(Prayer: Appeal filed under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench, dated 23.10.2007, passed in ITA No.525/Mds/2006.)
Dr. Vineet Kothari, J.
1. Revenue has filed this appeal under Section 260A of the Income Tax Act, in short, 'the Act', aggrieved by the order passed by the learned Income Tax Appellate Tribunal, dated 23.10.2007, passed in ITA No.525/Mds/2006, for the Assessment Year 2002-2003.
2. The substantial question of law, on which the present appeal was admitted by a Coordinate Bench of this Court on 07.07.2004, is quoted below :
“ Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing the interest payable on moneys borrowed for investment in shares, even when the income earned from the equity shares does not form part of total income as per Section 10 of the Income Tax Act ? ”
3. The controversy involved in this appeal is about disallowance under Section 14A of the Act of the expenditure incurred in relation to the income not includible in Total Income.
4. The facts, as found by the Assessing Authority in the present case for the Assessment Year 2001-2002, are that the Assessee company made a total investment of Rs.137.00 crores in equity shares in PPN-Power Generating Co. Ltd and the Assessee, during the year in question, paid total Debenture Interest and Finance Charges of Rs.6,46,21,000/-, on the Debentures issued by the company, the Debenture Interest component being to the extent of Rs.5,35,47,000/- and the Finance Charges were to the extent of Rs.1,10,74,000/-.
5. The Assessing Authority disallowed the entire Debentures' Interest and Finance Charges to the extent of Rs.6,46,20,719/- on the premise that the equity shares were purchased by the Assessee out of the borrowed money and, therefore, the entire interest on such Debentures and the Finance Charges were required to be disallowed under Section 14A of the Act. Section 14A (1) of the Act reads as under :-
“14A. Expenditure incurred in relation to income not includible in total income.—(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.”
6. The controversy involved in the present case stands squarely covered by a Division Bench of this Court in the case of Commissioner of Income Tax v. Chettinad Logistics (P) Ltd., (2017) 80 Taxmann.com 221 (Madras) and the same was affirmed by the Hon'ble Supreme Court by dismissal of the Revenue's appeal in S.L.P. (Civil) Diary No.15631 of 2018, on 02.07.2018, (2018) 95 Taxmann.com 250 (SC), and the Division Bench of this Court, while rendering the judgment in Chettinad's case, cited supra, had followed the earlier Coordinate Bench decision of this Court, in which, one of us, namely, Dr.Anita Sumanth, J., was a party, decided on 23.12.2016, in Redington (India) Ltd. v. Addl.CIT, (2017) 77 Taxmann.com 257 (Mad). The relevant extracts from the said judgments are quoted below:-
Chettinad's case :
“9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.
10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year.
10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section.
10.2 Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D.
10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee.
10.4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.
11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. CIT  77 taxmann.com 257 (Mad.) which was, subject matter of T.C.A.No.520 of 2016.
11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.
11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.
11.3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument.
12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income.
12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked.”
Redington's case :
“15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Madras Industrial Investment Corpn. Ltd. v. CIT  225 ITR 802/91 Taxman 340 (SC). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.”
7. Both the above direct judgments of this Court clearly held that disallowance of the expenditure for earning the income, which is not includible in total income, cannot be made under Section 14A of the Act, unless the Assessee has actually earned such exempt income during the assessment year in question.
8. The facts, as noted by the Assessing Authority himself, clearly reveal that no Dividend Income was at all earned by the Respondent-Assessee in this year and, therefore, the question of invoking Section 14A of the Act did not simply arise. The said provision applies only if there is an income, which cannot form part of the total income and is exempt during the year in question and the expenditure in relation to earning of such exempted income can only be disallowed under Section 14A of the Act.
9. If the provision of Section 14A itself is not attracted and if no such exempted income is earned during the year, there is no question of disallowing the entire Debenture Interest and Finance Charges, which was a usual business expenditure of the Assessee. The Assessing Authority, totally oblivious of the basic parameters of Section 14A itself, has invoked the said provision and misapplied the same in the present case.
