MOHANANLAL M. SHAH v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2006-LL-0830-5]

Citation 2006-LL-0830-5
Appellant Name MOHANANLAL M. SHAH
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 30/08/2006
Assessment Year 1999-2000
Judgment View Judgment
Keyword Tags profits and gains of business or profession • income from house property • disallowance of interest • investment in property • additional income-tax • revenue expenditure • cost of acquisition • cost of improvement • date of acquisition • capital expenditure • source of income • domestic company • interest payment • levy of interest • exempted income • revenue nature • additional tax • interest paid
Bot Summary: The assessee claimed that the interest on borrowings made on investments in shares and debentures is allowable as the same was consistently being allowed in the earlier years against the dividend income earned by the assessee although the dividend income is exempt during the year under consideration. Separate heads of income have been provided for computing the income under each head independently and separately and the heads of income are as under : A Salaries 14 C Income from house property D Profits and gains of business or profession E Capital gains F Income from other sources Sec. In view of the provisions of s. 14A, while allowing the claim of the expenditure, it is to be seen whether the aforesaid expenditure is relatable to any income forming part of total income assessable in the hands of the assessee. The provisions of s. 14A providing for disallowance of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act, would come into play. Apparently the expenses incurred by the assessee in relation to such dividend income could not be allowed as a deduction in computing the income of the assessee under Chapter IV of the Act, namely, under the five heads stated therein for computation of total income. The another way to consider the issue might be that if interest is allowable, it would be allowable against dividend income and the net dividend income after allowing that alone would be excluded from total income under s. 10(33). In these circumstances, the expenditure would not be allowable at all to the assessee even while computing the income under the head Capital gains and on the theory of indivisibility of source of income as contended by the assessee.


MS. SUSHMA CHOWLA, J.M. ORDER This appeal by assessee is against order of CIT(A), Central-III, Mumbai, dt. 23rd Oct., 2002 relating to asst. yr. 1999-2000 against order under s. 143(3) of IT Act, 1961. 2. assessee has raised following grounds of appeal : "1. Disallowance of interest : (a) learned CIT(A) erred in law and on facts in upholding order of AO for disallowing interest of Rs. 2,81,889 while assessing total income by wrongly applying provisions of s. 14A of Act. (b)(i) Your appellant submits that said interest was paid on borrowings made for investments in shares and debentures. (ii) Your appellant further submits that interest represented expenditure incurred for purposes of earning dividend and earning profits on sale of shares. (c) Your appellant pleads that said interest be allowed as deduction. 2. Interest under ss. 234B and 234C (a) learned CIT(A) once again erred in confirming levy of interest under ss. 234B and 234C, which was levied by learned AO without giving any opportunity of hearing and was levied without passing any speaking orders to that effect. (b) Your appellant submits that he has paid interest as per law and that no opportunity of hearing was given before levy of interest. (c) Your appellant pleads that interest should be deleted." 4. brief facts of case are that assessee had claimed deduction of interest which is paid on borrowings made for investment in shares and debentures. claim of assessee was that borrowings have been made with effect from financial year 1993-94 onwards for purpose of investment in shares and debentures and no fresh borrowings had been made for such investment during year under consideration. interest paid on such borrowings was being claimed as deduction out of income received from dividend from year to year and same was being allowed as deduction. assessee also borrowed funds for making investment in property and interest thereon was claimed as deduction. AO while completing assessment n d invoking provisions of s. 14A of IT Act disallowed claim of interest relating to investments which do not yield taxable income and accordingly disallowed interest of Rs. 3,22,189. Before CIT(A), assessee claimed that interest on borrowings made on investments in shares and debentures is allowable as same was consistently being allowed in earlier years against dividend income earned by assessee although dividend income is exempt during year under consideration. With regard to interest on funds borrowed for investment in house property, assessee claimed that same was fully deductible under provisions of s. 24(1) of IT Act. claim of assessee, with regard to interest paid on borrowings for investment in house property amounting to Rs. 40,300 was allowed by CIT(A) and balance disallowance of interest of Rs. 2,81,889, in view of provisions of s. 14A of IT Act was confirmed by CIT(A). assessee is aggrieved and hence this appeal. 