ORDER
R.V. Easwar, Vice President
1. This appeal filed by the Department relates to the asst. yr. 1999-2000 and arises out of the assessment made on the assessee under Section 143(3) of the IT Act on 28th March, 2002. The assessee-respondent is a company engaged in the business of manufacture and sale of tractors, engines, motorcycles, gears and other components.
2. The first ground is that the CIT(A) erred in allowing depreciation of Rs. 2,69,700 ignoring the fact that the furniture and fixtures were not used by the assessee for its business. At the time of the hearing, the learned Counsel for the assessee drew our attention to paras 4 and 5 of the order of the Tribunal, dt. 26th Aug., 2004 in the assessee’s own case for the asst. yr. 1997-98 in ITA No. 2863/Del/2001 in which this issue has been decided in favour of the assessee. A copy of the order was also filed. A perusal of the assessment order for the year under appeal shows that the AO disallowed the depreciation on the basis of the reasons given by him in the earlier years. The CIT(A) has brought on record the facts relating to the dispute. The assessee made additions to televisions, refrigerators, music systems, etc. which were provided to its employees with an option given to them to purchase the same at the WDV after five years. This was in accordance with a scheme framed by the assessee in this regard. The reason for the disallowance of the depreciation as recorded by the CIT(A), is that these items have not been used for the purpose of the assessee’s business. The CIT(A) following his predecessor’s order for the asst. yr. 1997-98, deleted the disallowance. A perusal of the order of the Tribunal.for the asst. yr. 1997-98 shows that it has followed the earlier order of the Tribunal in the assessee’s own case for the asst. yrs. 1993-94 and 1994-95. The issue is thus squarely covered by the orders of the Tribunal in the assessee’s own case for the asst. yrs. 1993-94, 1994-95 and 1997-98. Respectfully following the same, we decide the issue in favour of the assessee for the year under appeal. We may add that the facts relating to the ground are the same for the year under appeal also. The first ground is accordingly dismissed.
3. The second ground is that the CIT(A) erred in allowing deduction of Rs. 1,35,417 under Section 35AB of the IT Act. A perusal of the assessment order does not throw any light on this issue. However, the assessee raised the ground before the CIT(A) to the effect that the AO has grossly erred in not allowing the deduction. Apparently, the claim was made in the computation of the income or in the course of the assessment proceedings. Be that as it may, the fact remains that the claim was not allowed in the assessment. On appeal, the CIT(A) noted that the assessee incurred expenses of Rs. 8,12,510 towards the cost of Mofa drawings in the previous year relevant to the asst. yr. 1994-95 and that the same was claimed as deduction in full as scientific research expenditure under Section 35 of the Act. The AO in that year would appear to have allowed 1/6th of the amount which comes to Rs. 1,35,417 as deduction under Section 35AB, treating the expenditure to be in the nature of technical know-how expenditure. However, for the year under appeal, the AO did not allow 1/6th of the expenditure as he has done in the earlier year. The CIT(A) further noted that for the asst. yrs. 1997-98 and 1998-99, the assessee’s claim has been allowed in appeal by the CIT(A) arid the facts being the same, the present CTT(A) directed the AO to allow the amount of Rs. 1,35,417 as deduction.
4. Since the direction given by the CIT(A) is consistent with the stand taken by the AO himself in the asst. yr. 1994-95, we see no infirmity in his direction. Further, we were informed that for the asst. yr. 1997-98 against a similar direction given by the CIT(A), the Department did not prefer any appeal to the Tribunal. The ground is, therefore, dismissed.
