Income-tax Officer, Ward 6(2)(2), Mumbai v. Daga Capital Management (P.) Ltd.

ORDER

Per K.C. Singhal, Vice President. - The Hon'ble President, ITAT, vide order dated 4-7-2007 has constituted the Special Bench in the case of M/s. Daga Capital Management Pvt. Ltd., Mumbai to adjudicate upon the following issue :

"Whether, in the facts and in the circumstances of the case and in law, the provisions of section 14A of the Income-tax Act, 1961, are applicable with respect to dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock-in-trade and when earning of such dividend income is, therefore, incidental to trading in shares?"

as well as to dispose of the appeal on merits.

2. Subsequently, the Hon'ble President vide order dated 17-10-2007 has directed the Bench to dispose of the following appeals also :

3. The facts in the case of M/s. Daga Capital Management Pvt. Ltd. are hereby narrated. The assessee-company was engaged in the business of dealing in shares in the year under consideration which declared loss of Rs. 12,87,780. It was noted by the Assessing Officer that assessee had claimed expenditure by way of interest amounting to Rs. 9,58,325 on borrowed funds while computing the income as well as the losses incurred in dealing in shares and securities amounting to Rs. 2,86,240. It was also noted by him, that assessee had received dividend income of Rs. 1,78,163 which was claimed as exempt from taxation under section 10(33) of the Income-tax Act, 1961 ('the Act'). The assessee was therefore asked to explain as to why the expenses incurred in relation to exempted dividend income should not be disallowed, under section 14A. The explanation of the assessee in this behalf was - (i) that the business of assessee was to purchase and sell the shares and securities and not to make any investments in shares on long-term basis, (ii) that the assessee was engaged in the business of dealing in shares and securities. The purchase and sale of shares were not shown separately in the Profit & Loss Account but were shown under the head 'Investments' but on that account, no adverse inference could be drawn since the entire sales had always been offered to tax as revenue receipts in the earlier years, (iii) the intention of the assessee has always been to hold the shares as stock-in-trade and dividend income was only the by-product of the trading activity and therefore, there was no relation between the expenditure by way of interest and the exempted income. The explanation of the assessee was rejected by the Assessing Officer by observing "the borrowed funds were mainly used for making investments in shares and securities of other companies with long-term perception in mind to earn lump sum dividend without contributing anything to the exchequer on account of income-tax. During the year, the assessee has not done any business in shares and securities except for few transactions and only income earned during the year is dividend income."

In view of these observations, it was held by the Assessing Officer that provisions of section 14A of the Act became applicable. Consequently, the deduction of Rs. 9,58,325 in respect of interest payment was disallowed by the Assessing Officer. It may also be mentioned that loss of Rs. 2,86,240 in dealing of shares was however accepted by the Assessing Officer after considering the necessary details filed by the assessee. As a result thereof, loss of Rs. 3,29,455 was determined vide order dated 25-2-2003.

4. The assessment made by the Assessing Officer was challenged before the learned CIT(A) before whom it was contended (i) that main object of the assessee was to deal in shares and securities as was apparent from the Memorandum of Association, (ii) no adverse inference could be drawn merely from the fact that investments in the shares and securities was shown in the Balance Sheet under the head 'Investments', (iii) the Assessing Officer himself had accepted the loss in the share dealing amounting to Rs. 2,86,240, (iv) the assessee had always shown the business profit and never claimed as capital receipts either on long-term or on short-term basis. In view of the same, it was claimed that interest payment was allowable under section 36(1)(iii) of the Act and consequently no part of it can be disallowed under section 14A of the Act.

5. The learned CIT(A) held that the assessee was dealer in shares and securities considering (i) the object stated in Memorandum of Association, (ii) the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 wherein it has been held that entries made in the books of account is not determinative of the nature of the transaction, (iii) the fact that Assessing Officer himself accepted the fact of share trading and the loss arising therefrom. Accordingly, it was further held, that interest paid on money borrowed was allowable deduction under section 36(1)(iii) of the Act. However, on facts, it was found by him that total investment of the company in the share trading business was Rs. 99,24,061 out of which Rs. 27 lakhs had been invested in the unquoted shares. According to him, legal finding given by him was applicable only with reference to investment in quoted shares as a trader and consequently, the unquoted shares held by the assessee could not be considered as stock-in-trade because there is no market for unquoted shares. Since, the borrowed funds and assessee's own funds were mixed, the learned CIT(A) sustained the disallowance of Rs. 2,61,361 on pro rata basis and the same was held to be disallowable in view of section 14A of the Act. Aggrieved by the same, the revenue is in appeal before the Tribunal by raising the following grounds :

"1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the assessee-company is a dealer in shares and as such, interest paid on money borrowed for investment in quoted shares is to be considered as allowable deduction under section 36(1)( iii) of the Income-tax Act.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer to restrict the disallowance under section 14A to the extent of Rs. 2,61,361 being proportionate interest attributable to the investment in the unquoted shares of Rs. 27 lakhs, out of disallowance of Rs. 9,58,325 made by the Assessing Officer, without appreciating that the borrowed funds to the tune of Rs. 99,24,061 has been used for making investments in shares and securities and, therefore, the Assessing Officer rightly worked out the disallowance at Rs. 9,58,325 on the total investment of Rs. 99,24,061."

However, it may be mentioned that assessee has accepted the order of the learned CIT(A) by not filing any appeal against the disallowance sustained by him.

6. When the appeal came up before the Division Bench, it was noticed that there was difference of opinion between the Benches on the issue involved in the appeal. The revenue had relied on the decision of the Tribunal dated 5-9-2006 in the case of Ridge Investment Co. (P.) Ltd. v. Jt. CIT [IT Appeal Nos. 4260-61 (Mum.) of 2003] as well as the decision of Delhi Bench of the Tribunal in the case of Ever Plus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 wherein it was held that even if the main activity of the company was to make investments in holding company for retaining control over the group companies, the disallowance under section 14A can be made irrespective of the fact that dividend earnings were only incidental in nature. On the other hand, the assessee had relied on the decision of Delhi Bench of the Tribunal in the case of Vidyut Investments v. ITO [2006] 10 SOT 284 wherein it was held that when shares are held as stock-in-trade with the object of trading in shares, and dividend income earning was only incidental in nature no part of the expenses could be disallowed under section 14A of the Act. In view of such difference of opinion, the Bench recommended the constitution of a Special Bench to decide the question mentioned in para 1 above. It is in the above circumstances that Hon'ble President has constituted the Special Bench to decide the said question as well as to dispose of the appeal.

7. The facts relating to the appeals of M/s. Cheminvest Ltd., New Delhi, are these. The assessee is an investment company engaged in the business of dealing in shares and securities as noted by the Assessing Officer at page1 of the assessment order. In assessment year 2001-02, the assessee declared loss of Rs. 63,67,135. In the course of assessment proceedings, it was found that assessee had debited a sum of Rs. 2,64,169 as management/administrative expenses and Rs. 1,32,54,058 on account of interest on borrowed capital for purchasing the equity shares. The assessee had also earned dividend income of Rs. 2,06,43,193 which was claimed to be exempt from taxation under section 10(33) of the Act. The only other income earned by the assessee was interest income of Rs. 71,24,595. The Assessing Officer was of the view that the deduction in respect of interest paid on borrowed capital could not be allowed in view of the provisions of section 14A of the Act since the related dividend income was exempt from tax under section 10(33). The Assessing Officer determined the disallowance of interest at Rs. 1,00,49,752 on pro rata basis which resulted in the determination of total income at Rs. 36,82,620. In a similar manner he disallowed the sum of Rs. 59,95,717 in assess-ment year 2002-03 as against the returned loss of Rs. 57,56,762 which resulted in total income of Rs. 2,38,955. Both the assessment orders were confirmed in appeal by the learned CIT(A). Aggrieved by the same, the assessee is in appeal before the Tribunal.

8. The facts relating to the appeal of M/s. Maxopp Investments Ltd., New Delhi, are these. The assessee is an investment company primarily holding shares in Max India Ltd. It declared profit of Rs. 1,28,81,291 as per the P & L A/c which included dividend income of Rs. 49,90,860. The dividend income was declared as exempt from taxation under section 10(33) of the Act. The perusal of the P & L A/c also showed that assessee had received interest of Rs. 1,94,70,181 while the interest paid amounted to Rs. 1,16,21,168. It was also noted by the Assessing Officer that assessee had taken loans amounting to Rs. 8,33,40,000 against which the loans given by the assessee amounted to Rs. 14,62,85,000. The assessee was asked to show cause as to why the disallowance of interest could not be made under section 14A of the Act. The explanation of the assessee was that it had acquired the shares for selling it at a profit in future and not for earning dividend. According to the assessee, the dividend income was only incidental to such acquisition of shares. Consequently, no disallowance could be made under section 14A of the Act. However, the Assessing Officer applied the provisions of section 14A of the Act and made disallowance of Rs. 67,74,175 on pro rata basis. Finally, the total income was determined at Rs. 1,41,69,420. On appeal, the learned CIT(A) upheld the action of the Assessing Officer under section 14A of the Act. Aggrieved by the same, the assessee is in appeal before the Tribunal.

9. The learned Departmental Representative initially invited our attention to the Memorandum explaining the provisions in the Finance Bill, 2001 by which section 14A was proposed to be inserted in the Income-tax Act, 1961 ('the Act') to indicate that the intention of the Legislature was to allow the expenditure to the extent they are relatable to earning of taxable income. Then it was submitted by him that provisions of section 14A was inserted in the Act by way of abundant caution in lieu of the law already existed. Thus, it was pleaded that purposive construction should be applied which is also known as 'mischief rule' as described in Heydon's case. Thus, four aspects should be taken into consideration while applying such principle i.e., ( i) what was the law before making of the Act; (ii ) what was the mischief or defect for which the law did not provide; (iii) what is the remedy that the Act has provided; and (iv) what is the reason of remedy. Thus, the construction of Statute should be in such a manner which would suppress the mischief and advance the remedy. Consequently, the construction which defeat the intention of the Legislature should be avoided even though there may be some inexactitude in the language used.

10. According to him, the Parliament in its wisdom had enacted section 14A with retrospective effect from 1-4-1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. In the past, it was seen that assessee's were pushing the expenses relating to exempt income which were not taxable towards taxable income and thereby reducing the taxable income wrongly. It was to curb this mischief that the Parliament enacted section 14A and also to overcome the decision of Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation v. Commissioner Of Income Tax [2000] 242 ITR 450 , wherein it was held that if the exempted income and the taxable income are earned from one and indivisible business then the apportionment of expenditure could not be sustained. According to him, the intention of the Legislature is clearly evident from the Memorandum explaining the provisions contained in the Finance Bill wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation to earning the taxable income. It was further submitted that the use of the expression 'only to the extent' in the memorandum is clear indicator that only that part of expenses can be allowed as deduction which is related to the earning of taxable income. Accordingly, it was contended that when the income is exempt and does not form part of the total income then, no expenditure whether direct or indirect in relation to that income could be claimed as deduction. To put it differently, the expenses which are directly related to taxable income are to be allowed as deduction.

