Ita/153/2011 Paharpur Cooling Towers Ltd v. Commissioner Of Income Tax, Centre, Circle-Iii, Kolkata

ORDER IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE A.F.R. OD – 1 ITA/153/2011PAHARPUR COOLING TOWERS LTD.VERSUSCOMMISSIONER OF INCOME TAX, CENTRE, CIRCLE-III, KOLKATA BEFORE :THE HON’BLE JUSTICE SURYA PRAKASH KESARWANIANDTHE HON’BLE JUSTICE RAJARSHI BHARADWAJDate : 28[th] February 2024. Appearance:Mr. J. P. Khaitan, Senior AdvocateMr. Somak Basu, Advocate… for the appellant.Mr. Vipul Kundalia, AdvocateMr. Anurag Roy, AdvocateMs. Oindrila Ghosal, Advocate… for the respondent. 1.Heard Sri J. P. Khaitan, learned senior advocate assisted by Sri SomakBasu, learned counsel for the appellant assessee and Vipul Kundalia,learned senior standing counsel for the respondent. 2.This appeal was admitted by this Court by order dated 19.08.2011 onfour substantial questions of law. Learned counsel for the appellanthas stated that the appellant does not want to press the substantial question of law No.3. Thus, this appeal is being heard on the followingsubstantial questions of law:- 1)Whether the learned Tribunal below committed substantial errorof law in upholding the disallowance of Rs.44,03,373.68 Paiseunder Section 14A of the Income Tax Act, 1961 as interestexpenditure incurred in relation to exempt of income from taxfree bonds ?of law in upholding the disallowance of Rs.44,03,373.68 Paiseunder Section 14A of the Income Tax Act, 1961 as interestexpenditure incurred in relation to exempt of income from taxfree bonds ? 2)Whether the learned Tribunal below committed substantial errorof law in upholding the deduction of Rs.41,03,833/- from theunit dividend income as interest expenditure incurred in relationthereto and consequent reduction of relief under section 80M ofthe Income-tax Act, 1961 by Rs.24,62,300/- was arbitrary,unreasonable and perverse ?of law in upholding the deduction of Rs.41,03,833/- from theunit dividend income as interest expenditure incurred in relationthereto and consequent reduction of relief under section 80M ofthe Income-tax Act, 1961 by Rs.24,62,300/- was arbitrary,unreasonable and perverse ? 4)Whether the learned Tribunal below committed substantial errorof law in rejecting the ground taken by the appellant againstinterest under section 201(1A) of the Act, amounting toRs.10,48,423/- charged in the order under section 143(3) of theAct and in not considering and deciding the appellant’scontention that no interest was chargeable in view of theprovisions of Rule 119A(a) of the Income-tax Rules, 1962 ?of law in rejecting the ground taken by the appellant againstinterest under section 201(1A) of the Act, amounting toRs.10,48,423/- charged in the order under section 143(3) of theAct and in not considering and deciding the appellant’scontention that no interest was chargeable in view of theprovisions of Rule 119A(a) of the Income-tax Rules, 1962 ? Facts:- 3.Briefly stated facts of the present case are that for the assessment year1990-91 the assessing officer passed an assessment order dated31.3.1993 whereby he disallowed interest on borrowed capital underSection 14A of the Income Tax Act, 1961 (hereinafter referred to as the‘Act, 1961’), allowed lesser deduction under Section 80M of the Act,1990-91 the assessing officer passed an assessment order dated31.3.1993 whereby he disallowed interest on borrowed capital underSection 14A of the Income Tax Act, 1961 (hereinafter referred to as the‘Act, 1961’), allowed lesser deduction under Section 80M of the Act, Facts:- 3.Briefly stated facts of the present case are that for the assessment year1990-91 the assessing officer passed an assessment order dated31.3.1993 whereby he disallowed interest on borrowed capital underSection 14A of the Income Tax Act, 1961 (hereinafter referred to as the‘Act, 1961’), allowed lesser deduction under Section 80M of the Act,1990-91 the assessing officer passed an assessment order dated31.3.1993 whereby he disallowed interest on borrowed capital underSection 14A of the Income Tax Act, 1961 (hereinafter referred to as the‘Act, 1961’), allowed lesser deduction under Section 80M of the Act, 1961 on the income from dividends (full amount of dividend – intereston borrowed capital utilized for investment in units of UTI) as againstthe claim of the assessee for deduction under Section 80M of the Act,1961 on the full amount of dividend; and ordered for interest underSection 201(1A). The assessing officer also made certainadditions/disallowances to which we are not concerned in the presentappeal inasmuch as the assessee subsequently either succeeded withrespect to such other additions/disallowances before Tribunal or hasgiven up the point by not pressing substantial question of law no.3. 