5. Ground No. 4 is that the CIT(A) erred in directing the AO not to add the provision towards bad and doubtful debts while computing the book profit for the purpose of Section 115JA of the IT Act. It is contended that the provision is not an ascertained liability. In the assessment order, the AO added back Rs. 2,21,32,285 being provision for bad and doubtful debts to the income shown in the return, while computing the book profit under Section 115JA. The assessee took up the plea before the CIT(A) that book profit for the purpose of the section means, the profit ascertained as per the P&L a/c prepared by the assessee in accordance with Parts II and III of Schedule VI to the Companies Act, subject only to the adjustments specified in the Explanation below the section. It was pointed out that the Clause (c) of the Explanation provides for adding back the provision, made for meeting liabilities other than ascertained’liabilities and that a provision made for bad and doubtful debts is not a provision made for meeting any unascertained liability and, therefore, the said clause cannot be invoked to add back the provision for bad and doubtful debts. It was further pleaded that the provision in the present case has been made not ad hoc but in respect of specific and identified debts which had become bad or doubtful of recovery. It was, therefore, submitted that at any rate the provision cannot be considered as provision for unascertained liabilities so that it can be added back to the book profit. Reliance was placed on the order of the Delhi Bench of the Tribunal in the case of Modi Rubber Ltd. in ITA No. 3270/Del/1992 and the order in the case of Steel Authority of India Ltd. v. Asstt. CIT (2001) 70 TTJ (Del)(TM) 849 : (2001) 76 ITD 69 (Del)(TM). Reliance was also placed on the judgment of the Bombay High Court in CIT v. Echjay Foigings (P) Ltd. . The CIT(A) referred to Part III of Schedule VI to the. Companies Act which contains the definition of the terms “provision”, “reserves” and “liabilities”. He noted that in terms of the definition contained in para 7(1) and (2) of Part III of Schedule VI, the provision for doubtful debts made in respect of specific debts was in the nature of a provision for ascertained liabilities and was not in the nature of reserve. Accordingly, he upheld the assessee’s contention and directed the AO to reduce the book profit by the amount of Rs. 2,21,32,285.
6. The Revenue is in appeal. We have considered the rival contentions. So far as the computation of the book profit is concerned, as held by the Supreme Court in Apollo Tyres Ltd. v. CIT , the AO has no power to disturb the figure of net profit shown in the P&L a/c which has been prepared in accordance with the above provisions of the Companies Act. The only power given to the AO to vary the figure of book profit is to increase or decrease the same in accordance with the Explanation below Section 115JA. It is common ground that if at all, Clause (c), Explanation alone would apply. As already noted this clause gives the power to the AO to increase the book profit by the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities. The CIT(A) has accepted the assessee’s plea that a provision made’ for doubtful debts after taking note of specific debts cannot be considered as a reserve, so that Clause (b) of the Explanation can be invoked, but has to be considered as a provision for an ascertained liability. The CIT(A) has noted in para 7(1) of Part III of Schedule VI to the Companies Act which shows that expression “provision” shall mean any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of asset or retained by way of providing for any known liability of which the amount cannot be determined as substantial accuracy. The provision made by the assessee by taking into account specified and identified debts which were doubtful of recovery satisfies the above definition of a provision. It is not expected of the company to determine accurately the amount in respect of which it is allowable and it is sufficient that the liability is ascertained. Accordingly, the CIT(A) seems right in saying that the provision for doubtful debts is really in the nature of a provision for meeting an ascertained or known liability.
7. Before us, the learned Counsel for the assessee raised a plea that this is not a provision for meeting a liability at all. No doubt, this plea was not taken before the CIT(A), but having regard to the nature of the plea, which is purely a legal plea requiring no investigation into facts, we permit him to raise the same. A provision for bad and doubtful debts is made with the view to guarding against the non-recovery of certain debts which are considered by the company as bad or doubtful. It implies that monies receivable by the company may not be realised. Explanation (c) refers to amount set aside to provisions made “for meeting liabilities”. By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants of India (ICAI), in its guidance note on “Terms used in Financial Statements” (filed by the assessee) had defined a “liability” as “the financial obligation of an enterprise other than owners’ funds”. Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground.
8. We now take up the third ground which is that the CIT(A) erred in “deleting the addition of Rs. 5 lakhs made towards earning of exempted dividend income under Section 14A, ignoring the fact that certain expenses must have been incurred by the assessee in earning the dividend income”. The brief facts giving rise to the ground may be noticed. The assessee received dividend of Rs. 83,06,235 and claimed exemption in respect of the same under Section 10(33) of the IT Act. The AO, invoking Section 14A held that, since it was not in dispute that the assessee must have incurred some expenditure for earning the dividend income, disallowed a sum of Rs. 5 lakhs from the expenditure claimed by the assessee. On appeal, it was submitted that the entire dividend was received from Eicher Motors Ltd., a group company housed in the same premises, that the dividend was received by a single dividend warrant requiring no efforts or expenses to earn the same and that, therefore, no expenditure can be attributed to the earning of the dividend income. It was also contended that the shares from which the dividend was received were acquired by the assessee from its own funds in the earlier years and, therefore, no interest on borrowings could also be attributed to the earning of the dividend income. In support of the above contentions, the assessee placed reliance on certain decision, of the Calcutta High Court. Another contention raised by the assessee was that the disallowance under Section 14A can be made only if it is shown that some expenses were in fact incurred to earn the exempted income and that no disallowance can be made on estimate.
