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TMI Blog2013 (12) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer (AO) the said rebate in tax would only arise where the assessee's tax liability is worked out under the regular provisions of the Act. The ld. CIT(A) has allowed the assessee's claim in its respect following the decision by the Tribunal in the case of Horizon Capital Ltd. v. ITO [IT Appeal No. 592(Bang.) of 2010 dated 16.07.2010] discussing the matter in detail vide paras 2.1 to 2.3 (pages 4-8) of his order. 3. We have heard the parties, and perused the material on record. We find no infirmity in the impugned order; the same being rather the consistent view of the Mumbai Benches of the Tribunal. The order by the Tribunal in the case of Horizon Capital Ltd. (supra) has been since confirmed by the high court in CIT v. Horizon Capital Ltd. [2012] 17 taxmann.com 8 (Kar.) .We, may, however, clarify that the rebate u/s. 88E is only in respect of the tax chargeable under the head profit and gains of business or profession, and not any other. As such, only as much of tax under the MAT provisions which relates to the income, though based on book profit, attributable to the profits of the assessee's business arising from taxable securities transactions, would st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions, rendered independent of each other, is that where investment under reference is held as stock-in-trade, the dividend income arising on the shares is only incidental to the business of purchase and sale of shares. As such, no expenditure can said to have been incurred in acquiring or holding the shares for the purpose of earning dividend income, i.e., the income which does not form a part of total income under the Act, necessitating disallowance of the expenditure incurred in relation thereto u/s. 14A(1). That being the case, in our view there is no basis in the Revenue's claim that the said decisions being prior to A.Y. 2008-09 would not be applicable for the said year. This is as, irrespective of the year under reference, only the expenditure actually incurred in relation to income not forming part of the total income, which is the subject matter of disallowance u/s. 14A(1). The significance of AY 2008-09, or the year for which the disallowance is being made, is only that with effect from that year rules 8D comes into play so that the estimation of the expenditure, in the absence of the assessee's records exhibiting otherwise, is to be made with reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, to say that section 14A would not apply as shares are held as stock-in-trade would again not hold. Reference in this context may be drawn to the decision by the Special Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169, wherein this issue stands deliberated at length, being, rather, the issue under reference. The larger Bench has clarified that the expenditure in relation to the tax exempt incidental income is not immune to section 14A, which would apply irrespective of the fact that the shares are held as stock-in-trade (refer paras 24, 25 & 26). 6.3 Next, we may examine the assessee's claim that no disallowance u/s. 14A(1) would arise as no expenditure at all has been incurred in relation to the tax exempt dividend income; the same arising only incidentally to its share trading activity, i.e., on shares being retained for the time being, and being held as on the record date, yield dividend, the quantum of which is again uncertain. That is, no specific expenditure has been incurred for earning the dividend inasmuch as all the expenditure which stands incurred is for the purpose of its share trading business, so that no additional expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed if only direct expenditure was contemplated for exclusion and/or disallowance. This is for the simple reason that the direct expenditure incurred for earning an income not forming part of the total income would even otherwise, i.e., even in the absence of section 14A, not stand to be allowed in computing the total income. This is because the principle of only the net (and not gross) income (from any source or activity) being liable to tax is axiomatic in tax jurisprudence. Could, one may ask, the expenditure on an activity yielding only one income which is tax-exempt, be claimed against any other income forming part of the total income, where flowing from a similar or an allied activity? For example, could the interest expenditure on agricultural inputs (seeds, fertilizers, etc.) yielding agricultural produce, which is subject to further processing to generate processed food product/s, be deducted in computing the business income on such products. Certainly not. As explained in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), it is only to mitigate and transcend the issues relating to attribution that the provision of section 14A has been brought in place, viz. where one compos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Tribunal' at pages 134 to 137 of the judgment. Repelling the argument that investment in shares yielding tax free dividend income has been made out of the own funds, so that no interest expenditure has been incurred in relation to the dividend income, it clarified that the said fact was no longer dispositive of the matter, and that, even so, a disallowance in respect of interest would have to be made, and no presumption of investment of own funds, on ground of its sufficiency, could be drawn, distinguishing its own decision in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.); its relevant observations (at placitum 5, pg. 135) reading as under : "In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares/income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure shall fall within the scope of the words 'in relation to', as occurring in section 14A(1). We shall now examine the matter from the