DCIT Circle-22 (1), New Delhi V. Anil Kumar, New Delhi

ITA 2988/DEL/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53018 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 26-09-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SURJANI MOHANTIDR
• Keywords: Earning of tax free income
• Section: 14A; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI A BENC H BEFORE SHRI I.P. BANSAL, JM & SHRI A.N. PAHUJA, A M ITA N O. 2988 /DEL./20 0 8 ASSESSMENT YEAR:2004-05 A.C.I.T.CIRCLE-22(1), NEW DELHI V/S . 1.SMT. SUMITRA GUPTA, WIFE, 2.SMT. PAYAL AGGARWAL, DAUGHTER & 3.SHRI ANUJ GUPTA, SON, LEGAL HEIRS OF LATE SHRI ANIL GUPTA R/O 5/17, SHANTI NIKETAN,NEW DELHI [ PAN : AAOPG8733C ] (APPELLANT) (RESPONDENT) ASSESSEE BY NONE REVENUE BY SMT. SURJANI MOHANTI,DR DATE OF HEARING 14-10-2011 DATE OF PRONOUNCEMENT 21-10-2011 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 26.09.2008 BY THE REVENUE AGA INST AN ORDER DATED 16 TH JULY, 2008 OF THE LEARNED CIT(A)-XXIII, NEW DELHI, RAISES THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT (A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION OF ` .1,17,97,345/- MADE BY THE AO ON ACCOUNT OF DISALLO WANCE OF INTEREST PAID ON BORROWED MONEY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE ORDER OF THE LD. CIT (A) IS ERRONEOUS AND CONTRARY TO FACTS AND LAW. 3. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTE R THE GROUNDS OF APPEAL BEFORE OR DURING THE HEARING OF T HE APPEAL. 2. AT THE OUTSET, NONE APPEARED ON BEHALF OF THE AS SESSEE NOR ANY REQUEST FOR ADJOURNMENT HAS BEEN RECEIVED. CONSIDERING THE NATU RE OF ISSUE, WE ,THEREFORE, DECIDED TO DISPOSE OF THE APPEAL, AFTER HEARING THE LD. DR. 3. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE TH AT THAT RETURN DECLARING INCOME OF ` 45,99,274/- FILED ON 30.10.2004 BY THE ASSESSEE, EN GAGED IN MANUFACTURING ITA NO.2988/DEL./2008 2 COLOUR AND BLACK & WHITE TV, AFTER BEING PROCESSED ON 08.06.2005 U/S 143(1) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO A S THE ACT), WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF NOTICE U/S 143(2) OF T HE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE CLAIMED DEDUCTION FOR INTEREST OF ` .1,33,69,500/- ON UNSECURED LOANS FROM VARIOUS PAR TIES DETAILED ON PAGE 3 OF THE ASSESSMENT ORDER. INTER ALIA, THE AS SESSEE EARNED INTEREST ON FDR WITH BANK AND INTEREST FROM HOTLINE CPT BESIDES DIV IDEND INCOME OF ` .7,02,459/- EXEMPT U/S 10(34) OF THE ACT. THE AO WAS OF THE OP INION THAT THE ASSESSEE IS ENTITLED TO DEDUCT EXPENDITURE STIPULATED U/S 57 O F THE ACT ALONE AGAINST THE INCOME FROM OTHER SOURCES. TO A QUERY BY THE AO, T HE ASSESSEE REPLIED VIDE LETTER DATED 08.12.2006 THAT IT DID NOT RAISE ANY UNSECURE D LOAN. SINCE THE BALANCE SHEET OF THE ASSESSEE REVEALED LOANS AND ADVANCES O F ` .29,51,35,330/- AND ` .30,84,52,013/- AT THE BEGINNING AND CLOSE OF THE Y EAR UNDER CONSIDERATION WHILE THE ASSESSEE MADE INVESTMENT OF ` .52,33,18,327/- AT THE BEGINNING OF THE YEAR AND ` .51,25,26,186/- AT THE END OF THE YEAR IN SHARES OF VARIOUS COMPANIES AND ACCORDINGLY, EARNED DIVIDEND