9. The CIT(A) agreed with the assessee’s contention that no disallowance can be made under Section 14A on estimate basis and that only those expenses which have been actually incurred to earn the exempted income can be disallowed. Notional or proportionate expenses cannot be disallowed in the absence of material on record to support the same. He accordingly, deleted the disallowance of Rs. 5 lakhs.
10. Section 14A of the IT Act is as under:
Expenditure incurred in relation to income not includible in total income.
14A. 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:
Provided that nothing contained in this section shall empower the AO 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.
The section was introduced by the Finance Act, 2001 with retrospective effect from 1st April, 1962. The Memorandum Explaining the Provisions of the Finance Bill, 2001 [(2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 162] explains the purpose behind the introduction of the section 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 IT 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 IT Act.
The proposed amendment will take effect retrospectively from 1st April, 1962 and will accordingly, apply in relation to the asst. yr. 1962-63 and subsequent assessment years.
11. At this juncture, it becomes necessary to briefly trace the history. In CIT v. Indian Bank Ltd. , the assessee carried on the business of banking and in the course of the business it received deposits on which interest was paid. The bank invested huge sums in securities of the Mysore Government, the interest from which was exempt from income-tax. The bank also bought and sold these securities and the profit or losses were taken into account under the head “Business”. In the assessment, the bank claimed, deduction in respect of interest paid on its deposits under Section 10(2)(iii) of the 1922 Act. The AO, whose action was upheld by the Tribunal, disallowed a part of the interest which according to him was payable on monies borrowed for the purchase of the Mysore Government securities. Before the Supreme Court, it was pointed out on behalf of the assessee that since profits or losses on the disallowance in the Mysore Government securities were assessed under the head “Business”, no part of the interest could be disallowed as interest attributable to borrowings made for producing exempted income. The Supreme Court accepted this contention, but also proceeded to examine the validity of the action of the AO as to whether a part of the expenditure attributable to the exempted income can at all be disallowed. It was held by the Supreme Court as under:
We are concerned with the interpretation of Section 10. Let us then took at the language employed. Sub-section (1) directs that an assessee be taxed in respect of the profits and gains of business carried on by him. What is the business of the assessee must first be looked at. Does he carry on one business or two businesses or along with the business carried on by him some activity which is not a business? If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step. Secondly, we must look at Section 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises : Do we look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income? The answer must be in the negative for two reasons : First, Parliament has not directed us to undertake this enquiry. There are no words in Section 10(2) to that effect. On the other hand, indications are to the contrary. In Section 10(2)(xv), what Parliament requires to be ascertained is whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income.
Therefore, it seems to us that there is nothing in the language of Section 10 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfil some other condition before it can be allowed.
At p. 82 of the report, the Supreme Court also noted that they were concerned with a case of one indivisible business.
12. The issue came up again before the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. . This was also a case of single composite business of growing sugarcane and manufacturing sugar. The sugar manufacturing activity was a taxable activity whereas the sugarcane growing activity was agricultural activity. The finding of the Tribunal was that the cultivation of sugarcane as well as the manufacture of sugar constitute one business and this finding was not challenged. The assessee paid managing agency commission and the question was whether part of the commission can be disallowed on the ground that it related to the sugarcane cultivation which was an agricultural operation.,-At p. 454 of the report, the Supreme Court held as under:
What was urged on behalf of the Department is that the assessee’s business consisted of two parts, namely, (1) cultivation of sugarcane, and (2) the manufacture of sugar. The former part being agricultural operation, the income therefrom is not exigible to tax and therefore, any expenditure incurred in respect of that activity is not deductible. This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether a deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the allowance claimed is permissible under the Act then the same has to be deducted from the GP. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under Section 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in Section 10(2)(xv) which says that any expenditure laid out or expended wholly and exclusively for the purpose of such business shall be deducted as an allowance. The mandate of Section 10(2)(xv) is plain and unambiguous.. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the Act is not a relevant circumstance. For the foregoing reasons, we agree with the view taken by the High Court.
While holding as above, the Supreme Court followed its earlier judgment in the case of CIT v. Indian Bank Ltd. (supra).
13. Recently, the Supreme Court had occasion to examine the matter over again in Rajasthan State Warehousing Corporation v. CIT . In this case, the warehousing corporation derived income from interest, letting out of warehouses and administrative charges for procuring of foodgrains while working for the Food Corporation of India as well as the State Government. While computing the income under the head “Business”, the AO 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 which in that case was represented by the income derived from the letting out of warehouses exempt under Section 10(29) of the Act. In this case also, there was a finding which was recorded in the question referred to the High Court under Section 256(1) that the business of the assessee was one and individual. The Supreme Court laid down the following principles to be followed in cases of this type:
In view of the above discussion, the following principles may be laid down:
(i) if 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 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 ‘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 Act will depend on:
(a) fulfilment of requirements of that provision noted above; and
(b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction 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.
Since the finding was that the exempted income and taxable income were earned from one individual business, the Court held that the apportionment of the expenditure cannot be sustained.
14. Section 14A gives the AO the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question-that arises for consideration is whether it is necessary for the AO to show on the basis of the material on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the expenditure must have necessarily been incurred to produce non-taxable income. A look at the language of the section shows that the AO can disallow only expenditure “incurred” by the assessee in relation to the exempt income. The word “incurred” clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislature to confer power upon the AO to assume that a part of the expenditure must have necessarily been incurred to produce exempted income which the AO can estimate and disallow and accordingly, use suitable expressions in the section conferring such power upon the AO. One such instance is Section 38(2) of the Act which gives the power to the AO to restrict certain deductions under Sections 30, 31 and 32 “to a fair proportionate part thereof which the AO may determine having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession”. Another such instance is of Section 40A(2)(a) which gives power to the AO to determine, based on his own opinion, as to how much expenditure incurred by the assessee in respect of which payment is made to closely related persons or concerns, is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or the benefit derived by the assessee from the expenditure. But, when Section 14A has not given such specific power to the AO, he has no authority to estimate the expenditure which the assessee would have, in the opinion of the AO, incurred in relation to the exempted income. The words “in relation to” income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word “incurred”, it seems to us that these are restrictive words, restricting the power of the AO to estimate a part of the expenditure incurred by the assessee as relatable to the exempted income. It seems to us that implicit in the expression “in relation to” is the concept that the AO should be in a position to pin point, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non-taxable income. The word “incurred” signifies that the expenditure must have been actually incurred, not notionally.
15. Reading both the abovementioned expressions together, the conclusion seems inescapable that the expenditure which the AO seeks to disallow under Section 14A should be actually incurred and so incurred with a view to producing non-taxable income. If this much is clear from the section, it follows that it is the duty of the AO to pin point such expenditure on the basis of the material on record.
16. Reference was made on behalf of the Department to the judgment of the Supreme Court in CIT v. United General Trust Ltd. . To understand the judgment of the ratio laid down therein, we must refer to the judgment of the Bombay High Court in CIT v. United General Trust Ltd. , from which an appeal was taken to the Supreme Court. The judgment of the Bombay High Court is reported as Appendix to another judgment of the same High Court in CIT v. Advance Insurance Co. Ltd. . In this case, question No. 4 was to the effect whether the assessee, company was entitled to the rebates under Sections 85 and 101(2) of the IT Act on gross dividends or on net dividends after the deduction of the costs relating thereto. While deciding this question, the Bombay High Court referred to its earlier judgment rendered on 30th Nov., 1976 in the case of CIT v. United General Trust (P) Ltd., (supra) which was unreported at that time, but later on reported as Appendix to the judgment in the case of Advance Insurance Co. Ltd. (supra). In the case of Advance Insurance Co. Ltd. (supra) the question referred to above was answered in favour of the assessee. When we turn to the judgment of the Bombay High Court in the case of CIT v. United General Trust (supra), we find that the question sought to be referred was “whether the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses?” A perusal of the judgment further shows that initially the Department had obtained a rule from the High Court, but when the matter came up for final decision, it appears that the High Court felt that the question did not really arise out of the Tribunal’s order and that in any case it was concluded also by the judgments of the Bombay High Court in the case of Sahu Brothers (Saurashtra)(P) Ltd. (citation not given) and New Great Insurance Co. Ltd. (supra). The Bombay High Court further noted that the question appears to be finally concluded by the judgment of the Supreme Court in the case of CIT v. South Indian Bank Ltd. as also the decision of the Bombay High Court in CIT v. Industrial Investment Trust Co. Ltd. . Before the Bombay High Court, an argument was advanced on behalf of the Department that the question in respect of which the High Court had issued the rule can be said to deal with one of the aspects of the legal contention urged before the Tribunal and in this connection reliance was made on the amendment placed to Section 80M by Section 10 of the Finance Act, 1968. The High Court examined the contention with reference to the statement of objects and reasons and the Notes on Clauses of the Finance Bill and found that the reason for omitting certain words from the section was different from what was sought to be urged on behalf of the Department. Therefore, ultimately, the Bombay High Court discharged the rule with costs.
17. The CIT took up the matter in appeal before the Supreme Court and it is the judgment of the Supreme Court which is reported in CIT v. United General Trust Ltd. (supra). Before the Supreme Court, both counsel for the Revenue and the assessee agreed that the question sought to be raised by the Revenue, which was not allowed by the Bombay High Court, was concluded against the assessee and in favour of the Revenue by the decision of the Supreme Court in Distributors (Baroda)(P) Ltd. v. Union of India . The Supreme Court also held that the same result would follow from Section 80AA, introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968. For these reasons, the appeals filed by the Department were allowed and the application made by the CIT under Section 256(2) was deemed to have been allowed, a reference made and answered in the manner indicated above.
18. It seems clear to us from the above discussion that the controversy in the case of CIT v. United General Trust (supra), was (a) whether a question of law arose out of the order of the Tribunal as claimed by the Department; and (b) whether the question was covered in favour of the Revenue on merits? No doubt, the question framed contained a reference to “proportionate management expenses”, but the focus of the controversy was whether the assessee was entitled to the deduction under Section 80M on the gross amount of dividend or the net amount of dividend. While the Bombay High Court felt, at the time when its decision was rendered, that no question arose out of the order of the Tribunal in view of an earlier judgment of the Supreme Court as well as two judgments of the Bombay High Court itself which had decided the question of law, and on that ground discharged the rule with costs, by the time the matter had reached the Supreme Court, the judgment of the Supreme Court in the case of Distributors (Baroda)(P) Ltd. (supra) had been rendered in which the controversy as to whether the deduction was available in respect of the gross dividend or net dividend had been resolved in favour of the Department. Further, the section itself had been amended by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1989. In view of this position, the Supreme Court not only admitted the question for reference under Section 256(2), but also answered the same against the assessee. The real controversy in the above case was not so much as to whether the AO had the power to estimate certain expenses as having been incurred for the purpose of earning the dividend income and, therefore, they could be deducted from the gross amount of the dividend, so that the deduction could be worked out only on the net dividend, as it was on the pure question of law as to whether the deduction was available to an assessee on the gross amount of the dividend or the net amount of dividend. It was this pure question of law that was decided by the Supreme Court and not the question whether a particular type of expenditure could or could not be deducted from the gross dividend or whether the AO did or did not have the power, in the absence of any material on record, to estimate a part of the expenditure incurred by the assessee as having been incurred for the purpose of earning the dividend income and proceed to deduct the same from the gross amount of the dividend in order to calculate the deduction available to the assessee. In our humble understanding of the judgment of the Supreme Court, read along with the judgment of the Bombay High Court from which the appeal arose, these controversies were not before the Supreme Court.
19. Section 80AA introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968 as well as Section 80AB which was inserted by the same Finance Act, but w.e.f. 1st April, 1981, have the same effect. The only difference was that Section 80AA applied specifically to cases of deduction under Section 80M and Section 80AB applied to all cases of deduction other than Section 80M. This distinction has since been obliterated by an amendment made by the Finance Act, 1997 w.e.f. 1st April, 1998. By this amendment, Section 80AA has been omitted and an amendment was made to Section 80AB to make it applicable to all deductions, claimed in respect of certain incomes. The thrust of both the sections is that where an assessee claimed deduction in respect of certain income which is included in the gross total income, then for the purpose of computing the deduction under the relevant section, the AO will have the power to compute the income in accordance with the relevant provisions of the IT Act. This in turn meant that the AO had the power to reduce the income in respect of which deduction is claimed by the amount of expenditure which was authorised by the Act to be deducted from the income. To give an example, if an assessee claimed deduction in respect of dividend under Section 80M, the dividends being taxable under the head “Income from other sources”, the AO had the authority to compute the dividend income by reducing the same by the deductions specified in Section 57(i), such as any reasonable sum paid by way of commission or remuneration to a banker or any other persons for the purpose of realizing such dividend on behalf of the assessee. The deduction is allowed to the assessee only on the net income as computed under the relevant provision of the Act. The controversy that was raging at that time, i.e. prior to the judgment of the Supreme Court in the case of Distributors (Baroda)(P) Ltd. (supra) was whether the deduction was available to an assessee on the gross amount of income received by him or whether the AO had the power to reduce the same by an amount of expenditure incurred to earn the income. Both judicially as well as by retrospective amendment to the IT Act, the controversy was set at rest. The principle was thus settled, namely, that the deduction was available to an assessee only on the net income. The judgment of the Supreme Court in the case of CIT v. United General Trust Ltd. (supra) has been rendered in the context of this controversy which involved an important principle of law. Once, the controversy was settled both judicially as well as statutorily, there is no scope for re-agitating the matter.
20. Section 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the Revenue both judicially as well as statutorily as noted above. Now, Section 14A, as explained by the Memorandum Explaining the Provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. Obviously, the decisions which the Finance Bill sought to nullify are those in the case of Indian Bank (supra), Maharashtra Sugar Mills Ltd. (supra) and Rajasthan State Warehousing Corporation (supra). Both, the Memorandum Explaining the Finance Bill and the section as enacted say that only where the expenditure has been actually incurred by the assessee in relation to the exempt income, can the AO refuse to allow deduction in respect of the same. To the extent the earlier judgments held that the AO had no power to do so, they stand nullified by Section 14A without any doubt. The section confers power or authority upon the AO to disallow such expenditure as satisfies the requirements of the section. What the AO could not do earlier, in view of the three binding judgments of the Supreme Court on the question, he can now do under Section 14A. The power is, however, subject to the rider that he must show that the assessee in fact incurred expenditure which is related to the exempted income. It, therefore, appears to us clear that the section only removes the disability on the part of the AO to disallow such expenditure, a disability to which he was subjected by the three judgments of the Supreme Court cited supra. The mere removal of the disability statutorily, however, does not ipso facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not, in our opinion, relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. Even in regard to Section 80M, the Calcutta and Madhya Pradesh High Courts have held that the AO cannot estimate and disallow any notional or ad hoc expenditure to reduce the dividend income. The Calcutta view is embodied in the following judgments:
(a) CIT v. National & Grindlays Bank Ltd. ;
(b) CIT v. United Collieries Ltd. ;
(c) CIT v. Enemour Investments Ltd. (1994) 72 Taxman 370 (Cal).
In these judgments, it has been consistently held that “only the factual expenditure incurred by the assessee in earning the dividend income shall be deducted from the gross dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation.
(underlining, italicised in print, ours)
Referring to the above judgments, the Madhya Pradesh High Court held in State Bank of Indore v. CIT (2005) 193 CTR (MR) 62 : (2005) 144 Taxman 72 (MR), as under:
13. The question may still arise as to whether any notional expenditure can be taken into consideration for the purpose of deduction, while calculating the income from dividend or only expenditure actually incurred by an assessee can be taken into consideration while calculating the deduction claimed under Section 80M. In our considered opinion, there lies a distinction between what we call notional expenditure and actual expenditure. If it is proved to be a case of actual expenditure incurred by an assessee while earning/depositing the dividend, then certainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/depositing the dividend, then it is difficult for us to hold that some hypothetical and/or notional expenditure can be made basis for deduction. In other words, we have not been able to notice any provision which may entitle the taxing authorities to work out by way of expenditure any notional figure for the purpose of Section 80M though, in fact, it has not been so incurred by an assessee while encashing the dividend.