11. Apart from the above, the learned Sr. D.R. made various submissions which are being summarised below :

"(a) that section 14A being the special provision of law will override the general provisions of law like section 36(1)( iii) or section 57, etc. Therefore, even though the expenditure may be allowable under section 36(1)( iii) or section 57 of the Act, it would still be disallowable under section 14A of the Act if it is found that expenditure related to the income which does not form part of the total income.
(b) that expression 'in relation to' used by the Legislature in section 14A is of the widest amplitude and is much wider and broader than the other expressions 'attributable to' and 'derived from'. The Legislature was aware of the other expressions and deliberately ignored the same and used the wider expression 'in relation to'. Therefore, such expression neither can be interpreted in a narrower sense nor the same can be read down since the power of reading down the Statute is available only to the High Courts and Supreme Court of India. Since the expression 'in relation to' has been used in the widest sense, it must mean both the direct and indirect, related, associated, having some connection which is either proximate or distant but not remote and not the strict test of Causa Causans which means immediate and effective source. In support of this proposition, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Doypack Systems (P.) Ltd. v. Union of India [1988] 2 SCC 299 for the proposition that the expression 'in relation to' is of widest amplitude and would include direct as well as indirect connection depending on the context.
(c) that dividend income can be earned only after investments are made. The investments having been made out of the borrowed capital, the interest payment made on such borrowings is clearly an amount which is required to be regarded as expenditure laid out wholly and exclusively for the purpose of earning dividend income. Therefore, such expenditure must be deducted from the gross dividend and it is the net dividend income which can be allowed as exempt under section 10( 33) of the Act. In other words, such expenditure cannot be allowed while computing the taxable income. Reliance is placed on the decision of Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. Chemical Holdings Ltd. reported in 249 ITR 54 for the proposition that even the deduction under section 80M in the case of dealer in shares is to be allowed with reference to the net dividend income. According to him, if the expenditure is not allowed against the dividend income, then it would amount to double deduction which is not permissible in law in view of the decision of Hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India 199 ITR 44 SC.
(d) that section 14A being a special piece of Legislation will override the general provisions of law and consequently, the expenditure incurred in relation to exempted income would be disallowable even though such expenditure would have been allowable either under section 36(1)( iii) or under section 37 or under section 57 or under any other section meant for computation of total income under either of the heads. Reliance is placed on the decisions of the Tribunal reported as Inshahallah Investments Ltd. v. ITO in 23 SOT 130 and Maruti Udyog Ltd. v. DCIT 92 ITD 119.
(e) that there can be no business in acquisition of shares for controlling group companies and consequently, expenditure by way of interest on borrowed funds utilised for acquisition of shares cannot be allowed as deduction even under section 36(1)( iii) as held by the Tribunal in the case of Everplus Securities reported in 101 ITD 151 as well as the other Tribunal decisions namely Kanu Metals Pvt. Ltd. [ITA No. 7211/Mum./03, order dated 30-5-2008], Mohan T. Adwani Finance Pvt. Ltd. [ITA No. 1060/Mum./2003] and Mechintosh Finance Estates (P.) Ltd. [ITA No. 5615/Mum./2002].
(f) that the decision of the Tribunal in the case of S.G. Invest- ments and Industries Ltd. reported in 89 ITD 44 (Cal.) is an authority for the proposition that the words used in section 14A are wider than, the words used in section 57( iii) and consequently the expenditure in relation to exempted income has to be disallowed even though such expenditure may be allowable in other sections. Reference is also made to other decisions of the Tribunal namely, K.V. Trading Company [ITA No. 924 of 2003 (Cal.)].
(g) that the provisions of sub-sections (2) and (3) of section 14A are merely procedural and clarificatory in nature and therefore, would apply with retrospective effect. Reliance is placed on the various decisions of the Tribunal, namely, Mohanlal M. Shah v. Dy. CIT reported in 111 TTJ 886 (Mum.), ACIT v. City Corp. Finance India Ltd. reported in 108 ITD 457 (Mum.), DCIT v. Seksaria Biswan Sugar Factory Ltd. reported in 14 SOT 66 (Mum.), DCIT v. Smita Conductors Ltd. reported in 16 SOT 251 (Mum.) and ITO v. Rhino Bags (P.) Ltd. reported in 12 SOT 571 (Mum.). The decision of the Special Bench in the case of Acquarius Travels Pvt. Ltd. 111 ITD 53 (Delhi)(SB) is cited in support of the proposition that the provision of section 14A can be invoked by the appellate authorities even though, the same was not applied by the lower authorities. Accordingly, in view of sub-sections (2) and (3) of section 14A, the theory of apportionment would apply and the expenditure incurred by the assessee will have to be apportioned reasonably between taxable income and non-taxable income as held by the Tribunal in the case of Marezban Bharucha v. ACIT reported in 12 SOT 133 (Mum.). It was also pointed out by him that theory of apportionment is based on various Supreme Court judgments mentioned below :

(i) Anglo-French Textile Co. Ltd. v. CIT(A) [1954] 25 ITR 27 (SC)
(ii) CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC)
(iii) Continental Construction Co. v. ACIT 106 TTJ (Mum.) 855

(h) That entire provisions of section 14A should be read in a holistic manner and, therefore, sub-section (1) should not be read in isolation. Once the exempted income is earned by the assessee and the assessee claims that no expenditure is incurred in relation to such income than disallowance must be made in accordance with sub-section (3) thereof. Similarly, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee then having regard to the accounts of the assessee, disallowance can be made under sub-section (3) thereof.
(i) The following decisions were cited in support of the proposition that expenses which are direct/indirect, fixed or variable, managerial financial in relation to income not chargeable to tax are to be disallowed under section 14A of the Act :

(i) Sunash Investment Co. v. ACIT 106 TTJ (Mum.) 855
(ii) Kalpataru Construction Overseas (P.) Ltd. v. DCIT (Mum.) 13 (SOT) 194 (2007)
(iii) Conwood Agencies (P.) Ltd. v. ITO Wd. 9(1)(2), Mumbai-15 (SOT) 308(Mum.)(2007)
(iv) Narotamdas Bhau v. ACIT - 16(2), Mumbai- 15 SOT 629 (Mum.) (2007)
(v) D.J. Mehta v. ITO 107 TTJ (Mum.) 12 (2007)
(vi) Rhythm Exports (P.) Ltd. v. ITO (SMC) 97 TTJ (Mum.) 493 (2005)
(vii) Dy. CIT v. Tata Investment Corpn. Ltd. 295 ITR (AT) 330 (Mum.)(2007)

(j) That the decisions of the Hon'ble Supreme Court in the cases of Rajasthan Warehousing Ltd. 242 ITR 450 and in the case of Rajendra Prasad Moody 115 ITR 519 (SC) were rendered with reference to the language employed in sections 36, 37, 56 and 57 which is quite different from the language used in section 14A of the Act and therefore those decisions cannot be considered in interpreting the provisions of section 14A. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Baroda Distributors Pvt. Ltd. 155 ITR 120 wherein it was observed "It is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation, which might have been placed on an earlier statutory provision which is not only couched different language but is also structurally different." In view of these observations, it has been submitted that the judgment of Hon'ble Bombay High Court in the case of Emrald Company Ltd. 284 ITR 586 and the decision of the Tribunal in the case of Claridges Investment and Finance Pvt. Ltd. 18 SOT 390 would not help the case of the assessee."

12. Mr. Vipul Joshi, learned counsel for the assessee, has submitted before us that the question referred to the Special Bench is in a narrow compass and method of apportionment of disallowance would apply only if the question is answered against the assessee. He has raised various submissions in support of the proposition that in the case of dealer in shares and securities, the provisions of sub-section (1) of section 14A of the Act would not apply since the profit arising from the sale of shares and securities is chargeable to tax and the dividend income, if any, is only incidental in carrying on such business. He has not disputed the application of mischief rule as contended by the learned D.R. However, it has been submitted by him that inquiry under section 14A starts with reference to the expenditure incurred and not with reference to the income. According to him, the expenditure incurred must relate to the tax free income if section 14A is to be invoked. If the expenditure incurred by the assessee produces the taxable income then such expenditure is allowable as deduction under section 36(1)(iii) and no disallowance can be made under section 14A of the Act since such expenditure would not have any connection with the tax free income. Reliance is placed on the decisions of the Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Madras v. Indian Bank Limited, Madras [1965] 56 ITR 77 and in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 . Accordingly, it has been pleaded that once the expenditure incurred produces taxable income, the inquiry must stop there itself. The intention is to be seen at the time when the expenditure is incurred. Proceeding further, it was also submitted that onus is on the department to prove that expenses were incurred in relation to the tax-free income since existence of such relation is a condition precedent for invoking the provisions of section 14A. Coming to the scope of the expression 'in relation to' it was contended by him that remote connection is excluded as per the definition given in Law Lexicon. He also referred to the judgment of the Constitution Bench of eleven Judges in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior v. Union of India [1971] 1 SCC 85 wherein their Lordships by majority opinion held that such expression means dominant and immediate connection. In view of the same it is pleaded that any connection which is either incidental or ancillary or remote would be excluded from the scope of such expression. Accordingly, in the case of dealer in shares and securities, the expenditure incurred has a dominant and immediate connection with the profits arising on the sale of such shares and securities and the connection, if any, with the dividend income is only incidental one. Consequently, no disallowance can be made in such cases merely because the assessee has earned some dividend income in a casual manner. He also relied on the decisions of the Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax v. Emrald Co. Ltd. [2006] 284 ITR 586 as well as in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203 wherein it has been held that in the case of dealer in shares the expenditure is incurred in relation to the profits on the sale of shares and not with reference to the dividend income.

13. The learned Counsel, Mr. K.C. Patel, has appeared on behalf of the intervener i.e., Mandalia Group. He took us through the circulars issued by the CBDT to clarify the scope of section 14A. Then it has been pointed out that the disallowance, if any, has to be made in accordance with the prescribed manner. He drew our attention to rule 8B which has been inserted by Income-tax (Fifth Amendment) Rules, 2008. According to him, a formula has been prescribed in sub-rule (2)(ii) i.e., the expenditure incurred by way of interest multiplied by value of investment and divided by the value of all the assets. Emphasis was made by him on the words 'value of investment' to contend that the formula is applicable only in the case of an investor and therefore it impliedly means that the rules are not applicable in the case of dealer in shares. Proceeding further it was submitted by him that once the deduction is allowable under section 36(1)(iii) of the Act then there is no scope for applying the provisions of section 14A of the Act. Reliance has been placed on the following decisions:

1. Emrald Co. Ltd.'s case ( supra).
2. Addl. Commissioner Of Income-Tax v. Laxmi Agents P. Ltd. [1980] 125 ITR 227 (Guj.).
3. Commissioner Of Income-Tax, Gujarat-Iv v. Cotton Fabrics Ltd. [1981] 131 ITR 99(Guj.).
4. Commissioner Of Income-Tax v. Kanoria Investments (P.) Ltd. [1998] 232 ITR 7 (Cal.).
5. Vidyut Investment Ltd. ( supra).
6. Asstt. CIT v. Claridges Investments & Finances (P.) Ltd. [2007] 18 SOT 390 (Mum.).
7. Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194(SC).

14. Mr. Kunal Reshamwala, Counsel for the intervener, M/s. Taj Investments & Finance Company Ltd., has submitted before us as under :

1. Section 14A as it stood during the relevant assessment year did not provide for the method for calculation of disallowance under section 14A.
2. Method for computing disallowance under section 14A was first sought to be provided only with effect from 1-4-2007.
3. Notification No. 45/2008, dated 24-3-2008 now provides the method for computing disallowance under section 14A with effect from the date on which it is published in the Official Gazette.
4. Since no method for computing disallowance was provided prior to 1-4-2007/24-3-2008 as per the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 followed in Commissioner Of Income Tax, Bangalore v. Infosys Technologies Ltd. [2008] 297 ITR 167 if the computational provisions fail no liability can be fastened on the assessee.
5. The above notification cannot be given retrospective effect as it is only for the first time vide the notification that the Assessing Officer gets the right to calculate the disallowance based upon the notification.
6. Without prejudice to above, even if it is assumed that the notification is to be applied retrospectively it does not cover a case where securities are held on trading account and not as investment.

