1. This is an appeal by the assessee against the order dated 30-5-2002 of the learned Commissioner (Appeal)-XVI, New Delhi, relating to assessment year 1999-2000.
2.1 The facts and circumstances giving rise to the present appeal by the assessee are as follows: The assessee is a company. It is a non-banking finance company registered with the RBI. The main activity of the assessee company is purchase and sale of shares, advancing loans and providing guarantees. The assessee is an investment company and makes investments in shares of Jindal group of companies. Through the assessee company the Jindal family exercise control and management over the Jindal group of companies.
2.2 The assessee filed a return of income for assessment year 1999-2000 declaring loss of Rs. 3,74,05,126. In the course of the assessment proceedings the assessing officer noticed that the assessee had claimed interest income to the tune of Rs. 95,06,780 on loans and securities.
The assessee claimed to have paid interest and bank charges to the extent of Rs. 4,90,22,387. The assessee had earned dividend income on investments amounting to Rs. 49,99,388. This was claimed to be exempt under Section 10(33) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The assessing officer called upon the assessee to file the details with regard to the expenditure incurred to earn the dividend income, which was exempt under Section 10(33) of the Act.
Under the provisions of Section 14A of the Act while computing the total income, no deduction will be allowed in respect of the expenditure incurred by an assessee in relation to income, which does not form part of the total income under the Act. For the purpose of making disallowance of expenses incurred to earn the dividend income under Section 14A of the Act, the assessing officer called for the necessary details of expenditure incurred to earn the dividend income.
The assessee in reply took a stand that it had not incurred any expenditure to earn the dividend income. The assessee also submitted that it was engaged in the business of advancing loans and, therefore, all the expenditure with reference to interest payment have to be allowed as a deduction under Section 36(1)(iii) of the Act. The assessing officer, however, rejected the contention of the assessee and made a disallowance of Rs. 3,95,15,607 for the following reasons: The contention of the assessee is not accepted. The assessee is a non-banking finance company engaged in ihe business of advancing loans and has also made investments to earn dividend. All the funds are being utilized either for investment in shares or for lending the funds. During the year under consideration assessee has earned interest income of Rs. 95,06,780 and paid interest amounting to Rs. 4,90,22,387. Even if it is assumed that assessee has lent money out of the borrowed funds at the same rate of interest at which it has borrowed these funds, then the total interest paid by the assessee should not exceed the amount of interest earned by it. Therefore, the excess of interest paid by the assessee over the interest earned by it pertains to funds borrowed for investment yielding exempt dividend income. Moreover, dividend income has been treated as income from other sources specifically within the provisions of Section 56 of the Income Tax Act. Thus, difference of interest received and paid is (Rs. 4,90,22,387 minus Rs. 95,06,780) Rs. 3,95,15,607. The same is disallowed under Section 14A of the Income Tax Act and added back to the income of the assessee company, (addition Rs. 3,95,15,607).
2.3 On appeal by the assessee, the Commissioner (Appeals) confirmed the order of the assessing officer giving rise to the present appeal by the assessee before the Tribunal.
3.1 At the time of hearing of this appeal, the learned Counsel for the assessee raised a preliminary objection. Before discussing the objection raised by the learned Counsel for the assessee it has to be mentioned that the provisions of Section 14A were introduced by the Finance Act of 2001 with retrospective effect from 1-4-1962. A proviso was introduced to the provisions of Section 14A by the Finance Act of 2002 with retrospective effect from 11-5-2001 (the dates on which the Finance Bill 2001 inserting the provisions of Section 14A received the assent of the President of India). Under the proviso the assessing officer had no power to re-open an assessment under Section 147 of the Act or to pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of an assessee under Section 154 for any assessment beginning on or before 1-4-2001. In the present case, the return filed by the assessee on 29-11-1999 was processed under Section 143(1) of the Act and an intimation dated 24-2-2000 had been issued. A sum of Rs. 19,62,584 was also determined as amount refundable to the assessee under intimation under Section 143(1) of the Act. The contention of the assessee before us is that in view of the insertion of the proviso referred to above, the action of the assessing officer in making an enquiry for making disallowance under Section 14A of the Act in the assessment proceedings under Section 143(3) was in violation of the prohibition laid down in the proviso to Section 14A of the Act. According to him, in the case of the assessee for assessment year 1999-2000 doing so would amount to reducing a refund already granted, which is expressly prohibited under the proviso. In support of his contention the learned Counsel for the assessee has placed reliance on two decisions, both of the Single Member Bench of the Tribunal in the case of Paul John, Delicious Cashew Co. v. ITO (2005) 94 ITD 131 (Coch) and V. Uppalaiah v. Dy. CIT (2005) 94 ITD 178 (Hyd). Besides the aforesaid two decisions, the learned Counsel has also placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of Thacker & Co. v. ITO .
