M/S. TATA INDUSTRIES LTD, MUMBAI V. THE ITO 2(3)(3), MUMBAI

ITA 4894/MUM/2008

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2481 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 12-02-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 01-08-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ALOK JOHRI
• Assessee Lawyers: DINESH VYAS
• Keywords: Capital asset; Business expenditure; Search and seizure; Earning of tax free income; Retrospective amendment; Question of law; Cost of acquisition; Valuation report; Right to appeal; Commercial expediency; Revised return; Bonafide mistake; Capital expenditure
• Section: 143(3); 80HHC; 14A; 115JB; 37(1); 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUM BAI BEFORE SHRI G. S. PANNU, ACCOUTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.4894/MUM/2008 (A.Y.:2004-05) TATA INDUSTRIES LTD., B OMBAY HOUSE,24,HOMI MODY STREET, FORT, MUMBAI 400 001 VS. THE INCOME TAX OFFICER, WARD- 2 (3) (3), ROOM NO.555, AAYAKAR BHAVAN, MAHARSHI KARVE ROAD, MUMBAI 400 020 PAN: AAACT 4058 L APPELLANT .. RESPONDENT APPELLANT BY SHRI DINESH VYAS, AR RESPONDENT BY SHRI ALOK JOHRI, DR DATE OF HEARING 22-06-2016 DATE OF PRONOUNCEMENT 20-07-2016 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST TH E ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-XXX, MUMBAI [HEREINAFTER REFERRED TO AS THE CIT (A)] PASSED I N APPEAL NO.CIT (A) -XXX/IT-117/RG.2 (3)/07-08 DATED 06-05-2008 FOR ASSESSMENT YEAR 2004-05. 2. THE ASSESSEE IN THIS APPEAL HAS RAISED THE FOLLO WING GROUNDS:- 1. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANC E OF GROSS INTEREST EXPENDITURE OF RS.7520,81,011/- UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME-TAX ACT, 1961 (THE AC T) FOR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFES SION AND ALSO FOR COMPUTING THE ADJUSTED BOOK PROFIT U/S 115 JB OF THE ACT. 2. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF ESTABLISHMENT EXPENDITURE AMOUNTING TO RS.1,31,97,4 94/- UNDER THE PROVISIONS OF SECTION 14A OF THE ACT, IN THE SAME PROPORTION AS THE DIVIDEND INCOME BEARS TO TH TOTAL RECEIPTS, FOR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS O R PROFESSION AND ALSO FOR COMPUTING THE ADJUSTED BOOK PROFIT U/S 115JB OF THE ACT. ITA NO.4894/MUM/2008 2 3. THE CIT (A) ERRED IN NOT CONSIDERING THE ALTERNA TE CONTENTION OF THE APPELLANT OF FIRST REDUCING THE GROSS ESTABL ISHMENT EXPENDITURE BY THE AMOUNT ALREADY DISALLOWED BY THE APPELLANT IN ITS RETURN OF INCOME AMOUNTING TO RS.5 ,67,34,086 AS WELL AS THE EXPENDITURE DISALLOWED BY THE ASSESS ING OFFICER DURING ASSESSMENT PROCEEDING AMOUNTING TO RS.73,93, 030 AND ONLY CONSIDERING THE BALANCE ESTABLISHMENT EXPENDIT URE FOR PROPORTIONATE DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A OF THE ACT AS WELL AS FOR COMPUTING THE ADJUSTE D BOOK PROFIT U/S 115JB OF THE ACT. 4. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE ALTERNATE CLAIM OF THE APPELLANT THAT SHOULD ANY PA RT OF THE EXPENSES OF THE APPELLANT, INCLUDING INTEREST, BE D ISALLOWED, THE APPELLANT SHOULD BE PERMITTED TO CAPITALIZE SUC H EXPENSES AND ENHANCE THE COST OF ACQUISITION OF THE SHARES T O WHICH THE SAID EXPENSES RELATE. 5. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF PROFESSIONAL FEES OF RS.19,44,000/- PAID FOR OBTAIN ING VALUATION REPORTS OF CERTAIN INVESTMENTS HELD BY TH E APPELLANT, FOR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS O R PROFESSION. 6. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF PROCESSING FEES OF RS.27,50,000/- PAID TO THE BANKS FOR VARIOU S TERM LOANS ACQUIRED BY THE APPELLANT, FOR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFESSION. 7. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.22,14,030/- INCURRED AS DEBENTURE ISSUE EXPENSES FOR THE PURPOSE OF COMPUTING INCOME FROM B USINESS OR PROFESSION. 8. THE CIT (A) ERRED IN NOT DIRECTING THAT THE DISA LLOWANCE OF EXPENDITURE OF RS.22,14,030 INCURRED AS DEBENTURE I SSUE EXPENSES BE ALLOWED IN THE FOLLOWING ASSESSMENT YEA R I.E. ASSESSMENT YEAR 2005-06. 9. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF PROFESSIONAL FEES OF RS.4,85,000/- PAID FOR THE APP ELLANTS PROJECT RELATED ACTIVITIES, FOR THE PURPOSE OF COMP UTING INCOME FROM BUSINESS OR PROFESSION. 10. THE CIT (A) ERRED IN CONFIRMING NO DEDUCTION OF RS.9,00,00,000/-, BEING WRITE BACK OF PROVISION FOR CONTINGENCY, FOR THE PURPOSE OF COMPUTING THE ADJUS TED BOOK PROFITS U/S 115JB OF THE ACT. ITA NO.4894/MUM/2008 3 11. THE CIT (A) ERRED IN CONFIRMING THAT DEDUCTION UNDER SECTION 10A OF THE ACT CANNOT BE CLAIMED BY THE APPELLANT F OR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFES SION AND THAT DEDUCTION UNDER SECTION 10A OF THE ACT CAN ONL Y BE CLAIMED ON THE GROSS TOTAL INCOME OF THE APPELLANT. 12. THE CIT (A) ERRED IN CONFIRMING THAT DEDUCTION UNDER SECTION 10A OF THE ACT CAN ONLY BE CLAIMED AFTER ADJUSTMENT OF THE GROSS TOTAL INCOME BY BROUGHT FORWARD BUSINESS LOSS OF THE EARLIER ASSESSMENT YEARS. 13. YOUR APPELLANT CARVES LEAVE TO ADD TO AMEND, AL TER, VERY, OMIT OR SUBSTITUTE THE AFORESAID GROUND OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR A T THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. 3. APART FROM THE ABOVE, THE ASSESSEE HAS ALSO RAIS ED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL:- 1. THE APPELLANT SUBMITS THAT THE ASSESSING OFFICE R ERRED IN DISALLOWING GROSS INTEREST EXPENDITURE OF RS.75,20, 81,011/- CLAIMED BY THE APPELLANT U/S 36(1 (III) OF THE INCO ME-TAX ACT, 1961. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER OR AMEN D, THE ABOVE GROUND OF APPEAL AS AND WHEN ADVISED. 4. GROUNDS NO. 1,2,3 & ADDITIONAL GROUND : THE BRIEF FACTS RELATING TO THE ABOVE GROUNDS ARE T HAT DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTED THE ASSESSEE W AS HAVING ACTIVITIES OF PURCHASING THE SHARE IN GROUP COMPANI ES FOR THE PURPOSE OF CONTROLLING INTEREST AND ALSO PROMOTED S OME OF THE COMPANIES FOR WHICH ASSESSEE BORROWED THE FUNDS AND PAID THE INTEREST. THE ASSESSEE CLAIMED THE DEDUCTION OF SU CH INTEREST U/S. 36(1) (III) OF THE INCOME TAX ACT. THE AO FURTHER N OTED THAT THE ASSESSEES BALANCE SHEET AS ON 31.03.2004 REFLECT T OTAL UNSECURED LOAN AT RS.1062.8 CRORE, WHILE THE INVESTMENT MADE IN VARIOUS SHARES WAS AT RS.1727.83 CRORES. THE PROFIT AND LO SS A/C. FOR F.Y 2003-04 REFLECT THAT ASSESSEE PAID/CLAIMED GROSS IN TEREST OF ABOUT RS.75.21 CRORES, WHILE IT HAD RECEIVED DIVIDEND OF RS.6.16 CRORES WHICH WAS CLAIMED AS EXEMPT. THE ASSESSEE ALSO REF LECTED RECEIPT ITA NO.4894/MUM/2008 4 OF INTEREST OF RS.7.28 CRORES. THE ASSESSEE IN COMP UTATION OF TOTAL INCOME HAD SUO MOTO DISALLOWED RS.39 CRORES U/S. 14 A OF THE ACT. ON ENQUIRY FROM AO FOR THE METHOD AND CALCULATION O F SUCH AMOUNT, THE ASSESSEE SUBMITTED THAT THE WORKING WAS BASED ON PROPORTIONATE DISALLOWANCES OF NET INTEREST OF RS.6 7.9 CRORES (75.21 -7.28) AS PROPORTION OF LOAN FUND TO TOTAL FUND. 5. THE AO, HOWEVER, NOTED THAT ASSESSEE HAD THREE D EPARTMENTS WITH RESPECTIVE FUNCTION I. E. HEAD OFFICE (HO) FOR INVESTMENT AND PROMOTING NEW COMPANIES, TATA STRATEGIC MANUFACTURI NG GROUP (TSMG) FOR CONSULTANCY SERVICES AND TATA INTERACTIV E SERVICES (TIS) FOR E-LEARNING OF COMPUTER SOFTWARE. THE AO THEREFORE OBSERVED THAT THE ENTIRE DIVIDEND INCOME WAS BY THE ACTIVITY OF HEAD OFFICE (HO). THE ASSESSEE EXPLAINED THAT IT HELD SHARES IN THE COMPANIES PROMOTED BY IT. THAT THE INTEREST WAS PAID ON MONIE S BORROWED FOR THE PURCHASE OF SHARES IN GROUP COMPANIES FOR THE P URPOSE OF HOLDING CONTROLLING INTEREST WHICH WAS DEDUCTIBLE U /S. 36(1) (III) OF THE INCOME TAX ACT. THE ASSESSEE IN THIS RESPECT RE LIED ON THE CALCUTTA HIGH COURT CASE OF RAJEEV LOCHAN KANORIA 2 08 ITR 616, INDIAN BANK LTD. 56 ITR 77 (SC), RAJASTHAN STATE WA REHOUSING CORPORATION- 242 ITR 450(SC) AND TAJ TRADE AND INVE STMENT LTD. OF HONBLE ITAT, MUMBAI A BENCH ITA NO.3374/M/199 4. IN VIEW OF ASSESSEES REPLY ABOUT ITS ACTIVITY OF I NVESTMENT IN GROUP COMPANIES SHARE FOR THE PURPOSE OF CONTROLLIN G INTEREST AND ALLOWABILITY OF INTEREST U/S. 36(1)(III) , THE AO H ELD THAT THAT THE ASSESSEE HAD ADMITTED THE DIRECT NEXUS BETWEEN THE BORROWED FUND OF RS.1062.78 CRORES AND INVESTMENT OF RS.1727.83 C RORES . FROM THE ABOVE SUBMISSIONS AND CASE LAWS RELIED UPON BY THE ASSESSEE, THE AO SUMMED UP THE SUBMISSIONS OF THE ASSESSEE IN FOLLOWING THREE POINTS: (I) INTEREST PAID ON BORROWED FUND FO R ACQUIRING ITA NO.4894/MUM/2008 5 CONTROLLING INTEREST IN PROMOTED COMPANIES BY PURCH ASING SHARES IS ALLOWABLE EXPENDITURE;(II) INTEREST PAID ON BORROWI NG FOR CAPITAL EXPENDITURE IS ALLOWABLE.;(III) INTEREST EXPENSES ALLOWABLE EVEN THOUGH ASSESSEE DERIVED DIVIDEND INCOME. 6. THE AO, HOWEVER, HELD THAT ALL THE DECISION RELI ED ON BY ASSESSEE WERE RENDERED PRIOR TO INSERTION OF SEC.14 A AND THEREFORE, NOT APPLICABLE IN THE CASE OF ASSESSEE. THAT SINCE THE ASSESSEE HAD EARNED EXEMPT INCOME FROM SUCH INVESTMENTS FUNDED B Y BORROWED FUNDS ON WHICH IT INCURRED INTEREST EXPENDITURE, BY VIRTUE OF SECTION 14A, SUCH EXPENSES WERE NOT ALLOWABLE. THE AO, THER EAFTER DISCUSSED ABOUT THE PROMULGATION OF SEC.14A BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT AND HELD THAT THE RA TIO OF RAJASTHAN STATE WAREHOUSING CORPORATION (2000) 242 ITR 450(SC ) WAS NO MORE APPLICABLE. THE AO FURTHER HELD THAT SEC.14A DOES NOT SEEK TO DISTINGUISH BETWEEN THE INTENTION/PURPOSE OF THE ASSESSEE FOR ITS ACTIVITY RESULTING IN EXEMPT INCOME AND ALSO INCIDE NTAL BY PRODUCT IN THE FORM OF DIVIDEND. THE AO DISCUSSED IN DETAI L THE ORDER OF THE CO ORDINATE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF EVERPLUS SECURITIES & FINANCE LTD. 101 ITD 151 AND ALSO REFERRED TO THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE O F K. S. VENKATI SUBBIAH REDDIER 221 ITR 181 AND HONBLE DEL HI HC IN THE CASE OF BHARAT DEVELOPMENT PVT. LTD. 133 ITR 47 0 FOR THE PROPOSITION THAT PURCHASING OF SHARES FOR CONTROLLI NG INTEREST CANNOT BE TREATED AS BUSINESS ACTIVITIES. IN RESPECT OF CO NTENTION OF THE ASSESSEE THAT THE DIVIDEND INCOME WAS INCIDENTAL TO THE BUSINESS ACTIVITY OF THE ASSESSEE, THE AO REJECTED IT BY REL YING ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF AMRITABEN R. SHAH 238 ITR 777 AND M/S. MACINTOSH FINANCE PVT. LTD. OF HONBLE ITAT, MUMBAI F BENCH. THE A O ALSO REJECTED THE ALTERNATIVE CONTENTION OF ASSESSEE THA T DIVIDEND WAS ITA NO.4894/MUM/2008 6 RECEIVED ON THE TOTAL VALUE OF INVESTMENT OF RS.93. 73 CRORES, WHILE THERE WAS NO DIVIDEND RECEIVED ON INVESTMENT OF RS. 1689 CRORES AND THEREFORE, INTEREST DISALLOWANCES SHOULD BE RES TRICTED FOR THE BORROWED FUND UTILIZED FOR INVESTMENT OF RS.93.73 C RORES. THE AO THEREAFTER HELD THAT THE INTEREST EXPENSES WERE NOT ALLOWABLE AS PER THE PROVISIONS OF SEC.14A WHICH STATES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTI ON SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE AO CONSIDERED THE PROVISIONS OF SEC.10( 34) AND SEC.115-O OF THE ACT AND DISALLOWED GROSS INTEREST EXPENDITURE OF RS.75.21 CRORES U/S. 14A OF THE ACT BOTH FOR THE NO RMAL PROVISION AS WELL AS FOR BOOK PROFIT U/S. 115JB EXPLANATION F. THE AO FURTHER DISALLOWED FROM THE TOTAL EXPENDITURE OF HE AD OFFICE OF RS.93.39 CRORES, AN EXPENDITURE OF RS.1.32 CRORES B EING 7.57% (THE DIVIDEND RECEIPT OF RS.6.16 CRORES BEING 7.57% OF T OTAL RECEIPT OF RS.81.33 CRORES) AFTER EXCLUDING THE INTEREST ALREA DY DISALLOWED FROM THE TOTAL EXPENDITURE. 7. BEING AGGRIEVED BY THE ORDER OF THE AO, ASSESSE E PREFERRED APPEAL BEFORE THE CIT (A). THE LD. CIT (A) HOWEVER REJECTED THE CONTENTIONS OF THE ASSESSEE AND UPHELD THE ORDER OF THE AO. HE ALSO REJECTED THE ALTERNATE PLEA OF NETTING OF THE INTEREST EXPENDITURE AGAINST INTEREST INCOME HOLDING THAT NO NEXUS WAS E STABLISHED BY THE ASSESSEE THAT INTEREST BEARING FUNDS WERE USED FOR EARNING OF INTEREST INCOME. HE ALSO REJECTED THE PLEA THAT NET INTEREST EXPENDITURE SHOULD BE ALLOWED U/S. 36(1) (III) OF T HE ACT OBSERVING THAT THE ASSESSEE WAS NOT ENGAGED IN THE ACTIVITY O F SHARE TRADING AND THE INVESTMENTS MADE WERE NOT MADE FOR BUSINESS PURPOSE. BEING AGGRIEVED BY THE ABOVE ORDER OF THE CIT (A), THE ASSESSEE HAS COME IN FURTHER APPEAL BEFORE US. ITA NO.4894/MUM/2008 7 8. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE LD. REPRESENTATIVES OF BOTH THE PARTIES AND HAVE ALSO G ONE THROUGH THE RECORD. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OU TSET, HAS STATED THAT THE LOWER AUTHORITIES HAVE MADE DISALLOWANCE U /S 14A ONLY AND NO DISALLOWANCE HAS BEEN MADE UNDER SECTION 36( 1)(III) OF THE ACT. HE HAS FURTHER STATED THAT THE ASSESSEE IS AN INVESTMENT & FINANCE COMPANY AND A PROMOTER OF NEW COMPANIES IN HI-TECH FIELD. AS A BUSINESS ACTIVITY, THE ASSESSEE HOLDS I NVESTMENT IN THE SHARE CAPITAL OF THE COMPANIES PROMOTED BY IT AS CO NTROLLING INTEREST AND THEREFORE, TAKES ACTIVE INTEREST IN TH E BUSINESS OF THESE COMPANIES. THE ASSESSEE HAD MADE INVESTMENTS ONLY IN THE WHOLLY OWNED SUBSIDIARIES AND IN ASSOCIATED COMPANIES. TH AT THE ENTIRE INVESTMENTS WERE MADE FOR BUSINESS PURPOSES FOR HAV ING CONTROL OVER SUBSIDIARY AND ASSOCIATED COMPANIES. HE, THERE FORE, HAS CONTENDED THAT THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS OTHERWISE ALLOWABLE AS BUSINESS EXPENDITURE U/S 36( 1) (III) OF THE ACT. IN THE CONTEXT OF DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A, THE LD. AR RELYING UPON THE DECISION O F THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT P RIVATE LIMITED VS.CIT REPORTED IN 372 ITR 694 AND OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PCIT VS. EMPIRE PACKAGE PVT. LTD. [ITA NO. 415 OF 2015 DATE OF DECISION 12.01.2 016] HAS CONTENDED THAT DISALLOWANCE U/S 14 A CANNOT EXCEED THE EXEMPT INCOME EARNED DURING THE YEAR. HE HAS FURTHER SUBMI TTED THAT THE LAW DECLARED BY THE HIGH COURT OF THE OTHER STATE, IN THE ABSENCE OF ANY CONTRARY DECISION OF THE JURISDICTIONAL HIGH CO URT IS BINDING ON THE TRIBUNAL. HE HAS FURTHER RELIED UPON VARIOUS CASE LAWS TO STRESS THE POINT THAT EVEN IF THE ASSESSEE UNDER A MISTAKE OR MISCONCEPTION HAS OVER ASSESSED ITSELF IN THE RETUR N OF INCOME, THE ITA NO.4894/MUM/2008 8 TRIBUNAL CAN GIVE RELIEF TO THE ASSESSEE TO THE EXT ENT THE ASSESSEE IS OVER ASSESSED AND DIRECT THE LOWER AUTHORITIES TO T AX THE ASSESSEE AS PER THE PROVISIONS OF LAW. THE LD. AR HAS ALSO FILE D WRITTEN SUBMISSIONS DATED 21.6.2016 IN SUPPORT OF THE ABOVE CONTENTIONS RAISED WHICH FOR THE SAKE OF CONVENIENCE ARE REPROD UCED AS UNDER:- DISALLOWANCE IS ONLY UNDER SECTION 14A 1. (I) THE ENTIRE INTEREST EXPENDITURE IS DISALLOWED BY THE ASSESSING OFFICER ONLY UNDER SECTION 14A. THIS IS CLEARLY EST ABLISHED BY PARAGRAPH 3.1 ON PAGE 2 OF THE ASSESSMENT ORDER WHE REIN THE HEADING READS AS FOLLOWS: 3.1 DISALLOWANCE OF INTE REST ON UNSECURED LOAN AND DISALLOWANCE OF EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT IN CASE OF THE HEAD OFFICE UN DER NORMAL COMPUTATION AND U/S 115JB BOTH UNDER THE PROVISIONS OF SECTION 14A. (II) ON PAGE 3 OF THE ASSESSMENT ORDER, THE ASSESS ING OFFICER, IN RELATION TO CASES QUOTED BY THE APPELLANT, HAS OBSE RVED AS FOLLOWS: BY VIRTUE OF SECTION 14A, SUCH EXPENSES A RE NOT ALLOWABLE. IT IS SEEN THAT THESE DECISIONS PERTAIN TO THOSE ASSESSMENT YEARS WHEN SECTION 14A WAS NOT INSERTED. SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2001 WITH RETROSPE CTIVE EFFECT FROM 01/04/1962. ALSO, MOST OF THE DECISIONS QUOTED BY THE ASSESSEE IN ITS SUPPORT PREDATE THE SAID INSERTION OF SECTION 14A. WITHOUT PREJUDICE TO THE SAME, NONE OF THESE DECISI ONS COULD CONSIDER THE PROVISIONS OF SECTION 14A. (III) ON PAGE 7 OF THE ORDER, THE ABOVE POINT IS RE ITERATED OBSERVING AS FOLLOWS: THEREFORE, THE PRINCIPLES OF LAW LAID DOW N BY THE APEX COURT IN THE ABOVE CASE STAND SUPERSEDED BY THE INS ERTION OF NEW PROVISION IN THE FORM OF SECTION 14A OF THE ACT. (IV) MORE IMPORTANTLY, IN PARGRAPH 3.5 ON PAGE 10 , IT IS OBSERVED AS FOLLOWS: 3.5 THE CRUX OF THE FINDINGS IS THAT T HE INTEREST EXPENSES ARE NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 14A WHICH STATES THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. (V) THE PROVISIONS OF SECTION 14A ARE BODILY LIFTE D AND REPRODUCED IN THE ASSESSMENT ORDER AT PAGES 3-4 AND AT PAGE 11 , SINCE THIS WAS THE PROVISION WHICH WAS INTERPRETED AND APPLIED BY THE ASSESSING OFFICER. (VI) THE DISALLOWANCE OF OTHER EXPENSES IS ALSO MA DE ONLY UNDER SECTION 14A IN PARAGRAPH 4 AT PAGE 12, THE HEADING WHEREOF READS AS FOLLOWS: 4. APPORTIONMENT AND DISALLOWANCE OF O THER EXPENSES ITA NO.4894/MUM/2008 9 IN CASE OF THE ACTIVITIES OF THE HO VIS--VIS SECTI ON 14A FOR NORMAL COMPUTATION AND U/S 115KJB. (VII) THE DISALLOWANCE IS ONLY UNDER SECTION 14A I S ESTABLISHED CONCLUSIVELY AND FOR THIS PURPOSE REFERENCE IS MADE TO THE COMPUTATION OF INCOME IN PARAGRAPH 14 AT PAGE 24, W HEREIN THE FOLLOWING ADDITIONS ARE MADE IN WORDS QUOTED HEREIN BELOW I. INTEREST U/S 14A (PER PARA 3) 75,20,81,011 II. OTHER EXPENSES U/S 14A (PARA 4) 1,31,97,494 GROUND BEFORE CIT(A) AND HIS ORDER ARE ONLY ON SECT ION 14A 2 (I) IN VIEW OF THE FACT THAT THE DISALLOWANCE WAS MADE ONLY UNDER SECTION 14A, THE GROUND OF APPEAL PREFERRED BY THE APPELLANT TO THE CIT (A) WAS ALSO CONFINED TO SECTION 14A. THIS IS CLEAR FROM GROUND 2 IN THE AFORESAID APPEAL WHICH READS AS UND ER: 2.(A) THE ITO ERRED IN DISALLOWING THE ENTIRE INTEREST EXPEND ITURE OF RS.75,20,81,011/- UNDER THE PROVISIONS OF SECTION 1 4A, FOR THE PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFES SION AND ALSO IN THE COMPUTATION OF TAXABLE INCOME U/S. 115J B. 2. (B) THE ITO ERRED IN DISALLOWING ESTABLISHMENT EXPENDITURE AMOUNTING TO RS.1,31,97,494/- IN THE SAME PROPORTION AS THE DIVI DEND INCOME BEARS TO BE THE TOTAL RECEIPTS, FOR THE PURPOSES OF COMPUTING INCOME FROM BUSINESS OR PROFESSION AND ALSO IN THE COMPUTATION OF TAXABLE INCOME U/S 115JB. (II) THE CIT (A) IN HIS ORDER DATED 06/05/2008 CON SIDERED THE ABOVE SPECIFIC GROUND 2(A) REGARDING SECTION 14A AN D GAVE HIS FINAL ADJUDICATION IN PARA 8.1 AT THE END OF PAGE 1 2 IN THE FOLLOWING WORDS UNDER THESE FACTS AND CIRCUMSTANCES OF THE C ASE THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING THE E NTIRE INTEREST EXPENSES CLAIMED BY THE APPELLANT UNDER SECTION 14A OF THE INCOME-TAX ACT, 1961. ACCORDINGLY THIS GROUND IS DE CIDED AGAINST THE APPELLANT. WITH REGARD TO TH AFORESAID GROUND 2(B) HE MADE SIMILAR OBSERVATION IN PARA 10.1 AT THE END OF PAGE 16 BY HOLDING THUS THEREFORE .. THE DISALLOWANCE TO BE MADE ON ACCOUNT OF EXPENSES RELATING TO EARNING OF EXEMPT INCOME UNDER SECTION 14A IS UPHELD. GROUND BEFORE HONBLE BOMBAY HIGH COURTBLE ITAT IS ONLY ON SECTION 14A. 3. SIMILARLY, THE GROUND OF APPEAL BEFORE THIS HON BLE TRIBUNAL WHICH IS COUCHED IN A VERY BROAD LANGUAGE IS ALSO C ONFINED ONLY TO SECTION 14A. THE VERY FIRST GROUND NOS. 1 AND 2 REA D AS FOLLOWS: 1. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF GROSS INTEREST EXPENDITURE OF RS.75,20,81,011/- UNDER THE PROVISION OF SECTION 14A OF THE INCOME-TAX ACT, 1961 (THE ACT) , FOR THE ITA NO.4894/MUM/2008 10 PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFES SION AND ALSO FOR COMPUTING THE ADJUSTED BOOK PROFIT U/S 115 JB OF THE ACT. 2. THE CIT(A) ERRED IN CONFIRMING THE DISALL OWANCE OF ESTABLISHMENT EXPENDITURE AMOUNTING TO RS.1,31,97,4 94/- UNDER THE PROVISIONS OF SECTION 14A OF THE ACT, IN THE SA ME PROPORTION AS THE DIVIDEND INCOME BEARS TO THE TOTAL RECEIPTS, FO R THE PURPOSE OF COMPUTING INCOME FROM BUSINESS OR PROFESSION AND ALSO FOR COMPUTING THE ADJUSTED BOOK PROFIT U/S 115JB OF THE ACT. UNDER THE ABOVE GROUNDS, THE ENTIRE DISALLOWANCE UNDER SECTION 14A IS CHALLENGED IN TOTALITY. DIALLOWANCE UNDER SECTION 14A CANNOT EXCEED EXEMPT INCOME 4. (I) IT IS WELL ESTABLISHED THAT DISALLOWANCE UND ER SECTION 14A CANNOT EXCEED THE EXEMPT INCOME. THE DELHI HIGH COU RT AND THE PUNJAB & HARYANA HIGH COURT HAVE TAKEN THIS VIEW IN THE FOLLOWING TWO CASES RESPECTIVELY: A) JOINT INVESTMENTS PVT. LTD. VS. CIT 372 ITR 694 ( DEL) B) PCIT VS. EMPIRE PACKAGE ITA NO.415 OF 2015 DT. 12 /1/16 (P&H) DELHI HIGH COURT HAS UNAMBIGUOUSLY OBSERVED THAT TH E WINDOW FOR DISALLOWANCE IN SECTION 14A IS ONLY TO T HE EXTENT OF EXPENDITURE INCURRED IN RELATION TO THE TAX EXEM PT INCOME. THE PUNJAB & HARYANA HIGH COURT DISMISSED THE DEPAR TMENTAL APPEAL IN THE ABOVE CASE WHERE THE FOLLOWING QUESTI ON WAS RAISED BY IT. WHETHER IN THE FACTS AND CIRCUMSTANC ES OF THE CASE, THE HONBLE ITAT IS JUSTIFIED IN LAW TO HOLD THAT THE DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8 D CANNOT EXCEED THE EXEMPT INCOME, IN THE ABSENCE OF ANY SUCH RESTRICTION BEING THERE IN THE RELEVANT SECTION OR RULE? (II) MUMBAI BENCHES OF THE HONBLE TRIBUNAL AS ALS O OTHERS HAVE TAKEN THE ABOVE VIEW. SOME OF SUCH HONBLE TRI BUNAL ORDERS ARE AS FOLLOWS: A) SYNTEL LTD. VS. JCIT (OSD) ITA NO.3413/N/2007 (ITAT MUMBAI) B) DAGA GLOBAL VS. ACIT ITA NO.5592/M/2012(ITAT MUMBAI) C) SAHARA INDIA LTD. VS. DCIT (2014) 148 ITD 336 (ITAT DELHI) LAW DECLARED BY HIGH COURT IS BINDING ON TRIBUNAL I N ANOTHER STATE ITA NO.4894/MUM/2008 11 5 . THE APPELLATE TRIBUNAL IS OBLIGED TO RESPECT THE LAW LAID DOWN BY THE HIGH COURT THOUGH OF A DIFFERENT S TATE, SO LONG AS THERE IS NO CONTRARY DECISION OF ANY OTHER HIGH COURT ON THAT QUESTION. IN THE ABSENCE OF CONTRARY HIGH C OURT JUDGMENTS, THE ABOVE DECISIONS OF DELHI HIGH COURT (JOINT INVESTMENTS) AND PUNJAB & HARYANA HIGH COURT (EMPIR E PACKAGE) SHOULD BE FOLLOWED. 1. SMT. NIRMALABAI K 186 ITR 242 (BOM) 2. SMT. GODAVARIDEVI SARAF 113 ITR 589 ()BOM) 3. HIGHWAY CONSTRUCTION 217 ITR 234 (GAUHATI) 4. MAGANLAL MOHANLAL 210 ITR 580 (GUJARAT) NO TAX WITHOUT AUTHORITY OF LAW TRIBUNAL CAN GIVE RELIEF EVEN IF AMOUNT OFFERED TO TAX IN THE RETURN OF INCOME 6 . ARTICLE 265 OF THE CONSTITUTION IN UNMISTAKABLE TERMS PROVIDES THAT NO TAX SHALL BE LEVIED OR COLLECTED E XCEPT BY AUTHORITY OF LAW AND THEREFORE THE HONBLE SUPREME COURT HAS HELD THAT THE PURPOSE OF ASSESSMENT PROCEEDINGS IS TO ASSESS CORRECTLY THE TAX AND CONSEQUENTLY, THE TRIBUNAL HAS THE POWER TO GRANT RELIEF IF IT IS FOUND THAT A NON-TAXABLE I TEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED AND THUS AN ASSESSE D INCOME CAN B LESSER THAN THE RETURNED INCOME. HENCE, IN TH E PRESENT CASE, IT IS PERMISSIBLE FOR THE HONBLE TRIBUNAL TO CONFINE THE DISALLOWANCE UNDER SECTION 14A ONLY TO THE EXEMPT I NCOME OF RS.6.16 CRORES NOTWITHSTANDING THE APPELLANT HAVING OFFERED A DISALLOWANCE UNDER SECTION 14A IN ITS RETURN OF INC OME OF RS.49 CRORES WHICH WAS CALCULATED ON THE BASIS OF T HE METHOD ADOPTED BY THE DEPARTMENT IN THE EARLIER YEARS. IN THIS CONNECTION, THE FOLLOWING DECISIONS MAY BE NOTED: (I) NTPC VS. CIT 229 ITR 383 (SUPREME COURT) IN THIS CASE, THE SUPREME COURT HAS HELD AS FOLLOWS : THE POWER OF THE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIE S IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE I N ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIA L DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUN AL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISS IBLE DEDUCTION IS DENIED, THERE IS NO REASON WHY THE ASS ESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE O N RECORD IN RESPECT OF THE ITEM. (II) DCIT VS. MARUTI UDYOG LTD. (101 TTJ 760) (DELHI TRIBUNAL) IN THIS CASE, THE DELHI BENCH OF THE TRIBUNAL (SHRI K. C. SINGHAL AND SHRI G. S. PANNU) APPLIED T HE ITA NO.4894/MUM/2008 12 ABOVE DECISION OF THE APEX COURT. THE TRIBUNAL ENTERTAINED A QUESTION WHICH HAD NOT BEEN RAISED EA RLIER AT ANY STAGE. (III) BIRMALA L. MEHTA 299 ITR 1 (BOMBAY HIGH COURT) IN THIS CASE, THE BOMBAY HIGH COURT OBSERVED AS FOLLOWS: ARTICLE 265 OF THE CONSTITUTION OF IND IA UNMISTAKABLE TERMS PROVIDES THAT NO TAX SHALL BE LE VIED OR COLLECTED EXCEPT BY AUTHORITY OF LAW. ACQUIESCEN CE CANNOT TAKE AWAY FROM A PARTY THE RELIEF THAT HE IS ENTITLED TO WHERE THE TAX IS LEVIED OR COLLECTED WI THOUT AUTHORITY OF LAW. (IV) BALMUKUND ACHARYA 310 ITR 310 (BOMBAY HIGH COURT) IN THIS CASE, THE BOMBAY HIGH COURT APPLIED THE ABOVE DECISION OF NIRMALA L. MEHTA AND AT PAGE 318 IN PARAGRAPH 32 OBSERVED AS FOLLOWS: TAX CAN BE COLLECTED ONLY AS PROVIDED UNDER THE ACT. IF ANY ASSESSEE, UNDER A MISTAKE, MISCONCEPTIONS OR ON NOT BEING PROPERLY INSTRUCTED IS OVER ASSESSED, THE AUTHORITIES UNDER THE ACT ARE REQUIRED TO ASSIST HI M AND ENSURE THAT ONLY LEGITIMATE TAXES DUE ARE COLLECTED . (V) CIT VS. CIT VS. PRUTHVI BROKERS AND SHAREHOLDERS PVT. LTD. (2012) 349 ITR 336 (BOM.) BROKERS 349 ITR 336 (BOMBAY HIGH COURT) THE BOMBAY HIGH COURT IN THIS CASE HELD THAT THE APPELLATE AUTHORITIES HAVE JURISDICTION TO DEAL WITH GROUNDS WHICH BECOME AVAILABLE ON ACCOUNT OF CHANGE OF CIRCUMSTANCES OR LAW AND THUS, ENTERTAIN A DEDUC TION WHICH WAS NOT CLAIMED IN THE RETURN OF INCOME. (VI) GUHARAT GAS VS. JCIT 245 ITR 84 (GUJARAT HIGH COURT) IN THIS CASE, THE GUJARAT HIGH COURT HELD THAT AN ASSESSED INCOME CAN BE LESS THAN THE RETURNED INCOM E UNDER THE PROVISIONS OF THE INCOME-TAX ACT AND THEREFORE A CONTRARY CBDT CIRCULAR WAS NOT IN ACCORDANCE WITH LAW. (VII) CHANDRASHEKHAR BAHARWANI VS. ACIT (ITA NOS.7810/M/2010) (MUMBAI TRIBUNAL) IN THIS CASE, THE MUMBAI BENCH (SHRI SANJAY ARORA A ND SHRI SANJAY GARG) FOLLOWED THE ABOVE DECISIONS OF THE BO MBAY HIGH COURT AND OF THE GUJARAT HIGH COURT. THE TRIBU NAL GRANTED A RELIEF IN RESPECT OF CAPITAL GAINS WHICH WERE INADVERTENTLY INCLUDED IN THE RETURN. THE TRIBUNAL OBSERVED AS ITA NO.4894/MUM/2008 13 FOLLOWS: MOREOVER, IF THE ASSESSEE IS, OTHERWISE, ENTITLED TO A CLAIM OF DEDUCTION BUT DUE TO HIS IGNORANCE OR FOR SOME OTHER REASON COULD NOT CLAIM THE SAME IN THE RETURN OF IN COME, BUT HAS RAISED HIS CLAIM BEFORE THE APPELLATE AUTHORITY , THE APPELLATE AUTHORITY SHOULD HAVE LOOKED INTO THE SAME. THE ASS ESSEE CANNOT BE BURDENED WITH THE TAXES WHICH HE OTHERWIS E IS NOT LIABLE TO PAY UNDER THE LAW. 9. ON THE OTHER HAND, THE LD. DR HAS VEHEMENTLY CON TESTED THE ABOVE RAISED PLEA OF THE ASSESSEE. HE HAS SUBMITTED THAT INTENTION AND PURPOSE FOR INSERTING SEC.14A OF THE ACT IS THA T THERE SHOULD BE ALLOWED NO DEDUCTION FOR EXPENDITURE INCURRED IN RE SPECT OF EXEMPT INCOME. DEDUCTION ONLY OF EXPENDITURE CAN BE ALLOWE D WHICH HAS BEEN INCURRED FOR EARNING OF TAXABLE INCOME. THAT T HE TAXABLE NET INCOME IS ARRIVED AT BY DEDUCTING THE EXPENDITURE O UT OF THE GROSS INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALLOW ED IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWE D ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. THAT UNDER THE PROVISIONS OF SEC.14A, IT HAS BEEN PROVI DED THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME, NO DEDUCTIO N SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE I.T. ACT. THAT UNDER SUB-SECTION (2) TO SECTION 14A, IT IS MANDATORY FOR THE ASSESSING OFFICER TO DETERMINE TH E AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SU CH METHOD AS MAY BE PRESCRIBED. HOWEVER, THE ASSESSING OFFICER IS REQUIRED TO ADOPT THE PRESCRIBED METHOD IF HAVING REGARD TO THE ACCOUNTS OF ASSESSEE, HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE LD. DR HAS F URTHER STATED THAT THE EXPENDITURE INCLUDES BOTH DIRECT AND INDIR ECT EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. THAT THE RE IS FUNDAMENTAL DIFFERENCE BETWEEN THE RECEIPT AND I NCOME. HE ITA NO.4894/MUM/2008 14 HAS FURTHER CONTENDED THAT THIS CONCEPT HAS TO BE U NDERSTOOD AND APPLIED IN REFERENCE TO DIVIDEND AND INCOME BY W AY OF DIVIDEND. THAT INCOME BY WAY OF DIVIDEND WHICH C AN BE CLAIMED AS EXEMPT U/S 10 (34) OF THE ACT REFERS TO THE TOTAL DIVIDENDS RECEIVED MINUS THE EXPENDITURE INCURRED I N RELATION TO THE EARNING OF SUCH DIVIDENDS. THAT THE CONCEPT OF INCOME INCLUDES A LOSS I. E. NEGATIVE INCOME OR ZERO I. E. NIL INCO ME. THAT THE EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEM PT INCOME WHETHER SUCH ACTIVITY YIELDS POSITIVE INCOME, NIL O R NEGATIVE INCOME (LOSS) IS TO BE DISALLOWED U/S 14A OF THE AC T. HE HAS FURTHER RELIED UPON THE PROVISIONS OF SECTION 115-O (5) OF THE ACT WHEREIN IT HAS BEEN PROVIDED, NO DEDUCTION UNDER ANY OTHER PROVISION OF THIS ACT SHALL BE ALLOWED TO THE COMPANY OR A SHARE HOLDER IN RESPECT OF THE AMOUNT WHICH HAS BEEN CHARGED TO TAX UNDER SUB- SECTION (1) OR THE TAX THEREON. HE, THEREFORE, HA S CONTENDED THAT ANY EXPENDITURE RELATABLE TO DIVIDEND RECEIPT IS NO T ALLOWABLE UNDER ANY PROVISION OF THE ACT. HE HAS FURTHER RELIED UP ON VARIOUS CASE LAWS IN SUPPORT OF HIS CONTENTIONS. HE HAS ALSO FIL ED WRITTEN SUBMISSIONS IN SUPPORT OF HIS CONTENTIONS, THE RELE VANT PART OF WHICH FOR THE SAKE OF CONVENIENCE AND READY REFEREN CE IS REPRODUCED AS UNDER: (3) CONTENTIONS OF REVENUE 3.1 THE PROVISIONS OF SECTION 14A ONLY REITERATE TH E SETTLED LAW ABOUT MATCHING PRINCIPLE OF ACCOUNTANCY I. E. THAT CURRENT INCOME VS. CURRENT EXPENDITURE AND IN CASE EXEMPT INCOME NO EXPENDITURE TO BE ALLOWED AT ALL WHETHER DIRECT OR INDIRECT OTHERWISE THE MATCHING PRINCIPLE GETS DISTURBED. (A) AS PER THE BASIC PRINCIPLE OF TAXATION THE DIS ALLOWANCE U/S. 14A IS BOTH DIRECT AND INDIRECT EXPENDITURE AND IF AN ASSESSEE CLAIMS THAT HE HAS INCURRED NO INDIRECT EXPENDITURE- THEN AS PER MANDATE OF SEC.14A(2) AND 14A(3) HE WILL HAVE TO DEMONSTR ATE THE SAME BEFORE A.O. WHO WILL DETERMINE IT IN ACCORDANCE WIT H THE PROVISIONS OF SEC.14A(2) AND 14A(3) AND RECORD HIS DISSATISFAC TION WITH ITA NO.4894/MUM/2008 15 ASSESSEES METHOD OF COMPUTATION VIS-A-VIS THE METH OD OF COMPUTATION STATED IN SEC.14A(3) R.W. RULE 8D. (B) THIS WILL APPLY TO BOTH THE NORMAL PROFIT/STAT UTORY PROFIT AND ALSO TO THE BOOK PROFIT BECAUSE BOTH HAVE TO BE COMPUTED IN ACCORDANCE WITH THE MATCHING PRINCIPLE OF ACCOUNTAN CY WHICH REQUIRES DISALLOWANCE OF BOTH DIRECT AND INDIRECT E XPENDITURE IN RELATION TO THE EXEMPT INCOME. ALSO, SECTION 115JB (1)(F) USES THE SAME EXPRESSION. 3.2 (A) THERE IS FUNDAMENTAL DIFFERENCE BETWEEN THE RECEIP T AND INCOME. THE CONCEPT OF MATCHING PRINCIPLE AS EXP LAINED AND FOUND TO BE CENTRAL SPINE OF ACCOUNTING STANDARD OF RECORDING VARIOUS TRANSACTIONS FOR COMPUTATION OF INCOME IS B ASED ON THIS DIFFERENCE. THIS CONCEPT HAS TO BE UNDERSTOOD AND APPLIED IN REFERENCE TO DIVIDEND AND INCOME BY WAY OF DIVID END WHICH IS USED IN VARIOUS PROVISIONS OF THE ACT BOTH PRIOR TO INSERTION OF SECTION 14A OF THE ACT OR THEREAFTER SO TO ARRIVE A T THE CORRECT IMPORT OF THE PROVISION OF SECTION 14A, ITS INTERPR ETATION AND THE OBJECTIVE AND INTENT OF THE HONBLE LEGISLATURE FOR PROMULGATING THESE PROVISION. (B) THE CONSTITUTIONAL BENCH OF HONBLE SUPREME COURT ( BENCH CONSISTING OF FIVE HONBLE JUDGES) DEALT WITH THIS ISSUE IN THE CASE OF DISTRIBUTORS ( BARODA )(P) LTD V/S. UNION OF INDIA (1985) 22 TAXMAN 49 THROUGH DEALING WITH SECTION 80M OF THE ACT (OMI TTED W. E. F. 01.04.2004 BUT RELATED TO DIVIDENDS AND DEDUCTION / RELIEF OUT OF RECEIPT OF DIVIDEND). HONBLE APEX COURT TRACED, C ONSIDERED AND EXPLAINED THE HISTORY OF INTRODUCTION OF SUCH PROVI SIONS RELATED TO DIVIDEND IN THIS LANDMARK JUDGEMENT. (C) THE HONBLE CONSTITUTIONAL BENCH OF SUPREME COU RT WHILE DEALING WITH THE CONSTRUCTION OF SEC. 80M OF THE AC T, OVERTURNED, ITS EARLIER DECISION OF 3 MEMBER BENCH IN THE CASE OF CLOTH TRADERS ( P.) LTD. V. ADDL. CIT [1979] 118 ITR 243 AND OBSERVED THAT TO PERPETUATE AN ERROR IS NO HEROISM. TO RECTIFY I T IS THE COMPULSION OF JUDICIAL CONSCIENCE. IN THIS WE DERIVE COMFORT A ND STRENGTH FROM THE WISE AND INSPIRING WORDS OF JUSTICE BRONSON IN PIER CE V. A.M.Y. DELAMETERAT PAGE 18: 'A JUDGE OUGHT TO BE WISE ENOUGH TO KNOW-THAT HE IS FALLIBLE AND THEREFORE EVER READY TO LEARN : GREAT AND HONEST EN OUGH TO DISCARD ALL MERE PRIDE OF OPINION AND FOLLOW TRUTH WHEREVER IT MAY LEAD : AND COURAGEOUS ENOUGH TO ACKNOWLEDGE HIS ERRORS.' ITA NO.4894/MUM/2008 16 HONBLE APEX COURT AT PARA 14 TO 17 INTERPRETED THE SEC.80M AS FOLLOW: WE MAY, THEREFORE, FIRST EXAMINE THE LANGUAGE OF S ECTION 80M FOR ARRIVING AT ITS TRUE INTERPRETATION. BUT BEFORE WE DO SO, LET US CONSIDER WHAT IS THE OBJECT BEHIND GRANT OF RELIEF UNDER SEC TION 80M . IT WAS COMMON GROUND BETWEEN THE PARTIES THAT THE MAIN OBJ ECT OF THE RELIEF UNDER SECTION 80M IS TO AVOID TAXATION ONCE AGAIN IN THE HANDS OF THE RECEIVING COMPANY OF THE AMOUNT WHICH HAS AL READY BORNE FULL TAX IN THE HANDS OF THE PAYING COMPANY VIDE THE WRI TTEN SUBMISSION UNDER THE HEADING 'OBJECT OF RELIEF ON INTER-CORPOR ATE DIVIDENDS' FILED BY THE LEARNED COUNSEL ON BEHALF OF THE ASSESSEE IN THE COURSE OF THE ARGUMENTS. NOW WHEN AN AMOUNT BY WAY OF DIVIDEND IS RECEIVED BY THE ASSESSEE FROM THE PAYING COMPANY, THE FULL AMOU NT OF SUCH DIVIDEND WOULD HAVE SUFFERED TAX IN THE ASSESSMENT OF THE PAYING COMPANY AND IT IS OBVIOUS, THAT, IN ORDER TO ENCOUR AGE INTER-COMPANY INVESTMENTS, THE LEGISLATURE INTENDED THAT THIS AMO UNT SHOULD NOT BEAR TAX ONCE AGAIN IN THE HANDS OF THE ASSESSEE EI THER IN ITS ENTIRETY OR TO A SPECIFIED EXTENT. BUT THE AMOUNT BY WAY OF DIVIDEND WHICH WOULD OTHERWISE SUFFER TAX IN THE HANDS OF THE ASSE SSEE, WOULD BE THE AMOUNT COMPUTED IN ACCORDANCE WITH THE PROVISIONS O F THE ACT AND NOT THE FULL AMOUNT RECEIVED FROM THE PAYING COMPAN Y. THEREFORE, IT IS REASONABLE TO ASSUME THAT IN ENACTING SECTION 80 M, THE LEGISLATURE INTENDED TO GRANT RELIEF WITH REFERENCE TO THE AMOU NT OF DIVIDEND COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE A CT AND NOT WITH REFERENCE TO THE FULL AMOUNT OF DIVIDEND RECEIVED F ROM THE PAYING COMPANY. IT IS DIFFICULT TO IMAGINE ANY REASON WHY THE LEGISLATURE SHOULD HAVE INTENDED TO GIVE RELIEF WITH REFERENCE TO THE FULL AMOUNT OF DIVIDEND RECEIVED FROM THE PAYING COMPANY WHEN T HAT IS NOT THE AMOUNT WHICH IS LIABLE TO SUFFER TAX ONCE AGAIN IN THE HANDS OF THE ASSESSEE. THE LEGISLATURE COULD CERTAINLY BE ATTRIB UTED THE INTENTION TO PREVENT DOUBLE TAXATION BUT NOT TO PROVIDE AN AD DITIONAL BENEFIT WHICH WOULD GO BEYOND WHAT IS REQUIRED FOR SAVING T HE AMOUNT OF DIVIDEND FROM TAXATION ONCE AGAIN IN THE HANDS OF T HE ASSESSEE. BEARING IN MIND THESE PREFATORY OBSERVATIONS IN REG ARD TO THE LEGISLATIVE OBJECT, WE MAY NOW PROCEED TO CONSTRUE THE LANGUAGE OF SECTION 80M. 15. SECTION 80M(1) OPENS WITH THE WORDS 'WHERE THE GRO SS TOTAL INCOME OF AN ASSESSEE . INCLUDES ANY INCOME BY WAY OF DI VIDENDS FROM A DOMESTIC COMPANY' AND PROCEEDS TO SAY THAT IN SUCH A CASE, THERE SHALL BE ALLOWED IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE, A DEDUCTION 'FROM SUCH INCOME BY WAY OF DIVIDENDS' OF AN AMOUNT EQUAL TO THE WHOLE OF SUCH INCOME OR 60 PER CENT OF SUCH INCOME, AS THE CASE MAY BE, DEPENDING ON THE NATURE OF THE DOMESTIC COMPANY FROM WHICH THE INCOME BY WAY OF DIVIDENDS IS RECEIVED. THE OPENING WORDS DESCRIBE THE CONDITION WHICH MUST BE FULFILLED IN ORDER TO A TTRACT THE APPLICABILITY OF THE PROVISION CONTAINED IN SUB-SECTION (1) OF SE CTION 80M. THE CONDITION IS THAT THE GROSS TOTAL INCOME OF THE ASS ESSEE MUST INCLUDE INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY. ITA NO.4894/MUM/2008 17 'GROSS TOTAL INCOME' IS DEFINED IN SECTION 80B(5) T O MEAN 'TOTAL INCOME COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE A CT BEFORE MAKING ANY DEDUCTION UNDER CHAPTER VI-A OR UNDER SECTION 8 0-O.' INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY INCLUDED I N THE GROSS TOTAL INCOME WOULD, THEREFORE, OBVIOUSLY BE INCOME COMPUT ED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, THAT IS, AFTER DEDUCTING INTEREST ON MONIES BORROWED FOR EARNING SUCH INCOME . IF INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY COMPUTED I N ACCORDANCE WITH THE PROVISIONS OF THE ACT IS INCLUDED IN THE G ROSS TOTAL INCOME, OR IN OTHER WORDS, FORMS PART OF THE GROSS TOTAL INCOME, THE CONDITION SPECIFIED IN THE OPENING PART OF SUB-SECTION (1) OF SECTION 80M WOULD BE FULFILLED AND THE PROVISION ENACTED IN THAT SUB- SECTION WOULD BE ATTRACTED. 16. NOW IT WAS URGED ON BEHALF OF THE ASSESSEE THAT TH E WORDS 'WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE .INCLUDES A NY INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY' IN THE OPENIN G PART OF SUB- SECTION (1) OF SECTION 80M REFER ONLY TO THE INCLUS ION OF THE CATEGORY OF INCOME AND NOT TO THE QUANTUM OF SUCH INCOME AND , THEREFORE, THE WORDS 'SUCH INCOME BY WAY OF DIVIDENDS' FOLLOWING U PON THE SPECIFICATION OF THIS CONDITION, CANNOT HAVE REFERE NCE TO THE QUANTUM OF THE INCOME INCLUDED BUT MUST BE HELD REFERABLE O NLY TO THE CATEGORY OF THE INCOME INCLUDED, THAT IS, INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY. THIS WAS THE SAME ARGUMENT WHICH FOUND FAVOUR WITH THE COURT IN CLOTH TRADERS (P.) LTD.'S CASE (SUPRA) ,BUT ON FULLER CONSIDERATION, WE DO NOT THINK IT IS WELL FO UNDED. WE MAY ASSUME WITH THE COURT IN CLOTH TRADERS (P.) LTD.'S CASE (SUPRA)THAT THE WORDS 'WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE ..INCLUDES ANY INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY' ARE INTENDED ONLY TO PROVIDE THAT A PARTICULAR CATEGORY OF INCOM E, NAMELY, INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY SHOULD FORM A COMPONENT PART OF GROSS TOTAL INCOME, IRRESPECTIVE OF WHAT IS THE QUANTUM OF THE INCOME SO INCLUDED BUT IT IS DIFFICU LT TO SEE HOW THE FACTOR OF QUANTUM CAN ALTOGETHER BE EXCLUDED WHEN W E TALK OF ANY CATEGORY OF INCOME INCLUDED IN GROSS TOTAL INCOME. WHAT IS INCLUDED IN THE GROSS TOTAL INCOME IN SUCH A CASE IS A PARTICUL AR QUANTUM OF INCOME BELONGING TO THE SPECIFIED CATEGORY. THEREFORE, THE WORDS 'SUCH INCOME BY WAY OF DIVIDENDS' MUST BE REFERABLE NOT ONLY TO THE CATEGORY OF INCOME INCLUDED IN THE GROSS TOTAL INCO ME BUT ALSO TO THE QUANTUM OF THE INCOME SO INCLUDED. IT IS OBVIOUS, A S A MATTER OF PLAIN GRAMMAR, THAT THE WORDS 'SUCH INCOME BY WAY OF DIVI DENDS' MUST HAVE REFERENCE TO THE INCOME BY WAY OF DIVIDENDS MENTION ED EARLIER AND THAT WOULD BE INCOME BY WAY OF DIVIDENDS FROM A DOM ESTIC COMPANY WHICH IS INCLUDED IN THE GROSS TOTAL INCOME. CONSEQ UENTLY, IN ORDER TO DETERMINE WHAT IS 'SUCH INCOME BY WAY OF DIVIDENDS' , WE HAVE TO ASK THE QUESTION : WHAT IS THE INCOME BY WAY OF DIVIDEN DS FROM A DOMESTIC COMPANY INCLUDED THE GROSS TOTAL INCOME AN D THAT WOULD OBVIOUSLY BE THE INCOME BY WAY OF DIVIDENDS COMPUTE D IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IT IS DIFFICULT TO APPRECIATE HOW, WHEN WE ARE INTERPRETING THE WORDS 'SUCH INCOME BY WAY O F DIVIDENDS', WE ITA NO.4894/MUM/2008 18 CAN MAKE A DICHOTOMY BETWEEN THE CATEGORY OF INCOME BY WAY OF DIVIDENDS INCLUDED IN THE GROSS TOTAL INCOME AND TH E QUANTUM OF THE INCOME BY WAY OF DIVIDENDS SO INCLUDED. THIS COURT OBSERVED IN CLOTH TRADERS ( P.) LTD.'S CASE (SUPRA) THAT THE WORDS 'S UCH INCOME BY WAY OF DIVIDENDS' AS A MATTER OF PLAIN GRAMMAR MUST BE SUB STITUTED BY THE WORDS 'INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC C OMPANY' IN ORDER TO ARRIVE AT A PROPER CONSTRUCTION OF THE SECTION, BUT THERE IS A CLEAR FALLACY IN THIS OBSERVATION, BECAUSE IN MAKING THE SUBSTITUTION IT STOPS SHORT OF THE WORDS 'INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY' AND DOES NOT GO TO THE FULL LENGTH TO WHIC H PLAIN GRAMMAR MUST DICTATE US TO GO, NAMELY 'INCOME BY WAY OF DIV IDENDS FROM A DOMESTIC COMPANY INCLUDED IN THE GROSS TOTAL INCOME ', [EMPHASIS SUPPLIED] OTHERWISE, WE WOULD NOT BE GIVING TO THE WORD 'SUCH ITS FULL MEANING AND EFFECT. THE WORD 'SUCH' IN THE CONTEXT IN WHICH IT OCCURS CAN ONLY MEAN THAT INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY WHICH IS INCLUDED IN THE GROSS TOTAL INCOME AND THAT MUST NECESSARILY BE INCOME BY WAY OF DIVIDENDS COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. 17.THERE IS ALSO ONE OTHER STRONG INDICATION IN THE LANGUAGE OF SUB- SECTION (1) OF SECTION 80M WHICH CLEARLY COMPELS US TO TAKE THE VIEW THAT THE DEDUCTION ENVISAGED BY THAT PROVISION IS R EQUIRED TO BE MADE WITH REFERENCE TO THE INCOME BY WAY OF DIVIDENDS CO MPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND NOT W ITH REFERENCE TO THE FULL AMOUNT OF DIVIDEND RECEIVED BY THE ASSESSE E. THIS INDICATION WAS ALSO UNFORTUNATELY LOST SIGHT OF BY THE SUPREME COURT IN CLOTH TRADERS ( P.) LTD.'S CASE (SUPRA) PRESUMABLY BECAUS E IT WAS NOT BROUGHT TO THE ATTENTION OF THE SUPREME COURT. THE SUPREME COURT OBSERVED IN CLOTH TRADERS (P.) LTD.'S CASE (SUPRA )THAT THE WH OLE OF THE INCOME BY WAY OF DIVIDENDS FROM A DOMESTIC COMPANY OR 60 PER CENT OF SUCH INCOME, AS THE CASE MAY BE, WOULD BE DEDUCTIBLE FRO M THE GROSS TOTAL INCOME FOR ARRIVING AT THE TOTAL INCOME OF THE ASSE SSEE. WE ARE AFRAID THIS OBSERVATION APPEARS TO HAVE BEEN MADE UNDER SO ME MISAPPREHENSION, BECAUSE WHAT SUB-SECTION (1) OF SE CTION 80M REQUIRES IS THAT THE DEDUCTION OF THE WHOLE OR A SP ECIFIED PERCENTAGE MUST BE MADE FROM 'SUCH INCOME BY WAY OF DIVIDENDS' AND NOT FROM THE GROSS TOTAL INCOME. SUB-SECTION (1) OF SECTION 80M PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE THERE SH ALL BE ALLOWED A DEDUCTION FROM 'SUCH INCOME BY WAY OF DIVIDENDS' OF AN AMOUNT EQUAL TO THE WHOLE OR A SPECIFIED PERCENTAGE OF SUC H INCOME. NOW WHEN IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION HAS TO BE MADE FROM 'SUCH INCOME BY WAY OF DIVIDENDS', IT IS ELEMENTARY THAT 'SUCH INCOME BY WAY OF DIVIDENDS' FROM WHICH D EDUCTION HAS TO BE MADE MUST BE PART OF THE GROSS TOTAL INCOME. IT IS DIFFICULT TO SEE HOW THE LANGUAGE OF THIS PART OF SUB-SECTION (1) OF SECTION 80M CAN POSSIBLY FIT IN IF 'SUCH INCOME BY WAY OF DIVIDENDS ' WERE INTERPRETED TO MEAN THE FULL AMOUNT OF DIVIDEND RECEIVED BY THE AS SESSEE. THE FULL AMOUNT OF DIVIDEND RECEIVED BY THE ASSESSEE WOULD N OT BE INCLUDED IN THE GROSS TOTAL INCOME: WHAT WOULD BE INCLUDED W OULD ONLY BE THE AMOUNT OF DIVIDEND AS COMPUTED IN ACCORDANCE WITH T HE PROVISIONS OF ITA NO.4894/MUM/2008 19 THE ACT. IF THAT BE SO, IT IS DIFFICULT TO APPRECIATE HOW F AR THE PURPOSE OF COMPUTING THE TOTAL INCOME FROM THE GROSS TOTAL INC OME ANY DEDUCTION SHOULD BE REQUIRED TO BE MADE FROM THE FULL AMOUNT OF THE DIVIDEND. THE DEDUCTION REQUIRED TO BE MADE FOR COMPUTING THE TOTAL INCOME FROM THE GROSS TOTAL INCOME CAN ONLY BE FROM THE AM OUNT OF DIVIDEND COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE A CT WHICH WOULD BE FORMING PART OF THE GROSS TOTAL INCOME. IT IS, THER EFORE, CLEAR THAT WHATEVER MIGHT HAVE BEEN THE INTERPRETATION PLACED ON CLAUSE (IV) OF SUB-SECTION (1) OF SECTION 99 AND SECTION 85A, THE CORRECTNESS OF WHICH IS NOT IN ISSUE BEFORE US, SO FAR AS SUB-SECTION (1) OF SECTION 80M IS CONCERNED, THE DEDUCTION REQUIRED TO BE ALLOWED UND ER THAT PROVISION IS LIABLE TO BE CALCULATED WITH REFERENCE TO THE AM OUNT OF DIVIDEND COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE A CT AND FORMING PART OF THE GROSS TOTAL INCOME AND NOT WITH REFEREN CE TO THE FULL AMOUNT OF DIVIDEND RECEIVED BY THE ASSESSEE. D) HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES (P.) LTD. [(2012) 343 ITR 89 ] FOLLOWED THE RATIO OF HONBLE CONSTITUTION BENCH OF SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA)(P) LTD [(1985) 155 ITR 120] WHILE ADJUDIC ATING THE ISSUE OF NETTING OF INTEREST FOR CONSIDERATION U/S. 80HHC OF THE ACT. HONBLE SUPREME COURT DISTINGUISHED HONBLE BOMBAY HIGH COU RT DECISION IN THE CASE OF CIT V/S. ASIAN STAR CO. LTD. (2010) 326 ITR 56 AND OVERRULED CIT V/S. KALPATARU COLOURS AND CHEMICALS (2010) 192 TAXAMAN 435. AT PARA 11 OF THAT ORDER HONBLE APEX COURT CONSIDERED THE DIFFERENCE BETWEEN INCOME AND RECEIPT FOLLOWING THE RATIO OF D ISTRIBUTORS (BARODA) PVT. LTD. (SUPRA). IT IS IMPORTANT TO NOTE HERE THAT ONE OF THE GROUNDS OF APPELLANT IS RELATED TO NETTING OF INTER EST FOR CONSIDERATION OF DISALLOWANCES. THE FOLLOWING RATIO AS PER PARA 12 OF HONBLE SUPREME COURT ORDER IN THE CASE OF ACG ASSOCIATED C APSULES PVT. LTD. IS TO BE APPLIED. 12. IF WE NOW APPLY EXPLANATION (BAA) AS INTERPRETED B Y US IN THIS JUDGMENT TO THE FACTS OF THE CASE BEFORE US, IF THE RENT OR INTEREST IS A RECEIPT CHARGEABLE AS PROFITS AND GAINS OF BUSINESS AND CHARGEABLE TO TAX UNDER SECTION 28 OF THE ACT, AND IF ANY QUANTUM OF THE RENT OR INTEREST OF THE ASSESSEE IS ALLOWABLE AS AN EXPENSE IN ACCORDANCE WITH SECTIONS 30 TO 44D OF THE ACT AND IS NOT TO BE INCL UDED IN THE PROFITS OF THE BUSINESS OF THE ASSESSEE AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', NINETY PER CENT O F SUCH QUANTUM OF THE RECEIPT OF RENT OR INTEREST WILL NOT BE DEDUCTE D UNDER CLAUSE (1) OF EXPLANATION (BAA) TO SECTION 80HHC. IN OTHER WORDS, NINETY PER CENT OF NOT THE GROSS RENT OR GROSS INTEREST BUT ONLY THE N ET INTEREST OR NET RENT, WHICH HAS BEEN INCLUDED IN THE PROFITS OF BUSINESS OF THE ASSESSEE AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSIN ESS OR PROFESSION', IS TO BE DEDUCTED UNDER CLAUSE (1) OF EXPLANATION (BAA) TO SECTION 80HHC FOR DETERMINING THE PROFITS OF THE BU SINESS. 3.3. IT IS IN VIEW OF SUCH INTERPRETATION CLEARLY D ISTINGUISHING THE DIFFERENCE OF DIVIDENDS RECEIPTS AND INCOME BY W AY OF DIVIDENDS ONE ITA NO.4894/MUM/2008 20 HAS TO CONSIDER FOLLOWING PROVISIONS OF THE ACT AS HOW THE SAME IS APPLICABLE FOR SEC.14A OF THE ACT. (I) SECTION 2(22) OF THE ACT DEFINE DIVIDEND AS INCLU SIVE DEFINITION BEING DISTRIBUTION OF ACCUMULATED PROFITS IN CASH OR KIND . (II) SECTION 4 OF THE ACT IS THE CHARGE OF INCOME TAX ON TOTAL INCOME. (III) THE SECTION 2(45) OF THE ACT PROVIDE AN EXHAUSTIVE DEFINITION OF TOTAL INCOME AS TOTAL AMOUNT OF INCOME REFERR ED TO IN SEC.5, COMPUTED IN THE MANNER LAID DOWN IN THIS ACT. (IV) SEC.5 OF THE ACT DEFINES THE SCOPE OF TOTAL INCOME . (V) SEC.8 OF THE ACT THOUGH HAS HEADING AS DIVIDEND IN COME BUT THE SAME IS TO CATEGORIZE THE TIME WHEN SUCH DIVIDEND ( BOTH FINAL OR INTERIM) IS TO BE INCLUDED IN TOTAL INCOME. (VI) SEC.10 (34) IS THE SECTION FOR CONSIDERATION WHICH CAN BE BROKEN AS FOLLOWS FOR UNDERSTANDING. ANY INCOME BY WAY OF DIVIDEND REFERRED TO IN SEC.115-O (VII) SEC.10(34A), 10(35), 10(35A), 10(36), 10(3 7) AND 10(38) OF THE ACT ARE SIMILARLY WORDED WITH PHRASE ANY INCOME BY WAY OF . THIS IS BECAUSE CHAPTER III OF THE ACT HAS THE HEADING INC OME WHICH DO NOT FORM PART OF TOTAL INCOME. IT IS THEREFORE, FIRST WE HAVE TO COMPUTE THE INCOM E FOLLOWING THE MATCHING PRINCIPLE WHICH SAYS RECEIPT MINUS EXPENDI TURE/OUTGOING BEFORE TAKING A DECISION WHETHER SUCH INCOME IS EXC LUDABLE OR NOT FORMING PART OF TOTAL INCOME (VIII) SECTION 14 OF THE ACT UNDER CHAPTER IV WITH THE TITLE COMPUTATION OF TOTAL INCOME PROVIDES VARIOUS HEADS OF INCOME. THE SECTION CAN BE UNDERSTOOD BY BREAKING IT AS FOLLOWS SAVE AS OTHERWISE PROVIDED BY THE ACT. ALL INCOME SHALL FOR THE PURPOSE OF CHARGE OF INCOME TAX AND COMPUTATION OF TOTAL INCOM E BE CLASSIFIED UNDER FOLLOWING HEADS OF INCOME THE PHRASE SAVE AS OTHERWISE PROVIDED IS THE SAFE GUARD FOR INCLUSION OF INCOME UNDER DEEMING PROVISION AS PROV IDED IN THE CHAPTER VI OF THE ACT WITH THE TITLE AGGREGATION OF INCOME AND SET OFF AND CARRY FORWARD OF LOSS. THE DISTINCTION OF SEC.66 FOR IN CLUSION OF INCOME AS PROVIDED UNDER CHAPTER VII THOUGH THERE IS NO INCOM E TAX PAYABLE IS TO SEPARATE OUT SUCH INCOME FROM THE CHAPTER III OF TH E ACT. HOWEVER, ITA NO.4894/MUM/2008 21 SEC.68, 69, 69A, 69B, 69C, 69D OF THE ACT ARE DEEME D INCOME WHERE ENTIRE SUM IS TREATED AS INCOME WITHOUT FOLLOWING / APPLYING MATCHING PRINCIPLE (IX) SEC. 14A THOUGH INCLUDED IN THE CHAPTER IV OF THE ACT I.E COMPUTATION OF TOTAL INCOME BUT IT IS HAVING HEADING AS EXPEND ITURE INCURRED IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME. IT IS THEREFORE TO UNDERSTAND THE HEADING IT CAN BE BROKEN AS FOLLOWS : EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IT IS THEREFORE, THE INCOME WHICH IS NOT TO BE INCL UDED IN TOTAL INCOME IS THE INCOME COMPUTED UNDER VARIOUS HEAD FOLLOWING MATCHI NG PRINCIPLE UNDER THE CHAPTER III OF THE ACT. (X) SEC. 14A (1) OF THE ACT WHICH WAS BROUGHT RETRO SPECTIVELY, BY THE FINANCE ACT 2001 CAN BE UNDERSTOOD BY BREAKING THE PROVIS ION AS FOLLOWS: FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER(I.E UNDER VARIOUS HEAD) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FROM PART OF THE TOTAL INCOME UNDER THIS ACT. THE PROVISIONS, THEREFORE, CLEARLY ENVISAGED THAT F OLLOWING THE MATCHING PRINCIPLE FOR VARIOUS RECEIPTS FROM VARIOU S RESOURCES AN ASSESSEE HAS TO COMPUTE INCOME UNDER VARIOUS HEAD. IT IS AFTER COMPUTATION OF INCOME UNDER VARIOUS HEADS, THE INCO ME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE IDENTIFIED AND THE EXPENDITURE CONSIDERED FOR COMPUTING SUCH EXEMPT IN COME IS REQUIRED TO BE DISALLOWED U/S. 14A OF THE ACT. AS PER SETTLED LAW THE CONCEPT OF INCOME INCLUDES A LOSS I. E. NEGATIVE IN COME OR ZERO I. E. NIL INCOME. AS PER MATCHING PRINCIPLE, THERE CAN BE POSITIVE RECEIPT RESULTING INTO POSITIVE INCOME OR LOSS OR NIL INCOM E. SIMILARLY, FROM A SOURCE THERE CAN BE NIL RECEIPT WHICH MAY RESULT IN TO LOSS I. E. NEGATIVE INCOME OR NIL INCOME. THERE CAN BE A RECE IPT (SEC.66 R. W. CHAPTER VII) THE INCOME RESULTING THERE FROM THOUGH INCLUDABLE BUT NO INCOME TAX IS CHARGED RESULTING INTO NON APPLICA TION OF SEC.14A OF THE ACT. THERE CAN BE DIVIDEND WHICH IS NOT REFERA BLE U/S. 115-O OF ITA NO.4894/MUM/2008 22 THE ACT I.E ON WHICH NO DIVIDEND DISTRIBUTION TAX ( DDT) IS PAID AND THEREFORE, FOR RECEIPT OF SUCH DIVIDEND, INCOME UND ER THE HEAD INCOME FROM OTHER SOURCE IS REQUIRED TO BE COMPUT ED WHERE EXPENDITURE RELATED TO SUCH DIVIDEND ARE ADMISSIBLE IF ELIGIBLE U/S. 57 (III) OF THE I.T. ACT. THE BASIC INTENTION AND P URPOSE OF INTRODUCING SEC.14A OF THE ACT WAS TO ENLARGE THE SCOPE OF THE APPORTIONMENT OF VARIOUS EXPENDITURE IRRESPECTIVE OF THE FACT WHETHE R THE BUSINESS OR ACTIVITIES OF AN ASSESSEE IS DIVISIBLE OR INDIVISIB LE. SUCH INTENTION AND OBJECT OF HONBLE LEGISLATURE CANNOT BE DISREGARDED DELVING INTO CONSIDERATION OF RECEIPT OF DIVIDEND RATHER THAN CO NSIDERING INCOME FROM DIVIDEND . THE SCOPE FOR PROHIBITING THE DUAL BENEFIT WHICH WERE PERMISSIBLE PRIOR TO INSERTION OF 14A OF THE A CT BY NOT ONLY CLAIMING EXEMPT INCOME ON ONE HAND AND BY REDUCING TAXABLE INCOME WITH THE CLAIM OF EXPENDITURE RELATABLE TO E XEMPT INCOME ON OTHER HAND IS REQUIRED TO BE CONSIDERED. THE PR OHIBITION U/S. 115-O (5) OF THE ACT IS UNAMBIGUOUS AND CLEAR WITH FOLLOWING WORDS NO DEDUCTION UNDER ANY OTHER PROVISION OF THIS ACT SHALL BE ALLOWED TO THE COMPANY OR A SHAREHOLDER IN RESPECT OF THE A MOUNT WHICH HAS BEEN CHARGED TO TAX UNDER SUB-SECTION (1) OR THE TA X THEREON. IT IS THEREFORE, ANY EXPENDITURE RELATABLE TO DIVIDEND RE CEIPT IS NOT ALLOWABLE UNDER ANY PROVISION OF THE ACT. THERE CA N BE NIL DIVIDEND FROM ANY INVESTMENT RESULTING INTO NEGATIV E OR NIL INCOME BY WAY OF DIVIDENDS U/S. 10(34) OF THE ACT REQUIRED NO ALLOWABILITY OF SUCH EXPENDITURE IF THERE. 3.4. LEGAL PROPOSITION A) THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WA LFORT SHARE & STOCK BROKERS 326 ITR 1 (SC) OBSERVED THAT THE INSERTION OF SEC.14A WITH RETROSPECTIVE EFFECT REFLECTS THE SERI OUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RE SPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T AGAINST THE TAXABLE INCOME. THE SUPREME COURT ALSO CLEARLY HELD THAT IN THE CAS E OF AN INCOME LIKE DIVIDEND INCOME WHICH DOES NOT FORM PART OF TH E TOTAL INCOME, ANY EXPENDITURE/DEDUCTION RELATABLE TO SUCH (EXEMPT OR NON- TAXABLE) INCOME, EVEN IF IT IS OF THE NATURE SPECIF IED IN SEC.15 TO 59 CANNOT BE ALLOWED AGAINST ANY OTHER INCOME WHICH IS INCLUDABLE IN THE TOTAL INCOME . HONBLE SUPREME OBSERVED THAT BASIC PRINCIPLE OF TA XATION IS TO TAX THE NET INCOME, I.E GROSS INCOME MINUS THE EXPENDIT URE AND ON THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NE T INCOME. IN OTHER WORDS, WHERE THE GROSS INCOME WOULD NOT FORM PART OF TOTAL INCOME, ITS ASSOCIATED OR RELATED EXPENDITURE WOULD ALSO NOT BE PERMITTED TO BE DEBITED AGAINST OTHER TAXABLE INCOM E. THE SUPREME COURT MADE IT VERY CLEAR THAT THE PERMI SSIBLE DEDUCTION ENUMERATED IN SEC.15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF THE HEADS OF INCOME AND IS CHARGEABLE TO TAX. ITA NO.4894/MUM/2008 23 [NOTE: THE ABOVE OBSERVATION AND RATIO WERE DULY CO NSIDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVE STMENT LTD V/S.CIT (2011) 15 TAXMANN.COM 390 (DELHI)]. B) THE AO RELIED ON THE DECISION OF HONBLE ITAT DE LHI IN THE CASE OF EVERPLUS SECURITIES &FINANCE LTD (101 ITD 151) WHER EIN RELYING ON THE OBSERVATION PARTICULARLY IN RESPECT OF CLAUSE 5 OF SEC.115-O (PARA 5.15 OF THE HONBLE ITAT ORDER), THE HONBLE ITAT C ONSIDERED HONBLE ITAT KOLKATA BENCH ORDER IN THE CASE OF S.G .INVESTMENTINDS. LTD. HONBLE ITAT KOLKATTA OBSERVED FOLLOWING IMPOR TANT OBSERVATIONS IN RESPECT OF SECTION 10(33) (AS NOW 1 0(34)) AND SEC.115-O OF THE ACT. (I) THE SECTION 115-O(1) BEGINNING WITH THE EXPRESS ION NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISIONS OF THIS ACT IS TO GIVE THE PROVISIONS OF SECTION 115-O(1) IN CASE OF CONFLICT, AN OVERRIDING EFFECT OVER ANY OTHER PROVISIONS OF T HE IT ACT, 1961. IT IS THUS CLEAR THAT SECTION 115-O(1) IS A SPECIFIC P ROVISION OVERRIDING IN CASE OF CONFLICT, THE GENERAL PROVISIONS. THE SUB-S ECTION (5) OF SECTION 115-O HAS MADE IT CLEAR THAT NO DEDUCTION U NDER ANY OTHER PROVISIONS OF INCOME-TAX ACT SHALL BE ALLOWED TO TH E COMPANY OR A SHAREHOLDER IN RESPECT OF DIVIDEND INCOME WHICH HAS BEEN CHARGED TO TAX UNDER SECTION 115-O(1) OR THE TAX THEREON. T HUS, THIS SUB- SECTION HAS RESTRICTED THE ALLOWABILITY OF ALL DEDU CTIONS, WHICH MAY OTHERWISE BE ALLOWABLE UNDER ANY OTHER PROVISIONS O F THE ACT, AGAINST DIVIDEND INCOME. IT MEANS THAT THE INTEREST PAID FOR BORROWINGS USED FOR PURPOSE OF ACQUIRING SHARES WHI CH HAS RESULTED IN EARNING OF DIVIDEND, AND ALL OTHER EXPENSES IN R ELATING TO THE EARNING OF DIVIDEND INCOME WILL NOT BE ALLOWED AS D EDUCTION UNDER ANY OTHER PROVISIONS OF THE INCOME-TAX ACT. (II) REGARDING THE CLAIM FOR DEDUCTION OF INTEREST PAID ON MONIES BORROWED FOR PURCHASE OF SHARES HELD AS INVESTMENT, WE MAY OBSERVE THAT BEFORE INSERTION OF SECTIONS 10(33) AN D 115-O OF THE ACT, THE DEDUCTION FOR INTEREST PAID ON MONIES BORR OWED FOR ACQUIRING THE SHARES HELD AS INVESTMENTS COULD HAVE BEEN NORMALLY CLAIMED UNDER SECTION 57(III) OF THE ACT AGAINST DI VIDEND INCOME. IT CANNOT BE CLAIMED SO NOW DUE TO THE EXPLICIT PROVIS IONS OF SUB- SECTION (5) OF SECTION 115-O READ WITH SECTION 14A OF THE ACT INASMUCH AS SUCH DIVIDEND INCOME DOES NOT FORM PART OF TOTAL INCOME CHARGEABLE TO TAX.' (III) IT IS NOW IMMATERIAL WHETHER THE SHARES ARE HELD AS STOCK-IN- TRADE OR INVESTMENT PORTFOLIO AS AN INTEGRAL PART O F THE BUSINESS OR HELD AS INVESTMENT AS SUCH FROM THE POINT OF ALLOWA BILITY OF ITA NO.4894/MUM/2008 24 DEDUCTION FOR EXPENDITURE INCURRED IN RELATION TO D IVIDEND INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME BY VIRTU E OF SECTION 10(33) OF THE ACT. IT WAS FURTHER OBSERVED THAT NOW THE SITUATION IS CLARIFIED AS A RESULT OF INSERTION OF SECTION 14A A ND THE DECISIONS OF VARIOUS COURTS NOT ALLOWING THE APPORTIONMENT OF IN TEREST AGAINST DIVIDEND INCOME ARE OF NO HELP TO THE ASSESSEE. THE PURPOSE OF INSERTING SECTION 14A IS TO NULLIFY THE DECISION, I N RAJASTHAN STATE WAREHOUSING CORPN. V. CIT [2000] 242 ITR 450 1. (SC) TO THE EXTENT IT RELATES TO THE CASES OF INDIVISIBLE BUSINESS. (IV) THE APPELLATE TRIBUNAL ALSO OBSERVED THAT I T IS COMMON KNOWLEDGE THAT NO DIVIDEND COULD BE EARNED WITHOUT MAKING INVESTMENT AS THE DIVIDEND COULD HAVE BEEN EARNED O NLY AFTER INVESTMENTS ARE MADE. WHEN IT IS FOUND THAT THE INV ESTMENTS IN SHARES ARE MADE OUT OF BORROWED CAPITAL, IT IS THEN NOT UNDERSTOOD AS TO WHY INTEREST PAID ON SUCH BORROWINGS SHOULD N OT BE REGARDED AS EXPENDITURE INCURRED IN RELATION TO EARNING OF D IVIDEND INCOME. THE AMOUNT OF SUCH INTEREST IS, THEREFORE, REQUIRED TO BE DEDUCTED FROM THE DIVIDEND INCOME BEFORE COMPUTING THE AMOUN T OF DIVIDEND ON WHICH THE EXEMPTION UNDER SECTION 10(33) IS TO B E ALLOWED. C) HONBLE ITAT MUMBAI IN THE CASE OF KANKHAL INVESTME NT & TRADING CO. P. LTD. V/S. ACIT (2009) 116 ITD 492 (MUM) DEALT WITH SIMILAR FACTS. (I) HONBLE ITAT IN THIS ORDER AT PARA 8 & 9 CONSIDERE D FOLLOWING FACTS; 8. IN THE COURSE OF HEARING, A QUERY WAS RAISED FR OM THE BENCH AS TO HOW THE DEDUCTION COULD BE ALLOWED UNDER THE HEAD PROFITS & GAINS FROM BUSINESS/PROFESSION PARTICULARLY WHEN NEITHER OF THE RECEIPTS FROM SUCH BUSINESS WAS ASSESSABLE UNDER SUCH HEAD. IT WAS CLARIFIED TO HIM THAT IN THE BUSINESS OF HOLDING OF INVESTMEN TS IN SHARES, THE RECEIPTS WERE EITHER BY WAY OF DIVIDENDS OR SALE PR OCEEDS OF SHARES. BOTH THE RECEIPTS WERE NOT ASSESSABLE UNDER THE HEA D PROFITS & GAINS FROM BUSINESS/PROFESSION BUT WERE ASSESSABLE EITHER UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER THE H EAD CAPITAL GAINS. THUS, COMPUTATION OF INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION DID NOT ARISE. 9. FACED WITH SUCH QUERY, IT WAS SUBMITTED THAT THE ASSESSEE CANNOT LOSE THE STATUTORY DEDUCTION WHICH IS OTHERWISE ALL OWABLE UNDER SECTION 36(1)(III) MERELY BECAUSE RECEIPTS FROM SUC H BUSINESS ARE NOT ASSESSABLE UNDER THE HEAD PROFITS & GAINS FROM BUSINESS/PROFESSION. RELIANCE WAS PLACED ON THE JU DGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT V. RAJENDR A PRASAD MOODY [1978] 115 ITR 519 WHEREIN IT WAS HELD THAT DEDUCTION UNDER SECTION 57 WAS ALLOWABLE EVEN WHERE THERE WAS NO DIVIDEND I NCOME . ITA NO.4894/MUM/2008 25 PROCEEDING FURTHER, IT WAS SUBMITTED THAT THE ASSES SEE HAD OTHER INCOMES LIKE INTEREST ON DEBENTURES AND INTEREST ON LOANS AND, THEREFORE, SUCH DEDUCTION COULD BE ALLOWED AGAINST SUCH RECEIPTS. (II) THE REVENUE RELIED ON HONBLE SUPREME COURT JUDGEME NT IN THE CASE OF BENGAL ASSAM INVESTORS LTD., RAJENDRA P RASAD MODI, HONBLE ITAT DELHI DECISION IN THE CASE OF EVERPLUS SECURITIES & FINANCE LTD. AND ALSO HONBLE MUMBAI ITAT ORDER IN THE CASE OF KAMU METALS PVT. (ITA NO.7211/M/2003) FOR CONTENDING THAT NO DEDUCTION UNDER SECTIONS 30 TO 43D CAN BE ALLOWED A S THE RECEIPTS ARE CHARGEABLE TO TAX EITHER UNDER THE HEAD CAPITA L GAINS OR UNDER THE HEAD INCOME FROM OTHER SOURCES. PROCEEDING FU RTHER, IT WAS SUBMITTED THAT EVEN ASSUMING THAT THE ASSESSEE WAS IN THE BUSINESS OF HOLDING OF INVESTMENT THEN DIVIDEND INCOME ARISI NG FROM SUCH BUSINESS IS EXEMPT UNDER SECTION 10(33) OF THE ACT AND, THEREFORE, EXPENDITURE RELATED TO SUCH INCOME CANNOT BE ALLOWE D UNDER SECTION 14A OF THE ACT. (III) HONBLE ITAT CONSIDERED HONBLE APEX COURT J UDGEMENTS IN THE CASE OF DISTRIBUTORS (BARODA) PVT. LTD. 83 ITR 377 AND BENGAL AND ASSAM INVESTORS LTD., NARAINSWADESHI WEAVING MILLS 26 ITR 765 AND AMALGAMATION PVT. LTD 226 ITR 188 AT PARA 19 AND 20 HELD THAT 19. IN VIEW OF THE ABOVE LEGAL POSITION, WE ARE O F THE VIEW THAT WHERE A SPECIFIC HEAD IS PROVIDED IN RESPECT OF A P ARTICULAR INCOME, THEN SUCH INCOME MUST BE COMPUTED UNDER THAT VERY H EAD IRRESPECTIVE OF THE NATURE OF INCOME. IN THE CASE O F A COMPANY IN THE BUSINESS OF HOLDING SHARES, IF INVESTMENT IN SHARES IS DISPOSED OFF THEN INCOME THEREFROM HAS TO BE COMPUTED ONLY UNDER THE SPECIFIC HEAD CAPITAL GAINS AND THIS LEGAL POSITION IS NOT EVEN DISPUTED BY THE ASSESSEES COUNSEL AND THE ASSESSEE ITSELF HAS ALSO DECLARED THE INCOME UNDER THE HEAD CAPITAL GAINS. FURTHER DIVI DEND INCOME IS ALSO TO BE COMPUTED UNDER THE SPECIFIC HEAD INCOME FROM OTHER SOURCES IF SUCH INCOME IS TAXABLE. SINCE DIVIDEND INCOME IS EXEMPT UNDER SECTION 10(33) OF THE ACT, THE QUESTION OF CO MPUTING SUCH INCOME DOES NOT ARISE . THERE IS NO OTHER RECEIPT ARISING OR ACCRUING TO THE ASSESSEE FROM THE BUSINESS OF HOLDING INVESTMEN T IN SHARES. THEREFORE, THE ENTIRE RECEIPTS FROM SUCH BUSINESS H AS TO BE EXCLUDED FROM THE HEAD PROFITS AND GAINS FROM BUSINESS OR P ROFESSION SINCE SUCH RECEIPTS FALLS UNDER THE SPECIFIC HEADS. INCOM E CAN BE COMPUTED ONLY AFTER ALLOWING DEDUCTIONS AS PROVIDED UNDER TH E HEAD UNDER WHICH INCOME IS TO BE COMPUTED. NO OTHER DEDUCTION IS PERMISSIBLE EXCEPT PROVIDED UNDER THAT HEAD. THE INTEREST PAID ON THE BORROWED FUNDS, AT THE MOST, COULD BE ALLOWED AGAINST THE DI VIDEND INCOME IF ITA NO.4894/MUM/2008 26 INVESTMENT IS MADE TO EARN THE DIVIDEND INCOME. THE CONTENTION OF THE ASSESSEE IS THAT INVESTMENT WAS NOT MADE TO EAR N DIVIDEND INCOME. THEREFORE, SUCH DEDUCTION COULD NOT BE ALLO WED EVEN AGAINST THE DIVIDEND INCOME. EVEN OTHERWISE, SUCH INCOME BE ING EXEMPT THE QUESTION OF DEDUCTION AGAINST DIVIDEND INCOME BECOM ES ACADEMIC. THE INTEREST PAID AS PER THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE, COULD RELATE TO THE PROFITS ARISING FROM SALE OF INVESTMENTS SINCE THE MAIN OBJECT WAS TO HOLD THE INVESTMENTS. SINCE INCOME ARISING FROM SALE OF INVESTMENT HAS TO BE COMPUTED UNDER THE HEAD CAPITAL GAINS, THE DEDUCTION HAS TO BE ALLOWED ON LY IN ACCORDANCE WITH THE PROVISIONS SPECIFIED UNDER THE HEAD CAPIT AL GAINS. THE LEGISLATURE WAS AWARE OF THE ASPECT OF INFLATION OF PRICE AND, THEREFORE, IT MADE PROVISIONS TO DETERMINE THE INDE XED COST OF ACQUISITION, WHICH WOULD TAKE CARE OF INTEREST COST ALSO. NO SEPARATE DEDUCTION IS ALLOWABLE UNDER THIS HEAD IN RESPECT O F INTEREST PAID ON BORROWED FUNDS. THUS, IN OUR OPINION, NO DEDUCTION IS ALLOWABLE TO THE ASSESSEE IN RESPECT OF INTEREST PAID ON BORROWE D FUNDS. 20. IT HAS BEEN CONTENDED BY THE LD. COUNSEL FOR T HE ASSESSEE THAT THE ASSESSEE SHOULD NOT LOSE THE STATUTORY DEDUCTIO NS UNDER SECTION 36(1)(III) MERELY BECAUSE ITS INCOME IS TO BE COMPU TED UNDER OTHER HEADS. WE ARE UNABLE TO ACCEPT SUCH CONTENTION. WHA T IS TO BE COMPUTED UNDER SECTION 28 IS THE PROFITS AND GAINS OF BUSINESS OR PROFESSION, WHICH ALSO INCLUDES LOSSES. AS PER THE COMMERCIAL OR ACCOUNTING PRINCIPLES, NEITHER THE PROFITS NOR THE LOSSES FROM A BUSINESS CAN BE COMPUTED UNLESS THE RECEIPTS AND TH E EXPENDITURES HAVING NEXUS WITH EACH OTHER ARE TAKEN INTO CONSIDE RATION. FURTHER, THE INCOME UNDER SECTION 28 IS TO BE COMPUTED IN AC CORDANCE WITH THE PROVISIONS OF SECTIONS 30 TO 43D AS PROVIDED IN SECTION 29. ALL THE PROVISIONS CONTAINED IN SECTIONS 30 TO 43D PROVIDE THAT DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE OR A LLOWANCE MENTIONED THEREIN . THE DEDUCTION PRE-SUPPOSES THE EXISTENCE OF RECEIPTS CHARGEABLE UNDER THIS HEAD. IF THE RECEIPT S ARE TO BE CONSIDERED UNDER OTHER HEADS THEN, QUESTION OF DEDU CTION UNDER THE HEAD PROFITS & GAINS FROM BUSINESS OR PROFESSI ON WOULD NOT ARISE. AS ALREADY POINTED OUT RECEIPTS AND EXPENDIT URE MUST GO TOGETHER. WE MAY CLARIFY THAT THE RECEIPT MAY BE AC TUAL OR TO BE RECEIVED IN FUTURE. THE RECEIPT MAY BE ON ACCRUAL B ASIS. THERE MAY BE CASES THAT THERE IS NO RECEIPT IN ONE YEAR AND I T MAY BE RECEIVED IN NEXT YEAR. IN SUCH CASES, THE LOSS MAY BE COMPUT ED BECAUSE RECEIPTS MAY BE EXPECTED IN NEXT YEAR. THE CRUX OF THE MATTER IS THAT THERE MUST BE RECEIPTS EITHER ACTUAL OR ON ACCRUAL BASIS BEFORE A DEDUCTION CAN BE ALLOWED THEREFROM. CONSEQUENTLY, IF RECEIPTS, IN ITA NO.4894/MUM/2008 27 RESPECT OF WHICH EXPENDITURE ARE INCURRED, ARE CONS IDERED UNDER OTHER HEADS, THEN QUESTION OF DETERMINING ANY INCOM E UNDER THE HEAD PROFITS OR GAINS FROM BUSINESS OR PROFESSION DOES NOT ARISE. HENCE, THE CONTENTION OF THE ASSESSEE IS REJECTED. D) A LARGER BENCH OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD ( 1997 ) 227 ITR 172 CONSIDERED THE ISSUE OF COMPUTATION OF INCOME UNDER VARIOUS HEADS. E) HONBLE HIGH COURT OF MYSORE IN THE CASE OF UN ITED BREWERIES ( [1973] 89 ITR 17) HELD IT IS WELL-SETTLED THAT THE MERE FACT THAT A MAN H OLDS ALL THE SHARES IN A COMPANY DOES NOT MAKE THE BUSINESS CARRIED ON BY THAT COMPANY HIS BUSINESS, NOR DOES IT MAKE THE COMPANY HIS AGEN TS FOR THE CARRYING ON OF THE BUSINESS. THAT PROPOSITION IS JUST AS TRU E IF THE SHAREHOLDER IS ITSELF A LIMITED COMPANY. IT IS ALSO WELL-SETTLE D THAT THERE MAY BE SUCH AN ARRANGEMENT BETWEEN THE SHAREHOLDERS AND A COMPANY AS WILL CONSTITUTE THE COMPANY THE SHAREHOLDERS AGENT FOR THE PURPOSE OF CARRYING ON THE BUSINESS AND MAKE THE BUSINESS T HE BUSINESS OF THE SHAREHOLDERS. IT IS, THEREFORE, A QUESTION OF FACT IN EACH CASE TO BE DECIDED WHETHER THE SUBSIDIARY WAS CARRYING ON THE BUSINESS AS THE COMPANYS BUSINESS OR AS ITS OWN. THE BUSINESS OF A SUBSIDIARY COMPANY CAN BE REGARDED AS THE BUSINESS OF THE PARE NT-COMPANY IF IN ADDITION TO THE CAPITALIST CONTROL; IT HAS FUNCTIO NAL CONTROL OVER ITS SUBSIDIARY. IN THE CASE OF APPELLANT, THE QUESTION OF BUSINESS CARRIED ON BY THE GROUP COMPANIES WITH THAT OF APPELLANTS OWN BUSINE SS IS REQUIRED TO BE CONSIDERED IF THE CLAIM OF INTEREST IS TO BE ALL OWED U/S 36 (1) (III) OF THE ACT WITH TOTAL DISRESPECT TO THE PROVISIONS OF SECTION 14 A OF THE ACT READ WITH PROVISION OF SECTION 115-O OF THE ACT . IT IS IMPORTANT TO BEAR INTO CONSIDERATION THAT THIS CASE WAS PRIOR TO INSERTION OF SECTION 14 A OF THE ACT BUT THE RATIO IS STILL RELEVANT IN VIEW OF PROVISIONS SO BROUGHT IN. F) ITAT MUMBAI A BENCH IN THE CASE OF PANATONE FINVEST LTD (ITA NO 7324/MUM/2005 ) WIDE ORDER DATED 5-10-09 CONSIDERED THE ISSUE OF ALLOWABILITY OF INTEREST OF THIS SUBSIDIAR Y OF TATA SONS LIMITED FOR THE PURCHASE OF SHARES FROM BORROWED FUND NOT F OR THE TRADING BUT TO OBTAIN CONTROLLING INTEREST FOR THE TATA GRO UP. HONBLE ITAT REJECTED THE CLAIM OF THE INTEREST U/S 57 (III) OF THE ACT CONSIDERING THE FACT THAT THE ASSESSEE WITHDRAWN ITS CLAIM DEDUCTIO N U/S 36 (1) (III) AND ALSO THAT THE INTENTION OF MAKING INVESTMENT FO R ACQUIRING CONTROLLING INTEREST WAS EVEN NOT TO EARN ANY RECEI PT TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES HENCE NO DEDUCTI ON U/S 57 (III) OF THE ACT. RATIO OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF AMRITABEN R SHAH WAS FOLLOWED. ITA NO.4894/MUM/2008 28 G) HONBLE ITAT MUMBAI D BENCH IN THE CASE OF GANJAM TRADING CO PVT LTD ( ITA NO 3724/ MUM/2005) WIDE ORDER DATED 28-6-2012 DEALT WITH SECTION 14 A AS WELL AS 36 (1) (III) OF THE ACT. AT PARA 4.4 OF THAT ORDER HONBLE ITAT HELD THAT THE ASSESSEE HAD BEEN MAKING ONLY LONG TERM STRATEGIC INVESTMENT IN GROUP COMPANIES THE INCOME FROM WHICH EITHER IN THE FORM OF LONG TERM C APITAL GAIN OR IN THE FORM OF DIVIDEND IS EXEMPT FROM TAX. THEREFORE, THE EXPENDITURE INCURRED IN RELATION TO SUCH INVESTMENT IS REQUIRED TO BE DISALLOWED UNDER SECTION 14 A OF THE ACT. HOWEVER, INTEREST RE LATING TO THE BORROWINGS USED IN THE PURCHASE OF TRADING SHARES F ROM WHICH DIVIDEND HAD BEEN RECEIVED IS REQUIRED TO BE EXCLUD ED FROM SUCH DISALLOWANCE. IN REFERENCE TO ALLOWABILITY OF INTEREST, HONBLE I TAT AT PARA 5.5 HELD THAT WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASPECTS O F THE MATTER. THE LD. AR FOR THE ASSESSEE HAS ARGUED THAT TRADING AND INVESTMENT IN SHARES WAS BUSINESS OF THE ASSESSEE AND THEREFORE, THE BORROWED FUNDS USED FOR MAKING ADVANCES FOR ACQUISITION OF S HARES HAVE TO BE CONSIDERED AS USED FOR THE PURPOSE OF BUSINESS AND NO DISALLOWANCE SHOULD BE MADE. WE ARE UNABLE TO ACCEPT THE CONTENT IONS RAISED. THE ASSESSEE HAD ADVANCED MONEY FOR PURCHASE OF SHARES OF THE GROUP COMPANIES FOR THE PURPOSE OF ACQUIRING CONTROLLING INTEREST AND FOR THE ACQUISITION OF OTHER COMPANIES FOR THE GROUP. T HE ACQUISITION OF CONTROLLING INTEREST IN COMPANIES WAS NOT THE BUSIN ESS OF THE ASSESSEE AS THE ASSESSEE HAD NOT ACQUIRED CONTROLLING INTERE ST IN ANY COMPANY WITH A VIEW TO MANAGING THE SAME. THE ASSESSEE IS A N INVESTMENT ARM OF THE ZEE GROUP WHO HAS THE MANAGEMENT CONTROL OVE R THE COMPANIES. ADVANCING MONEY INTEREST FREE IS ALSO NO T THE BUSINESS OF THE ASSESSEE. THEREFORE, ACQUIRING SHARES IN THE GR OUP COMPANIES FOR MAINTAINING THE CONTROLLING INTEREST DOES NOT PROMO TE THE BUSINESS OF THE ASSESSEE AND IS ONLY HELPFUL TO THE GROUP FOR H AVING THE MANAGEMENT CONTROL OVER THE COMPANIES. THE LD. AR H AS RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F S.A. BUILDERS (288 ITR 01) TO ARGUE THAT ADVANCES HAD BEEN MADE O N COMMERCIAL EXPEDIENCY AND THEREFORE INTEREST ON BORROWINGS SHO ULD BE ALLOWED. IT HAS NOT BEEN SHOWN TO US AS TO HOW BUSINESS OF T HOSE COMPANIES PROMOTES THE BUSINESS INTERESTS OF THE ASSESSEE SO THAT INTEREST FREE ADVANCES TO THEM COULD BE JUSTIFIED ON COMMERCIAL E XPEDIENCY. RELIANCE HAS ALSO BEEN PLACED ON THE JUDGMENT OF TH E HON'BLE SUPREME COURT IN THE CASE OF CORE HEALTH CARE LTD. (298 ITR 194) (SUPRA), IN WHICH IT HAS BEEN HELD THAT ONCE THE CA PITAL HAS BEEN BORROWED FOR THE PURPOSE OF BUSINESS, INTEREST HAS TO BE ALLOWED IRRESPECTIVE OF THE FACT WHETHER THE BORROWED FUND HAS BEEN USED FOR ACQUISITION OF CAPITAL ASSETS OR FOR REVENUE ASSETS . THE SAID JUDGMENT IS NOT APPLICABLE AS ADVANCING INTEREST FREE FUND T O THE GROUP COMPANIES IS NOT THE BUSINESS OF THE ASSESSEE. THE JUDGMENT OF THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. PHIL CORPORATION LTD. (4 CTR 226) (SUPRA), IS ALSO NOT APPLICABLE AS IN THAT CASE THERE ITA NO.4894/MUM/2008 29 WAS NO DISPUTE THAT THE AMOUNT HAD BEEN PAID TO THE SISTER CONCERN AS AN INTEGRAL PART OF BUSINESS, WHICH IS NOT SO IN THE PRESENT CASE. 5.6 THEREFORE, THE INTEREST EXPENSES INCURRED BY TH E ASSESSEE TOWARDS SUCH INTEREST FREE ADVANCES MADE FOR SHARE APPLICAT ION IN GROUP COMPANIES OR FOR ACQUISITION OF OTHER COMPANIES FRO M THE GROUP HAS TO BE CONSIDERED FOR DISALLOWANCE. H) THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V/S. DCIT 328 ITR 81 , ADJUDICATED FOLLOWING SUBSTANTIAL QUESTION OF LAW. (A)WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE TRIBUNAL OUGHT TO HAVE HELD THAT AS THE LIMITED I SSUE RAISED BY RESPONDENT NO. 1 IN THE ASSESSMENT ORDER WAS AS TO THE QUANTUM OF THE EXEMPTION UNDER SECTION 10(33) THAT WAS AVAILAB LE AND NOT TO DISALLOW ANY PART OF THE EXPENDITURE CLAIMED, HENCE IT WAS NOT OPEN TO THE REVENUE TO EXPAND THE SCOPE OF APPEAL BY INV OKING THE PROVISIONS OF SECTION 14A OF THE ACT TO DISALLOW TH E EXPENDITURE INCURRED; (B)WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL OUGHT TO HAVE HELD THAT NO DISALLOWANCE CO ULD BE MADE UNDER SECTION 14A OF THE ACT AND HENCE ERRED IN SETTING ASIDE THE ISSUE RELATING TO CALCULATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT TO RESPONDENT NO. 1; (C)WHETHER THE TRIBUNAL ERRED IN DIRECTING RESPONDENT NO. 1 TO APP LY RULE 8D OF THE RULES FOR COMPUTING THE AMOUNT OF DI SALLOWANCE UNDER SECTION 14A OF THE ACT. THE ASSESSEE HAS, IN ADDITION, FILED A PETITION UNDER ARTICLE 226 OF THE CONSTITUTION IN ORDER TO CHALLENGE THE CONSTITUTI ONAL VALIDITY OF THE PROVISIONS OF SECTION 14A AND OF RULE 8D HONBLE JURISDICTIONAL HIGH COURT HELD THAT SECTION 14A ENSURES THAT THE SHAREHOLDER, WHOSE IN COME FROM DIVIDEND IS NOT INCLUDED IN THE TOTAL INCOME OF A P REVIOUS YEAR, SHALL NOT CLAIM A DEDUCTION IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO EARNING SUCH INCOME. SECTION 14A IS FOU NDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS T O TAX NET INCOME, THAT IS TO SAY, GROSS INCOME MINUS THE EXPENDITURE. ON THAT ANALOGY AS THE SUPREME COURT OBSERVED IN WALFORT SHARE & ST OCK BROKERS (P.) LTD.S CASE (SUPRA), THE EXEMPTION IS ALSO IN RESPECT OF NET INCOME AND EXPENSES ALLOWED CAN ONLY BE IN RELATION TO THE EARNING OF TAXABLE INCOME. THEREFORE, IT CANNOT BE SAID THA T AN ABSURDITY ITA NO.4894/MUM/2008 30 WOULD RESULT ON THE APPLICATION OF THE LITERAL INTE RPRETATION OF SECTION 14A [PARA 45]. I) THE CBDT VIDE CIRCULAR NO.5/2013 DT.11.02.14 THROUG H A CLARIFICATION IN RESPECT OF DISALLOWANCE OF EXPENSE S UNDER RULE 14 A OF THE ACT CLARIFIED AS FOLLOWS: SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRE D IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SEC TION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THE FINANCIAL YEAR CIRCULAR NO.5/2014 [F.NO.225/182/2013-ITA.II], DATE D 11-2-2014 SECTION 14A OF THE INCOME-TAX ACT, 1961 ['ACT'] PRO VIDES FOR DISALLOWANCE OF EXPENDITURE IN RELATION TO INCOME N OT 'INCLUDIBLE' IN TOTAL INCOME. 2. A CONTROVERSY HAS ARISEN IN CERTAIN CASES AS TO WHETHER DISALLOWANCE CAN BE MADE BY INVOKING SECTION 14A OF THE ACT EVEN IN THOSE CASES WHERE NO INCOME HAS BEEN EARNED BY A N ASSESSEE WHICH HAS BEEN CLAIMED AS EXEMPT DURING THE FINANCI AL YEAR . 3. THE MATTER HAS BEEN EXAMINED IN THE BOARD. IT IS P ERTINENT TO MENTION THAT SECTION 14A OF THE ACT WAS INTRODUCED BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01.04.1962 . THE PURPOSE FOR INTRODUCTION OF SECTION 14A WITH RETROSPECTIVE EFFE CT SINCE INCEPTION OF THE ACT WAS CLARIFIED VIDE CIRCULAR NO. 14 OF 20 01 AS UNDER: 'CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME, AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RE SPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX IN CENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CATEGORIES OF INCOME I S BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOM E BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGA INST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLES OF TAX ATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPEND ITURE, IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME'. ITA NO.4894/MUM/2008 31 THUS, LEGISLATIVE INTENT IS TO ALLOW ONLY THAT EXPE NDITURE WHICH IS RELATABLE TO EARNING OF INCOME AND IT THEREFORE FOL LOWS THAT THE EXPENSES WHICH ARE RELATABLE TO EARNING OF EXEMPT I NCOME HAVE TO BE CONSIDERED FOR DISALLOWANCE, IRRESPECTIVE 6F THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YE AR OR NOT. 4. THE ABOVE POSITION IS FURTHER CLARIFIED BY THE U SAGE OF TERM 'INCLUDIBLE' IN THE HEADING TO SECTION 14A OF THE A CT AND ALSO THE HEADING TO RULE-8D OF I.T. RULES, 1962 WHICH INDICA TES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME, FOR DISALLOWANCE TO BE TR IGGERED. ALSO, SECTION 14A OF THE ACT DOES NOT USE THE WORD 'INCOM E OF THE YEAR' BUT 'INCOME UNDER THE ACT'. THIS ALSO INDICATES THA T FOR INVOKING DISALLOWANCE UNDER SECTION 14A, IT IS NOT MATERIAL THAT ASSESSEE SHOULD HAVE EARNED SUCH EXEMPT INCOME DURING THE FI NANCIAL YEAR UNDER CONSIDERATION. 