15. Mr. Ajay Vora, the learned Counsel for the assessee namely, M/s. Cheminvest Ltd. and M/s. Maxopp Investments Ltd. has not disputed the legal contention of the learned Sr. D.R. that provisions of section 14A of the Act has overriding effect over the other computational provisions relating to other heads. However, it has been submitted that on the facts of the case, no disallowance can be made in the cases of above assessees. It has been submitted that both these assessees are promoters of Max India Ltd. engaged in diverse business activities which are also listed in the Stock Exchange. It is further submitted that both the assessees are engaged in the business of holding investments in shares of listed companies, namely, Max India Ltd. and Gaylord Impex Ltd. as well as other companies which are not listed. Our attention was drawn to page Nos. 140 to 142 to point out that investment in shares of Max India Ltd. and Gaylord Impex Ltd. are shown as investment in quoted shares while investments in the shares of other companies are shown as investments in unquoted shares. It is further pointed out that quoted shares are held as trading assets i.e., stock-in-trade while the unquoted shares are shown as capital assets. The investments in quoted shares have been made with a view to have controlling interest in those companies and consequently, the same had been held as trading assets. It was further pointed out that whenever any of the quoted shares had been sold, the profits thereon was declared as business income and the Assessing Officer had also accepted such profits as "business profits". In support of his submissions, he drew our attention to page 26 of the paper book to point out that profits on sale of quoted shares amounting to Rs. 4,966 has been shown as business income pertaining to assessment year 1998-99. He also drew our attention to the assessment order relating to assessment year 1998-99 appearing at pages 31 and 32 of the paper book to point out that entire income has been assessed as business income. It was also submitted by him that the assessee itself had disallowed the interest expenditure relatable to investment in unquoted shares and the dispute relates to the interest liability relatable to investment in the shares held as stock-in-trade. On the basis of these facts, it was contended by him that no disallowance can be made under section 14A of the Act since expenditure was not incurred with a view to earn dividend income but to earn the business income on the sale of shares held as stock-in-trade.

16. Proceeding further, it was submitted that section 14A can be applied when it is established that - (i) the expenditure is incurred and (ii) such expenditure was incurred in relation to the income not liable to tax. Therefore, some inquiry must be made in this regard. Regarding the scope of the expression 'in relation to' appearing in section 14A of the Act, he endorsed the arguments made by Mr. Vipul Joshi and also relied on the decision of the Hon'ble Supreme Court in the case of Navin Chemical Mfg. & Trading Co. Ltd. v. Collector of Customs [1993] 4 SCC 320 wherein the expression 'in relation to' has been defined as a direct and proximate relationship. Further reliance has been placed on the decision of the Third Member of the Tribunal in the case of Wimco Seedlings Ltd. v. Dy. CIT [2007] 293 ITR 216 (AT)(Delhi) wherein the Tribunal was concerned regarding the scope of section 14A of the Act itself. In this case it was held that the expression 'in relation to' would mean direct connection or association between the expenditure incurred and the income which is not taxable. He also placed reliance on other decisions of the Tribunal namely, Asstt. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi) 369 and Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi) . However, it was submitted that it is the intention/motive of the assessee at the time when the expenditure is incurred which is relevant for establishing the dominant and immediate connection between the expenditure incurred and the income earned by the assessee. If the earning of tax free income is merely incidental then it cannot be said that dominant and immediate connection existed between the expenditure incurred and the earning of tax free dividend income. According to him, in the case of these assessees, there cannot be any motive/intention to earn the dividend income since the dominant motive/intention is to earn the taxable income on the sale of shares. Reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Cit, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 and the decision of the Hon'ble Bombay High Court in the case of Commissioner Of Income Tax… v. Tata Chemicals Ltd.…. [2002] 256 ITR 395 . Proceeding further it was also submitted that if the dividend arises or accrues to the assessee in the course of its business activities then the nature of dividend would continue to be as business receipts even though the same might be assessable under different heads i.e., 'Income from other sources'. Reliance was placed on the decisions of Hon'ble Supreme Court in CIT v. Chugandas & Co. [1965] 55 ITR 17 , CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 and Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 . In view of these judgments, it was pleaded that if the intention of the assessee is to carry on the business then the expenditure incurred in relation thereto must be allowed as deduction even though the dividend income might have arisen or accrued to the assessee in the course of carrying on such business activity. He also relied on various High Court judgments in support of his above proposition. Reference was made to the decision of Gujarat High Court in the case of Laxmi Agents (P.) Ltd. ( supra) wherein it was held that interest on borrowed amount was allowable as deduction against his business income even though the dividend was assessable under the separate head. Reference was made to certain judgments of various High Courts i.e.,Commissioner Of Income-Tax v. Rajeeva Lochan Kanoria. [1994] 208 ITR 616 (Cal.) , Commissioner Of Income-Tax v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal.) , Commissioner Of Income-Tax v. Amritaben R. Shah [1999] 238 ITR 777 (Bom.) and the decision of the Tribunal in the case of ATE Enterprises v. Jt. CIT [2006] 102 ITD 110 (Mum.) wherein interest on borrowed capital was held to be deductible where the borrowed capital was utilised to purchase shares of different companies in order to acquire controlling interest. Lastly, it was submitted by him that decisions relied upon by the learned D.R. were distinguishable on facts.

17. Rival submissions of the parties have been considered carefully in the light of material produced before us and case law referred to. This Bench is required to define the scope of the provisions of section 14A of the Act which reads as under :

"14A. (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 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 under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."

18. The scheme of the Act shows that total income of assessee is to be computed under various heads of income specified in section 14. The provisions for computation of income under various heads are provided in sections 15 to 57 of the Act. The Legislature in its wisdom thought that expenditure in relation to income exempted from taxation should not be allowed deduction while computing the income chargeable to tax. Accordingly, the Legislature, instead of making various provisions for disallowance under various heads, inserted section 14A at the inception i.e., prior to the computational provisions under various heads. Thus, intention of the Legislature is clear to disallow all the expenditures incurred in relation to income not forming part of total income. Contextual interpretation of section 14A clearly suggests that expenditure in relation to exempted income has to be disallowed even though such expenditure would have been allowable under the computational provisions relating to various heads of income. Hence, we are in agreement with the contention of the learned Sr. D.R. that section 14A has an overriding effect over the computational provisions under various heads. We hold accordingly. To hold otherwise would amount to rendering the provisions of section 14A as otiose/redundant which is not permissible in law. Hence, we do not find force in the contention of Mr. Patel that no disallowance can be made under section 14A if the deduction is permissible under section 36(1)(iii) of the Act. Consequently, in the case of an assessee carrying on a business activity, any expenditure incurred by him even though allowable under section 36(1)(iii) or section 37 can be disallowed under section 14A if such expenditure has been incurred in relation to the income not forming part of total income.

19. Coming to the scope of section 14A of the Act, the perusal of the said section reveals that any expenditure incurred in relation to income not forming part of total income has to be disallowed. Thus, the scope of this section entirely depends upon the meaning of the expression 'in relation to' used by the Legislature in this section. Such expression has not been defined in the Act. However, we find that such expression has been judicially defined by the Constitution Bench of Eleven Judges of the Hon'ble Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra). Their Lordships considered the scope of the expression 'provisions of this Constitution relating to' appearing in Article 363 of the Constitution of India. Their Lordships, in para 135 of the judgment, held that such expression means 'provisions having a dominant and immediate connection with'. It was also held that it does not mean merely having a reference to.

20. It is the settled legal position that if a word or an expression has been judicially defined by the court then it should be presumed that the Legislature was well aware of such meaning while enacting an enactment and consequently, such word or expression in the enactment should be understood in the same sense in which it was judicially defined. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 wherein it was observed as under:

"It is well-settled that where the Legislature uses a legal term which has received judicial interpretation, the courts must assume that the term has been used in the sense in which it has been judicially interpreted."

Similar view was taken by the Apex Court in the case of Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 by observing as under:

"When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context."

21. In view of the above legal position, it is held that the expression 'in relation to' in section 14A of the Act must be understood in the same sense in which their Lordships of the Apex Court understood in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra). Accordingly, the expression 'in relation to' would mean dominant and immediate connection. This means that disallowance of expenditure under section 14A can be made only when there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income. As a necessary corollary, it would mean that disallowance cannot be made if the connection is not dominant and immediate but is merely incidental, ancillary or remote one. The contention of the revenue that the expression 'in relation to' would mean any and every relation except remote is, therefore, rejected.

22. The decision of the Hon'ble Supreme Court in the case of Doypack Systems (P.) Ltd. v. Union of India [1988] 2 SCC 299 has been relied on by the revenue for the proposition that the expression 'in relation to' would include direct as well as indirect connection. A perusal of this decision shows that it was rendered by Bench of two Judges without considering the decision of the Constitution Bench of Eleven Judges in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra). It is a settled rule of precedence that in case of any conflict of opinion between the views expressed by different Benches of a Court then the view taken by the Larger Bench would prevail since the Division Bench cannot enlarge the scope of the decision rendered by the Larger Bench. Therefore, in our opinion, the later decision cannot be applied to determine the scope of section 14A of the Act.

23. Having held as above, the next question is how to determine the nature of the connection between the expenditure incurred and the income earned by the assessee. In our opinion, the answer to this question would depend upon the intention/object with which the expenditure was incurred. If the expenditure is incurred with a view to earn the taxable income then it can be said that dominant and immediate connection exists between the expenditure incurred and the taxable income and consequently, no disallowance under section 14A can be made even where some tax-free income is received incidentally. On the other hand, if the expenditure is incurred mainly with a view to earn the tax-free income then it can be said, that the dominant and immediate connection exists between the expenditure incurred and in the tax-free income and consequently disallowance under section 14A can be made even though some taxable income may arise incidentally.

24. However, there may also be cases where the expenditure may be incurred with a view to earn tax-free as well as taxable income simultaneously from an indivisible activity. Reference can be made to the decision of Hon'ble Supreme Court in the case of Maharashtra Sugar Mills. Ltd. (supra) where the assessee was carrying on the composite business of growing sugarcane and manufacturing sugar therefrom. The assessee claimed deduction in respect of managing agency commission paid by it but the Assessing Officer partly disallowed the same on the ground that part of such expenditure related to management of sugarcane cultivation income from which was exempt from tax. However the Supreme Court held that there is no basis for the view that the only expenditure incurred in respect of a business activity giving rise to taxable income can be allowed as deduction under section 10(2)(xv) and not otherwise. If the allowance claimed is permissible under the Act, then the same has to be deducted from the gross profit and if it is not permissible under the Act, it has to be rejected. For the similar reasons, the Apex Court held in the case of Rajasthan State Warehousing Corpn. ( supra) that where assessee was carrying on one indivisible business then deduction in respect of an expenditure could not be disallowed merely because part of the income from such business was exempt from tax. In both the cases, the expenditure was incurred with a view to earn tax-free as well as taxable income simultaneously and therefore it can be said that dominant and immediate connection exists in such cases between the expenditure incurred and the tax-free as well as taxable income earned by the assessee. Therefore, in such cases, in our opinion, the disallowance can be made under section 14A on proportionate basis in accordance with the provisions of sub-sections (2) and (3) of section 14A of the Act. At this stage, it may also be pointed out that section 14A was inserted with a view to overcome the effect of the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. ( supra).

