ORDER
D.K. Srivastava, Accountant Member
1. The appeal filed by the department is directed against the order of the Commissioner (Appeals). The appeal relates to assessment year 2000-01.
2. Ground No. 1 taken by the department reads as under:
(a) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the disallowance of interest claim, amounting to Rs. 36,03,466, shown to be payable to M/s. Euro Alloys Ltd.
(b) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) failed to appreciate that during the relevant period the assessee was in dispute regarding the liability of the interest and no provision had been made for it in the books of account.
3. We have heard the parties. At the time of hearing, the learned Authorized Representative for the assessee invited our attention to the order dated 19-12-2006 passed by this Tribunal in the department’s appeal in the assessee’s case for assessment year 1998-99 in which identical issue has been decided against the department with the following observations:
4. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal order relied upon by the learned Authorized Representative for the assessee. We find that the learned Commissioner (Appeals) in this year had decided the issue by following this Tribunal order in assessee’s own case for assessment year 1997-98. In fact, the assessing officer has also decided this issue by following the assessment order in assessment year 1997-98. In assessment year 1997-98, the Tribunal has decided the issue in favour of the assessee and it was held that interest on principal amount is also admissible to the assessee as per decree of Bombay High Court even though the provision for interest was not made in the accounts.
Learned departmental Representative of the revenue could not point out any reason as to why contrary view, should be taken in this year and therefore respectfully following the precedent, this issue is decided in favour of the assessee. This ground of the revenue is rejected.
4. Following the aforesaid order, ground No. 1 taken by the department is dismissed.
5. Ground No. 2 taken by the department reads as under:
(a) On the facts and in the circumstances of the case and in law, the ld. Commissioner (Appeals) has erred in deleting the disallowance made under Section 14A of the Income Tax Act of proportionate administrative expenses, amounting to Rs. 10,000.
(b) On the facts and in the circumstances of the case and in law, the ld. Commissioner (Appeals) failed in appreciating that part of the administrative expenditure was attributable to the earning of dividend income.
6. Briefly stated, the facts of the case are that the assessee has dividend income amounting to Rs. 1,20,805 as exempt under Section 10(33)of the Income Tax Act on gross basis. The assessee sought to explain before the assessing officer that no expenditure was incurred for earning the dividend income the assessing officer however did not accept the aforesaid submission of the assessee. Relying on the Circular No. 780 dated 4-10-1999 issued by the CBDT in the context of Section 10(23G). He A held that any expenditure incurred on earning tax income has to be considered and only the net amount will be eligible for exemption. He estimated a sum of Rs. 10,000 as expenditure incurred for earning the dividend and therefore disallowed the same to work out for working out the net dividend. On appeal, the learned Commissioner (Appeals) has deleted the addition. Being aggrieved by the order of the Commissioner (Appeals), the department is now in appeal before this Tribunal.
7. We have heard the parties. When the matter came up for hearing before us, the attention of both the parties was invited to certain orders passed by this Tribunal in which identical issue has been considered. It has been held in those cases that proportionate disallowance of expenses allocable to earning the exempted income was permissible and that the quantification of such disallowance was to be made in the light of the provisions of subsections (2) and (3) as those provisions being procedural and computational provisions would apply to all pending matters. In the aforesaid cases, identical issues have been restored to the file of the assessing officer for working out the disallowance in the light of the provisions of Sub-sections (2) and (3) of Section 14A of the Income Tax Act. The learned Counsel for the assessee submitted that the matter could be restored to the file of the assessing officer for deciding the matter afresh.
8. There are several orders of this Tribunal dealing with the issue under consideration. For the sake of brevity, we shall refer to only one decision of this Tribunal, i.e., the decision in Kalpataru Construction v. Dy. CIT (IT Appeal No. 7160/Mum./2002), in which identical issue has been considered and disposed of with the following observations:
6. We have heard both the parties and considered their submissions including the judicial authorities cited by them. Short issue in the matter before us is whether the provisions of Section 14A empower the assessing officer to make proportionate allocation in respect of the expenditure incurred in relation to exempt income and consequentially take the same into account for computing the exempt income and, if so, whether the mechanism for computing allocation of such expenditure as provided in Sub-section (2)/(3) of Section 14A (inserted by the Finance Act, 2006) would apply to all pending matters or would apply to matters arising with effect from assessment year 2006-07.