INCOME OF ` .7,02,459/-, IN THE ABSENCE OF RELEVANT DETAILS, THE AO DISALLOWED THE ENTIRE EXPENDITURE O F ` .1,33,69,500/- ON ACCOUNT OF INTEREST, HAVING RECOURSE TO THE PROVISIONS OF SEC TION 14A OF THE ACT. 4. ON APPEAL, THE LEARNED CIT (A) REDUCED THE DIS ALLOWANCE TO ` .15,72,155/- AS UNDER :- RIVAL CONTENTIONS HAVE CAREFULLY BEEN CONSIDERED. AFTER CONSIDERING THE RIVAL SUBMISSIONS I HAVE COME TO TH E FOLLOWING CONCLUSIONS :- 1. IT IS A FACT THAT IN THE YEAR UNDER CONSIDERATIO N NO NEW LOAN HAVE BEEN RAISED BY THE APPELLANT. SINE THE APPELL ANT HAS NOT RAISED ANY NEW LOAN THE QUESTION OF UTILIZATION ALS O DOES NOT ARISE. UNDER THESE CIRCUMSTANCES WE HAVE TO LOOK I NTO THE PREVIOUS RECORD OF THE APPELLANT SO AS TO ASCERTAIN IF THE INTEREST BEARING BORROWED FUNDS HAVE ACTUALLY BEEN UTILIZED FOR THE PURPOSE OF INVESTMENT IN SHARES ON WHICH EXEMPT ED DIVIDEND INCOME HAS BEEN EARNED. 2. SCRUTINY OF THE ASSESSMENT ORDER AND ALSO THE AP PELLATE ORDER OF THE IMMEDIATE PRECEDING YEAR HAVE REVEALED THAT THE ASSESSEE HAD INVESTED ITS INTEREST BEARING BORROWED LOANS IN THE SHARES OF ITS GROUP COMPANIES ON WHICH DIVIDEND INCOME ITA NO.2988/DEL./2008 3 HAS BEEN EARNED. IN ADDITION TO THAT THE APPELLANT HAD ALSO NON-INTEREST BEARING LOANS TO ITS GROUP COMPANIES O N WHICH INTEREST HAS BEEN CHARGED BY THEM. THEREFORE, THERE IS DIRECT NEXUS BETWEEN THE INTEREST BEARING LOAN WITH THE IN VESTMENT IN SHARES OF ITS GROUP COMPANIES. THIS PARTICULAR FACT WAS DISCUSSED AT LENGTH BY MY PREDECESSOR ALSO IN HIS A PPELLATE ORDER FOR THE ASSESSMENT YEAR 2003-04. 3. THE SUBMISSIONS OF THE LD. A.R. OF THE APPELLANT THAT THE AMOUNT OF INTEREST INCOME EARNED WAS MORE THAN THE INTEREST PAID IN THE EARLIER YEARS AND THEREFORE THERE CANNO T BE DIFFERENT PARAMETER WHERE THERE IS A NEGATIVE INCOME UNDER TH E HEAD INCOME FROM 0THER SOURCES HAS BEEN FOUND ON DIFFERE NT FOOTING AND NOT APPLICABLE TO THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERATION. FIRSTLY THE SUBMISSIONS OF THE APPEL LANT ON THE FACTS ITSELF IS WRONG BECAUSE IN THE IMMEDIATE PREC EDING YEAR ALSO THE AMOUNT OF INTEREST PAID WAS MORE THAN THE INTEREST INCOME EARNED. SECONDLY TILL THE IMMEDIATE PRECEDIN G YEAR THE DIVIDEND INCOME WAS TAXABLE AND THEREFORE THE PROVI SIONS OF SECTION 14A OF I.T.ACT WERE NOT APPLICABLE. ACCORDI NGLY VARIOUS JUDICIAL COURT'S DECISIONS RELIED UPON BY THE APPEL LANT ARE NOT APPLICABLE TO THE FACTS OF ITS CASE AT ALL. ANOTHER SUBMISSIONS OF THE APPELLANT THAT THE CAPIT AL OF THE ASSESSEE AND INTEREST FREE UNSECURED LOAN ARE MORE THAN THE AMOUNT OF INVESTMENT MADE IN THE SHARES OF THE COMP ANY, HENCE PROVISIONS OF SECTION 14A OF THE I.T.ACT, 1961 ARE NOT APPLICABLE HAS ALSO BEEN FOUND NOT TENABLE BOTH IN LAW AND ALSO ON FACTS. FIRSTLY THE SCRUTINY OF THE ASSESSMENT ORDER AND ITS ANALYSIS I N THE APPELLATE ORDER PASSED BY MY PREDECESSOR IN THE IMMEDIATE PRE CEDING YEAR I.E. ASSESSMENT YEAR 2003-04 HAS CLEARLY FOUND THE NEXUS BETWEEN THE INTEREST BEARING LOAN TAKEN AND ITS INVESTMENT IN SHARES OF THE GROUP COMPANY. A CHART INCORPORATED ON PAGE NO. 11 OF THE APPELLATE OF