M/s. Kamron Laboratories Ltd.,, Mehsana v. The ACIT.,(OSD),, Mehsana

ITA 1476/AHD/2009 | 2006-2007
Pronouncement Date: 31-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 147620514 RSA 2009
Assessee PAN AABCK2012L
Bench Ahmedabad
Appeal Number ITA 1476/AHD/2009
Duration Of Justice 1 year(s) 8 month(s) 19 day(s)
Appellant M/s. Kamron Laboratories Ltd.,, Mehsana
Respondent The ACIT.,(OSD),, Mehsana
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 31-01-2011
Date Of Final Hearing 27-01-2011
Next Hearing Date 27-01-2011
Assessment Year 2006-2007
Appeal Filed On 11-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MAHAVIR SINGH JM & SHRI A N PAHUJA AM ITA NO.1476/AHD/2009 (ASSESSMENT YEAR:-2006-07) M/S KAMRON LABORATORIES LTD. 737 RAKANPUR VILLAGE SOLA SANTEJ ROAD KALOL MEHSANA V/S ASSISTANT COMMISSIONER OF INCOME-TAX (OSD) MEHSANA PAN: AABCK 2012 L [APPELLANT] [RESPONDENT] ITA NO.1961/AHD/2009 (ASSESSMENT YEAR:-2006-07) DEPUTY COMMISSIONER OF INCOME-TAX MEHSANA CIRCLE MEHSANA V/S M/S KAMRON LABORATORIES LTD. 737 RAKANPUR VILLAGE SOLA SANTEJ ROAD KALOL MEHSANA [APPELLANT] [RESPONDENT] ASSESSEE BY :- NONE [WRITTEN SUBMISSIONS] DEPARTMENT BY:- DR. RAJA RAM SAH DR O R D E R A N PAHUJA: THESE CROSS APPEALS AGAINST AN ORDER DATED 20-03- 2009 OF THE LD. CIT(APPEALS) GANDHINAGAR FOR THE ASSESSMENT YEAR (AY) 2006-07 RAISE THE FOLLOWING GROUNDS:- ITA NO.1476/AHD/2009[ASSESSEE] 1.0 THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) IS BAD IN LAW SINCE IT IS CONTRARY TO THE PROVISIONS O F LAW AND THE FACTS OF YOUR APPELLANT'S CASE. IT IS SUBMITTED THAT IT B E SO HELD NOW. 2.0 THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOLDING DISALLOWANCE OF RS.1 33 679/- OUT OF BUSINESS PROMO TION EXPENSES. THE APPELLANT SUBMITS THAT EACH AND EVERY EXPENDITU RE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND THEREFORE FULLY DEDUCTIBLE IN COMPUTATION OF THE TO TAL INCOME. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BE DELET ED. ITA N OS.1476 & 1961/A/09 2 2.1 THE APPELLANT FURTHER SUBMITS THAT IN ANY EVENT DISALLOWANCE MADE BY THE ASSESSING OFFICER IS EXCESSIVELY HIGH CONSID ERING FACTS AND PROVISIONS OF LAW. THE APPELLANT SUBMITS THAT THE D ISALLOWANCE THEREFORE BE DIRECTED BE ALSO REDUCED. 3.0 THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOLDING ACTION OF INVOKING PROVISIONS OF SECTION 14A. THE A PPELLANT SUBMITS THAT NEITHER INCOME EXEMPT WAS DERIVED NOR ANY EXPE NDITURE WAS INCURRED AND THEREFORE DISALLOWANCE U/S 14A IS CONT RARY TO THE FACTS AND PROVISIONS OF LAW. THE DISALLOWANCE BE DELETED. 