Maxopp Investment Ltd v. Commissioner Of Income-Tax, New Delhi

*IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 18.11.2011 +ITA 687/2009 MAXOPP INVESTMENT LTD …Appellant - versus – COMMISSIONER OF INCOME-TAX, NEW DELHI …Respondent Advocates who appeared in this case:For the Appellant : Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva For the Respondent/Revenue: Mr Sanjeev Sabharwal with Ms P. L. Bansal and Ms Sonia Mathur +ITA 112/2010 AND M/S EICHER GOODEARTH LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit SachdevaFor the Respondent/Revenue: Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 263/2010 MOHAIR INVESTMENT & TRADING CO. (P) LTD ... Appellant - versus – COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva For the Respondent/Revenue: Mr Sanjeev Sabharwal with Mr Utpal Saha +ITA 805/2009 AND EICHER LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva For the Respondent/Revenue : Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 98/2009 COMMISSIONER OF INCOME TAX DELHI-IV ... Appellant - versus - ESCORTS FINANCE LTD ... Respondent Advocates who appeared in this case:For the Appellant/Revenue : Mr Sanjeev Sabharwal with Mr Utpal SahaFor the Respondent: Mr R. M. Mehta AND +ITA 853/2009 CHEMINVEST LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal and For the Respondent/Revenue Mr Amit Sachdeva: Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 856/2009 CHEMINVEST LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit SachdevaFor the Respondent/Revenue: Mr Sanjeev Sabharwal with Mr Utpal Saha AND + ITA 932/2009 THE COMMISSIONER OF INCOME TAX, DELHI-V ... Appellant - versus - M/S NALWA INVESTMENTS LTD ... Respondent Advocates who appeared in this case:For the Appellant/Revenue: Ms Sonia MathurFor the Respondent: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva AND +ITA 958/2009 MINDA INDUSTRIES LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva For the Respondent/Revenue : Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 1060/2009 MAXPAK INVESTMENT LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the AppellantFor the Respondent/Revenue : Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva: Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 1096/2009 JAGATJIT INDUSTRIES LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX & ANR ... Respondents Advocates who appeared in this case:For the Appellant: Mr Satyen Sethi with Mr Arta Trana PandaFor the Respondent/Revenue: Ms P. L. Bansal AND +ITA 1114/2009 COMMISSIONER OF INCOME TAX, LTU ... Appellant - versus - SHARDA MOTORS INDUSTRIES LTD ... Respondent AND +ITA 1060/2009 MAXPAK INVESTMENT LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the AppellantFor the Respondent/Revenue : Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva: Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 1096/2009 JAGATJIT INDUSTRIES LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX & ANR ... Respondents Advocates who appeared in this case:For the Appellant: Mr Satyen Sethi with Mr Arta Trana PandaFor the Respondent/Revenue: Ms P. L. Bansal AND +ITA 1114/2009 COMMISSIONER OF INCOME TAX, LTU ... Appellant - versus - SHARDA MOTORS INDUSTRIES LTD ... Respondent Advocates who appeared in this case:For the Appellant/Revenue: Mr Sanjeev Sabharwal with Mr Utpal SahaFor the Respondent: Mr Satyen Sethi with Mr Arta Trana Panda AND +ITA 936/2009 EICHER LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit SachdevaFor the Respondent/Revenue: Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 416/2010 MEDICARE INVESTMENTS LTD ... Appellant - versus - COMMISSIONER OF INCOME TAX, NEW DELHI ... Respondent Advocates who appeared in this case:For the Appellant: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva For the Respondent/Revenue : Mr Sanjeev Sabharwal with Mr Utpal Saha AND +ITA 57/2008 COMMISSIONER OF INCOME TAX, DELHI-VI ... Appellant - versus - VOU INVESTMENT PVT LTD ... Respondent Advocates who appeared in this case:For the Appellant: Ms P. L. BansalFor the Respondent/Revenue: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva AND +ITA 139/2009 THE COMMISSIONER OF INCOME TAX, DELHI-V ... Appellant - versus - M/S HCL PEROT SYSTEMS LTD ... Respondent Advocates who appeared in this case:For the AppellantFor the Respondent/Revenue : Ms P. L. Bansal and Ms Sonia Mathur: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva AND +ITA 77/2009 THE COMMISSIONER OF INCOME TAX, DELHI-V ... Appellant - versus - M/S HCL PEROT SYSTEMS LTD ... Respondent Advocates who appeared in this case:For the AppellantFor the Respondent/Revenue : Ms P. L. Bansal and Ms Sonia Mathur: Mr Ajay Vohra with Ms Kavita Jha, Ms Akanksha Aggarwal andMr Amit Sachdeva AND +ITA 683/2008 COMMISSIONER OF INCOME TAX, DELHI-IV ... Appellant - versus - ICRA LTD ... Respondent Advocates who appeared in this case:For the Appellant: Ms Prem Lata BansalFor the Respondent: Dr Rakesh Gupta with Ms Poonam Ahuja and Mr Johnson Bara AND +ITA 702/2008 COMMISSIONER OF INCOME TAX, DEHI-IV ... Appellant ICRA LTD - versus - ... Respondent Advocates who appeared in this case:For the Appellant: Ms Prem Lata BansalFor the Respondent: Dr Rakesh Gupta with Ms Poonam Ahuja and Mr Johnson Bara AND +ITA 217/2009 COMMISSIONER OF INCOME TAX, DELHI-I ... Appellant - versus - GLAD INVESTMENTS PVT LTD(Now merged with AKM SYSTEMS PVT LTD ... Respondent Advocates who appeared in this case:For the Appellant/RevenueFor the Respondent : Ms P. L. Bansal with Ms Anshul Sharma: Mr Ajay Nair with Mr Rajat Joneja AND +ITA 389/2010 THE COMMISSIONER OF INCOME TAX (LTU) ... Appellant - versus - SHARDA MOTORS INDUSTRIES LTD ... Respondent Advocates who appeared in this case:For the Appellant/Revenue: Mr Sanjeev Sabharwal with Mr Utpal SahaFor the Respondent: Mr Satyen Sethi with Mr Arta Trana Panda CORAM:HON'BLE MR JUSTICE BADAR DURREZ AHMEDHON'BLE MR JUSTICE SIDDHARTH MRIDUL AND +ITA 217/2009 COMMISSIONER OF INCOME TAX, DELHI-I ... Appellant - versus - GLAD INVESTMENTS PVT LTD(Now merged with AKM SYSTEMS PVT LTD ... Respondent Advocates who appeared in this case:For the Appellant/RevenueFor the Respondent : Ms P. L. Bansal with Ms Anshul Sharma: Mr Ajay Nair with Mr Rajat Joneja AND +ITA 389/2010 THE COMMISSIONER OF INCOME TAX (LTU) ... Appellant - versus - SHARDA MOTORS INDUSTRIES LTD ... Respondent Advocates who appeared in this case:For the Appellant/Revenue: Mr Sanjeev Sabharwal with Mr Utpal SahaFor the Respondent: Mr Satyen Sethi with Mr Arta Trana Panda CORAM:HON'BLE MR JUSTICE BADAR DURREZ AHMEDHON'BLE MR JUSTICE SIDDHARTH MRIDUL BADAR DURREZ AHMED, J 1.This is a batch of twenty one (21) appeals under section 260A of the IncomeTax Act, 1961. Eleven (11) of these have been filed by assessees and ten (10) by therevenue. Eight of these appeals – four by assessees and four by the revenue -- havebeen admitted and questions have been framed in them.The other appeals weretagged along therewith.It was, however, clearly understood by all the counselappearing on both sides that the appeals which had not been formally admitted wouldbe deemed to have been admitted for hearing and it was on this basis that argumentswere addressed. All these appeals are concerned with section 14A of the Income TaxAct, 1961 and Rule 8D of the Income Tax Rules, 1962. In particular, we are calledupon to examine as to whether interest paid on funds borrowed for investing in sharesof operating companies for acquiring and retaining a controlling interest therein isallowable under section 36(1)(iii) and is not hit by section 14A of the Income tax Act,1961?And, consequently, we are also required to examine the retrospectiveapplicability of the sub-sections (2) & (3) of the said section 14A and of the said Rule8D to the assessment years in question which range from 1998-99 to 2005-06. Questions 2.Since, across these appeals, there were some minor differences in languageinsofar as the admitted and/or proposed questions were concerned, it was agreed that the following substantial questions of law would, in general, cover all the cases beforeus:- 1. Whether expenditure (including interest paid on funds borrowed) inrespect of investment in shares of operating companies for acquiringand retaining a controlling interest therein is hit by section 14A ofthe Income tax Act, 1961 inasmuch as the dividend received on suchshares does not form part of the total income?respect of investment in shares of operating companies for acquiringand retaining a controlling interest therein is hit by section 14A ofthe Income tax Act, 1961 inasmuch as the dividend received on suchshares does not form part of the total income? 2. Whether the provisions of sub-section (2) and sub-section (3) ofsection 14A inserted by the Finance Act, 2006 with effect from01/04/2007, would apply retrospectively to all pending proceedings?section 14A inserted by the Finance Act, 2006 with effect from01/04/2007, would apply retrospectively to all pending proceedings? 3. Whether Rule 8D inserted by the Income -tax (Fifth Amendment)Rules, 2008 with effect from 24/03/2008 was procedural in natureand hence would apply retrospectively to all pending proceedings?Rules, 2008 with effect from 24/03/2008 was procedural in natureand hence would apply retrospectively to all pending proceedings? 2. Whether the provisions of sub-section (2) and sub-section (3) ofsection 14A inserted by the Finance Act, 2006 with effect from01/04/2007, would apply retrospectively to all pending proceedings?section 14A inserted by the Finance Act, 2006 with effect from01/04/2007, would apply retrospectively to all pending proceedings? 3. Whether Rule 8D inserted by the Income -tax (Fifth Amendment)Rules, 2008 with effect from 24/03/2008 was procedural in natureand hence would apply retrospectively to all pending proceedings?Rules, 2008 with effect from 24/03/2008 was procedural in natureand hence would apply retrospectively to all pending proceedings? 3.In order to provide some factual basis behind the above mentioned questions,we shall refer to the appeal in the case of Maxopp Investment Limited v. CIT [ ITANo.687/2009]. The assessee company is in the business of finance, investment and ofdealing in shares and securities.The assessee held shares and securities, partly asinvestments on the "capital account" and partly as "trading assets" for the purpose ofacquiring and retaining control over its group companies, primarily Max India Ltd.As per the assessee, any profit resulting on the sale of shares held as trading assetswas duly offered to tax as business income of the assessee. During the previous yearrelevant to the assessment year 2002-03, the assessee incurred total interestexpenditure of Rs. 1,61,21,168/-, which was claimed as business expenditure undersection 36 (1) (iii) of the Income Tax Act, 1961 (hereinafter referred to as "the saidact"). According to the assessee, the expenditure claimed was not hit by section 14Aof the said act, on the ground that although borrowed funds were partly utilised forinvestment in shares held as trading assets, such investment was made with theintention to acquire and retain a controlling interest in the aforesaid company and thatthe receipt of dividend thereon was merely incidental. 