Income Tax Appellate Tribunal - Mumbai
Mohan T. Advani Finance (P) Ltd. vs Ito on 28 February, 2006
ORDER
Sunil Kumar Yadav, J.M.
1. These appeals are preferred by the assessee against the order of Commissioner (Appeals) on various grounds, which are as under ITA No. 1060/Mum/2003
"I1 The Commissioner (Appeals)-l erred in confirming the order of the Income Tax Officer in relation to disallowance of interest expenses purportedly relatable to earning of income to the extent of Rs. 19,21,182.
2. He failed to appreciate and ought to have held that no such disallowance, was called for since the appellant had paid interest on borrowings which were used for the purpose of investment and finance activities of the company and which was the business of the company and hence the interest expense was allowable as normal business expenditure of the company.
3. The appellant prays that it be held that the said interest expense of Rs. 19,21,182 be allowed as business expenditure.
II.1. The Commissioner (Appeals) erred in confirming restriction of exemption for dividend income under Section 10(33) of the Income Tax Act, 1961 at Rs. 10,29,437 against a claim of Rs. 29,50,619.
2. He failed to appreciate and ought to have held that the question of considering restriction of exemption of dividend income under Section 10(33) does not arise since the expense on account of interest was fully allowable as business expenditure.
3. The appellant prays that it be held that the claim for exemption under Section 10(33) be fully allowed at Rs. 29,50,619.
ITA No. 1061/Mum/2003'I 1 The Commissioner (Appeals) erred in confirming the order of the Income Tax Officer in relation to disallowance of interest expenses purportedly relatable to earning of income to the extent of Rs. 18,57,346.
2. He failed to appreciate and ought to have held that no such disallowance was called for since the appellant had paid interest on borrowings which were used for the purpose of investment and finance activities of the company and which was the business of the company and hence the interest expense was allowable as normal business expenditure of the company.
3. The appellant prays that it be held that the said interest expense of Rs. 18,57,346 be allowed as business expenditure.
II.1. The Commissioner (Appeals) erred in confirming restriction of exemption for dividend income under Section 10(33) of the Income Tax Act, 1961 at Rs. 10,58,273 against a claim of Rs. 29,15,610.
2. He failed to appreciate and ought to have held that the question of considering restriction of exemption of dividend income under Section 10(33) does not arise since the expense on account of interest of Rs. 57,346 was fully allowable as business expenditure.
3. The appellant prays that it be held that the claim for exemption under Section 10(33) be fully allowed at Rs. 29,15,620.
II.1 The Commissioner (Appeals) erred in considering ground 3 as not been pressed though he discussed and allowed the said ground in paras 1, 2.1 and 2.2 of his appellate order.
2. He failed to appreciate and ought to have held that para 4 of his appellate order mentioning the ground not being pressed was in fact not so and was an incorrect statement and that the said ground is allowable in view of the specific discussion and allowing of the appeal on this ground in paras 1, 2.1 and 2.2 of his order.
3. The appellant prays that para 4 of the appellate order of the Commissioner (Appeals) be deleted and relief be appropriately granted.
2. Since common issues are involved in these appeals, these were heard together and are being disposed of by this consolidated order.
3. Though assessee has raised various grounds, but all these grounds relate to a sole issue whether assessee is entitled to claim a set off of interest paid on the borrowings, which were invested in investment in shares ?
4. The facts borne out from the record are that the assessee is engaged in the business of investment and finance and during the year, the assessee received interest and dividend at Rs. 12,33,752 and Rs. 29,50,619, respectively in assessment year 1998-99. The assessee company incurred expenses of Rs. 30,56,184 on account of interest. As dividend income was not taxable under Section 10(33) read with Section 115-O of the Act, the assessing officer disallowed pro rata expenses.
5. The assessee preferred an appeal before the Commissioner (Appeals) with the submission that the assessee is an investment and finance company, which held shares of Blue Star Ltd. as stock-in-trade. The assessee has also carried finance activity, which included lending money to others. For its business purposes, the assessee has borrowed money, as such, the interest on the same was allowable as business expenditure. The assessee has received dividend income on the aforesaid shares. He placed a reliance upon the judgments of the Supreme Court in the cases of CIT v. Indian Bank Ltd. , CIT v. Maharashtra Sugar Mills Ltd. and Rajasthan State Warehousing Corpn. v. CIT (2000) 159 CTR (SC) 132 : (2000) 109 Taxman 145 (SC) in support of the proposition that where an assessee carries as an indivisible business and a part of the business is not assessable under the Act, the interest on money borrowed would be allowable in its entirety. It was further contended that in case of a composite business, provisions of Section 14A shall not be applicable. The Commissioner (Appeals) reexamined the issue and after having relied upon the provisions of Section 14A has held that assessing officer has rightly disallowed the pro rata interest on monies borrowed for carrying interest.