3.1 THE APPELLANT WITHOUT PREJUDICE TO ABOVE SUBMIT S THAT THE DISALLOWANCE OF RS.4 50 000/- IN ANY EVENT IS EXCES SIVE. THE ASSESSING OFFICER BE DIRECTED TO SCALE DOWN DISALLO WANCE AND ALLOW RELIEF AS PER THE PROVISIONS OF LAW. YOUR APPELLANT PRAYS FOR LEAVE TO ADD ALTER AMEND AND/OR WITHDRAW ALL OR ANY OF THE GROUNDS OF APPEAL BEFORE THE FINA L HEARING OF THE APPEAL. ITA NO.1961/AHD/2009[REVENUE] 1 THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION OF RS.3 47 503/- MADE ON ACCOUNT OF DISALLOWANCE OF IN TEREST U/S 14A OF THE I.T. ACT 1961. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD . CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. 3 IT IS THEREFORE PRAYED THAT THE ORDER OF THE LEAR NED CIT(A) MAY BE SET ASIDE AND THAT OF THE AO BE RESTORED TO THE ABO VE EXTENT. 2. ADVERTING FIRST TO GROUND NOS.2 AND 2.1 IN THE A PPEAL OF THE ASSESSEE FACTS IN BRIEF AS PER RELEVANT ORDERS A RE THAT RETURN DECLARING NIL INCOME AFTER SETTING OFF OF BROUGHT FORWARD LOSS OF RS.2 94 012/- FILED ON 29-12-2006 BY THE ASSESSEE MANUFACTURING PHARMACEUTICAL PRODUCTS AFTER BEING PROCESSED U/S 143(1) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS TH E ACT] WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ON 12-10-2007.DURING THE COURSE OF ASSESSMENT P ROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE CLAIMED EXPENDITURE OF RS.1 33 679/- ON ACCOUNT OF GIFT TO DOCTORS. TO A QUERY BY THE AO THE ASSESSEE SUBMITTED THAT THE AM OUNT SPENT ON ITA N OS.1476 & 1961/A/09 3 PURCHASE OF PRESENTATION ARTICLES GIVEN TO DOCTORS WAS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE EXPENDITURE WAS INCURRED VOLUNTARILY AND THE ASSESSEE WAS UNDER NO OBLIGATION TO INCUR THE SAME. ACCORDINGLY THE AO DISALLOWED THE CLAIM. 3. ON APPEAL THE LEARNED CIT(A) UPHELD THE FINDING S OF THE AO IN THE FOLLOWING TERMS:- 3.3. THE MATTER HAS BEEN CONSIDERED. FROM THE READ ING OF THE ASSESSMENT ORDER AS ALSO THE SUBMISSION OF THE ASSE SSEE IT IS CLEAR THAT THE EXPENDITURE INCURRED IS IN CONNECTION WITH THE PRESENTATION / GIFT ITEMS TO THE DOCTORS. HOWEVER WHAT KIND OF GIFT PRESENTA TIONS WERE GIVEN WHETHER THEY WERE ITEMS OF PERSONAL USE OR ITEMS FO R USE IN THE DOCTORS' CLINICS AND AT WHAT OCCASIONS THESE WERE GIVEN REMA INED UNCLEAR AS NEITHER THE ASSESSING OFFICER NOR THE ASSESSEE HAS BROUGHT THESE FACTS ON RECORD. HOWEVER FROM THE LANGUAGE USED BY BOTH THE ASSESSING OFFICER AND THE ASSESSEE IT IS CLEAR THAT THESE WERE PRESU MABLY THE ITEMS OF PERSONAL USE FOR THE DOCTORS GIVEN THROUGH OUT THE YEAR. IT IS INTERESTING TO NOTE THAT THE APPELLANT IS OPENLY ADMITTING THAT IT IS GIVING CERTAIN INCENTIVES TO THE DOCTORS WHICH ARE MORE OR LESS MONETARY IN CONSIDERATION TO PRESCRIBE ITS DRUGS. IT IS DIFFERENT STORY IF AS A PART OF SALE 'PROMOTION THAT THE APPELLANT WAS TO PRESENT SOMETHING WHICH WAS OF THE USE OF DOCTORS FOR CARRYING OUT THEIR PROFESSION BUT TO SOLICIT BUSINE SS ON THE BASIS OF PERSONAL ENRICHMENT OF THE DOCTORS CLEARLY UNETHICAL OF MEDI CAL PRACTICE. IT CANNOT BE CALLED BUSINESS PROMOTION AND THEREFORE THE SAME MAY NOT BE ALLOWABLE. IT