Q
5) Before we proceed further, we may
briefly note the facts of Civil Appeal Nos. 104-109 of 2015, for better understanding
of the issue involved.
The appellant company is engaged, inter alia , in the
business of finance, investment and dealing in shares and securities. The
appellant holds shares/securities in two portfolios, viz. (a) as investment on
capital account; and, (b) as trading assets for the purpose of acquiring and retaining
control over investee group companies, particularly Max India Ltd., a widely
held quoted public limited company. Any profit/loss arising on sale of
shares/securities held as ‘investment’ is returned as income
under the head ‘capital gains’,
whereas profit/loss arising on sale of shares/securities held as ‘trading
assets’ (i.e. held,
inter alia , with the intention of
acquiring, exercising and retaining control over investee group companies) has
been regularly offered and assessed to tax as business income under the head
‘profits and gains of business or profession’.
Consistent with the aforesaid
treatment regularly followed, The appellant filed return for the previous year
relevant to the Assessment Year 2002-03, declaring income of Rs.78,90,430/-. No
part of the interest expenditure of Rs.1,16,21,168/- debited to the profit and
loss account, to the extent relatable to investment in shares of Max India
Limited, yielding tax free dividend
income, was considered disallowable under Section 14A of the Act on the ground
that shares in the said company were acquired for the purposes of retaining
controlling interest and not with the motive of earning dividend. According to
the appellant, the dominant purpose/intention of
investment in shares of Max India Ltd. was acquiring/retaining controlling
interest therein and not earning dividend and, therefore, dividend of
Rs.49,90,860/- earned on shares of Max India Ltd. during the relevant previous
year was only incidental to the holding of such shares.
The
Assessing Officer (AO), while passing the assessment order dated August 27,
2004, under Section 143(3) worked out disallowance underSection 14A of the Act at
Rs.67,74,175/- by apportioning the interest expenditure of Rs.1,16,21,168/- in
the ratio of investment in shares of Max India Ltd. (on which dividend was
received) to the total amount of unsecured loan. The AO, however, restricted dis allowance under that Section to Rs.49,90,860/- being the amount of dividend
received and
claimed exempt.
7. After hearing the learned counsel appearing for the
parties and after going through the materials on record and the decisions cited
by Mr. Khaitan, we find that the Supreme Court in the cases of CIT v. Maharastra Sugar Mills Ltd.
[1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 having held that where
there is one indivisible business giving rise to taxable income as well as
exempt income, the entire expenditure incurred in relation to that business
would have to be allowed even if a part of the income earned from the business
is exempt from tax, section 14A
of the Act was enacted to overcome those judicial pronouncements. The object of
section 14A of the
Act is to disallow the direct and indirect expenditure incurred in relation to
income which does not form part of the total income.
8. In the case before us, there is no dispute that part of
the income of the assessee from its business is from dividend which is exempt
from tax whereas the assessee was unable to produce any material before the
authorities below showing the source from which such shares were acquired. Mr.
Khaitan strenuously contended before us that for the last few years before the
relevant previous year, no new share has been acquired and thus, the loan that
was taken and for which the interest is payable by the assessee was not for
acquisition of those old shares and, therefore, the authorities below erred in
law in giving benefit of proportionate deduction.
9. In our opinion, the mere fact that those shares were old
ones and not acquired recently is immaterial. It is for the assessee to show
the source of acquisition of those shares by production of materials that those
were acquired from the funds available in the hands of the assessee at the
relevant point of time without taking benefit of any loan. If those shares were
purchased from the amount taken in loan, even for instance, five or ten years
ago, it is for the assessee to show by the production of documentary evidence
that such loaned amount had already been paid back and for the relevant
assessment year, no interest is payable by the assessee for acquiring those old
shares. In the absence of any such materials placed by the assessee, in our
opinion, the authorities below rightly held that proportionate amount should be
disallowed having regard to the total income and the income from the exempt
source. In the absence of any material disclosing the source of acquisition of
shares which is within the special knowledge of the assessee, the assessing
authority took a most reasonable approach in assessment.”
27) We have already stated as to how the two divergent
opinions have emerged from different High Courts and the respective reasons in
support of these conflicting outcome. Obviously, assessees are banking upon the
reasons which prevailed with the High Courts that have taken the view which are
favourable to the assessees and the Revenue is relying upon the reasoning given
by Delhi High Court as well as Calcutta High Court in Dhanuka and Sons case.