25. In view of the above legal position, the next question which arises for our consideration is whether any disallowance under section 14A can be made in the case of a dealer in shares. Generally, in our opinion, a dealer in shares does not acquire shares and securities to earn dividend income. The dominant and immediate object behind acquisition of shares is to earn profit on the sale of shares at the earliest point of time which is chargeable to tax under the Act. Sometimes, such person by chance may also get the dividend on the shares held by him as 'stock-in-trade'. Since such dividend income is never intended at the time of purchase of shares, in our opinion, the connection between the expenditure incurred and the dividend income can be said to be incidental only since the dominant and immediate connection exists only between the expenditure incurred and profit on sale of shares. Since the existence of dominant and immediate connection is the condition precedent for invoking the provisions of section 14A of the Act, in our opinion, the mere receipt of dividend income incidentally in the case of dealer in shares would not be sufficient for invoking the provisions of section 14A of the Act.

26. However, on facts, there may be instances where even a dealer in shares may choose to acquire shares with the main object of earning dividend income. In various cases, it has been seen that the shares/securities are purchased only with a view to earn dividend income despite knowing well in advance that there would be loss on the sale of such shares/securities, for example, Unit Trust of India usually notifies a date for declaration of dividend. In such cases, market price of units rises abnormally before the notified date and falls also abnormally after the notified date. Even in such situation, the assessee buys units at a high price before the notified date, receives the tax free dividend and then sells the units shortly thereafter at a loss. Reference can be made to the case of Walfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB) where such facts existed. The dividend income earned is exempt from tax while the loss is the business loss which gets adjusted against other business profits. In such cases, it cannot be said that dominant and immediate object is to earn profit on sale of securities. On the other hand, the dominant and immediate object of assessee is self evident i.e., to earn dividend income which is exempt from tax under section 10(33) of the Act. Therefore, in our considered opinion, the disallowance under section 14A can be made in such cases in respect of expenditure incurred. However, onus would be heavy on the revenue to establish such connection because the settled legal proposition is that onus of proof lies on the person who invokes a particular provision or alleges that a fact exists. If Assessing Officer wants to invoke the provisions of section 14A then onus would be on him to establish that there exists dominant and immediate connection between the expenditure incurred and the income not forming part of total income. On the other hand, where the assessee claims deduction under section 36(1)(iii) or section 37, the onus would be on the assessee to prove that expenditure was for the purpose of the business. Once this onus is discharged, it would shift to the Assessing Officer to establish that there exists dominant and immediate connection between expenditure incurred and income exempt from tax if section 14A is to be invoked by him. We hold accordingly.

27. Coming to the scope of sub-sections (2) and (3) of section 14A, we find that these are the procedural provisions for determining the disallowance of the expenditure in relation to income not forming part of the total income. These sub-sections provide the procedure for making disallowance under section 14A. The Hon'ble Supreme Court, in the case of CWT v. Sharwan Kumar Swarup [1994] 210 ITR 886 , has held that procedural law, generally speaking, is applicable to all pending cases since no person has a vested right in the procedure. In view of this legal position, we are in agreement with the contention of the learned Sr. D.R. that such provisions would be applicable to all pending matters. Therefore, the contention of Mr. Kunal Reshamwala, that provisions of sub-sections (2) and (3) of section 14A cannot be applied to earlier years cannot be accepted. However, we are unable to agree with his contention that disallowance under sub-sections (2) and (3) can be made even if sub-section (1) does not apply, in our opinion, sub-sections (2) and (3) being procedural provisions cannot control the substantive provisions of sub-section (1) of section 14A. Sub-sections (2) and (3) would apply only when sub-section (1) applies to the facts of the case. If the Assessing Officer finds that there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income then only the provisions of sub-sections (2) and (3) would come into play and not otherwise. We hold accordingly.

28. In view of the above discussion, it is held that in case of dealer in shares no disallowance under section 14A of the Act can be made merely because some dividend is received incidentally unless it is established that there was dominant and immediate connection between the acquisition of shares and the earning of dividend income. Consequently, the referred question is answered in negative and in favour of the assessee.

29. Coming to the merits of the appeal in the case of Daga Capital Management Pvt. Ltd., we find that assessee was engaged in the business of purchase and sale of shares and securities which is also apparent from the fact that Assessing Officer himself has accepted the loss of Rs. 2,86,240 incurred in dealing of shares and securities. There is nothing on record to suggest that there was any dominant and immediate connection between the borrowed funds for acquisition of funds and the dividend earned by the assessee. The onus which lies on the Assessing Officer to prove such connection has not been discharged and consequently, we do not find any infirmity in the order of the learned CIT(A) deleting the disallowance made by the Assessing Officer.

30. Now we take up the appeals of Cheminvest Limited and Maxopp Investments Limited. Rival submissions of the parties, already referred to earlier, have been considered carefully in the light of the material placed before us. The material placed before us reveals that investment was made in acquisition of quoted shares as well as unquoted shares. The assessee companies are also admittedly one of the promoters of Max India Ltd. and Gaylord Impex Ltd. whose shares are listed at stock exchange. However, investment in shares of these companies has been shown in the balance sheet, as trading assets while the investment in shares of all other companies has been shown as investments in unquoted shares. Further, interest relatable to unquoted shares has not been claimed as deduction in computing its income. Only the interest on borrowings relatable to acquisition of shares of Max India Ltd. and Gaylord Impex Ltd. has been claimed as deduction under section 36(1)(iii) of the Act. Further, the assessee had sold some insignificant quantity of shares of Max India Ltd. in assessment year 1998-99 and the resultant profit on the sale of such shares had been shown as business receipt and the Assessing Officer had also accepted the same as business receipt chargeable to tax under section 28 of the Act. On these facts, undisputedly, the assessees were allowed deduction under section 36(1)(iii) of the Act in respect of interest on borrowed capital utilised for acquiring shares of Max India Ltd. and Gaylord Impex Ltd. in the earlier years which is apparent from the assessment orders passed by the Assessing Officer. Therefore, it could not be contended by the learned D.R. that investment by the assessee was on capital account. We, there- fore, proceed on the footing that the assessee was also engaged in the business of holding investment in shares of two companies apart from making investments in unquoted shares on capital account.

31. The learned Counsel for the assessee, Mr. Ajay Vora, has raised a plea that investment in shares of Max India Ltd. and Gaylord Impex Ltd. was made with a view to have controlling interest in these two companies. Such plea was never raised either before the Assessing Officer or the learned CIT(A). The only explanation before the lower authorities was that assessee was an investment company engaged in the business of dealing in shares and securities. We have also gone through the Memorandum of Association of M/s. Cheminvest Ltd. The object clause permits the assessee to carry on the business of an investment company and to buy, underwrite, invest in, acquire, hold and deal in shares, stocks, debentures, etc. This also suggests that assessee was authorised to carry on the business as an investment company. The mere fact that the assessee was one of the promoters of the above two companies, would not lead to the conclusion that the only purpose for acquiring the shares was to have controlling interest. There is nothing on record to hold that investment in shares of these two companies was made with a view to have controlling interest. It was merely a case of making investment by an investment company in pursuance of its objects. Acquisition of controlling interest normally is on capital account. It is also not the business of the assessees to take over the other companies by acquiring the controlling interest. Accordingly, the plea raised by the assessee cannot be accepted. Consequently, the case law relied upon by the learned Counsel for the assessee in this regard would have no relevance in adjudicating the issue before us.

32. Now the question arises whether on the facts stated above disallowance can be made under section 14A of the Act. The learned Counsel for the assessee also has not disputed the legal position that section 14A can be applied even if deduction is allowable under section 36(1)(iii). His only contention is that on the facts of the case, there is no direct connection between the expenditure incurred and the dividend income and the connection, if any, is merely incidental to the main business activity of holding investment in shares. After giving our due consideration to the facts of the case, we are unable to accept the contention of the learned counsel for the assessee for the reasons given hereafter. We have already held that disallowance under section 14A can be made only when there is dominant and immediate connection between the expenditure incurred and the tax free income and not otherwise. The factual details regarding holding of shares of Max India Ltd. by M/s. Cheminvest Ltd. is given below:

Note : The assessee had purchased 36,650 shares of Gaylord Impex Ltd. prior to 1-4-1996 and thereafter no transaction was made by the assessee in respect of such shares.

DETAILS OF DIVIDEND RECEIVED

Note : The factual position in the case of Maxopp Investments Ltd. is almost similar to the case of Cheminvest Ltd.

33. On the basis of the above factual details, it is clear that motive/intention of the assessee was to acquire and hold the shares on long-term basis as an investment company. So the dominant intention is not to sell the shares on regular basis. Since the intention of the assessee is not to sell the shares of these companies in the near future, in our opinion, it cannot be said that there is any dominant and immediate connection between the interest paid and the taxable profits on the sale of shares. The chart given above reveals that only one transaction of insignificant quantity of shares was made. On the other hand, the enormous dividend income has been accrued and received by the assessee every year. In the case of investment companies, the main purpose of investment is to earn the maximum dividend income. There is no other motive or intention in case of investment companies. Therefore, we are of the view that there did not exist any dominant and immediate connection between the interest paid and the taxable income. In fact, such connection existed between interest paid and the dividend income since the only motive/object was to earn the dividend income as is apparent from the amount of dividend received. Therefore, in our view, the disallowance under section 14A was justified. The orders of the learned CIT(A) in both the cases are therefore upheld.

34. In the result, the appeal of the revenue in the case of M/s. Daga Capital Management (P.) Ltd. and the appeals of M/s. Maxopp Investments Ltd. and M/s. Cheminvest Ltd. are dismissed.

G.C. Gupta, Judicial Member and R.S. Syal, Accountant Member. - We have meticulously gone through the order proposed by the Hon'ble Vice President. Despite rounds of discussion, there could not be any consensusad idem on certain issues. We are therefore, constrained to write separate order.

2. The factual matrix of the case, along with the submissions made by the rival parties have been aptly recorded by the Hon'ble Vice President in his proposed order through paras 1 to 16. We adopt the same and proceed to give our decision on the issues raised in these appeals.

3. The core of controversy raised before us is to interpret section 14A of the Income-tax Act, 1961 (hereinafter called 'the Act') for determining as to whether or not any disallowance of expenses is warranted under this section when the assessee is dealing in shares by way of purchase and sale and any dividend income, which is exempt under section 10(33), is earned on the shares or other securities held by it as stock-in-trade. However, there is no controversy about the rightness in making the disallowance of expenses under section 14A when the shares and other securities are held as investment and not as stock-in-trade. The case of the revenue is that the disallowance is necessary under section 14A even when the shares are held as stock-in-trade. On the other hand, the view point of the assessee is that the main purpose of making investment in shares and securities is to hold them as stock-in-trade and earning profit on their trading, which income is otherwise taxable under the head 'Profits and gains of business or profession' (hereinafter called the 'Business income'). Since such income from trading is taxable and not exempt and hence on that analogy the dividend income resulting from such holding, though exempt under the provisions of the Act, is only incidental to the holding of shares and accordingly no disallowance be made under section 14A. In order to appreciate the rival submissions qua the instant controversy, it is relevant to extract section 14A, which is as under :—

"14A. (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 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 under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before 1-4-2001.]"

4. This section has been inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962. At the time of insertion there were no sub-sections. It is only by the Finance Act, 2006 that sub-sections (2) and (3) have been inserted with effect from 1-4-2007 and that the earlier part of section 14A has been renumbered as sub-section (1).

5. Before we analyze this section and test the facts of our cases on the touchstone of its prescription, it would be beneficial to note down the background which led to the insertion of this section.

