE INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES SHALL BE COMPUTED AFTER MAKING THE FOLLOWIN G DEDUCTIONS, NAMELY :--- . . . (III) ANY OTHER EXPENDITURE (NOT BEING IN THE NATUR E OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF MAKING OR EARNING SUCH INCOME.' IT IS CLEAR FROM A PLAIN READING OF ABOVE PROVISION THAT IN ORDER TO GET DEDUCTION, THE EXPENDITURE SHOULD BE INCURRED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING THE INCOME FROM OTHER SOURCES AND THAT IT SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE. THE QUESTION WHICH ARISES IN THIS CASE IS : WHETHER THE EXPENDITURE INCURRED FOR BORROWING MONEY FOR PURCHASING SHARES FOR ACQUIRING CONTROLLING INTERES T IN A COMPANY CAN BE HELD TO BE AN EXPENDITURE INCURRED WHOLLY OR EXCLUSIVELY FOR EARNING INCOME FROM DIVIDEND. THERE IS NO DISPUTE IN THIS CASE THAT THE SHARES IN QUESTION WERE ACQUIRED BY THE ASSESSEE FOR THE PURPOSE OF ACQUIRI NG CONTROLLING INTEREST IN THE COMPANY AND NOT FOR EARNING DIVIDEND. THAT BEIN G SO, THE EXPENDITURE INCURRED BY WAY OF INTEREST ON THE LOAN TAKEN BY TH E ASSESSEE FOR THE SAID PURPOSE CANNOT BE HELD TO BE AN EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING INCOME BY WAY OF DIVIDEN DS. FROM THE NATURE OF TRANSACTION, IT IS CLEAR THAT THE EXPENDITURE WAS N OT FOR THE PURPOSE OF EARNING INCOME BY WAY OF DIVIDENDS BUT FOR THE PURPOSE OF A CQUIRING CONTROLLING INTEREST IN THE COMPANY AND, THEREFORE, IT WOULD NO T BE ALLOWABLE AS A DEDUCTION UNDER SECTION 57(III) OF THE ACT. WE ARE SUPPORTED IN OUR OPINION BY ITA.NO.2753/AHD/2004 -8- THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN T HE CASE OF SARABHAI SONS (P.) LTD. V. CIT [1993] 201 ITR 464 . IN THAT CASE, IT WAS HELD THAT IF THE DOMINANT PURPOSE FOR WHICH THE EXPENDITURE WAS INCU RRED, WAS NOT TO EARN THE INCOME, THE EXPENDITURE INCURRED IN THAT BEHALF WOU LD FALL OUTSIDE THE PURVIEW OF SECTION 57(III) OF THE ACT. HONBLE JURISDICTIONAL HIGH COURT REFERRED TO THEI R EARLIER DECISIONS IN THE CONTEXT OF DEDUCTION UNDER SECTION 12(2) OF THE 1922 ACT, WHICH PROVISION IS SIMILAR TO SECTION 57(III) OF THE 1961 ACT, IN THE CASE OF KASTURBHAI LALBHAI [1968] 70 ITR 267 (GUJ), WHEREIN IT WAS HELD AS UNDER (AT PAGE 273) : ' . . . IN ORDER TO DECIDE WHETHER AN EXPENDITURE I S A PERMISSIBLE DEDUCTION UNDER SECTION 12(2), WE HAVE TO EXAMINE THE NATURE OF THE EXPENDITURE. THE PURPOSE FOR WHICH THE EXPENDITURE IS INCURRED MUST BE IN ORDER TO EARN THE INCOME AND HERE WE MUST NOT CONFUSE PURPOSE WITH MO TIVE. WHAT SECTION 12(2) EMPHASIZES IS THE PURPOSE FOR WHICH THE EXPEN DITURE IS INCURRED AND THE WORD 'PURPOSE' DOES NOT MEAN MOTIVE FOR THE TRANSAC TION. THE MOTIVE WHICH MAY HAVE OPERATED ON THE MINDS OF ASSESSEES IN MAKI NG THE EXPENDITURE IS QUITE IRRELEVANT ... MOREOVER, THE PURPOSE OF MAKIN G OR EARNING THE INCOME MUST BE THE SOLE PURPOSE FOR WHICH THE EXPENDITURE IS INCURRED. IF THE EXPENDITURE IS INCURRED FOR THE PURPOSE OF MAKING O R EARNING THE INCOME AS ALSO FOR ANOTHER PURPOSE OR, IN OTHER WORDS, THE PU RPOSE OF MAKING OR EARNING THE INCOME IS MIXED UP WITH ANOTHER PURPOSE IN MAKI NG OF THE EXPENDITURE ... THE EXPENDITURE WOULD BE OUTSIDE THE SCOPE AND AMBI T OF SECTION 12(2) AND WOULD NOT BE A PERMISSIBLE DEDUCTION UNDER THAT SEC TION. THE EXPENDITURE IN ORDER TO FALL WITHIN SECTION 12(2) MUST, THEREFORE, BE INCURRED SOLELY FOR THE PURPOSE OF MAKING OR EARNING THE INCOME SOUGHT TO B E ASSESSED . .' AGAIN, IN SMT. VIRMATI RAMKRISHNA'S CASE [1981] 131 ITR 659 (GUJ), HONBLE HIGH COURT, HELD THAT THE PURPOSE OF MAKING OR EARN ING SUCH INCOME MUST BE THE SOLE PURPOSE FOR WHICH THE EXPENDITURE MUST HAV E BEEN INCURRED, THAT IS TO SAY, THE EXPENDITURE SHOULD NOT HAVE BEEN INCURRED FOR SUCH PURPOSE AS ALSO FOR ANOTHER PURPOSE, OR FOR A MIXED PURPOSE. 