Therefore, it may not be necessary to give a detailed narrative of the
arguments which were advanced by various counsel appearing for the assessees as
well as counsel for the Revenue. A brief resume of their submissions would
serve the purpose.
28) Insofar as assessees are
concerned, their arguments are recapitulated in brief hereinbelow:
(i) The holding of investment in
group companies representing controlling interest, amounts to carrying on
business, as held in the various cases.
(ii) Notwithstanding that dividend
income is assessable under the head “income from other sources”, in view of the
mandatory prescription in Section 56
of the Act, the nature of dividend income has to be ascertained on the facts of
the case. Where dividend is earned on shares held as stock-in-trade/shares
purchased for acquiring/retaining controlling interest, dividend income is in
the nature of business income.
(iii) Interest paid on loans
borrowed for acquiring shares representing controlling interest in the investee
company is allowable business expenditure in terms of Section 36(1)(iii)
of the Act, since acquiring controlling interest in companies and managing,
administering, financing and rehabilitating such companies are for business
and/or professional purposes and not for earned dividend.
(iv) Conversely, interest paid on
funds borrowed for investment in shares representing controlling interest does
not represent expenditure incurred for earning dividend income and is not
allowable under Section 57(iii)
of the Act (prior to introduction of Section 14A).
29) Basing their case on the
aforesaid principles, it was argued that when the shares were acquired, as part
of promoter holding, for the purpose of acquiring controlling interest in the
company, the dominant object is to keep control over the management of the
company and not to earn the dividend from investment in shares. Whether
dividend is declared/earned or not is immaterial and, in either case, the
assessee would not liquidate the shares in investee companies. Therefore, no
expenditure was made ‘in relation to’ the income i.e. the dividend income and,
therefore, Section 14A
would not be attracted. In this hue, it was submitted that Section 14A was to be
accorded plain and grammatical interpretation meaning thereby mandating and
requiring a direct and proximate nexus/link between the expenditure actually
incurred and the earning of the exempt income. It was also argued that even if
contextual/purposive interpretation is to be given, that also called for direct
and proximate connection between the expenditure incurred and earning of
dividend. According to the learned counsel appearing for the assessees, the
legislative intention behind inserting Section 14A in this
statute was to exclude both, viz. the receipts which are exempt under the
provisions of the Act as well as expenditure actually incurred ‘in relation
thereto’ from entering into the computation of assessable income, so as to
remove the double benefit to the assessee (i) in the form of exempt income, on
which no tax is leviable; and (ii) providing deduction in respect of
expenditure actually incurred which directly resulted in the earning of exempt
income by the assessee.
30) Mr. K. Radhakrishnan, learned
senior counsel appearing for the Revenue, on the other hand, made a fervent
plea to accept the view taken by the Delhi High Court. He submitted that the
objective behind insertion of Section 14A of the
Act manifestly pointed out that expenditure incurred in respect of income
earned, which is exempted from tax, has to be disallowed. He also pointed out
that this message was eloquently brought out by this Court in Walfort Share and
Stock Brokers P Ltd. case. Otherwise, argued the learned senior counsel, the
assessee will get double benefit, one, in the form of exemption from income tax
insofar as dividend income is concerned and other by getting deduction on
account of expenditure as well. He, thus, submitted that expression ‘in
relation to’ had to be given expansive meaning in order to sub-serve the
purpose of the said provision. He also emphasised that literal meaning of Section 14A of the
Act pointed towards that and that was equally the purpose behind the insertion
of Section 14A
as well.
31) We have given our thoughtful
consideration to the argument of counsel for the parties on both sides, in the
light of various judgments which have been cited before us, some of which have
already been taken note of above.
32) In the first instance, it needs
to be recognised that as per section 14A(1) of the
Act, deduction of that expenditure is not to be allowed which has been incurred
by the assessee “in relation to income which does not form part of the total
income under this Act”. Axiomatically, it is that expenditure alone which has
been incurred in relation to the income which is includible in total income
that has to be disallowed. If an expenditure incurred has no causal connection
with the exempted income, then such an expenditure would obviously be treated
as not related to the income that is exempted from tax, and such expenditure
would be allowed as business expenditure. To put it differently, such
expenditure would then be considered as incurred in respect of other income
which is to be treated as part of the total income.