4. Aggrieved with the assessment order, the assessee filed an appealNo.7/CIT(A)-X/Cir.10/03-04 which was partly allowed by theCommissioner of Income Tax (Appeals)–X, Kolkata by order dated14.11.2006. Aggrieved with the order of the CIT(A), the assessee filedan appeal being ITA No.555/Kol/2007 before the Income Tax AppellateTribunal, Bench-“A”, Kolkata (ITAT) which was partly allowed by theITAT. Aggrieved with the aforesaid order of the ITAT dated 25.03.2011,the assessee has filed the present appeal which has been admitted bythis Court by order dated 19.08.2011 on the substantial questions oflaw as afore-quoted. Submissions: 5.Sri J. P. Khaitan, learned senior advocate for the appellant/assesseesubmits as under:submits as under: i)The entire amount of interest on borrowed capital being anexpenditure relating to the business of the assessee, was allowable asdeduction which was wrongly disallowed by the assessing officer andupheld by the Tribunal. The tax free bonds were purchased by theassessee as part of his business activity and subsequently when thebonds were sold, the surplus/loss became part of taxable income ofthe assessee. The loss suffered by the assessee on account of sale ofthe aforesaid bonds was itself treated by the assessing officer asbusiness loss while determining the income of the assessee for theassessment year in question.expenditure relating to the business of the assessee, was allowable asdeduction which was wrongly disallowed by the assessing officer andupheld by the Tribunal. The tax free bonds were purchased by theassessee as part of his business activity and subsequently when thebonds were sold, the surplus/loss became part of taxable income ofthe assessee. The loss suffered by the assessee on account of sale ofthe aforesaid bonds was itself treated by the assessing officer asbusiness loss while determining the income of the assessee for theassessment year in question. ii)Even if the entire amount of interest was not allowable, then only theamount of interest as may be apportioned for the tax-free income i.e.,tax-free interest on bonds could have been disallowed and the rest ofthe interest was allowable as deduction even after the enforcement ofSection 14A of the Act, 1961. Thus, only that part of interest onborrowed capital which is relatable to the tax-free income i.e., tax-freeinterest on bonds could be disallowed and could be subjected to tax asincome in the hands of the assessee.amount of interest as may be apportioned for the tax-free income i.e.,tax-free interest on bonds could have been disallowed and the rest ofthe interest was allowable as deduction even after the enforcement ofSection 14A of the Act, 1961. Thus, only that part of interest onborrowed capital which is relatable to the tax-free income i.e., tax-freeinterest on bonds could be disallowed and could be subjected to tax asincome in the hands of the assessee. iii)Section 80M read with Section 80AA of the Act, 1961 provides fordeduction @ 60% on the income by way of dividend from a domesticcompany. Therefore, the entire amount received as dividend was theincome from dividend and, as such, deduction under Section 80M wasallowable on the entire amount of dividend. Reliance is placed upon adeduction @ 60% on the income by way of dividend from a domesticcompany. Therefore, the entire amount received as dividend was theincome from dividend and, as such, deduction under Section 80M wasallowable on the entire amount of dividend. Reliance is placed upon a co-ordinate Bench judgment of this Court in Commissioner of IncomeTax vs. National and Grindlays Bank Ltd. reported in (1993) 202 ITR559 (Cal) and Commissioner of Income Tax vs. Kanoria Investments (P)Ltd. reported in (1998) 232 ITR 7 (Cal) and a judgment of the Hon’bleSupreme Court in Maxopp. Investment Ltd. vs. Commissioner ofIncome Tax, reported in (2018) 301 CTR (SC) 489. iv) iv)Imposition of interest under Section 201(1A) by the assessment orderwas totally illegal as neither a separate order was passed by theassessing officer for interest under Section 201(1A) nor anyopportunity of hearing was afforded nor any reasons have beenrecorded while imposing interest under Section 201(1A) of the Act,1961. ITAT has held that a separate order was required to be passedby the assessing officer and yet the ITAT rejected the point on theground that a separate appeal has not been filed. Thus, even thoughon the facts and findings recorded by the ITAT, no separate orderpassed by the assessing officer under Section 201(1A) of the Act andyet imposition of interest has been affirmed on a totally illogicalground that a separate appeal has not been filed by the assessee.6.Sri Vipul Kundalia, learned counsel for the revenue, submits as under:- (i)The co-ordinate Bench judgments of this Court in National andGrindlays Bank Limited (supra) and in Kanoria Investments (P)Limited (supra) relied by learned counsel for the appellant are perGrindlays Bank Limited (supra) and in Kanoria Investments (P)Limited (supra) relied by learned counsel for the appellant are per inquirium inasmuch as in both the aforesaid judgments of the co-ordinate Bench of this Court, the Constitution Bench judgment ofHon'ble Supreme Court in Distributors (Baroda) Private Limited v.Union of India & Others [1986] 1 SCC 43 (paragraphs 12-19)settling the law on the question i.e. with respect to computation ofdeduction under Section 80M, was not noticed by the co-ordinateBenches. Thus, both the aforesaid judgments of this Court areper inquirium. The Constitution Bench of Hon'ble Supreme Courtholds the field. The view taken by the ITAT in the impugned orderis wholly in consonance with the law laid down by theConstitution Bench in the case of Distributors (Baroda) PrivateLimited (supra). inquirium inasmuch as in both the aforesaid judgments of the co-ordinate Bench of this Court, the Constitution Bench judgment ofHon'ble Supreme Court in Distributors (Baroda) Private Limited v.Union of India & Others [1986] 1 SCC 43 (paragraphs 12-19)settling the law on the question i.e. with respect to computation ofdeduction under Section 80M, was not noticed by the co-ordinateBenches. Thus, both the aforesaid judgments of this Court areper inquirium. The Constitution Bench of Hon'ble Supreme Courtholds the field. The view taken by the ITAT in the impugned orderis wholly in consonance with the law laid down by theConstitution Bench in