6. The Hon'ble Supreme Court in the case of Indian Bank Ltd. (supra) was confronted with a situation in which the Indian Bank Limited carried on the business of banking and in the normal course of its business it received deposits from constituents and paid interest to them. It invested a large sum in securities both of the Central and State Governments. The interest on State Government securities was exempt from income-tax and super tax under the provisions of a Notification issued under section 60 of the Indian Income-tax Act, 1922. It bought and sold the securities and the profits and losses on purchase and sale of such securities were taken into account in computing the income under the head 'Business'. It claimed deduction as interest paid to various depositors for a sum of Rs. 25.91 lakhs. The Income-tax Officer disallowed interest of Rs. 2.80 lakhs by calculating the proportionate amount which would be payable on the money borrowed for purchase of State Government securities. The Tribunal upheld the Income-tax Officer's stand on the ground that the assessee was not entitled to double benefit, being the exemption from the tax in respect of certain securities and also allowance of interest against the regular business income. Eventually the Hon'ble Supreme Court held that the interest paid by the Bank on the money borrowed from, its various depositors had to be allowed in its entirety and there is no scope for making any disallowance of the proportionate part of the interest referable to the monies borrowed for the purchase of securities whose interest was tax free.

7. Almost a similar issue was raised before the Hon'ble Apex Court in the case of Maharashtra Sugar Mills Ltd. (supra) in which the assessee-company owned extensive lands on which it grew sugarcane and used the sugarcane for the manufacture of sugar in its factory. The assessee-company was managed by managing agents who were paid remuneration in accordance with the agreement entered into between the assessee-company and the managing agents. The managing agents were entitled to commission at Rs. 4.86 lakhs which was claimed as deduction. The Income-tax Officer disallowed a sum of Rs. 1.26 lakhs on the ground that the same related to the commission of the managing agents for managing the sugarcane cultivation part of the business. The Tribunal as well as High Court deleted the addition by observing that it was one single indivisible business. The Hon'ble Supreme Court observed that the entire managing agency commission was expended for the purpose of the business carried on by the assessee and was allowable in entirety notwithstanding the fact that the income from a part of that business was not exigible to tax.

8. Similar facts came up for consideration before the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. (supra). In this case the assessee was a State Government Corporation who derived its income from interest, letting out of warehouse and administration charges for procurement of foodgrains. It claimed deduction of expenditure amounting to Rs. 38.13 lakhs under section 37 of the Act. The Income-tax Officer allowed only so much of the expenditure as could be allocated to the taxable income and disallowed the rest of it which was referable to the non-taxable income, being exempt under section 10(29) of the Act. When the matter finally came up before the Hon'ble Supreme Court, it allowed deduction as claimed by the assessee following the above discussed two judgments and also laid down the following principles for allowing or denying deduction in respect of expenses vis-a-vis taxable or exempt income :—

(i) if the 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 the 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 expenditure in earning the income from that head is deductible; and
(iii) in computing the "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 Income-tax Act, 1961, will depend on : ( a) fulfilment of requirements of that provision and ( b) on the facts whether all the ventures carried on by him constituted one indivisible business; if they do the entire expenditure will be a permissible deductible 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.

9. On going through the above referred three judgments of the Hon'ble Apex Court along with several other judgments laying down the similar proposition, it transpires that the opinion of the judiciary was that the deductibility of the expenditure was to be viewed with reference to the relevant provisions of the Act allowing such deduction, notwithstanding the fact that the resultant income so produced is taxable or exempt. It was further elaborated in Rajasthan State Warehousing Corpn.'s case (supra) that if the two businesses producing taxable and exempt income can be bifurcated and do not constitute one indivisible business, then the apportionment of expenditure is permissible, but if the entire business was composite and indivisible, then no disallowance of the expenditure relatable to the exempt business could be made.

10. It was pursuant to the judgment in Rajasthan State Warehousing Corpn.'s case (supra) rendered on 23-2-2000 and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962. At this juncture it would be appropriate to note down the intention behind the insertion of this section which is coming up from the Memorandum explaining the provision in the Finance Bill, 2001 [248 ITR (St.) 195], as under :—

"No deduction for expenditure incurred in respect of exempt income against taxable income—

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 non-exempt 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 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 1-4-1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years."

11. After the Finance Bill getting approval of the Parliament and the President of India, Circular No. 14 was issued relating to the provisions of Finance Act, 2001 reported in 252 ITR (St.) 65, the relevant part of which is as under :—

"25. No deduction for expenditure incurred in respect of exempt income against taxable income—

25.1 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 non- exempt 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 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.

25.2 Through Finance Act, 2001, a new section 14A has been inserted to 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.

25.3 It is also being clarified that the assessments where the proceedings have become final before 1-4-2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act.

25.4 This amendment takes effect retrospectively from 1-4-1962, and accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years."

12. On a cursory look at the Memorandum explaining the provision in the Finance Bill as well as the aforenoted Circular, it becomes abundantly clear that the Legislature clarified its intention that no deduction is allowable 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. It has further been made clear that the purpose of insertion of section 14A is not to make any disallowance of expenditure in relation to the exempt income for the first time, but it was always the intention of the Act for not allowing such deductions and this insertion was made only to clarify the intention of the Legislature as it was since inception. Thus the judgments granted deductions for expenses in relation to the exempt income against the taxable income, were considered as not laying down the correct law in consonance with the intention of the Legislature. Such a view was, therefore, sought to be invalidated with the insertion of the new section.

13. At this stage, it would not be out of place to consider the Heydon's Rule also known as the 'Mischief Rule' which deals with ascertaining the correct intention of the Legislature by looking into the mischief that was sought to be remedied by the legislation. This rule basically comprises four things to be considered.

(a) what was the common law before the making of the Act;
(b) what was the mischief and defect for which the common law did not provide;
(c) what remedy the Parliament has appointed to cure the defect; and
(d) the true reasons of the remedy.

14. This rule contemplates in considering the position prevailing anterior to the amendment, which was intended to be rectified by way of amendment or insertion of a section and then considering the amendment as overruling the hitherto legal position. If a particular provision is enacted for getting rid of the existing law, as it is or as interpreted by the Courts, the new amendment would be construed as superseding the earlier prevalent view which was considered by the Legislature as mischievous. The Mischief rule has been repeatedly approved by several Courts in the country including the Hon'ble Apex Court in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392.

15. Coming back to our case and applying the Mischief rule, we observe that section 14A has been inserted so as to clarify the intention of the Legislature that no deduction is allowable, against the income from taxable business, in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income. The contrary view expressed by the Hon'ble Courts on this issue is, therefore, to be regarded as no more relevant and binding and that too since the commencement of the Act, as has been clarified by the Circular.

16. With this background in mind, we will take up certain issues, one by one that have been raised before us for decision.

A. Whether section 14A has overriding effect over all other sections allowing deductions

17.1 The learned Counsel for the assessee contended that section 14A would have no application to income chargeable under the head "Business income". He submitted that the disallowance of interest has been wrongly made by considering the applicability of section 14A, whereas the correct section allowing deduction is 36(1)(iii) as per which the amount of interest paid in respect of capital borrowed for the purposes of business or profession is to be allowed as deduction. The learned A.R. further submitted that though the dividend income falls under the head 'Income from other sources', but in view of the fact that the shares were held as stock-in-trade, such income would also be considered as 'Business income' and not 'Income from other sources'. He relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. [2006] 282 ITR 423 , which in turn has followed the judgmemt of the Hon'ble Supreme Court in the case of Cocanada Radhaswami Bank Ltd. (supra) for contending that the dividend earned by an assessee from shares held as stock-in-trade is to be treated as business income. Once the dividend income is held to be falling under the head "Business income", the learned A.R. put forth that interest on borrowed capital would become deductible as it is so allowable under section 36(1)(iii). He relied on the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) in support of his proposition.

17.2 Per contra, the learned Departmental Representative submitted that section 14A is fully applicable to all the heads in respect of which income is computed under the Act and it is not borne out from the section that it would have no application in respect of business income.

17.3 There is no squabble over the fact that when the assessee is engaged in the business of purchase and sale of shares, then the dividend income is assessable as business income and not as income from other sources. This view has been taken by the Hon'ble Supreme Court in the above-noted celebrated case of Cocanada Radhaswami Bank Ltd. (supra) and host of several other High Courts. Unfortunately the arguments have departed from the real controversy before us which is not to determine the head under which dividend income would fall, but whether under section 14A applies to 'Business income' or not. There is no denial of the fact that the dividend earned by the assessee from the shares held as stock-in-trade, prior to insertion of section 10(33) exempting it from the taxation under this Act, was taxable under the head 'Business income'. But in this batch of appeals we are concerned in deciding as to whether section 14A would have any application when expenditure is otherwise deductible under any of section enshrined under the head 'Business income'.

17.4 In order to appreciate this controversy it is of utmost importance to consider the placement of section 14A under Chapter IV of the Act. This Chapter comprises of seven sub-chapters. The first sub-chapter has been titled as "Heads of income" containing two sections viz., 14 and 14A. Section 14 specifies that all income shall be classified under the heads 'Salaries', 'Income from house property', 'Profits and gains of business or profession', 'Capital gain' and 'Income from other sources' except as otherwise provided. The head of income "Interest on securities" has been omitted by the Finance Act, 1988 with effect from 1-4-1989. The only other section in the first sub-chapter is 14A, which starts with the words "for the purpose of computing the total income under this Chapter". It, therefore, emerges that section 14A has been inserted to have applicability over all the heads of income. The residence of this section in the first sub-chapter, viz., "Heads of income", clearly demonstrates that it has been made applicable to all the head of income. If the intention of the Legislature had been to restrict its application to the expenditure under the heads other than "business income", then it would have been placed under the relevant sub-chapter instead of the first sub-chapter, which, in turn, refers to all the heads of income. We, therefore, hold that the expenses deductible under the head 'Business income' are not immune from section 14A and this section has full application over all the heads of income. In other words if any expenditure is found to have been claimed as deduction under any of the heads of income in relation to income which does not form part of the total income under this Act, that will fall in the consideration zone of section 14A for disallowance.

17.5 The learned A.R. has argued that section 36(1)(iii) is a complete code in itself and the amount of interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as deduction. It has, therefore, been claimed that since the capital was borrowed for the purpose of business, that is investing in shares held as stock-in-trade, the interest cannot be disallowed under section 14A. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) in which it has been held that in order to claim deduction under section 36(1)(iii), the assessee should have borrowed capital and the purpose of the borrowing be for business which is carried on by the assessee. It has also been held in this case that the deduction cannot be denied if the borrowed capital is utilized for capital purposes. We observe that the assessment years involved in this case are between 1992-93 to 1997-98. It has further been made clear in this judgment that the proviso to section 36(1)(iii), by which any interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date first put to use shall not be allowed as deduction, would have only retrospective effect from assessment year 2004-05 and would not hold good for the assessment years in question. We respectfully bow before the verdict of the Hon'ble Supreme Court by which interest on borrowed capital has been held to be deductible irrespective of its user for revenue or capital purposes. The question before us is not the deductibility of interest under section 36(1)(iii), but the applicability of section 14A. This judgment was rendered for determination of the question : "Whether interest paid in respect of borrowings on capital asset not put to use in the concerned financial year can be permitted as allowable deduction under section 36(1)(iii) of the Income-tax Act, 1961?" It is patent from the question raised before the Hon'ble Supreme Court that Their Lordships were to decide the deductibility of interest under section 36(1)(iii) and no issue qua the applicability of section 14A was ever raised before it. As against that we are concerned in the present appeals about the applicability of section 14A to the deductions otherwise available under the provisions of the Act.

