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TMI Blog2010 (11) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... k-in-trade and not as investment. Hence the stock-in-trade is mainly held for the purpose of earning profits on sales of shares and dividend income is merely incidental to the holding of the stock-in-trade. 1.3. The CIT(A) ought to have considered that the entire borrowings made by the Appellant was for the purpose of business which includes the investment made in stock-intrade and accordingly the interest on the borrowings would deductible expenditure u/s.36(1)(iii). 1.4. The CIT(A) erred in not appreciating the fact there is no provision for proportionate distribution of expenses between taxable income and tax free income and hence the expenses should be allowed in full. 2. Bare minimum facts which we consider necessary to mention, as extracted from the corresponding assessment order passed u/s.143(3) of the Act, dated 29/03/2004 for Ay 2001-02, were that the assesseecompany is in the business of trading of pharmaceutical products. In respect of the issue, as raised in the grounds of appeal, the observation of the Assessing Officer was that on perusal of Profit Loss account, it was found that the assessee has earned dividend income of ₹ 13,39,322/-. Undisputedly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce there was no change in respect of the facts as also in respect of law for the year under consideration, therefore, applying the same ratio the addition was confirmed in both the years. Being aggrieved, now the assessee is further in appeals. 4. We have heard both the sides and also perused the orders of the authorities below. At the outset, it is worth to mention that for both the years the Assessing Officer had specifically commented that the addition was on the basis of the discussion and addition made in earlier assessment years, however, the calculation made in the past was wrong. Likewise, the first appellate authority has also noted while deciding this ground that the same has already been decided by his predecessor in the past, therefore, for these years as well, following the said orders, the addition was confirmed. In this context, therefore, it is worth to mention that for Assessment Years 1999-2000, 2000-01, 2001-02, 2002-03 2003-04, the Revenue was in appeal in the past as is evident from the order of the ITAT Ahmedabad D Bench dated 30/09/2010. In that order, there was no ground in respect of the issue of section 14A of the Act. On examining these facts, a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income and/or income from mutual fund which do not form part of the total income as contemplated u/s.14A of the I.T. Act, 1961. It has also been directed that the Assessing Officer can adopt a reasonable basis for effecting the apportionment. It has also been observed by the Hon'ble Court that while making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and material having a bearing on the facts and circumstances of the case. 6.1. In this judgement at the end, the Hon'ble Court has also recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier years would have no relevance in considering disallowance in assessment year 2002- 2003 in the light of Section 14A of the Act. 73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion : 74. Our conclusions in this judgment are as follows ; i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. 6.2. In addition to the above precedent, we are also governed by a decision of respected ITAT Mumbai Bench pronounced in the case of Daga capital Management Pvt.Ltd. reported as 117 ITD 169 (Mum.), wherein also it was pronounced that in order to escape the applicability of section 14A, onus is on the assessee to prove that the expenditure was incurred for earning only taxable income. However, it has also been prescribed that after introduction of Rule 8D, it becomes clear that not only the expenditure directly relating to exempted income but also the indirect expenditure like interest which is not directly attributable to any particular: income or receipt are to be taken into for the purpose of invocation of the provisions of section 14A of the I.T. Act, 1961. 6.3. Apart from the above discussion, an another case law should also not escape our attention as pronounced in the case of Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expenditure in the scheme of section 14A; for attracting section 14A there has to be a proximate cause for disallowance, which is in relationship with the tax exempt income. Pay back or return of investment is not such proximate cause. 6.4. It is worth to mention, as held in the case of Hero Cycles (323 ITR 518)[P H] that if there is sufficient material on record to establish that investment in shares/units was made out of non-interest bearing funds, then no disallowance has to be made out of interest debited to Profit Loss account, even if there is dividend income from such investment. Where the expenditure incurred could not be related to exempted income, the provisions of section 14A would also not be attracted. It is also a settled law that the theory of apportionment of expenditure between taxable and non-taxable income, has been accepted. However, Assessing Officer has to satisfy himself and such satisfaction must be arrived at on the objective basis. If benefit arising from investment in shares out of interest-bearing fund is the dividend income exempt u/s.10(34) of the Act, the related expenditure has to be disallowed . 6.5. However, it depends on the facts of e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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