factual standpoint. The expenditure, it may be appreciated, is incurred by the assessee for the purpose of its business of share trading. All the expenditure, therefore, is incurred by the assessee in the regular course of its business, and for its purposes. That represents the input, in terms of an activity/s as 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 would give us the income/loss, as the case may be, from the business. As regards the uncertainty aspect, take the example of a share bought at Rs. 100 (say). Could it be said as to when it will be sold and at what rate1? The answers to both lie only in the womb of future. What is certain though is the incurring of the cost at Rs. 100/-, with pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible and, therefore, would be required to be apportioned between the taxable and non-taxable incomes where the business generates more than one income stream. Clearly, the direct expenditure would stand to be set off against the relevant income/s and the apportionment, in effect, comes into play only for indirect expenditure. 6.5 We may now come to the actual apportionment, for which rule 8D has been provided and, as held in the case of Godrej & BoyceMfg. Co. Ltd. (supra), operative w.e.f A.Y. 2008-09. At the outset, though, we may set at rest an argument by the assessee that rule 8D, which is mandatory, would not apply in a case where the shares are held as stock-in-trade. That is, even though section 14A may be applicable, rule 8D would not be inasmuch as words used in the rule, specifying the apportionment formula, is the 'value of investment', so that it would apply only where the shares are held as investment. Reliance has been placed in the matter on the decision in the case of Dy. CIT v. Gulshan Investment Co. Ltd. [2013] 142 ITD 89 (Kol.). This argument was specifically taken before the Special Bench in the case of Daga CapitalManagement (P.) Ltd. (supra), and reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments, income from which is not taxable, on a proportionate basis, and which though is not only understandable, but as appropriate and justifiable as a general formula could be. However, in the instant case, shares, which yield the tax exempt dividend income, interest qua which is to be disallowed, being held as stock-in-trade, also yield share trading income, which is taxable. Therefore, to say that the entire interest relatable to the average share holding is to be attributed to the tax exempt dividend income would be patently incorrect on facts. That, in fact, the shares are bought and held primarily for share trading income, further accentuates the apparent incongruity of the situation arising on the mechanical application of r. 8D(2)(n). Clearly, therefore, the amount as per rule 8D(2)(ii) would need to be scaled down, bifurcating the expenditure so arrived at as between these two incomes. As regards the ratio of such scaling down, no hard and fast rule for the purpose would hold, each fact situation being different. However, considering that the dominant objective of the share holding, which in our view should be dispositive of the matter, is the share trading income, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d without considering the decision in the case of Godrej & BoyceMfg. Co. Ltd. (supra). We are in fact, in deciding on the applicability of s.14A as well as rule 8D, in a case where shares are held as stock-in-trade, supported by the decision in the case of Jt. CIT v. American Express Bank Ltd. [2012] [2012] 138 ITD 288. 7. The assessee, in the instant case, has suo motu disallowed Rs. 1,22,295/-. Its argument for non-application of s.l4A(l) is thus even otherwise infirm. The disallowance by the Revenue, per rule 8D, works to Rs. 12,23,627/-, a part of which stands to be deleted and the balance confirmed, as indicated above. Under the circumstances, the assessee gets part relief. We decide accordingly. 8. In the result, the Revenue's appeal is dismissed, and the assessee's appeal is partly allowed. I.P.Bansal, Judicial Member In view of my respectful disagreement with the order passed by ld. Brother I proceed to pass separate order. In my opinion the issue raised in the present appeal is no more res integra and is covered in favour of the assessee by the solitary available decision rendered by Hon'ble Karnataka High Court in the case of CCI Ltd. (supra). In the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of Hon'ble High Court of Kerala in the case of CIT v. Smt Leena Ramachandran [2011] 339 ITR 296 to argue that the disallowance could not be made in relation to the dividend received from trading shares. The Tribunal had however, distinguished the said judgment of Hon'ble High Court of Kerala on the ground that in that case the acquisition of shares with the borrowed funds was for the purpose of controlling the company. Therefore, even though the purpose for acquiring the shares was business, the High Court had upheld the disallowance u/s.l4A of the I.T. Act. The Tribunal also noted that the High Court in that case had only observed that the interest paid on borrowed funds utilised for acquiring shares could be allowed as deduction u/s.36(l)(iii) only if shares were held as stock-in-trade. These observations were only obiter dicta and not the ratio decidendi of the judgment. The ratio decidendi of the judgment was disallowance of interest u/s.l4A which had been upheld by the Tribunal. The Tribunal therefore, did not accept the arguments based on the judgment of Hon'ble High Court of Kerala in the case of Smt. Leena Ramachandran (supra) which was not directly on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from trading shares cannot be made. We, therefore, see no infirmity in the order of the ld. CTT(A) in deleting the disallowance u/s,14A computed by the A.O. in relation to the stock-in-trade. The order of the ld. CIT(A) is accordingly upheld." 2. It may be mentioned that the aforementioned decision in the case of India Advantage Securities Ltd. (supra) is dated 14/09/2012 and it has subsequently been followed consistently by the other Benches of the Mumbai ITAT. It may also be mentioned here that Mumbai Tribunal in the case of American Express Bank Ltd. (supra) did not consider the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra), which was available on the date when the appeal in the case of American Express BankLtd. (supra) was decided. Therefore, in my opinion the decision in the case of American Express BankLtd. (supra) was rightly not followed in the subsequent decisions of Mumbai ITAT. In my considered opinion, to maintain consistency with the series of abovementioned decisions of ITAT which have duly considered the decision of Special Bench in the case of Daga Capital Management (P) Ltd. (supra) and Division Bench decision in the case of American ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S Bedi, Judicial Member (As a Third Member) The aforesaid appeal was heard initially by a Division Bench. There were however differences of opinion between the Members constituting the Division Bench. On a reference made by them, the Hon'ble President has nominated me as Third Member in terms of the provisions of section 255(4) of the Income-tax Act. 2. The ld. Judicial Member has referred the following point of difference: "Whether on the facts and in the circumstances of the case disallowance under section 14A of the I. T. Act, 1961 (the Act) can be made where dividend income has been earned on the shares held as stock-in-trade? " 3. The ld. Accountant Member however felt that the point of difference referred by the ld. Judicial Member did not represent their points of difference correctly. He therefore referred the following points of difference. "(1) Whether it is permissible for the Tribunal to base its decision on the decisions by the coordinate benches which were neither cited nor referred to at the time of hearing, or even before the authorities below, without confronting them to the parties, in view of the settled-principles of natural justice, applied by the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me stands incurred by an assessee where the shares yielding such income are held as stock-in-trade? " 4. Cross-appeals, i.e., appeal bearing I.T.A. No. 5l63/Mum/20ll by the Department and another appeal bearing I.T.A. No. 57245/Murn/2011 by the assessee, were filed before this Tribunal for the assessment year 2008-09. A consolidated order was proposed by the ld. Accountant Member. The ld. Judicial Member agreed with the order disposing of Department's appeal bearing I.T.A. No. 5163/Mum/2011. He however differed from the view taken by the ld. Accountant Member in the assessee's appeal bearing I.T.A. No. 5724/Mum/20l l. Both of them consequently proceeded to refer their points of difference to the Hon'ble President, which have been already been stated earlier in this order. 5. On the date fixed for hearing, the ld. counsel for the assessee filed an application for adjournment on the ground that two of the partners of the CA firm, who had briefed the counsel, have gone out of station to attend Jain Festival and therefore the case may be adjourned. But when the counsel for the assessee was asked to show whether this firm of CA has been engaged by the assessee through any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Godrej & Boyce Mfg. Co. Ltd. (supra), and adverse decision in Daga Capital Management (P.) Ltd. (supra) as well as in American Express Bank Ltd. (supra). It was further submitted that the ld. Judicial Member has chosen to follow the abovereferred later direct decision of the Hon'ble Karnataka High Court in CCI Ltd. (supra) in favour of the assessee. It was also clarified that the Hon'ble Bombay High Court decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), is applicable only where shares are held as investment and not where the shares are held by the assessee as stock-in-trade while Special Bench decision in the case of Daga Capital Management (P.) Ltd. (supra) is applicable where shares are held as stock-in-trade. 7. It was further submitted that it is well-settled that once the authority higher than the Tribunal has expressed an opinion on the issue before the Tribunal, it is not permissible to rely upon a contrary decision of the Tribunal including decision of a Special Bench. Reliance was placed on Tej International (P.) Ltd. v. Dy. CIT (2000) 69 TTJ (Del.) 650) and the decision in the case of CIT v. Smt. Godavari Devi Saraf [1978] 113 ITR 589(Bom.). 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares were held by it as stock-in-trade. The issue under appeal is squarely covered by the principles laid down by the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) as also by the judgment of the Hon'ble Calcutta High Court in Dhanuka & Sons v. CIT [2011] 339 ITR 319 and by the decisions of this Tribunal in American Express BankLtd. (supra) arid Dy. CIT v. Damani Estates and Finance(P.) Ltd. [IT Appeal No. 3029 (Mum.) of 2012, dated 17-1-2013] in which the issue under appeal has been elaborately considered. It may be relevant to mention that the ld. Judicial Member himself is a party to the order passed by this Tribunal in American Express Bank Ltd., (supra) which has been followed by the ld. AM. The aforesaid judgments relate to the assessment years after the insertion of Rule 8D in the Income-tax Rules. In my considered view, the ld. AM has rightly, after careful consideration of all the relevant aspects of the case, followed the aforesaid decisions. The ld. AM has rightly observed that the judgment of the Hon'ble Karnataka High Court in CCILtd. (supra) is not a solitary judgment on the issue under appeal inasmuch as the issue under app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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