17.6 Here we are reminded of the maxim GENERALIA SPECIALIBUS NON DEROGANT which means that the general things do not derogate from special. In other words, it implies that the special provisions override the general provision. If there are two conflicting provisions in the same section or clause, the special provision will prevail as the same is excluded from the general provision. To put it still differently, if a specific provision is made on a certain subject-matter, that matter is excluded from the general provision. The Hon'ble jurisdictional High Court in the case of Forbes Forbes Campbell & Co. Ltd. v. CIT [1994] 206 ITR 495 (Bom.) has quoted this maxim with approval. This maxim has also been applied by the Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. Copes Vulcan Inc. [1987] 167 ITR 884 , in which case it was held that section 9(1)(i) is general in nature and section 9(1)(vii) refers to a particular type of income and is a special provision dealing with even for technical services rendered by the foreign company. After considering the arguments from both sides it was held that section 9(1)(vii) would apply. Turning to the facts of our case, we observe that the deductibility of interest is covered by the general provision of section 36(1)(iii). On the other hand, section 14A is a special provision which deals with disallowing expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The expenses falling under any head or section which are otherwise deductible as business expenditure or under other respective heads, would call for disallowance in view of the specific provision of section 14A to the extent these have been incurred in relation to the income exempt from tax. Recently the Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 had an occasion to deal with the disallowance of general expenses such as rents, repairs, maintenance and depreciation of premises used for the purposes of guest house under section 37(4). It was claimed on behalf of the assessee that these expenses such as rent, repairs, maintenance, depreciation, etc., are allowable under the respective sections and section 37(4) dealing with disallowances in respect of guest house cannot have any application. The Hon'ble Supreme Court, jettisoning such a contention, held that if the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then the Legislature would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in section 37. Finally it was held that any expenditure towards rent, repairs, maintenance of the guest house used in connection with the business was to be disallowed under section 37(4).

17.7 In view of the foregoing discussion, we are of the considered opinion that the contention raised on behalf of the assessee that section 36(1)(iii) allows deduction on account of interest and hence no disallowance out of interest is warranted under section 14A, is bereft of any force and deserves the fate of dismissal. Since the provisions of section 14A are special in nature and deal with the disallowance of expenditure in relation to exempt income, all such expenses cannot be allowed as deduction if these relate to the exempt income notwithstanding the fact that there are separate provisions for allowing such deduction.

B. Sub-sections (2) and (3) of section 14A - Whether Retrospective or Prospective

18.1 We have reproduced sub-sections (2) and (3) of section 14A in an earlier part of this order, which were inserted by the Finance Act, 2006 with effect from 1-4-2007. The issue of their prospective or retrospective applicability has been hotly argued before us. Whereas the assessee is claiming that these sub-sections were inserted with effect from 1-4-2007 and hence will not be applicable to the assessment year in question, the learned D.R. has opposed the assessee's contention by submitting that these sub-sections are merely clarificatory in nature and provide the procedure for computing the disallowance of the expenditure and hence should be considered as retrospectively inserted.

18.2 In order to properly appreciate the present controversy, it would be relevant to consider the intention behind the insertion of these sub-sections, coming out from Memorandum explaining the provisions in the Finance Bill, 2006, as under :—

"Method for allocating expenditure in relation to exempt income—

Under the existing provisions of section 14A, it has been provided that for the purpose of computing the total income, 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 Income-tax Act. However, the existing provisions of section 14A do not provide the method of computing the expenditure incurred in relation to income which does not form part of the total income. Consequently, there is considerable dispute between the tax-payers and the Department on the method of determining such expenditure.

In view of the above, it is proposed to insert a new sub-section (2) in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall be required to adopt the prescribed method if having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. It is also proposed to provide that provisions of sub-section (2) shall also apply in 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.

This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to assessment year 2007-08 and subsequent years." [281 ITR (St.) 190]

18.3 The normal rule is that any statutory provision is to be treated as prospective unless expressly stated otherwise or is inferred by necessary implication. Only the procedural provisions are regarded as being applicable to the pending proceedings, even though such proceedings may have commenced at a point of time interior to their introduction. However when a substantive provision is incorporated for the first time, it cannot be considered as retrospective so as to unsettle the position already settled. Thus, it is only in a case where the amendment is clarificatory, procedural or declaratory that such provision is applied in respect of matters relating to periods prior to the date of introduction of the provision, even in the absence of express language to that effect. This principle of interpretation of statutes is fairly settled by several judgments including the case of S. Subash v. CIT [2001] 248 ITR 512 (Mad.) . From the enunciation of law in this case, it is clearly borne out that a procedural, clarificatory or declaratory provision is always considered as retrospective and presumed to be applicable to the period anterior as well as posterior to the amendment. This view has been taken by the Hon'ble Supreme Court in several judgments including H.H. Sir Rama Varma v. CIT [1994] 205 ITR 433 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 . Similar view has been reiterated in CIT v. Shelly Products [2003] 261 ITR 367 (SC) in which it has been held that the clarifactory provision inserted to clarify the law so as to remove the doubt, is retrospective even if it is stated to be applicable from a particular assessment year.

18.4 The learned Counsel for the assessee has strongly relied on the judgment of the Hon'ble Supreme Court in the case of Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 83 in which it was held that the Explanation 4 to section 271(1)(c) has been substituted by the Finance Act, 2002 with effect from 1-4-2003 so as to impose penalty under the section even if the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income and hence this Explanation will apply only from the assessment year 2003-04. Gaining strength from this judgment, it was contend- ed by the ld. AR that since sub-sections (2) and (3) have been inserted with effect from assessment year 2007-08 and the date of their applicability has been specified, these cannot have any retrospective effect. We observe that this judgment in the case of Virtual Soft Systems Ltd. (supra) came up for consideration before the Hon'ble Supreme Court in the later case of CIT v. Raman Lal C. Hathi [2008] 117 Taxman 479, in which case again the question for consideration was the applicability of Explanation 4 to section 271(1)(c) from retrospective or prospective date. After considering the decision in the case of Virtual Soft Systems Ltd. (supra) it was felt that the matter needed reconsideration. Hence it was placed for the appropriate direction before the Hon'ble Chief Justice of India. We further note that in pursuance to that, the Hon'ble Supreme Court recently in a Larger Bench considered this aspect in CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 . After taking note of the various judgments on the issue of retrospective or prospective applicability of any provision, the earlier judgment in Virtual Soft Systems Ltd.'s case (supra) has been overruled by holding that Explanation 4 to section 271(1)(c)( iii) of the Income-tax Act, 1961 regarding imposition of penalty even if the returned income is loss, is clarificatory and not substantive. It was further held that the Finance Act, 2002 only intended to make the position explicit which otherwise was implied. Accordingly it has been held to apply even to the assessment years prior to 1-4-2003, being the date from which it was stated to be applicable from.

18.5 Explanation 2 to section 40(b) was added by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1985 which provided that where an individual is a partner in a firm on behalf, or for the benefit or any other person any interest paid by the firm to such individual otherwise than partner in a representative capacity, shall not be taken into consideration for the purpose of this clause. When the applicability of Explanation 2 was taken to the Courts, the Hon'ble Supreme Court in the case of Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 , came to the conclusion that Explanation 2 to section 40(b) is declaratory in nature and is available for the period interior to 1-4-1985. Similar view was reiterated by the Hon'ble Apex Court in the case of Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753. However certain contrary observations were made in the case of Rashik Lal & Co. v. CIT [1998] 229 ITR 458 (SC) as to the operation of Explanation 2. Again the matter was considered by the Hon'ble Supreme Court in Commissioner Of Income Tax, Bombay v. Kanji Shivji & Co.. [2000] 242 ITR 124 in which all the earlier three judgments were considered. It was finally held that Explanation 2 to section 40(b) is declaratory and hence retrospective in operation. The observations in the case of Rashik Lal & Co. (supra) appearing to be not in consonance with the view taken in the case of Brij Mohan Das Laxman Das (supra), were held to be obiter.

18.6 From the above discussion, it is amply clear that the general rule is that a provision is normally prospective unless it is given retrospective operation expressly or can be so inferred by necessary implication. This rule is true in case of substantive provisions. But when the clarificatory or explanatory or procedural provision is under consideration, the date of insertion loses its significance. It takes retrospective effect from the date when the substantive provision was inserted. So the relevant consideration for addressing to this issue is to understand the true nature of the amendment. If the new insertion or the amendment has the effect of imposing a new liability then it is substantive in nature and ordinarily applies prospectively. If, however it is either procedural or clarificatory in the nature, then it would be retrospective notwithstanding the fact that a particular date has been mentioned from which it would be applicable to. Such clarificatory or procedural amendment would be fully applicable in the time anterior to the date from which it has been said to be applicable. So the ultimate test for considering the retrospective or prospective operation of an amendment is to consider its nature rather than going by the date from which it has been stated to be applicable from.

18.7 As can be seen that section 14A was inserted with a view to clarify the intention of making disallowance in respect of 'expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act'. It can be viewed from the Memorandum explaining the provisions, as extracted above, that this section declared the intention of the Act 'since inception'. Sub-section (2) provides the procedure from determining 'the amount of expenditure incurred by the assessee in relation to such income which does not form part of the total income under this Act', if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) further provides that the provisions of sub-section (2) shall apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to the exempt income. Thus the procedure for determining the expenditure incurred by the assessee in relation to exempt income shall apply in both the situations, that is, where the assessee makes a claim that a particular expenditure is incurred in relation to exempt income with which the Assessing Officer is not satisfied and also where the assessee claims that no expenditure has been incurred by him in relation to the exempt income. The procedure for determining the amount of expenditure incurred in relation to the exempt income is to be worked out 'in accordance with such method as may be prescribed'. The method for such computation has been, in turn, prescribed in rule 8D. On going through these two sub-sections, it is clearly noticed that the purpose of these two sub-sections is to determine the amount of expenditure incurred in relation to the exempt income. We are unable to find out any substantive liability imposed by the Legislature through these sub-sections (2) and (3). These sub-sections simply lay down the procedure and mechanism for working out the expenditure in relation to income which is exempt from tax. Rule 8D has been enshrined to the Income-tax Rules, 1962 which prescribes the method by which the Assessing Officer has to determine the disallowable expenditure as relatable to the exempt income in terms of sub-sections (2) and (3). Further when sub-section (1) itself is clarificatory and then resultantly retrospective, it is beyond our comprehension as to how sub-sections (2) and (3), providing the mechanism to do what is provided in sub-section (1), can be construed as substantive and hence prospective. At the same time, it is significant to mention that a proviso has also been inserted to section 14A for reducing its rigor, which stipulates that no reassessment under section 147 or rectification under section 154 shall be carried out by the Assessing Officer so as to give effect to the newly inserted provision. This has been done so as not to disturb the proceedings which have already attained the finality in the period prior to this insertion. However, the assessments which are pending at any stage, may be before the Assessing Officer or Commissioner (Appeals) or Tribunal or the higher Courts, would be governed by the mandate of this section as it is retroactive. The Special Bench of the Tribunal in Aquarius Travels (P.) Ltd. v. ITO [2008] 111 ITD 53 (Delhi) has also held that the proviso to section 14A merely restrains the Assessing Officer from invoking the provisions of sections 147 and 154 only in relation to completed assessments for assessment year 2001-02 and the earlier years; proviso does not talk of restricting the power of CIT(A) or the Tribunal and, therefore, CIT(A) and the Tribunal are empowered to apply the provisions of section 14A in the appeals pending before them for the assessment year 2001-02 and earlier years even if section 14A had not been invoked by the Assessing Officer or the said provision was not available at the time of assessment. From the above discussion, it is vivid that sub-sections (2) and (3) are procedural in nature and hence retrospective. We hold accordingly.

