Full Judgment
1.1 "On the facts and circumstances of the case and in law, the CIT(A) -XV, Mumbai erred in upholding the action of the Income Tax Officer of disallowing the entire interest and other office and administrative expenses in computing the total income for captioned assessment year.
1.2 The CIT(A) failed to appreciate and ought to have held that such expenditure has always been claimed and allowed in the past assessment years as expenditure under the head "business" and that since there are no new facts relevant to the captioned year, the disallowance made by the assessing officer is unjustifiable and hence ought to be deleted.
1.3 Without prejudice to the above, the extra expenditure ought to be allowed under the head "other sources" if not under the head "business"." 2.1 "On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the assessing officer of invoking the provisions of section 14A of the Act for justifying the disallowance of entire interest and other administrative expenses.
2.2 The appellant submits that dividend income is chargeable to tax under section 115-0 of the Act and, therefore, cannot be regarded as exempt income and hence, the provisions of section 14A cannot apply." 3.1 "The CIT(A) erred in not allowing alternative ground which was taken by the appellant without prejudice to the foregoing, assuming (without accepting) that provisions of section 14A are rightly invoked, disallowance in respect of interest can be justified only to the extent of interest attributable to incremental loans /credit balances relevant for the captioned year and that no disallowance is justified in respect of loans/credit balances to the extent they continue from the earlier years.
3.2 Further, the CIT(A) erred in not allowing alternate ground which was taken by appellant without prejudice to the foregoing ground, assuming (without admitting) that the provisions of section 14A are rightly invoked, the disallowance cannot be for the whole of the expenditure but the disallowance can be justified only to the extent attributable to the dividend income. Such expenditure attributable to dividend income, if any, ought to be determined on a scientific/ realistic basis and there is no justification in assuming that the whole of the expenditure is relatable to dividend income." 4.1 "On the facts and in the circumstances of the case and in law, the CIT(A) erred in not giving any effective finding on the alternative ground taken without prejudice to the foregoing grounds, of assuming (without accepting) that the disallowance of interest expenditure is justified under section 14A, either partly or wholly, the amount so held to be disallowable ought to be added as part of cost of acquisition of the shares held by the appellant and thus, be allowed as deductible as and When the relevant shares are sold and taxable capital gains/losses are returned/ assessed." 5.1 "On the facts and in the circumstances of the case and in law, the CIT(A) erred in not entertaining the ground taken against the action of the assessing officer of initiating penalty proceeding under section 271(1)(c) of the Act." The assessee, in the present case, is a firm which filed its return of income at loss of Rs. 11,16,274. During the course of assessment proceedings, the assessing officer found that the assessee did not carrying on any business activity during the year under consideration.
All the funds were invested in shares from where the assessee had received income from dividends, which were exempted under section 10(33) of the Income Tax Act, 1961 (Act). Therefore, the assessing officer concluded that as per provisions of section 14A of the Act, interest paid to partners as well as interest paid to other parties on borrowed funds could not be allowed. Similarly, the assessing officer concluded that the expenses incurred by assessee on shop rent, (ii) salaries, (iii) sundry expenses (iv) car expenses, (v) professional charges, (vi) Vatava etc. are also not allowable as these expenses could only be allowed against business income and assessee did not carry on any business activity during year. Aggrieved assessee filed an appeal before the CIT(A), who has also upheld the action of assessing officer. The assessee is still aggrieved, hence in appeal before us.
As per profit and loss account, following amounts have been credited to income side During the year under consideration, the assessee has shown long term capital gains of Rs. 648 on sale of instruments as mentioned in Annexure-A appended to this order.
Under these facts, it is the grievance of the assessee; firstly that since all the expenses were allowed by the revenue in the past, no disallowance could be made for the year under consideration, secondly provisions of section 14A could not be invoked for disallowing entire interest and administrative expenses as also that the dividends are taxable under section 115-0 of the Act and cannot be regarded as exempt within the purview of the section 14A, thirdly the alternative plea of the assessee is that in case it is held that the provisions of section 14A are rightly invoked then, that part of interest only could be disallowed, which is attributable to incremental loan or credit balances relevant for the year under consideration and disallowance is not justified in respect of loans/credit balances, which have been brought forward from earlier years, fourthly and lastly, it is the alternative claim of the assessee that interest relatable to the cost of acquisition should be considered to be cost of the shares acquired by assessee for the purpose of computing capital gains tax thereon.