4.In respect of the said assessment year 2002-03, the assessee had filed a returnof income declaring an income of Rs.78,90,430/-.The assessee had received thefollowing incomes: – The aforesaid dividend of Rs. 49,90,860/- was received on the shares of Max IndiaLtd, held by the assessee as "trading assets".By an order dated 27/08/2004, theassessing officer, invoking section 14A of the said act, apportioned the said interestexpenditure in the ratio of investment in shares of Max India Ltd, on which dividendwas received, to the principal amount of unsecured loans, which worked out to Rs.67,74,175/-. However, the assessing officer restricted the disallowance under section14A of the said act to Rs. 49,90,860/-, being the amount of dividend received. Onappeal, the CIT (A), by the order dated 12/01/2005, upheld the order of the assessingofficer. Thereafter, the case of the assessee was heard by a Special Bench constitutedin the case of Daga Capital Management (P) Ltd. The Special Bench of the Tribunalheld that the expenditure claimed was hit by the provisions of section 14A of the saidAct. Pursuant to the majority decision of the Special Bench of the Tribunal, the issueof quantum of expenditure to be disallowed was restored to the assessing officer to berecomputed in terms of Rule 8D of the Income Tax Rules, 1961 (hereinafter referredto as “the said rules”), which was held to be retrospective. 5.As regards Question 1, it has been contended on behalf of the assessees thatholding of shares for acquiring and retaining control of operating companies amountsto business and, consequently, dividend income on such shares is in the nature ofbusiness income. It was further submitted that the intention behind acquiring suchshares was not to earn dividend but to acquire and retain a controlling interest in the operating companies. Dividend was merely incidental. It was thus contended that theinterest paid on the funds borrowed to acquire such shares was allowable as a businessexpenditure as it was not directed at earning dividend income, which was incidental. Legislative History of Section 14A and Rule 8D 5.As regards Question 1, it has been contended on behalf of the assessees thatholding of shares for acquiring and retaining control of operating companies amountsto business and, consequently, dividend income on such shares is in the nature ofbusiness income. It was further submitted that the intention behind acquiring suchshares was not to earn dividend but to acquire and retain a controlling interest in the operating companies. Dividend was merely incidental. It was thus contended that theinterest paid on the funds borrowed to acquire such shares was allowable as a businessexpenditure as it was not directed at earning dividend income, which was incidental. Legislative History of Section 14A and Rule 8D 6.Before we delve deeper into the questions at hand it would be appropriate tonot only examine the provisions of section 14A of the said act but also to notice itslegislative history. Section 14A was inserted into the said Act by the Finance Act,2001 with retrospective effect from 01/04/1962. “Expenditure incurred in relation to income not includible intotal income . 14A.For the purposes of computing the total income under thisChapter, no deduction shall be allowed in respect of expenditureincurred by the assessee in relation to income which does notform part of the total income under this Act.” 7.By virtue of the Finance Act, 2002, the following proviso was inserted insection 14A and was deemed to have been inserted with effect from 11/05/2001:- “Provided that nothing contained in this section shall empowerthe Assessing Officer either to reassess under section 147 or passan order enhancing the assessment or reducing a refund alreadymade or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before the1st day of April, 2001.” 8.As a result of the insertion of the said proviso, Section 14A was as follows:-“Expenditure incurred in relation to income not includible intotal income. 14A.For the purposes of computing the total income under thisChapter, no deduction shall be allowed in respect of expenditureincurred by the assessee in relation to income which does notform part of the total income under this Act. Provided that nothing contained in this section shall empowerthe Assessing Officer either to reassess under section 147 or passan order enhancing the assessment or reducing a refund alreadymade or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before the1st day of April, 2001.” 