CANNOT BE CALLED THE EXPEDIENCY OF TH E BUSINESS A FACT THE ASSESSING OFFICER WANTED TO SAY WHEN HE REFERRED TO IT AS VOLUNTARY TRANSACTION AS NO COMMERCIAL ANGLE IS ATTACHED TO I T. 3.3.1. EVEN IN CASE OF PRESENTATION ARTICLES THE I SSUE WHICH THE COURTS HAVE UPHELD IN A DIFFERENT CONTEXT IS THAT ONLY WH EN SUCH ARTICLES BEAR THE APPELLANT'S BUSINESS LOGO IT CAN BE TREATED AS FOR THE PURPOSE OF THE ADVERTISEMENT AND HENCE AS PART OF A SALES PROMOTIO N EXPENSES. IN THE INSTANT CASE THE APPELLANT HAS SQUARELY FAILED TO SHOW THE MANNER OF SALES PROMOTION EXPENSES AND OVERALL IMPACT ON THE ADVERT ISEMENT AND CONSEQUENT BUSINESS OF THE ASSESSEE. 3.3.2. THEREFORE IN MY VIEW IN THE FACTS AND CIRC UMSTANCES ON RECORD THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION OF THE AMOUN T OF RS.1 33 679/-. 4. THE ASSESSEE IS IN NOW APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). NONE APPEARED ON BE HALF OF THE ITA N OS.1476 & 1961/A/09 4 ASSESSEE; INSTEAD WRITTEN SUBMISSIONS HAVE BEEN FIL ED WHEREIN IT IS MENTIONED THAT THE DOCTORS WERE IN CONSTANT CONTACT WITH THE PATIENTS AS ALSO WITH THE RESEARCH IN THE FIELD OF MEDICINES AND VARIOUS MANUFACTURING CONCERNS. SINCE DOCTORS WERE IN POSITION TO PROVIDE VALUABLE INFORMATION ABOUT THE PHARMACEUTIC AL PRODUCTS AND MARKETING TECHNIQUES THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE PRESEN TATION ARTICLES WERE GIVEN TO DOCTORS FOR AVAILING THEIR SERVICES A ND NOT ON ANY OCCASION AS PRESUMED BY THE LEARNED CIT(A) WITHOUT AFFORDING ANY OPPORTUNITY TO THE ASSESSEE THE ASSESSEE POINTED O UT. SINCE THE PRESENTATION ARTICLES WHETHER FOR PERSONAL USE OR F OR PROFESSIONAL WERE GIVEN BY THE ASSESSEE AS A REMUNERATION FOR AV AILING SERVICES / INFORMATION FOR BUSINESS PROMOTION THE EXPENDITURE WAS ALLOWABLE. INTER ALIA THE ASSESSEE RELIED UPON A NUMBER OF D ECISIONS IN CIT VS. AHMEDABAD ELECTRICITY CO. LTD. 262 ITR 97 (GUJ ) CIT VS. VEERABHADRA RAO K. KOTESWARA RAO & CO. (1985) 55 ITR 152 (SC) TN SHAH PVT. LTD. VS. CIT (1979) 120 ITR 354 ( ALL) SASSOON J DAVID & CO. (P) LTD. VS. CIT (1979) 118 ITR 261 (SC ) CIT VS. BIRLA COTTON SPG. & MFG. MILLS LTD. / CIT VS. BIRLA BROTH ERS (P) LTD. 82 ITR 166 (SC) CIT VS. SHAHIBAG ENTERPRENEURS (P) LTD. 21 5 ITR 810 (GUJ) CIT VS. PANIPAT WOOLEN & GENERAL MILLS CO. LT D. 103 ITR 66 (SC) CIT VS. SALES MAGNESITE (P) LTD. 214 ITR 1 / 8 1 TAXMAN 334 (BOM) ANDCIT VS. HAYWARD WALDIA REFINERY LTD. 209 I TR 159 (CAL).THE LEARNED DR ON THE OTHER HAND SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 5. WE HAVE HEARD THE LD. DR AND GONE THROUGH THE WR ITTEN SUBMISSIONS FILED BY THE ASSESSEE AS ALSO THE DECIS IONS REFERRED TO THEREIN. WE FIND THAT THE AO DISALLOWED THE CLAIM F OR PRESENTATION ARTICLES TO THE DOCTORS ON THE GROUND THAT THE EXPE NDITURE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. NONE