Bhaskar Bhattacharya, J.@mdashThis appeal u/s 260A of the income tax Act, 1961 is at the instance of an Assessee and is directed against an
order dated April 29, 2004, passed by the income tax Appellate Tribunal, ""D"" Bench, Calcutta, in income tax Appeal being ITA No. 2055 (K0L)
of 2003, for the Assessment Year 1998-99 thereby dismissing the appeal filed by the Assessee against the order of the Commissioner of income
tax (Appeals).
2. The facts giving rise to filing of this appeal may be summed up thus:
a) The Assessee had earned dividend income of Rs. 2,40,501/- apart from the income from trading in share, interest and commission. The
Assessing Officer found that the Assessee had claimed interest amounting to Rs. 12,96,597/- and that the interest payment was attributable to
investment in share from which income is exempted u/s 10(34) of the income tax Act. He, therefore, worked out the interest disallowance by
applying the formula: Interest paid X Investments in shares/Total loan over which interest has been paid and arrived at the following figure: Rs.
12,96,597 X Rs. 8,95,56/Rs.69,11,561= Rs. 1,68,005/-.
b) Being dissatisfied, the Assessee preferred an appeal before the Commissioner of income tax (Appeals) who dismissed the appeal with the
finding that the Assessee itself had admitted that it would not be possible for him to establish the acquisition of shares and sources thereof by
producing books of accounts or other documentary evidence and consequently, the said appellate authority observed that the Assessee had failed
to establish its contention whereas the Assessing Officer had worked out the disallowable amount on the basis of documentary evidence on record.
c) Being dissatisfied, the Assessee preferred an appeal before the Tribunal below and the Tribunal, by the order impugned herein has dismissed the
appeal.
3. Being dissatisfied, the Assessee has come up with the present appeal.
4. At the time of admission of this appeal, a Division Bench of this Court admitted this appeal on the following questions of law:
i) Whether the Tribunal was justified in law upholding the action of the Assessing Officer in notionally working out for the purpose of disallowance
a part of the interest expenditure as relatable to investment in shares/dividend received thereon and its purported findings in that behalf are
arbitrary, unreasonable and perverse?
ii) Whether and in any event, the entire interest expenditure incurred by the Appellant for its indivisible business of trading in shares, granting loans
and advances and investing in shares was allowable as a deduction u/s 36(1)(iii) and no part thereof could be disallowed by applying the principle
of apportionment or as incurred in relation to the dividend income falling u/s 10(33)?
iii) Whether on a true and proper interpretation of the provisions of Sections 115O and/or 14A of the income tax Act, 1961 and/or the circular
dated July 23, 2001 issued by the Central Board of Direct Taxes, the Appellant is entitled to deduction of interest amounting to Rs. 1,68,005/-.
5. Mr. Khaitan, the learned senior Advocate appearing on behalf of the Appellant, has criticized the orders of the authorities below on the ground
that in dismissing the appeals, the authorities below did not consider the fact that there was no acquisition of any new share in course of last five
years and thus, in such circumstances, those authorities should have taken a reasonable approach in calculating the amount of disallowance. Mr.
Khaitan, in this connection placed strong reliance upon the decision of the Supreme Court in the case of Commissioner of income tax v. Walfort
Share & Stock Brokers Pvt. Ltd., reported in (2010) 326 ITR 1 and also of the Division Bench of the Bombay High Court in the case of Godrej
and Boyce Mfg. Co. Ltd. Vs. Dy. Commissioner of Income Tax, Range 10(2) and Others, .
6. Mr. Khatan submits that Section 14A of the income tax Act clarifies that expenses incurred can be allowed only to the extent they are relatable
to the earning of taxable income and in many cases, the nature of expenses incurred by the Assessee may be relatable partly to exempt income and
partly to taxable income and in the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against
taxable income. Mr. Khaitan submits the mandate of Section 14A is clear and it desires to curb the practice of claiming deduction of expenses
incurred in relation to exempt income against taxable income and at the same time, to avail of the tax incentive by way of exempt income without
making any apportionment of expenses incurred in relation to exempt income. Mr. Khaitan submits that in the case before us, the approach of the
Tribunal below was totally erroneous as the Assessing Officer failed to determine the proportion of expenditure incurred in relation to earning of
exempt income by taking a reasonable approach.
7. Mr. Sarkar, the learned advocate appearing on behalf of the Revenue, has, on the other hand, supported the order passed by the Tribunal and
has contended that the Assessee itself having failed to produce material in support of its contention, the Assessing Officer rightly assessed the
deductible income on proportionate basis. Mr. Sarkar submits that the same is in conformity with Rule 8D of the income tax Rule and thus, we
should not interfere with the order passed by the Tribunal.
8. After hearing the learned Counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr.
Khaitan, we find that the Supreme Court in the cases of Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay, and
Rajasthan State Warehousing Corporation Vs. Commissioner of Income Tax, having held that where there is one indivisible business giving rise to
taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the
income earned from the business is exempt from tax, Section 14A of the Act was enacted to overcome those judicial pronouncements. The object
of Section 14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total
income.
9. In the case before us, there is no dispute that part of the income of the Assessee from its business is from dividend which is exempt from tax
whereas the Assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired.
Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and
thus, the loan that was taken and for which the interest is payable by the Assessee was not for acquisition of those old shares and, therefore, the
authorities below erred in law in giving benefit of proportionate deduction.
10. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the Assessee to show the source
of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the Assessee at the
relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or
ten years ago, it is for the Assessee to show by the production of documentary evidence that such loaned amount had already been paid back and
for the relevant Assessment Year, no interest is payable by the Assessee for acquiring those old shares. In the absence of any such materials
placed by the Assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total
income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the
special knowledge of the Assessee, the assessing authority took a most reasonable approach in assessment.
11. We, thus, find no merit in this appeal and dispose of this appeal by answering the first point in the affirmative and the other two in the negative.
12. In the facts and circumstances, there will be, however, no order as to costs.
Sambuddha Chakrabarti, J.
13. I agree.
