Principal Commissioner Of Income Tax Central-3 New Delhi v. Alchemist Ltd

$~8 & 9 * IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment delivered on: 07.08.2024 % + ITA 362/2024 PRINCIPAL COMMISSIONER OF INCOME TAX CENTRAL-3 NEW DELHI .....Appellant Through: Mr. Abhishek Maratha, Sr. SC alongwith Mr. Parth Semiwal, Mr. Apoorv Agarwal, Jr. SCs. with Ms. Nupur Sharma, Mr. Manav Goyal, Mr. Gaurav Singh, Ms. Muskaan and Mr. Bhanukaran Singh Jodha, Advs. versus ALCHEMIST LTD .....Respondent Through: None. 9 + ITA 384/2024 PR. COMMISSIONER OF INCOME TAX (CENTRAL)-2 .....Appellant Through: Mr. Sanjay Kumar, SSC with Ms. Esha, Adv. versus UNO MINDA LTD .....Respondent Through: None. CORAM: HON'BLE MR. JUSTICE YASHWANT VARMAHON'BLE MR. JUSTICE RAVINDER DUDEJA J U D G M E N T YASHWANT VARMA, J. (Oral) CM APPL. 40581-82/2024 in ITA 362/2024 1.Bearing in mind the disclosures made, the delay in filing and ITA 362/2024 & 384/2024 Signature Not Verified refiling the appeal is condoned. 2.The applications shall stand disposed of. ITA 362/2024 & 384/2024 3.These two appeals although assailing separate judgments rendered by the Income Tax Appellate Tribunal[1] were heard together since both questioned the view expressed by the Tribunal that a disallowance under Section 14A of the Income Tax Act, 1961[2]would be liable to be restricted to the extent of exempt income earned during the year. 4.As would be evident from a reading of the judgment handed down by the Tribunal, it has while upholding the view taken by theCommissioner of Income Tax, (Appeals)[3] followed the principles which had been enunciated by this Court in Principal Commissioner of Income-Tax vs. Caraf Builders and Constructions PVT. Ltd[4]. 5.In Caraf Builders, the Court upon a due appreciation of the scheme underlying Section 14A had held that the disallowance of expenditure under the aforenoted provision would not only be restricted to the exempt income earned during that year, any disallowance even if computed in accordance with Rule 8D of theIncome Tax Rules, 1962[5] cannot exceed the exempt income earned in that year. The aforesaid position emerges from a reading of Paras 25 and 26 of the report and which are extracted hereinbelow:- “25. Total exempt income earned by the respondent-assessee in this year was Rs. 19 lakhs. In these circumstances, we are not 1 ITAT 2 Act 3 CIT(A) 4 2018 SCC Online Del 12876 5 Rules Page 2 of 30 Signature Not Verified required to consider the case of the Revenue that the disallowance should be enhanced from Rs. 75.89 crores to Rs. 144.52 crores. Upper disallowance as held in Principal CIT v. McDonalds India Pvt. Ltd. I.T.A. No. 725 of 2018 decided on October 22, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) and the earlier judgments of the Delhi High Court in Cheminvest Ltd. v. CIT [2015] 378ITR 33 (Delhi) and CIT v. Holcim India Pvt. Ltd. [2014] 272 CTR (Delhi)282. Relevant portion of the judgment in McDonalds India Pvt. Ltd. (supra) reads: 8. The decision in the case of Maxopp Investment Ltd. (supra) is significant and does answer the question in issue. This decision does not support the Revenue as the Assessing Officer in the case of Maxopp Investment Ltd. (supra) had himself restricted the disallowance to the extent of exempt income. After referring to Walford Share and Stock Brokers —P. Ltd. (supra) it was held 8. The decision in the case of Maxopp Investment Ltd. (supra) is significant and does answer the question in issue. This decision does not support the Revenue as the Assessing Officer in the case of Maxopp Investment Ltd. (supra) had himself restricted the disallowance to the extent of exempt income. After referring to Walford Share and Stock Brokers —P. Ltd. (supra) it was held 'Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income‟which is to be treated as part of the total income. xxxx xxxx xxxx 10. The decision of the Delhi High Court in Holcim India Pvt. Ltd. (supra) had referred to the issue whether disallowance of expenditure under section 14A of the Act would be made even when no exempt income in the form of dividend was earned in the year, and it was observed: xxxx xxxx xxxx '14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue -and against the appellantRevenue. No contrary decision of a High Court has been shown to us.The Punjab and Haryana High Court in CIT v. Lakhani Marketing Incl. —ITA No. 970 of 2008, decided on April 2, 2014 (2015) 4 ITR-OL 246 (P&H) made reference to two earlier decisions of the same court in CIT v. Hero Cycles Limited (2010) 323 ITR 518 (P&H) and CIT v. Winsome Textile Industries Limited (2009) 319 ITR 204 (P&H) to hold that section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. (2014) 223 Taxman 130 (Guj) ; (2015) 372 ITR 97 (Guj). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, CIT v. Shivam Motors (P.) Ltd. decided on May 5, 2014. In the said decision it has been held: “As regards the second question, section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance.The view of the Commissioner of Income-tax (Appeals), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752 made by the Assessing Officer was in order.” 15. Income exempt under section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long-term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that the respondent-assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to ITA 362/2024 & 384/2024 Signature Not Verified 15. Income exempt under section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long-term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that the respondent-assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to ITA 362/2024 & 384/2024 Signature Not Verified management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.' xxxx xxxx xxxx 16. The decision in Holcim India Pvt. Ltd. (supra) was followed and elaborated in Cheminvest Ltd. (supra).” 