Arguing all these grounds, it was submitted by the learned counsel for the assessee that the interest as well as other expenses have wrongly been held to be not allowable. He, further submitted that the assessee had earned interest on debentures as also the profit on the sale of shares, therefore, to that extent the interest as well as expenses related to earning of those incomes should have been allowed. For the contention that interest on money borrowed, for purchase of shares constitute part of actual cost of the assessee for the purpose of determining the capital gain derived from the sale of shares, he relied on the following decisions : For the proposition that no interest could be disallowed for the year under consideration, as the entire interest bearing borrowed funds were brought forward from earlier years, he placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT v. Sridev Enterprises (1991) 192 ITR 165 (Kar).
On the other hand, the learned Departmental Representative relied on the orders of the assessing officer and CIT(A).
I have carefully considered the rival submissions in the light of the material placed before me. As pointed out earlier, the major income of the assessee is dividend income, which is exempted under section 10(33) of the Act. It is also undisputed that assessee did not carry on any business during the year under appeal. The allowability or otherwise of expenditure claimed under the head 'business income' is described under section 37 of the Act. Under section 37 of the Act, any expenditure (except expenditure of the nature described in sections 30 to 36 and capital or personal expenditure) which is laid out or expended wholly and exclusively for the purpose of business is allowable in computing income chargeable under the head "Profits and gains of business or profession". As no business was carried on by assessee, the allowability of expenditure claimed by the assessee cannot be held justified under section 37 of the Act. Then the claim of assessee is that expenditure relatable to earning of income from other sources has to be allowed under the provisions of section 57(iii) of the Act. As pointed out earlier, the taxable income of the assessee, if any, consist of interest on debentures and long term capital gains on sale of certain shares. The claim of the assessee regarding expenses, if any, can be considered only against income earned by assessee as interest on debentures. No material whatsoever has been brought by assessee to show that the debentures on which the assessee has earned interest were borrowed with the help of interest bearing borrowed funds, so that interest relatable to the same could be considered for allowance. Here, it is the contention of the assessee that these debentures were purchased out of interest bearing borrowed funds and the assessee can establish such nexus, if the matter is sent back to the assessing officer. In such circumstances, considering the interest of justice, I am of the opinion that to that extent the matter can be restored back to the file of the assessing officer to verify the claim of the assessee and in case, the assessee is able to establish the nexus between the interest bearing borrowed funds and the investments in the debentures on which interest has been earned by assessee to the extent of Rs. 2,283.56, then to that extent interest should be allowed against said income. I direct accordingly.
Now, coming to the alternative contention of the assessee regarding consideration of interest as cost relating to investment made by it in the shares, which have been sold and such income has been returned as long term capital gains. Here also the nexus has not been established by assessee to show that any interest bearing funds were invested by assessee for purchase of those shares. The list of shares sold during the year has been described in Annexure-A. The case of assessee is that these shares were also purchased from the interest bearing borrowed funds and therefore, the interest relatable to the investment made in those shares should be added to the cost while computing capital gain.
However, there is no material on record to substantiate this contention of the assessee. Here also, keeping in view the interest of justice, I restore this issue to the file of assessing officer with a direction that if the assessee is able to establish direct nexus between the interest bearing borrowed funds and investments in the shares, which have been sold during the year, the said interest should be added to the cost of acquisition as the same will be in accordance with the decision relied upon by learned authorised representative of the assessee and that is so also as no contrary decision was cited by learned departmental Representative against the decisions relied by learned authorised representative of the assessee. I direct accordingly.
In respect of submission of the assessee that interest as well as other expenses should be allowed in its entirety on the ground that in the earlier years no such disallowance was made, cannot be accepted on the ground that continuance of business activity is a condition precedent for allowability of expenditure. According to section 37 of the Act, these expenses could be allowed only for the purpose of computing income chargeable under the head 'Profit and gains from business or profession'. In the absence of any such profit and also business activity, none of the expenses is allowable and thus the submissions of the assessee cannot be accepted. As regards to the decision Hon'ble Karnataka High Court in the case of CIT v. Sridev Enterprises (1991) 192 ITR 165 (Kar), the said case cannot be said to be an authority to support the case of the assessee, as in the said case, there was no discontinuation of business whereas in the present case, it is undisputed that the assessee did not carry on any business activity.
To sum up, ground No. 1 regarding disallowance of interest and other administrations expenses is dismissed. In respect of ground No. 2, it is held that as against dividend income, section 14A was rightly invoked. I may mention here that no argument was submitted by learned counsel for the assessee in respect of chargeability of dividend under section 115-0. Therefore, no cognisance of such ground is taken. In respect ground Nos. 3 & 4, directions are given to assessing officer as mentioned in the earlier paras and the assessing officer will decide accordingly. In respect of ground No. 5, it was pleaded that the same is pre-mature and, therefore, the same is dismissed.