APPEARED BEFORE THE LEARNED CIT(A) AND INSTEAD WRIT TEN SUBMISSIONS ITA N OS.1476 & 1961/A/09 5 WERE FILED. ON PERUSAL OF THESE WRITTEN SUBMISSIONS THE LEARNED CIT(A) OBSERVED THAT IN THE ABSENCE OF NATURE OF PR ESENTATION ARTICLES IT WAS NOT POSSIBLE TO CONCLUDE AS TO WHE THER OR NOT THESE PRESENTATION ARTICLES WERE FOR PERSONAL USE FOR OR FOR USE IN THE CLINIC OF DOCTORS NOR THE ASSESSEE EXPLAINED THE OCCASION FOR MAKING THE GIFTS. EVEN BEFORE US NONE APPEARED AND INSTEAD WRI TTEN SUBMISSIONS HAVE BEEN FILED WHERE IT IS MENTIONED THAT THE EXPENDITURE HAS BEEN INCURRED FOR SERVICES RENDERED BY THE DOCTORS / INFORMATION RECEIVED FROM THEM FOR THE PURPOSE OF B USINESS OF THE ASSESSEE. HOWEVER NO SUCH EVIDENCE OF RENDERING OF ANY SERVICES BY THE DOCTORS TO THE ASSESSEE HAS BEEN PLACED BEFO RE US NOR APPEARS TO HAVE BEEN SUBMITTED BEFORE THE AO OR EVE N THE LD. CIT(A).THOUGH A NUMBER OF DECISIONS HAVE BEEN CITED IN THE WRITTEN SUBMISSIONS IT HAS NOT BEEN EXPLAINED AS TO HOW TH ESE DECISIONS ARE APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF TH E CASE UNDER CONSIDERATION. THE ONUS IS ON THE ASSESSEE TO ESTAB LISH THAT THE PRESENTATION ARTICLES WERE GIVEN TOWARDS BUSINESS PROMOTION AND FOR SERVICES RENDERED. IN THE PRESENT MATTER THERE IS NOTHING TO SHOW THAT THE A SSESSEE HAS DISCHARGED THE ABOVEMENTIONED BURDEN. IN THESE CIRCUMSTANCES ESP ECIALLY WHEN THE ASSESSEE DID NOT EVEN REVEAL THE NATURE OF PRESENT ATION ARTICLES BEFORE THE LOWER AUTHORITIES AND EVEN BEFORE US NOR EVEN ANY MATERIAL HAS BEEN PLACED BEFORE US EVIDENCING THAT THE THESE ARTICLES WERE GIVEN TO THE DOCTORS IN LIEU OF SERVI CES RENDERED OR INFORMATION OBTAINED FROM THE DOCTORS FOR THE PURPO SE OF BUSINESS OF THE ASSESSEE WE ARE NOT INCLINED TO INTERFERE WITH THE CONCLUSION DRAWN BY THE LD. CIT(A).THEREFORE GROUND NOS.2 AND 2.1 IN THE APPEAL OF THE ASSESSEE ARE REJECTED . 6. GROUND NOS.3 AND 3.1 IN THE APPEAL OF THE ASSESS EE AS ALSO GROUND NO.1 IN THE APPEAL OF THE REVENUE RELATE TO DISALLOWANCE OF INTEREST U/S 14A OF THE ACT. DURING THE COURSE OF A SSESSMENT PROCEEDINGS THE AO NOTICED THAT AN AMOUNT OF RS.28 77 313/- WAS INCURRED ON ACCOUNT OF INTEREST ON LOANS. SINCE THE ASSESSEE MADE ITA N OS.1476 & 1961/A/09 6 INVESTMENTS IN SHARES DIVIDEND INCOME FROM WHICH W AS EXEMPT U/S 10(33) OF THE ACT THE AO DISALLOWED AN AMOUNT OF R S.4 50 000/- BEING INTEREST @ 12% OF THE AMOUNT OF RS.37 25 000/- INVESTED IN SHARES OF M/S PRAVIN RATILAL SHARES AND STOCK BROKE RS LTD. IN TERMS OF PROVISIONS OF SECTION 14A OF THE ACT. 7. ON APPEAL THE LEARNED CIT(A) FOLLOWING THE DECI SION OF THE SPECIAL BENCH OF ITAT MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD. 119 TTJ 89 DIRECTED TO DISALLOW THE INTEREST IN TERMS OF RULE 8D OF THE INCOME-TAX RULES 1962. THE REFORE QUANTUM OF DISALLOWANCE WAS STATED TO HAVE BEEN REDUCED BY RS.3 47 503/-. 