26. There is another error made by the Assessing Officer in computing the disallowance under clause (ii) of rule 8D (2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ITA No. 615 of 2014, —ACB India Ltd. v. Asst. CIT decided on March 24, 2015 (2015) 374 ITR 108 (Delhi), has held that only average value of the entire investment that does not form part of the total income is the factor which could be covered by the numerical B for computing disallowance under clause (ii) of rule 8D(2) of the Rules.” 6.Both Mr. Kumar and Mr. Maratha, learned counsels who appeared in support of these appeals have essentially questioned the apportionment of expenditure incurred on a purported reading of Section 14A to submit that irrespective of whether any exempt income is earned or not in a particular fiscal year, there can be no bifurcation of expenditure and that the Tribunal has clearly erred in taking the view which stands embodied in its orders impugned before us in these appeals. 7.According to Mr. Kumar, the incurring of expenditure is liable to be viewed as being totally disconnected or at least its recognition not being dependent upon the actual earning of a return on investment or any exempt income accruing in that year. According to learned ITA 362/2024 & 384/2024 Signature Not Verified counsel, the bifurcation of expenditure is thus wholly unwarranted. 8.While and undoubtedly Caraf Buildersbinds this Court having been rendered by a Coordinate Bench, since elaborate submissions were addressed by learned counsels on the question which stands raised, we had proceeded to hear the appeals on merit. 9.In order to appreciate the challenge which stands raised, it would, however, be apposite to notice the following salient facts at the outset. Section 14A came to be introduced in the statute book by virtue of Finance Act, 2001[6] with retrospective effect from 01 April 1962. The Legislature thus thought it fit to accord retrospectivity to the said provision and thus it would be deemed to have existed from the time when the Act itself came to be originally promulgated. 10.It would be pertinent to briefly advert to the following parts of the Memorandum seeking to explain the various provisions of the Finance Bill 2001 and insofar as it spoke of Section 14A and the relevant extracts whereof are reproduced hereinbelow:- “Objective behind the Insertion of section 14A:- 9.In order to appreciate the challenge which stands raised, it would, however, be apposite to notice the following salient facts at the outset. Section 14A came to be introduced in the statute book by virtue of Finance Act, 2001[6] with retrospective effect from 01 April 1962. The Legislature thus thought it fit to accord retrospectivity to the said provision and thus it would be deemed to have existed from the time when the Act itself came to be originally promulgated. 10.It would be pertinent to briefly advert to the following parts of the Memorandum seeking to explain the various provisions of the Finance Bill 2001 and insofar as it spoke of Section 14A and the relevant extracts whereof are reproduced hereinbelow:- “Objective behind the Insertion of section 14A:- The object behind the Insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill, 2001 which is to the following effect (see [2001] -248 ITR (St.) 162, 195): “Certain Incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of Income is being used to reduce also the -tax payable on the nonexempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the 6 The 2001 Act expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.” It is proposed to insert a new section 14A so as to clarify the Intention of the Legislature since the inception of the Income-tax Act, 1961 that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years.” 11.As the provision originally existed, it provided that no deduction would be allowed in respect of expenditure incurred by the assessee in relation to any income which does not form part of total income under the Act. By virtue of Finance Act 2006, sub-sections (2) and (3) came to be added to the principal provision. The last amendment came to be introduced by virtue of Finance Act, 2022[7]and which saw the addition of an Explanation to Section 14A. 12.The provision as it exists presently is reproduced hereinbelow:- “[14A. Expenditure incurred in relation to income not includible in total income.—[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such 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 such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in 7 2022 Act relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such 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 such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in 7 2022 Act relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess undersection 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee undersection 154, for any assessment year beginning on or before the 1st day of April, 2001.]” —[Explanation.For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the totalincome.] 13.On a plain textual reading of Section 14A, we find that the provision mandates that no deduction would be allowed in respect of expenditure that may be incurred for the purposes of earning income which would ultimately not form part of total income under the Act. The expenditure which is thus identified is that which may have been expended for the purposes of earning income which is otherwise not liable to be included in total income and is thus viewed as exempt. 