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TMI Blog2016 (5) TMI 1248X X X X Extracts X X X X X X X X Extracts X X X X ..... see was engaged in trading in shares. So far as the acquisition of shares was in the form of investment and the only benefit the assessee derived was the dividend income which was not assessable under the Act, we are of the opinion that the disallowance under section 14A of the Act was squarely attracted and the Assessing Officer has rightly disallowed the claim - Decided against assessee - I.T.A. No. 2112/Mds/2015 - - - Dated:- 10-3-2016 - Shri Chandra Poojari, Accountant Member And Shri Duvvuru RL Reddy, Judicial Member For the Appellant : Shri K. Parashivaiah, CIT For the Respondent : Shri Raghav Rajeev Menon, Advocate ORDER Per Duvvuru Rl Reddy, Judicial Member This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) - 2, Chennai, dated 31.08.2015 relevant to the assessment year 2010-11. The only effective ground raised in the appeal of the Revenue relates to deletion of disallowance made under section 14A of the Income Tax Act, 1961 [ Act in short] read with Rule 8D of the Income Tax Rules. 2. Brief facts of the case are that the assessee is engaged in the business of finance and investments. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and by following the decision of the Tribunal in I.T.A. No. 1690/Mds/2013 dated 27.11.2013 for the assessment year 2009-10 in assessee s own case, deleted the disallowance made by the Assessing Officer. 4. Aggrieved, the Revenue is in appeal before the Tribunal and supported the order passed by the Assessing Officer. The ld. DR has submitted that the ld. CIT(A) followed the decision of the Tribunal in I.T.A. No. 1690/Mds/2013 dated 27.11.2013 for the assessment year 2009-10 in assessee s own case, wherein, the Tribunal has followed its own order in I.T.A. No. 1523/Mds/2012 in the case of MSA Security Services I.T.A. No.1524/Mds/2012 in NMS Consultancy vide order dated 17.12.2012, against which the Department has preferred further appeal before the Hon ble High Court and prayed that the order of the ld. CIT(A) may be reversed. 5. On the other hand, the ld. Counsel for assessee has submitted that the issue involved in this appeal is covered in favour of the assessee by the order of the Tribunal and supported the order passed by the ld. CIT(A). 6. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant relied upon the decision reported in CIT Vs. Rajendra Prasad Moody [1978] 115 ITR 519 wherein, it is held that interest paid on money borrowed for investment in shares is deductible under section 57(iii) of the Incometax Act, which requires that the expenditure must be laid out or expended wholly and exclusively for making or earning income. She also relied upon another decision in the case of CIT Vs. Smt. Sushila Devi Khadaria [2009] 319 ITR 413 (Bom); [2009] TIOL 171 HC (Mum-IT) and submits that the orders passed by the assessing authority and the Tribunal are erroneous and contrary to the aforementioned decisions. Therefore, she submits that substantial questions (i) and (ii) framed in the appeal memorandum arise for consideration of this court and requested to set aside the order passed by the Tribunal. The substantial questions of law framed in the appeal are extracted as hereunder. (i) Whether or not the Tribunal was right in not allowing the interest incurred by the assessee as expenditure in computing income of the assessee? (ii) Whether or not the Tribunal was right in reversing the findings of the Commissioner of Income-tax (Appeals), which was bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. Therefore, the dividend income is exempted from the tax liability under section 10(33) of the Act. Under section 14A of the Act, expenditure relating to exempted income is not allowable. The assessing authority has considered the above relevant factor and disallowed the claim of the assessee. The first appellate authority reversed the order of the assessing authority by applying the decision in Rajendra Prasad Moody's case [1978] 115 ITR 519 (SC), referred to supra, which was rendered prior to introduction of section 14A of the Act and which has no application to the fact situation. The Tribunal has rightly set aside the order of the first appellate authority. It cannot be disputed that dividend income is exempted under section 10(33) of the Act from the tax liability and the same cannot be computed for income under the head Other sources . Exempted income is not allowable for deduction in view of section 14A of the Act. In view of these two provisions, the claim of the assessee is wholly untenable and the decisions relied upon by the learned counsel on behalf of the appellant are not applicable to the fact situation. We are in agreement with the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by applying section 14A, squarely applied to the interest paid on the borrowed funds because it was on record that the entire funds borrowed were utilised for the acquisition of shares by the assessee in the company. The assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilised for the acquisition of shares only if shares were held as stock-in-trade and that would arise only if the assessee was engaged in trading in shares. So far as the acquisition of shares was in the form of investment and the only benefit the assessee derived was the dividend income which was not assessable under the Act, the disallowance under section 14A was squarely attracted and the Assessing Officer rightly disallowed the claim. 