the case of Distributors (Baroda) PrivateLimited (supra). (ii)The disallowance of interest on tax-free bonds in view of Section14A of the Act 1961 is wholly justified and correct inasmuch asthe assessee borrowed money to invest in bonds carrying tax-freeinterest. The judgment of Hon'ble Supreme Court in Maxopp.Investments Limited (supra) relied by learned counsel for theappellant assessee is distinguishable in view of the law clarifiedby Hon'ble Supreme Court in subsequent judgment in SouthIndian Bank Limited v. Commissioner of Income Tax [2021] 10SCC 153 (paragraphs 31 and 32). Therefore, the impugned orderpassed by the Tribunal does not require any interference. (iii)The interest under Section 201(1A) was lawfully imposed by theassessing officer and the ITAT has correctly dismissed the appealof the assessee on the point of imposition of interest.assessing officer and the ITAT has correctly dismissed the appealof the assessee on the point of imposition of interest. Discussion and Finding:- Substantial Question of Law No.1 7.In the assessment order, the assessing officer has recorded a finding offact that the assessee is engaged in the business of manufacture,supplies, exports, erections, installations and commissioning of widerange of cooling towers etc., manufacture, supplies and export of highdensity polypropylene woven bags for use in packing of fertilisers,cement, chemicals, grains etc. and investment in stocks of securitiesfrom time to time. As per book results, the total sale of the assesseeincluding sales of bonds of public sector undertakings and units of UTIwas Rs.14,722.56 lakh resulting in a net profit of Rs.973.61 lakh whichincludes tax-free interest on bonds. After reducing the amount of tax-free interest on bonds, the net profit came to Rs.7,67,70,836/- asmentioned by the assessing officer in the computation part of theassessment order. This net profit was arrived after deducting intereston borrowed capital said to have been utilised for investment in units ofUTI which was (interest amount) Rs.4,03,833/-. The assessing officerhas not disallowed the interest claimed as business expenditure by theassessee. He made certain additions which included the interest paid on loans used for investment in tax-free bonds. The interest sodisallowed and added to income was Rs.50,05,240/- which was reducedby the Tribunal to Rs.44,03,373.68. This amount is in dispute in thepresent appeal referable to substantial question of law No.1. on loans used for investment in tax-free bonds. The interest sodisallowed and added to income was Rs.50,05,240/- which was reducedby the Tribunal to Rs.44,03,373.68. This amount is in dispute in thepresent appeal referable to substantial question of law No.1. 8.The assessing officer noted in the assessment order that the interestpaid on borrowed capital utilised to earn tax-free interest on bonds isliable to be disallowed in view Section 14A of the Act 1961. Inparagraph 5 of the assessment order the A.O. has given details ofinvestment in public sector bonds from borrowed capitals, whichdiscloses that the investment was made by the assessee in public sectorbonds on various dates. The bonds of American Express BankLimited were purchased between 12.07.1989 and 06.11.1989. Thebonds of M/s. Canbank Financial Services Limited were purchasedbetween 29.03.1989 and 28.04.1989. The bonds of PeerlessGeneral Finance and Investment Limited were purchased between31.05.1989 and 29.03.1990. Certain bonds were purchased throughM/s. Rahul & Co. between 12.05.1989 and 28.12.1989. Fromparagraph 5 of the assessment order, it is evident that the finance ofRs.7.25 crore was made available on 08.05.1989 which was repaidby the assessee to the lenders on 05.07.1989 (Rs.3.25 crore) and on31.07.1989 (Rs.4 crore). Thus, the amount borrowed on 08.05.1989was repaid by the assessee on 05.07.1989 and 31.07.1989, whereas the bonds purchased by the assessee were sold substantially afterrepayment of loan. 9.Thus, the entire borrowed finance of Rs.7.25 crores was repaid by theassessee, on 5/7/1989 Rs.3.25 crores and on 31.07.1989 Rs. 4 crores.The purchases of bond of American Express Bank Ltd. were madebetween 12.7.1989 and 6.11.1989 on eight dates. The purchases ofbonds of Can Bank Financial Services Limited were made between29.3.1989 and 28.4.1989 on four dates. The bonds of M/s. PeerlessGeneral Finance and Investment Co. Limited were purchased between31.5.1989 and 29.3.1990 on five dates. Thus the purchases of bondsof M/s. Can Bank Financial Services Limited were made prior tothe arrangement of finance of Rs.7.25 crores. Except the firstpurchase of bonds of American Express Bank Limited on12.7.1989, rest of purchases of bonds were made after repaymentof the finance. Except the purchase of bonds of M/s. Peerless GeneralFinance & Investment Co. Limited made on 31.5.1989, 26.6.1989 and21.7.1989. The rest of the bonds of Peerless General Finance &Investment Co. Ltd. were purchased on 18.8.1989 and 29.3.1990and 12.3.1990 i.e., much subsequent to the repayment of theaforesaid finance. 10. As per chart extracted in paragraph 5 of the assessment order thebonds of M/s. Peerless General Finance & Investment Co. Ltd. were soldbonds of M/s. Peerless General Finance & Investment Co. Ltd. were sold on 17.7.1989, 26.7.1989, 7.8.1989, 4.9.1989, 6.3.1990 and 30.3.1990.Thus, except the sales made on 17.7.1989 and 26.7.1989 the bondsof M/s. Peerless General Finance & Investment Co. Ltd. were soldby the assessee much after the repayment of the aforesaid financeof Rs.7.25 crores. 