33) There is no quarrel in assigning
this meaning to section 14A
of the Act. In fact, all the High Courts, whether it is the Delhi High Court on
the one hand or the Punjab and Haryana High Court on the other hand, have
agreed in providing this interpretation to section 14A of the
Act. The entire dispute is as to what interpretation is to be given to the
words ‘in relation to’ in the given scenario, viz. where the dividend income on
the shares is earned, though the dominant purpose for subscribing in those
shares of the investee company was not to earn dividend. We have two scenarios
in these sets of appeals. In one group of cases the main purpose for investing
in shares was to gain control over the investee company. Other cases are those
where the shares of investee company were held by the assessees as
stock-in-trade (i.e. as a business activity) and not as investment to earn
dividends. In this context, it is to be examined as to whether the expenditure
was incurred, in respective scenarios, in relation to the dividend income or
not.
34) Having clarified the aforesaid
position, the first and foremost issue that falls for consideration is as to
whether the dominant purpose test, which is pressed into service by the
assessees would apply while interpreting Section 14A of the
Act or we have to go by the theory of apportionment. We are of the opinion that
the dominant purpose for which the investment into shares is made by an
assessee may not be relevant. No doubt, the assessee like Maxopp Investment
Limited may have made the investment in order to gain control of the investee
company. However, that does not appear to be a relevant factor in determining
the issue at hand. Fact remains that such dividend income is non-taxable. In
this scenario, if expenditure is incurred on earning the dividend income, that
much of the expenditure which is attributable to the dividend income has to be
disallowed and cannot be treated as business expenditure. Keeping this
objective behind Section14A of the Act in mind, the said provision has to be
interpreted, particularly, the word ‘in relation to the income’ that does not
form part of total income. Considered in this hue, the principle of
apportionment of expenses comes into play as that is the principle which is
engrained in Section 14A
of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant
passage whereof is already reproduced above, for the sake of continuity of
discussion, we would like to quote the following few lines therefrom.
“The next phrase is, “in relation to
income which does not form part of total income under the Act”. It means that
if an income does not form part of total income, then the related expenditure
is outside the ambit of the applicability of section 14A..
xxx xxx xxx The theory of
apportionment of expenditure between taxable and non-taxable has, in principle,
been now widened under section 14 A.”
35) The Delhi High Court, therefore,
correctly observed that prior to introduction of Section 14A of the
Act, the law was that when an assessee had a composite and indivisible business
which had elements of both taxable and non-taxable income, the entire
expenditure in respect of said business was deductible and, in such a case, the
principle of apportionment of the expenditure relating to the non-taxable
income did not apply. The principle of apportionment was made available only
where the business was divisible. It is to find a cure to the aforesaid problem
that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act,
2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself
came into force. The aforesaid intent was expressed loudly and clearly in the
Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree
with the view taken by the Delhi High Court, and are not inclined to accept the
opinion of Punjab & Haryana High Court which went by dominant purpose
theory. The aforesaid reasoning would be applicable in cases where shares are
held as investment in the investee company, may be for the purpose of having controlling
interest therein. On that reasoning, appeals of Maxopp Investment Limited as
well as similar cases where shares were purchased by the assessees to have
controlling interest in the investee companies have to fail and are, therefore,
dismissed.
36) There is yet another aspect
which still needs to be looked into. What happens when the shares are held as
‘stock-in-trade’ and not as ‘investment’, particularly, by the banks? On this
specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015.
37) This Circular has already been
reproduced in Para 19 above. This Circular takes note of the judgment of this
Court in Nawanshahar case wherein it is held that investments made by a banking
concern are part of the business or banking. Therefore, the income arises from
such investments is attributable to business of banking falling under the head
‘profits and gains of business and profession’. On that basis, the Circular
contains the decision of the Board that no appeal would be filed on this ground
by the officers of the Department and if the appeals are already filed, they
should be withdrawn. A reading of this circular would make it clear that the
issue was as to whether income by way of interest on securities shall be
chargeable to income tax under the head ‘income from other sources’ or it is to
fall under the head ‘profits and gains of business and profession’. The Board,
going by the decision of this Court in Nawanshahar case, clarified that it has
to be treated as income falling under the head ‘profits and gains of business
and profession’. The Board also went to the extent of saying that this would
not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i)
of the Act but would also be applicable to all banks/commercial banks, to which
Banking Regulation Act,
1949 applies.
38) From this, Punjab and Haryana
High Court pointed out that this circular carves out a distinction between
‘stock-in-trade’ and ‘investment’ and provides that if the motive behind
purchase and sale of shares is to earn profit, then the same would be treated
as trading profit and if the object is to derive income by way of dividend then
the profit would be said to have accrued from investment. To this extent, the
High Court may be correct. At the same time, we do not agree with the test of
dominant intention applied by the Punjab and Haryana High Court, which we have
already discarded. In that event, the question is as to on what basis those
cases are to be decided where the shares of other companies are purchased by
the assessees as ‘stock-in-trade’ and not as ‘investment’. We proceed to
discuss this aspect hereinafter.
