A.K. Sikri, J. - (1.) Chapter IV of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') contains the provisions pertaining to 'computation of total income'. Section 14 which is the first provision under this Chapter enumerates five heads of income within which all income are to be classified. Under the scheme of the Act, certain types of income are exempt from tax and, in this behalf, specific provisions are made stipulating that such incomes would not form part of the total income under the Act as fortiorari, they are not included under any of the heads of income and, therefore, no taxes levied on such exempted incomes. It is in this backdrop, Section 14A of the Act clarifies that if any expenditure is incurred in earning that income which does not form part of the total income, such expenditure shall also not be allowed as deduction. Though, Section 14A was inserted by the Finance Act, 2001, but it was given retrospective effect from April 1, 1962. Original Section was in the following terms: "Section 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."
(2.) By the Finance Act, 2006, the aforesaid provision was amended whereby it was renumbered as sub-section (1) and sub-sections (2) and (3) were added thereto. Before that, a proviso was also added by amendment vide Finance Act, 2002 which was to operate retrospectively from May 11, 2001. In these batch of appeals, we are not concerned with sub-sections (2), (3) or the proviso and it is only interpretation that has to be given to sub-section (1), which arises for consideration.
(3.) Though, it is clear from the plain language of the aforesaid provision that no deduction is to 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 Act, the effect whereof is that if certain income is earned which is not to be included while computing total income, any expenditure incurred to earn that income is also not allowed as a deduction. It is well known that tax is leviable on the net income. Net income is arrived at after deducting the expenditures incurred in earning that income. Therefore, from the gross income, expenditure incurred to earn that income is allowed as a deduction and thereafter tax is levied on the net income. The purpose behind Section 14A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent.;