MY PREDECESSOR FOR ASSESSMENT YEAR 200 3-04 HAS CLEARLY PROVED THE NEXUS BETWEEN THE LOAN TAKEN AND INVESTMENT IN SHARES WHICH HAS NOT BEEN DISPUTED BY THE APPELLANT ALSO. THEREFORE, VARIOUS COURT'S CITATION RELIED UPON BY THE APPELLANT ARE NOT APPLICABLE TO THE FACTS OF THE CASE AT ALL. THE FACTS OF THE APPELLANT'S CASE ARE CLEARLY COVERED BY THE PROVISI ONS OF SECTION 14- A OF THE I.T. ACT. AS FAR AS THE QUANTUM OF DISALLOWANCE OF THE INTERE ST PAID WITH REFERENCE TO THE EXEMPTED DIVIDEND INCOME IS CONCER NED, I FIND THAT THE ENTIRE DISALLOWANCE OF RS.1,33,69,500/- ON THE INTEREST PAID AMOUNT IS TOTALLY ARBITRARY AND UNJUSTIFIED ON THE PART OF THE ASSESSING OFFICER PARTICULARLY WHEN HE HIMSELF HAS ACKNOWLEDGED THAT THE APPELLANT HAD EARNED INCOME BY WAY OF INTE REST FROM BANK, FDR AND THEIR GROUP COMPANIES ON THE DEPOSITS/LOAN S GIVEN TO THEM. SINCE IT IS NOT POSSIBLE TO ASCERTAIN THE EXA CT AMOUNT OF THE ITA NO.2988/DEL./2008 4 INTEREST BEARING LOAN IN THE INVESTMENT OF SHARES, I CONSIDER IT MOST REASONABLE TO MAKE ITS PROPORTIONATE DISALLOWANCE O F THE INTEREST PAID WITH REFERENCE TO EXEMPTED DIVIDEND INCOME VIZ -A-VIZ TOTAL INCOME EARNED, WHICH IS WORKED OUT AS UNDER :- INCOME FROM OTHER SOURCES 52,71,202 DIVIDEND INCOME 7,02,459 TOTAL INCOME FROM OTHER SOURCES 59,73,661 TOTAL EXPENSES ON ACCOUNT OF INTEREST PAID 1,33,69 ,500 PROPORTIONATE DISALLOWANCE: 1,33,69,500 X 7,02,459 /59,73,661 = 15,72,155 IN THE TOTALITY OF ALL ABOVE MENTIONED FACTS AND CI RCUMSTANCES, I DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISA LLOWANCE TO THE EXTENT OF RS. 15,72,155/- AS HAS BEEN INCURRED FOR EARNING THE DIVIDEND INCOME OF RS.7,02,459/- INSTEAD OF THE ENT IRE AMOUNT OF RS.1,33,69,500/-. 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF LEARNED CIT (A). THE LEARNED DR WHILE SUPPORTIN G THE FINDINGS OF AO CONTENDED THAT THE LD. CIT(A) PRESUMED WITHOUT ANY BASIS THAT THE ENTIRE BORROWED FUNDS WERE UTILIZED FOR EARNING INCOME FROM OTHER SOURCES . EVEN THE FINDINGS OF THE LD. CIT(A) IN THE AY 2003-04 RELIED UPON OR THE QUANTU M OF BORROWED FUNDS INVESTED IN SHARES UP TO THE END OF THE PRECEDING YEAR, IS NOT EVIDENT FROM THE IMPUGNED ORDER. IN THE ABSENCE OF ANY COGENT BASIS, THE LD. CIT(A) WAS NOT JUSTIFIED IN RESTRICTING THE DISALLOWANCE TO ` .15,72,155/-, THE LD. DR ADDED. 6.. WE HAVE HEARD LEARNED DR AND GONE THROUGH THE F ACTS OF THE CASE. AS IS APPARENT FROM THE AFORECITED FACTS, THE AO DID NOT CARE TO ASCERTAIN AS TO WHETHER OR NOT BORROWED FUNDS HAVE INDEED BEING UTILIZED F OR INVESTMENT IN SHARES NOR ADVERTED TO FACTS IN THE ASSESSMENT ORDERS FOR THE PRECEDING YEARS, EVEN WHILE NOTING THAT INVESTMENT OF ` 52,33,18,327/- WAS MADE IN THE SHARES OF VARIOUS COMPANIES BY THE ASSESSEE UNTIL THE PRECEDING YEAR. HOWEVER, THE LEARNED CIT (A) NOTICED THAT THE ASSESSEE DID NOT RAISE ANY NEW LOAN IN THE YEAR UNDER CONSIDERATION WHILE IN THE PRECEDING ASSESSMENT YEA R, IT WAS FOUND THAT THE ASSESSEE HAD INVESTED ITS INTEREST BEARING BORROWED FUNDS IN SHARES OF ITS GROUP COMPANIES, ON WHICH DIVIDEND INCOME HAS BEEN EARNED . THE QUANTUM OF