10. As per chart extracted in paragraph 5 of the assessment order thebonds of M/s. Peerless General Finance & Investment Co. Ltd. were soldbonds of M/s. Peerless General Finance & Investment Co. Ltd. were sold on 17.7.1989, 26.7.1989, 7.8.1989, 4.9.1989, 6.3.1990 and 30.3.1990.Thus, except the sales made on 17.7.1989 and 26.7.1989 the bondsof M/s. Peerless General Finance & Investment Co. Ltd. were soldby the assessee much after the repayment of the aforesaid financeof Rs.7.25 crores. 11. Thus, it can be safely concluded on the basis of facts and figures notedin the assessment order that the investment in bonds and units werepart of business activity of assessee and the entire capital/fundavailable to the assessee either as its own fund or as borrowed capitalwas a common pool, out of which purchases/investments were madefrom time to time and were also sold. Therefore, the inference drawn bythe fact finding authorities that the entire investment in tax free bondswere from the borrowed finance, is apparently incorrect and perverse.in the assessment order that the investment in bonds and units werepart of business activity of assessee and the entire capital/fundavailable to the assessee either as its own fund or as borrowed capitalwas a common pool, out of which purchases/investments were madefrom time to time and were also sold. Therefore, the inference drawn bythe fact finding authorities that the entire investment in tax free bondswere from the borrowed finance, is apparently incorrect and perverse. 12.In view of the facts aforenoted, the findings recorded by the ITAT inparagraph 10.1 and 11 of the impugned order that the assessee madeinvestments out of borrowed funds and utilised the borrowed funds forthe purposes of investments, shares and units; cannot be said to becorrect in view of the facts noted above by us which emerges from theassessment order itself.paragraph 10.1 and 11 of the impugned order that the assessee madeinvestments out of borrowed funds and utilised the borrowed funds forthe purposes of investments, shares and units; cannot be said to becorrect in view of the facts noted above by us which emerges from theassessment order itself. 13.In Maxopp. Investment Ltd. Vs. Commissioner of Income Tax;2018(1) 301 CTR (SC) 489 (paragraphs 34 to 41) Hon’ble SupremeCourt explained the provisions of Section 14A and held as under:2018(1) 301 CTR (SC) 489 (paragraphs 34 to 41) Hon’ble SupremeCourt explained the provisions of Section 14A and held as under: 34. Having clarified the aforesaid position, the first andforemost issue that falls for consideration is as to whether thedominant purpose test, which is pressed into service by theassessees would apply while interpreting s. 14A of the Act orwe have to go by the theory of apportionment. We are of theopinion that the dominant purpose for which theinvestment into shares is made by an assessee may notbe relevant. No doubt, the assessee like Maxopp InvestmentLtd. may have made the investment in order to gain control ofthe investee company. However, that does not appear to be arelevant factor in determining the issue at hand. Fact remainsthat such dividend income is non-taxable. In this scenario, ifexpenditure is incurred on earning the dividend income, thatmuch of the expenditure which is attributable to the dividendincome has to be disallowed and cannot be treated as businessexpenditure. Keeping this objective behind s. 14A of the Act inmind, the said provision has to be interpreted, particularly, thewords in relation to the income that does not form part of totalincome. Considered in this hue, the principle ofapportionment of expenses comes into play as that is theprinciple which is engrained in s. 14A of the Act. This isso held in Walfort Share & Stock Brokers (P) Ltd. (supra),relevant passage whereof is already reproduced above for thesake of continuity of discussion, we would like to quote thefollowing few lines therefrom: "The next phrase is, in relation to income which does notform part of total income under the Act'. It means that ifan income does not form part of total income, then the related expenditure is outside the ambit of theapplicability of s. 14A. The theory of apportionment of expenditure between taxableand non-taxable has, in principle, been now widened under s.14A." 35. The Delhi High Court, therefore, correctly observed thatprior to introduction of s. 14A of the Act, the law was thatwhen an assessee had a composite and indivisible businesswhich had elements of both taxable and non- taxable income,the entire expenditure in respect of said business wasdeductible and, in such a case, the principle of apportionment ofthe expenditure relating to the non-taxable income did notapply. The principle of apportionment was made available onlywhere the business was divisible. It is to find a cure to theaforesaid problem that the legislature has not onlyinserted s. 14A by the Finance (Amendment) Act, 2001 butalso made it retrospective, i.e., 1962 when the IT Act itself cameinto force. The aforesaid intent was expressed loudly andclearly in the Memorandum Explaining the Provisions of theFinance Bill, 2001. We, thus, agree with the view taken by theDelhi High Court, and are not inclined to accept the opinion ofPunjab & Haryana High Court which went by dominantpurpose theory. The aforesaid reasoning would be applicable incases where shares are held as investment in the investee-company, may be for the purpose of having controlling interesttherein. On that reasoning, appeals of Maxopp Investment Ltd.as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companieshave to fail and are, therefore, dismissed. 