8. BOTH THE REVENUE AS WELL AS THE ASSESSEE ARE NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEA RNED CIT(A). THE ASSESSEE IN ITS WRITTEN SUBMISSIONS SUBMITTED THAT THEY HAD INVESTED SURPLUS FUNDS IN THE SHARES OF THE AFORESAID BROKER COMPANY WHICH HAD NOT DECLARED ANY DIVIDEND IN THE PAST. THEREFOR E THE INVESTMENT WAS NOT MADE FOR EARNING ANY DIVIDEND INCOME; RATHE R IT WAS MADE HAVING REGARD TO OVERALL BUSINESS INTEREST OF THE A SSESSEE. ACCORDINGLY IT WAS CONTENDED THAT THE PROVISIONS O F SECTION 14A OF THE ACT WERE NOT APPLICABLE. IT WAS FURTHER MENTION ED THAT THE ASSESSEE HAD NOT UTILIZED ANY BORROWED FUNDS FOR AC QUIRING SHARES WHILE THE INTEREST WAS PAID ON FUNDS BORROWED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF PHARMACEUTICALS CARR IED ON BY THE ASSESSEE. ACCORDINGLY IT WAS SUBMITTED THAT NO DIS ALLOWANCE COULD BE MADE U/S 14A OF THE ACT. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 9. WE HAVE HEARD THE LEARNED DR AND GONE THROUGH TH E FACTS OF THE CASE. WE FIND THAT THE AO MADE AN ESTIMATED DI SALLOWANCE OF INTEREST ON BORROWED FUNDS ON THE GROUND THAT THE ASSESSEE INVESTED IN SHARES OF M/S PRAVIN RATILAL SHARES AN D STOCK BROKERS LTD. FOR THE PURPOSE OF EARNING EXEMPT INCOME. THE LD. CIT(A) REDUCED THE DISALLOWANCE FOLLOWING THE DECISION OF THE SPECIAL ITA N OS.1476 & 1961/A/09 7 BENCH OF THE ITAT IN THE CASE OF DAGA CAPITAL MANAG EMENT (P) LTD.(SUPRA) AND ACCORDINGLY DIRECTED THE AO TO REC OMPUTE THE DISALLOWANCE IN TERMS OF RULE 8D OF THE IT RULES 19 62. THERE IS NOTHING TO SUGGEST AS TO WHETHER THE LD. CIT(A) ASC ERTAINED THAT THE BORROWED FUNDS INDEED HAVE BEEN UTILISED IN ACQUIRI NG THE AFORESAID SHARES. 9.1 WE FURTHER FIND THAT RECENTLY HONBLE BOMBA Y HIGH COURT IN THEIR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. IN THE ITA NO. 626/2010 WHILE ADJUDICATING A SIMILAR I SSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT AND RULE 8D OF TH E IT RULES 1962 CONCLUDED THAT RULE 8D INSERTED W.E.F 24.3.2008 CANNOT BE R EGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATIN G EXPENDITURE RELATABLE TO TAX- FREE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE ASSESSMENT YEARS WHERE RULE 8D DOES NOT APPLY THE AO WILL HAVE TO DETERMI NE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAV ING REGARD TO ALL FACTS AND CIRCUMSTANCES THE HONBLE HIGH COURT CONCLUDED. 9.2. HONBLE SUPREME COURT IN THEIR DECIS ION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. 