39) In those cases, where shares are
held as stock-in-trade, the main purpose is to trade in those shares and earn
profits therefrom. However, we are not concerned with those profits which would
naturally be treated as ‘income’ under the head ‘profits and gains from business
and profession’. What happens is that, in the process, when the shares are held
as ‘stock-in-trade’, certain dividend is also earned, though incidentally,
which is also an income. However, by virtue of Section 10 (34) of
the Act, this dividend income is not to be included in the total income and is
exempt from tax. This triggers the applicability of Section 14A of the
Act which is based on the theory of apportionment of expenditure between
taxable and non-taxable income as held in Walfort Share and Stock Brokers P
Ltd. case. Therefore, to that extent, depending upon the facts of each case,
the expenditure incurred in acquiring those shares will have to be apportioned.
40) We note from the facts in the
State Bank of Patiala cases that the AO, while passing the assessment order,
had already restricted the disallowance to the amount which was claimed as
exempt income by applying the formula contained in Rule 8D of the Rules and
holding that section 14A
of the Act would be applicable. In spite of this exercise of apportionment of
expenditure carried out by the AO, CIT(A) disallowed the entire deduction of
expenditure. That view of the CIT(A) was clearly untenable and rightly set
aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has
arrived at a correct conclusion by affirming the view of the ITAT, though we
are not subscribing to the theory of dominant intention applied by the High
Court. It is to be kept in mind that in those cases where shares are held as
‘stock-in-trade’, it becomes a business activity of the assessee to deal in
those shares as a business proposition. Whether dividend is earned or not
becomes immaterial. In fact, it would be a quirk of fate that when the investee
company declared dividend, those shares are held by the assessee, though the
assessee has to ultimately trade those shares by selling them to earn profits.
The situation here is, therefore, different from the case like Maxopp
Investment Ltd. where the assessee would continue to hold those shares as it
wants to retain control over the investee company. In that case, whenever
dividend is declared by the investee company that would necessarily be earned
by the assessee and the assessee alone. Therefore, even at the time of
investing into those shares, the assessee knows that it may generate dividend
income as well and as and when such dividend income is generated that would be
earned by the assessee. In contrast, where the shares are held as
stock-in-trade, this may not be necessarily a situation. The main purpose is to
liquidate those shares whenever the share price goes up in order to earn
profits. In the result, the appeals filed by the Revenue challenging the
judgment of the Punjab and Haryana High Court in State Bank of Patiala also
fail, though law in this respect has been clarified hereinabove.
41) Having regard to the language of
Section 14A(2) of the
Act, read with Rule 8D of the Rules, we also make it clear that before applying
the theory of apportionment, the AO needs to record satisfaction that having
regard to the kind of the assessee, suo moto disallowance under Section 14A was not
correct. It will be in those cases where the assessee in his return has himself
apportioned but the AO was not accepting the said apportionment. In that
eventuality, it will have to record its satisfaction to this effect. Further,
while recording such a satisfaction, nature of loan taken by the assessee for
purchasing the shares/making the investment in shares is to be examined by the
AO.
42) Civil Appeal No. 1423 of 2015 is
filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the
Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A)
had set aside the disallowance, which view was upturned by the ITAT in the
following words:
“...Admittedly the assessee had paid total interest of
Rs.2.92 crores out of which interest paid on term loan raised for specific
purpose totals to Rs.1.70 crores and balance interest paid by the assessee is
Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in
view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the
disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc
disallowance made by the CIT (Appeals) at Rs.5,00,000/-.
Consequently, ground of appeal
raised by the Revenue is partly allowed and ground raised by the assessee in
cross-objection is allowed...” Taking note of the aforesaid finding of fact,
the High Court has dismissed the appeal of the assessee observing as under:
“In the present case, after examining the balance-sheet of
the assessee, a finding of fact has been recorded that the funds utilized by
the assessee being mixed funds, therefore, the interest paid by the assessee is
also an interest on the investments made. Such being a finding of fact, we do
not find that any substantial question of law arises for consideration of this
Court.” After going through the records and applying the principle of
apportionment, which is held to be applicable in such cases, we do not find any
merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed.
