Income Tax Appeal No.565 of 2006 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 565 of 2006 Date of decision: 18.7.2011 Commissioner of Income Tax-I Chandigarh --- Appellant Versus M/s. Punjab State Industrial Development Corporation Ltd. --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL ACTING CHIEF JUSTICE HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Ms. Urvashi Dhugga, Senior Standing Counsel for the appellant-Revenue. Mr. Sanjay Bansal, Sr. Advocate with Mr. Robin Jarial, Advocate for the respondent-assessee. --- AJAY KUMAR MITTAL, J. This order will dispose of Income Tax Appeal Nos. 565, 567, 568 and 569 of 2006 as identical questions have been claimed by the Revenue in all the four appeals. The facts are being referred from Income Tax Appeal No. 565 of 2006. 2. This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the revenue against the order dated 24.4.2006, passed by the Income Tax Appellate Tribunal Income Tax Appeal No.565 of 2006 2 Special Bench, Chandigarh (in short “the Tribunal”) in ITA No. 26/CHANDI/2000, relating to the assessment year 1996-97. 3. The substantial questions of law claimed by the revenue in all the four appeals mentioned above are as under: “ (i) Whether in the facts and circumstances of the case, the Hon’ble ITAT is justified in holding that the Project Survey Expenses should be treated as Revenue Expenditure whereas the Project Survey Expenses are in the nature of Capital Expenditure? (ii) Whether in the facts and circumstances of the case, the Hon’ble ITAT is justified in directing the A.O. to allow deduction u/s 80M to the assessee without deducting all the expenses incurred for earning dividend income when the provisions of Section 80M read with Section 80AA of the Income Tax Act, 1961 (as they stood during the relevant assessment year) are clear that gross amount of dividend income cannot be deducted but dividend income calculated after making all the deductions as per the provisions of Chapter IV of the Act has to be taken into consideration? (iii) Whether in the facts and circumstances of the case, the Hon’ble ITAT is justified in holding that sale of shares by the assessee resulted in Capital Gains and not Profit and Gains from Business when the main business of the assessee is the acquisition and sale of shares to earn profit from the same? Income Tax Appeal No.565 of 2006 3 4. In Income Tax Appeal No. 568 of 2006, however, the revenue apart from the aforesaid three questions has claimed an additional substantial question of law, which is as under: “Whether on the facts and circumstances of the case, the Hon’ble ITAT is justified in law in holding that under Section 36(1)(viii) the assessee was entitled to deduction of 40% of the total income arrived at without taking this deduction into account and whether the Hon’ble ITAT was also justified in allowing an opportunity to the assessee to create further reserve which fell short of the admissible deduction u/s 36(1)(viii) of the Income Tax Act, 1961?” 5. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-assessee filed return for the assessment year 1996-97 on 28.11.1996 showing total income of Rs. 23,46,546/-. However, assessment under Section 143(3) was framed at an income of Rs.3,01,85,241/- on 24.12.1998. During assessment it was noticed that the assessee had debited an expenditure of Rs. 5,22,435/- on the preparation of survey reports but no income was shown by it on account of sale of survey reports. It was further observed that since no survey report was sold during the year, the whole of the expenditure of Rs. 5,22,435/- formed stock-in- trade of the assessee and thus, an addition of the said amount was made by the assessing officer. Besides the aforesaid, the assessee had received dividend income of Rs.7,94,18,337/- and claimed deduction @ 60% of the gross dividend under Section 80M of the Act. The net dividend after deducting expenses @ 92.85% was calculated to be Rs.56,76,083/- on which deduction of Rs.34,05,650/- Income Tax Appeal No.565 of 2006 4 was allowed under Section 80M of the Act by the assessing officer. Further, the profit of Rs.3,52,52,583/- on account of sale of shares was assessed as business income as against claim of the assessee to be “income from capital gains”. 6. In the appeal carried against the order of the Assessing Officer, the plea raised on its behalf found favour with the Commissioner of Income-tax (Appeals) {in short “the CIT(A)”}, relating to disallowance of expenditure on preparation of survey reports and sale of shares to be income from capital gains and consequently, the additions regarding the same were deleted following the earlier orders of the Tribunal in the case of the present assessee itself for the assessment years 1990-91 and 1992-93. However, the issue with respect to deduction of net dividend after reducing the expenses under Section 80M of the Act was adjudicated against the assessee. 