C. Expenditure incurred 'in relation to' exempt income

19. The learned Counsel for the assessee contended that the Assessing Officer erred in disallowing proportionate interest by holding it as relatable to the exempt dividend income. It was stated that the shares were held by the assessee as stock-in-trade and the main object of the assessee was to trade in shares and earning profit on its trading and not for earning any dividend income. Such dividend income incidentally arose out of the shareholding by the assessee as stock-in-trade. Since the main purpose of the assessee in acquiring the shares was to earn profit by its trading which was taxable under the Act, the incidental income resulting by way of dividend from such shareholding could not be considered for making any disallowance of the expenditure under section 14A. It was asserted that what is relevant to consider is the object of incurring the expenditure. If such object is for earning exempt income then the disallowance is rightly called for under section 14A. If however it is for earning taxable income then no disallowance can be made, even if the assessee had incidentally earned some income which is exempt from tax. The learned A.R. relied on the judgment of the Hon'ble Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra ) for contending that the expression "in relation to" as used in section 14A should be considered to mean having "a dominant and immediate connection with the subject and any indirect connection was ruled out". In the light of this judgment it was stated that section 14A contemplated the making of disallowance of only such expenditure, the dominant object of whose spending was, to earn exempt income. If the dominant and immediate object of the expenditure is not to earn the exempt income, the learned A.R. submitted that the same would go out of the purview of section 14A. It was further contended that even where the exempt income earned by the assessee was the main source and not incidental, in those cases also the Assessing Authority is not obliged to make any disallowance of any indirect expenditure as relatable to the exempt income. In his opinion only the direct expenditure calls for disallowance. Still further the onus was stated to be on the Assessing Officer to establish the nexus of the such expenditure with the exempt income. If the Assessing Officer fails to conclusively prove nexus between the direct expenditure and the exempt income, the ld. AR submitted, the provisions of section 14A will fail and no disallowance will be warranted.

20. In the opposition, the learned D.R. contended that the expression 'in relation to' is wide in its scope and amplitude. In his opinion any expenditure having direct or indirect relation with the exempt income would call for disallowance under this section. He relied on the judgment of the Hon'ble Supreme Court in the case of Doypack Systems (P.) Ltd. (supra).

21. From the above submissions made by the erudite AR, it is noted that he has put across essentially the following three points for our consideration under this segment of the issue :

I. Section 14A talks of the relation between the expenditure and the exempt income.
II. Unless there is a direct and proximate connection between the exempt income and the expenditure, section 14A will not apply.
III. Section 14A has no application on the incidental exempt income.

We will deal with these points individually.

I. Section 14A talks of the relation between the expenditure and the exempt income

22. The contention is that we have to view the items of expenditure first. If these have resulted in exempt income, only then the disallowance is to be considered. In other words, the starting point for applying section 14A is to consider the amount of expenditure and then moving forward for examining if it has resulted in the exempt income or not. We are not convinced with the view point of the learned A.R. that section 14A speaks about making disallowance of expenditure which has resulted into exempt income. The language of sub-section (1) of section 14A clearly provides that 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". On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. What is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. If the view point of the learned A.R. is accepted then it would mean putting the cart in front of the horse and redrafting sub-section (1) of section 14A. On going through sub-section (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. It is clearly borne out from rule 8D as has been discussed infra that it has three clauses of sub-rule (2), being the expenditure directly relating to the exempt income as per clause (i); expenditure by way of interest which is not directly attributable to particular income as per clause (ii); and an amount equal to one half per cent of the average of the value of investment as per clause (iii). The sum total of these three amounts is the amount disallowable under section 14A. From here it clearly emerges that stipulation of section is to compute the amount of expenditure which is not allowable under section 14A as is relatable to the exempt income and not in considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter considering such amount as disallowable under section 14A. If this way of interpretation of section 14A as suggested by the ld. AR is accepted, then the method of computing the expenditure as relatable to the exempt income as provided in rule 8D, would become meaningless and the words 'in accordance with such method as may be prescribed' in sub-section (2) for determining the amount disallowable would require obliteration, which in our considered opinion is not possible. We, therefore, reject this contention raised on behalf of the assessee.

II. Unless there is a direct and proximate connection between the exempt income and the expenditure, section 14A will not apply

23.1 The next point urged on behalf of the assessee is that unless there is a direct and proximate connection between the expenditure and the exempt income, there cannot be any disallowance of the expenditure under this section This view point is based on the meaning given by the ld. AR to the expression 'in relation to' used in section as having only direct and proximate connection between the expenditure and exempt income. On the contrary, the ld. DR proposed that this expression is very wide to encompass both the direct and indirect expenditure.

23.2 It would be relevant to consider the two Apex Court judgments which have been strongly relied upon by the rival parties for bringing home the point that section 14A embraces only the direct expenditure or both direct and indirect expenditure. In the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra) a petition was filed under Article 32 of the Constitution by Madhav Rao Scindia claiming a declaration under the Presidential order dated 6-9-1970 derecognizing the Rulers as unconstitutional. The Union of India contended, inter alia, that Articles 291 and 362 of the Constitution did not invest the petitioner and the other Rulers with any enforceable right as the recognition of the Rulers under Article 366(22) was a matter of State Policy and the President was competent to pass the order. Thus, the question before the Hon'ble Supreme Court was to examine if it had the jurisdiction in examining the aforenoted three Articles viz., 291, 362 and 366(22). In that context the expression "relating to" came up for consideration when the Union of India contended that the jurisdiction of the Court was barred as the dispute relating to enforcement interpretation or approach of any treaty etc., was barred from the Court's jurisdiction. After examining the issue in detail, the Hon'ble Supreme Court, by the majority judgment, came to conclusion that the expression "relating to" should mean a direct and immediate connection with the subject-matter. It was, therefore, held that the Court had jurisdiction to examine Articles 291, 362 and 366(22) insofar as the dispute in question was concerned.

23.3 The facts in the case of Doypack Systems (P.) Ltd. (supra), relied upon by the learned D.R. are that the Swadeshi Cotton Mills Co. Ltd. (Acquisition and Transfer of Undertakings) Act, 1986 was enacted with a view to effect acquisition and transfer of certain textile undertakings of the Swadeshi Cotton Mills Co. Ltd. and securing of such maintenance undertakings so as to subserve the interest of the general public by ensuring the continued manufacture, production and distribution of different varieties of cloth and yarn. As per section 3 of this Act every textile undertakings and the right, title and interest of the company in relation to every such textile undertaking shall, virtue of this Act, vest in the Central Government, section 4 provides that "the textile undertaking referred to in section 3 shall be deemed to include all assets, rights, leaseholds, power, authorities and privileges and all property movable and immovable including lands, buildings, workshops, stores, instruments, machinery and.....". Section 7 provides that the shares were to be issued by the National Textile Corporation for the value of the assets transferred to it by the Central Government. Swadeshi Cotton Mills had 10 lakh shares in Swadeshi Polytex Limited and 17,18,344 shares in Swadeshi Mining and Manufacturing Co. Ltd. It was claimed on behalf of these companies that such type of assets would not vest with the Government for acquisition. The Hon'ble Supreme Court noted that section 3 employs expression "in relation to". Interpreting this expression, the Hon'ble Court held that it was a very broad expression which presupposes another subject-matter as these are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject-matters, the Hon'ble Court held that even then these would be brought within the purview of the vesting by reason of the aforenoted expression. Resultantly, it was held that the disputed properties vested in NTC.

23.4 Here we would like to mention that the meaning of a word or a phrase has to be adopted by considering the context in which such word or phrase has been used. It is equally important to note that the meaning given to a particular expression in one enactment cannot be bodily lifted and fitted into an another altogether different enactment. The Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Bangalore v. Venkateswara Hatcheries (P) Ltd. [1999] 237 ITR 174 has held that "the meaning assigned to a particular word in a particu- lar statute cannot be imported to a word used in a different statute. . . . The same word, if read in context of one provision of the Act, may mean or convey one meaning and another in a different context." From the above enunciation of the law by the Hon'ble Apex Court, it is patent that while giving meaning to a particular word in one section, there is no authority for importing and adopting the meaning of that word in some other parts of the same Act or in a different enactment.

23.5 With this background in mind, we go to the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra) relied upon by the learned A.R. for canvassing his point that the expression 'in relation to' as used in section 14A should be used in a narrow sense. From the narration of the facts of this case, it is observed that the expression "relating to" discussed in this case has been used by the Hon'ble Supreme Court in the context of examining whether it had jurisdiction in a dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of this Constitution relating to any such treaty, etc. It was only in this context that the Hon'ble Supreme Court held that the jurisdiction vests in it because the expression 'relating to' necessarily means that there should be direct and proximate connection. Thus, it is clear that the context in which the expression 'relating to' was interpreted by the Hon'ble Supreme Court did not have any relation, worth the name, insofar provisions like section 14A concerning with the disallowance of expenditure relatable to the exempt income, are concerned. What to talk of that Act as homogeneous to the Income-tax Act, it has no matching shades at all. Moreover, in this judgment the Hon'ble Supreme Court was dealing with the scope of the expression "relating to". However, in the case of Doypack Systems (P.) Ltd. (supra) the question for consideration was to determine whether the shares etc. held by the Swadeshi Cotton Mills would vest in the Central Government or not. The Hon'ble Supreme Court observed that in section 3 of the Swadeshi Cotton Mills Co. Ltd. (Acquisition and Transfer of Undertakings) Act, 1986 the phrase used was "in relation to". Giving meaning to this expression, it was held as under :—

"The expression 'in relation to' (so also 'pertaining to'), is a very broad expression which presupposes another subject-matter. These are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject-matters, even then these would be brought within the purview of the vesting by reason of the above expression."

23.6 Before we proceed to evaluate and examine the contentions raised on this issue, it would be important to have a look at different expressions used in the Income-tax Act, 1961 that spell out the scope of the respective provision in the light of such expression. For example, section 72AB(3)(1) uses the phrase "directly relatable to" while dealing with the set-off of the accumulated losses and unabsorbed depreciation allowable to the resulting co-operative bank. In the like manner the phrase "attributable to" has been employed in various sections including Explanation 6 to section 43(6), section 44AC prior to its omission and section 10(23B). The expression "in relation to" has also been used in various sections apart from section 14A, such as sections 36(1)(ix), 35(2AB). The phrase "relating to" has been used again in several sections including 36(1)(vii), 28(ii )(c). The phrase "wholly and exclusively for the purposes of" has been used in sections 37 and 57(iii). On going through the use of the above and other similar expressions in different parts of the Act, it is clearly borne out that these are not used interchangeably. The Legislature is fully conscious of employment of appropriate expression depending upon its intent of expanding or contracting the scope of the section. Wherever it intends to give a wider meaning, it uses the phrase like "in relation to" or "attributable to" etc. However, where the scope is to be restricted, it uses the suitable phrase such as "directly relatable to" or "wholly and exclusively for the purposes of", which narrows its ambit. We have noted above that the meaning of a word or phrase can be viewed only in reference to the context in which it is used. There is no need to wander here and there in search of the meaning of the expression 'in relation to' as used in sub-section (1) because the same has been explained in sub-section (2) itself. Whereas sub-section states that 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", sub-section (2) provides the meaning of the same expression that is "expenditure incurred 'in relation to' such income which does not form part of the total income" to mean the amount as determined by the Assessing Officer 'in accordance with such method as may be prescribed'. The method has been prescribed in rule 8D to mean both direct and indirect expenditure as discussed elsewhere in this order. Since the Legislature opted to field the expression 'in relation to' in preference over 'directly relatable to' or 'wholly and exclusively for the purposes of', it clarified its intention of giving wider meaning and bringing into sweep not only the direct but also the indirect expenditure in relation to the exempt income for the purposes of disallowance under section 14A. The position becomes more clear when we look into the direction of rule 8D, which has been brought in pursuance to sub-section (2) of section 14A. Here it would be interesting to jot down rule 8D, which runs as under :—

"8D. Method for determining amount of expenditure in relation to income not includible in total income.—(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year.

He shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :—

(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:—

Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

(iii) an amount equal to one half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the 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 the increase on account of revaluation of assets but including the decrease on account of revaluation of assets."

23.7 On going through the contents of rule 8D, it becomes amply clear that not only the expenditure directly relating to exempt income [Sub-rule 2(i) of rule 8D] but also the indirect expenditure like interest which is not directly attributable to any particular income or receipt [Sub-rule 2(ii)] and then further one half per cent of the value of investment to cover up incidental indirect expenses [Sub-rule 2(iii)] have been categorized as expenditure incurred in relation to exempt income. We do not have even an iota of doubt in our mind that the intention behind using the expression 'in relation to' in section 14A is to encompass not only the direct but also the indirect expenditure which has any relation to the exempt income. We, therefore, held that all the direct and indirect expenses are disallowable under section 14A, which have any relation with the income not chargeable to tax under the Act.

23.8 Be that as it may, we would also deal with the contention that there should be a dominant and immediate connection between the expenditure incurred and the exempt income so as to make disallowance under section 14A. A great deal of emphasis has been laid on the establishing of dominant and immediate connection between the expenditure incurred and the exempt income. According to the ld. AR the expenditure of interest on investment in shares has direct and proximate link with the profit or loss from trading of shares and indirect link with the dividend income which was earned incidentally and hence no disallowance is warranted. In our opinion there is a basis fallacy in this argument. Dominant and immediate connection refers to first degree of relation between the two things. However, it would cease to be dominant if the degree of relationship slips from first to second. It is noticed that there is a dominant and immediate connection between the expenditure incurred by the assessee in the shape of interest on borrowings for purchase of shares and the dividend income. It is only due to the investment in the shares that the dividend income has resulted. Such investment results into two incomes, viz., the profit on its sale and the dividend. Both these incomes fall on the same platform and are the direct result of investment. If a person invests in the shares from which dividend income is earned and thereafter such dividend is deposited in the bank from where the interest income results, in such a situation the relation between the interest paid by the assessee on the borrowed funds for the purchase of shares with the dividend income is dominant and immediate, being that of the first degree but the relation of such interest paid with the interest income earned on the amount invested in the bank, would be of second degree, being indirect and non-immediate. We, therefore, do not find any force in this submission.

23.9 The learned Counsel for the assessee while inviting our attention to rule 8D(2)(ii) contended that it refers to the "value of investment". On this analogy it was urged that section 14A along with this rule cannot have any application where the shares are held as stock-in-trade. The sum and substance of his submissions was that this section would apply only when the shares are held as 'Investment'. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word "investment" in this rule refers to the making of purchase of shares and not holding it as investment.

23.10 The learned A.R. has relied of certain judgments including that of the Hon'ble jurisdictional High Court in the case of Emrald Co. Ltd. (supra), in which it was held that the interest on borrowing and other expenditure incurred in the course of share trading activity are allowable as deduction while computing the business income and hence these cannot again be deducted from the dividend income for the purposes of computing deduction under section 80M. Based on this judgment, the learned A.R. bolstered his point of view that no disallowance is permissible in respect of interest and other expenditure under section 14A. We are not in agreement with the contention raised on behalf of the assessee primarily for the reason that the judgment of Hon'ble Bombay High Court has been rendered in the context of compu- tation of deduction under section 80M. The question was whether gross or net dividend should be considered for computing deduction under this section. Nowhere section 14A was the subject-matter of consideration. Whereas section 80M talks of granting deduction from the gross total income, section 14A, which operates in an entirely different field, concerns itself with making disallowance of the expenditure incurred in relation to the exempt 'income'. In this view of the matter, we are of the considered opinion that the judgments rendered in the context of section 80M cannot be applied when the question is of making disallowance under section 14A.

23.11 We further do not approve the view canvassed by the ld. AR that the onus would be on the Assessing Officer to establish that there exists dominant and immediate connection between the expenditure incurred and the income not forming part of total income before he intends to invoke section 14A. Diagonally opposite opinions have been expressed by different Benches, which have been relied on by the rival parties. We note that there is a direct and solitary judgment, brought to our notice during the course of hearing, rendered by the Hon'ble Punjab & Haryana High Court in Haryana Land Reclamation & Development Corpn. v. CIT [2008] 302 ITR 218 in which it has been held as under :—

"Held, dismissing the appeal, that once the assessee had not been able to substantiate before the authorities that the assessees were not used for agricultural operations and that in fact they were being used for business purposes, there was no question of grant of depreciation thereon. Similarly, on account of gratuity, bonus, etc., the Tribunal also held that the assessee could not bring any evidence on record to show that the staff was engaged in its business operations and not in its agricultural operations. The Tribunal was correct in holding that section 14A would apply since substantial income was generated out of agricultural activity from the farm."

23.12 On going through the above judgment two things are noticeable viz., first the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the assessee and secondly, the apportionment of the expenses is permissible for making disallowance under section 14A. No contrary judgment of any other High Court on this point has been pointed out. In the light of the fact that there is a cleavage of opinion amongst the Benches of the Tribunal and there is no other judgment either of the Hon'ble Supreme Court or of any other High Court, this judgment of the Hon'ble Punjab & Haryana High Court appeals to us. Be that as it may, in our considered opinion, the discussion about the apportionment of direct or indirect expenditure towards taxable and exempt income has become academic in view of rule 8D which prescribes mechanism for working out the disallowance under section 14A. In this scenario, the further question as raised by the parties about the onus on the Assessing Officer or the assessee for bringing a particular amount of expenditure in the purview of section 14A and the manner of computation of disallowance has ceased to be of any relevance since the Assessing Officer is bound to adopt rule 8D for making disallowance under section 14A, where he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

III. Section 14A has no application on the incidental exempt income

24. Now we turn to examine the main plank of the submissions made on behalf of the assessee with a lot of vehemence that it is of paramount importance to see the intention with which the expenditure was incurred and if it is incurred with a view to earn a taxable income then no disallowance under section 14A is possible even in respect of the exempt income resulting incidentally. The reason for this proposition is advanced to be the presence of the dominant or immediate connection between the expenditure incurred and taxable income. To put it simply it was submitted that if the dominant object of the expenditure is to earn taxable income, being the profit on sale of shares in the present case, then no disallowance would be made with reference to the incidental income in the shape of dividend from the holding of shares as stock-in-trade. We are not convinced with this argument for the obvious reason that the line of distinction sought to be drawn on behalf of the assessee between the main and incidental income is, unfortunately, missing in the section. Sub-section (1) spells out in unambiguous terms that the expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act is to be disallowed under section 14A. The reference is to the "income which does not form part of the total income" without making any further distinction between the main or incidental exempt income. The status of income is not enhanced or lowered if it is earned from the main business activity or incidentally. There may be a difference in classification of such income under one head or the other. But no special treatment is envisaged for the main or incidental income under the Act. There is no provision in the Act, which exempts a particular income from taxation simply on the ground that it is an incidental income. What is material to consider is the nature of income and not it being major or subsidiary. Moreover dividend is exempt irrespective of whether it is earned by the assessee from the shares held as investment or as stock-in-trade. The instruction of sub-section (1) is unexceptional in the sense that if there is any exempt income, the disallowance of the expenditure under section 14A in relation to such income has to automatically follow. There is absolutely no indication much less the reference in the language of section that could even remotely suggest that the disallowance is not contemplated in respect of incidental income, which is otherwise exempt from tax in the same manner as is the main income. We have already repelled the contention raised on behalf of the assessee that the object of the expenditure is to be viewed as a determinative factor for making any disallowance under this section. It is simple and plain that the disallowable expenditure is to be worked out which has relation with the exempt income and not otherwise. We are, therefore, not inclined to accept the assessee's version that if the exempt income is incidental to the main business whose income is taxable, then the provisions of section 14A will be defeated.

25. It was further argued on behalf of the assessee that the interpretation sought to be given by the learned D.R. to section 14A, if accepted would be very harsh and unequitable as it will result in disallowance of expenditure which is indirectly related to the exempt income. We are again at loss to appreciate this contention for the simple reason that the duty of the Tribunal is to interpret the provision as it exists in the Act. The Tribunal cannot usurp the Legislative power to tone down the rigor of any provision. It is settled legal position that equity or hardship is hardly any relevant ground for the interpretation of tax law. Our view is supported by the judgment of the Hon'ble Supreme Court in the case of Karamchari Union v. Union of India [2000] 243 ITR 143 in which it was pleaded that the receipts on account of CCA, HRA and DA be not charged under the head 'Salaries'. It was also submitted that it would be of immense hardship if CCA is put to tax. Rejecting this contention, the Hon'ble Supreme Court held that the receipt on account of CCA, HRA and DA are in the nature of income and are chargeable to tax as profits in lieu of salary. It was further laid down that equity is no consideration while interpreting the taxation laws. Similar opinion has been expressed again by the Hon'ble Supreme Court in the case of Hemalatha Gargya v. CIT [2003] 259 ITR 1 in which it was held as under :—

"In none of the decisions of the High Courts which have held that the time prescribed under section 67(1) was not rigid has any legal basis been relied on. The decision to extend the time appears to have been arrived at on considerations of equity. This approach, in our opinion, was incorrect as the Court had no power to act beyond the terms of the statutory scheme under which the benefits had been granted to the assessee."

From the above discussion, it boils down that the Tribunal is restricted in interpreting the provision as it exists, whether it is hard or soft. Turning to the language of section 14A, we observe that the disallowance is contemplated in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income under this Act. When the language of section is clear and does not admit of any doubt whatsoever, we are bound to interpret it literally. It is trite law that so long as there is no ambiguity in the statutory language, resort to in interpretive process to unfold the Legislative intent becomes impermissible. Taxing statute has to be strictly construed and nothing can be read in it as has been held by the Hon'ble Supreme Court in several cases including Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36 . In Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) also it was held that 'while interpreting a statute legislative intention must be found in the words used by the Legislature itself; legislative casus omissus cannot be supplied interpretative process except in case of clear necessity and when reason for it is found in the four corners of the statute itself'. Coming back to our case, we note that sub-section (1) of section 14A provides in unequivocal terms for not allowing deduction in respect of expenditure incurred by the assessee in relation to exempt income and sub-section (2) lays down the mechanism for determining such amount of expenditure incurred in relation to the exempt income in accordance with the method as prescribed under rule 8D. There is hardly anything to infer, that the Legislature intended to immune the expenditure in relation to incidental exempt income from the operation of section 14A. There is no exception for not considering any income which is exempt from tax, be it the main or incidental. We, therefore, jettison this argument.

26. In view of the foregoing discussion we hold that the provisions of section 14A of the Act are applicable with respect of dividend income earned by the assessee engaged in the business of dealing with shares and securities, on the shares held as stock-in-trade when earning of such dividend income is incidental to the trading in shares. We, therefore, answer the question posed to us in affirmative. As we have held that sub-sections (2) and (3) of section 14A are retrospective in nature and the resultant rule 8D would also fall on the same line, then the disallowance under section 14A is required to be computed with reference to the mandate of these provisions. We, therefore, set aside the impugned orders in all the cases before us and remit the matter to the file of the Assessing Officers for computing the disallowance in terms of section 14A read with rule 8D.

27. We want to make it clear that all the cases relied on by both the sides have been duly taken into consideration while deciding the matter. The reference to some of the cases in the order is avoided either due to their irrelevance or to relieve the order from the burden of the repetitive ratio decidendi laid down in such decisions. Before parting with these appeals, we place on record our appreciation for the illuminating arguments put forth by the learned Senior Departmental Representative and Authorised Representatives, which has assisted us in the disposal of the issue raised in these appeals.

28. In the result, all the appeals are allowed for statistical purposes, by majority view.

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