6. Now, the assessee has preferred an appeal before the Tribunal and placed heavy reliance upon the judgment of the apex court in the case of Rajasthan State Warehousing Corpn. (supra) in which it has been categorically held that when assessee is carrying on one indivisible business in various ventures and some amongst them yield taxable income and others do not, the entire expenditure is a permissible deduction without any apportionment. During the course of hearing, the learned Counsel for the assessee further contended that it has borrowed funds to acquire the controlling shares in Blue Star Ltd. Since the acquisition of controlling shares in the group concern is also one of the business activities of the assessee, the interest expenditure incurred on borrowed funds is a business expenditure and is allowable under Section 36(l)(iii) of the Income Tax Act (hereinafter called as an 'Act'). In support of this plea, the learned Counsel for the assessee has relied upon the following judgments
1. CIT v. Model Manufacturing Co. (P) L td ;
2. CIT v. Indian bank Ltd. ;
3. CIT v. Rajeeva Lochan Kanoria ,
4. Addl. CIT v. Laxmi Agents (P) Ltd. (1980) 125 ITR 227 (Guj);
5. Mafatlal Holdings Ltd. v. Addl. CIT (2004) 85 TTJ (Mumbai) 821;
6. CIT v. Tata Chemicals Ltd. ;
7. Admo Holdings (P) Ltd. v. Jt CIT (ITA No. 2151/Mum/2001).
7. With regard to provisions of Section 14A of the Act, the learned Counsel for the assessee has invited our attention to the provisions of Section 115-O, according to which tax on distributed profits of domestic companies is charged as an additional tax @ 12-1/2 per cent. Since the allocated dividend is subject to tax before distribution amongst the shareholders, it cannot be called to be nontaxable income in the hands of the recipient i.e., the shareholder, and the interest expenditure incurred on borrowed funds which were invested in acquiring the shares on which dividend is received cannot be disallowed for the reasons that borrowed funds were invested to earn non-taxable income as per provisions of Section 14A of the Income Tax Act. In support of this proposition, the learned Counsel for the assessee has relied upon the order of the Tribunal in the case of Admo Holdings (P) Ltd. v. Jt. CTT (ITA No. 2151/Mum/2001).
8. The learned departmental Representative, on the other hand, has submitted that the assessee has borrowed funds, out of which some part was invested on acquiring shares of M/s Blue Star Ltd. and some were utilized to advance loans. Before any of the lower authorities the assessee has not raised any plea or argument that it has made the investment in shares of Mls Blue Star Ltd. to have the controlling shares in the company. This argument is raised for the first time before the Tribunal and since it requires the factual verification, it cannot be entertained at this stage. So far as the judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. (supra) is concerned, the learned departmental Representative has invited our attention to the object of introduction of Section 14A with the submission that Section 14A have been inserted by the Finance Act, 2001 with retrospective effect from the 1st day of April, 1962 to nullify the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. (supra). Through Section 14A it has been made emphatically clear by the legislature that for the purpose of computing total income under Chapter XIV, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not fall part of the total income under the Act. When this provision with retrospective effect has prompted the department to reopen those complete assessments in which principle laid down by the apex court has been followed, this has created hardship to taxpayers. The Board has taken note of the hardship and issued a Circular No. 11 of 2001 directing the department not to reopen the assessment which has become final before 1-4-2001 in which expenditures incurred towards exempt income was allowed following the judgment of the apex court in the case of Rajasthan State Warehousing Corpn, (supra). Later on, this circular was converted into a statutory provision by inserting proviso to the section. This series of events shows that Section 14A was inserted to nullify the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. (supra). As such, placing the reliance upon the judgment of the apex court in the case of Rajasthan State Warehousing Corpn. (supra) is not proper, as it cannot be followed in the light of the statutory amendment. The learned departmental Representative further contended that as per Section 115-O, additional tax is to be paid by the company on any amount declared and distributed by the company by way of dividend @ 12-1/2 per cent in addition to the income-tax chargeable in respect of total income to a domestic company for any assessment years. This additional income-tax was not charged at a scheduled rate of tax, as such, the tax suffered on the distributed amount cannot be called the tax paid by the recipient on the dividends and make the dividend income as taxable to take it out from the purview of non-taxable income in order to have an escape from the clutches of Section 14A of the Act. For the purpose of Section 14A, it is only to be examined whether the income received by the assessee is taxable or non-taxable. If the assessee is not required to pay the tax on that income, which forms a part of total income, the expenditure incurred in earning that non-taxable income cannot be allowed against the other income of the assessee. It has no relevance whether the income received by the assessee has already suffered tax in the hands of the payer. If the contention of the assessee is accepted, then no income would be taxable in the hands of the recipient if it has already suffered a tax in the hands of the payer. The learned. departmental Representative further invited our attention to the observations of the Tribunal in the case of Mafatlal Holdings