7. Section 14A has been inserted in the Income Tax Act, by Section 11 of the Finance Act, 2001, with retrospective effect from 1-4-1962, i.e., for and from assessment year 1962-63. Section 14A has been amended by Section 10 of the Finance Act, 2002 and again by Section 7 of the Finance Act, 2006. Section 14A as so amended reads now as under:
14A. Expenditure incurred in relation to income not includible in total income.-(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2)The assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the totalincome under this Act in accordance with such method as may beprescribed, if the assessing officer, having regard to the accounts of theassessee, is not satisfied with the correctness of the claim of the assesseein 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 casewhere an assessee claims that no expenditure has been incurred by himin relation to income which does not form part of the total income underthis 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 1-4-2001.
8. In the matter before us, we are not concerned with the Proviso tosection 14A. We are concerned with Sub-section (1) (as originally inserted(without numbering of the sub-section by the Finance Act, 2001 withretrospective effect from 1-4-1962) and Sub-section (2)/(3) (inserted bythe Finance Act, 2006 with consequential numbering of the clauses ofsection 14A), of Section 14A. The scope and effect of the insertion of Section 14A, with retrospective effect from 1-4-1962, in the Income Tax Act by the Finance Act, 2001 have been explained in para 25 of Circular No. 14 of 2001 issued by the Central Board of Direct Taxes, which reads 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 principals 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 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.
25.3 Vide Circular No. 11/2001 dated 23-7-2001, a direction was issued by the Central Board of Direct Taxes that the assessments where the proceedings have become final before the first day of April, 2001 should not be re-opened under Section 147 of the Act to disallow expenditure ” relatable to the exempt income by applying the provisions of Section 14A of the Act. This circular has been issued by the Board by exercising its powers to issue beneficial circular under Section 119(2)(a) of the Income Tax 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.
9. Section 14A clearly makes a distinction between exempt income andtaxable income. It treats both of them as separate classes f or computa tionof income after allocation of expenditure relating thereto and mandatesthat no deduction in respect of any expenditure shall be allowed againsttaxable income which is incurred in relation to exempt income. Theunderlying object is to compute both the exempt income and taxableincome correctly, which is possible only after the expenditure incurred in relation thereto is allocated to them. In other words, Section 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income.
10. The prohibition for allowing the deduction under Section 14A for and from assessment year 1962-63 is “in respect of expenditure incurred by the assessee in relation to income” which does not fall part of the total income. The term “expenditure” has been defined at page 598 of Black’s Law Dictionary (Seventh Edition) thus:” 1. The act or process of paying out; disbursement. 2. A sum. paid out.” The term “expense” has been defined at the same page of the aforesaid dictionary as follows: “n. An expenditure of money, time, labour, or resources to accomplish a result; esp., a business expenditure chargeable against revenue for a specific period. – expense, vb. Cf. COST (1).” The “expense” has many forms, namely, accrued expense, administrative expense, business expense, capital expense, capitalized expense, current expense, deferred expense, educational expense, entertainment expense, extraordinary expense, fixed expense, funeral expense, general administrative expense, medical expense, moving expense, operating expense, ordinary and necessary expense, organizational expense, put-of-pocket expense, prepaid expense travel expense. The term “expenditure” occurring in Section 14A would thus take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The term “incur” has been defined at page 771 of the aforesaid dictionary as follows: “incur, vb. To suffer or bring on oneself (a liability or expense).” One of the meanings given to the word “relate” under the head “Law” at page 2534 in” The New Shorter Oxford English Dictionary (1993 Edition) is “Have some connection with, be connected to.” The phraseology used in Section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income. This is also achieved by the matching principle of accountancy. In Taparia Tools Ltd. v. JCIT 260 ITR 102 (Bom.), the Hon’ble jurisdictional High Court has explained the matching principle as under:
The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited. Therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses).
Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable income….
11. It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring on or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 93 TTJ (Chennai) 161. After comprehensive consideration of all the relevant aspects; of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. ITO (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt B under Section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of Section 14A. In Dy. CIT v. S.G. Investments & Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of Section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression “expenditure incurred bj’ the assessee in relation to income which does not form part of the total income” in Section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon’ble Supreme Court in CIT v. United General Trust Ltd. 200 ITR 488, the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the d money borrowed for the puipose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd v. Dy. CIT (2006) 102 TTJ (Delhi) 120, the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of Section 14A would not apply to that extent. In Assistant Commissioner v. Premier Consolidated Capital Trust (I) Ltd (2004) TTJ (Mumbai) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of Section 14A.
12. Keeping in view the provisions of Section 14A as also the aforesaid decisions of the co-ordinate Benches of this Tribunal, we hold that all expenses connected with the exempt income have to be disallowed under Section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. In this connection, the provisions of Sub-section (2)/(3) of Section 14A inserted by the Finance Act, 2006 deserve to be noted.
13. The procedure for computation of disallowance has now been provided in Sub-sections (2) and (3) of Section 14A of the Income Tax Act.
