ITA No. 10 of 2011 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 10 of 2011 Date of Decision: 30.5.2011 Ved Parkash Paliwal (HUF) ....Appellant. Versus Commissioner of Income Tax, Karnal ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL, ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. R.P. Sawhney, Senior Advocate with Mr. Saurav Khurana, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1. This order shall dispose of ITA Nos. 10 and 51 of 2011 as according to the learned counsel both the appeals involve identical questions. For brevity, the facts are being taken from ITA No. 10 of 2011. 2. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 30.4.2010 passed by the Income Tax Appellate Tribunal, Delhi Bench “H”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 4193/Del/2009, relating to the assessment year 2006-07, claiming the following substantial questions of law:- ITA No. 10 of 2011 -2- “(a) Whether on the facts and circumstances of the case that the appellant's claim of deduction of interest paid to the bank for investment in shares out of its income of interest on FDRs received from the bank in view of the judgment of Hon'ble Supreme Court reported in 115 ITR 519 (supra)? (b) Whether the learned Tribunal was justified in affirming the order of learned CIT who has justified the order of the Assessing Authority on a ground which was not taken in the order of the Assessing Authority? (c) Whether on the facts and circumstances of the case the learned Tribunal has misconceived the provisions of Section 57(iii) inasmuch as income from the FDRs from the bank was reflected in the return of income filed by the appellant to the tune of Rs.2359825/- out of which it has claimed deduction of interest charged by the bank on the overdraft taken from the bank as utilized in investment of shares? (d) Whether on the facts and circumstances of the case, the learned Tribunal was justified in segregating one integrated transaction of earning interest on the FDR from bank and interest paid to the bank on overdraft taken by the appellant?” 3. Briefly stated, the facts necessary for adjudication as ITA No. 10 of 2011 -3- narrated in the appeal are that the assessee filed its return of income for the assessment year 2006-07 on 31.7.2006 showing the total income of Rs.12,64,883/- (Rs.6,93,111/- income from capital gains and Rs.5,71,772/- income from other sources) after claiming deduction of Rs.1 lac under Chapter VIA. The assessee also declared agriculture income amounting to Rs.50,000/- and paid tax on the income of Rs.11,64,883/- and claimed a refund of Rs.1,30,479/-. The said return was processed under Section 143(1) of the Act and the case was taken up for scrutiny by issuing notices under Sections 143(2) and 142(1) of the Act. The assessee had earned interest of Rs.23,06,066/- from the bank on fixed deposit receipts and had also paid interest to the bank to the tune of Rs.18,15,393/- on the overdraft taken from the bank for investment in shares. He also claimed the deduction of Rs.18,15,593/- paid to the bank out of interest income. The said claim of the assessee was disallowed by the Assessing Officer vide order dated 5.9.2008. Feeling aggrieved, the assessee took the matter in appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT (A) vide order dated 31.8.2009 dismissed the appeal. On further appeal by the assessee, the Tribunal vide order dated 30.4.2010 affirmed the view of the CIT(A) on the point of deduction of interest paid to the bank on the overdraft out of the interest income on the FDRs with the bank and restored the issue relating to allowability of interest expenditure to the Assessing Officer with a direction to verify utilization of borrowed funds in acquisition of securities out of which the assessee had earned short term capital gain. Hence, the present appeal by the assessee. ITA No. 10 of 2011 -4- 4. We have heard learned counsel for the assessee. 5. Learned counsel for the assessee has raised the following contentions:- i) Interest paid by the assessee to the Bank for investment in shares out of its income of interest on fixed deposit receipts received from the bank was deductible in view of the Apex Court judgment in Commissioner of Income Tax, West Bengal-III v. Raghunandan Prasad Moody [1978] 115 ITR 519; ii) The provisions of Section 14A did not apply. Moreover, the assessing officer or the CIT(A) had not relied upon or referred to Section 14A for declining the claim of the assessee. The Tribunal, therefore, erred in relying upon the said provision. Further, the reliance of the Tribunal on the judgment reported in Commissioner of Income Tax v. Dr. V.P. Gopinathan [2001] 248 ITR 449 was misplaced as it was on fact situation involved therein and was not applicable to the facts in hand. 6. After giving our thoughtful consideration to the submissions made by learned counsel for the assessee, we find ourselves unable to agree with the same. 7. Section 14A of the Act inserted retrospectively from 01.04.1962 stipulates that any expenses which are incurred by an assessee