In the ITAT, Mumbai Bench ‘SMC’
Shree Shyamkamal Finance & Leasing
v.
Income-tax Officer, 8(3)1, Mumbai
K. P. T. Thangal, Vice President
IT Appeal No. 15 (Mum.) of 2006
[Assessment year 2002-03]
October 15, 2007
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in
relation to exempt income - Assessment year 2002-03 - Assessee-company was
engaged in business of finance and investment in equity shares - In relevant
previous year, assessee paid interest on unsecured loan taken from two of its
directors and claimed deduction of same - Further assessee invested a major
amount of unsecured loan in acquiring unquoted shares of its subsidiary company
but received no dividend on said investment - Assessing Officer disallowed
interest expenditure by resorting to provisions of section 14A - Whether since
assessee had not received any dividend and further since it had not claimed any
income exempted, provisions of section 14A were not applicable to instant case
- Held, yes - Whether, therefore, disallowance of interest expenditure under
section 14A was wrong - Held, yes
Circulars and Notifications:
Circular No. 14/10, dated 12-12-2001
The assessee-company was engaged in the business of finance and investment in equity shares. In the relevant previous year, the assessee paid on interest against unsecured loan taken from two of its directors and claimed deduction of the same. Further the assessee invested a major amount of unsecured loan in acquiring unquoted shares of its subsidiary company, but received no dividend on the said investment. The Assessing Officer asked the assessee to explain as to when there was no income from investment and if any income accrued at all as dividend which was exempt from tax, then why not the disallowance of interest on loan be made under section 14A. The assessee in reply submitted that since it had not received any dividend and further since it had not claimed any income exempted, section 14A could not be applied. The Assessing Officer did not agree with the assessee and disallowed the interest expenditure resorting to provisions of section 14A.
On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal:
Section 14A inserted by the Finance Act, 2001, with retrospective effect
from 1-4-1962, provides that no deduction shall be allowed in respect of any
expenditure incurred by the assessee in relation to income which does not form
part of the total income under the Act. [
By virtue of section 10(33), as it stood at relevant time,
dividend income referred to in section 115-O does not form part of the total
income. Section 115-O is a special provision related to tax on distributed
profit of domestic companies. Section 115-O is not in tandum with section 10(33).
The additional tax under section 115-O becomes leviable in the hands of the
company if such dividend is exempted in the hands of the shareholders. If the
assessee earned income which is not includible in the total income, in that
case the expenditure could be disallowed under section 14A because it speaks of
expenditure incurred by the assessee in relation to income which does not form
part of the total income. In other words the assessee has earned income which
forms part of the total income. [
Further a proviso was inserted on section 14A by the Finance Act, 2003, with retrospective effect from 11-5-2001. By virtue of this insertion the Legislature made it clear that even though section 14A is retrospective in operation from 1-4-1962 onwards, the Assessing Officer shall not reassess the case under section 147 or pass an order enhancing the assessment or reduce a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before 1-4-2001. Thus, reading of section 14A makes it clear that while computing the income under Chapter IV deduction would not be allowed with regard to expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Act. Therefore, the expenditure incurred by the assessee in relation to income which forms part of the total income for the year under consideration only can be disallowed. Otherwise the wording ‘does not form part of the total income’ becomes otiose. Further income is computed for each year. Income should form part of the total taxable income under consideration so as to get taxed and not otherwise. [Paras 19 and 20]
In the instant case, there was no dividend income earned by the assessee.
Further the assessee had not claimed any income exempted. Therefore, the
provisions of section 14A were not applicable to the instant case. Therefore,
the disallowance of interest expenditure under section 14A was wrong. [
EDITOR’S NOTE:
The Tribunal further considering the additional ground raised by the assessee that interest expenses be treated as capital expenditure incurred towards acquiring controlling interest in subsidiary company directed the Assessing Officer that while giving group effect to the impugned order passed by the Tribunal he would keep the decision of the Tribunal. In the case of Birla Group of Holdings Ltd. v. Dy. CIT [IT Appeal No. 2891 (Mum.) 2004, dated 31-10-2006] in mind and the additional ground might be dealt with accordingly.