Madras High Court
Saka Marketing Services Pvt. Ltd. vs The Deputy Commissioner Of Income-Tax on 21 February, 2005
Author: N.V. Balasubramanian
Bench: N.V. Balasubramanian
JUDGMENT N.V. Balasubramanian, J.
1. This is an appeal preferred by the assessee against the order of the Income-tax Appellate Tribunal dated 5.6.2002 made in I.T.A. No. 56/Mds/2002 confirming the order of the Commissioner of Income-tax (Appeals) dated 31.12.2001 confirming the order of assessing officer dated 30.3.2001. At the time of admission of the appeal, the following questions of law were framed for consideration:
1. Whether on the facts and circumstances of the case, the Tribunal was right in rejecting the claim of the appellant for payment of interest on monies borrowed which were invested for the purchase of shares which has resulted in the improvement of the business of the appellant?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that for the assessment year 1998-99 expenditure on exempted income cannot be deducted against the business income by applying the provisions of section 14A introduced by Finance Act, 2001?
2. The assessment year involved is 1998-99. The question that arises is whether the interest paid by the appellant/assessee on the loan amount borrowed by it for the purchase of shares can be allowed as a deduction from the business income of the assessee. The appellant, hereinafter referred to as 'the assessee', claimed deduction of a sum of Rs.44,74,187/- being the interest amount paid on the loan borrowed by the assessee on the ground that the substantial portion of loan amount was utilised for the purchase of shares and with a view to prevent any dislocation in the business of the assessee, the assessee had borrowed money and utilised the same for purchase of shares in the company. No doubt, the assessee might have borrowed the money to have control over the affairs of the companies in which the shares have been purchased, but that is not very much relevant. The assessing officer issued a show-cause notice to the assessee as to why the interest paid by the assessee to M/s. Indbank should not be disallowed as the money borrowed by the assessee was utilised for investment in shares and not for the purpose of business of the assessee. The assessee sent a reply, but the assessing officer was not satisfied with the same and held that the assessee was not eligible for deduction. The Commissioner of Income-tax (Appeals) confirmed the order of the assessing officer.
3. The assessee carried the matter in appeal to the Appellate Tribunal and the Appellate Tribunal rejected the claim of the assessee on two grounds. The first ground of rejection was that the investment was a capital outlay and the interest paid, which could be said to have directly related to the said outlay, was part of the capital outlay. The second ground on which the Appellate Tribunal rejected the claim of the assessee was that the dividend from the companies in which the assessee had purchased shares was exempt from tax and the interest paid in relation to the dividend income was not allowable as business expenditure. The Appellate Tribunal dismissed the appeal preferred by the assessee. Against the order of the Appellate Tribunal, the assessee has preferred this appeal.
4. We heard Mr. P.P.S. Janarthana Raja, learned counsel for the assessee and Mrs. Pushya Sitaraman, learned senior standing counsel for the Revenue. We are of the view that the second ground on which the Appellate Tribunal rejected the claim of the assessee is sustainable under section 14A of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). Section 14A of the Act was inserted by the Finance Act, 2001 with effect from 1.4.1962 and the said section reads as under:-
"14A. Expenditure incurred in relation to income not includible in total income:-
For the purposes 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:
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
5. A careful reading of the section would show that the assessee is not entitled to claim deduction in respect of expenditure incurred by it in relation to an income which does not form part of total income under the Act. The assessee, admittedly, had borrowed money and utilised the same for the purchase of shares. Even assuming that by the purchase of shares in the companies, the assessee have control over the affairs of the companies in which the assessee had purchased the shares, Section 10(33) of the Act provides that any income by way of dividend is exempt from tax. In other words, the dividend income does not form part of the total income of the assessee. The assessee has purchased the shares which would result in dividend income which does not form part of total income of the assessee.
6. The submission of learned counsel for the assessee is that the assessee had borrowed money to have an effective control over the affairs of the companies in which the shares were purchased, and therefore the assessee is entitled to claim deduction of the interest amount from its business income. We are unable to accept the submission of learned counsel for the assessee as the purpose of borrowing is not relevant as Section 14A of the Act postulates that where the expenditure incurred by the assessee is in relation to an income which does not form part of total income, then, the expenditure is not allowable. Admittedly, the assessee had purchased shares which would result in dividend income, which is not includible as part of total income of the assessee under Section 10(33) of the Act and hence, the expenditure is liable to be disallowed. Section 14A of the Act, in our opinion, is not concerned with the object or the purpose of the expenditure, but it is more concerned with the end result of the expenditure or the effect of the expenditure.
7. The submission of learned counsel for the assessee is that the assessee has not received any dividend income during the previous year relevant to the assessment year in question and since there was no receipt of dividend income, the bar under section 14A of the Act does not apply. We are unable to accept the said submission. We are of the view, when section 14A of the Act refers to a category of income, namely, the income which as the result of investment made by the assessee is exempt under section 10 of the Act, then the assessee is not entitled to claim deduction of expenditure incurred in relation to such investment. We are of the view, the allowability of expenditure does not depend upon the actual receipt of income as the expression found in section 14A, is 'in relation to income' and it does not contemplate that there must be actual receipt of income before the bar under section 14A of the Act would operate.
8. This Court in ADDL. C.I.T. v. BIMETAL BEARINGS LTD. (110 ITR 131) has considered the provisions of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and held that the Act has made a distinction between the kinds of income which are not includible within the meaning of section 10 of the Act and other incomes which are exempt under any other provisions of the Act. We are of the view that the ratio of the decision of this Court in Bimetal Bearings Ltd. Case would apply as section 14A uses the expression, 'in relation to income which does not form part of the total income under this Act'. Since the dividend income is one kind of income which does not form part of total income under the Act, we hold that the expenditure incurred in relation to such investment which would result in the dividend income is not liable to be deducted under section 14A of the Act. Section 14A of the Act, in our opinion, does not require that the bar would operate only if the investment yields positive result by way of positive income. If the submission of learned counsel for the assessee is to be accepted, it would result in a strange situation resulting in a position that the bar under Section 14A of the Act would operate for one assessment year where there is receipt of dividend income, and the bar does not come into operation when there is no positive income by way of dividend. We are of the view, section 14A of the Act operates in relation to a subject matter of taxation of income which in its very inherent nature does not form part of total income under section 10 of the Act. The fact that the assessee has not received the dividend income is immaterial and once the expenditure has been incurred in relation to the dividend income, then the bar under section 14A of the Act would operate. We hold that the view of the Appellate Tribunal is sustainable and we do not find any infirmity in the order of the Appellate Tribunal warranting interference by this Court.
9. In the view we are taking on the second question, it is not necessary to answer the first question and we answer the both questions in favour of the Revenue and against the assessee. Consequently, the appeal fails and the same is dismissed. However, in the circumstances, there will be no order as to costs.