14.The expenditure which is spoken of is thus in respect of income which is specified in Section 10 and which stands placed in Chapter IIIof the Act. Section 14A, on the other hand, is placed in Chapter IV and which contains various provisions relating to computation of total income. Both sub-sections (1) and (2) of Section 14A, use the expression “income which does not form part of the total income” in conjunction with the expenditure that may be incurred by an assessee in relation thereto. The two expressions noted above are coupled together by the phrase “in relation to”. ITA 362/2024 & 384/2024 Signature Not Verified Page 8 of 30 15.The Section thus clearly appears to suggest that expenditure which is relatable to income which would ultimately not form part of total income or be exempt cannot be claimed as a deduction. The mischief which Section 14A sought to address stands eloquently spelt out in the Memorandum which had explained the provisions of the 2001 Act while noting that assessees were claiming deductions in respect of expenditure incurred in relation to exempt income. It was noted that as a result of the above, assessees were being able to derive a double benefit and thus not only deriving income which was otherwise claimed as exempt from taxation, but additionally claiming deductions with respect to the expenditure incurred in relation thereto. It was thus noted that the tax incentive made available by way of exemption of certain categories of income was being used to reduce the tax payable even on non-exempt income. It was to overcome the aforesaid lacuna that Section 14A came to be introduced. 16.One of the earliest decisions of the Supreme Court which lucidly explained the objectives underlying Section 14A was the one rendered in Commissioner of Income Tax vs. Walfort Share and Stock Brokers Private Ltd.[8] In Walfort, the Supreme Court explained the scheme of Section 14A in the following terms:- 16.One of the earliest decisions of the Supreme Court which lucidly explained the objectives underlying Section 14A was the one rendered in Commissioner of Income Tax vs. Walfort Share and Stock Brokers Private Ltd.[8] In Walfort, the Supreme Court explained the scheme of Section 14A in the following terms:- “28. In this batch of cases, we are required to decide three distinct points which are as follows: (i) Whether "return of investment" or "cost recovery" would fall within the expression "expenditure incurred" in section 14A? (ii) Impact of section 94(7) with effect from 1 -4-2002 on the impugned transactions. 82010 SCC Online SC 671 (iii)Reconciliation of section 14A with section 94(7) of the Act. 32.The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, whichdoes not form part of the total income under the Act -against the taxable income (see Circular No. 14 of 2001, dated 2211-2001). In other words, section I4A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was -being used to reduce the tax payable on the nonexempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respeet of earning of taxable income. This is the purport of section I4A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to ineome which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to ineome which is brought under one of the above heads and is chargeable to tax. If an income like ITA 362/2024 & 384/2024 Signature Not Verified ITA 362/2024 & 384/2024 Signature Not Verified dividend income is not a part of the total ineome, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax.The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that thewords "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). Every pay-out is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an "expenditure incurred" in tenns of section 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an "expenditure" as it does not impact the Profit and Loss Account. Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the Profit and Loss Account. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not "expenditure incurred" in terms of section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of section 14A. For attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proxirnate cause, hence, section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, section 14A cannot be invoked. In our view, return of investment cannot be construed to mean "expenditure" and if it ITA 362/2024 & 384/2024 Signature Not Verified is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under sections 30 to 37 of the Act and, therefore, section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of section 14A.” ITA 362/2024 & 384/2024 Signature Not Verified is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under sections 30 to 37 of the Act and, therefore, section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of section 14A.” 17.As is manifest from the aforequoted passage, the Supreme Court enunciated the objective of Section 14A being that expenses incurred can only be allowed to the extent that they relate to the earning of taxable income. The introduction of Section 14A was further explained as being driven by the legislative intent of attending to situations where expenditure incurred in earning exempt income was also being claimed against income which was otherwise exigible to tax. The Supreme Court explained that Section 14A was driven by the aim of the Legislature to curb the practice of claiming deduction of expenses incurred even in relation to exempt income. 