9.Then, by the Finance Act, 2006, Section 14A was numbered as sub-section (1)thereof and after sub-section (1) as so numbered, the following sub-sections wereinserted, with effect from 01/04/2007:- “(2) The Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income which does notform part of the total income under this Act in accordance withsuch method as may be prescribed, if the Assessing Officer,having regard to the accounts of the assessee, is not satisfied withthe correctness of the claim of the assessee in respect of suchexpenditure in relation to income which does not form part of thetotal income under this Act. (3) The provisions of sub-section (2) shall also apply in relationto a case where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form part ofthe total income under this Act.” 10.Consequent upon the Finance Act, 2006, section 14A as it now stands is asunder:- “Expenditure incurred in relation to income not includible intotal income . 14A.(1) For the purposes of computing the total income underthis Chapter, no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relation to income whichdoes not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relationto a case where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form part ofthe total income under this Act.” 10.Consequent upon the Finance Act, 2006, section 14A as it now stands is asunder:- “Expenditure incurred in relation to income not includible intotal income . 14A.(1) For the purposes of computing the total income underthis Chapter, no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relation to income whichdoes not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income which does notform part of the total income under this Act in accordance withsuch method as may be prescribed, if the Assessing Officer,having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of suchexpenditure in relation to income which does not form part of thetotal income under this Act. (3) The provisions of sub-section (2) shall also apply in relationto a case where an assessee claims that no expenditure has beenincurred by him in relation to income which does not form part ofthe total income under this Act. Provided that nothing contained in this section shall empowerthe Assessing Officer either to reassess under section 147 or passan order enhancing the assessment or reducing a refund alreadymade or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before the1st day of April, 2001.” 11.By Notification No.45/2008 dated 24/03/2008, the Central Board of DirectTaxes (CBDT), in exercise of its powers under section 295 of the said Act read withsub-section (2) of section 14A of the said Act, made the “Income-tax (FifthAmendment) Rules, 2008” to further amend the said Rules (i.e., the Income-tax Rules,1962) by introducing Rule 8D therein.Clause 1(2) of the Income-tax (FifthAmendment) Rules, 2008 clearly stipulated that the rules would come into force fromthe date of publication in the Official Gazette. The said Rule 8D is as under:- “Method for determining amount of expenditure in relationto income not includible in total income. 8D.(1)Where the Assessing Officer, having regard to theaccounts of the assessee of a previous year, is not satisfied with— (a)the correctness of the claim of expenditure made bythe assessee; orthe assessee; or (b)the claim made by the assessee that no expenditurehas been incurred,has been incurred, in relation to income which does not form part of the total incomeunder the Act for such previous year, he shall determine theamount of expenditure in relation to such income in accordancewith the provisions of sub-rule (2). (2)The expenditure in relation to income which does not formpart of the total income shall be the aggregate of followingamounts, namely :— (i)the amount of expenditure directly relating toincome which does not form part of total income;income which does not form part of total income; (ii)inacasewheretheassesseehasincurredexpenditure by way of interest during the previousyear which is not directly attributable to anyparticular income or receipt, an amount computedinaccordancewiththefollowingformula,namely:—expenditure by way of interest during the previousyear which is not directly attributable to anyparticular income or receipt, an amount computedinaccordancewiththefollowingformula,namely:— Where A =amount of expenditure by way of interestother than the amount of interest included inclause (i) incurred during the previous year ;other than the amount of interest included inclause (i) incurred during the previous year ; (i)the amount of expenditure directly relating toincome which does not form part of total income;income which does not form part of total income; (ii)inacasewheretheassesseehasincurredexpenditure by way of interest during the previousyear which is not directly attributable to anyparticular income or receipt, an amount computedinaccordancewiththefollowingformula,namely:—expenditure by way of interest during the previousyear which is not directly attributable to anyparticular income or receipt, an amount computedinaccordancewiththefollowingformula,namely:— Where A =amount of expenditure by way of interestother than the amount of interest included inclause (i) incurred during the previous year ;other than the amount of interest included inclause (i) incurred during the previous year ; B =the average of value of