Commissioner Of Income Tax-Ichandigarh v. M/S. Punjab State Industrialdevelopment Corporation Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 565 of 2006Date of decision: 18.7.2011 Commissioner of Income Tax-IChandigarh --- Appellant Versus M/s. Punjab State IndustrialDevelopment Corporation Ltd. --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELACTING CHIEF JUSTICE HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Ms. Urvashi Dhugga, Senior Standing Counselfor 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 claimedby the Revenue in all the four appeals. The facts are being referredfrom 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 theorder dated 24.4.2006, passed by the Income Tax Appellate Tribunal 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, theHon’ble ITAT is justified in holding that the Project SurveyExpenses should be treated as Revenue Expenditurewhereas the Project Survey Expenses are in the nature ofCapital Expenditure?Hon’ble ITAT is justified in holding that the Project SurveyExpenses should be treated as Revenue Expenditurewhereas the Project Survey Expenses are in the nature ofCapital Expenditure? (ii)Whether in the facts and circumstances of the case, theHon’ble ITAT is justified in directing the A.O. to allowdeduction u/s 80M to the assessee without deducting allthe expenses incurred for earning dividend income whenthe provisions of Section 80M read with Section 80AA ofthe Income Tax Act, 1961 (as they stood during therelevant assessment year) are clear that gross amountof dividend income cannot be deducted but dividendincome calculated after making all the deductions as perthe provisions of Chapter IV of the Act has to be takeninto consideration?Hon’ble ITAT is justified in directing the A.O. to allowdeduction u/s 80M to the assessee without deducting allthe expenses incurred for earning dividend income whenthe provisions of Section 80M read with Section 80AA ofthe Income Tax Act, 1961 (as they stood during therelevant assessment year) are clear that gross amountof dividend income cannot be deducted but dividendincome calculated after making all the deductions as perthe provisions of Chapter IV of the Act has to be takeninto consideration? (iii)Whether in the facts and circumstances of the case, theHon’ble ITAT is justified in holding that sale of shares bythe assessee resulted in Capital Gains and not Profitand Gains from Business when the main business of theassessee is the acquisition and sale of shares to earnprofit from the same? Hon’ble ITAT is justified in holding that sale of shares bythe assessee resulted in Capital Gains and not Profitand Gains from Business when the main business of theassessee is the acquisition and sale of shares to earnprofit from the same? 4. In Income Tax Appeal No. 568 of 2006, however, therevenue apart from the aforesaid three questions has claimed anadditional substantial question of law, which is as under: “Whether on the facts and circumstances of the case, theHon’ble ITAT is justified in law in holding that underSection 36(1)(viii) the assessee was entitled to deductionof 40% of the total income arrived at without taking thisdeduction into account and whether the Hon’ble ITATwas also justified in allowing an opportunity to theassessee to create further reserve which fell short of theadmissible deduction u/s 36(1)(viii) of the Income TaxAct, 1961?” 4. In Income Tax Appeal No. 568 of 2006, however, therevenue apart from the aforesaid three questions has claimed anadditional substantial question of law, which is as under: “Whether on the facts and circumstances of the case, theHon’ble ITAT is justified in law in holding that underSection 36(1)(viii) the assessee was entitled to deductionof 40% of the total income arrived at without taking thisdeduction into account and whether the Hon’ble ITATwas also justified in allowing an opportunity to theassessee to create further reserve which fell short of theadmissible deduction u/s 36(1)(viii) of the Income TaxAct, 1961?” 5.The facts, in brief, necessary for adjudication as narratedin the appeal, are that the respondent-assessee filed return for theassessment year 1996-97 on 28.11.1996 showing total income of Rs.23,46,546/-. However, assessment under Section 143(3) wasframed at an income of Rs.3,01,85,241/- on 24.12.1998. Duringassessment it was noticed that the assessee had debited anexpenditure of Rs. 5,22,435/- on the preparation of survey reports butno income was shown by it on account of sale of survey reports. Itwas further observed that since no survey report was sold during theyear, 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 wasmade by the assessing officer. Besides the aforesaid, the assesseehad received dividend income of Rs.7,94,18,337/- and claimeddeduction @ 60% of the gross dividend under Section 80M of theAct. The net dividend after deducting expenses @ 92.85% wascalculated to be Rs.56,76,083/- on which deduction of Rs.34,05,650/- 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 shareswas assessed as business income as against claim of the assesseeto be “income from capital gains”. 