for earning an income not forming part of taxable income, ITA No. 10 of 2011 -5- shall not be allowed as deductible expenditure. This Court in The Punjab State Cooperative Milk Producer's Federation Ltd. v. Commissioner of Income Tax-II and another, (Income Tax Appeal No. 530 of 2008 decided on 28.3.2011)discussing the scope of Section 14A of the Act, had observed as under: “Further, Section 14A was inserted in the Act by Finance Act, 2001 with effect from 1.4.1962. The said Section provides that any expenses incurred by the assessee for earning income which does not form part of total income under the Act, shall not be an allowable expenditure. The apex Court in Walfort Share and Stock Brokers’s case (supra), defining the scope of Section 14A of the Act, incorporated retrospectively from 1.4.1962, had laid down as under: “The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No.14 of 2001 dated 22.11.2001). In other words, Section 14A 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 expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable ITA No. 10 of 2011 -6- income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The 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 and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt 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 certain provisions of the Act. In the past, there have been cases in which deduction 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 the net income, i.e., gross income minus the expenditure. On the same analogy the exemption 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 Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed ITA No. 10 of 2011 -7- under Chapter IV would fall within Section 14A. The next phrase is, "in relation 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 outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, 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 to tax under those heads. Sections 15 to 59 quantify the total income chargeable 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 the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in Sections 15 to 59 but related to the income not forming part of total 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 Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14A ITA No. 10 of 2011 -8- refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see Sections 30 to 37). 8. Admittedly, the assessee had earned income by way of dividend or long term capital gain from sale of shares which is exempt under Sections 10(33) and 10(34), respectively. In view of insertion of Section 14A in the Act, any amount spent for earning such income could not be allowed as deductible expenditure. However, the Tribunal had restored the issue relating to allowability of interest expenditure in respect of short term capital gain as the same was not exempt. The claim of the assessee that the amount was deductible under Section 57 (iii) of the Act was, thus, rightly denied by the Assessing Officer and upheld by the CIT(A) as well as the Tribunal. 9. Reliance of the assessee on Raghunandan Prasad Moody's case (supra) is untenable for the reason that the Apex Court was dealing with a case where the assessee had not received any income by way of dividend. Under the fact situation involved therein, it was held that expenditure incurred on interest was deductible. Moreover, Section 14A of the Act was not under consideration in that case. 10. Once the provision of Section 14A of the Act applies to the case in hand, the argument that the same had not been relied upon by the Assessing Officer or the CIT(A) is of no consequence. Though there is no specific reference to Section 14A of the Act in the assessment order, but the order, in sum and substance, is based on ITA No. 10 of 2011 -9- principles enunciated therein. Further, on a specific query being put to the learned counsel for the assessee as to how he was entitled to deduction of expenditure in respect of the dividend income and the long term capital gain for sale of shares in view of Section 14A of the Act, learned counsel for the assessee was unable to give any reply much less any satisfactory reply except reiterating his submissions, as noticed above. 11. In view of the above, no substantial question of law arises in these appeals. The appeals are dismissed. (AJAY KUMAR MITTAL) JUDGE May 30, 2011 (ADARSH KUMAR GOEL) gbs ACTING CHIEF JUSTICE ITA No. 10 of 2011 -10- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 51 of 2011 Date of Decision: 30.5.2011 Pratibha Paliwal ....Appellant. Versus Commissioner of Income Tax, Karnal ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL, ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. R.P. Sawhney, Senior Advocate with Mr. Saurav Khurana, Advocate for the appellant. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the detailed order of even date recorded in ITA No. 10 of 2011 (Ved Parkash Paliwal (HUF) v. Commissioner of Income Tax, Karnal). (AJAY KUMAR MITTAL) JUDGE May 30, 2011 (ADARSH KUMAR GOEL) gbs ACTING CHIEF JUSTICE