5. THE ABOVE POSITION IS FURTHER SUBSTANTIATED BY A LA NGUAGE USED IN RULE 8D(2)(II) & 8D(2)(III) OF I.T. RULES WHICH ARE EXTRACTED BELOW: '(II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT OF AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: A/B/C WHERE .. B=THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM W HICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARIN G IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR;' (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AV ERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR.' (EMPHASIS ADDED) 6. THUS, IN LIGHT OF ABOVE, CENTRAL BOARD OF DIREC T TAXES, IN EXERCISE OF ITS POWERS UNDER SECTION 119 OF THE ACT HEREBY CLARIFIES THAT RULE 8D READ WITH SECTION 14A OF THE ACT PROVI DES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EXEMPT INCOME . ITA NO.4894/MUM/2008 32 7. THIS MAY BE BROUGHT TO THE NOTICE OF ALL CONCERNED . THE RATIO OF THE ABOVE JUDGEMENTS EMPHASISES THAT F OR COMPUTATION OF INCOME ONE HAS TO FOLLOW THE SCHEME UNDER VARIOU S HEADS GIVEN U/S 14 OF THE ACT. OUT OF THE TOTAL RECEIPTS FROM VARIO US SOURCES ONE HAS TO CATEGORIZE THE HEAD UNDER WHICH SUCH RECEIPT WILL F ALL AND FOR COMPUTING THE INCOME UNDER THAT HEAD THE EXPENDITUR E / ALLOWANCE / DEDUCTION REQUIRED TO BE REDUCED, IF ALLOWABLE UNDE R SUCH HEAD. THERE CAN BE NIL RECEIPT FROM A SOURCE DURING PREVIOUS YE AR BUT NATURE OF SUCH RECEIPT ACCRUES OR ARISES EARLIER OR IN LATER YEARS WILL DETERMINE THE HEAD UNDER WHICH INCOME HAS TO BE COMPUTED. TH E SHIFT OF NATURE OF RECEIPT I.E. INVESTMENT CONVERTED INTO STOCK IN TRADE, HAS TO BE LIMITED FOR SHIFTING OF HEAD FROM THAT YEAR ONLY. IT IS THEREFORE DIFFERENCE BETWEEN RECEIPT AND INCO ME IS TO BE CONSIDERED WITH THE SCHEME OF VARIOUS HEADS. THERE IS DIFFERENCE BETWEEN RECEIPT OF DIVIDEND AND INCOME FROM DIVIDEN D. SIMILARLY IT IS THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME WHICH IS REQUIRED TO BE CONSIDERED U/S 14 A OF THE IT ACT. IN SEC 10( 34) OF THE ACT IT IS INCOME BY WAY OF DIVIDEND AND NOT THE RECEIPT OF DI VIDEND WHICH IS EXEMPTED. FURTHER SUCH INCOME BY WAY OF DIVIDEND IS REFERRED TO THE PROVISION OF SECTION 115-O OF THE ACT I E NOT ALL T HE INCOME BY WAY OF DIVIDEND IS EXEMPT SEC 115-O (1) OF THE IT ACT DEAL S WITH THE ADDITIONAL INCOME TAX CHARGEABLE ON DOMESTIC COMPANY ON ANY AM OUNT DECLARED, DISTRIBUTED, OR PAID BY SUCH COMPANY BY WAY OF DIVI DEND. FOR DOMESTIC COMPANY THIS IS IN THE FORM OF APPROPRIATION WHILE THE SAME IS RECEIPT IN THE HANDS OF SHAREHOLDER. SEC 115-O (5) OF THE A CT RESTRICT ANY DEDUCTION UNDER ANY OTHER PROVISION OF THE ACT TO B E ALLOWED TO SHAREHOLDER IN RESPECT OF SUCH DIVIDEND RECEIPT. IT IS THEREFORE FOR COMPUTING INCOME BY WAY OF DIVIDEND FROM THE DIVIDE ND RECEIPT SO TO CLAIM EXEMPT U/S 10(34) OF THE ACT, NO EXPENDITURE CAN BE ALLOWED UNDER ANY PROVISION. WITH DUE REGARDS TO RATIO OF VARIOUS CASE LAWS RELI ED ON BY APPELLANT, SUCH PROPOSITION WERE NEVER CONSIDERED BY THE RESPE CTIVE COURT OR HONBLE ITAT AND THEREFORE THE RATIOS ARE DISTINGUI SHABLE ON THIS ISSUE. AS PER JUDICIAL HIERARCHY, RATIO OF HONBLE SUPREME COURT WHICH IS NOT CONSIDERED BY HONBLE HIGH COURTS AND TRIBUNALS (AS RELIED ON BY APPELLANT) REQUIRED TO DISTINGUISH. THE RATIO OF J URISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. IS BINDING. THE RATIO OF VARIOUS CASES RELIED ON BY APPELLANT ARE OF OTHER H ONBLE COURTS AND TRIBUNALS BUT NO SUCH RATIOS ARE LAID DOWN BY HONB LE JURISDICTIONAL HIGH COURT OR HONBLE ITAT, MUMBAI. RATHER THE RATIOS O F HONBLE ITAT ARE IN FAVOUR OF REVENUE PREPOSITION. (4) THE LD. CIT(A) ORDER DT. 02.05.2008 A) AT PARA 8 PAGE 10,LD.CIT(A) CONSIDERED FOLLOW ING UNDISPUTED FACTS I. TOTAL LOAN FUND OF RS.1062.8 CRS. ITA NO.4894/MUM/2008 33 II. INTEREST PAID ON BORROWED CAPITAL AND CLAIMED I N P&L A/C. IS RS.75.20 CRS. III. INVESTMENT AS PER THE BALANCE SHEET AS ON 31. 03.2004 IS OF RS.1727.82 CRS. IV DIVIDEND RECEIPT IS OF RS.6.16 CRS. V. THE ASSESSEE IN ITS COMPUTATION OF INCOME (ANNEX URE B AT SR.32 OF APPELLANTS PAPER BOOK) SUO-MOTO DISALLOWED EXPENDI TURE FOR EARNING DIVIDENDS AT RS.39 CRS. VI. THE ASSESSEE ADMITTED THAT INTEREST PAID ON MON EY BORROWED FOR THE PURCHASE OF SHARE IN GROUP CONCERN/COMPANIE S FOR THE PURPOSE OF CONTROLLING INTEREST AND CLAIM THE SAME DEDUCTABLE U/S. 36(1)(III) OF THE ACT, HENCE DIRECT NEXUS IS T HERE BETWEEN BORROWED FUND AND INVESTMENT. VII. BEFORE THE ASSESSING OFFICER, THE ASSESSEE CLA IMED THAT INTEREST PAID FOR BUSINESS ACTIVITY OF CONTROLLING INTEREST IN THE GROUP COMPANIES BY PURCHASE OF SHARES HENCE THE SAME IS A LLOWABLE U/S.36(1)(III). VIII. THE ASSESSEE PLACE RELIANCE ON VARIOUS CASE L AWS WHICH WERE PRIOR TO THE INSERTION OF SEC.14A OF THE ACT. ALL THESE CASES WERE DISTINGUISHED BY THE ASSESSING OFFICER. IX. THE AO PLACED RELIANCE ON THE CASE OF EVERPLUS SECURITIES & FINANCE LTD. V/S. DCIT 101 ITD 15 (DELHI) AND ITS R ATIO WAS CONSIDERED AS APPLICABLE IN THE CASE OF ASSESSEE CO NSIDERING THE SIMILARITY IN THE FACTS OF THE CASE B) THE LD. CIT (A) AT PARA 8.1 PAGE 12 HELD THAT I. THE AO HAS ESTABLISHED THE NEXUS OF ENTIRE BORROWED FUNDS HAVING BEEN INVESTMENT IN THE SHARES AGAINST WHICH EXEMPTED DIVIDEND INCOME WAS EARNED. II. IT IS NOT THAT THE APPELLANT IS EITHER ENGAGED IN THE TRADING OF SHARES ALSO. III THEREFORE, THERE IS NO REQUIREMENT OF CALCULATI NG THE INTEREST ATTRIBUTABLE TO EARNING OF DIVIDEND OR BUSINESS OR ANY OTHER INCOME. IV. THE ENTIRE INTEREST EXPENDITURE HAVING BEEN REL ATABLE TO EARNING OF DIVIDEND INCOME WHICH IS EXEMPT U/S. 10( 34) OF THE I.T. ACT, 1961, THE ACTION OF THE AO IN DISALLOWING THE SAME IS JUSTIFIED. ITA NO.4894/MUM/2008 34 V. RATIO OF HONBLE ITAT ORDER IN THE CASE OF M/S. EVERPLUS SECURITIES AND FINANCE LTD. (SUPRA) IS SQUARELY APP LICABLE IN THE FACTS AND CIRCUMSTANCES OF THE ASSESSEES CASE. VI. EVEN THE CLAIM OF THE APPELLANT THAT NET INT EREST EXPENDITURE OF RS. 67.93 CRS. CLAIMED AS ALLOWABLE U/S. 36(1)(I II) SHOULD BE ALLOWED IS ALSO BASELESS. THE ASSESSEE HAS NOT CLA IMED SUCH NETTING EITHER IN ITS RETURN OF INCOME OR DURING IT S ASSESSMENT PROCEEDINGS BEFORE THE AO . C) IN REFERENCE TO DISALLOWANCE TO ADMINISTRATIVE EXPENDITURE, LD.CIT(A) AT PARA 9 PAGE 13 CONSIDERED (IN BRIEF) F OLLOWING FACTS AND SUBMISSION OF THE ASSESSEE. I. DISALLOWANCES ARE ON THE BASIS OF CONJECTURE AND SURMISES. II. HONBLE ITAT DELHI BENCH RATIO IN THE CASE OF V IMCO SEEDLING LTD. V/S. DCIT 100 ITD 267 IS APPLICABLE WHICH PER MITS THE DISALLOWANCES FOR EXPENDITURE WHICH HAS DIRECT NEXU S APPROXIMATE IN RELATION TO THE EARNING OF TAX FREE INCOME. III. THE AMENDMENT BROUGHT TO SEC,14A BY THE FINANC E ACT 2006 W.E.F 1.4.2007 CONFERRED SUCH DISALLOWANCES FOR THE FIRST TIME FROM 1.4.2007. IV. THE RATIO OF ITAT COCHIN IN THE CASE OF DHANLAX MI BANK LTD. V/S. ACIT -12 SOT 625 DOES NOT PERMIT SUCH DISALLOW ANCES IN THE ABSENCE OF ANY METHOD WHICH WAS SUBSEQUENTLY PR OVIDED BY SEC.40A (2) OF THE ACT. V. THE ASSESSEE VIDE ITS LETTER DT.18.2.2008 SUBMIT TED BEFORE THE LD.CIT(A) ABOUT COMPLETE DETAIL OF HEAD OFFICE EXPE NDITURE OF RS.93.39 CRS. EXPENDITURESUO-MOTO DISALLOWED BY THE ASSESSEE IN THE RETURN OF INCOME BY RS.5.67 CRS. (EXCLUDING RS.39 CRS) AND DISALLOWANCES OF EXPENSES MADE BY THE AO IN THE IMPUGNED ASSESSMENT ORDER OF RS. 0.74 CRS. (DISALLO WANCE OF BALANCE INTEREST OF RS.36.21 CRS EXCLUDED )FOR THE CONTENTION DISALLOWANCE CAN BE CONSIDERED ON AN AMOUNT OF RS.1 0.26 CRS. AT THE RATE OF 7.57 % I.E DISALLOWANCE OF RS.776885 0/- INSTEAD OF RS.13197494/. D) THE LD. CIT(A) AT PARA 10 PAGE 15 HELD THAT I. THE APPELLANT HAS MERELY CONTENDED THAT THE DISA LLOWANCE PURELY ON CONJECTURES AND SURMISES WITHOUT ESTABLIS HES ANY NEXUS BETWEEN THE EXPENDITURE AND HEAD OFFICE AND T HE TAX FREE INCOME CANNOT BE MADE AND SUSTAINED. HOWEVER, THE APPELLANT HAS NOT DENIED THAT PARTS OF THESE EXPENS ES ARE ALSO RELATED TO THE INVESTMENT. II. IN REFERENCE TO RELIANCE ON VIMCO SEEDLING LTD. , THE AMENDMENT BROUGHT IN THE SEC.14A BY FINANCE ACT, 20 06, THE ISSUE WAS EXAMINED BY THE HONBLE ITAT MUMBAI IN TH E CASE OF ACIT V/S. CITICORP FINANCE LTD. 108 ITD 457 WHIC H MANDATES THAT TERM EXPENDITURE OCCURRING IN SEC.14A TAKE IN ITS SWEEP NOT ONLY DIRECT EXPENDITURE BUT ALSO ALL FORMS OF E XPENDITURE REGARDLESS WHETHER THEY ARE FIXED, VARIABLE, DIRECT , INDIRECT, ITA NO.4894/MUM/2008 35 ADMINISTRATIVE, MANAGERIAL OR FINANCIAL EXPENDITURE . THE LD. CIT(A) SUPPORTED THIS BY REFERRING TO HONBLE ITAT , MUMBAI H BENCH ORDER DT.30.10.2006 IN THE CASE OF MAREZBAN B HARUCHA. OTHER SUCH CASES WERE ALSO RELIED ON TO HOLD THAT S UCH DISALLOWANCES ARE JUSTIFIED EVEN IN THE CASE WHERE COMMON FUND ACCOUNTING SYSTEM IS MAINTAINED. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. SO FA R AS THE ISSUE OF ALLOWANCE OR DISALLOWANCE OF INTEREST EXPENDITUR E U/S 36(1) (III) IN RELATION TO THE STRATEGIC INVESTMENTS IN GROUP C OMPANIES IS CONCERNED, ADMITTEDLY, THE LOWER AUTHORITIES HAVE M ADE NO ADDITION ON ACCOUNT OF ANY DISALLOWANCE UNDER SECTION 36(1)( III) OF THE ACT. HOWEVER IN THE BODY OF THE ORDER OF THE AO AS WELL OF THE IMPUGNED ORDER OF THE LD. CIT(A), DISCUSSION HAS BE EN MADE REGARDING THE NON-ADMISSIBILITY OF CLAIM OF DEDUCT ION OF THE INTEREST EXPENDITURE EVEN U/S 36(1)(III) OF THE ACT . RELIANCE HAS ALSO BEEN PLACED BY THE AO IN THIS RESPECT ON THE C ERTAIN DECISIONS OF THE TRIBUNAL MORE PARTICULARLY IN THE CASE OF E VERPLUS SECURITIES & FINANCE LTD (101 ITD 151) (SUPRA). THOUGH, NO ADDITION HAS BEEN BY THE AO ON ACCOUNT OF DISALLOWA NCE OF INTEREST EXPENDITURE EVEN U/S 36(1)(III), YET THIS ISSUE BEI NG DISCUSSED BY THE LOWER AUTHORITIES, FOR THE SAKE OF COMPLETENESS , WE DEEM IT FIT TO ADJUDICATE THIS ISSUE ALSO SO THAT NO ISSUE MAY BE LEFT UNADDRESSED. 11. THE LD. DR, IN THIS RESPECT, HAS PLACED STRONG RELIANCE ON THE OBSERVATIONS OF THE LOWER AUTHORITIES AND ALSO ON H IS WRITTEN SUBMISSIONS AS REPRODUCED ABOVE. THE LD. AR, HOWEVER, IN THIS RESPECT, HAS REITERATE D HIS SUBMISSIONS THAT THE ASSESSEE IS AN INVESTMENT & FINANCE COMPAN Y AND A PROMOTER OF NEW COMPANIES IN HI-TECH FIELD. AS A BU SINESS ACTIVITY, THE ASSESSEE HOLDS INVESTMENT IN THE SHARE CAPITAL OF THE COMPANIES PROMOTED BY IT AS CONTROLLING INTEREST AND THEREFOR E, TAKES ACTIVE ITA NO.4894/MUM/2008 36 INTEREST IN THE BUSINESS OF THESE COMPANIES. THE A SSESSEE HAD MADE INVESTMENTS ONLY IN THE WHOLLY OWNED SUBSIDIARIES A ND IN ASSOCIATED COMPANIES. THAT THE ENTIRE INVESTMENTS W ERE MADE FOR BUSINESS PURPOSES FOR HAVING CONTROL OVER SUBSIDIAR Y AND ASSOCIATED COMPANIES THE UNDISPUTED FACTS ARE THAT THE ASSESSEE IS AN INVESTMENT & FINANCE COMPANY AND A PROMOTER OF N EW COMPANIES IN HI-TECH FIELD. AS A BUSINESS ACTIVITY, THE ASSESSEE HOLDS INVESTMENT IN THE SHARE CAPITAL OF THE COMPAN IES PROMOTED BY IT AS CONTROLLING INTEREST AND THEREFORE, TAKES ACT IVE INTEREST IN THE BUSINESS OF THESE COMPANIES. THE ENTIRE INVESTMENT S WERE MADE FOR BUSINESS PURPOSES FOR HAVING CONTROL OVER SUBSI DIARY AND ASSOCIATED COMPANIES. 12. WE FIND THAT THE ABOVE ISSUE IS NOW SQUARELY CO VERED BY THE DECISION OF THE JURISDICTIONAL HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT, PANAJI, GOA VS. PHIL CORPN. LTD. (20 11) 202 TAXMAN 368 WHEREIN IT HAS BEEN HELD THAT WHERE THE INVESTMENT IN SHARES OF SISTER/SUBSIDIARY COMPANY IS MADE TO HAVE CONTROL OVER THAT COMPANY AND FURTHER THAT SUCH AN INVESTMENT WA S ACCORDINGLY PART OF THE BUSINESS OF THE ASSESSEE, IN THAT EVENT THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST PAID ON THE BORRO WED AMOUNT UNDER SECTION 36(1)(III) OF THE ACT. WE, FURTHER F IND THAT RECENTLY THE HONBLE DELHI HIGH COURT IN THE CASE OF EICHER GOODEARTH LTD. VS. CIT (2015) 60 TAXMAN.COM 268 (DEL.) HAS H ELD THAT IF THE EXPENDITURE IS INCURRED FOR THE PURPOSE OF PROMOTIO N OF BUSINESS- MORE SPECIFICALLY TO RETAIN CONTROL OR AS PART OF H IS STRATEGIC INVESTMENT OF THE ASSESSEE COMPANY, SUCH EXPENSES B Y WAY OF INTEREST OUT GO WOULD HAVE TO BE TREATED AS ALLOWAB LE UNDER SECTION 36(1)(III) OF THE ACT. THE LD. DR HAS ALSO PLACED RELIANCE ON THE DECISION OF THE ITA NO.4894/MUM/2008 37 TRIBUNAL IN THE CASE OF KANKHAL INVESTMENT & TRADIN G CO. P. LTD. V/S. ACIT (2009) 116 ITD 492 (MUM) TO CONTEND THA T WHERE A SPECIFIC HEAD IS PROVIDED IN RESPECT OF A PARTICULA R INCOME, THEN SUCH INCOME MUST BE COMPUTED UNDER THAT VERY HEAD I RRESPECTIVE OF THE NATURE OF INCOME AND THAT THE DEDUCTION COU LD BE ALLOWED UNDER THE HEAD PROFITS & GAINS FROM BUSINESS/PROFE SSION PARTICULARLY WHEN NEITHER OF THE RECEIPTS FROM BUSI NESS OF HOLDING OF INVESTMENTS IN SHARES, EITHER BY WAY OF DIVIDEND S OR SALE PROCEEDS OF SHARES WERE NOT ASSESSABLE UNDER THE HE AD PROFITS & GAINS FROM BUSINESS/PROFESSION BUT WERE ASSESSABLE EITHER UNDER THE HEAD INCOME FROM OTHER SOURCES OR UNDER THE H EAD CAPITAL GAINS. HOWEVER, WE FIND THAT THE ABOVE CONTENTIONS HAVE BE EN DULY DISCUSSED BY THE HONBLE DELHI HIGH COURT IN THE CA SE OF EICHER GOODEARTH LTD. VS. CIT HAS DISCUSSED THE ABOVE ISS UE AND HAS HELD AS UNDER : THE JUDGMENTS IN COCANADA RADHASWAMI BANK (SUPRA) AND UNITED COMMERCIAL BANK (SUPRA) AND THE SUBSEQUENT JUDGMENT S IN WESTERN STATES TRADING (P) LTD. V. CIT [1971] 80 ITR 21 (SC ) AND BROOKE BOND & CO. LTD. V. CIT [1986] 162 ITR 373/28 TAXMAN 426E ( SC) ARE AUTHORITIES THAT THE HEADS OF INCOME ENUMERATED IN THE INCOME T AX ACT IN SECTION 14 DO NOT DENOTE THEIR ESSENTIAL CHARACTERI STICS. IN OTHER WORDS THAT A BUSINESS OR AN INDIVIDUAL RECEIVES SOM E AMOUNT WHICH MAY BE ASSESSED AS INCOME OF A PARTICULAR KIND WOUL D NOT BE CONCLUSIVELY DETERMINATIVE OF THAT CHARACTER. IN TH E FACTS OF THE PRESENT CASE, THAT PRINCIPLE, IN THE OPINION OF THE COURT, WOULD SQUARELY APPLY. IF INDEED THE ASSESSEE HAD INVESTED AND SUBSCRIBED TO THE RIGHTS ISSUE IN ORDER TO RETAIN THE CONTROL IT ORIGINALLY DID IN EICHER TRACTORS LTD, IT CAN STILL BE SAID THAT T HE EXPENDITURE WAS TOWARDS PROMOTION OF BUSINESS AND, THEREFORE, PROPE RLY ENTITLED TO BE TREATED AS SUCH UNDER SECTION 36 (1) (III). AT THE SAME TIME, WE ARE ALSO OF THE OPINION THAT THERE HAS BEEN INADEQUATE CONSIDERATION AND DISCUSSION ON THIS ASPECT BEFORE THE LOWER AUTHORIT IES, PARTICULARLY THE AO AND THE CIT (A). AS HAS BEEN POINTED OUT ON BEHA LF OF THE REVENUE, AT THAT STAGE, THE PARTIES WERE MORE CONCE RNED WITH WHETHER NET OR GROSS EXPENDITURE HAD TO BE DEDUCTED UNDER SECTION 80M. AT THE SAME TIME, THE ASSESSEE, WE NOTICE DID PUT HIS CONTENTION BOTH TO THE CIT (A) AND ITAT. ITA NO.4894/MUM/2008 38 10. THIS COURT, THEREFORE, IS OF THE OPINION THAT THE L AW AS DECLARED BY THE SUPREME COURT IN SUCH CASES IS THAT IF THE E XPENDITURE IS INCURRED FOR THE PURPOSE OF PROMOTION OF BUSINESS- MORE SPECIFICALLY AS IN THE FACTS OF THIS CASE TO RETAIN CONTROL OR A S PART OF A STRATEGIC INVESTMENT OF THE ASSESSEE/COMPANY, SUCH EXPENSES - BY WAY OF INTEREST OUTGO WOULD HAVE TO BE TREATED UNDER SECTI ON 36 (1) (III) AND NOT UNDER SECTION 57 . THE MATTER IS, THEREFORE, REMITTED TO THE AO FOR FULL APPRAISAL OF THE FACT SITUATION AND FIN DINGS IN THE LIGHT OF OUR CONCLUSIONS. IF, AS A RESULT OF THE AO'S DETERM INATION, IT IS FOUND THAT SUCH EXPENDITURE IS INCURRED, THE NET EXPENDIT URE IS OBVIOUSLY TO BE TAKEN INTO CONSIDERATION UNDER SECTION 80M OF TH E ACT IN THE FACTS OF THE PRESENT CASE. 13. THE ABOVE ISSUE IS THUS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE BY THE ABOVE REFERRED TO DECISIONS OF THE HONBLE HIGH COURTS INCLUDING THAT OF JURISDICTIONAL BOMBAY HIGH COURT WHICH HOLDS BINDING PRECEDENT OVER THIS TRIBUNAL. 