Income Tax Appellate Tribunal - Mumbai
Dy. Cit vs Seksaria Biswan Sugar Factory Ltd. on 22 January, 2007
ORDER
D.K. Srivastava, Accountant Member
1. The appeal filed by the department is directed against the order of the Commissioner (Appeals), Mumbai. The appeal relates to assessment year 2000-01.
2. Ground No. I taken by the department reads as under:
On the facts and in the circumstances of the case and in law, the Id. Commissioner (Appeals) has erred in deleting the addition of Rs. 4,42,65,747 made by the assessing officer rejecting the claim of the assessee that the amount, being the differential amount against additional quota, as capital receipt.
3. The short issue is whether the sum of Rs. 4,42,65,747 representing the difference between free sale price of additional quota of sugar allotted as incentive and levy price of sugar is capital receipt or revenue receipt. The assessee is engaged in the business of manufacture and sale of sugar. In para 3 of his Order, the Id. Commissioner (Appeals) has referred to several orders of this Tribunal in which identical issue has been considered in the case of the assessee itself by the Tribunal and decided in favour of the assessee. Following the aforesaid orders of this Tribunal, the Id. Commissioner (Appeals) has decided the issue in favour of the assessee. At the time of hearing, the Id. Sr. Counsel for the assessee invited our attention to the orders of this Tribunal in the assessee's own case relating to assessment years 1991-92, 1992-93, 199394,1995-96,1996-97,1997-98,1998-99 and 1999-2000 in which this Tribunal has held that the amount received on free sale of additional quota was capital receipt. Following the aforesaid orders of the Tribunal, ground No. I taken by the department is dismissed.
4. Ground No. 2 taken by the department reads as under:
On the facts and in the circumstances of the case and in law, the Id. Commissioner (Appeals) has erred in deleting the addition of Rs. 10,34,730 made by the assessing officer on account of disallowance of interest being the expenditure related to earn dividend income and claimed exempt under Section 10(3) of the Act within the meaning of Section 14A.
5. We have heard the parties. The assessee has claimed exemption in respect of gross amount of dividend amounting to Rs. 32,61,650 under Section 10(33) of the Income Tax Act. The assessing officer noted that the assessee had claimed exemption on gross amount of dividend without allocating any expenditure in relation thereto. The assessing officer further observed that the assessee had borrowed funds to the extent of Rs. 31,70,49,647 out of total funds of Rs. 89,36,51,771 which work out to 35.47% of total funds inclusive of share capital, reserves and surplus. The assessing officer noted that total investment in shares was Rs. 4,40,00,000 and that the assessee had paid total interest of Rs. 2,10,52,667 during the year under appeal on the entire borrowed funds amounting to Rs. 31,70,49,647. The assessing officer calculated the average cost of borrowing at 6.63% which he allocated towards the investment in shares and thus attributed interest of Rs. 10,34,730 as the expenditure incurred in relation to the earning of dividend income and consequently disallowed the same. On appeal, the Id. Commissioner (Appeals) has allowed the claim of the assessee with the following observations:
5.2 On a perusal of the bank statement it is found that during the year under consideration total amount invested on mutual fund is amounting to Rs. 4,40,00,000 out of which gross dividend received is of Rs. 32,61,656.
On verification of the bank statement furnished by the appellant it is established that the amount invested in the mutual funds is out of the surplus funds and not from borrowed funds. The appellant company had surplus fund on the date of purchase of the mutual fund units which is also supported by the account statement-IL & FS bond funds transaction slip. There is merits in the appellant's submission that the amount invested on mutual funds was out of surplus funds and not out of borrowed funds which is also supported by the bank statement. Under the circumstances, interest expenditure amounting to Rs. 10,34,730 allocated towards the borrowed funds is hereby deleted. In the result, appellant's appeal on this ground is allowed.
6. Section 14A prohibits deduction of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income Tax Act. Sub-sections (2) and (3) have been inserted in Section 14A of the Income Tax Act by the Finance Act, 2006. Sub-section (2) provides that the assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Income Tax Act in accordance with such method as may be prescribed, if the assessing officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Income Tax Act. The prohibition for allowing the deduction under Section 14A for and from assessment year 1962-63 is "in respect of expenditure incurred by the assessee in relation to income" which does not form part of the total income. The term "expenditure" has been defined at page 598 of Black's Law Dictionary (Seventh Edition) thus : "1. The act or process of paying out; disbursement. 2. A sum paid out." The term "expense" has been defined at the same page of the aforesaid dictionary as follows : "n. An expenditure of money, time, labour, or resources to accomplish a result; esp., business expenditure chargeable against revenue for a specific period. - expense, vb. Cf. COST (1)". The expense" has many forms, namely, accrued expense, administrative expense, business expense, capital expense, capitalized expense, current expense, deferred expense, educational expense, entertainment expense, extraordinary expense, fixed expense, funeral expense, general administrative expense, medical expense, moving expense, operating expense, ordinary and necessary expense, organizational expense, put-of-pocket expense, pre-paid expense, travel expense. The term "expenditure" occurring in Section 14A would thus take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The term "incur" has been defined at page 771 of the aforesaid dictionary as follows: "incur, vb. To suffer or bring on oneself (a liability or expense)." One of the meanings given to the word "relate" under the head "Law" at page 2534 in "The New Shorter Oxford English Dictionary" (1993 Edition) is "Have some connection with, be connected to." The phraseology used in Section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income. This is also achieved by the matching principle of accountancy. In Taparia Tools Ltd. v. Joint CIT(2003) 260 ITR 1021 (Bom.), the Hon'ble jurisdictional High Court has explained the matching principle as under:
The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited. Therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. in this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable income....
7. it is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a f ew dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decision in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer(2004) 91 ITD 311, the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under Section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of Section 14A. In Dy. CIT v. S.G. Investments & Industries Ltd. (2004) 89 ITD 44, the Kollkata Bench of this Tribunal has laid down two propositions : one, in view of Section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in Section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income, Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. , the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151, the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of Section 14A would not apply to that extent. In Assit. CIT v. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mum.) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of Section 14A.
8. Keeping in view of provisions of Section 14A as also the aforesaid decisions of the co-ordinate Benches of this Tribunal, we hold that all expenses connected with the exempt income have to be disallowed under Section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. In this connection, the provisions of Sub-section (2)/(3) of Section 14A inserted by the Finance Act, 2006 deserve to be noted.
9. The procedure for computation of disallowance has now been provided in Sub-sections (2) and (3) of Section 14A of the Income Tax Act, It is no longer open to the assessing officer to apply his discretion in computing the disallowance or make ad hoc disallowance under Section 14A. Substantive provisions are contained in Sub-section (1) of Section 14A prohibiting deduction in respect of expenditure incurred in relation to exempt income while procedural provisions regarding computation of the aforesaid disallowancc are contained in Sub-sections (2) and (3) thereof. Sub-sections (2) and (3) seek to achieve the underlying object of Section 14A(l) that any expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them.
10. In W.H. Cockerline & Co. v. IRC (1930) 16 TC I (CA) at 19, Lord Hanworth quoted with approval the following passage from the judgment of Sargant L.J, : "The liability is imposed by the charging section, namely, Section 3 8, the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately." In Halsbury ~ Law of England (Fourth edition, Vol. 23, paragraph 29), referring to the machinery provisions, it is stated : "It is important to distinguish between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the charge and the levying and collection of the tax in respect of the charge so imposed. Machinery provisions do not impose a charge or extend or restrict a charge elsewhere clearly imposed." In Kesoram Industries & Cotton Mills Ltd. v. CWT , Hon'ble Mr. Justice Shah observed : "Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained.... This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation." Though the aforesaid observation was part of the minority opinion, there is, however, nothing said to the contra in the majority view. In Associated Cement Co. Ltd. v. CTO (1981) 148 STC 466, the Hon'ble Supreme Court has held: "It is settled law that a distinction has to be made by courts while interpreting the provisions of a taxing statute between charging provisions which impose the charge to tax and machinery provisions which provide the machinery for the quantification of the tax and the levying and collection of the tax so imposed. While charging provisions are construed strictly, machinery sections are not generally subject to a rigorous construction. The courts are expected to construe the machinery sections in such a manner that a charge to tax is not defeated." Bennions Statutory Interpretation (First edition, page 446, paragraph 191) lays down as follows : "Because a change made by the legislator in procedural provisions is expected to be for the general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings." At page 447, it is stated. "Procedure and practice is the mere machinery of law enforcement. As Ormrod L.J. said : 'The object of all procedural rules is to enable justice to be done between the parties consistently with the public interest'." In Jose Da Costa v. Bascora Sadasiva Sinai Narcorn im , the Hon'ble Supreme Court has held at page 1849:
Before ascertaining the effect of the enactments aforesaid passed by the Central Legislature on pending suits or appeals, it would be appropriate to bear in mind two well-established principles. The first is that 'while provisions of a statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible, have retrospective effect attributed to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment (See Delhi Cloth & General Mills Co. Ltd. v. ITC AIR 1927 PC 242). The second is that a right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals available under the law then in force would be preserved to the parties to the suit throughout the rest of the career of the suit. There are two exceptions to the application of this rule, viz., (i) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect; and (ii) when the court to which appeal lay at the commencement of the suit stands abolished (See Garikapati Veeraya v. N. Subbiah Choudhury , and Colonial Sugar Refining Co. Ltd. v. Irving (1905) AC 369 (PC).
Halsburys Laws of England (Fourth edition, Vol. 44, paragraph 925) states:
The presumption against retrospection does not apply to legislation concerned merely with matters of procedure or of evidence; on the contrary, provisions of that nature are to be construed as retrospective unless there is a clear indication that such was not the intention of Parliament.
All the aforesaid observations have been cited, with approval, by the Hon'ble Supreme Court in CWT v. Sharvan Kumar Swarup & Sons .
11. In view of the aforesaid, we hold that the provisions for quantification of disallowance as contained in Sub-sections (2) and (3) of Section 14A are procedural and therefore apply to all pending matters. It is no longer open to the assessing officer to make disallowance according to his own discretion or on ad hoc basis. He is statutorily required to compute the disallowance in the manner provided by Sub-sections (2) and (3) of Section 14A. All these aspects have neither been considered by the assessing officer nor the Commissioner (Appeals) while making the impugned disallowance.
12. In view of the above, we consider it appropriate to set aside the orders passed by the Commissioner (Appeals) and the assessing officer in this behalf and restore the matter to the assessing officer for a fresh decision in the light of the provisions of Section 14A including Sub-sections (2) and (3) thereof. Ground No. 2 is treated as allowed for statistical purposes.
13. In the result, this appeal of the department is partly allowed.