36. There is yet another aspect which still needs to be lookedinto. What happens when the shares are held as 'stock-in-trade'and not as investment', particularly, by the banks ? On thisspecific aspect, CBDT has issued Circular No. 18 of 2015, dt.2nd Nov., 2015. 37. This circular has already been reproduced in para 19above. This circular takes note of the judgment of this Court inNawanshahar case (supra) wherein it is held that investmentsmade by a banking concern are part of the business or banking.Therefore, the income arises from such investments isattributable to business of banking falling under the head'Profits and gains of business or profession. On that basis, thecircular contains the decision of the Board that no appeal wouldbe filed on this ground by the officers of the Department and ifthe appeals are already filed, they should be withdrawn. Areading of this circular would make it clear that the issue wasas to whether income by way of interest on securities shall bechargeable to income-tax under the head 'Income from othersources or it is to fall under the head 'Profits and gains ofbusiness or profession'. The Board, going by the decision of thisCourt in Nawanshahar case (supra), clarified that it has to betreated as income falling under the head 'Profits and gains ofbusiness or profession'. The Board also went to the extent ofsaying that this would not be limited only to co-operativesocieties/banks claiming deduction under s. 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercialbanks, to which Banking Regulation Act, 1949 applies. Act but would also be applicable to all banks/commercialbanks, to which Banking Regulation Act, 1949 applies. 38. From this, Punjab & Haryana High Court pointed out thatthis circular carves out a distinction between 'stock-in-trade’and "investment and provides that if the motive behindpurchase and sale of shares is to earn profit, then the samewould be treated as trading profit and if the object is to deriveincome by way of dividend then the profit would be said tohave accrued from investment. To this extent, the High Courtmay be correct. At the same time, we do not agree with the testof dominant intention applied by the Punjab & Haryana HighCourt, which we have already discarded. In that event, thequestion is as to on what basis those cases are to be decidedwhere the shares of other companies are purchased by theassessees as 'stock-in-trade' and not as investment'. Weproceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, themain purpose is to trade in those shares and earn profitstherefrom. However, we are not concerned with those profitswhich would naturally be treated as 'income' under the head'Profits and gains of business or profession'’. What happens isthat, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally,which is also an income. However, by virtue of s. 10(34) of theAct, this dividend income is not to be included in the totalincome and is exempt from tax. This triggers the applicability ofs. 14A of the Act which is based on the theory of apportionmentof expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P) Ltd. case (supra).Therefore, to that extent, depending upon the facts of each case,the expenditure incurred in acquiring those shares will have tobe apportioned. 40. We note from the facts in the State Bank of Patiala case(supra) that the AO while passing the assessment order, hadalready restricted the disallowance to the amount which wasclaimed as exempt income by applying the formula contained inr. 8D of the Rules and holding that s. 14A of the Act would beapplicable. In spite of this exercise of apportionment ofexpenditure carried out by the AO, CIT(A) disallowed the entirededuction of expenditure. That view of the CIT(A) was clearlyuntenable and rightly set aside by the Tribunal. Therefore, onfacts, the Punjab & Haryana High Court has arrived at a correctconclusion by affirming the view of the Tribunal, though we arenot subscribing to the theory of dominant intention applied bythe High Court. It is to be kept in mind that in those caseswhere shares are held as 'stock-in-trade', it becomes a businessactivity of the assessee to deal in those shares as a businessproposition. Whether dividend is earned or not becomesimmaterial. In fact, it would be a quirk of fate that when theinvestee company declared dividend, those shares are held bythe assessee, though the assessee has to ultimately trade thoseshares by selling them to earn profits. The situation here is,therefore, different from the case like Maxopp Investment Ltd.where the assessee would continue to hold those shares as itwants to retain control over the investee company. In that case,whenever dividend is declared by the investee company thatwould necessarily be earned by the assessee and the assessee alone, Therefore, even at the time of investing into those shares,the assessee knows that it may generate dividend income aswell and as and when such dividend income is generated thatwould be earned by the assessee. In contrast, where theshares are held as stock-in-trade, this may not be necessarily asituation. The main purpose is to liquidate those shareswhenever the share price goes up in order to earn profits. In theresult, the appeals filed by the Revenue challenging thejudgment of the Punjab & Haryana High Court in State Bank ofPatiala (supra) also fail, though law in this respect has beenclarified hereinabove. alone, Therefore, even at the time of investing into those shares,the assessee knows that it may generate dividend income aswell and as and when such dividend income is generated thatwould be earned by the assessee. In contrast, where theshares are held as stock-in-trade, this may not be necessarily asituation. The main purpose is to liquidate those shareswhenever the share price goes up in order to earn profits. In theresult, the appeals filed by the Revenue challenging thejudgment of the Punjab & Haryana High Court in State Bank ofPatiala (supra) also fail, though law in this respect has beenclarified hereinabove. 