5. learned Authorised Representative for assessee submitted that borrowings for acquiring shares were made in 1993 and interest on such borrowings was claimed and allowed as deduction from year to year. claim of interest was also allowed to assessee in asst. yr. 1998-99 by way of order under s. 143(3) of IT Act, though order is non-speaking order. dividend income, which was taxable in earlier years was exempted from tax under provisions of s. 10(33) of IT Act, by way of subsequent legislations. exemption provided under s. 10(33) of IT Act does not make it exempt from income. learned Authorised Representative further stated that s. 14A of IT Act was introduced subsequently but with retrospective operation and provisions of said section apply to only such income which do not form part of total income. Reliance was placed on decision of Hon ble Calcutta High Court in Royal Calcutta Turf Club vs. CIT (1983) 33 CTR (Cal) 208 : (1983) 144 ITR 709 (Cal). learned Authorised Representative for assessee further placed reliance on under mentioned decisions : (i) Mafatlal Holdings Ltd. vs. Asstt. CIT (2004) 85 TTJ (Mumbai) 821; (ii) Harish Krishnakant Bhatt vs. ITO (2004) 85 TTJ (Ahd) 872 : (2004) 91 ITD 311 (Ahd); (iii) P. Jayantilal & Co. (P) Ltd. vs. Dy. CIT (2005) 97 TTJ (Mumbai) 100. learned Authorised Representative for assessee made alternate claim of allowing aforesaid interest as part of cost of investment and not as cost of improvement to asset. Reliance was further placed on under mentioned decisions for abovesaid propositions : (i) CIT vs. Mithlesh Kumari (1973) 92 ITR 9 (Del); (ii) Addl. CIT vs. K.S. Gupta (1979) 119 ITR 372 (AP); (iii) CIT vs. Maithreyi Pai (1984) 43 CTR (Kar) 88 : (1985) 152 ITR 247 (Kar). learned Departmental Representative for Revenue vehemently argued that with retrospective introduction of s. 14A of IT Act, provision of law is clear that while computing income of person, no deduction of expenditure incurred for earning exempt income is to be allowed. 6 . We have heard rival submissions and perused records. Under Chapter IV of IT Act, heads of income are provided as enumerated in s. 14 of IT Act. Sec. 14 of IT Act provides heads of income, which are chargeable to tax while computing income of assessee. Separate heads of income have been provided for computing income under each head independently and separately and heads of income are as under : Salaries 14 () C Income from house property D Profits and gains of business or profession E Capital gains F Income from other sources Sec. 14A of IT Act was inserted by Finance Act, 2001 with retrospective effect from 1st April, 1962, which provided as under : Sec. 14A For purpose of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act : Provided that nothing contained in this section shall empower AO either to reassess under s. 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under s. 154, for any assessment year beginning on or before 1st day of April, 2001. Sec. 2(24) defines income which in addition to all other incomes also includes dividend as per cl. (ii) to s. 2(24) of IT Act. Sec. 2(45) defines total income as total amount of income referred to in s. 5 and computed in manner laid down in this Act. Sec. 10 of IT Act specifies incomes which shall not be included in total income. Sec. 10(33) provides that income received by way of dividend as referred to in s. 115-O of IT Act are exempt from tax. Sec. 115-O of IT Act talks of tax on distributed profits of domestic companies. In other words, dividend distributed by domestic companies is not taxable in hands of recipient i.e., shareholder of domestic company by virtue of provisions of s. 10(33) of IT Act, but tax is charged on distribution of such profits by way of dividend on domestic companies, as per provisions of s. 115-O of IT Act. In other words, tax is charged on distributor of income and no tax is charged in hands of recipient by virtue of s. 10(33) of IT Act. 7 . Sec. 14A inserted by Finance Act, 2001 with retrospective effect from 1st April, 1962 provides for disallowance of expenditure in relation to income which does not form part of total income. In view of provisions of s. 14A, while allowing claim of expenditure, it is to be seen whether aforesaid expenditure is relatable to any income forming part of total income assessable in hands of assessee. 8 . In facts of present case before us, assessee had invested borrowed funds for purchase of shares in domestic companies in previous years. interest paid on such borrowings was claimed and allowed as deduction against dividend income earned by assessee from year to year. By virtue of insertion of s. 10(33) w.e.f. 1st April, 1998 by Finance Act, 1997 such dividend income received by assessee became exempt. During year under consideration, assessee had claimed interest paid on borrowed funds as deduction though dividend income was exempt. issue before us was considered at length by Ahmedabad Bench of Tribunal in Harish Krishnakant Bhatt s vs. ITO (supra) (relied on by learned Authorised Representative for assessee). Tribunal after considering issue of dividend not being taxable and insertion of provision of s. 14A had held as under : "There was no dispute that interest payment in instant case, was expenditure incurred for making or earning income from dividend. In view of provisions of s. 10(33), there was also no dispute that dividend received by assessee did not form part of its total income. That being so, provisions of s. 14A providing for disallowance of expenditure incurred by assessee in relation to income which does not form part of total income under Act, would come into play. Apparently, therefore, expenses incurred by assessee in relation to such dividend income could not be allowed as deduction in computing income of assessee under Chapter IV of Act, namely, under five heads stated therein for computation of total income. " Regarding claim of deduction of interest paid on borrowed funds utilized for