BORROWED FUNDS UTILIZED IN INVESTMENT IN SHARES IS NOT EVIDENT FROM THE IMPUGNED ITA NO.2988/DEL./2008 5 ORDER .IN VIEW OF DIRECT NEXUS BETWEEN INTEREST BEA RING LOANS WITH THE INVESTMENT IN ITS GROUP COMPANY, THE LEARNED CIT(A) DISALLOWED PR OPORTIONATE EXPENSES IN RELATION TO EXEMPT DIVIDEND INCOME OUT OF TOTAL INC OME SHOWN UNDER THE HEAD OTHER SOURCES. WE FIND THAT NEITHER BEFORE THE AO N OR BEFORE THE LD. CIT(A), THE ASSESSEE FURNISHED DETAILS AND EVIDENCE THAT FUNDS BORROWED BY IT WERE UTILIZED FOR THE PURPOSE OF THE IR BUSINESS ALONE AND NOT BY WAY OF INVESTMENTS IN EQUITY SHARES. THU S, THE ASSESSEE FAILED TO DISCHARGE THE ONUS PLACED UPON THEM IN E STABLISHING THAT THE BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF THEIR BUSINESS PURPOSES NOR THE ASSESSEE PROVED THAT THE AFORESAID INVESTMENT HAD BEEN MADE IN THE SHARES OUT OF THEIR OWN INTEREST FREE FUNDS. RESULTANTLY, THE AO DISALLOWED THE ENTIRE AMOUNT OF ` 1 ,33,69,500/-. THE LD. CIT(A) ALSO PRESUMED THAT ENT IRE INTEREST HAS BEEN PAID FOR EARNING INCOME UNDER THE HEAD OTHER S OURCES AND DISALLOWED PROPORTIONATE AMOUNT OF ` .15,72,155/- ON THE GROUND THAT DISALLOWANCE TO THE AFORESAID EXTENT IS REASONABLE. WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THEIR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI WHILE HOLDING THAT RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETR OSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATIN G EXPENDITURE RELATABLE TO TAX-FREE INCOME AND IS APPLICABLE ONLY W.E.F AY 2008-09, CONCLUDED THAT FOR THE ASSESSMENT YEARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES. 6.1. HONBLE SUPREME COURT IN THEIR DECIS ION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RELA TIONSHIP WITH THE TAX EXEMPT INCOME. HONBLE APEX COURT OBSERVED IN THE CONTEXT OF PROVISIONS SEC.14A OF THE ACT IN THE FOLLOWING TERM S: ITA NO.2988/DEL./2008 6 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIV E EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001, DATED 22- 11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THA T 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 EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14 A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS BEING CLAI MED AGAINST TAXABLE INCOME. THE MANDATE OF SECTION 14A IS CLEAR . IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES IN CURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INC OME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RE LATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 1 4A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL IN COME AS THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RE SPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTI VES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. O N THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INC OME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABL E INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIR ST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRES CRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT O F THE APPLICABILITY OF SECTION 14A. FURTHER, SECTION 14 SPECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEA BLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECT IONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIF Y THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUME RATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH, REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE ABOVE HEAD S AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOM E IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED TO THE I NCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST O THER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF C HARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND ITA NO.2988/DEL./2008 7 NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UND ER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14 A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC . IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) 6.2. WE ALSO FIND THAT HONBLE KERALA HIGH COURT IN THEIR DECISION DATED 17.6.2010 IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN IN ITA.NO. 1784 OF 2009, HELD IN THE CONTEXT OF PROVIS IONS OF SEC.14A OF THE ACT AS UNDER: 4. ON FACTS WE FIND THAT THE INTEREST PAID BY THE ASSESSEE DURING THE PREVIOUS YEAR FOR THE FUNDS BORROWED FOR ACQUISITIO N OF SHARES IN THE COMPANY WAS AT THE RATE OF 24% P.A. AND THE TOTAL I NTEREST PAID IN THE ACCOUNTING YEAR ALONE IS AS MUCH AS RS.17,44,310/-. IT IS ON RECORD THAT ASSESSEE HAD RECEIVED ONLY A DIVIDEND INCOME O F RS.3 LAKHS AND NO OTHER BENEFIT IS DERIVED FROM THE COMPANY FOR TH E BUSINESS CARRIED ON BY IT. THE DISALLOWANCE PROHIBITED UNDER SECTION 14A IS EXPENDITURE INCURRED FOR EARNING ANY INCOME WHICH D OES NOT CONSTITUTE TOTAL INCOME OF THE ASSESSEE. IN OTHER W ORDS, ANY EXPENDITURE INCURRED FOR EARNING ANY INCOME WHICH I S NOT TAXABLE UNDER THE ACT, IS NOT AN ALLOWABLE EXPENDITURE. DIV IDEND INCOME IS EXEMPT UNDER SECTION 10(33) OF THE INCOME TAX ACT A ND SO MUCH SO, DIVIDEND EARNED BY THE ASSESSEE ON THE SHARES ACQUI RED BY HER WITH BORROWED FUNDS DOES NOT CONSTITUTE TOTAL INCOME IN THE HANDS OF THE ASSESSEE. SO MUCH SO, IN OUR VIEW, DISALLOWANCE WAS RIGHTLY MADE BY THE ASSESSING OFFICER. IN FACT, THE TRIBUNAL ITSELF HAS ESTIMATED DISALLOWANCE OF RS.2 LAKHS BY APPLYING SECTION 14A. WE DO NOT KNOW HOW THE TRIBUNAL CAN RESTRICT THE DISALLOWANCE TO R S.2 LAKHS AND ALLOW BALANCE ABOVE RS.15 LAKHS WHEN THE WHOLE BORR OWED FUNDS WERE UTILISED BY THE ASSESSEE FOR PURCHASE OF SHARE S IN THE COMPANY. IN OUR VIEW, THE REASONING GIVEN BY THE TRIBUNAL FO R DISALLOWANCE OF RS.2 LAKHS I.E. BY APPLYING SECTION 14A, SQUARELY A PPLIES FOR THE INTEREST PAID ON BORROWED FUNDS BECAUSE IT IS ON RE CORD THAT THE ENTIRE FUNDS BORROWED WERE UTILISED FOR ACQUISITION OF SHARES BY THE ASSESSEE IN THE COMPANY. IN FACT, IN OUR VIEW, ASSE SSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST UNDER SECTION 36( 1)(III) OF THE ACT ON BORROWED FUNDS UTILISED FOR THE ACQUISITION OF SHAR ES ONLY IF SHARES ARE HELD AS STOCK IN TRADE WHICH ARISES ONLY IF THE ASSESSEE IS ENGAGED IN TRADING IN SHARES. SO FAR AS ACQUISITION OF SHARES IS IN THE FORM OF INVESTMENT AND THE ONLY BENEFIT ASSESSEE DE RIVED IS DIVIDEND INCOME WHICH IS NOT ASSESSABLE UNDER THE ACT, THE D ISALLOWANCE UNDER SECTION 14A IS SQUARELY ATTRACTED AND THE ASS ESSING OFFICER, IN OUR VIEW, RIGHTLY DISALLOWED THE CLAIM. AS ALREADY POINTED OUT, THE CALCUTTA HIGH COURT DECISION WHICH PERTAINS TO THE PERIOD PRIOR TO INTRODUCTION OF SECTION 14A, HAS NO APPLICATION. TH E DECISION OF THE ITA NO.2988/DEL./2008 8 SUPREME COURT ALSO DOES NOT APPLY BECAUSE IN THIS C ASE APART FROM INVESTMENT IN SHARES OF THE COMPANY, THERE IS NOTHI NG TO INDICATE THAT THE ASSESSEE'S BUSINESS WAS FULLY LINKED WITH THE B USINESS OF THE LEASING COMPANY OR THAT ASSESSEE'S BUSINESS IS SOLE LY DEPENDENT ON THE BUSINESS OF THE LEASING COMPANY. IN FACT, THE W HOLE TRANSACTION WAS A TOTAL FIASCO IN AS MUCH AS, AS AGAINST RS.17, 44,310/- PAID TOWARDS INTEREST ON BORROWED FUNDS SERVICED AT THE RATE OF INTEREST OF 24% P.A., THE DIVIDEND INCOME RECEIVED BY THE ASSES SEE DURING THE PREVIOUS YEAR WAS A MEAGRE SUM OF RS.3 LAKHS. THIS ONLY SHOWS THAT THE BUSINESS CARRIED ON BY THE LEASING COMPANY WAS NOT VERY SUBSTANTIAL TO JUSTIFY THE ASSESSEE'S INVESTMENT TH ROUGH BORROWED FUNDS. THEREFORE, IN OUR VIEW, THE PRINCIPLE OF COM MERCIAL EXPEDIENCY GONE INTO BY THE SUPREME COURT DOES NOT APPLY TO TH E FACTS OF THIS CASE. THEREFORE, WE HOLD THAT THE TRIBUNAL IN PRINC IPLE RIGHTLY HELD THAT THE UTILISATION OF BORROWED FUNDS FOR ACQUISIT ION OF SHARES WILL NOT ENTITLE THE ASSESSEE FOR CLAIMING DEDUCTION OF INTE REST PAID ON SUCH BORROWED FUNDS. HOWEVER, WE HOLD THAT THE TRIBUNAL WAS NOT JUSTIFIED IN ALLOWING THE CLAIM IN EXCESS OF RS.2 LAKHS. FOR THE SAME REASONING APPLIED BY THE TRIBUNAL, THE ASSESSEE IS NOT ENTITL ED TO DEDUCTION OF ANY AMOUNT TOWARDS INTEREST PAID ON FUNDS BORROWED BY WAY OF FIXED DEPOSITS TAKEN FOR ACQUISITION OF SHARES IN THE COM PANY, WHICH HELPED THE ASSESSEE ONLY TO EARN SOME DIVIDEND. 6.3 HONBLE PUNJAB & HARYANA HIGH COURT IN THEIR DECISION IN CIT VS. HERO CYCLES LTD.,323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A C ANNOT STAND. 6.4 RECENTLY, HONBLE CALCUTTA HIGH COURT IN DHA NUKA & SONS V. CIT (CENTRAL)-1, [2011] 12 TAXMANN.COM 227 (CAL.) WHILE ADJUDICATING A SIMILAR ISSUE CONCLUDED AS UNDER: 9. IN OUR OPINION, THE MERE FACT THAT THOSE SHARES WERE OLD ONES AND NOT ACQUIRED RECENTLY IS IMMATERIAL. IT IS FOR THE ASSESSEE TO S HOW THE SOURCE OF ACQUISITION OF THOSE SHARES BY PRODUCTION OF MATERIALS THAT THOSE WERE ACQUIRED FROM THE FUNDS AVAILABLE IN THE HANDS OF THE ASSESSEE AT THE RELEV ANT POINT OF TIME WITHOUT TAKING BENEFIT OF ANY LOAN. IF THOSE SHARES WERE PURCHASED FROM THE AMOUNT TAKEN IN LOAN, EVEN FOR INSTANCE, FIVE OR TEN YEARS AGO, IT IS FOR THE ASSESSEE TO SHOW BY THE PRODUCTION OF DOCUMENTARY EVIDENCE THAT SUCH LOANED AMOUNT HAD ALREADY BEEN PAID BACK AND FOR THE RELEVANT ASSESSMENT YEAR, NO INTEREST IS PAYABLE BY THE ASSESSEE FOR ACQUIRING THOSE OLD SHARES. IN THE ABS ENCE OF ANY SUCH MATERIALS PLACED BY THE ASSESSEE, IN OUR OPINION, THE AUTHORI TIES BELOW RIGHTLY HELD THAT PROPORTIONATE AMOUNT SHOULD BE DISALLOWED HAVING RE GARD TO THE TOTAL INCOME AND ITA NO.2988/DEL./2008 9 THE INCOME FROM THE EXEMPT SOURCE. IN THE ABSENCE O F ANY MATERIAL DISCLOSING THE SOURCE OF ACQUISITION OF SHARES WHICH IS WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE, THE ASSESSING AUTHORITY TOOK A MOST REASO NABLE APPROACH IN ASSESSMENT. 