Ltd. (supra), in which the Tribunal has held that the dividend income received by the shareholder is non-exempted income after quoting an example that if total dividend declared by the assessee company is Rs. 1,000 and the tax paid by the shareholder on this amount @ 10 per cent then net income remains in the hands of the shareholder is Rs. 900 only with the submission that the shareholder is only concerned with the dividend amount received in his hands i.e. only Rs. 900 and he is not concerned about this amount which was declared by the domestic company and the interest paid thereon. The example quoted by the Tribunal before declaring the dividend income as non-exempted income is misquoted, as Section 14A only talks about the income received by the recipient and not the amount paid by the payee. In these circumstances, the revenue authorities are justified in disallowing the claim of the assessee.
9. Having given a thoughtful consideration to the rival submissions and from the careful perusal of the orders of the authorities below, we find that the assessee was admittedly engaged in the business of investment and finance and he has borrowed the funds to utilize it in its business. Some portions of the borrowed funds were utilized in its finance business and some were invested in shares of M/s Blue Star Ltd. It is not the case of the assessee that he is engaged in trading of shares. Not only it is evident from the orders of the lower authorities, but also it was admitted by the learned Counsel for the assessee during the course of hearing that he did not raise a plea before the lower authorities that he made the investment in shares to acquire a controlling interest, which is a part of business of the assessee. Undisputedly, the part of borrowed funds was invested in shares and the assessee claimed the entire interest paid on the borrowed funds as an allowable expenditure against the dividend income as well as the interest income, on the basis of the judgments of the apex court in the cases of CIT v. Indian Bank Ltd. (supra), CIT v. Maharashtra Sugar Mills Ltd. (supra) and Rajasthan State Warehousing Corpn. (supra). The judgments, which were relied by the assessee in support of its legal proposition that where the assessee carried the indivisible business and a part of the business income is not assessable under the Act, the interest on funds borrowed would be allowed in its entirety against the taxable income cannot be applied to the instant case. While taking a plea the assessee lost the sight of the provisions of Section 14A which was introduced by the Finance Act, 2001 with retrospective effect from 1-4-1962. We have examined the aforesaid judgments of the apex court and the legislative intent of the introduction of Section 14A and we find that 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 deduction has been claimed in respect of such exempt income. This in effect means that the tax incentives given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against the taxable income. This is against the basic principle of taxation whereby only the net income i.e. the gross income minus expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. To nullify the decision of the Supreme Court in Rajasthan State Warehousing Corpn. (supra) in which it was held that the income of the assessee arises under any of the heads of the income but from different items i.e. different house properties of different securities, etc., and income from one or more items alone is taxable whereas income from other items is exempt under the Act, the entire permissible expenditure in earning income under that head is deductible and that if assessee carries on business for various ventures, some of which yield taxable income and others do not and business is one indivisible, the entire expenditure of this indivisible business would be deductible, the legislature has inserted Section 14A by the Finance Act, 2001 with retrospective effect from 1st April, 1962, according to which, for the purpose of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The scope and effect of this new provision were also explained by the Board through Circular No. 14 of 2001, dated 12-12-2001. Through this circular, it was explained by the Board that 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 respect of said exempt income, but the tax incentives are being used to reduce the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against the taxable income. This retrospective insertion of Section 14A has prompted the department to reopen those completed assessments in which principle laid down by the Supreme Court has been followed and this has created hardship to taxpayers. Having taken note of this hardship, the Board has issued another Circular No. 11 of 2001, dated 23-7-2001 in which it has been directed that assessments where the proceedings have become final before 1-4-2001 should not be reopened under Section 147 of the Act to disallow the expenditures incurred to earn exempt income by applying provisions of Section 14A. These administrative instructions were converted into statutory provisions by way of insertion of proviso to Section 14A. The object and scope of Section 14A were again clarified by the Board through their Circular No. 8 of 2002, dated 27-8-2002, reported in ((2002) 258 ITR (St) 13) by saying that through Finance Act, 2001 new section namely, Section 14A was inserted in the Income Tax Act retrospectively with effect from 1-4-1962 to clarify the intention of the legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income Tax Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the case by raising the issue afresh. Through proviso to Section 14A it was also clarified that assessing officer shall not reassess the case under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise incurring the liability of the assessee under Section 154, for any assessment year beginning on or before 1-4-2001.