18.Section 14A and its ambit again arose for the consideration of this Court in Maxopp Investment Limited vs. Commissioner of Income Tax[9]. The Court noticed the position which prevailed prior to the introduction of Section 14A and the mischief that it sought to address in the following words:- “12. Prior to the introduction of section 14A in the said Act, the position in law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT (2000) 242 ITR 450 (SC). In Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC), the assessee's business comprised of two parts, namely, (1) cultivation of sugarcane, and (2) the manufacture of sugar. The Revenue had contended that as the income from the cultivation of sugarcane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of 9 2011 SCC OnLine Del 4855 that activity was not deductible. The Supreme Court repelled this contention in the following manner (page 454): “This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the allowance claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv) which says that any expenditure laid out or expended wholly an exclusively for the purpose of such business shall be deducted as an allowance. The mandate of section 10(2)(xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the Act is not a relevant circumstance." (emphasis supplied) 13. In Rajasthan State Warehousing Corporation (2000) 242 ITR 450 (SC), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) laid down the following principles (455 of 242 ITR): 13. In Rajasthan State Warehousing Corporation (2000) 242 ITR 450 (SC), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) laid down the following principles (455 of 242 ITR): "(i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income; (ii) if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible ITA 362/2024 & 384/2024 Signature Not Verified expenditure in earning the income from that head is deductible ; and (iii) in computing 'profits and gains of business or profession' when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfilment of requirements of that provision noted above ; and (b) on the facts whether all the ventures carried on by him constituted one indivisible business or not ; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 14.Thus, prior to the introduction of section 14A in the said Act, the law was that when 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 said business was deductible and, in such a case, the principle of apportionment of -the expenditure relating to the nontaxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the "exempt" income or income not exigible to tax, was not allowable as a deduction. xxxx xxxx xxxx 24. We do not agree with the submission of the learned counsel appearing on behalf of the assessees that a narrow meaning ought to be ascribed to the expression "in relation to" appearing in section 14A of the said Act. The context does not suggest that a narrow meaning ought to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act, 2001, with retrospective effect from April 1, 1962. In other words, it was the intention of Parliament that it should appear in the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that Parliament wanted that it should be understood by all that from the very beginning, such ITA 362/2024 & 384/2024 Signature Not Verified expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen the finalised assessments prior to the assessment year beginning on April 1, 2001. Furthermore, as observed by the Supreme Court in Walfort (2010) 326 ITR 1 (SC), the basicprinciple of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it\qs associated or related expenditure would also not be permitted to be debited against other taxable income. ITA 362/2024 & 384/2024 Signature Not Verified expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen the finalised assessments prior to the assessment year beginning on April 1, 2001. Furthermore, as observed by the Supreme Court in Walfort (2010) 326 ITR 1 (SC), the basicprinciple of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it\qs associated or related expenditure would also not be permitted to be debited against other taxable income. 25. We are of the view that the expression "in relation to", appearing in section 14A of the said Act, cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows: "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act." 26.That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (2010) 326 ITR 1 (SC), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. The Supreme Court further clarified that if an income like dividend income is not part of the total income, the expenditure/deduction related to such income, though of the nature specified in sections 15 to 59, cannot be allowed against other income which is includible in the total income for the purpose of ”chargeability to tax. 19.The conflicting views expressed by different High Courts in the context of Section 14A ultimately fell for the examination of the Supreme Court in Maxopp Investment Limited vs. Commissioner of Income Tax[10]. Sikri J., speaking for the Bench, while examining Section 14A made the following pertinent introductory remarks:- 19.The conflicting views expressed by different High Courts in the context of Section 14A ultimately fell for the examination of the Supreme Court in Maxopp Investment Limited vs. Commissioner of Income Tax[10]. Sikri J., speaking for the Bench, while examining Section 14A made the following pertinent introductory remarks:- “3.Though, it is clear from the plain language of the aforesaid provision that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditures incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest-bearing loan from the bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from the tax net. There is no quarrel up to this extent. 