8. Further, in the case of Lakshmi Ring Travellers v. ACIT in I.T.A. No. 2083/Mds/2011 vide order dated 02.03.2012 for the assessment year 2008- 09, the Coordinate Bench of the Tribunal has held as under: 6. We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act by observing that as to why he is not satisfied with the correctness of claim of the assessee that no expenditure was incurred. The AO has recorded the findings that earning of dividend was not an automatic process and the assessee was required to keep regular control over the investments made. 5.1. The contention put forth by the ld. AR that it had earned dividend income of ₹ 262907.86 lakhs without incurring any expenses does not convince us at all. The term expenditure as per section 14A would include the expenditures that are related to investments made i.e. expenditures on administration, capital expenses, travelling expenses, operating expenses etc. It is difficult to accept that the assessee company was making investments decisions to the tune of ₹ 6,31,637 lakhs of public money without incurring a single penny out of its pocket. Such decisions are highly strategic in nature and are required to be made by highly qualified and experienced professionals. The same would also require market research and analysis. The assessee company by acquiring controlling interest in the subsidiary companies would also be required to attend board meetings and make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of s. 14A. In s. 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed under Chapter IV would fall within s. 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of s. 14A. Further, s. 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Secs. 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Secs. 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in ss. 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, the learned CIT(A),by his order dt. 16th June, 2003, directed the AO to allow deduction on the gross amount of dividend without allocating any expenditure. Department is aggrieved by the aforesaid order and is now in appeal before this Tribunal. 13. It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the board of directors f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (2006) 102 TTJ (Del) 120, the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of s. 14A would not apply to that extent. In Asstt.CIT vs. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mumbai)843,the Mumbai Bench of this Tribunal has held that the AO is justified in attributing a part of the financial and administrative expenses as expenditure in relation to exempt income and disallowing the same in view of the provisions of s.14A. We find that the aforesaid judgement is squarely applicable to the present case of the assessee. 5.4. The findings recorded by us as regards the expenditure required to be incurred by the assessee company for carrying out the investments and earning dividends income also finds force from the decision rendered by ITAT, Chennai Bench in the case of Southern Petro Chemical Industries vs DCIT (2005) 3 SOT 157 dated 20th October, 2004 relevant part of which is reproduced as under :- 6. We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submissions of the learned Departmental Representative, we restore this matter to the AO to verify the quantum of deduction claimed by the assessee in earlier years under s. 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes. 5.5. Since the assessee had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure u/s 14A read with Rule 8D. It is pertinent to refer to the observations made by ITAT Chennai Bench in the case of Lakshmi Ring Travellers vs ACIT in ITA No.2083/Mads/2011 dated 2nd March,2012 wherein it was held as under (relevant portion reproduced) :- Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the present case. 5.8. The ld. AR submitted without prejudice to the aforesaid grounds that there is a computational error in calculation under rule 8D(iii) and the AO has included the investments of the subsidiaries, which have not paid dividends to the assessee. In view of submission made, the said issue is remanded to the file of AO to make a correct computation without including the investments of companies which have not paid any dividend to the assessee company. The aforesaid grounds are, therefore, held to be against the assessee on merits and on the issue of computation under rule 8D(iii), the matter is remanded back to the file of AO. Accordingly Grounds 1(a), 1(b), 1(c), 2(b) and 2(c) of the assessee are dismissed. 10. The case law relied on by the ld. Counsel for the assessee in assessee s own case for the assessment year 2009-10 in I.T.A. No. 1690/Mds/2013 is not reflecting correct position of law and therefore, this Bench cannot blindly follow the earlier decision of the Tribunal in view of the rulings of the Hon ble Jurisdictional High Court in the case of CIT v. Hi Tech Arai Ltd. [2010] 321 ITR 477, wherein the Hon ble High Court has held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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