326 ITR 1 INTER ALIA OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH THE TA X EXEMPT INCOME. HONBLE APEX COURT OBSERVED IN THE CONTEXT OF PROVISIONS SEC.14 A OF THE ACT IN THE FOLLOWING TERMS: 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIVE EFF ECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTIO N IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST THE TAXABLE INCO ME (SEE CIRCULAR NO. 14 OF 2001 DATED 22-11-2001). IN OTHER WORDS SECTION 14 A CLARIFIES THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSE S INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PA RTLY TO THE TAXABLE INCOME. IN THE ABSENCE OF SECTION 14A THE EXPENDITURE INCURRE D IN RESPECT OF EXEMPT INCOME WAS BEING CLAIMED AGAINST TAXABLE INCOME. TH E MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AN D AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY ITA N OS.1476 & 1961/A/09 8 APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UNDER CE RTAIN PROVISIONS OF THE ACT. IN THE PAST THERE HAVE BEEN CASES IN WHICH DEDUCTI ON HAS BEEN SOUGHT IN RESPECT OF SUCH INCOMES WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN INCOMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX T HE NET INCOME I.E. GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY THE EXEM PTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECT ION 14A THE FIRST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER TH IS CHAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRESCRIBED UN DER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS 'IN RELATIO N 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 OU TSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER SECTION 14 S PECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEA BLE AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEADS. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR THE PURPOSE OF CHARGEABILITY T O TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEA BLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOWED ONLY WITH REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF T HE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEND INCOM E IS NOT A PART OF THE TOTAL INCOME THE EXPENDITURE/DEDUCTION THOUGH OF THENATU RE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED TO THE INCOME NOT FORMING PART OF TO TAL INCOME COULD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON- TAXABLE HAS IN PRINCIPLE BEEN NOW WIDENED UNDER S ECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 15 TO 59 IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON R ENT TAXES SALARIES INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FO R (SEE SECTIONS 30 TO 37) 9.3. WE ALSO FIND THAT HONBLE KERALA HIGH COURT IN THEIR DECISION DATED 17.6.2010 IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN IN ITA.NO. 1784 OF 2009 HELD N THE CONTEXT OF PROV ISIONS OF SEC.14A OF THE ACT AS UNDER: 4. ON FACTS WE FIND THAT THE INTEREST PAID BY THE ASSESSEE DURING THE PREVIOUS YEAR FOR THE FUNDS BORROWED FOR ACQUISITION OF SHAR ES IN THE COMPANY WAS AT THE RATE OF 24% P.A. AND THE TOTAL INTEREST PAID IN THE ACCOUNTING