By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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33 (2008) 21 SOT 42 (Mum.) (SMC)
Shree Shyamkamal Finance & Leasing Co. (P) Ltd. v.
ITO
ITA No. 15 (Mum.) of 2006
A.Y. 2002-03. Dated : 15-10-2007
S. 14A of the Income-tax Act, 1961 — Interest paid on funds
invested in shares which have yielded no dividend income cannot be disallowed
u/s.14A.
During the relevant assessment year, the assessee-company
which was engaged in the business of finance and investment in equity shares,
acquired unquoted equity shares of its subsidiary company out of unsecured loan
taken. The interest paid on the loan was claimed as deductible expenditure. The
Assessing Officer required 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 u/s.10(33), then why should not the disallowance of interest on
loan be made u/s.14A. The assessee’s contention that since it had not received
any dividend and, further, since it had not claimed any exemption of income, S.
14A could not be applied was not accepted by the Assessing Officer and he
disallowed the interest expense u/s.14A. The CIT(A) upheld the disallowance.
The Tribunal, relying on the decision in the case of Jt.
CIT v. Holland Equipment Co. B. V., (2005) 3 SOT 810, held that no
disallowance could be made u/s.14A.
The Tribunal noted as under :
(1) By virtue of S. 10(33), as it stood at relevant time,
dividend income referred to in S. 115-O does not form part of the total
income. If the assessee earned income which is not includible in the total
income, then the expenditure could be disallowed u/s.14A, because it speaks of
expenditure incurred by the assessee in relation to income which does not form
part of the total income.
(2) A reading of S. 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.
(3) In the instant case, there was no dividend income
earned by the assessee. Therefore, there was no income which could be termed
as ‘income which does not form part of the total income under the Act’.
Therefore, the provisions of S. 14A were not applicable.