41. Having regard to the language of s.14A(2) of the Act,r/wr.8D of the Rules, we also make it clear that before applying thetheory of apportionment, the AO needs to record satisfactionthat having regard to the kind of the assessee, suo motudisallowance under s.14A was not correct. It will be in thosecases where the assessee in his return has himself apportionedbut the AO was not accepting the said apportionment. In thateventuality, it will have to record its satisfaction to this effect.Further, while recording such a satisfaction, nature of loantaken by the assessee for purchasing the shares/making theinvestment in shares is to be examined by the AO. 14.In South Indian Bank Limited Vs. Commissioner of Income Tax, (2021) 10 SCC 153 (paragraphs 31 and 32) Hon’ble Supreme Courtagain explained the provisions of Section 14A of the Act 1961, in thematter and held as under: “31. The aforesaid discussion and the cited judgements advisethis Court to conclude that the proportionate disallowance ofinterest is not warranted, under Section 14-A of the Income TaxAct for investments made in tax-free bonds/securities whichyield tax-free dividend and interest to assessee Banks in thosesituations where, interest-free own funds available with theassessee, exceeded their investments. With this conclusion ,we unhesitatingly agree with the view taken by the leaned ITATfavouring the assessees. 32. The above conclusion is reached because nexus has notbeen established between expenditure disallowed and earningof exempt income. The respondents as earlier noted, have failedto substantiate their argument that the assessee was requiredto maintain separate accounts. Their reliance on Honda Sie toproject such an obligation on the assessee, is already negated.The learned counsel for the Revenue has failed to refer to anystatutory provision which obligates the assessee to maintainseparate accounts which might justify proportionatedisallowance.” 15.Section 14A of the Act, 1961 provides and makes a provision withrespect to expenditure incurred in relation to income not includable inthe total income. It provides that for the purposes of computing the totalincome under this Chapter (Chapter IV), no deduction shall be allowedin respect of expenditure incurred by the assessee in relation to incomewhich does not form part of total income under the Act. The proviso toSection 14A was inserted by Finance Act, 2022 with retrospective effectto which we are not concerned in the present set of facts inasmuch as the assessment year involved in the present appeal is the A.Y. 1990-1991. 16.Section 14A prohibits deduction of an expenditure incurred by anassessee in relation to income which does not form part of the totalincome under the Act, 1961. Therefore, the expenditure incurred by theassessee in relation to income i.e., the tax free interest which does notform part of total income under the Act, 1961, is not allowable.assessee in relation to income which does not form part of the totalincome under the Act, 1961. Therefore, the expenditure incurred by theassessee in relation to income i.e., the tax free interest which does notform part of total income under the Act, 1961, is not allowable. the assessment year involved in the present appeal is the A.Y. 1990-1991. 16.Section 14A prohibits deduction of an expenditure incurred by anassessee in relation to income which does not form part of the totalincome under the Act, 1961. Therefore, the expenditure incurred by theassessee in relation to income i.e., the tax free interest which does notform part of total income under the Act, 1961, is not allowable.assessee in relation to income which does not form part of the totalincome under the Act, 1961. Therefore, the expenditure incurred by theassessee in relation to income i.e., the tax free interest which does notform part of total income under the Act, 1961, is not allowable. 17.The first contention of learned Counsel for the appellant cannot beaccepted being in conflict of Section 14A of the Act, 1961. The phrase“in relation to income which does not form part of total income underthe Act” means that if an income does not form part of total income, therelated expenditure is not allowable as revenue expenditure. Thus,principle of apportionment is clearly engrained in Section 14 A of theAct, 1961. Where shares or units or bonds are held as stock-in-trade,the main purpose is to trade in shares or units or bonds and earn profittherefrom and the profit so earned would naturally be treated as “Profitsand gains of business or profession”. Incidentally, dividend on sharesor tax free interest on bonds is earned which are exempt from incometax, then Section 14 A comes into play, which is based on theory ofapportionment of expenditure between taxable and non taxable income.accepted being in conflict of Section 14A of the Act, 1961. The phrase“in relation to income which does not form part of total income underthe Act” means that if an income does not form part of total income, therelated expenditure is not allowable as revenue expenditure. Thus,principle of apportionment is clearly engrained in Section 14 A of theAct, 1961. Where shares or units or bonds are held as stock-in-trade,the main purpose is to trade in shares or units or bonds and earn profittherefrom and the profit so earned would naturally be treated as “Profitsand gains of business or profession”. Incidentally, dividend on sharesor tax free interest on bonds is earned which are exempt from incometax, then Section 14 A comes into play, which is based on theory ofapportionment of expenditure between taxable and non taxable income. 18.In the present set of facts, the assessing officer although noted certainfacts and figures in paragraph 5 and certain other paragraphs of thefacts and figures in paragraph 5 and certain other paragraphs of the assessment order which discloses that the assessee was also engaged inthe business of purchase and sale of bonds and units and it was onlyfor a period of about 2.1/2 months that he borrowed a sum of Rs.7.25crores whereas the purchases of tax free bonds were made even prior totaking finance and subsequent to the repayment of finance. Therefore,when the Tribunal or the authorities below were of the view that intereston finance taken by the assessee was invested in the tax free bondswhich earned some tax free income, then they must have applied theirmind on the questions of apportionment, particularly in view of the lawlaid down by Hon’ble Supreme Court in the case of Maxopp. InvestmentLtd. (supra) and South Indian Bank Limited (Supra) afore-quoted. assessment order which discloses that the assessee was also engaged inthe business of purchase and sale of bonds and units and it was onlyfor a period of about 2.1/2 months that he borrowed a sum of Rs.7.25crores whereas the purchases of tax free bonds were made even prior totaking finance and subsequent to the repayment of finance. Therefore,when the Tribunal or the authorities below were of the view that intereston finance taken by the assessee was invested in the tax free bondswhich earned some tax free income, then they must have applied theirmind on the questions of apportionment, particularly in view of the lawlaid down by Hon’ble Supreme Court in the case of Maxopp. InvestmentLtd. (supra) and South Indian Bank Limited (Supra) afore-quoted. 19.We are of the view that since the impugned order of the ITAT suffersfrom perversity and examination of facts needs to be made by the factfinding authority i.e., the Assessing Officer with regard toapportionment or proportionate disallowance, therefore on theaforequoted substantial question of law No.(1) the case deserves to beremanded to the assessing officer. The substantial question of lawNo.(1) is answered accordingly and the matter is remanded to theassessing officer for apportionment or proportionate disallowance of theinterest incurred as expenditure, to the extent related to the tax freeinterest on bonds.from perversity and examination of facts needs to be made by the factfinding authority i.e., the Assessing Officer with regard toapportionment or proportionate disallowance, therefore on theaforequoted substantial question of law No.(1) the case deserves to beremanded to the assessing officer. The substantial question of lawNo.(1) is answered accordingly and the matter is remanded to theassessing officer for apportionment or proportionate disallowance of theinterest incurred as expenditure, to the extent related to the tax freeinterest on bonds. Substantial Question of Law No.(2): 20.With regard to the substantial question of law no.(2), we find that aco-ordinate Bench of this Court in National Grindlays Bank (supra) andKanoria Investment Pvt. Ltd. (supra) held that the deduction underSection 80 M of the Act, 1961 will have to be allowed on the entireamount of dividend. These judgments are in conflict with the law laiddown by Constitutional Bench of the Hon’ble Supreme Court inDistributors (Baroda) Pvt. Ltd. Vs. Union of India& Ors., (1986) 1SCC 43 (paragraphs 12 to 19) which were not noticed by the coordinateBenches of this Court. In Distributors (Baroda) Pvt. Ltd. (Supra) theConstitution Bench of Hon’ble Supreme Court held that deductionunder Section 80M is liable to be calculated with reference to theamount of dividend computed in accordance with the provisions of theAct and forming part of gross total income and not with referenceto the full amount of dividend received by the assessee. The aforesaidjudgment of Hon’ble Supreme Court was rendered in the year 1985while the aforesaid two judgments of Coordinate Bench of this Court arelater judgments taking contrary view. It appears that aforesaidjudgment of Hon’ble Supreme Court was not noticed by the CoordinateBenches of this Court in the aforesaid two judgments. Therefore, thejudgments of Coordinate Benches of this Court in the case of NationalAnd Grindlays Bank Ltd. (Supra) and in Kanoria Investments (P.) Ltd.