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TMI Blog2008 (7) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the financial year, the assessee was in the business of investment, finance and trading etc., and during the course of the said business, the assessee earned badala income, dividend, etc., the assessee has also traded in chemicals items and earned income from such trading. In the profit and loss account, the assessee had debited a sum of Rs. 1,704.24 lakhs as interest paid to loan creditors. On perusal of the details filed, the Assessing Officer noticed that the interest pertains the amount borrowed for the purpose of investment in shares. The income from shares, i.e., dividend income was exempt under section 10(33) of the Income-tax Act, 1961. Hence, the Assessing Officer called upon the assessee to explain why proportionate expenses incurred by the assessee should not be attributable to the dividend income in terms of section 14A of the Income-tax Act, 1961. The assessee submitted that it was engaged in the business of investment, trading and finance and the expenses including interest have been incurred for the purpose of the said business. No part of the expense was attributable to the dividend income. The assessee has received dividend income which is incidental to its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividend income and accordingly, in terms of section 14A of the Income-tax Act, the expenditure of the interest allowable is reduced to the extent of Rs. 1,623.24 lakhs. 5. Before learned CIT(A), the same arguments as were put forth before Assessing Officer were reiterated. On the question of nexus between the interest expense and earning of exempt dividend income, the learned CIT(A) gave the following findings :- (a)The assessee had invested in purchase of shares of RIL, which yielded the exempt dividend income of Rs. 13,60,69,842. (b)The investment in shares of M/s. RIL was made in the financial year relevant to assessment year 1999-2000. The investment was to the tune of Rs. 619.18 crores. (c)As on 31-3-2000, i.e., the last date of the financial year in which, the investment was made, the assessee had availed the following loans :- (i)Amure Trading (P.) Ltd. 110.46 crores (ii)Yangaste Trading (P.) Ltd. 112.81 crores (iii)Tresta Trading (P.) Ltd. 112.62 crores (iv)Reliance Capital Ltd. 285.89 crores 621.78 crores (d)As on 31-3-2001, the last date of the financial year relevant to assessment year 2000-01, the loan outstanding was as follows :- (i)Amure T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proposition that a person could carried on a business of holding investments, learned counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of CIT v. Amalgamations (P.) Ltd. [1997] 226 ITR 188 and CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377. His further submission was that, though income in the form of dividend is assessable under the head 'Other sources', in the case of a company, which trade in shares and securities, such dividend income is normally be regarded in commercial sense as business income, if so, considered as business income, the interest expenditure incurred in relation to funds borrowed for investment in purchase of shares should also be regarded as business income. In support of the above contention, learned counsel for the assessee relied on the following decisions :- u Gold Rock Investments Ltd., IT Appeal No. 4050/Mum./98 u Meghraj Financial Ltd., IT Appeal No. 6563/Mum./97 u Velocity Trading Ltd., IT Appeal No. 7719/Mum./2004 u Yangste Trading (P.) Ltd., IT Appeal No. 5055/Mum./2003 u Tresta Trading (P.) Ltd., IT Appeal No. 5063/Mum./03 His further contention was that the assessee admittedly was in multiple b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or from other sources is immaterial. Some of the cases relied upon by learned DR of the revenue are the decision of Calcutta Bench of the ITAT in the case of Dy. CIT v. S.G. Investments & Industries Ltd. [2004] 89 ITD 44 and Everplus Securities & Finance Ltd.v. Dy. CIT [2006] 101 ITD 151 (Delhi). 10. We have considered the rival submissions. At the outset, we may point out that the plea of learned counsel for the assessee that the assessee is in the business of holding investments has not been raised before the lower authorities. We may also point out that the test as to whether the assessee is in the business of holding investments is to see whether real substantial and systematic or organized course of activity with a view to have controlling interest over other companies is being carried out. In the absence of specific plea in this regard before the lower authorities, it is not possible at this stage to give a finding on this aspect. Decisions relied upon by learned counsel for the assessee in support of his contention that, in a case of an assessee who trades in shares and securities, dividend income is to be regarded in a commercial sense as business income; and therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the insertion of section 14A of the Act as observed and discussed above. However, the position has now been clarified as a result of insertion of section 14A in the statute. As observed and discussed above, the effect of section 14A is to allow the expenses incurred only to the extent they are relatable to the earning of taxable income as (sic) had been since the inception of the Act. It is true that the dividend income arising from shares held as stock-in-trade is business income in the sense that the dividend is realised from the trading asset, but, at the same it has to be brought in mind that part of the business income in the nature of dividend is not includible in the total income by virtue of the same being exempted under section 10(33) of the Act, and as such it is not understood as to why the interest incurred to the extent it is capable of being regarded as expenditure in relation to part of the business income in the nature of dividend should not be adjusted against exempted dividend income. The extent of benefit allowed by Parliament for dividend income is an amount which is required to be calculated with reference to the net dividend. It is not possible to sug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-free dividend income (para 6 of the order) A decision on facts of it's own case. Therefore does not help the case of the assessee. 2. 4585/Mum./02 (A.Y. 1999-2000) dated 31-8-2006 Kudrat Investment & Leasing (India) (P.) Ltd. -do- -do- (para 7 of the order) -do- S. No ITA No. Facts of the case Decision of ITAT Comments 3. 1219/Mum./02 (A.Y. 1998-99) dated 30-3-2007 Avhesh Mercantile (P.) Ltd. -do- Disallowance cannot be made on ad hoc basis without establishing nexus between expenditure and dividend income. Nexus has to be established between expenses disallowed u/s. 14A and the earning of the exempt dividend income. In the case of the assessee, disallowance has not been made on ad hoc basis. Therefore, decision does not help the assessee. 4. 1628/Mum./20 03 (A.Y. 1999-2000) dated 9-1-2006) M/s. Pams Investments & Trading Company (P.) Ltd. -do- (Interest expenses also) -do- (para 3 of the; order) -do- 5. 2505 & 2506/Bom./1990 (A.Ys. 1987-88 & 1988-89) dated 12-3-1998 A case of calculating exemption u/s. 80M of the Act which permits deduction only on net dividend i.e., gross dividend less expenses incurred in earning exempt income. The assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 23-9-2005 Riyaz Trading (P.) Ltd. -do- -do- (para 3 of the order) -do- 19. 1220/Mum./2002 (A.Y. 1998-99) dated 23-9-2005 Ornate Traders (P.) Ltd. -do- -do- (para 2 of the order) -do- 20. 2669/Mum./2002 (A.Y. 1998-99) dated 31-10-2005 Ornamental Trading Enterprises (P.) Ltd. -do- -do- (para 9 of the order) -do- 21. 2035/Mum./2003 (A.Y. 1999- 2000) dated 15-2-2006 Auspicious Investments (P.) Ltd. -do- -do- (paras 6 to 8 of the order) -do- 22. 1312/Mum./2002 (A.Y. 1998-99) dated 17-4-2006 -do- -do- (para 4 of the order) -do- S. No ITA No. Facts of the case Decision of ITAT Comments Gaylord Investments & Trading Co. (P.) Ltd. 23. 2343/Mum./2003 (A.Y. 1999-2000) dated 29-8-2006 Revlon Trading Company (P.) Ltd. -do- -do- (para 5 of the order) -do- For the reasons given in the chart, we are of the view that the case relied upon by learned counsel for the assessee are not of any assistance to the plea raised by the assessee before us. 12. Another contention of learned counsel for the assessee before us was that to earn exempt dividend income of Rs. 1360.16 lakhs it is not possible to have incurred an interest exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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