6.5 IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS , WE ARE OF THE OPINION THAT THE UTILISATION OF BORROWED FUNDS FOR ACQUISITION OF SHARES WILL NOT ENTITLE THE ASSESSEE FOR CLAIMING D EDUCTION OF INTEREST PAID ON SUCH BORROWED FUNDS . AS ALREADY POINTED OUT, THE ASSESSEE DID NOT FURNISH COMPLETE DETAILS OF UTILIZATION OF THEIR BORROWED FUNDS BEFORE THE AO/LD.CIT(A). AS A RESULT, THE AO OR THE LD. CIT(A) DID NOT HAVE ANY OCCASION TO ASCERTAIN AS TO WHETHER OR NO T BORROWED FUNDS HAVE INDEED BEEN UTILISED FOR THE PURPOSE OF BUSIN ESS OF THE ASSESSEE AND WERE NOT UTILISED IN ACQUIRING THE AFO RESAID SHARES. EVEN BEFORE US, SITUATION IS NO BETTER, THE ASSESSE E HAVING CHOSEN NOT TO APPEAR BEFORE US . SINCE THE ASSESSEE FAILED TO DISCHARGE THE ONUS PLACED UPON THEM IN ESTABLISHING THAT THE BORR OWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF THEIR BUSIN ESS PURPOSES NOR THE ASSESSEE PROVED THAT THE AFORESAID INVESTMENT H AD BEEN MADE IN THE SHARES OUT OF THEIR OWN INTEREST FREE FUNDS, WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A ) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUE OF DISAL LOWANCE OF INTEREST U/S 14A RAISED IN THE GROUND NO. 1 IN THIS APPEAL , AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDICIA L PRONOUNCEMENTS, INCLUDING THOSE REFERRED TO ABOVE, AFTER ALLOWING S UFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE RED ECIDING THE ISSUE, THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER, KEE PING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF T HE ACT, BRINGING OUT CLEARLY AS TO WHETHER OR NOT BORROWED FUNDS HAD IND EED BEEN UTILISED IN INVESTMENT IN SHARES FOR EARNING EXEMPT DIVIDEN D INCOME AND IF SO, THE QUANTUM OF INVESTMENT OF BORROWED FUNDS IN SHARES SHOULD BE CLEARLY SPELT OUT. WITH THESE OBSERVATIONS, GROUND NO. 1 IN THE APPEAL IS DISPOSED OF. ITA NO.2988/DEL./2008 10 7. GROUND NO.2 IN THE APPEAL, BEING GENERAL IN NATU RE NOR ANY SUBMISSIONS HAVING BEEN MADE BEFORE US, DOES NOT REQUIRE ANY SE PARATE ADJUDICATION WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN T ERMS OF RESIDUARY GROUND NO.3 IN THE APPEAL, ACCORDINGLY, THESE GROUNDS ARE DISMI SSED. 6. IN THE RESULT, APPEAL IS ALLOWED BUT FOR STATI STICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT SD/- SD/- (I.P. BANSAL) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTAN T MEMBER COPY FORWARDED TO: 1. I.SMT. SUMITRA GUPTA, WIFE,II.SMT. P AYAL AGGARWAL, DAUGHTER & III.SHRI ANUJ GUPTA, SON,LEGAL HEIRS OF LATE SHRI ANIL GUPTA R/O 5/17, SHANTI NIKETAN,NEW DELHI 2.AC.I.T.CIRCLE-22(1), NEW DELHI 3.CIT CONCERNED 4.CIT (A)-XXIII, NEW DELHI.. 5. DR A BENCH, ITAT, NEW DELHI. AR, ITAT NEW DELHI.