Expenditure incurred in relation to exempt income

Court :
IN THE ITAT MUMBAI BENCH ‘F’

Brief :
Section 14A read with sections 10(33), 57, 115-O of the Income-tax Act, 1961 – Expenditure incurred in relation to exempt income – Assessment year 2001-02 – Whether where income earned by assessee in terms of provisions of Act is exempt from tax, no part of expenditure attributable to earning of such exempted income was to be allowed after insertion of section 14A – Held, yes – Whether expenditure directly relatable to earning of dividend income, which is exempt from tax under section 10(33), can only be allocated for purpose of disallowance under section 14A – Held, yes – Assessee claimed deduction of interest paid on borrowed money – It also claimed deduction of administrative and other expenses – Assessee had utilized part of borrowed money for purpose of investment in shares, from which dividend income was received by assessee, which was exempt from tax – Assessee had also utilized part of borrowed money for purpose of investment in foreign companies, dividend from which was not governed by provisions of section 115-O – Assessee also utilized part of borrowed money for purpose of investment in units of growth fund – Whether interest paid on borrowings utilized for investment in shares was not to be allowed as an expenditure in view of provisions of section 14A – Held, yes – Whether interest paid on borrowings utilized for investment in foreign companies was to be considered for allowance under section 57(iii) – Held, yes – Whether interest paid on borrowings utilized for making investments in units of growth fund was not allowable as an expenditure in terms of section 14A – Held, yes – Whether since administrative and other expenses incurred by assessee were not directly relatable to earning of dividend income, Assessing Officer was not justified in disallowing part of said expenses by invoking provisions of section 14A – Held, yes FACTS For the relevant assessment year, the assessee-company claimed deduction under section 36(1)(iii) in respect of interest paid on borrowed money. The assessee had utilized part of the borrowed money for the purpose of investment in shares, from which dividend income was received by the assessee, which was exempt from tax. The assessee had also utilized part of borrowed money for purpose of investments in foreign companies and in units of growth fund. The Assessing Officer invoking the provisions of section 14A partly disallowed the claim of the assessee with regard to the interest payment. The Assessing Officer also disallowed 10 per cent of the expenses, out of the administrative and other expenses, being expenses incurred for earning the dividend income. On appeal, the Commissioner(Appeals) held that provisions of section 14A were applicable to the instant case, and that the expenditure incurred in relation to the earning of dividend income, which did not form part of total income in view of section 10(33), was not an allowable deduction. The Commissioner(Appeals), therefore, confirmed the disallowance of interest payment and reduced the disallowance out of administrative and other expenses to some extent. On second appeal, the assessee contended, inter alia, that provisions of section 14A were not applicable to the expenditure incurred in relation to earning of dividend income because the dividend income though exempt in the hands of the assessee, the shareholder was liable to be taxed under section 115-O being tax levied on the company, who was the distributing company and the shareholder only earned net dividend after such taxes were paid, that it had also made investments in foreign companies, wherefrom the assessee had received dividend which was not governed by the provisions of section 115-O and the same was also not exempt in the hands of the assessee under section 10(33). In the alternative, the assessee submitted that the interest on the borrowings attributable to the investment in shares should be allowed to be capitalized as part of cost of acquisition of shares.

Citation :
BIRLA GROUP HOLDINGS LTD. v. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 2(1), MUMBAI K.K. BOLIYA, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER IT APPEAL NO. 2891 (MUM.) OF 2004 [ASSESSMENT YEAR 2001-02]