6.In the appeal carried against the order of the AssessingOfficer, the plea raised on its behalf found favour with theCommissioner of Income-tax (Appeals) {in short “the CIT(A)”},relating to disallowance of expenditure on preparation of surveyreports and sale of shares to be income from capital gains andconsequently, the additions regarding the same were deletedfollowing the earlier orders of the Tribunal in the case of the presentassessee itself for the assessment years 1990-91 and 1992-93.However, the issue with respect to deduction of net dividend afterreducing the expenses under Section 80M of the Act was adjudicatedagainst the assessee. 7.The revenue as well as the assessee preferred appealsbefore the Tribunal. The appeal of the revenue was dismissed videorder 24.4.2006. The Tribunal directed the assessing officer tocompute the deduction under Section 80M of the Act by deducting50% of the gross dividend on account of expenses attributable to theearning of such dividend income and this is how the revenue is onceagain in appeal in this Court. 8.In Income Tax Appeal No.568 of 2006, additionally,during the course of assessment proceedings, the deduction underSection 36(1)(viii) was restricted to the extent of amount of reservecreated. On appeal to CIT(A) filed by the assessee, the assessingofficer was directed to afford an opportunity to the assessee to create further reserve. The Tribunal had dismissed the appeal of therevenue. 9.We have heard learned counsel for the parties and haveperused the record. 10. Learned counsel for the appellant-revenue very fairlyaccepted that question Nos. (i) and (iii) mentioned above claimed inall the four appeals have been answered by this Court against theRevenue, in Income Tax Reference No. 20 of 2000 (The PunjabState 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 questionNos. (i) and (iii) against the Revenue and in favour of the assessee. further reserve. The Tribunal had dismissed the appeal of therevenue. 9.We have heard learned counsel for the parties and haveperused the record. 10. Learned counsel for the appellant-revenue very fairlyaccepted that question Nos. (i) and (iii) mentioned above claimed inall the four appeals have been answered by this Court against theRevenue, in Income Tax Reference No. 20 of 2000 (The PunjabState 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 questionNos. (i) and (iii) against the Revenue and in favour of the assessee. 11. Adverting to question No.(ii), learned counsel for therevenue submitted that while determining the quantum of deductionadmissible to the assessee under Section 80M of the Act, theexpenditure incurred relating to the earning of dividend income has tobe excluded there-from. According to the learned counsel, theexpenditure which was to be deducted was required to be deductedon proportional basis for incurring of such expenditure. Reliance wasplaced on Section 14A of the Act which was incorporated by FinanceAct 2001 retrospectively w.e.f. 1.4.1962. Support was gathered fromthe decision of the Rajasthan High Court in Shekhavati GeneralTraders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR 116and the judgment of this Court in Income Tax Appeal No. 530 of2006 (The Punjab State Cooperative Milk Producer’s FederationLtd. vs. Commissioner of Income Tax-II and another) decided on28.3.2011 and of the Apex Court in Commissioner of Income Tax vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12.Controverting the aforesaid submission, learned counselfor the assessee relied upon the decision of the Calcutta High Courtin Commissioner of Income Tax vs. United Collieries Ltd. (1993)203 ITR 857 (Calcutta). Learned counsel also relied uponCommissioner 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 wascontended that it was only the actual expense incurred for earningdividend which was to be deducted from the dividend income forcalculating the admissible deductions under Section 80M of the Act.It was urged that the plea of the Revenue that proportional expensesshould also be reduced, was against the statute. 13.We have given our thoughtful consideration to therespective submissions of the learned counsel for the parties and findforce in the submissions of the learned counsel for the revenue.Finance Act 2001 had inserted Section 14A with effect from1.4.1962. According to the said Section, any expenditure incurred bythe assessee for earning income which did not form part of the totalincome under the Act was not to be allowed as expenses. This Courtin the case of Punjab State Cooperative Milk Producer’sFederation Ltd.’s case (supra) relying upon the decision of theApex 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 asunder: 13.We have given our thoughtful consideration to therespective submissions of the learned counsel for the parties and findforce in the submissions of the learned counsel for the revenue.Finance Act 2001 had inserted Section 14A with effect from1.4.1962. According to the said Section, any expenditure incurred bythe assessee for earning income which did not form part of the totalincome under the Act was not to be allowed as expenses. This Courtin the case of Punjab State Cooperative Milk Producer’sFederation Ltd.’s case (supra) relying upon the decision of theApex 