10. Though it was so, the learned Commissioner of Income Tax (Appeals), in the first appeal, restricted the disallowance of such expenditure to the extent of 2% of the expenditure. The Assessee did not, however, file any further appeal against the said order of CIT (Appeals), but, the Revenue took an appeal before the learned Income Tax Appellate Tribunal, which dismissed the appeal of the Revenue by the order, dated 23.10.2007, which is impugned in this appeal.
11. Learned counsel for the Revenue, however, relying on a judgment of the Supreme Court in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, (2018) 402 ITR 640 (SC), rendered on 12.02.2018, has submitted that since the equity shares in question were purchased out of the borrowed funds, the Assessing Authority was justified in disallowing the debenture interest and finance charges. The observations of the Hon'ble Supreme Court in the factual context of the Assessee viz., M/s.Maxopp Investment Ltd. are quoted below to the extent relevant, besides giving a brief of the facts as well :
“3) Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditures incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel up to this extent.
4) However, in these appeals, the question has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as ‘stock-in-trade’. However, incidentally income was also generated in the form of dividends as well. (Distinguishing Feature from the present case). On this basis, the assessees contend that the dominant intention for purchasing the share was not to earn dividends income but control of the business in the company in which shares were invested or for the purpose of trading in the shares as a business activity etc. In this backdrop, the issue is as to whether the expenditure incurred can be treated as expenditure ‘in relation to income’ i.e. dividend income which does not form part of the total income. To put it differently, is the dominant or main object would be a relevant consideration in determining as to whether expenditure incurred is ‘in relation to’ the dividend income. In most of the appeals, including in Civil Appeal Nos. 104-109 of 2015, aforesaid is the scenario. Though, in some other cases, there may be little difference in fact situation. However, all these cases pertain to dividend income, whether it was for the purpose of investment in order to retain controlling interest in a company or in group of companies or the dominant purpose was to have it as stock-in-trade.
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.”
12. Per contra, learned counsel for the Respondent-Assessee supported the order passed by the learned Tribunal and urged that in the absence of any actual dividend income earned by the Assessee during the year in question, there was no question of any disallowance of Debenture Interest and Finance Charges to be made under Section 14A of the Act, as no expenditure can be said to have been incurred at all in relation to the income, which did not form part of the total income.
13. Having heard the learned counsel for the parties, we are of the clear opinion that there is no merit in this appeal filed by the Revenue and the entire edifice of the argument of Revenue is without any foundation. The Assessing Authority misapplied the provision of Section 14A of the Act, which, in clear terms, stipulates that no deduction can be allowed in respect of expenditure incurred in relation to income, which does not form part of total income under the Act.
14. In view of the clear fact found in the present case that the Assessee did not earn any exempted income or dividend income on the equity shares held by it during this year
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, there was no question of disallowing any part of the Debenture Interest or Finance Charges, since the provisions under Section 14A of the Act were not attracted at all. 15. The facts of the judgments cited at Bar by the learned counsel for the Revenue are totally distinguishable. The Assessee i.e., Maxopp Investment Ltd. invested the borrowed funds in Maxopp India for gaining and retaining the control over the investee company and held the shares in question as a stock-in-trade. No such facts are available in the present case. While dealing with that peculiar situation, the observation was made by the Hon'ble Supreme Court in Paragraph 40, quoted above, that in such cases, where equity shares are purchased as stock-in-trade to gain control over the investee company, whether the dividend is actually declared by the investee company or not, would not make a difference. These contextual observations of Hon'ble Supreme Court in the case of Maxopp India, are, therefore, of little help to the Revenue in the present case. 16. On the contrary, the controversy in hand before us is squarely covered by the two decisions cited above of the Coordinate Benches of this Court and one of which has been affirmed by the Hon'ble Supreme Court itself with dismissal of the SLP, after the aforesaid decision in the case of Maxopp India was rendered. 17. Therefore, we are of the considered opinion that the appeal filed by the Revenue deserves to be dismissed and the substantial question of law framed above for our consideration deserves to be answered in favour of the Assessee and against the Revenue. 18. This appeal of the Revenue is, accordingly, dismissed. There shall be no order as to costs.