Ved Parkash Paliwal (Huf v. Commissioner Of Income Tax, Karnal

ITA No. 10 of 2011 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Ved Parkash Paliwal (HUF) Versus Commissioner of Income Tax, Karnal ITA No. 10 of 2011 Date of Decision: 30.5.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. R.P. Sawhney, Senior Advocate with Mr. Saurav Khurana, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 10 and 51 of 2011 asaccording to the learned counsel both the appeals involve identicalquestions. For brevity, the facts are being taken from ITA No. 10 of2011. 2.This appeal has been preferred by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 30.4.2010 passed by the Income Tax AppellateTribunal, Delhi Bench “H”, New Delhi (hereinafter referred to as “theTribunal”) in ITA No. 4193/Del/2009, relating to the assessment year2006-07, claiming the following substantial questions of law:- 3. “(a) Whether on the facts and circumstances of the casethat the appellant's claim of deduction of interest paidto the bank for investment in shares out of its incomeof interest on FDRs received from the bank in view ofthe judgment of Hon'ble Supreme Court reported in115 ITR 519 (supra)? (b) Whether the learned Tribunal was justified inaffirming the order of learned CIT who has justifiedthe order of the Assessing Authority on a groundwhich was not taken in the order of the AssessingAuthority? (c) Whether on the facts and circumstances of the casethe learned Tribunal has misconceived the provisionsof Section 57(iii) inasmuch as income from the FDRsfrom the bank was reflected in the return of incomefiled by the appellant to the tune of Rs.2359825/- outof which it has claimed deduction of interest chargedby the bank on the overdraft taken from the bank asutilized in investment of shares? (d)Whether on the facts and circumstances of the case,the learned Tribunal was justified in segregating oneintegrated transaction of earning interest on the FDRfrom bank and interest paid to the bank on overdrafttaken by the appellant?” Briefly stated, the facts necessary for adjudication as (c) Whether on the facts and circumstances of the casethe learned Tribunal has misconceived the provisionsof Section 57(iii) inasmuch as income from the FDRsfrom the bank was reflected in the return of incomefiled by the appellant to the tune of Rs.2359825/- outof which it has claimed deduction of interest chargedby the bank on the overdraft taken from the bank asutilized in investment of shares? (d)Whether on the facts and circumstances of the case,the learned Tribunal was justified in segregating oneintegrated transaction of earning interest on the FDRfrom bank and interest paid to the bank on overdrafttaken by the appellant?” Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee filed its return of incomefor the assessment year 2006-07 on 31.7.2006 showing the totalincome of Rs.12,64,883/- (Rs.6,93,111/- income from capital gains andRs.5,71,772/- income from other sources) after claiming deduction ofRs.1 lac under Chapter VIA. The assessee also declared agricultureincome amounting to Rs.50,000/- and paid tax on the income ofRs.11,64,883/- and claimed a refund of Rs.1,30,479/-. The said returnwas processed under Section 143(1) of the Act and the case was takenup for scrutiny by issuing notices under Sections 143(2) and 142(1) ofthe Act. The assessee had earned interest of Rs.23,06,066/- from thebank on fixed deposit receipts and had also paid interest to the bank tothe tune of Rs.18,15,393/- on the overdraft taken from the bank forinvestment in shares. He also claimed the deduction of Rs.18,15,593/-paid to the bank out of interest income. The said claim of the assesseewas disallowed by the Assessing Officer vide order dated 5.9.2008.Feeling aggrieved, the assessee took the matter in appeal before theCommissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated 31.8.2009 dismissed the appeal. On further appealby the assessee, the Tribunal vide order dated 30.4.2010 affirmed theview of the CIT(A) on the point of deduction of interest paid to the bankon the overdraft out of the interest income on the FDRs with the bankand restored the issue relating to allowability of interest expenditure tothe Assessing Officer with a direction to verify utilization of borrowedfunds in acquisition of securities out of which the assessee had earnedshort term capital gain. Hence, the present appeal by the assessee. 4.We have heard learned counsel for the assessee. 5.Learned counsel for the assessee has raised the followingcontentions:- i)Interest paid by the assessee to the Bank forinvestment in shares out of its income of interest onfixed deposit receipts received from the bank wasdeductible in view of the Apex Court judgment inCommissioner of Income Tax, West Bengal-III v.Raghunandan Prasad Moody [1978] 115 ITR 519; ii)The provisions of Section 14A did not apply.Moreover, the assessing officer or the CIT(A) had notrelied upon or referred to Section 14A for decliningthe claim of the assessee. The Tribunal, therefore,erred in relying upon the said provision. Further, thereliance of the Tribunal on the judgment reported inCommissioner of Income Tax v. Dr. V.P.Gopinathan [2001]248 ITR 449 was misplaced as itwas on fact situation involved therein and was notapplicable to the facts in hand. 6.After giving our thoughtful consideration to thesubmissions made by learned counsel for the assessee, we findourselves unable to agree with the same. 7. Section 14A of the Act inserted retrospectively from01.04.1962 stipulates that any expenses which are incurred by anassessee for earning an income not forming part of taxable income, shall not be allowed as deductible expenditure. This Court in ThePunjab State Cooperative Milk Producer's Federation Ltd. v.Commissioner of Income Tax-II and another, (Income Tax AppealNo. 530 of 2008 decided on 28.3.2011)discussing the scope of Section14A of the Act, had observed as under: 6.After giving our thoughtful consideration to thesubmissions made by learned counsel for the assessee, we findourselves unable to agree with the same. 7. Section 14A of the Act inserted retrospectively from01.04.1962 stipulates that any expenses which are incurred by anassessee for earning an income not forming part of taxable income, shall not be allowed as deductible expenditure. This Court in ThePunjab State Cooperative Milk Producer's Federation Ltd. v.Commissioner of Income Tax-II and another, (Income Tax AppealNo. 