4.However, in these appeals, the question has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as “stock-in-trade”. However, incidentally income was also generated in the form of dividends as well. On this basis, the assessees contend that the dominant intention for purchasing the share was not to earn dividends income but control of the business in the company in which shares were invested or for the purpose of trading in the shares as a business activity, etc. In this backdrop, the issue is as to whether the expenditure incurred can be treated as expenditure “in relation to income” i.e. dividend income which does not form part of the total income. To put it differently, is the dominant or main object would be a relevant consideration in determining as to whether expenditure incurred is “in relation to” 10 (2018) 15 SCC 523: (2018) 402 ITR 640 ITA 362/2024 & 384/2024 Signature Not Verified the dividend income. In most of the appeals, including in Civil Appeals Nos. 104-109 of 2015, aforesaid is the scenario. Though, in some other cases, there may be a little difference in the fact situation. However, all these cases pertain to dividend income, whether it was for the purpose of investment in order to retain controlling interest in a company or in a group of companies or the dominant purpose was to have it as stock-in-trade.” 20.While noticing the view expressed by our Court on the subject, the learned Judge observed:- 10 (2018) 15 SCC 523: (2018) 402 ITR 640 ITA 362/2024 & 384/2024 Signature Not Verified the dividend income. In most of the appeals, including in Civil Appeals Nos. 104-109 of 2015, aforesaid is the scenario. Though, in some other cases, there may be a little difference in the fact situation. However, all these cases pertain to dividend income, whether it was for the purpose of investment in order to retain controlling interest in a company or in a group of companies or the dominant purpose was to have it as stock-in-trade.” 20.While noticing the view expressed by our Court on the subject, the learned Judge observed:- “14. Sub-section (2) of section 14A deals with the proportionality as it empowers the Assessing Officer to extricate that amount of expenditure which is Incurred in relation to such Income which does not form part of the total income under the Act. However, this is to be done "In accordance with such method as may be prescribed". This prescription is provided by the delegated legislation, in the form of rule 8D of the Income-tax Rules, 1962 (for short "Rules") which rule was inserted with effect from March 24, 2008 vide the Income-tax (Fifth Amendment) Rules, 2008*..... xxxx xxxx xxxx 20. The High Court then undertook the exercise of analysing the provisions of section 14A of the Act and, in the process, examined the contours and scope of the expressions "in relation to" and "expenditure incurred" occurring therein. The High Court pointed out that the contention of the assessees, in this behalf, was that the word "incurred" must be taken literally in the sense that the expenditure must have actually taken place. Moreover, the expenditure must also have taken place in relation to income which does not form part of total income. Further, the expression "in relation to" implies that there must be a direct and proximate connection with the subject matter. In other words, only that actual 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 of the Act. If the dominant and main objective of spending was not the earning of "exempt" income then, the expenditure could not be disallowed under section 14A of the Act provided it was otherwise allowable under sections 15 to 59 of the said Act. 21. The High Court, however, did not agree with the aforesaid propositions advanced by the learned counsel for the assessees which according to it was mired by several difficulties. Distinguishing the case law cited by the assessees where the expression "in relation to" was interpreted by this court, as not ITA 362/2024 & 384/2024 Signature Not Verified applicable in the present context, the High Court, instead, referred to the judgment in the case of Doypack Systems Pvt. Ltd. v. Union of India* wherein this court has held that expressions "pertaining to", "in relation to" and "arising out of" used in the deeming provisions, are used in an expansive sense. It also referred to the judgment of this court in CIT v. Walfort Share and Stock Brokers P. Ltd.** wherein this court has held that the basic principle of taxation is to tax the net income, i.e., gross Income minus the expenditure and on the same analogy the exemption Is also in respect of net income. In other words, where the gross income would not form part of total income, its associated or related expenditure would also not be permitted to be debited against other taxable income. applicable in the present context, the High Court, instead, referred to the judgment in the case of Doypack Systems Pvt. Ltd. v. Union of India* wherein this court has held that expressions "pertaining to", "in relation to" and "arising out of" used in the deeming provisions, are used in an expansive sense. It also referred to the judgment of this court in CIT v. Walfort Share and Stock Brokers P. Ltd.** wherein this court has held that the basic principle of taxation is to tax the net income, i.e., gross Income minus the expenditure and on the same analogy the exemption Is also in respect of net income. In other words, where the gross income would not form part of total income, its associated or related expenditure would also not be permitted to be debited against other taxable income. 22. Likewise, explaining the meaning of "expenditure incurred", the High Court agreed that this expression would mean incurring of actual expenditure and not to some imagined expenditure. At the same time, observed the High Court, the "actual" expenditure that is in contemplation under section 14A(1) of the said Act is the "actual" expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the said Act. On the basis of the aforesaid discussion, the High Court answered the question formulated by it in the affirmative. 21.After considering the contrarian view which had been expressed b