(Supra) are per incuriam and are not binding precedent. On Section80M the aforesaid judgment of Hon’ble Supreme Court in Distributors (Baroda) Pvt. Ltd. (supra) is binding. The view taken by the ITAT in theimpugned order is in consonance with the law laid down by Hon’bleSupreme Court. Per incuriam: (Baroda) Pvt. Ltd. (supra) is binding. The view taken by the ITAT in theimpugned order is in consonance with the law laid down by Hon’bleSupreme Court. Per incuriam: 21.A decision is given per incuriam when the court has acted in ignoranceof a previous decision of its own or of a court of co-ordinate jurisdictionwhich covers the case before it or when it has acted in ignorance of alaw laid down by the Hon’ble Supreme Court or when the decision isgiven in an ignorance of the terms of a statute or rule having statutoryforce. Thus, the rule of per incuriam can be applied where a court omitsto consider a binding precedent of the same court or the superior courtrendered on the same issue or where a court omits to consider anystatute while deciding that issue, vide Dr. Shah Faesal & Ors. Vs. Unionof India & Anr. (2020) 4 SCC 1 (paragraph 31) and the State of BiharVs. Kalika Kuer alias Kalika Singh and Ors. (2003) 5 SCC 448(paragraph 5 to 9). Since in the present set of facts the co-ordinateBench of this Court in the case of National and Grindlays Bank Limited(supra) and Kanoria Investment Pvt. Ltd. (supra) have taken theaforesaid view without noticing the Constitutional Bench of the Hon’bleSupreme Court in the case of Distributors (Baroda) Pvt. Ltd. (supra).Therefore, we hold that the aforesaid two judgments of co-ordinateBench of this Court are per incuriam.of a previous decision of its own or of a court of co-ordinate jurisdictionwhich covers the case before it or when it has acted in ignorance of alaw laid down by the Hon’ble Supreme Court or when the decision isgiven in an ignorance of the terms of a statute or rule having statutoryforce. Thus, the rule of per incuriam can be applied where a court omitsto consider a binding precedent of the same court or the superior courtrendered on the same issue or where a court omits to consider anystatute while deciding that issue, vide Dr. Shah Faesal & Ors. Vs. Unionof India & Anr. (2020) 4 SCC 1 (paragraph 31) and the State of BiharVs. Kalika Kuer alias Kalika Singh and Ors. (2003) 5 SCC 448(paragraph 5 to 9). Since in the present set of facts the co-ordinateBench of this Court in the case of National and Grindlays Bank Limited(supra) and Kanoria Investment Pvt. Ltd. (supra) have taken theaforesaid view without noticing the Constitutional Bench of the Hon’bleSupreme Court in the case of Distributors (Baroda) Pvt. Ltd. (supra).Therefore, we hold that the aforesaid two judgments of co-ordinateBench of this Court are per incuriam. 22.In view of the law laid down by the Constitution Bench of Hon’bleSupreme Court in Distributors (Baroda) Pvt. Ltd.(Supra), we do not findany illegality in the impugned order of the ITAT so far as the substantialquestion of law no.2 is cornered. Therefore, the substantial question oflaw No. (2) is answered in favour of the revenue and against theassessee. The appeal of the assessee on this substantial question of lawdeserves to be dismissed.Supreme Court in Distributors (Baroda) Pvt. Ltd.(Supra), we do not findany illegality in the impugned order of the ITAT so far as the substantialquestion of law no.2 is cornered. Therefore, the substantial question oflaw No. (2) is answered in favour of the revenue and against theassessee. The appeal of the assessee on this substantial question of lawdeserves to be dismissed. 23.With regard to substantial question of law No. (4), we find that inparagraph 73.1 of the impugned order of the ITAT has recorded thefinding as under :paragraph 73.1 of the impugned order of the ITAT has recorded thefinding as under : 23.With regard to substantial question of law No. (4), we find that inparagraph 73.1 of the impugned order of the ITAT has recorded thefinding as under :paragraph 73.1 of the impugned order of the ITAT has recorded thefinding as under : “73.1 However, in respect of interest chargeable undersection 201(1A) of the Act, a separate order is required tobe passed by the authorities below and accordinglyseparate appeal is to be filed by the assessee. Hence, thesaid ground is not considered by us in the absence of anydetails and discussions in the orders of the authoritiesbelow. Accordingly, Ground No.15 of the appeal taken bythe assessee is rejected.”section 201(1A) of the Act, a separate order is required tobe passed by the authorities below and accordinglyseparate appeal is to be filed by the assessee. Hence, thesaid ground is not considered by us in the absence of anydetails and discussions in the orders of the authoritiesbelow. Accordingly, Ground No.15 of the appeal taken bythe assessee is rejected.” 24.It is wholly unreconcilable and totally unjustified that when the ITAThas itself found that a separate order was required to be passed forinterest chargeable under Section 201(1A) of the Act, 1961 and theassessing officer has not passed a separate order then dismissing theappeal for the aforequoted reason cannot be sustained. Therefore, thesubstantial question of law No. (4) is answered in favour of the assesseehas itself found that a separate order was required to be passed forinterest chargeable under Section 201(1A) of the Act, 1961 and theassessing officer has not passed a separate order then dismissing theappeal for the aforequoted reason cannot be sustained. Therefore, thesubstantial question of law No. (4) is answered in favour of the assessee and against the revenue. The appeal with regard to the substantialquestion of law No. (4) is allowed. 25.For all the reasons afore-stated, the appeal is partlyallowed to the extent indicated above and substantial question of lawNos. (1), (2) and (4) are answered accordingly. Case is remanded to theAssessing Officer for decision afresh on the substantial question of lawNo.1 for apportionment of expenditure (interest paid on finance) interms of the law laid down by Hon’ble Supreme Court in MaxoppInvestment Ltd.(Supra). (SURYA PRAKASH KESARWANI, J.) (RAJARSHI BHARADWAJ, J.)