investment in shares, it was held by Ahmedabad Tribunal as under : "............It was, thus, clear that when dividend is not taxable at all, interest pertaining to that would also not be allowable because there is no taxable income of assessee against which such interest can be allowed. another way to consider issue might be that if interest is allowable, it would be allowable against dividend income and net dividend income after allowing that alone would be excluded from total income under s. 10(33). Sec. 14A was inserted to clarify this intention of legislature to set existing controversy on this issue at rest. With regard to chargeability of additional tax on companies distributing dividend, it was further held by Ahmedabad Tribunal as under : "........The first contention of assessee was that dividend had been assessed in case of company and, therefore, s. 14A did not apply. Income-tax is levy on person and not on income though it is charged in respect of total income this is evident from charging s. 4. Thus, income- tax as well as levy of additional income-tax is tax in respect of total income and it is levied on person. It is thus, personal tax levied on person on his total income. Sec. 115-O levies additional tax on company and it would be additional tax within meaning of and mentioned in s. 4. ........Therefore, amount declared or distributed or paid by way of dividend had not suffered any tax in hands of assessee. It was fully exempted in his hand by virtue of s. 10(33). Even otherwise company and shareholder are two different entities and t x paid or payable by company is not tax paid or payable by assessee shareholder." Ahmedabad Bench of Tribunal concluded by holding that income being exempt from tax, no part of expenditure attributable to earning of such exempted income was to be allowed after insertion of s. 14A and it was held : Sec. 14A provides for disallowance of expenditure in relation to income Sec. 14A provides for disallowance of expenditure in relation to income which does not form part of total income. It is assessee s own total income that is to be seen for applying provisions of s. 14A and not that of somebody else. Admittedly by virtue of s. 10(33) dividend income is not includible/included in total income of assessee shareholder. In other words by virtue of s. 10(33), it does not form part of total income of shareholder and, therefore, expenditure incurred by shareholder in earning that income would not be allowable. issue of allowability of expenditure in past was also considered by Ahmedabad Bench of Tribunal and it was held as under : ... second issue made out by assessee was that when shares were purchased and assessee incurred liability to pay interest, dividend was forming part of assessee s total income chargeable to tax. It became non- includible only with effect from asst. yr. 1998-99 and since expenditure was incurred for earning taxable income at that time, it would not change its character by subsequent event. There was no force in this contention of assessee as well because interest liability is recurring liability of expenditure of revenue nature from year to year starting from date of acquisition of shares onwards. In instant case before us, it is admitted position that borrowed money was utilized for purpose of investment in shares, from which dividend income is received, which is exempt from tax. In view of decision of Ahmedabad Bench in case of Harish Krishnakant Bhatt s vs. ITO (supra), expenditure being interest paid on such borrowings utilized for purpose of investment in shares is not to be allowed as expenditure in view of provisions of s. 14A of IT Act. Though, learned Authorised Representative for assessee had during course of argument relied upon aforesaid decision but on perusal of same it transpires that said decision is against assessee, but does over total legal position raised in instant appeal before us. learned Authorised Representative for assessee had also relied upon decision of Mumbai Bench in Mafatlal Holdings Ltd. s case (supra), which has been considered by Ahmedabad Bench of Tribunal and reliance on P. Jayantilal & Co. (P) Ltd.s case (supra) is misplaced. 9 . alternate claim of assessee to allow interest paid on borrowings for investment in shares as part of its cost of acquisition has also been considered and deliberated upon by Ahmedabad Bench and it is held as under : "... expenditure of interest on borrowed capital up to date of sale or up to date of purchase of shares could at best be said to be capital expenditure and could be allowed as deduction while computing income from capital gains in year of sale but once shares had been acquired, interest pertaining to period after acquisition would be revenue expenditure and allowable under s. 57 of IT Act, while computing income of assessee from dividend in view of decision of Hon ble Supreme Court in case of CIT vs. Rajendra Prasad Mody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC). In these circumstances, expenditure would not be allowable at all to assessee even while computing income under head Capital gains and on theory of indivisibility of source of income as contended by assessee." 10. In view of above, we hold that interest paid on borrowed funds utilized for purpose of investment in shares is not to be allowed as either expenditure or as part of cost of acquisition of shares. In view of provisions of s. 14A of Act, appeal of assessee is rejected. 11. In result, appeal filed by assessee is dismissed. *** MOHANANLAL M. SHAH v. DEPUTY COMMISSIONER OF INCOME TAX
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