Calcutta H.C : purpose of disallowance a part of the interest expenditure as relatable to investment in shares/dividend received thereon and its purported findings in that behalf are arbitrary, unreasonable and perverse

High Court Of Calcutta

Dhanuka & Sons vs. CIT, (Central)-1

Assessment Year : 1998-99

Section : 14A

Bhaskar Bhattacharya And Sambuddha Chakrabarti, JJ.

IT Appeal No. 633 Of 2004

April 19, 2011


Bhaskar Bhattacharya, J. – This appeal under section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against an order dated April 29, 2004, passed by the Income-tax Appellate Tribunal, “D” Bench, Calcutta, in Income-tax Appeal being ITA No. 2055 (KOL) of 2003, for the assessment year 1998-99 thereby dismissing the appeal filed by the assessee against the order of the Commissioner of Income-tax (Appeals).

2. The facts giving rise to filing of this appeal may be summed up thus:

(a) The assessee had earned dividend income of Rs. 2,40,501 apart from the income from trading in share, interest and commission. The Assessing Officer found that the assessee had claimed interest amounting to Rs. 12,96,597 and that the interest payment was attributable to investment in share from which income is exempted under section 10(34) of the Income-tax Act. He, therefore, worked out the interest disallowance by applying the formula: Interest paid X Investments in shares/Total loan over which interest has been paid and arrived at the following figure: Rs. 12,96,597 × Rs. 8,95,56/Rs. 69,11,561= Rs. 1,68,005.

(b) Being dissatisfied, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who dismissed the appeal with the finding that the assessee itself had admitted that it would not be possible for him to establish the acquisition of shares and sources thereof by producing books of account or other documentary evidence and consequently, the said appellate authority observed that the assessee had failed to establish its contention whereas the Assessing Officer had worked out the disallowable amount on the basis of documentary evidence on record.

(c) Being dissatisfied, the assessee preferred an appeal before the Tribunal below and the Tribunal, by the order impugned herein has dismissed the appeal.

Being dissatisfied, the assessee has come up with the present appeal.

3. At the time of admission of this appeal, a Division Bench of this Court admitted this appeal on the following questions of law:

“(i) Whether the Tribunal was justified in law upholding the action of the Assessing Officer in notionally working out for the purpose of disallowance a part of the interest expenditure as relatable to investment in shares/dividend received thereon and its purported findings in that behalf are arbitrary, unreasonable and perverse?”

(ii) Whether and in any event, the entire interest expenditure incurred by the appellant for its indivisible business of trading in shares, granting loans and advances and investing in shares was allowable as a deduction under section 36(1)(iii) and no part thereof could be disallowed by applying the principle of apportionment or as incurred in relation to the dividend income falling under section 10(33)?”

(iii) Whether on a true and proper interpretation of the provisions of sections 115-O and/or 14A of the Income-tax Act, 1961 and/or the circular dated July 23, 2001 issued by the Central Board of Direct Taxes, the appellant is entitled to deduction of interest amounting to Rs. 1,68,005.”

4. Mr. Khaitan, the learned senior Advocate appearing on behalf of the appellant, has criticized the orders of the authorities below on the ground that in dismissing the appeals, the authorities below did not consider the fact that there was no acquisition of any new share in course of last five years and thus, in such circumstances, those authorities should have taken a reasonable approach in calculating the amount of disallowance. Mr. Khaitan, in this connection placed strong reliance upon the decision of the Supreme Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/ 192 Taxman 211 and also of the Division Bench of the Bombay High Court in the case of Godrej & Boyce MFG. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/ 194 Taxman 203 .

5. Mr. Khaitan submits that section 14A of the Income-tax Act clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income and in many cases, the nature of expenses incurred by the assessee may be relatable partly to exempt income and partly to taxable income and in the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. Mr. Khaitan submits the mandate of section14A is clear and it desires to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time, to avail of the tax incentive by way of exempt income without making any apportionment of expenses incurred in relation to exempt income. Mr. Khaitan submits that in the case before us, the approach of the Tribunal below was totally erroneous as the Assessing Officer failed to determine the proportion of expenditure incurred in relation to earning of exempt income by taking a reasonable approach.

6. Mr. Sarkar, the learned advocate appearing on behalf of the revenue, has, on the other hand, supported the order passed by the Tribunal and has contended that the assessee itself having failed to produce material in support of its contention, the Assessing Officer rightly assessed the deductible income on proportionate basis. Mr. Sarkar submits that the same is in conformity with Rule 8D of the Income-tax Rule and thus, we should not interfere with the order passed by the Tribunal.

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 section14A 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.

10. We, thus, find no merit in this appeal and dispose of this appeal by answering the first point in the affirmative and the other two in the negative.

11. In the facts and circumstances, there will be, however, no order as to costs.

Sambuddha Chakrabarti, J. – I agree.

[Citation : 339 ITR 319]

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