Dy. CIT v. Damani Estates & Finance (P) Ltd.

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The Tax Publishers2013 TaxPub(DT) 2132 (Mum-Trib) : (2013) 025 ITR (Trib) 0683 Income Tax Act, 1961 --Business expenditure--Disallowance under section 14A Applicability of section 14A to stock-in-trade--Assessee-company was a dealer and trader in shares and securities. It various business segments were, future and option (F&O) in shares and securities, share transactions in cash and derivatives market, speculation business, shares in companies and units of mutual fund, (MFs). Assessee had disclosed long-term capital gains (LTCG) at Rs. 695.91 lakhs, claimed tax exempt under section 10(38). Also assessee having earned dividend income on shares at 386.10 lakhs, claimed and allowed tax exempt under section 10(34). Assessing officer disallowed expenditure to earn exempt income under section 14A read with rule 8D at Rs. 140.69 lakhs. Commissioner (Appeals) restricted disallowance to Rs. 10 lakhs, i.e., the amount disallowed suo motu by the assessee. Revenue contended that section 14A as well as rule 8D being applicable in respect of stock-in-trade (at an average of Rs. 37.98 crores), i.e., apart from that held as investment (at an average of 13.26 crores). *Held:* Acceptable. The factual situation obtaining in the instance case, where shares trading business yields both taxable income in the form of share trading profit and tax exempt income by way of dividend income is the same, therefore, to say that section 14A would not apply as shares were held stock-in-trade would not hold correct. This Tribunal does not think that the purpose for which the shares are purchased and held would in any manner impact the applicability of section 14A, which gets attracted on incurring the expenditure in relation to a tax-exempt income, as dividend income. It may impact the head of the income under which the income arising there-from would stand to be assessed, i.e., were it to be taxable, but nothing more. The same is irrelevant as section 14A is independent of the head of the income under which the tax exempt income would be otherwise liable to tax. In fact, dividend income has been specifically provided under the statute for being assessable under section 56, so that the fact that it arises in respect of shares held as stock-in-trade, i.e., as a part of the business income, and as such there is under the circumstances not even a change in the head of income, as would generally be the case, would be of no consequence. Section 14A would come into play irrespective of the head of income (on account of it arising qua a trading asset), under which the income not forming part of the total income would be otherwise liable to be assessed. The court in the case of Godrej & Boyce Mfg. Co. Ltd., examining the genesis of the provision of section 14A, clarified that the basic principle of taxation being that only the net income, i.e., gross income minus expenditure, is taxable, holding section 14A as curative and declaratory of the intent of the Parliament. The same was required to be enacted to overcome the incidence of non-disallowance of expenditure in view of the judicial precedents by the apex court where there is a one, indivisible business giving rise to taxable as well as exempt incomes. Reference in this context may be made to the section of the decision under the heading 'Enactment of section 14A' with the court proceeding to meet the various arguments advanced, summarizing its findings under the heading 'A summation of conclusions on the interpretation of the provisions'. This position stands independently observed by the Calcutta High Court in Dhanuka & Sons. The factual situation obtaining in the instant case, where the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income, is the same. Therefore, to say that section 14A would not apply as shares are held as stock-in-trade would not hold. 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. Further, in this view of the matter, the assessee's claim that the assessing officer had not satisfactorily impugned its suo motu disallowance, which he is required to under section 14A(2), would not hold; the entire basis of the assessee's claim being the inapplicability of section 14A(1) to income's arising, or that may arise, on shares held as stock-in-trade, so that the expenditure in relation to the same would have to be excluded in estimating the amount liable for disallowance thereunder. [Para 5.3] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 2132 (Mum-Trib) : (2013) 025 ITR (Trib) 0683

Income Tax Act, 1961

--Business expenditure--Disallowance under section 14A Applicability of section 14A to stock-in-trade--Assessee-company was a dealer and trader in shares and securities. It various business segments were, future and option (F&O) in shares and securities, share transactions in cash and derivatives market, speculation business, shares in companies and units of mutual fund, (MFs). Assessee had disclosed long-term capital gains (LTCG) at Rs. 695.91 lakhs, claimed tax exempt under section 10(38). Also assessee having earned dividend income on shares at 386.10 lakhs, claimed and allowed tax exempt under section 10(34). Assessing officer disallowed expenditure to earn exempt income under section 14A read with rule 8D at Rs. 140.69 lakhs. Commissioner (Appeals) restricted disallowance to Rs. 10 lakhs, i.e., the amount disallowed suo motu by the assessee. Revenue contended that section 14A as well as rule 8D being applicable in respect of stock-in-trade (at an average of Rs. 37.98 crores), i.e., apart from that held as investment (at an average of 13.26 crores). Held: Acceptable. The factual situation obtaining in the instance case, where shares trading business yields both taxable income in the form of share trading profit and tax exempt income by way of dividend income is the same, therefore, to say that section 14A would not apply as shares were held stock-in-trade would not hold correct.

This Tribunal does not think that the purpose for which the shares are purchased and held would in any manner impact the applicability of section 14A, which gets attracted on incurring the expenditure in relation to a tax-exempt income, as dividend income. It may impact the head of the income under which the income arising there-from would stand to be assessed, i.e., were it to be taxable, but nothing more. The same is irrelevant as section 14A is independent of the head of the income under which the tax exempt income would be otherwise liable to tax. In fact, dividend income has been specifically provided under the statute for being assessable under section 56, so that the fact that it arises in respect of shares held as stock-in-trade, i.e., as a part of the business income, and as such there is under the circumstances not even a change in the head of income, as would generally be the case, would be of no consequence. Section 14A would come into play irrespective of the head of income (on account of it arising qua a trading asset), under which the income not forming part of the total income would be otherwise liable to be assessed. The court in the case of Godrej & Boyce Mfg. Co. Ltd., examining the genesis of the provision of section 14A, clarified that the basic principle of taxation being that only the net income, i.e., gross income minus expenditure, is taxable, holding section 14A as curative and declaratory of the intent of the Parliament. The same was required to be enacted to overcome the incidence of non-disallowance of expenditure in view of the judicial precedents by the apex court where there is a one, indivisible business giving rise to taxable as well as exempt incomes. Reference in this context may be made to the section of the decision under the heading 'Enactment of section 14A' with the court proceeding to meet the various arguments advanced, summarizing its findings under the heading 'A summation of conclusions on the interpretation of the provisions'. This position stands independently observed by the Calcutta High Court in Dhanuka & Sons. The factual situation obtaining in the instant case, where the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income, is the same. Therefore, to say that section 14A would not apply as shares are held as stock-in-trade would not hold. 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. Further, in this view of the matter, the assessee's claim that the assessing officer had not satisfactorily impugned its suo motu disallowance, which he is required to under section 14A(2), would not hold; the entire basis of the assessee's claim being the inapplicability of section 14A(1) to income's arising, or that may arise, on shares held as stock-in-trade, so that the expenditure in relation to the same would have to be excluded in estimating the amount liable for disallowance thereunder. [Para 5.3]