43) Few appeals are filed by the
Revenue against the assessees which pertained to the period prior to the
introduction of Rule 8D of the Rules. Here, the case is decided in favour of
the assessees also on the ground that Rule 8D of the Rules is prospective in nature
and could not have been made applicable in respect of the Assessment Years
prior to 2007 when this Rule was inserted. This view has already been upheld by
this Court in Civil Appeal No. 2165 of 2012 (Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager), pronounced on January 31, 2018, that
the said Rule is prospective in nature. On this ground alone, these appeals of
the Revenue fail as it is not necessary to go into the other issues.
44) To sum up:
(a) Appeals of the assessees, i.e.
Civil Appeal Nos. 104-109, 110-112, 130, 1423 of 2015, are dismissed.
(b) Appeals of the Revenue, i.e.
Civil Appeal Nos. 3267, 19614, 10096 of 2013, 8596 of 2014, 18019 of 2017, 115,
123, 6590 of 2015, Civil Appeals arising out of SLP (C) Nos. 27054, 31417 of
2016, 20475, 23123, 32405 of 2017, Diary Nos. 36413, 39820, 39823, 41890,
41903, 41922 of 2017 and 1146 of 2018 are dismissed.
(c) Appeal of the Revenue, i.e.
Civil Appeal arising out of Diary No. 41203 of 2017, is allowed.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN) NEW DELHI;
FEBRUARY 12, 2018.
UQ
(Spl. Font Supplied)
UQ
(Spl. Font Supplied)
Feedback Input (as shared) @
vswami says:
OFFHAND: A welcome verdict, well
reasoned and founded on sound logic. long awaited though.The enactment replete
with/ subjected to varying kind of controversies=s, on widely / mutually
distinct factual matrix of numerous cases, has now been broadly interpreted;
rightly so,- the thus far maligned provisions, by the apex court construing, in
its wisdom, invoking and applying the very basic and fundamental principle of
‘commercial expediency’, which has been historically. time and again, reiterated,and
well established. It is only expected that,at least at this late hour the
Revenue will realize its folly and make speedy amends to the hardship meted out
to taxpayers for too long to be taken in the stride.
Foot Note: To repeat, may you refer
once again, the analytical study attempted / the view points aired in the
published article titled – Section 14 A of Inconme-tax Act – in Interpretation
of -A Critique” – (2009)14 CPT pg. 819-825.
READ:
Posted comments
(Recommend
a must read the cited aricle, - (2009)14 CPT pg. 819-825; that should hopefully
enable anyone to appreciate the missed out points; which , if stressed
/explained, could help in having the issues settled conclusively , once for
all.)
CROSS REfer >
http://itatonline.org/archives/?category_name=all-judgements&judges=§ion=14a&counsel=&court=&catchwords=&genre=
< Feedback Input (as shared) @
https://www.linkedin.com/pulse/amendment-rule-8d-us-14a-its-effect-swaminathan-venkataraman?trk=mp-author-card
< (within)
< (within)
vswami says:
OFFHAND: A welcome verdict, well
reasoned and founded on sound logic. long awaited though.The enactment replete
with/ subjected to varying kind of controversies=s, on widely / mutually
distinct factual matrix of numerous cases, has now been broadly interpreted;
rightly so,- the thus far maligned provisions, by the apex court construing, in
its wisdom, invoking and applying the very basic and fundamental principle of
‘commercial expediency’, which has been historically. time and again,
reiterated,and well established. It is only expected that,at least at this late
hour the Revenue will realize its folly and make speedy amends to the hardship
meted out to taxpayers for too long to be taken in the stride.
Foot Note: To repeat, may you refer
once again, the analytical study attempted / the view points aired in the
published article titled – Section 14 A of Inconme-tax Act – in Interpretation
of -A Critique” – (2009)14 CPT pg. 819-825.
READ:
Posted comments
(Recommend
a must read the cited aricle, - (2009)14 CPT pg. 819-825; that should hopefully
enable anyone to appreciate the missed out points; which , if stressed
/explained, could help in having the issues settled conclusively , once for
all.)
<> As per the language in Sec.14A, the
enquiry has to be undertaken by the Assessing Officer which has been so ordered
by the Tribunal. Hence, it can be said that the Tribunal has exercised the
discretion where rights of both sides are kept open for admissible deduction
under Sec.14A. When such a discretion is exercised and the rights of the
assessee is also kept open to satisfy the Assessing Officer, it cannot be said
that any substantial questions of law would arise for consideration, as sought
to be canvassed. At the stage of enquiry under Sec.14A, it is open to the
Assessing Officer to independently consider the matter for admissibility of the
interest on borrowings and if yes to what extent. Hence, when the question at
large is further to be considered by the Assessing Officer, we do not find that
any further observations are required to be made in this regard. In any case,
the question of law as sought to be canvassed would not arise for consideration
at this stage on the said aspects as sought to be canvassed.