10. From a careful reading of the various Board circulars with regard to Section 14A it has become abundantly clear that legislature has no intent to allow any expenditure incurred in earning exempted income against the taxable income. The judgments relied upon by the assessee relate to the pre-amendment period and were rendered following the judgment of Supreme Court in the case of CIT v. Indian Bank & Rajasthan State Warehouse Co. (supra), which cannot be relied on in the light of newly inserted Section 14A of which object was to nullify the effect of the judgment.
11. We have also carefully examined the judgment of the jurisdictional High Court in the case of CIT v. Amritaben R. Shah in which the Hon'ble Bombay High Court has categorically held that in order to get deduction under Section 57(iii), the expenditure should be incurred wholly and exclusively for the purpose of making or earning the income from other sources and that it should not be in the nature of capital expenditure. The shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly or exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it is clear that expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as deduction under Section 57(iii) of the Income Tax Act.
12. Turning to the case in hand, we find that the assessee has borrowed the funds to make investment in shares and to utilize it in its finance business. Meaning thereby, the interest expenditure incurred on borrowed funds is indivisible and the pro rata expenditures relating to investment in shares cannot be allowed against the taxable income. So far as the assessee's argument that it had made the investment in shares to have controlling shares in the company is concerned, we find this plea has not been raised before any of the lower authorities and without any documentary evidence it cannot be considered here, as it related to verification of facts. We, therefore, decline to entertain this new plea at the second appellate stage.
13. Now, we come to another argument of the assessee that the dividend income cannot be called to be an exempted income as it has already suffered tax in the hands of the company, which distributes it amongst its shareholders at the time of its declaration and distribution. In support of this contention, the assessee has placed reliance upon the Tribunal order in the case of Mafatlal Holdings Ltd. v. Addl. CIT (2004) 85 TTJ (Mumbai) 821 in which the Tribunal has quoted an example before holding that dividend income was non-exempt income. Through this example the Tribunal has explained that the assessee is in receipt of net dividend after having suffered tax by the domestic company. While dealing with the issue the Tribunal has placed reliance upon the judgment of the Gujarat High Court in the case of Dy. CIT v. Core Health Care and CIT v. Tata Chemicals Ltd. in which the Hon'ble High Court have not examined the object and scope of Section 14A introduced by Finance Act, 2001 and have laid down the ratio following the judgments of the apex court in the cases of CIT v. Indian bank Ltd. (supra) and Rajasthan State Warehouse Co. v. CIT (supra). While dealing with taxable and non-taxable income for the purpose of Section 14A one has to look the nature of receipts in the hands of the recipient and not in the hands of the payer. If income is non-taxable in the hands of the recipient, the provisions of Section 14A would certainly apply and expenditure incurred in earning that non-taxable income will not be allowed to be deducted against the taxable income. If it is permitted it would be a violence to the newly inserted Section 14A. In the instant case, since the dividend income earned on investment in shares is exempted from tax by virtue of Section 10(33), any expenditures incurred to earn the dividend income is not allowable against the taxable income of the assessee. In the instant case, since the interest expenditures is indivisible as the investments in shares and advancement of loan was made out of the common funds, the pro rata interest incurred on funds invested in shares, cannot be allowed against the interest income of the assessee. We, therefore, find no merit in the assessees appeal. Accordingly, we confirm the order of the Commissioner (Appeals) and dismiss the appeal of the assessee.
14. In the result, the appeals of the assessee are dismissed.