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TMI Blog2020 (12) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... d to compute the disallowance by way of apportionment of expenditure incurred by the assessee in relation to exempt income by segregating the expenditure qua strategic and non-strategic investment in shares. - ITA No.6219/Del./2016 - - - Dated:- 18-12-2020 - Shri Anil Chaturvedi, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : None For the Revenue : Shri Arun Kumar Yadav, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Jalco Financial Services (P) Ltd. (hereinafter referred to as the assessee ) by filing the present appeal sought to set aside the impugned order dated 23.09.2016 passed by the Commissioner of Income-tax (Appeals)-5, Delhi qua the assessment year 2008-09 on the grounds inter alia that :- 1. That the order of the Ld. CIT (A) is bad in law and is against the facts and circumstances of the case. 2. That the Ld. CIT (A) has erred in partially upholding the disallowance u/s 14A. 3. That having regards to the fact that no dividend income was earned on shares held as investment, the action of the Ld. CIT (A) in upholding the disallowance u/s 14A is squarely against the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend income from the shares held in stock-in-trade and with regard to shares held as investment, it did not earn any dividend income and as such no disallowance u/s 14A read with Rule 8D is called for and relied upon the decision rendered by Hon ble Delhi High Court in case of Cheminvest Limited (supra). During the course of appellate proceedings, assessee company has given the detail of its key value of investment and stock-in-trade as per balance-sheet which is extracted for ready perusal as under :- Particulars Amount (Rs.) Value of Investment as at 1.4.2007 15,20,68,225 Value of investment as at 31.3.2008 39,53,68,225 Average value of investment 27,37,18,225 Value of stock-in-trade as at 1.4.2007 1,85,27,13,427 Value of stock-in-trade as at 31.3.2008 1,13,02,25,462 Average value of stock-in-trade 1,49,14,69,444 Average value of investment + stock-in-trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words in relation to in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. 34) Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. 36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as stock-in-trade and not as investment , particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words: ...Admittedly the assessee had paid total interest of ₹ 2.92 crores out of which interest paid on term loan raised for specific purpose totals to ₹ 1.70 crores and balance interest paid by the assessee is ₹ 1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at ₹ 10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) at ₹ 5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed... Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under: In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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