Judgment:
V. Gopala Gowda, J.
1. This appeal is filed by the assessee against the order dated 27/1/2009 passed by the Income Tax Appellate Tribunal, Bangalore, in ITA. No. 917/Bang/2008.
2. The claim of the assessee for deduction of interest on the amounts borrowed by him for purchase of shares is disallowed by the assessing officer. In the appeal filed by him against the assessment order, the first appellate authority reversed the order of assessing authority by applying the decision of the Supreme Court reported in : [1978]115ITR519(SC) . The Revenue took up the matter in second appeal before the Income Tax Appellate Tribunal, hereinafter called as the 'Tribunal' in short. The Tribunal reversed the decision of the first appellate authority and restored the order of assessing authority. Being aggrieved by the same, the assessee is before us by filing this appeal framing substantial questions of law and urged the grounds in support of the same.
3. Smt Anuradha, learned Counsel for the appellant relied upon the decision reported in : [1978]115ITR519(SC) (Commissioner of Income Tax v. Rajendra Prasad Mody) wherein, it is held that interest paid on money borrowed for investment in shares is deductible under Section 57(iii) of Income Tax Act, which requires that the expenditure must be laid out or expended wholly and exclusively for making or earning income. She also relied upon another decision in the case of The Commissioner of Income Tax-20 v. Smt. Sushila Devi Khadaria reported in 2009 TIOL 171 HC MUM-IT and submits that the orders passed by the assessing authority and the Tribunal are erroneous and contrary to the aforementioned decisions. Therefore, she submits that substantial question (i) and (ii) framed in the appeal memorandum arise for consideration of this Court and requested to set aside the order passed by the Tribunal. The substantial questions of law framed in the appeal are extracted as hereunder:
(i) Whether or not the Tribunal was right in not allowing the interest incurred by the assessee as expenditure in computing income of the assessee?
(ii) Whether or not the Tribunal was right in reversing the findings of the CIT(A), which was based on a Supreme Court's decision by relying on the decision of other Tribunals?
(iii) Whether or not the Tribunal was justified in not affording an opportunity of hearing to the assessee before deciding the issue on hand by placing reliance on judgments, which were not cited by either side?
(iv) Whether or not the Tribunal was right in relying on the decisions inapplicable to the facts on hand by distinguishing the decision of the Hon'ble Supreme Court, which is squarely applicable?
4. With reference to the contentions urged, we have perused the orders passed by the assessing authority, first appellate authority and the Tribunal with a view to find out as to whether the substantial questions of law framed in this appeal would arise for consideration of this Court. It is not in dispute that the assessee had borrowed loans and invested the same in shares. Deduction is claimed by him the interest amount paid on the borrowed loans. The amounts borrowed by the appellant were invested in shares and dividend is earned. When deduction for the interest paid is claimed, the dividend earned cannot be excluded from income. Computation of income has to be made taking the amount of dividend income earned by the Appellant.
5. The assessing authority considered the decision in Rajendra Prasad Modi's case relied upon by the learned Counsel and held that it is not applicable to the fact situation. The reasons assigned for such a conclusion in the assessment order are extracted hereunder:
The decision is with reference to deduction allowable Under Section 57(iii) of the Income Tax Act. The decision relates to an asst. year where dividend income was taxable in the hands of the assessee. With the introduction of Section 10(33) of the Income Tax Act from the A.Y. 98-99 the position of law in regard to taxability of dividends has been changed since such income becomes a part of income which do not form a part of total income of the assessee. The provisions of Section 14A introduced by Finance Act 2001 w.e.f. 1.4.62 retrospectively bars allowing any expenditure in respect of income which is not includible in the total income. Considering this change in the position of law the decision of the Supreme Court relied upon by the assessee does not apply to the assessee's case.
6. Therefore, the dividend income is exempted from the tax liability under Section 10(33) of the Act. Under Section 14A of the Act, expenditure relating to exempted income is not allowable. The assessing authority has considered the above relevant factor and disallowed the claim of the assessee.
7. The first appellate authority reversed the order of assessing authority by applying the decision in Rajendra Prasad Mody's case, referred to supra, which was rendered prior to introduction of Section 14A of the Act and which has no application to the fact situation. The Tribunal has rightly set aside the order of first appellate authority. It cannot be disputed that dividend income is exempted under Section 10(33) of the Act from the tax liability and the same cannot be computed for income under the head 'other sources'. Exempted income is not allowable for deduction in view of Section 14A of the Act In view of these two provisions, the claim of the assessee is wholly untenable and the decisions relied upon by the learned Counsel on behalf of the appellant are not applicable to the fact situation.
8. We are in agreement with the orders passed by the assessing authority and the Tribunal and differ from the view taken by the first appellate authority. For the reasons stated supra, interference with the impugned order of the Tribunal is warranted in this case. No substantial questions of law much less the questions of law framed by the appellant will arise for consideration of this Court The appeal is devoid of merit and liable to be dismissed.
9. Accordingly, the appeal is dismissed.