7. The revenue as well as the assessee preferred appeals before the Tribunal. The appeal of the revenue was dismissed vide order 24.4.2006. The Tribunal directed the assessing officer to compute the deduction under Section 80M of the Act by deducting 50% of the gross dividend on account of expenses attributable to the earning of such dividend income and this is how the revenue is once again in appeal in this Court. 8. In Income Tax Appeal No.568 of 2006, additionally, during the course of assessment proceedings, the deduction under Section 36(1)(viii) was restricted to the extent of amount of reserve created. On appeal to CIT(A) filed by the assessee, the assessing officer was directed to afford an opportunity to the assessee to create Income Tax Appeal No.565 of 2006 5 further reserve. The Tribunal had dismissed the appeal of the revenue. 9. We have heard learned counsel for the parties and have perused the record. 10. Learned counsel for the appellant-revenue very fairly accepted that question Nos. (i) and (iii) mentioned above claimed in all the four appeals have been answered by this Court against the Revenue, in Income Tax Reference No. 20 of 2000 (The Punjab State Industrial Development Corporation Ltd., Chandigarh vs. The Commissioner of Income Tax) decided on 30.9.2010. We, therefore, following the decision of the said case answer question Nos. (i) and (iii) against the Revenue and in favour of the assessee. 11. Adverting to question No.(ii), learned counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act 2001 retrospectively w.e.f. 1.4.1962. Support was gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR 116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer’s Federation Ltd. vs. Commissioner of Income Tax-II and another) decided on 28.3.2011 and of the Apex Court in Commissioner of Income Tax Income Tax Appeal No.565 of 2006 6 vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax vs. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax vs. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore vs. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute. 13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. This Court in the case of Punjab State Cooperative Milk Producer’s Federation Ltd.’s case (supra) relying upon the decision of the Apex Court in Walfort Share and Stock Brokers’s case (supra), wherein, while defining the scope of Section 14A of the Act, incorporated retrospectively w.e.f. 1.4.1962, it had laid down as under: Income Tax Appeal No.565 of 2006 7 “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 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 Income Tax Appeal No.565 of 2006 8 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 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 Income Tax Appeal No.565 of 2006 9 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 refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see Sections 30 to 37). “ 14. The apex Court had specifically recorded that the theory of apportionment of amount of expense between taxable and non- taxable income stood widened by incorporation of Section 14A. It was further noticed that the expression ‘expenses incurred’ occurring in Section 14A referred to tax, salary, interest etc. in respect of which allowances are provided for under Sections 30 to 37 of the Act. 15. In all fairness to the assessee, in the judgments relied upon by the learned counsel for the assessee, Section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee. 16. In view of the above, the substantial question No.(ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly. 17. Adverting to additional question raised in Income Tax Appeal No. 568 of 2006 as claimed, the issue is, whether the Tribunal was right while calculating the deduction under Section 36 (1)(viii) by reducing it by 40% of the total income and also to allow an opportunity to the assessee to create further reserve which fell short Income Tax Appeal No.565 of 2006 10 of admissible deduction under Section 36(1)(viii) of the Act. Learned counsel for the revenue candidly accepted that the said issue had been answered by this Court against the Revenue in Commissioner of Income Tax, Patiala v. Punjab State Industrial Development Corporation, Chandigarh, ITR No.8 of 1995 decided on 4.11.2009. 18. In view of the above, Income Tax Appeal No. 568 of 2006 stands disposed of as indicated above. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) July 18, 2011 ACTING CHIEF JUSTICE *rkmalik*