14. SO FAR AS THE RELIANCE OF THE LD. DR ON THE DEC ISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF AMRITABEN R SHAH (SUPRA) IS CONCERNED, THE ISSUE BEFORE THE HONBLE HIGH COURT WAS THAT AS TO WHETHER THE EXPENDITURE INCURRED FOR BOR ROWING MONEY FOR PURCHASING SHARES FOR ACQUIRING CONTROLLING INT EREST IN A COMPANY CAN BE HELD TO BE AN EXPENDITURE INCURRED W HOLLY OR EXCLUSIVELY FOR EARNING INCOME FROM DIVIDEND. THE HONBLE HIGH COURT HELD THAT SECTION 57 SETS OU T THE DEDUCTIONS WHICH ARE PERMISSIBLE IN THE COMPUTATION OF THE INCOME CHARGEABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCE S'. CLAUSE (III) OF SECTION 57 PROVIDES THAT IN COMPUTING INCO ME UNDER THE HEAD 'INCOME FROM OTHER SOURCES' DEDUCTION IS TO BE MADE IN RESPECT OF EXPENDITURE INCURRED WHOLLY AND EXCLUSIV ELY FOR MAKING OR EARNING SUCH INCOME PROVIDED THE EXPENDITURE IS NOT IN THE NATURE OF CAPITAL EXPENDITURE. THAT , SINCE THERE WAS NO DISPUTE THAT THE SHARES IN QUESTION WERE PURCHASED BY THE A SSESSEE FOR THE PURPOSE OF ACQUIRING CONTROLLING INTEREST IN THE CO MPANY AND NOT ITA NO.4894/MUM/2008 39 FOR EARNING DIVIDEND HENCE, THE EXPENDITURE INCURR ED BY WAY OF INTEREST ON THE LOAN TAKEN BY THE ASSESSEE FOR THE SAID PURPOSE CANNOT BE HELD TO BE AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING INCOME BY WA Y OF DIVIDENDS, AND, THEREFORE, IT WOULD NOT BE ALLOWABL E AS A DEDUCTION UNDER SECTION 57(III) OF THE ACT. HOWEVER, THE HON BLE BOMBAY HIGH COURT IN PARA 4 OF THE JUDGEMENT (SUPRA) HAS O BSERVED AS UNDER: 4. IT MAY BE PERTINENT TO MENTION THE DISTINCTION IN THE LANGUAGE USED BY THE LEGISLATURE IN SECTIONS 37(1) OF THE ACT AND 57(III) OF THE ACT. SECTION 37 PROVIDES FOR DEDUCTION OF EXPENDITURE INCURRED WHO LLY AND EXCLUSIVELY 'FOR THE PURPOSE OF BUSINESS' WHERE AS SECTION 57(III) PROVIDES FOR DEDUCTION ONLY OF EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY 'FOR THE PURPOSE OF MAKING OR EARNING S UCH INCOME'. 'SUCH INCOME' REFERS TO 'INCOME FROM OTHER SOURCES'. THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS NARROWER THAN THE EXPRE SSION 'FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME'. IN ORDER THAT AN EXPENDITURE MAY BE ADMISSIBLE UNDER SECTION 57(III) IT IS NECESSARY THAT THE PRIMARY MOTIVE OF INCURRING IT IS DIRECTLY TO EARN INCOME FALLING UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. THAT IS NOT SO UNDER SECTION 37 WHICH ALLOWS DEDUCTION OF EXPENDITURE 'INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS'. UNDER SECTION 57(III) , DEDUCTION WILL NOT BE ALLOWED IF THE EXPENDITURE IS NOT INCURRED FOR THE PURPOSE OF EARNING INCOME F ALLING UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. 15. THE HONBLE HIGH COURT HAS THUS MADE A DISTINCT ION BETWEEN THE PROVISIONS OF SECTION 57(III) AND THAT OF SECTION 37 OF THE ACT. THE HONBLE HIGH COURT HAS THUS OBSERVED T HAT UNDER SECTION 57(III) IT IS NECESSARY THAT THE PRIMARY MO TIVE OF INCURRING IT IS DIRECTLY TO EARN INCOME FALLING UNDER THE HEAD ' INCOME FROM OTHER SOURCES'. THAT IS NOT SO UNDER SECTION 37 WHI CH ALLOWS DEDUCTION OF EXPENDITURE 'INCURRED WHOLLY AND EXCLU SIVELY FOR THE PURPOSES OF THE BUSINESS'. IN THE CASE OF THE ASSES SEE, ADMITTEDLY, THE STRATEGIC INVESTMENTS WERE MADE FOR BUSINESS PU RPOSES. THE ASSESSEE BEING AN INVESTMENT & FINANCE COMPANY AND A PROMOTER OF NEW COMPANIES, AS A BUSINESS ACTIVITY, HOLDS INV ESTMENT IN THE ITA NO.4894/MUM/2008 40 SHARE CAPITAL OF THE COMPANIES PROMOTED BY IT AS CO NTROLLING INTEREST AND THEREFORE, TAKES ACTIVE INTEREST IN TH E BUSINESS OF THESE COMPANIES. 16. THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT (SUPRA) HAS HELD THAT NO DISALLOWANCE OF I NTEREST EXPENDITURE IS CALLED FOR ON ACCOUNT OF ADVANCING L OANS TO SISTER CONCERNS, IF IT IS FOUND THAT SAID ADVANCES WERE MA DE FOR COMMERCIAL EXPEDIENCY AND THOSE SISTER CONCERNS HA VE NOT USED THE AMOUNTS FOR PERSONAL PURPOSES. THE HONBLE APEX COURT HAS CATEGORICALLY HELD THAT WHAT IS TO BE SEEN AS TO WH ETHER THE ASSESSEE HAS ADVANCED LOAN TO ITS SISTER CONCERN OR TO A SUB SIDIARY AS A MEASURE OF COMMERCIAL EXPEDIENCY? THE HONBLE SUPR EME COURT, WHILE REFERRING TO SECTION 37 OF THE ACT, HAS HELD THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUDES E XPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMATERIAL IF A THIRD PARTY ALSO GETS BENEFITTED TH EREBY. THE HONBLE SUPREME COURT FURTHER EXPLAINED THE EXPRESS ION COMMERCIAL EXPEDIENCY AS UNDER: THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRE SSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET I T IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 17. THE HONBLE SUPREME COURT THEREAFTER CONSIDERIN G THE VARIOUS ASPECTS OF THE MATTER HAS CONCLUDED AS UNDE R: WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COU RT IN CIT VS. DALMIA CEMENT (BHART) LTD. (2002) 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPEND ITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFI ABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN TH E POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE I TS PROFIT. THE ITA NO.4894/MUM/2008 41 INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE S HOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD AC T. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED AB OVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PR OFITS. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINIO N THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLO WED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DE PENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTA NCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMER CIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANC ED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIR CUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS S UBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONE Y TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY F OR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDIN ARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. 18. A PERUSAL OF THE ABOVE CONCLUSION REVEALS THAT THOUGH AS PER THE PROVISIONS OF SECTION 37, IT IS NOT NECESSARY T HAT THE LOAN AMOUNT SHOULD BE EXCLUSIVELY USED IN THE BUSINESS O F THE ASSESSEE. HOWEVER, THE REQUIREMENT IS THAT IT SHOULD BE USED FOR THE PURPOSE OF THE BUSINESS WHICH NEED NOT NECESSARILY BE THE B USINESS OF THE ASSESSEE ITSELF. WHAT IS TO BE SEEN IS THAT THE TR ANSFER OF BORROWED FUNDS TO A SISTER CONCERN WAS OUT OF COMMERCIAL EXP EDIENCY. THE HONBLE SUPREME COURT THEREAFTER WISHED TO MAKE IT CLEAR THAT THE ORDER OF THE HONBLE SUPREME COURT SHOULD NOT BE IN TERPRETED AS THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT A LL DEPENDS UPON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. TH E TWO CONDITIONS WHICH ARE TO BE FULFILLED ARE THAT THE LOAN SHOULD BE ADVANCED OUT OF COMMERCIAL EXPEDIENCY AND SECONDLY THE SISTER CO NCERN SHOULD USE THE LOAN FOR ITS BUSINESS PURPOSE AND NOT FOR T HE PERSONAL PURPOSE OF ITS DIRECTORS OR PARTNERS ETC. THE HON BLE SUPREME ITA NO.4894/MUM/2008 42 COURT THEREAFTER HELD IN THE SAID CASE THAT SINCE T HE SISTER CONCERN WAS A SUBSIDIARY OF THE ASSESSEE COMPANY AND THE AS SESSEE COMPANY BEING THE HOLDING COMPANY HAD A DEEP INTERE ST IN ITS SUBSIDIARY, HENCE THE LOAN ADVANCED TO SUBSIDIARY W AS OUT OF COMMERCIAL EXPEDIENCY. 19. THOUGH, IN THE CASE IN HAND, ISSUE IS NOT REGAR DING THE INTEREST FREE ADVANCE TO THE SISTER CONCERNS, YET, THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE SUPREME COURT CAN BE V ERY WELL APPLIED IN THIS CASE AS THE ASSESSEE BEING AN INVES TMENT & FINANCE COMPANY AND A PROMOTER OF NEW COMPANIES AND HAVING INTEREST IN THE BUSINESS OF THESE COMPANIES HAS MADE THE INVEST MENTS FOR BUSINESS PURPOSES FOR HAVING CONTROL OVER THESE SUB SIDIARY AND ASSOCIATED COMPANIES. IN THE LIGHT OF THE PROPOSITI ON OF LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT, PANAJI, GOA VS. PHIL CORPN. LTD. (SUPRA), HONBLE DELHI HIGH COURT IN THE CASE OF EICHER GOODEARTH LTD. VS. CIT (SUPRA) AND THE HONBLE SUPREME COURT IN S.A. BUILDERS VS. CI T (SUPRA);IT IS HELD THAT NO DISALLOWANCE IN THIS CASE IS ATTRACTE D U/S 36(III) OF THE ACT. 20. EVEN OTHERWISE, THE LOWER AUTHORITIES THOUGH HA VE DISCUSSED IN THEIR RESPECTIVE ORDERS THE ISSUE OF DISALLOWANC E U/S 36(III) BUT HAVE FINALLY NOT MADE ANY SUCH DISALLOWANCE U/S 36( III). THE DISALLOWANCE ON THIS ISSUE HAS BEEN MADE ONLY UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. 21. NOW, COMING TO THE MERIT OF DISALLOWANCE MADE U /S 14A OF THE ACT, THERE IS NO DISPUTE HAS BEEN RAISED BY THE ASSESSEE IN THIS CASE AS REGARDS TO THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF WALFORT SHARE & STOCK BROKERS PVT. ITA NO.4894/MUM/2008 43 LTD. (SUPRA) AS WELL AS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT (SUPRA) THAT NO DEDUCTION IS TO BE ALLOWED IN RESPE CT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCO ME. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAD EARNED SUBSTANTIAL DIVIDEND INCOME DURING THE YEAR OUT OF THE INVESTME NTS MADE. THE ASSESSEE HAS NOT CONTESTED THE APPLICABILITY OF THE PROVISIONS OF SECTION 14A IN RELATION TO THE EXEMPT INCOME RECEIV ED. THE ASSESSEE HAS CHOSEN NOT TO REBUT THE CONTENTIONS OF THE DR THAT ONLY THE NET DIVIDEND INCOME CAN BE ALLOWED TO BE E XEMPTED FROM TAX AND NOT THE GROSS DIVIDEND RECEIPTS. THE LD. AR HAS ALSO NOT ADVANCED ANY ARGUMENTS REGARDING THE APPLICABILITY OF THE PROVISIONS OF SECTION 115-O OF THE ACT. 22. SINCE THE ASSESSEE HAS NOT CONTESTED THE APPLI CABILITY OF SECTION 14A OF THE ACT IN RELATION TO THE EXEMPT DI VIDEND INCOME RECEIVED BY IT, HENCE WE DO NOT DEEM IT NECESSARY T O DELIBERATE ON THE CONTENTIONS RAISED BY THE LD. DR REGARDING THE PURPOSE AND OBJECT OF INSERTION OF SECTION 14 A OF THE ACT. EVE N NO DISPUTE HAS BEEN RAISED BY THE ASSESSEE REGARDING THE CONCEPT O F NET EXEMPT INCOME VS. GROSS RECEIPTS/GROSS DIVIDEND RECEIPT. H ENCE, WE DO NOT DEEM IT NECESSARY TO GO INTO FURTHER DISCUSSION IN THIS RESPECT. EVEN NO CONTROVERSY HAS BEEN RAISED BY THE ASSESSEE AS T O WHETHER THE EXPENDITURE INCURRED ON THE FUNDS USED FOR MAKING S TRATEGIC INVESTMENTS MADE IN GROUP COMPANIES/SUBSIDIARIES FO R BUSINESS PURPOSES FOR HAVING CONTROL OVER THEM CAN BE SUBJEC TED TO THE DISALLOWANCE U/S 14A OF THE ACT. UNDER THE CIRCUMST ANCES, IT IS UNDISPUTED THAT CERTAIN DISALLOWANCE OF EXPENDITURE IS ATTRACTED IN RELATION TO EXEMPT DIVIDEND INCOME EARNED BY THE AS SESSEE DURING THE YEAR. NOW, THE QUESTION BEFORE US AS TO WHAT SHOULD BE T HE QUANTUM OF ITA NO.4894/MUM/2008 44 SUCH A DISALLOWANCE AND WHAT METHOD SHOULD BE ADOPT ED TO CALCULATE THE EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME FOR THE PURPOSE OF DISALLOWANCE. 23. THE CONTENTION OF THE LD. DR IN THIS RESPECT IS THAT SINCE THE ENTIRE INVESTMENTS WERE LONG TERM, MADE FOR THE PUR POSE OF HAVING CONTROL IN THE MANAGEMENT OF SUBSIDIARIES/GROUP COM PANIES, HENCE THE ENTIRE INTEREST EXPENDITURE WAS INCURRED IN REL ATION TO EXEMPT DIVIDEND INCOME AND THEREFORE THE AO HAS RIGHTLY DI SALLOWED THE ENTIRE INTEREST EXPENDITURE. 24. ON THE OTHER HAND, THE LD. AR, HAS PLACED STRON G RELIANCE UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PRIVATE LIMITED VS. CIT (SUPRA) AND OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PCIT VS. EMPIRE PACKAGE PVT. LTD. [(SUPRA)] TO CONTEND THAT DISALLOWANCE U/S 14 A CANNOT EXCEED THE EXEMPT INCOME EARNED DUR ING THE YEAR. 25. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BO TH THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORDS ON THIS ISSU E. IT IS PERTINENT TO MENTION HERE THAT ASSESSMENT YEAR INVOLVED IN TH IS CASE IS AY- 2004-05. SUB-SECTION (2) OF SECTION 14A STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME 'IN ACCORDANCE WITH SUCH METHOD AS MAY BE PR ESCRIBED'. HOWEVER SUCH A METHOD HAS BEEN PRESCRIBED IN RULE 8 D OF THE INCOME TAX RULES. IT MAY BE FURTHER OBSERVED THAT I N THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) THE H ON'BLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D R. W. S. 14 A(2) IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY I F THE ASSESSEE'S METHOD IS NOT SATISFACTORY. IT HAS BEEN FURTHER HEL D THAT RULE 8D IS ITA NO.4894/MUM/2008 45 NOT RETROSPECTIVE AND APPLIES FROM A.Y. 2008-09. FO R THE YEARS FOR WHICH RULE 8D IS NOT APPLICABLE AND IN THE EVENT OF THAT THE AO IS NOT SATISFIED WITH THE EXPLANATION/WORKING GIVEN BY THE ASSESSEE, DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE ON A REASONABLE BASIS. ALMOST SIMILAR VIEW HAS BEEN EXPRESSED BY HO N'BLE DELHI HIGH COURT IN THE CASE OF 'MAXOPP INVESTMENT LTD. & OTHERS' VS. CIT (247 ITR 162). HENCE, THE RULE 8 D OF THE INCOM E TAX RULES IS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSID ERATION. DISALLOWANCE UNDER SECTION 14 A, THUS, CAN BE MADE ON SOME REASONABLE BASIS FOR THE YEAR UNDER CONSIDERATION A ND NOT UNDER RULE 8 D AS HELD BY THE HONBLE BOMBAY HIGH COURT I N THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA). 26. IT MAY BE FURTHER OBSERVED THAT THIS IS NOT A C ASE WHERE NO EXEMPT INCOME WAS RECEIVED BY THE ASSESSEE DESPITE MAKING INVESTMENTS. THE ASSESSEE ADMITTEDLY HAS EARNED A S UBSTANTIAL TAX EXEMPT DIVIDEND INCOME OF RS. 6.16 CRORES DURING TH E YEAR. EVEN OTHERWISE, IT IS ALSO NOT THE CASE OF THE REVENUE T HAT THE EXEMPT INCOME EARNED BY THE ASSESSEE IS VERY LESS OR NEGLI GIBLE. IT IS ALSO NOT DISPUTED BY THE AO THAT THE ASSESSEE BEING AN I NVESTMENT & FINANCE COMPANY AND A PROMOTER OF NEW COMPANIES AND HAVING INTEREST IN THE BUSINESS OF THESE COMPANIES HAS MAD E THE INVESTMENTS FOR BUSINESS PURPOSES FOR HAVING CONTR OL OVER THESE SUBSIDIARY AND ASSOCIATED COMPANIES. UNDER SUCH CIR CUMSTANCES THE DIFFERENT CO-ORDINATE BENCHES OF THIS TRIBUNAL HAVE OBSERVED THAT IN SUCH CASES CERTAIN PERCENTAGE OF EXEMPT INC OME CAN CONSTITUTE A REASONABLE ESTIMATE FOR MAKING DISALLO WANCE FOR THE YEARS EARLIER TO ASSESSMENT YEAR 2008-09. THE HON'B LE BOMBAY HIGH COURT IN THE CASE OF CIT VS. 'GODREJ AGROVET L TD.' (ITA NO.934/2011) DECIDED ON 08.01.13 HAS UPHELD THE ORD ER OF THE ITA NO.4894/MUM/2008 46 TRIBUNAL DIRECTING THE AO TO RESTRICT THE DISALLOWA NCE TO THE EXTENT OF 2% OF THE TOTAL EXEMPT INCOME EARNED BY THE ASSE SSEE. 27. EVEN OTHERWISE, THE ENTIRE INTEREST EXPENDITURE CAN NOT BE ATTRIBUTED TO EARNING OF EXEMPT DIVIDEND INCOME ONL Y. EVEN AN INVESTOR NORMALLY DOES NOT INVEST MERELY FOR EARNIN G OF DIVIDENDS. IT ALSO TAKES INTO CONSIDERATION THE POSSIBILITY OF RISE IN PRICE OF SHARES WHICH MAY RESULT INTO TAXABLE CAPITAL GAINS ALSO. THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVES TMENT PRIVATE LIMITED (SUPRA) HAS HELD THAT SECTION 14 OF THE ACT OR RULE 8D CANNOT BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME OF THE ASSESSEE IS TO BE DISALLOWED. THAT T HE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A AND IS ONL Y TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION O F THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOU NT OF TAX EXEMPT INCOME. SIMILAR VIEW HAS BEEN TAKEN BY THE H ONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PCIT VS . EMPIRE PACKAGE PVT. LTD.