530 of 2008 decided on 28.3.2011)discussing the scope of Section14A of the Act, had observed as under: “Further, Section 14A was inserted in the Act by FinanceAct, 2001 with effect from 1.4.1962. The said Sectionprovides that any expenses incurred by the assessee forearning income which does not form part of total incomeunder the Act, shall not be an allowable expenditure. Theapex Court in Walfort Share and Stock Brokers’s case(supra), defining the scope of Section 14A of the Act,incorporated retrospectively from 1.4.1962, had laid downas under: “The insertion of Section 14A with retrospective effect isthe serious attempt on the part of the Parliament not toallow deduction in respect of any expenditure incurred bythe assessee in relation to income, which does not formpart of the total income under the Act against the taxableincome (see Circular No.14 of 2001 dated 22.11.2001). Inother words, Section 14A clarifies that expenses incurredcan be allowed only to the extent they are relatable to theearning of taxable income. In many cases the nature ofexpenses incurred by the assessee may be relatablepartly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditureincurred in respect of exempt income was being claimedagainst taxable income. The mandate of Section 14A isclear. It desires to curb the practice to claim deduction ofexpenses incurred in relation to exempt income againsttaxable income and at the same time avail the taxincentive by way of exemption of exempt income withoutmaking any apportionment of expenses incurred inrelation to exempt income. The basic reason for insertionof Section 14A is that certain incomes are not includiblewhile computing total income as these are exempt undercertain provisions of the Act. In the past, there have beencases in which deduction has been sought in respect ofsuch incomes which in effect would mean that taxincentives to certain incomes was being used to reducethe tax payable on the non-exempt income by debiting theexpenses, incurred to earn the exempt income, againsttaxable income. The basic principle of taxation is to taxthe net income, i.e., gross income minus the expenditure.On the same analogy the exemption is also in respect ofnet income. Expenses allowed can only be in respect ofearning of taxable income. This is the purport of Section14A. In Section 14A, the first phrase is "for the purposesof computing the total income under this Chapter" whichmakes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The nextphrase is, "in relation to income which does not form partof total income under the Act". It means that if an incomedoes not form part of total income, then the relatedexpenditure is outside the ambit of the applicability ofSection 14A. Further, Section 14 specifies five heads ofincome which are chargeable to tax. In order to bechargeable, an income has to be brought under one ofthe five heads. Sections 15 to 59 lay down the rules forcomputing income for the purpose of chargeability to taxunder those heads. Sections 15 to 59 quantify the totalincome chargeable to tax. The permissible deductionsenumerated in Sections 15 to 59 are now to be allowedonly with reference to income which is brought under oneof the above heads and is chargeable to tax. If an incomelike dividend income is not a part of the total income, theexpenditure/deduction though of the nature specified inSections 15 to 59 but related to the income not formingpart of total income could not be allowed against otherincome includible in the total income for the purpose ofchargeability to tax. The theory of apportionment ofexpenditures between taxable and non-taxable has, inprinciple, been now widened under Section 14A. ReadingSection 14 in juxtaposition with Sections 15 to 59, it isclear that the words "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest, etc.in respect of which allowances are provided for (seeSections 30 to 37). 8.Admittedly, the assessee had earned income by way ofdividend or long term capital gain from sale of shares which is exemptunder Sections 10(33) and 10(34), respectively. In view of insertion ofSection 14A in the Act, any amount spent for earning such incomecould not be allowed as deductible expenditure. However, the Tribunalhad restored the issue relating to allowability of interest expenditure inrespect of short term capital gain as the same was not exempt. Theclaim of the assessee that the amount was deductible under Section 57(iii) of the Act was, thus, rightly denied by the Assessing Officer andupheld by the CIT(A) as well as the Tribunal. 9.Reliance of the assessee on Raghunandan PrasadMoody's case (supra) is untenable for the reason that the Apex Courtwas dealing with a case where the assessee had not received anyincome by way of dividend. Under the fact situation involved therein, itwas held that expenditure incurred on interest was deductible.Moreover, Section 14A of the Act was not under consideration in thatcase. 10.Once the provision of Section 14A of the Act applies to thecase in hand, the argument that the same had not been relied upon bythe Assessing Officer or the CIT(A) is of no consequence. Thoughthere is no specific reference to Section 14A of the Act in theassessment order, but the order, in sum and substance, is based on principles enunciated therein. Further, on a specific query being put tothe learned counsel for the assessee as to how he was entitled todeduction of expenditure in respect of the dividend income and the longterm capital gain for sale of shares in view of Section 14A of the Act,learned counsel for the assessee was unable to give any reply muchless any satisfactory reply except reiterating his submissions, as noticedabove. 11.In view of the above, no substantial question of law arisesin these appeals. The appeals are dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Pratibha Paliwal Versus Commissioner of Income Tax, Karnal ITA No. 51 of 2011 Date of Decision: 30.5.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. R.P. Sawhney, Senior Advocate with Mr. Saurav Khurana, Advocate for the appellant. AJAY KUMAR MITTAL, J. The appeal is dismissed. 11.In view of the above, no substantial question of law arisesin these appeals. The appeals are dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Pratibha Paliwal Versus Commissioner of Income Tax, Karnal ITA No. 51 of 2011 Date of Decision: 30.5.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. R.P. Sawhney, Senior Advocate with Mr. Saurav Khurana, Advocate for the appellant. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the detailed order of even date recorded in ITA No. 10 of 2011 (Ved Parkash Paliwal (HUF) v. Commissioner of Income Tax, Karnal). (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE