ITAT Special Bench New Delhi — ‘B’ Bench
Before R. P. Garg (VP) and A. D. Jain (AM) and
Rajpal Yadav (JM)
ITA No. 87/Del./2008
A.Y. : 2004-05. Decided on : 5-8-2009
Counsel for assessee/revenue : Ajay Vohra, Rohit
Jain, Gaurav Jain & Rohit Garg/S. D. Srivastava, Rajesh Tuteja, & Manish Gupta
S. 14A — Disallowance u/s.14A can be made even in
the year in which no exempt income has been earned or received — Disallowance
u/s.14A in respect of interest expenditure is to be made with reference to
gross interest expenditure and not with reference to interest expenditure as
reduced by interest receipt.
Per R. P. Garg :
Facts :
The assessee had invested Rs.17,36,89,230 in
purchase of shares. Some of the shares were held by the assessee as its
capital assets, whereas the others were held as its stock-in-trade. The
assessee had taken unsecured loans of Rs.8,51,65,000. It had paid interest of
Rs.1,21,02,367 on unsecured loans borrowed by it. Of the borrowed funds a sum
of Rs.6,88,70,000 was invested in shares. During the previous year relevant to
the assessment year 2004-05, the assessee did not earn any dividend income.
In the course of assessment proceedings before
the Assessing Officer (AO), the assessee contended that since it had not
earned or received exempt income the question of disallowance of interest does
not arise. The AO did not accept the contention of the assessee and disallowed
interest on a proportionate basis i.e., a sum of Rs.97,87,570 was
disallowed out of total interest.
Aggrieved by the disallowance of interest the
assessee preferred an appeal to CIT(A) who confirmed the action of the AO in
disallowing proportionate interest pertaining to investment for earning
dividend, though exempt income was not earned during the year. The CIT(A),
however, agreed with the alternative contention of the assessee that the
disallowance be computed with reference to the net interest amount debited to
the Profit & Loss Account and not the gross interest expenditure. The CIT(A)
directed the AO to work out disallowable interest on pro rata basis of
the net interest i.e., interest payment as reduced by receipt of
interest.
The assessee preferred an appeal on the ground
that disallowance was not warranted since the assessee had neither earned nor
received any exempt income during the previous year relevant to the assessment
year under consideration. The Revenue preferred an appeal on the ground that
the proportionate gross interest expenditure ought to have been held to be
disallowable.
In view of the contrary decisions on the issue
under consideration, the President, ITAT constituted a Special Bench (SB) to
dispose of the appeal and decide the following question :
“Whether disallowance u/s.14A of the Act can be
made in a year in which no exempt income has been earned or received by the
assessee ?”
Held :
The Special Bench held that —
(a) when the expenditure of interest is
incurred in relation to income which does not form part of total income, it
has to suffer the disallowance, irrespective of the fact whether any income
is earned by the assessee or not. S. 14A does not envisage any such
exception;
(b) when prior to introduction of S. 14A, an
expenditure both u/s.36 and u/s.57 was allowable to an assessee without such
requirement of earning or receipt of income, such a condition cannot be
imported when it comes to disallowance of the same expenditure u/s.14A of
the Act;
(c) in the case of Rajendra Prasad Moody the SC
held that irrespective of dividend receipt, expenditure has to be allowed.
Applying the ratio of this decision in the reverse case since dividend is
exempt, expenditure has to be disallowed. The fact that during the year
dividend has neither been earned nor has it been received would be
irrelevant;
(d) the allowance of expenditure in relation to
dividend income would thus be not admissible in computing the income of an
assessee under this Act, irrespective of whether the shares are held as
investment or they are held on trading account as stock-in-trade;
(e) S. 57 allows the expenditure incurred for
making or earning the income, whereas S. 14A disallows the expenditure ‘in
relation to income which does not form part of total income’. The term
‘expenditure in relation to’ is wider in scope and provides for disallowance
if it is related to income not forming part of total income;
(f) the disallowance has to be of the entire amount of the
expenditure so related and cannot be reduced by the receipt of interest which
has no relation to such expenditure.
