ISG TRADERS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This appeal under Section 260A of the Income-tax Act, 1961 (Act) is at the instance of an assessee and is directed against an order dated 29th May, 2002 passed by the Income-tax Appellate Tribunal, C Bench, Kolkata, in Income-tax Appeal being ITA No.349 (Kol) of 2002 for the Assessment Year 1998-99 by which the Tribunal allowed the appeal preferred by the Revenue and set aside the order passed by the CIT (Appeals).

(2.) Being dissatisfied, the assessee has come up with the present appeal. The facts giving rise to filing of this appeal may be summed up thus: a) The appellant is a public limited liability company within the meaning of the Companies Act, 1956 and is assessed to tax under the Act. The present appeal arises out of the assessment of the appellant under the Act for the Assessment Year 1998-99 for which the relevant previous year was the financial year ending on March 31, 1998. b) The appellant is an investment company and carries on business of purchase and sale of shares and securities, money lending, trading in paper etc. and interest tax under the provision of Interest Tax Act, 1974 is levied upon the appellant. All the aforesaid business activities constituted one individual business and for the purpose of the said business the appellant from time to time borrowed capital in respect of which it paid interest. c) Section 115 O was inserted in the Act with effect from June 1, 1997 and it provided that in respect of any amount deducted, distributed or paid by a company by way of dividend on or after June 1, 1997 the company should be charged to the additional tax @ 10 %. Sub-section (5) of Section 115 O provided that no deduction under any other provision of the Act should be allowed to the company or a shareholder in respect of the amount which had been charged to tax under sub-section (1) or the tax thereon. d) Finance Act, 1997 inserted Clause 33 in Section 19 of the Act to provide that any income by way of dividend referred to in Section 115 O should not be included in computing the total income of a previous year of any person. e) During the previous year relevant to the Assessment Year 1998-99 the appellant received dividend of Rs.41,38,854/- in respect of shares held by it on which the tax was paid by the company concerned under Section 115 O of the Act. The appellant filed its return of income for the Assessment Year 1998-99 and in the said return, the appellant claimed that the entire interest expenditure of Rs.3,69,36,637/- incurred by it under Section 36(1)(iii) of the Act should be deducted. f) In course of assessment proceedings, the Assessing Officer required the appellant to furnish the breakup of the cost relating to earning of the dividend when it was explained by the appellant that no cost could be apportioned to the dividend income. The Assessing Officer, however, sought to work out pro-rata interest expenditure as relatable to earning of dividend. Such dividend constituted 5.27 percent of the total turnover of the assessee and as such, the Assessing officer assumed 5.27 percent of the interest expenditure amounting to Rs.19,14,940/- as relatable to earning of exempt dividend income and consequently, disallowed the said amount. The Assessing Officer, however, accepted the position that all other expenses incurred by the appellant were mainly for trading business carried on by it. g) Being dissatisfied, the appellant preferred an appeal before the CIT (Appeals) and the said Appellate Authority by order dated January 8, 2002 allowed the appeal by accepting the appellants contention that the interest expenditure incurred in respect of money borrowed for the purposed of the appellants business was deductible under Section 36(1) (iii) of the Act and no part thereof could be apportioned as relatable to the dividend income. h) Being dissatisfied, the Assessing Officer preferred an appeal before the Tribunal below and the Tribunal below by relying upon the provisions contained in Section 14A and sub-section (5) of Section 115 O of the Act held that exempt dividend income were not an allowable deduction. The tribunal further held that provision of Section 14A had the effect of nullifying the judgment of the Supreme Curt in the case of Rajasthan State Warehousing Corporations vs. CIT, reported in (2000) 242 ITR page 450 which supported the claim of the assessee.

(3.) Being dissatisfied, the assessed has come up with the present appeal. A Division Bench of this Court while admitting the appeal formulated the following substantial question of law: Whether on the facts and in the circumstances of the case in view of the provisions of sections 115 O (5) 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 or interest amounting to Rs.19,14,940? Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, strenuously contended before us that the entire interest expenditure was incurred by the assessee for the purpose of its one and indivisible business of purchasing and selling of shares, securities, papers etc. and was allowable as deduction under Section 36 (1)(iii) of the Act in its entirety. According to Mr. Khaitan, simply because some dividend income accrued in favour of the assessee in respect of the shares held by it for the purpose of the business, no part of the interest expenditure could be apportioned as incurred in relation to the dividend income. Mr. Khaitan contends at the time of passing the assessment order by the Assessing officer, there being no existence of Section 14A of the Act, the Tribunal below committed substantial error of law in reversing the order passed by the CIT (Appeals) by relying upon the provisions contained in Section 14A of the Act.