Share
this:
S. 14A/ Rule 8D: Interest
expenditure attributable to a taxable business cannot be disallowed.
Expenditure on creating assets which do not belong to the assessee is revenue
expenditure
|
(i) Once it was duly established
that no borrowed funds on which interest was paid had been invested for earning
tax free income, no disallowance was permissible under Section 14A. The
Tribunal has observed that under Rule 8D(2)(ii), a proportionate…
<>P S PRASAD RAO says:
In my opinion, power to estimate
disallowance by AO as provided in the Act before Rule 8D was introduced, can be
examined by assessee or Appellate authorities and the reasonableness or
otherwise of the disallowed amount can be ascertained.
But now the new provision of ‘AO’s
SATISFACTION’ is nothing short of arbitrariness, avoidance of which is the
intention of the new provision as commented by the Appellate authorities. This
is so because no yard stick is provided in the Act now to ” measure the so
called satisfaction of AO ” If you can not measure any decision with a reason,
then it is arbitrary. Neither the Act nor the judicial pronouncements so far
addressed this lacuna.
<>R Swaminathan says:
This section 14A was introduced in
2001 and it took good seven year to frame the rules. This itself shows the
problem of implementing the section. Secondly, it was a retrospective amendment
from 1961.
This section of about 3 lines has
generated maximum litigation and there are various decisions interpreting it in
as many ways as possible including the extreme way as in Cheminvest Ltd’s case.
This has allowed free play of
interpretation when any assessment was pending whether on account of regular
assessment, reassessment or appeal till insertion of Rules and even after that for
reasons of applicability or otherwise of the section to a case. The assesses
have to live with the decision that is the latest, when their appeal or
assessment comes for hearing, or seek adjournments till a favourable decision
comes along. Section 14A has forced many big assesses to provide for tax and
take a hit in their profits retrospectively.
Whenever there is any mention about
of retrospective amendment and how it affects the investments only Vodafone and
non-residents are thought of. It is time this section, which is affecting
residents, along with other sections which have retrospective effect, are
scrapped and a fresh thought is given.
<><><><><>...............
<><><><><>...............
itatonline.org › Home › All
Judgements
May 8, 2017 - The Supreme Court had
to consider two questions arising from the judgement of the Bombay High Court
in Godrej & Boyce vs. CIT 328 ITR 81 (Bom):. (a) Whether the
phrase “income which does not form part of total income under this Act”
appearing in Section 14A includes within its scope dividend income ...
COURT: Supreme Court
AY:
2002-03
SECTION(S): 14A
(4) The argument that the method in Rule 8D r.w.s 14A (2)
for determining expenditure relating to the tax-free income is arbitrary and
violative of Article 14 is not acceptable because there is an adequate
safeguard before Rule 8D can be invoked. The AO cannot ipso facto apply Rule
8D but can do so only where he records satisfaction on an objective basis that
the assessee is unable to establish the correctness of its claim. Also a
uniform method prescribed to resolve disputes between assessees and the
department cannot be said to be arbitrary or oppressive. There is a rationale
in Rule 8D and its method is “fair & reasonable”. It cannot be said that
there is “madness” in the method of Rule 8D so as to render it
unconstitutional;
(5) Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded
as retrospective because it enacts an artificial method of estimating
expenditure relatable to tax-free income. It applies w.e.f AY 2008-09;
Legal
position as on today
However, in respect of A.Yrs
2007-08 and onwards, the Tribunal/Court will have to decide this aspect of
the issue on the facts of each case considering the expression “having regard
to the accounts of the assessee” used by the legislature in sub section (2) of
section 14A. It is to be noted that the Hon’ble Bombay High Court in Godrej’s
case has commented upon as under:
“In the decision of the Division
Bench of this Court in Reliance Utilities (supra) the Division Bench
has held that “if there be interest free funds available to an assessee
sufficient to meet its investments and at the same time the assessee had raised
a loan it can be presumed that the investments were from the interest free
funds available”. The decision of the Division Bench turned on a finding of
fact by the Tribunal that there were sufficient interest free funds available
in that case. The judgment in Reliance Utilities shows that there were
interest free owned funds available and not merely reserves”.
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