(SUPRA). THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S CH EMINVEST LTD. VS. CIT (2015) 61 TAXMAN.COM 118, WHEREIN ALS O THE ASSESSEE HAD MADE STRATEGIC INVESTMENTS IN SUBSIDIA RIES/GROUP COMPANIES FOR RETAINING CONTROL OVER THEM BUT HAS N OT RECEIVED ANY DIVIDEND INCOME FROM SUCH INVESTMENTS, HAS HELD THAT SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR AND THAT THE EXPR ESSION DOES NOT FORM PART OF THE TOTAL INCOME, IN SECTION 14A OF T HE ACT ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME WH ICH IS NOT INCLUDED IN THE TOTAL INCOME DURING THE RELEVANT PR EVIOUS YEAR FOR ITA NO.4894/MUM/2008 47 THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. ALMOST IDENTICAL ISSUE HAS BEEN TAKEN BY THE HONBL E ALLAHABAD HIGH COURT IN THE CASE OF CIT KANPUR VS. M/S. SHIV AM MOTORS PVT. LTD. IN ITA NO.88 OF 2014 VIDE ORDER DATED 05 .05.2014; BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECTH ENERGY PVT. LTD. IN ITA NO.239 OF 2014 VIDE ORDER DATED 24.03.2014 AND BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. DELITE ENTERPRISES IN ITA NO.110 OF 2009 VIDE ORDER DATED 26.02.09. 28. THE LD. DR HAS NOT POINTED OUT ANY CONTRARY DEC ISION TO THE ABOVE PROPOSITION. 29. IN VIEW OF THE OVERALL FACTS AND CIRCUMSTANCES OF THE CASE, AS DISCUSSED ABOVE, AND IN THE LIGHT OF THE ABOVE DECI SIONS OF THE HIGHER COURTS, WHICH ARE OTHERWISE BINDING ON THIS TRIBUNAL, WE ARE OF THE VIEW THAT DISALLOWANCE U/S 14 A IN THIS CAS E CANNOT EXCEED THAN THE TAX EXEMPT INCOME EARNED BY THE ASSESSEE D URING THE YEAR. 30. SO FAR AS THE CONTENTION THAT THE ASSESSEE ITSE LF HAS OFFERED DISALLOWANCE IN THE RETURN OF INCOME MORE THAN THE EXEMPT INCOME EARNED IS CONCERNED, THE LD. AR HAS RELIED UPON VAR IOUS CASE LAWS AS MENTIONED IN THE WRITTEN SUBMISSIONS DATED 21.06 .2016 TO STRESS THE POINT THAT EVEN IF THE ASSESSEE UNDER A MISTAKE OR MISCONCEPTION HAS OVER ASSESSED ITSELF IN THE RETUR N OF INCOME, THE TRIBUNAL CAN GIVE RELIEF TO THE ASSESSEE TO THE EXT ENT THE ASSESSEE IS OVER ASSESSED AND DIRECT THE LOWER AUTHORITIES TO T AX THE ASSESSEE AS PER THE PROVISIONS OF LAW. WE FIND THAT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. CIT 229 ITR 383, THE FACTS BEFORE THE HONBLE SUPREME COURT WERE THAT THE ASSESSEE IN THAT CASE ITA NO.4894/MUM/2008 48 OFFERED THE INTEREST AMOUNT FOR TAXATION AND THE AS SESSMENT WAS COMPLETED ON THAT BASIS. BEFORE THE LD. CIT (A), T HE ASSESSEE THOUGH HAD TAKEN A NUMBER OF GROUNDS OF APPEAL; HOW EVER, THE INCLUSION OF THE SAID AMOUNT OF INTEREST WAS NOT CH ALLENGED. THE INCLUSION OF THE SAID AMOUNT OF INTEREST WAS NOT OB JECTED TO EVEN IN THE GROUNDS OF APPEAL AS ORIGINALLY FILED BEFORE TH E TRIBUNAL. HOWEVER, THE ASSESSEE BY WAY OF SUBSEQUENT LETTER R AISED THE ADDITIONAL GROUND IN RELATION TO THE SAID INCLUSION OF INTEREST INTO THE INCOME OF THE ASSESSEE. IN THE ABOVE CIRCUMSTA NCES, THE QUESTION BEFORE THE HONBLE SUPREME COURT WAS WHER E ON THE FACTS FOUND BY THE AUTHORITIES BELOW A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHORITIES) WHICH BE ARS ON THE TAX LIABILITY OF THE ASSESSEE, WHETHER THE TRIBUNAL HAS JURISDICTION TO EXAMINE THE SAME? THE HONBLE SUPREME COURT WHILE ANSWERING THE SAID QUESTION OBSERVED THAT UNDER SECTION 254 O F THE INCOME TAX ACT, THE POWER OF THE TRIBUNAL IN DEALING WITH THE APPEALS IS EXPRESSED IN THE WIDEST POSSIBLE TERMS; THE POWER O F THE TRIBUNAL UNDER SECTION 254 IS NOT RESTRICTED ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS); THAT BOTH THE ASSESSEE AS WELL AS THE DE PARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS OBJECTION BEFORE THE TRIBUNAL AND THE TRIBUNAL IS NOT PREVENTED FROM CONSIDERING QUESTION S OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLI ER. WHILE ANSWERING THE QUESTION IN AFFIRMATIVE, THE HONBLE SUPREME COURT CONCLUDED THAT THE TRIBUNAL HAS JURISDICTION TO EXA MINE A QUESTION OF LAW WHICH ARISES FROM THE FACTS AS FOUND BY THE AUTHORITIES BELOW AND HAVING A BEARING ON THE TAX LIABILITY OF THE ASSESSEE. THE FULL BENCH OF THE HONBLE BOMBAY HIGH COURT IN THE CASES OF AHMEDABAD ELECTRICITY COMPANY LTD. VS. CI T AND GODAVARI SUGAR MILLS LTD. VS. CIT BY WAY OF A COM MON ORDER ITA NO.4894/MUM/2008 49 DATED 30.04.1992 (1993) 199 ITR 351 HAS OBSERVED TH AT THE BASIC PURPOSE OF AN APPEAL PROCEDURE IN AN INCOME TAX MAT TER IS TO ASCERTAIN THE CORRECT TAX LIABILITY OF THE ASSESSEE IN ACCORDANCE WITH LAW. THEREFORE, AT BOTH THE STAGES, EITHER BY THE A PPELLATE ASSISTANT COMMISSIONER OR BEFORE THE APPELLATE TRIBUNAL, THE APPELLATE AUTHORITY CAN CONSIDER THE PROCEEDINGS BEFORE IT AN D THE MATERIAL ON RECORD BEFORE IT FOR THE PURPOSE OF DETERMINING THE CORRECT TAX LIABILITY OF THE ASSESSEE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PRUTHVI BROKERS AND SHAREHOLDERS P VT. LTD. (2012) 349 ITR 336 (BOM.) HAS OBSERVED THAT THE ASS ESSEE IS ENTITLED TO RAISE NOT MERELY ADDITIONAL LEGAL SUBMI SSIONS BEFORE THE APPELLATE AUTHORITIES, BUT IS ALSO ENTITLED TO RAIS E ADDITIONAL CLAMS BEFORE THEM. THE APPELLATE AUTHORITIES HAVE JURISD ICTION TO DEAL NOT MERELY WITH ADDITIONAL GROUNDS, WHICH BECAME AVAILA BLE ON ACCOUNT OF CHANGE OF CIRCUMSTANCES OR LAW, BUT WITH ADDITIONAL GROUNDS WHICH WERE AVAILABLE WHEN THE RETURN WAS FI LED. THE WORDS COULD NOT HAVE BEEN RAISED MUST BE CONSTRUE D LIBERALLY AND NOT STRICTLY. THERE MAY BE SEVERAL FACTORS JUSTIFY ING THE RAISING OF A NEW PLEA IN AN APPEAL AND EACH CASE MUST BE CONSIDE RED ON ITS OWN FACTS. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN TH E CASE OF SHRI CHANDRASHEKHAR BAHIRWANI ITA NO.7810/M/2010 AND 6599/M/2011 VIDE ORDER DATED 17.06.2015 WHILE DECID ING THE QUESTION AS TO WHETHER THE INCOME CANNOT BE ASSESSE D LESS THAN THE RETURNED INCOME HAS OBSERVED AS UNDER: 5. NOW COMING TO THE FINDING OF THE LD. CIT(A), TH AT INCOME CANNOT BE ASSESSED LESS THAN THE RETURNED INCOME, T HE LD. A.R. OF THE ASSESSEE HAS SUBMITTED BEFORE US THAT THE ACTION OF THE LD. CIT(A) IN REJECTING THE CLAIM OF THE ASSESSEE ON THIS GROUND WAS NOT JUSTIFIED. HE HAS FURTHER RELIED UPON THE DECISION OF THE HON BLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT GAS LTD. VS. JCIT (2 000) 245 ITR 84. IN THE SAID CASE, THE WORDS OF THE CIRCULAR NO.549, PA RA 5.12, DT. 31ST OCTOBER, 1989, PROVIDING THAT THE ASSESSED INCOME U NDER SECTION 143(3) SHALL NOT BE LESS THAN THE RETURNED INCOME W AS CONSIDERED BY THE HONBLE HIGH COURT AND IT WAS HELD THAT AS PER PROVISO TO SECTION ITA NO.4894/MUM/2008 50 119 OF THE ACT, THE BOARD CANNOT ISSUE INSTRUCTIONS TO THE INCOME TAX AUTHORITY TO MAKE A PARTICULAR ASSESSMENT OR TO DIS POSE OF A PARTICULAR CASE IN A PARTICULAR MANNER AS WELL AS N OT TO INTERFERE WITH THE DISCRETION OF THE COMMISSIONER IN EXERCISE OF H IS APPELLATE FUNCTIONS. IT WAS FURTHER HELD THAT THE AO, WHILE EXERCISING HIS QUASI JUDICIAL POWERS, WAS NOT BOUND BY THE SAID CIRCULAR AND SHOULD HAVE EXERCISED HIS POWERS INDEPENDENTLY. THE HONBLE HI GH COURT, THEREFORE, DIRECTED THE AO TO MAKE THE ASSESSMENT W ITHOUT KEEPING IN MIND THE SAID CIRCULAR. IT MAY BE FURTHER OBSER VED THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PRUTHVI BROKERS & SHAREHOLDERS PVT. LTD. ITA NO.3908 OF 2010 DECIDED ON 21.06.12, WHILE RELYING UPON THE VARIOUS DECISIONS OF THE HONBLE SUPREME C OURT AND OTHER HONBLE HIGH COURTS HAS HELD THAT EVEN IF A CLAIM I S NOT MADE BEFORE THE AO, IT CAN BE MADE BEFORE THE APPELLATE AUTHORI TIES. THE JURISDICTION OF THE APPELLATE AUTHORITIES TO ENTERT AIN SUCH A CLAIM IS NOT BARRED. THE HONBLE HIGH COURT HAS FURTHER OBSE RVED THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F GOETZE (INDIA) LIMITED V. CIT (2006) 157 TAXMAN 1, RELATING TO TH E RESTRICTION OF MAKING THE CLAIM THROUGH A REVISED RETURN WAS LIMIT ED TO THE POWERS OF THE ASSESSING AUTHORITY AND THE SAID JUDGMENT DO ES NOT IMPINGE ON THE POWER OR NEGATE THE POWERS OF THE APPELLATE AUT HORITIES TO ENTERTAIN SUCH CLAIM BY WAY OF ADDITIONAL GROUND. E VEN OTHERWISE, THE LD. CIT(A) OUGHT TO HAVE CONSIDERED THE CLAIM OF TH E ASSESSEE IN EXERCISE OF HIS APPELLATE JURISDICTION UNDER SECTIO N 250 OF THE ACT. MOREOVER, IF THE ASSESSEE IS, OTHERWISE, ENTITLED T O A CLAIM OF DEDUCTION BUT DUE TO HIS IGNORANCE OR FOR SOME OTHE R REASON COULD NOT CLAIM THE SAME IN THE RETURN OF INCOME, BUT HAS RAISED HIS CLAIM BEFORE THE APPELLATE AUTHORITY, THE APPELLATE AUTHO RITY SHOULD HAVE LOOKED INTO THE SAME. THE ASSESSEE CANNOT BE BURDE NED WITH THE TAXES WHICH HE OTHERWISE IS NOT LIABLE TO PAY UNDER THE LAW. EVEN A DUTY HAS ALSO BEEN CAST UPON THE INCOME TAX AUTHORI TIES TO CHARGE THE LEGITIMATE TAX FROM THE TAX PAYERS. THEY ARE NO T THERE TO PUNISH THE TAX PAYERS FOR THEIR BONAFIDE MISTAKES. IN VIE W OF OUR ABOVE OBSERVATIONS, IT IS HELD THAT THE ASSESSEE IS NOT L IABLE TO PAY CAPITAL GAINS TAX, THOUGH ORIGINALLY HE HAD SUBJECTED HIMSE LF TO THE SAID TAX AS PER HIS RETURN OF INCOME. THE AO IS DIRECTED TO PROCESS THE CLAIM OF REFUND IN THIS RESPECT AS PER PROVISIONS OF THE LAW . 31. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF HIGHER COURTS AND THAT OF CO-ORDINATE BENCHES OF THE TRIBUNAL, WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE U/S 14A TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. ITA NO.4894/MUM/2008 51 32. GROUNDS NO. 4 & 5: THE LD. COUNSEL FOR THE ASSESSEE HAS STATED AT THE BAR THAT HE DOES NOT PRESS GROUNDS NO 4 & 5. THESES GROUNDS ARE THER EFORE DISMISSED AS NOT PRESSED. 33. GROUND NO. 6: DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD PAID PROCESSING FEES FOR ACQUIRING THE TERM LOANS FROM T HE BANKS. THE ASSESSEE CLAIMED THE SAID FEES AS BUSINESS EXPENDIT URE. THE AO HOWEVER, HELD THAT THE LOAN FUNDS WERE USED FOR MAK ING INVESTMENTS IN GROUP COMPANIES AND FOR PROMOTING NE W COMPANIES HENCE THE PROCESSING FEES PAID WAS CAPITAL EXPENDIT URE. THE LD. DR WHILE RELYING UPON THE PROVISIONS OF SECTION 2 (28) OF THE ACT HAS CONTENDED THAT THE INTEREST INCLUDES PROCESSING FEE S ALSO. 34. WE HAVE ALREADY HELD IN THE EARLIER PARAGRAPHS OF THIS ORDER THAT THE ASSESSEE BEING AN INVESTMENT & FINANCE COM PANY AND A PROMOTER OF NEW COMPANIES AND HAVING INTEREST IN TH E BUSINESS OF THESE COMPANIES HAS MADE THE INVESTMENTS FOR BUSINE SS PURPOSES FOR HAVING CONTROL OVER THESE SUBSIDIARY AND ASSOCI ATED COMPANIES, HENCE, IN THE LIGHT OF THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT, PANA JI, GOA VS. PHIL CORPN. LTD.(SUPRA), HONBLE DELHI HIGH COURT IN THE CASE OF EICHER GOODEARTH LTD. VS. CIT (SUPRA) AND THE HON BLE SUPREME COURT IN S.A. BUILDERS VS. CIT (SUPRA), NO INTER EST DISALLOWANCE IS ATTRACTED U/S 36(III) OF THE ACT. ON THE SAME AN ALOGY, THE PROCESSING FEES PAID BY THE ASSESSEE FOR OBTAINING SUCH LOANS IS ALSO ALLOWABLE AS BUSINESS EXPENDITURE. MORE OVER T HE ISSUE IS COVERED WITH THE DECISION OF THE HONBLE SUPREME C OURT IN THE CASE OF INDIA CEMENTS LTD. V. CIT [1966] 60 ITR 52, WHEREIN THE SUPREME COURT HELD THAT THE EXPENDITURE IN RAISING LOANS OR ISSUING ITA NO.4894/MUM/2008 52 DEBENTURES WOULD BE REVENUE IN NATURE, IRRESPECTIVE OF WHETHER THE BORROWING IS A LONG TERM OR SHORT TERM ONE. THIS IS SUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 35. GROUND NO. 7: GROUND NO. 7 RELATES TO THE ISSUE OF DISALLOWANCE O F EXPENDITURE IN THE SHAPE OF UPFRONT FEES AND BROKERAGE ETC. PAID F OR ISSUING THE NON-CONVERTIBLE DEBENTURES. THE AO CONCLUDED THAT S INCE THE TERM OF THE DEBENTURES WAS SPREAD OVER TWO YEARS, HENCE BENEFIT ARRIVED AT BY THE ASSESSEE WAS OF ENDURING NATURE SPREAD OV ER TWO YEARS. THE AO THEREFORE CALCULATED THE EXPENSES PERTAINING TO THE YEAR UNDER CONSIDERATION AND DISALLOWED THE REMAINING EX PENSES. 36. WE FIND THAT THIS ISSUE IS ALSO COVERED WITH TH E DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF INDIA CEM ENTS LTD. V. CIT [1966] 60 ITR 52, WHEREIN THE SUPREME COURT HEL D THAT THE EXPENDITURE IN RAISING LOANS OR ISSUING DEBENTURES WOULD BE REVENUE IN NATURE, IRRESPECTIVE OF WHETHER THE BORR OWAL IS A LONG TERM OR SHORT TERM ONE. IT WAS HELD THAT THE ACT OF BORROWING MONEY WAS INCIDENTAL TO THE CARRYING ON OF BUSINESS, THE LOAN OBTAINED WAS NOT AN ASSET OR AN ADVANTAGE OF ENDURING NATURE, TH E EXPENDITURE WAS MADE FOR SECURING THE USE OF MONEY FOR A CERTAI N PERIOD AND IT WAS IRRELEVANT TO CONSIDER THE OBJECT WITH WHICH TH E LOAN WAS OBTAINED. THIS ISSUE IS ACCORDINGLY DECIDED IN FAVO UR OF THE ASSESSEE. 37. GROUNDS NO. 8 HAS NOT BEEN PRESSED BY THE ASSESSEE BEING TAKEN AS ALTERNATIVE GROUND TO GROUND NO. 7. THIS G ROUND IS THEREFORE DISMISSED AS NOT PRESSED. ITA NO.4894/MUM/2008 53 38. GROUND NO. 9 HAS ALSO NOT BEEN PRESSED BY THE LD. AR OWING TO THE SMALLNESS OF THE AMOUNT INVOLVED. THIS GROUND IS THEREFORE, DISMISSED AS NOT PRESSED. 39. GROUND NO. 10 IS ALSO NOT PRESSED BY THE ASSESSEE IN VIEW OF THE RELIEF GRANTED IN RECTIFICATION PROCEEDINGS U/S 154 OF THE ACT. THIS GROUND IS THEREFORE ALSO DISMISSED AS NOT PRES SED. 40. GROUNDS NO. 11 & 12: THE ISSUE RAISED VIDE GROUNDS NO.11 & 12 IS AS TO AT WHAT STAGE THE DEDUCTION UND ER SECTION 10A CAN BE ALLOWED. THE ASSESSEE DEDUCTED THE INCOME FR OM ITS ELIGIBLE UNIT U/S SECTION 10A AT THE FIRST STAGE I. E. PRIOR TO THE SETTING OFF OF THE UNABSORBED BROUGHT FORWARD LOSSES. THE AO, HOWE VER, HELD THAT THE DEDUCTION AVAILABLE U/S 10 A IS TO BE SET OFF AGAINST BROUGHT FORWARD LOSSES. HE ACCORDINGLY SET OFF THE DEDUCTION AVAILABLE U/S 10A AGAINST THE AVAILABLE UNABSORBED LOSSES AND DISALLOWED THE CARRY FORWARD OF BUSINESS LOSS OF RS . 6.59 CRORES. THE LD. CIT (A) UPHELD THE ACTION OF THE AO IN THIS RESPECT. THE ASSESSEE THUS HAS COME IN APPEAL BEFORE US ON THIS ISSUE. 41. THE LD. A.R. OF THE ASSESSEE, AT THE OUTSET, H AS STATED THAT THIS ISSUE IS SQUARELY COVERED WITH THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BLACK & VEATCH C ONSULTING PVT. LTD. (2012) 348 ITR 72 (BOM) WHEREIN THE HONBLE B OMBAY HIGH COURT HAS CATEGORICALLY HELD THAT THE DEDUCTIO N UNDER SECTION 10A HAS TO BE GIVEN AT THE STAGE WHEN THE PROFITS A ND GAINS OF BUSINESS ARE COMPUTED IN THE FIRST INSTANCE AND THU S THE BROUGHT FORWARD UNABSORBED LOSSES CANNOT BE SET OFF AGAINST CURRENT PROFIT OF THE SECTION 10A ELIGIBLE UNIT FOR COMPUTING THE INCOME OF THE ASSESSEE. THAT THE UNABSORBED LOSSES HAVE TO BE DED UCTED ONLY FROM THE PROFIT AVAILABLE AFTER ALLOWING DEDUCTION U/S 10A. THE ITA NO.4894/MUM/2008 54 LD. D.R. HAS NOT BROUGHT ANY DECISION CONTRARY TO T HE ABOVE DECISION OF THE HONBLE BOMBAY HIGH COURT. HENCE, RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH C OURT, THIS ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 42. GROUND NO.13 OF THE ASSESSEES APPEAL IS GENERA L IN NATURE AND REQUIRES NO ADJUDICATION. 43. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JULY, 2016 SD/- SD/- (G. S. PANNU) (SANJAY GARG) ACCOOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 20 JULY, 2016 LAKSHMIKANTA DEKA/SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ASSISTANT REGISTRAR ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT (A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//