3.2 The learned Departmental Representative, on the other hand, brought to our notice the decision of the Division Bench of Ahmedabad in the case of Harish Krishnakant Bhatt v. ITO (2004) 91 ITD 311 (Ahd) wherein the Division Bench has taken a contrary view. The facts in the case before the Ahmedabad Bench were that the assessee's return was originally accepted under Section 143(1) of the Act. In the assessment proceedings under Section 143(3) of the Act, the assessing officer invoked the provisions of Section 14A and sought to disallow expenses incurred in earning the income, which does not form part of the total income. The objection raised by the assessee was that in view of the prohibition contained in the proviso the assessing officer could not do so. The Tribunal held that proviso applies only in the case of reassessment under Section 147 or rectification under Section 154 prior to the assessment year beginning 1-4-2001 and the proviso will not operate to making a disallowance in scrutiny assessment under Section 143(3) of the Act. The Bench further held that in such circumstances there was no reassessment or enhancement of assessment and, therefore, the prohibition laid down in the proviso would not apply.
4. We have considered the rival submissions. We notice that the decision of the Cochin Bench, which was a Single Member decision, related to a case where provisions of Section 263 of the Act were invoked by the CIT directing the assessing officer to make disallowance under Section 14A of the Act in respect of assessment year 2000-01.
This was held to be in contravention of the proviso.
In the facts of that case there was only an intimation under Section 143(1) of the Act and in exercise of powers under Section 263, the CIT set aside the assessment for the purpose of making disallowance under Section 14A of the Act. The Tribunal held that while issuing an intimation under Section 143(1) of the Act the assessing officer could not make any disallowance by invoking Section 14A of the Act and, therefore, the finding of the CIT that the assessing officer failed to invoke Section 14A of the Act was not correct. In the case decided by the Hyderabad Bench, the return filed by an assessee was accepted under Section 143(1) of the Act. Notice under Section 143(2) of the Act was not issued before the stipulated time for making assessment under Section 143(3) of the Act. The assessing officer sought to invoke Section 148 of the Act for the purpose of making the disallowance under Section 14A of the Act. This was held to be not proper by the Tribunal.
In both the cases it can be seen that the assessments were sought to be reopened under Section 148 or Section 263 of the Act. The proviso specifically refers to both these sections and imposes a bar in respect of assessments prior to assessment year 2001-02. The idea behind the proviso was to ensure that the intention of inserting Section 14A was not to unsettle the cases by raising the issue afresh. In the present case we, however, notice that the assessing officer has merely sought to make an enquiry only in proceedings under Section 143(3) of the Act.
The assessment has not been completed or has not attained finality when (proviso to) Section 14A was introduced with effect from 11-5-2001.
Ahmedabad Division Bench in the case of Harish Krishankant Bhatt v. ITO (supra) has dealt with a case, the facts of which were identical to the case before us. The Bench held as follows: In the instant case an intimation was sent under Section 143(1) and thereafter when the scrutiny assessment was made under Section 143(3), it could not be a case of reassessment or enhancement of assessment. It was making of the assessment itself. Since it was not proceedings under Section 154 which were opted or resorted to by the assessing officer, it would also not be a case of increasing the liability of the assessee under Section 154 as well.
5. We may also mention here that the expression 'reducing a refund' already made has to be held in the context of exercise of such power by the assessing officer under Section 154 of the Act. The assessing officer cannot reduce a refund already allowed except by resort to the provisions of Section 154 of the Act. Therefore, the only instance of reducing a refund will be only by exercise of powers under Section 154.
This is another reason why the proviso will not be applicable to the facts of the present case.
6. The decision in the case of Thacker & Co. v. ITO (supra) is again a case of reopening under Section 147 of the Act. In that case, which pertained to assessment years 1998-99 and 1999-2000, an intimation under Section 143(1) was not followed by a notice under Section 143(2) of the Act within the statutory period. Thereafter reassessment proceedings were initiated and provisions of Section 14A were invoked to disallow expenses. The Tribunal taking note of the decision of the jurisdictional High Court of Bombay that intimation under Section 143(1) would amount to an assessment where no notice under Section 143(2) is issued within the statutory period, held that the issue of disallowance under Section 14A had become final and, therefore, could not be reopened by resort to Section 147 of the Act. As already noticed in the present case, we are concerned with the proceedings under Section 143(3) of the Act. Consequently, the said decision will not be of any assistance to the plea of the assessee before us. We are of the view that the view expressed by the Division Bench of Ahmedabad is proper. We, therefore, reject the preliminary objection raised by the assessee, before us.
7.1 As far as the merits of the impugned disallowance, we notice that recently a Third Member decision of the Delhi Tribunal in the case of Wimco Seedlings Ltd. v. Dy. CIT (2007) 107 ITD 267 (Del)(TM) has dealt with this issue and has laid down that it is only where it is proved that expenditure has been incurred in relation to earning of tax-free income, the disallowance under Section 14A can be made and disallowance cannot be made on estimation that some expenditure must have been incurred for the purpose of earning the tax-free income. It has also been laid down that the burden in this regard would be that of the assessing officer, both to show that expenditure was factually incurred and also the relationship with the expenditure with the income exempt from tax.
7.2 We notice that the assessing officer in the present case has made the impugned disallowance on estimation. In the circumstances, we are of the view that the matter should be restored to the file of the assessing officer with a direction that he will follow the ratio laid down in the Third Member decision referred to above and decide the issue afresh in accordance with law. The order of the Commissioner (Appeals) is accordingly set aside and the issue is restored to the file of the assessing officer to be decided by the assessing officer in the light of the directions given above. The assessing officer will afford opportunity of being heard to the assessee, before deciding the issue.
8. In the result, the appeal of the assessee is treated as allowed, for statistical purposes.