investment, incomefrom which does not or shall not form part ofthe total income, as appearing in the balancesheet of the assessee, on the first day and thelast day of the previous year ;from which does not or shall not form part ofthe total income, as appearing in the balancesheet of the assessee, on the first day and thelast day of the previous year ; C =the average of total assets as appearing in thebalance sheet of the assessee, on the first dayand the last day of the previous year ;balance sheet of the assessee, on the first dayand the last day of the previous year ; (iii)an amount equal to one-half per cent of the averageof the value of investment, income from which doesnot or shall not form part of the total income, asappearing in the balance sheet of the assessee, onthe first day and the last day of the previous year.of the value of investment, income from which doesnot or shall not form part of the total income, asappearing in the balance sheet of the assessee, onthe first day and the last day of the previous year. (3)For the purposes of this rule, the “total assets” shall mean,total assets as appearing in the balance sheet excluding theincrease on account of revaluation of assets but including thedecrease on account of revaluation of assets.” The law prior to insertion of Section 14A 12.Prior to the introduction of section 14A in the said Act, the position in law wasas laid down by the Supreme Court inCIT v. Maharashtra Sugar Mills Ltd:82 ITR452 (SC) andRajasthan State Warehousing Corporation v. CIT:242 ITR 450 (SC).In Maharashtra sugar Mills Ltd (supra) the assessee’s business comprised of twoparts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. Therevenue had contended that as the income from the cultivation of sugar cane, being theresult of an agricultural operation, was not exigible to tax, therefore, any expenditureincurred in respect of that activity was not deductible. The Supreme Court repelledthis contention in the following manner:- The law prior to insertion of Section 14A 12.Prior to the introduction of section 14A in the said Act, the position in law wasas laid down by the Supreme Court inCIT v. Maharashtra Sugar Mills Ltd:82 ITR452 (SC) andRajasthan State Warehousing Corporation v. CIT:242 ITR 450 (SC).In Maharashtra sugar Mills Ltd (supra) the assessee’s business comprised of twoparts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. Therevenue had contended that as the income from the cultivation of sugar cane, being theresult of an agricultural operation, was not exigible to tax, therefore, any expenditureincurred in respect of that activity was not deductible. The Supreme Court repelledthis contention in the following manner:- "This contention proceeds on the basis that only expenditureincurred in respect of a business activity giving rise to income,profit or gains taxable under the Act can be given deduction toand not otherwise. We see no basis for this contention.To findout whether the deduction claimed is permissible under the Act ornot, all that we have to do is to examine the relevant provisions ofthe Act.Equitable considerations are wholly out of place inconstruing the provisions of a taxing statute. We have to take theprovisions of the statute as they stand. If the amount claimed ispermissible under the Act then the same has to be deducted fromthe gross profit. If it is not permissible under the Act, it has to berejected.As mentioned earlier, it is not disputed that thecultivationofsugar-caneandthemanufactureofsugarconstituted one single and indivisible business.Section 10(2)says that profits under section 10(1) in respect of a businessshould be computed after deducting the allowances mentionedtherein.One of the allowances allowed is that mentioned insection 10(2)(xv) which says that any expenditure laid out orexpended wholly an exclusively for the purpose of such businessshall be deducted as an allowance. The mandate of section 10(2)(xv) is plain and unambiguous.Undoubtedly, the allowanceclaimed in this case was laid out or expended for the purpose ofthe business carried on by the assessee. The fact that the incomearising from a part of that business is not exigible to tax underthe act is not a relevant circumstance." (Emphasis supplied) 13.In Rajasthan State warehousing Corporation (supra), the Supreme Courtafter, inter alia, considering its earlier decisions inCIT v. Indian bank Ltd:56 ITR77 (SC) and Maharashtra Sugar Mills Ltd (supra) laid down the followingprinciples:- "(i)if income of an assessee is derived from various heads ofincome, he is entitled to claim deduction admissible underthe respective head whether or not computation under eachhead results in taxable income;income, he is entitled to claim deduction admissible underthe respective head whether or not computation under eachhead results in taxable income; (ii)if income of an assessee arises under any of the heads ofincome but from different items, e.g., different houseproperties or different securities, etc., and income fromone or more items alone is taxable whereas income fromthe other item is exempt under the Act, the entirepermissible expenditure in earning the income from thathead is deductible; andincome but from different items, e.g., different houseproperties or different securities, etc., and income