IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.290 of 2009 (O&M) Date of decision: 19.01.2011 M/s Muthoot Bankers. -----Appellant. Vs. Assistant Commissioner of Income Tax. -----Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Sumeet Goel, Advocate for the appellant. Ms. Urvashi Dhugga, Standing Counsel for the respondent. --- ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the assessee under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, New Delhi dated 18.1.2008 in I.T.A. No.3792/DEL/2006 and was admitted to consider following substantial question of law:- “WHETHER the provisions of Sec.14A of the Act are applicable to a case where an Assessee follows cash system of account and no expenditure has been incurred by it in the relevant Assessment Year for deriving dividend income which is exempt from tax and does not form part of total income under the Act?” I.T.A. No.290 of 2009 2. The assessee is engaged in the business of banking and financing. It made investment in shares and received dividend income, which was exempt from income tax under Section 10(33) of the Act. The Assessing Officer did not allow the expenditure claimed by the assessee in view of Section 14A of the Act, rejecting the claim of the assessee that during the years under consideration, Section 14A was not applicable. On appeal, the disallowance was set aside and payment of interest claimed as deduction by the assessee was allowed. The CIT(A) held that borrowing of the assessee was utilised only for working capital purposes and direct nexus between the amount invested and the amount borrowed was not established. Appeal of the revenue has been allowed by the Tribunal and the matter remanded to the Assessing Officer to determine the question as to how acquisition of shares in the earlier years was financed. 3. We have heard learned counsel for the parties. 4. Learned counsel for the assessee submitted that Section 14A of the Act was not retrospective and there is no evidence to surplus disallowance of expenditure, as no nexus was established between the investment made in shares and the amount borrowed. The business of the assessee is indivisible business of banking and financing and unless nexus of borrowing, on which interest was paid, was established with investment in shares, the disallowance under Section 14A of the Act was not permissible. 2 I.T.A. No.290 of 2009 5. On the other hand, learned counsel for the revenue submitted that the Tribunal has merely remanded the matter to determine the source of funds of the assessee for investment in shares and at this stage, interference was not called for. Reliance has been placed on judgment of this Court in Punjab Small Industries and Export Corporation Ltd. v. CIT [2009] 316 ITR 239. Reliance has also been placed on judgment of the Hon’ble Supreme Court in CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233 to submit that Section 14A of the Act was only clarificatory to curb the practice to claim reduction of expenses incurred in relation to exempt income. Moreover, sub-sections (1) of Section 14A was retrospective w.e.f. 1.4.1962. The judgment of the Hon’ble Supreme Court in Walfort Share & Stock Brokers (P) Ltd. has also been applied by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. D.C. of Income Tax & another (2010) 43 DTR Judgments 177. 6. In view of the fact that the question whether expenditure claimed by the assessee on the payment of interest on borrowed capital was admissible, having been remanded in the context of applicability of Section 14A of the Act, no interference is called for at this stage. The Assessing Officer has to go into the question of admissibility of expenditure in relation of income which does not form part of the total income as required 3 I.T.A. No.290 of 2009 under Section 14A(1) of the Act. The question is accordingly answered against the assessee. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE January 19, 2011 ( AJAY KUMAR MITTAL ) ashwani JUDGE 4