7.1. IN VIEW OF THE FOREGOING , ESPECIALLY WHEN THE ASSESSEE CONCEDED BEFORE THE LD. CIT(A) THAT BORROWED FUNDS WERE UTI LIZED FOR ACQUIRING CONTROLLING STAKES IN THE AFORESAID COMPANY M/S. V IVRO FINANCIAL SERVICES PVT. LTD ., APPLYING THE TEST AS LAID DOWN IN KASTURBHAI LA LBHAI'S CASE [1968] 70 ITR 267 (GUJ), SMT. VIRMATI RAMAKRISHNA'S CASE [1981] 131 ITA.NO.2753/AHD/2004 -9- ITR 659 (GUJ) AND FOLLOWED IN SARABHAI SONS (P.) LTD. V. C IT [1993] 201 ITR 464 , TO THE FACTS OF THIS CASE, IT BECOMES CLEAR THAT T HE DOMINANT PURPOSE FOR WHICH EXPENDITURE WAS INCURRED WAS NOT TO EARN INCO ME. AT THE HIGHEST, IT WAS A MIXED PURPOSE. FOR THAT REASON, IT WILL HAVE TO B E HELD THAT THE EXPENDITURE INCURRED IN THAT BEHALF FELL OUTSIDE THE PURVIEW OF SECTION 57(III) OF THE ACT. THUS, ALTERNATE CLAIM FOR DEDUCTION U/S 57 IS ALSO REJECTED. 8. MOREOVER, EVEN IF THE PURPOSE OF INVESTME NT IS PRESUMED TO BE THE SOLE PURPOSE OF MAKING OR EARNING DIVIDEND INCOME, HERE ALSO NONE OF THE AFORESAID JUDGMENTS RELIED ON BY THE ASSESSEE SUPPO RTS HER CASE SINCE THESE JUDGMENTS WERE RENDERED PRIOR TO THE INSERTION OF T HE S. 14A OF THE ACT .AFTER THE INSERTION OF S. 14A ALL EXPENDITURE RELATING TO EXEMPTED INCOME OR AN INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME OF THAT PREVIOUS YEAR ARE NOT ALLOWABLE TO BE DEDUCTED AGAINST THE TAXABLE INCOME OF THE ASSESSEE. MEMORANDUM EXPLAINING THE INTRODUCTION OF S. 14A SH OWS THE INTENTION OF THE LEGISLATURE. SUCH AN INTENTION HAS BEEN CLARIFIED I N THE PROVISIONS OF NEWLY INSERTED S. 14A BY THE FINANCE ACT, 2001, WITH RETR OSPECTIVE EFFECT FROM 1ST APRIL, 1962 AND AS WELL AS IN THE MEMORANDUM EXPLAI NING THE PROVISIONS, NOTES ON CLAUSES RELATING TO THE FINANCE BILL, 2001 AND IN THE BOARD'S CIRCULAR NO. 14 OF 2001, DT. 22ND NOV., 2001 [(2002) 172 CTR (ST) 131 AND CIRCULAR NO. 8 OF 2002, DT. 27TH AUG., 2002 [(2002) 178 CTR (ST) 91 IN THE FOLLOWING WAY: 'CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THE RE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SU CH 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 T HE 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 P RINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MIN US THE EXPENDITURE, IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO I N RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO TH E EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IT IS PROPOSED TO INSERT A NEW S. 14A SO AS TO CLAR IFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE IT ACT, 1961 THAT NO DEDUCTION SHALL BE ITA.NO.2753/AHD/2004 -10- MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IT ACT.' 8.1. SEC. 14A PROVIDES FOR DISALLOWANCE OF EXPEN DITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. SINCE DIVIDEND INCOME WAS EXEMPT UNDER THE EXTANT SECTION 10(33) OF THE ACT, APPARENTLY, THE ASSESSEE WOULD NOT BE ENTITLED TO ANY DEDUCTION ON ACCOUNT OF EXPENDITURE INCURRED IN MAKING OR EARNING SUCH DIVIDEND INCOME. THUS, ON TH IS SCORE ALSO, THE CLAIM FOR DEDUCTION OF INTEREST IS NOT TENABLE AND HAS RI GHTLY BEEN REJECTED BY THE LD. CIT(A). 9. IN THE LIGHT OF AFORESAID DISCUSSION, WE HAV E NO HESITATION IN REJECTING GROUND NO.1 IN THE APPEAL. 10. NO ADDITIONAL GROUND HAVING BEEN RAISED IN TERMS OF THE RESIDUARY GROUND, ACCORDINGLY, THIS GROUND IS ALSO REJECTED . 11. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 31ST JULY, 2009. SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (A.N.PAHUJA) ACCOUNTANT MEMBER PLACE : AHMEDABAD DATE : 31-7-2009 COPY OF THE ORDER FORWARDED TO: 1) ASSESSEE 2) ITO, WARD-11(4)AHMEDABAD 3) : CIT(A)-XVII,AHMEDABAD 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD ITA.NO.2753/AHD/2004 -11-