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 asunder: “The insertion of Section 14A with retrospective effect isthe serious attempt on the part of the Parliament not toallow deduction in respect of any expenditure incurred bythe assessee in relation to income, which does not formpart of the total income under the Act against the taxableincome (see Circular No.14 of 2001 dated 22.11.2001). Inother words, Section 14A clarifies that expenses incurredcan be allowed only to the extent they are relatable to theearning of taxable income. In many cases the nature ofexpenses incurred by the assessee may be relatablepartly to the exempt income and partly to the taxableincome. In the absence of Section 14A, the expenditureincurred in respect of exempt income was being claimedagainst taxable income. The mandate of Section 14A isclear. It desires to curb the practice to claim deduction ofexpenses incurred in relation to exempt income againsttaxable income and at the same time avail the taxincentive by way of exemption of exempt income withoutmaking any apportionment of expenses incurred inrelation to exempt income. The basic reason for insertionof Section 14A is that certain incomes are not includiblewhile computing total income as these are exempt undercertain provisions of the Act. In the past, there have beencases in which deduction has been sought in respect ofsuch incomes which in effect would mean that taxincentives to certain incomes was being used to reducethe tax payable on the non-exempt income by debiting theexpenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to taxthe net income, i.e., gross income minus the expenditure.On the same analogy the exemption is also in respect ofnet income. Expenses allowed can only be in respect ofearning of taxable income. This is the purport of Section14A. In Section 14A, the first phrase is "for the purposesof computing the total income under this Chapter" whichmakes it clear that various heads of income as prescribedunder Chapter IV would fall within Section 14A. The nextphrase is, "in relation to income which does not form partof total income under the Act". It means that if an incomedoes not form part of total income, then the relatedexpenditure is outside the ambit of the applicability ofSection 14A. Further, Section 14 specifies five heads ofincome which are chargeable to tax. In order to bechargeable, an income has to be brought under one of thefive heads. Sections 15 to 59 lay down the rules forcomputing income for the purpose of chargeability to taxunder those heads. Sections 15 to 59 quantify the totalincome chargeable to tax. The permissible deductionsenumerated in Sections 15 to 59 are now to be allowedonly with reference to income which is brought under oneof the above heads and is chargeable to tax. If an incomelike dividend income is not a part of the total income, theexpenditure/deduction though of the nature specified inSections 15 to 59 but related to the income not formingpart of total income could not be allowed against otherincome includible in the total income for the purpose of chargeability to tax. The theory of apportionment ofexpenditures between taxable and non-taxable has, inprinciple, been now widened under Section 14A. ReadingSection 14 in juxtaposition with Sections 15 to 59, it isclear that the words "expenditure incurred" in Section14A refers to expenditure on rent, taxes, salaries, interest,etc. in respect of which allowances are provided for (seeSections 30 to 37). “ 14. The apex Court had specifically recorded that the theory ofapportionment of amount of expense between taxable and non-taxable income stood widened by incorporation of Section 14A. Itwas further noticed that the expression ‘expenses incurred’ occurringin Section 14A referred to tax, salary, interest etc. in respect of whichallowances are provided for under Sections 30 to 37 of the Act. 15.In all fairness to the assessee, in the judgments reliedupon by the learned counsel for the assessee, Section 14A asincorporated by Finance Act 2001, with effect from 1.4.1962, was notunder consideration and, therefore, the same do not come to therescue of the assessee. 16. In view of the above, the substantial question No.(ii) isanswered in favour of the revenue and against the assessee.Income Tax Appeal Nos. 565, 567 and 569 stand disposed ofaccordingly. 17.Adverting to additional question raised in Income TaxAppeal No. 568 of 2006 as claimed, the issue is, whether theTribunal was right while calculating the deduction under Section 36(1)(viii) by reducing it by 40% of the total income and also to allow anopportunity to the assessee to create further reserve which fell short of admissible deduction under Section 36(1)(viii) of the Act. Learnedcounsel for the revenue candidly accepted that the said issue hadbeen answered by this Court against the Revenue in Commissionerof Income Tax, Patiala v. Punjab State Industrial DevelopmentCorporation, Chandigarh, ITR No.8 of 1995 decided on 4.11.2009.18.In view of the above, Income Tax Appeal No. 568 of 2006stands disposed of as indicated above. (AJAY KUMAR MITTAL) JUDGE July 18, 2011*rkmalik* (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE