S.14A may not be applicable even if some dividend is earned incidentally when commercially expedient investment in shares for business purposes is made

[CA DEV KUMAR KOTHARI]

Recent judgment on issue:

Assistant Commissioner of Income-tax, Circle-36, Kolkata Versus Shri Rikhab Chand Jain and Vica-Versa 2016 (7) TMI 613 - ITAT KOLKATA  2016 (7) TMI 613

Cases referred to their in:

1. Hero Cycles (P.) Ltd. Versus Commissioner of Income-tax (Central) , Ludhiana - 2015 (11) TMI 1314 - SUPREME COURT OF INDIA on issue of business  purposes / expediency and non-business purposes.
2. SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX - 2006 (12) TMI 82 - SUPREME COURT  on issue of business  purposes / expediency and non-business purposes.
3. CCI Ltd. Versus Joint Commissioner of Income-tax - 2012 (4) TMI 282 - KARNATAKA HIGH COURT  on S.14A
4. M/s. Dhanuka & Sons Versus Commissioner of Income-tax, (Central) -1 - 2011 (4) TMI 861 - CALCUTTA HIGH COURT on S. 14A
5.   on issue of business  purposes / expediency and non-business purposes.

Citations: in 2015 (11) TMI 1314 - SUPREME COURT OF INDIA

1. SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX - 2006 (12) TMI 82 - SUPREME COURT    on issue of business  purposes / expediency and non-business purposes.
2. Madhav Prasad Jatia Versus Commissioner of Income-Tax, Uttar Pradesh - 1979 (4) TMI 2 - SUPREME Court - on issue of business  purposes / expediency and non-business purposes.
3. Commissioner of Income-Tax, West Bengal I Versus Birla Cotton Spinning  1971 (8) TMI 9 - SUPREME Court - on issue of business  purposes / expediency and non-business purposes.
4. Commissioner Of Income-Tax, Kerala Versus Malayalam Plantations Limited - 1964 (4) TMI 9 - SUPREME Court - on issue of business  purposes / expediency and non-business purposes.
5. Commissioner of Income-Tax Versus Abhishek Industries Limited. - 2006 (8) TMI 123 - PUNJAB AND HARYANA High Court  - on issue of business  purposes / expediency and non-business purposes.
6. Commissioner of Income Tax Versus Dalmia Cement (Bharat) Ltd. - 2001 (9) TMI 48 - DELHI High Court  - on issue of business  purposes / expediency and non-business purposes.

Decision in case of Shri Rikhab Chand Jain on S.14A:

On reading of the judgment we find the following important aspect:

• When investment has been made for business purposes/ strategic investment from which other taxable income has also been derived, S. 14A is not applicable.
• When investment in shares has been made out of own funds and not out of borrowed funds, a portion of interest expenditure cannot be disallowed by invoking S.14A merely because dividend has been earned incidentally.
• What is relevant for consideration of allowability of interest on capital borrowed as per provisions of S.36 (1) (iii), is also relevant while invoking S.14A. If interest on borrowed funds has been paid for business purposes, then a part of it cannot be disallowed by invoking S.14A.

What has been missed in this case?

Author feels that in this case also non-applicability of S.14A, when any income, though exempt in hands of assessee, but which has been taxed under simplified taxation schemes has not been considered.

As per author dividend is not an income which does not constitute ‘total income’ under the Act.  Dividend which is taxed u/s 115O and 115R is not an income not taxable under the Act. Therefore, S.14A is not applicable in relation to dividend earned by shareholders or unit holders, in respect of which tax is levied as finally collected tax under simplified scheme of tax on income by way of dividend.

Secondly, declaration of dividend is totally under discretion of management of company/ mutual fund. Dividend is earned only if a dividend is declared. The yield by way of dividend is very low. Therefore, it is wrong to say that investment in shares or units is made for earning dividend, particularly if borrowed funds have also been used. No wise man will invest in shares to earn dividend of about 1-.15% only. In case interest bearing borrowed funds have been used, then definitely, investment in shares cannot be with the purpose of earning dividend.

Crucial wordings and aspects of S.14A not contended:

We find two sets of wordings in the sub-section (1) these are given in first column and in second column significance is discussed:

Words uses	Significance
total income under this Chapter,	This expression is used in relation to total income of assessee which is computed as per provisions of the Chapter IV that is Sections 14- 59.
which does not form part of the total income under this Act.	Here 'total income under this Act' means any income on which tax is not imposed under the entire Act whether directly or indirectly.
The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act	The AO can determine disallowable expenditure only when any 'income does not form part of total income under the Act' and not merely when any income is not included in total income of assessee.

 

We find use of first expressions 'total income under this chapter' which is used in relation to 'total income of assessee' which is to be computed under Chapter IV.

We find that the second expression 'total income under this Act' used in sub-section (1) and (2) both, this expression means chargeable or taxable income under the entire Income-tax Act.

If it was intended only in relation to the assessee whose income is to be computed, then similar expression could have been used that is 'which does not form part of total income under this chapter or 'which does not form part of total income of assessee' instead of words 'which does not form part of the total income under this Act.

The Income tax Act is a self contained and integrated code. As per scheme of the Act, some incomes are taxable in hands of the recipient of income whereas some incomes are taxable in hands of person who pays or distribute income. When a tax is finally collected (that is not in nature of tax deducted or collected on behalf of recipient of income) at distribution stage, then the income in respect of which such tax is collected is nothing but tax on income. Therefore, it cannot be said that such income does not form part of total income under this Act.

Once it is found that dividend forms part of 'total income under this Act', and a taxable income is computed, and tax is imposed and collected, then S.14A will not at all be applicable in relati)on to such income which has already been include in taxable income in some other scheme of imposing tax on income.

Similar is case in relation to share in profit of firm which is exempt in hands of partner, because tax has been paid by the firm. Other income of partner received from the same firm by way of interest, salary etc. is taxable in hands of partner as it is allowed to the firm as expenditure. Therefore, it can be said that the share in profit of the firm which has suffered tax in hands of the firm is not an income which does not form part of total income under the Income Tax Act. Therefore, S. 14A will not be applicable in respect of the same.

Above aspect has not been considered so far:

On reading of many other reported judgments also and also judgment in case of Shri Rikhab Chand Jain,  and on discussion in groups and tax authorities, it is found that the above aspect has not been considered and even contended in any reported case, so far my reading could cover in reported judgments.

In view of author, S.14A cannot be invoked in case of earnings by way of Dividend which has suffered dividend distribution tax and  share in profit of firm  which is paid or distribute only after payment of tax in nature of tax on income at distribution stage and no credit for which is allowed to anyone.

 

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Citations: in 2011 (4) TMI 861 - CALCUTTA HIGH COURT

1. CIT., Mumbai Versus M/s. Walfort Share & Stock Brokers P. Ltd. - 2010 (7) TMI 15 - SUPREME COURT
2. Rajasthan State Warehousing Corporation Versus Commissioner of Income-Tax - 2000 (2) TMI 5 - SUPREME Court
3. Commissioner of Income-Tax, Bombay City I Versus Maharashtra Sugar Mills Limited - 1971 (8) TMI 14 - SUPREME Court
4. GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER - 2010 (8) TMI 77 - BOMBAY HIGH COURT