9911796707
TMI Blog2013 (8) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... ler and trader in shares and securities. Its various business segments are: Futures & Options (F&O) in shares and securities, shares transactions in the cash and derivative markets, speculation business therein (the above classifications may bear some overlapping). Shares in companies and Units of Mutual Funds (MFs) are also held by way of investments, on transfer of a part of which during the year the assessee has in fact disclosed long term capital gain (LTCG) at Rs. 695.91 lacs, claimed tax exempt u/s.10(38) of the Act (PB pages 18-19). The assessee having earned dividend on shares at Rs. 386.10 lacs, claimed & allowed tax-exempt u/s.10(34), the AO proceeded to disallow the expenditure incurred by the assessee in relation thereto u/s. 14A (1) in terms of rule 8D; the said rule being applicable and mandatory for the current year, at Rs. 140.69 lacs. The assessee challenged it before the ld. CIT(A) on several grounds. In appellate proceedings, it was also contended that the AO had not examined the correctness of the assessee's claim as to the amount liable for disallowance u/s. 14A (1) at Rs. 10 lacs. The assessee, in his opinion, had with facts and figures been able to show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able disallowance u/s. 14A at Rs. 10 lacs, which it further claims the AO to have not satisfactorily impugned, rests on the dividend income on such shares being not liable to any disallowance u/s. 14A(1). Two, though this aspect has been dealt with in extenso by the special bench of the Tribunal in ITO vs. Daga Capital & Management Services Pvt. Ltd. [117 ITD 169 (Mum)(SB), 312 ITR (AT) 1], which should normally be conclusive of the matter (as far as the Tribunal is concerned), the controversy arises in view of decisions as in the case of CCI Ltd. vs. Jt. CIT [2012] 71 DTR (Kar.) 141 and CIT v. Smt. Leena Ramachandran [2011] 339 ITR 296 (Ker). The Revenue has in this respect relied, per its sole ground of appeal, on the decision in the case of Dhanuka & Sons vs. CIT [339 ITR 319 (Cal)], besides of course on the decision in the case of Godrej & Boyce Manufacturing Mfg. Co. Ltd. vs. Dy. CIT [2010] 328 ITR 81 (Bom). 5.2 In our view, the matter being legal, would have to be considered from the stand- point of whether the decision by the jurisdictional high court in case of Godrej & Boyce Mfg. Co. Ltd. (supra), upholding the constitutionality of section 14A as well as of rule 8D, delib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt may be made to the section of the Decision under the heading 'Enactment of s.14A' with the hon'ble court proceeding to meet the various arguments advanced, summarizing its findings under the heading 'A summation of our conclusions on the interpretation of the provisions'. This position stands independently observed by the hon'ble Calcutta High Court in Dhanuka & Sons (supra). The factual situation obtaining in the instant case, where the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income, is the same. The said decisions thus squarely cover the facts of the instant case as well. Therefore, to say that section 14A would not apply as shares are held as stock-in-trade would not hold. The rationale, view and verdict of the hon'ble jurisdictional court, drawn on the basis of the decisions by the apex court rendered prior to the insertion of s. 14A; the interpretation of the provision, including as to the purpose of it having been brought on the statute-book, as well as its placement therein; and the decision by the apex court in the case of CIT vs. Walfort Share and Stock Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Yatish Trading Company Pvt. Ltd. (supra) relied upon by it. The algorithm being applicable in the instant case, the said reliance cannot be said to be bad; the assessee's said stand being made in the alternative. In this regard, without doubt a proximate cause is to be established between the expenditure and the relevant income, for it to qualify as an expenditure in relation to an income which does not form part of the total income and, consequently, liable for disallowance u/s.14A(1). The question, therefore, boils down to determination as to whether this proximate cause would imply a relationship of only first degree, i.e., having a direct nexus as conveyed by the words 'derived from', or would it also include a broader relationship, as indicated by the words 'attributable to', and which would include within its ambit both direct as well as indirect expenditure qua the relevant income. Without doubt, the scope would stand to be gathered from the words employed by the statute, i.e., 'in relation to'. In our clear view, the said words would, and for more than one reason, signify a broader relationship, i.e., of a first as well as second degree. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the provision of section 14A has been brought in place, viz. where one composite indivisible business gives rise to more than one stream of income, of which (at least) one does not form part of the total income. Prior to insertion of section 14A, it was impermissible for the A.O. to apportion the expenditure incurred in relation to such income as between the taxable and the tax- exempt income. That is, the very situation that arises and confronts us in the instant case. This aspect stands amply clarified by the hon'ble court in the said case, stating, with reference to the decision in the case of CIT vs. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), that the theory of apportionment of expenditure between the taxable and non taxable income has, in principle, been now widened under section 14A. The expenditure subject to disallowance u/s.14A would, therefore, mean just that, i.e., any expenditure falling u/ss. 15 to 59 of the Act, where incurred in relation to the tax- exempt income. Again, it clarifies (at pg.137, para 86(e)) that section 14A has brought in material changes, setting aside the argument made with reference to consistency and definiteness in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine." To the same effect are the observations by the hon'ble court in Dhanuka & Sons (supra), stating that the object of s.14A is to disallow both direct and indirect expenditure incurred in relation to income not forming part of the total income (para 8 of the decision). The hon'ble court went on to validate the apportionment of interest expenditure on shares purchased years ago in the absence of the assessee leading evidence as to the utilization of borrowed funds, so that, on a general pool of funds hypothesis, they stood also invested in business and, thus, also in shares held as trading stock. The same situation marks the instant case as well. We have dwelled on the matter at length, as the argument raised moves on the premise t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the attendant costs. The same would, therefore, stand to be deducted from the output in computing the income, be it in the form of share trading income or dividend income, which would also, though tax exempt, bear the character of business income. The dividend income, it needs to be appreciated, also arises from and forms an integral part of the said business. The net result, i.e., output minus the input, would give us the income or loss, as the case may be, from the business. As regards the uncertainty aspect, take the example of a share bought at Rs. 1000 (say). Could it be said as to when it will be sold, and at what rate? The answers to both (questions) lie only in the womb of future. What is certain though is the incurring of the cost at Rs. 1000/-, with profit motive, and which would, therefore, need to be deducted, irrespective of the time and value for which the share is sold. It is this, a direct cost, which would therefore stand to be deducted in determining the income or loss, as the case may be, on sale, as and when it occurs. Uncertainty as to both the timing as well as the quantum of income that would finally inure, obtains, but that would not in any manner de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual apportionment, for which rule 8D has been provided and, as held in the case of Godrej & Boyce (supra), is operative w.e.f. A.Y. 2008-09, the current year. Continuing further, with regard to the actual apportionment of costs, we find that r. 8D(2), which provides the formula for apportionment; r. 8D(1) stating the basis for the application of r. 8D itself, consists of three parts, each in relation to a separate set of expenses. The first sub-clause (i) is in respect of direct expenditure relating to income which does not form part of the total income. The second, i.e., sub- clause (ii), concerns the interest expenditure (other than that directly attributable to any particular income or receipt), while sub-clause (iii), which is qua indirect expenditure, provides for an amount equal to one half per cent of the average value (as appearing in the books of account) of the investment, income from which does not form part of the total income. The rule is self explanatory. There could be no quarrel with regard to the allocation of direct expenditure, which in fact states the obvious, and would in any case warrant a disallowance, i.e., even in the absence of the rule. No disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/r. 8D, the amount as per r. 8D(2)(ii) qua shares held as stock-in-trade would stand to be restricted to 20% thereof. As regards the legal mandate for the adjustment aforesaid, we have already clarified of the manifestly incorrect, if not absurd results that would otherwise follow. In fact, in our view, the language of r. 8D(2)(ii) itself provides the mandate inasmuch as it prescribes or authorizes a disallowance only qua investment, income from which is not taxable, so that in limiting the amount worked out with reference to the total investment; the same also yielding taxable income, we have only sought to operationalize and implement the said rule. It would also be appreciated that not doing so would also violate the principle of only the net income (from any source) being subject to tax inasmuch as disallowance of the total interest as per r. 8D(2)(ii) would in effect bring the share trading income to tax without deduction of the interest expenditure allocable or attributable thereto. Needless to add that no adjustment would arise in respect of shares held as 'investments', so that the two parts would need to be separately computed, which is otherwise manifest in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase and toward which the allocation of indirect expenditure is prescribed per r. 8D(2)(iii). The fact that trading shares also yield dividend income, which is not taxable, i.e., besides share trading income, is itself relevant and sufficient for attracting the provision of s.14A(1). In fact, an argument to this effect, i.e., r. 8D(2)(iii) as being not applicable to shares held as stock- in-trade, was specifically assumed in the case of Daga Capital (supra). The tribunal rejected the argument, made with reference to the language of r.8D, clarifying that the words used are 'value of investment' and not 'held as investment'. We may reproduce the relevant part of the order for the sake of better clarity: (pg. 233 of the report in ITD). "23.9 The learned Counsel for the assessee ....................... We are not impressed with this submission raised on behalf of the assessee for the out- and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word & ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