Having held as above, the High Court proceeded to hold that the view that they have taken “is not in conflict with the decision of Supreme Court in Distributors (Baroda)(P) Ltd.’s case (supra). Indeed, we may make it clear that in case, if the taxing authorities or assessee as the case may be is able to prove or show that a particular amount was actually incurred by an assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from gross dividend income and then the same is to be taken into consideration under Section 80M.
(underlining, italicized in print, ours)
It was further observed that since in the case before the High Court “the taxing authorities have not taken into consideration the actual expenditure incurred by an assessee while earning the dividend but has only proceeded to take notional expenditure, the same cannot be held to be sustainable in law” and that “it is not in accordance with the view even taken by Supreme Court in the case of Distributors (Baroda)(P) Ltd. (supra)(underlining, italicised in print, ours). Two aspects stand out, on a perusal of the above judgments. First, that the High Courts have not authorised the disallowance of any notional expenditure (as against actual expenditure) to reduce the income in respect of which deduction is claimed and second, that in the cases before the Calcutta High Court in Enemour Investments Ltd. (supra) and the Madhya Pradesh High Court in State Bank of Indore (supra) even the Revenue has not relied on the judgment of the Supreme Court in CIT v. United General Trust Ltd. (supra) thereby suggesting that in its understanding also that judgment cannot be understood as authority for permitting an estimated or notional expenditure to be disallowed in order to reduce the income eligible for the deduction.
21. Having held as above, we now proceed to examine whether there is any evidence or material on record in the present case authorizing the AO to invoke Section 14A for the purpose of disallowing the expenditure of Rs. 5 lakhs. There is no dispute that the entire dividend of Rs. 83,02,635 which is exempt under Section 10(33) was received from M/s Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought before us to show that the assessee’s contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, we have to agree with the assessee that there is no material on the basis of which the AO would estimate and disallow a sum of Rs. 5 lakhs by invoking Section 14A. We, therefore, agree with the decision of the CIT(A), affirm the same and dismiss the ground No. 3.
22. In the course of the arguments, reference was made to the order of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 LTD 119 (Del) in which a question of disallowance under Section 14A arose and was considered. A perusal of the order of the Tribunal shows that the purely legal aspect of the matter has been discussed in paras 59-61 of the order. The question before the Tribunal was whether any part of the interest paid by the assessee on borrowed funds can be disallowed under Section 14A on the ground that the assessee had received dividend income exempt under Section 10(33). It appears to have been contended before the Tribunal that Section 14A does not override the provisions of Section 36(1)(iii) of the Act. This contention was rejected by the Tribunal by holding that the language employed by Section 14A is very wide and includes every expenditure irrespective of the head under which it is claimed. The Tribunal further proceeded to hold and we are respectfully in agreement with the same that the burden under Section 14A is on the Revenue to prove that interest paid by the assessee on borrowed funds related to the acquisition of shares yielding tax-free income. In para 61, the Tribunal further held that the words “in relation to” appearing in the section would include any expenditure which is proved (by the Revenue) to have nexus directly or indirectly with the utilisation of the funds for earning tax-free income. The question whether it was the duty of the AO to prove on the basis of material on record that the assessee actually incurred expenditure in relation to the exempted income did not precisely arise before the Tribunal nor has it been decided specifically. However, it seems to us that the decision could be construed as holding, albeit impliedly, that only actual expenditure incurred in relation to exempted income can be disallowed, because the Tribunal in terms held that the onus is on the Revenue to prove that interest paid by the assessee on borrowed funds related to acquisition of shares yielding tax-free income. Obviously, the Revenue would be in a position to discharge the burden only on the basis of material on record to show that interest (or any other expenditure) was paid by the assessee on funds borrowed for acquiring the shares. It seems to us with respect, that it is possible to understand the order of the Tribunal in Maruti Udyog Ltd. (supra) as also laying down that only actual expenditure incurred by the assessee to earn exempted income can be disallowed by the AO tinder Section 14A.
23. In the result, the appeal is dismissed with no order as to costs.