YEAR ALONE IS AS MUCH AS RS.17 44 310/-. IT IS ON RECORD THAT ASSESS EE HAD RECEIVED ONLY A DIVIDEND INCOME OF RS.3 LAKHS AND NO OTHER BENEFIT IS DERIVED FROM THE COMPANY FOR THE BUSINESS CARRIED ON BY IT. THE DISALLOWANCE PROHIBITED UNDER SECTION 14A IS EXPENDITURE INCURRED FOR EARNING ANY INCOME WHIC H DOES NOT CONSTITUTE TOTAL ITA N OS.1476 & 1961/A/09 9 INCOME OF THE ASSESSEE. IN OTHER WORDS ANY EXPENDI TURE INCURRED FOR EARNING ANY INCOME WHICH IS NOT TAXABLE UNDER THE ACT IS NOT A N ALLOWABLE EXPENDITURE. DIVIDEND INCOME IS EXEMPT UNDER SECTION 10(33) OF T HE INCOME TAX ACT AND SO MUCH SO DIVIDEND EARNED BY THE ASSESSEE ON THE SHA RES ACQUIRED BY HER WITH BORROWED FUNDS DOES NOT CONSTITUTE TOTAL INCOME IN THE HANDS OF THE ASSESSEE. SO MUCH SO IN OUR VIEW DISALLOWANCE WAS RIGHTLY MADE BY THE ASSESSING OFFICER. IN FACT THE TRIBUNAL ITSELF HAS ESTIMATED DISALLOWANC E OF RS.2 LAKHS BY APPLYING SECTION 14A. WE DO NOT KNOW HOW THE TRIBUNAL CAN RE STRICT THE DISALLOWANCE TO RS.2 LAKHS AND ALLOW BALANCE ABOVE RS.15 LAKHS WHEN THE WHOLE BORROWED FUNDS WERE UTILISED BY THE ASSESSEE FOR PURCHASE OF SHARE S IN THE COMPANY. IN OUR VIEW THE REASONING GIVEN BY THE TRIBUNAL FOR DISALLOWANC E OF RS.2 LAKHS I.E. BY APPLYING SECTION 14A SQUARELY APPLIES FOR THE INTEREST PAID ON BORROWED FUNDS BECAUSE IT IS ON RECORD THAT THE ENTIRE FUNDS BORROWED WERE UT ILISED FOR ACQUISITION OF SHARES BY THE ASSESSEE IN THE COMPANY. IN FACT IN OUR VIE W ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT ON BORROWED FUNDS UTILISED FOR THE ACQUISITION OF SHARES ONLY IF SHAR ES ARE HELD AS STOCK IN TRADE WHICH ARISES ONLY IF THE ASSESSEE IS ENGAGED IN TRADING I N SHARES. SO FAR AS ACQUISITION OF SHARES IS IN THE FORM OF INVESTMENT AND THE ONLY BENEFIT ASSESSEE DERIVED IS DIVIDEND INCOME WHICH IS NOT ASSESSABLE UNDER THE A CT THE DISALLOWANCE UNDER SECTION 14A IS SQUARELY ATTRACTED AND THE ASSESSING OFFICER IN OUR VIEW RIGHTLY DISALLOWED THE CLAIM. AS ALREADY POINTED OUT THE C ALCUTTA HIGH COURT DECISION WHICH PERTAINS TO THE PERIOD PRIOR TO INTRODUCTION OF SECTION 14A HAS NO APPLICATION. THE DECISION OF THE SUPREME COURT ALSO DOES NOT APPLY BECAUSE IN THIS CASE APART FROM INVESTMENT IN SHARES OF THE CO MPANY THERE IS NOTHING TO INDICATE THAT THE ASSESSEE'S BUSINESS WAS FULLY LIN KED WITH THE BUSINESS OF THE LEASING COMPANY OR THAT ASSESSEE'S BUSINESS IS SOLE LY DEPENDENT ON THE BUSINESS OF THE LEASING COMPANY. IN FACT THE WHOLE TRANSACTION WAS A TOTAL FIASCO IN AS MUCH AS AS AGAINST RS.17 44 310/- PAID TOWAR DS INTEREST ON BORROWED FUNDS SERVICED AT THE RATE OF INTEREST OF 24% P.A. THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR WAS A MEAGRE SUM OF RS.3 LAKHS. THIS ONLY SHOWS THAT THE BUSINESS CARRIED ON BY THE LEAS ING COMPANY WAS NOT VERY SUBSTANTIAL TO JUSTIFY THE ASSESSEE'S INVESTMENT