It is no longer open to the assessing officer to apply his discretion in computing the disallowance or make ad hoc disallowance under Section 14A. Substantive provisions are contained in Sub-section (1) of Section 14A prohibiting deduction in respect of expenditure incurred in relation to exempt income while procedural provisions regarding computation of the aforesaid disallowance are contained in Sub-sections (2) and (3) thereof. Sub-sections (2) and (3) seek to achieve the underlying object of Section 14A(1) that any expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them.
14. In W.H. Cockerline & Co. v. IRC (1930) 16 TC 1 (CA)at 19,Lord Hanworth quoted with approval the following passage from the judgment of Sargant L.J.: “The liability is imposed by the charging section, namely, Section 38, the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately.” InHalsbury’s Laws of England (Fourth edition, Vol. 23, paragraph 29), referring to the machinery provisions, it is stated: “It is important to distinguish between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the charge and the levying and collection of the tax in respect of the charge so imposed. Machinery provisions do not impose a charge or extend or restrict a charge elsewhere clearly imposed.” In Kesoram Industries & Cotton Mills Ltd v. CWT , Hon’ble Mr. Justice Shah observed: “Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained…. This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation.” Though the aforesaid observation was part of the minority opinion, there is, however, nothing said to the contra in the majority view. In Associated Cement Co. Ltd v. CTO , the Hon’ble Supreme Court has held: “It is settled law that a distinction has to be made by courts while interpreting the provisions of a taxing statute between charging provisions which impose the charge to tax and machinery provisions which provide the machinery for the quantification of the tax and the levying and collection of the tax so imposed. While charging provisions are construed strictly, machinery sections are not generally subject to a rigorous construction. The courts are expected to construe the machinery sections in such a manner that a charge to tax is not defeated.” Bennion’s Statutory Interpretation (First edition, page 446, paragraph 191) lays down as follows: “Because a change made by the legislator in procedural provisions is expected to be for the general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings.” At page 447, it is stated: “Procedure and practice is the mere machinery of law enforcement. As Ormrod L.J. said: ‘The object of all procedural rules is to enable justice to be done between the parties consistently with the public interest’.” In Jose Da A Costa v. Bascora Sadashiva SinaiNarcornin ,, the Hon‘ble Supreme Court has held at page 1849 of AIR 1975 SC: “Before ascertaining the effect of the enactments aforesaid passed by the Central Legislature on pending suits or appeals, it would be appropriate to bear in mind two well-established principles. The first is that ‘while provisions of a statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible, have retrospective effect attributed to them, provisions which touch a right in B existence at the pEissing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment’ (See Delhi Cloth and General Mills Co. Ltd. v. ITC AIR 1927 PC 242). The second is that right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals available under the law then in force would be preserved to the parties to the suit throughout the rest of the career of the suit. There are two exceptions to the application of this rule, viz., (i) when by competent enactment such c right of appeal is taken away expressly or impliedly with retrospective effect; and (ii) when the court to which appeal lay at the commencement of the suit stands abolished (See Gariluxpati Veeraya v. N. Subbiah Choudhry (1957) SCR 488; MR 1957 SC 540, and Colonial Sugar Refining Co. Ltd v. Irving (1905) AC 369 (PC).” Halsbury’s Laws of England (Fourth edition, Vol. 44, paragraph 925) states: “The presumption against retrospection does not apply i;o legislation concerned merely with matters of procedure or of evidence; on the contrary, provisions of that nature are rj to be construed as retrospective unless there is a clear indication that such was not the intention of Parliament.” All the aforesaid observations have been cited, with approval, by the Hon’ble Supreme Court in CWT v. Sharwan Kumar Swarup & Sons 210 ITR 886.
15. In view of the aforesaid, we hold that the provisions for quantification of disallowance as contained in Sub-sections (2) and (3) of Section 14A are procedural and therefore apply to all pending matters. It is no longer open to the assessing officer to make disallowance according to his own discretion or on ad hoc basis. He is statutorily required to compute the disallowance in the manner provided by Sub-sections (2) and (3) of Section 14A. We therefore set aside the orders passed by the Commissioner (Appeals) and the assessing officer in this behalf and restore all the issues arising in both the appeals to the assessing officer for a fresh decision in the light of the provisions of Section 14A including Sub-sections (2) and (3) thereof and other relevant provisions of law.
9. In view of the foregoing, the issue raised in ground No. 2 by the department is restored to the file of the assessing officer for a fresh decision after giving reasonable opportunity of hearing to the assessee. Ground No. 2 is treated as allowed for statistical purposes.
10. Appeal filed by the department is partly allowed.