fromone or more items alone is taxable whereas income fromthe other item is exempt under the Act, the entirepermissible expenditure in earning the income from thathead is deductible; and (iii)in computing "profits and gains of business or profession"when an assessee is carrying on business in variousventures and some among them yield taxable income andthe others do not, the question of allowability of theexpenditure under section 37 of the Act will depend on:when an assessee is carrying on business in variousventures and some among them yield taxable income andthe others do not, the question of allowability of theexpenditure under section 37 of the Act will depend on: (iii)in computing "profits and gains of business or profession"when an assessee is carrying on business in variousventures and some among them yield taxable income andthe others do not, the question of allowability of theexpenditure under section 37 of the Act will depend on:when an assessee is carrying on business in variousventures and some among them yield taxable income andthe others do not, the question of allowability of theexpenditure under section 37 of the Act will depend on: (a)fulfilment of requirements of that provision notedabove; andabove; and (b)on the facts whether all the ventures carried on byhim constituted one indivisible business or not; ifthey do, the entire expenditure will be a permissiblededuction but if they do not, the principle ofapportionmentoftheexpenditurewillapplybecause there will be no nexus between theexpenditure attributable to the venture not formingan integral part of the business and the expendituresought to be deducted as the business expenditureof the assessee."him constituted one indivisible business or not; ifthey do, the entire expenditure will be a permissiblededuction but if they do not, the principle ofapportionmentoftheexpenditurewillapplybecause there will be no nexus between theexpenditure attributable to the venture not formingan integral part of the business and the expendituresought to be deducted as the business expenditureof the assessee." 14.Thus, prior to the introduction of section 14A in the said Act, the law was thatwhen an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the saidbusiness was deductible and, in such a case, the principle of apportionment of theexpenditure relating to the non-taxable income did not apply. However, where thebusiness was divisible, the principle of apportionment of the expenditure wasapplicable and the expenditure apportioned to the ‘exempt’ income or income notexigible to tax, was not allowable as a deduction. Objective behind insertion of section 14A 15.The object behind the insertion of section 14A in the said Act is apparent fromthe Memorandum explaining the provisions of the Finance Bill 2001 which is to thefollowing effect:- "Certain incomes are not includable while computing the totalincome as these are exempt under various provisions of the Act.There have been cases where deductions have been claimed inrespect of such exempt income. This in effect means that the taxincentive given by way of exemptions to certain categories ofincome is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn theexempt income against taxable income. This is against the basicprinciples of taxation whereby only the net income, i.e., grossincome minus the expenditure is taxed. On the same analogy, theexemption is also in respect of the net income.Expensesincurred can be allowed only to the extent they are relatable tothe earning of taxable income. It is proposed to insert a new section 14A so as to clarify theintention of the Legislature since the inception of the Income -tax Act, 1961, that no deduction shall be made in respect of anyexpenditure incurred by the assessee in relation to income whichdoes not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively fromApril 1, 1962 and will accordingly, apply in relation to theassessment year 1962-63 and subsequent assessment years." 16.As observed by the Supreme Court in the case ofCIT v. Walfort Share andStock Brokers P Ltd:326 ITR 1 (SC), the insertion of section 14 A with retrospectiveeffect reflects the serious attempt on the part of Parliament not to allow deduction inrespect of any expenditure incurred by the assessee in relation to income, which doesnot form part of the total income under the said act against the taxable income. TheSupreme Court further observed as under:- The proposed amendment will take effect retrospectively fromApril 1, 1962 and will accordingly, apply in relation to theassessment year 1962-63 and subsequent assessment years." 16.As observed by the Supreme Court in the case ofCIT v. Walfort Share andStock Brokers P Ltd:326 ITR 1 (SC), the insertion of section 14 A with retrospectiveeffect reflects the serious attempt on the part of Parliament not to allow deduction inrespect of any expenditure incurred by the assessee in relation to income, which doesnot form part of the total income under the said act against the taxable income. TheSupreme Court further observed as under:- ".. In other words, section 14 A clarifies that expenses incurredcan be allowed only to the extent that they are relatable to theearning of taxable income. In many cases the nature of expensesincurred by the assessee may be relatable partly to the exemptincome and partly to the taxable income.In the absence ofsection 14A, the expenditure incurred in respect of exemptincome was being claimed against taxable income. The mandateof section 14A is clear. It desires to curb the practice to claimdeduction of expenses incurred in relation to exempt incomeagainst taxable income and at the same time avail of the taxincentive by way of an exemption of exempt income withoutmaking any apportionment of expenses incurred in relation toexempt income…”can be allowed only to the extent that they are relatable to theearning of taxable income. In many cases the nature of expensesincurred by the assessee may be relatable partly to the exemptincome and partly to the taxable income.In the absence ofsection 14A, the expenditure incurred in respect of exemptincome was being claimed against taxable income. The mandateof section 14A is clear. It desires to curb the practice to claimdeduction of expenses incurred in relation to exempt incomeagainst taxable income and at the same time avail of the taxincentive by way of an exemption of exempt income withoutmaking any apportionment of expenses incurred in relation toexempt income…” “..Expenses allowed can only be in respect of earning taxableincome. This is the purport of section 14A. In section 14A, thefirst phrase is "for the purposes of computing the total incomeunder this Chapter" which makes it clear that various heads ofincome as prescribed in the Chapter IV would fall within section14A.The next phrase is, "in relation to income which does not"form part of total income under the Act.It means that if anincome does not form part of total income, then the relatedexpenditure is outside the ambit of the applicability of section14A..” (Emphasis supplied) 17.The Supreme Court also clearly held that in the case of an income like dividendincome which does not form part of the total income, any expenditure/deductionrelatable to such (exempt or non-taxable) income, even if it is of the nature specifiedin sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are asunder:- "Further, section 14 specifies five heads of income which arechargeable to tax. In order to be chargeable, an income has to bebrought under one of the five heads. Sections 15 to 59 lay downthe rules for computing income for the purpose of chargeabilityto tax under those heads.Sections 15 to 59 quantify the totalincomechargeabletotax.Thepermissibledeductionsenumerated in sections 15 to 59 are now to be allowed only withreference to income which is brought under one of the aboveheads and is chargeable to tax.If an income like dividendincomeisnotapartofthetotalincome,theexpenditure/deduction though of the nature specified in sections15 to 59 but related to the income not forming part of the totalincome could not be allowed against other income includable inthe total income for the purpose of chargeability to tax.The-theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14 A." (emphasis supplied) (emphasis supplied) Analysis of section 14A 18.Sub-section (1) of section 14A clearly stipulates that for the purposes ofcomputing total income under Chapter IV (Computation of Total Income), nodeduction shall be allowed in respect of expenditure “incurred” by the assessee “inrelation to” income which does not form part of the total income under the said Act.A lot of emphasis was laid on the expressions “incurred” and “in relation to”. It wascontended by Mr Ajay Vohra, who appeared on behalf of most of the assesses, that theword “incurred” must be taken literally in the sense that the expenditure must haveactually taken place. Moreover, the expenditure must also have taken place in relationto income which does not form part of total income. Mr Vohra contended that theexpression “in relation to” implies that there must be a direct and proximateconnection with the subject matter. In other words, according to Mr Vohra, only thatactual expenditure which is made directly and for the object of earning exempt income(in the present appeals – dividend income) could be disallowed under section 14A. He submitted that if the dominant and main objective of spending was not the earningof ‘exempt’ income then, the expenditure could not be disallowed under section 14Aprovided it was otherwise allowable under sections 15 to 59 of the said Act.Mr Satyen Sethi and Dr Rakesh Gupta, who appeared for some of the assesses, alsoadopted the arguments of Mr Vohra and emphasized that the expenditure must beactual and cannot be computed on the basis of some formula as stipulated under Rule8D read with sub-sections (2) & (3) of section 14A. “in relation to” 19.Let us examine the expression “in relation to”. Mr Vohra had referred to theSupreme Court decision inMadhav Rao Scindia v. Union of India:AIR 1971 SC530 where, in paragraph 134, it is observed as under:- ".. The expression "provisions of this Constitution relating to" inarticle 363 means provisions having a dominant and immediateconnection with: it does not mean merely having a reference to." 20.According to Mr Vohra, the expression “in relation to” appearing in section14A of the said Act has to be considered in similar light.He submitted that theexpenditure incurred must have a dominant and immediate connection with theexempt