TH ROUGH BORROWED FUNDS. THEREFORE IN OUR VIEW THE PRINCIPLE OF COMMERCIAL EXPEDIENCY GONE INTO BY THE SUPREME COURT DOES NOT APPLY TO THE FACTS OF THIS C ASE. THEREFORE WE HOLD THAT THE TRIBUNAL IN PRINCIPLE RIGHTLY HELD THAT THE UTI LISATION OF BORROWED FUNDS FOR ACQUISITION OF SHARES WILL NOT ENTITLE THE ASSESSEE FOR CLAIMING DEDUCTION OF INTEREST PAID ON SUCH BORROWED FUNDS. HOWEVER WE H OLD THAT THE TRIBUNAL WAS NOT JUSTIFIED IN ALLOWING THE CLAIM IN EXCESS OF RS.2 L AKHS. FOR THE SAME REASONING APPLIED BY THE TRIBUNAL THE ASSESSEE IS NOT ENTITL ED TO DEDUCTION OF ANY AMOUNT TOWARDS INTEREST PAID ON FUNDS BORROWED BY WAY OF F IXED DEPOSITS TAKEN FOR ACQUISITION OF SHARES IN THE COMPANY WHICH HE LPED THE ASSESSEE ONLY TO EARN SOME DIVIDEND. 9.4 HONBLE PUNJAB & HARYANA HIGH COURT IN THEIR DECISION IN CIT VS. HERO CYCLES LTD. 323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS ITA N OS.1476 & 1961/A/09 10 FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAS BEEN INCURRED DISALLOWANCE UNDER SECTION 14A CANNOT STAND. 9.5 AS ALREADY POINTED OUT SINCE THE LD. CIT(A) HAVE NOT CARED TO ASCERTAIN AS TO WHETHER OR NOT BORROWED FUNDS HAVE INDEED BEEN UTILISED TOWARDS INVESTMENT IN SHARES NOR THE LD. CIT(A) HAD BENEFIT OF THE VIEW TAKEN IN THE AFORESAID DECISIONS WE CO NSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A ) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUES RAISED IN THE GROUND NOS.3 AND 3.1 IN THE APPEAL OF THE ASSESSEE AS ALSO GROUND NO.1 IN THE A PPEAL OF THE REVENUE AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THOSE REFERRED TO ABOVE AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY TH AT WHILE REDECIDING THE ISSUE THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER KEE PING IN MIND INTER ALIA THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT. WI TH THESE OBSERVATIONS GROUND NOS.3 AND 3.1 IN THE APPEAL OF THE ASSESSEE AS ALSO GROUND NO.1 IN THE APPEAL OF THE REVENUE ARE DISPOSED OF. 10. GROUND NO.1 IN THE APPEAL OF THE ASSESSEE A ND GROUND NOS. 2 & 3 IN THE APPEAL OF THE REVENUE BEING GENERAL IN NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION WHILE NO ADDITION AL GROUND HAVING BEEN RAISED IN TERMS OF THE RESIDUARY GROUND IN THE APPEAL OF THE ASSESSEE ALL THESE GROUNDS ARE DISMISSED. 11. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLO WED PARTLY WHILE THAT OF REVENUE IS ALLOWED BUT BOTH FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 31-01-2011 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 31-1-2011 ITA N OS.1476 & 1961/A/09 11 COPY OF THE ORDER FORWARDED TO: 1. M/S KAMRON LABORATORIES LTD. 737 RAKANPUR VILL AGE SOLA SANTEJ ROAD KALOL MEHSANA 2. ACIT (OSD) MEHSANA 3. CIT CONCERNED 4. CIT(A) GANDHINAGAR 5. DR ITAT AHMEDABAD BENCH-C AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD