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TMI Blog2013 (12) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... 17-10-2012 - SHRI ABRAHAM P. GEORGE AND SHRI S.S. GODARA, JJ. For the Appellant : Shri R. Sivaraman, Advocate For the Respondent : Shri K.E.B. Rengarajan, Junior Standing Counsel Order Abraham P. George (Accountant Member).- These are appeals of the assessees, directed against orders dated May 31, 2012 of the Commissioner of Income-tax (Appeals)-V, Chennai. These appeals are considered together since grounds taken by the assessees are similar. 2. The appeal in I. T. A. No. 1524/Mds/2012 of the assessee, M/s. NMS Consultancy P. Ltd. is considered first for disposal. 3. The grievances of the assessee are that the Commissioner of Income-tax (Appeals) upheld disallowance of interest of Rs. 1,38,93,443 pertaining to certain investments made by the assessee in one M/s. Sringaravalli Consultants P. Ltd. and also held that section 14A of the Income-tax Act, 1961 (in short "the Act") was applicable on interest paid on borrowed funds utilised for purchasing equity shares. 4. The facts as culled out from assessment order are that the assessee, dealing in shares and also doing investment counselling, had filed return of income declaring a loss of Rs. 3,48,57,095 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SCPL) was in the course of its business of dealing in shares. As per the assessee, the shares acquired in M/s. SCPL formed part of its stock-in-trade and could not be considered as an investment which would result in exempt income. According to the assessee, sale of such shares would give rise to capital gains which was includible in the total income, and further, it had got controlling right in such company by the acquisition of shares. As per the assessee, the investment was made for business expediency and not for the purpose of earning dividend income. It was, therefore, argued that section 14A had no application. Thus, the main crux of its argument was that dividend income was only an incidental income, whereas, main income of the assessee was on account of trading in equity shares. 7. However, the Commissioner of Income-tax (Appeals) was not impressed. According to him, amounts spent for the purchase of shares in SCPL and share application money paid to the said company were shown by the assessee as investment in its books of account. In the opinion of the Commissioner of Income-tax (Appeals), such investment yielded dividend which was exempt from tax. Just because capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f investment made in M/s. SCPL was by way of share application money. It could not be considered that share application money would yield any dividend at all. The learned authorised representative pointed out that the Assessing Officer had made disallowance of interest of Rs. 1,38,93,443 for a reason that it was not business expenditure. Again, when he was calculating a disallowance under rule 8D, a part of the interest charged to profit and loss account was disallowed. This also resulted in excess disallowance of interest. The learned Commissioner of Income-tax (Appeals) had applied section 14A while justifying both the disallowances made by the Assessing Officer, but, nevertheless, ignored the double disallowance of interest. Reliance was placed by the learned authorised representative on the decision of the co-ordinate Bench of this Tribunal in the case of Siva Industries Holdings Ltd. v. Asst. CIT [2011] 59 DTR 182 (Chennai), that of Shriram Transport Finance Co. Ltd. v. Asst. CIT in I.T.A. No. 701/Mds/2012 dated June 28, 2012, that of the Mumbai Bench of the Tribunal in the case of Avshesh Mercantile P. Ltd. v. Deputy CIT (I. T. A. No. 5779/Mum/2006 dated June 13, 2012 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and heard the rival submissions. Facing sheet of the assessment order mentions the assessee's business as investment counselling. Nevertheless, at paragraph 1 of the assessment order, the Assessing Officer also states that the assessee was a dealer in shares. Read together, this would clearly imply that the assessee was both, doing investment as well as share trading as a part of its business. The assessee had invested a sum of Rs. 10,99,00,000 in the share of M/s. SCPL. In addition, it had also placed share application money with same company to the tune of Rs. 47.51 crores. It is not disputed that the assessee had received a dividend of Rs. 10,11,449. However, there is no finding by the Assessing Officer that the said dividend income had come from shares held in M/s. SCPL. At paragraph 2 of the assessment order, it is clearly mentioned that the assessee had converted its investment in shares into stock-in-trade on April 1, 2007, which is the first day of the relevant previous year. The assessee had also returned short-term capital gains on the sale of shares effected by it. Acquisition of shares in M/s. SCPL, whether as investment or as stock-in-trade, in such circumstances, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all. 13. The Commissioner of Income-tax (Appeals) has given a finding that intention with which shares were acquired is not a criterion for application of section 14A of the Act. In our opinion, intention of the assessee cannot be treated as irrelevant when the assessee admittedly was a dealer in shares and was also in receipt of short-term capital gains on account of its share dealings. The assessee, being a trader in share, even if the shares were held as a part of its investment, such holding of shares could still be considered only as a part of its business. When such holdings were considered as part of its business, whether the intention for such holding of shares was to receive the benefit of dividend has to be seen from the facts and circumstances. All along the assessee's plea was that such shares were held by it as a part of its business and not for the purpose of earning dividend income. Now the question boils down to the relevance of the intention of the assessee in so far as application of section 14A is considered. 14. Though the learned Departmental representative did not rely on the decision of Maxopp Investment Ltd. [2012] 347 ITR 272 (Delhi) of the hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition to disallowance of brokerage, the Assessing Officer ought to have made a disallowance for the part of indirect expenses under section 14A, as well. When the matter reached the hon'ble High Court, it was held that when the shares were retained not with an intention of earning dividend income and dividend income was incidental to the assessee's business of selling shares, which arose on shares remaining unsold, it could not be said that expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and should be disallowed. It was held by the hon'ble Karnataka High Court at para 5 of its judgment, as under : "5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent. of shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent. of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not with an intention of earning any dividend. In our opinion, the learned Commissioner of Income-tax (Appeals) fell in error when he held that whether shares were acquired to earn gains on sale thereof or to have controlling interest, were irrelevant factors. The circumstances, on the other hand, clearly show that dividend received was only incidental to the assessee's business of dealing in shares. The decisions of the hon'ble Karnataka High Court in the case of CCI Ltd. [2012] 71 DTR 141 (Karn) and that of the hon'ble Bombay High Court in the case of Delite Enterprises (supra) definitely come to the aid of the assessee. When two reasonable constructions can be given to a section, then the one which helps the assessee has to be given preference, by virtue of the decision of the hon'ble apex court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). In the circumstances of the case, we are of the view that disallowance under section 14A was not warranted. The acquisition of shares and placing share application money were in the course of business of the assessee and a disallowance under section 36(1)(iii) of the Act also could not have been made. Interest paid o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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