income.Thus, according to him, since the shares were acquired for thepurpose of acquiring and retaining control of the operating company, the expenditurein respect of such acquisition of shares would not have a dominant and immediateconnection with the dividend income, which was merely incidental.As such,Mr Vohra submitted, the expenditure could not be disallowed under section 14 A ofthe said act. 21.There are several difficulties with the argument advanced by Mr Vohra. Thefirst of them is that in Madhavrao Scindia (supra) the Supreme Court was concerned 20.According to Mr Vohra, the expression “in relation to” appearing in section14A of the said Act has to be considered in similar light.He submitted that theexpenditure incurred must have a dominant and immediate connection with theexempt income.Thus, according to him, since the shares were acquired for thepurpose of acquiring and retaining control of the operating company, the expenditurein respect of such acquisition of shares would not have a dominant and immediateconnection with the dividend income, which was merely incidental.As such,Mr Vohra submitted, the expenditure could not be disallowed under section 14 A ofthe said act. 21.There are several difficulties with the argument advanced by Mr Vohra. Thefirst of them is that in Madhavrao Scindia (supra) the Supreme Court was concerned with the interpretation of a constitutional provision dealing with the jurisdiction ofcourts, inter alia, concerning any dispute in respect of any right accruing under or anyliability or obligation arising out of any of the provisions of the Constitution relatingto a treaty, agreement, covenant, engagement, sanad or other similar instrument whichwas entered into or executed before the commencement of the Constitution by anyRuler of an Indian State and to which the Government of the Dominion of India or anyof its predecessor governments was a party and which is or has been continued inoperation after such commencement.In the present appeals we are not concernedwith a provision of the Constitution and that too dealing with the jurisdiction of acourt. Secondly, what needs to be emphasised is that in the very same paragraph 134,the Supreme Court observed that the meaning of a word or expression used in theConstitution often is coloured by the context in which it occurs and that the simplerand more common the word or expression, the more meanings and shades of meaningit has. The Supreme Court further held that it is the duty of the court to determine inwhat particular meaning and particular shade of meaning the word or expression wasused by the Constitution makers and in discharging the duty the court will take intoaccount the context in which it occurs, the object to serve which it was used, it'scollocation, the general congruity with the concept or object it was intended toarticulate and a host of other considerations. It is in this backdrop that the SupremeCourt concluded that the expression "provisions of this Constitution relating to" inArticle 363 meant provisions having a dominant an immediate connection with andthe said expression did not mean merely having a reference to. The Supreme Courtclearly explained that a wide meaning of the expression might exclude disputes fromthe jurisdiction of the courts in respect of rights or obligations, however indirect ortenuous the connection between the constitutional provision and the covenant may be.It is therefore clear that the expression "relating to" would depend upon the context inwhich it occurs. 22.InDoypack Systems Pvt Ltd v. Union of India:AIR 1988 SC 782, theSupreme Court observed that the expressions "pertaining to", "in relation to" and"arising out of", used in the deeming provision, are used in the expansive sense. TheSupreme Court further observed as under:- "49.The expression "in relation to" (so also "pertaining to"), isa very broad expression which presupposes another subjectmatter. These are words of comprehensiveness which might bothhave a direct significance as well as an indirect significance"depending on the context… "… In this connection reference may be made to 76 Corpus JurisSecundum at pages 620 and 621 where it is stated that the term"relate" is also defined as meaning to bring into association orconnection with. It has been clearly mentioned that " relating to"has been held to be equivalent to or synonymous with as to"concerningwith"and"pertainingto".Theexpression"pertaining to" is an expression of expansion and not ofcontraction." (emphasis supplied) "49.The expression "in relation to" (so also "pertaining to"), isa very broad expression which presupposes another subjectmatter. These are words of comprehensiveness which might bothhave a direct significance as well as an indirect significance"depending on the context… "… In this connection reference may be made to 76 Corpus JurisSecundum at pages 620 and 621 where it is stated that the term"relate" is also defined as meaning to bring into association orconnection with. It has been clearly mentioned that " relating to"has been held to be equivalent to or synonymous with as to"concerningwith"and"pertainingto".Theexpression"pertaining to" is an expression of expansion and not ofcontraction." (emphasis supplied) 23.Mr Vohra also placed reliance onNavin Chemicals Manufacturi