TMI Blog2008 (7) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of trading, investment and finance. During the financial year, the assessee was in the business of investment, finance and trading etc., and during the course of the said business, the assessee earned badala income, dividend, etc., the assessee has also traded in chemicals items and earned income from such trading. In the profit and loss account, the assessee had debited a sum of Rs. 1,704.24 lakhs as interest paid to loan creditors. On perusal of the details filed, the Assessing Officer noticed that the interest pertains the amount borrowed for the purpose of investment in shares. The income from shares, i.e., dividend income was exempt under section 10( 33 ) of the Income-tax Act, 1961. Hence, the Assessing Officer called upon the assessee to explain why proportionate expenses incurred by the assessee should not be attributable to the dividend income in terms of section 14A of the Income-tax Act, 1961. The assessee submitted that it was engaged in the business of investment, trading and finance and the expenses including interest have been incurred for the purpose of the said business. No part of the expense was attributable to the dividend income. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,429.56 = Rs. 1,623.24 lakhs. Accordingly, Rs. 1,623.24 lakhs is considered as expenditure in relation to the earning of dividend income and accordingly, in terms of section 14A of the Income-tax Act, the expenditure of the interest allowable is reduced to the extent of Rs. 1,623.24 lakhs. 5. Before learned CIT(A), the same arguments as were put forth before Assessing Officer were reiterated. On the question of nexus between the interest expense and earning of exempt dividend income, the learned CIT(A) gave the following findings : ( a )The assessee had invested in purchase of shares of RIL, which yielded the exempt dividend income of Rs. 13,60,69,842. ( b )The investment in shares of M/s. RIL was made in the financial year relevant to assessment year 1999-2000. The investment was to the tune of Rs. 619.18 crores. ( c )As on 31-3-2000, i.e., the last date of the financial year in which, the investment was made, the assessee had availed the following loans : ( i )Amure Trading (P.) Ltd. 110.46 crores ( ii )Yangaste Trading (P.) Ltd. 112.81 crores ( iii )Tresta Trading (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was in the business of holding investments, which was real substantial and systematic and organized course of activity. In the course of such business, the assessee held that the shares by utilizing borrowed funds on which, interest was paid. It was submitted that interest expenditure was, therefore, incurred for the purpose of business and the assessee was therefore, allowable as deduction in computing the income. For the proposition that a person could carried on a business of holding investments, learned counsel for the assessee relied on the decision of Hon ble Supreme Court in the case of CIT v. Amalgamations (P.) Ltd. [1997] 226 ITR 188 and CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377. His further submission was that, though income in the form of dividend is assessable under the head Other sources , in the case of a company, which trade in shares and securities, such dividend income is normally be regarded in commercial sense as business income, if so, considered as business income, the interest expenditure incurred in relation to funds borrowed for investment in purchase of shares should also be regarded as business income. In support o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard, it was submitted by him that for provisions of section 14A were introduced to prevent the mischief; and therefore, reasons why the same was enacted would be relevant. Learned DR of the revenue placed reliance on several judicial pronouncements in support of this contention that the disallowance of expenses under section 14A had to be done, where there is income, which does not form part of the total income and where the nature of such income whether from business or from other sources is immaterial. Some of the cases relied upon by learned DR of the revenue are the decision of Calcutta Bench of the ITAT in the case of Dy. CIT v. S.G. Investments Industries Ltd. [2004] 89 ITD 44 and Everplus Securities Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi). 10. We have considered the rival submissions. At the outset, we may point out that the plea of learned counsel for the assessee that the assessee is in the business of holding investments has not been raised before the lower authorities. We may also point out that the test as to whether the assessee is in the business of holding investments is to see whether real substantial and systematic or organized course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that they are otherwise assessable under different heads by virtue of specific provisions of the Act, and as such it would be contended that interest paid on the monies borrowed which were utilised for the purchase of shares to be held as stock-in-trade amounts to interest paid for the purpose of the business and, therefore, fully allowable as deduction under section 36(1)( iii ) without treating the same as relatable to earning of dividend income. This view has been expressed by various courts before the insertion of section 14A of the Act as observed and discussed above. However, the position has now been clarified as a result of insertion of section 14A in the statute. As observed and discussed above, the effect of section 14A is to allow the expenses incurred only to the extent they are relatable to the earning of taxable income as ( sic ) had been since the inception of the Act. It is true that the dividend income arising from shares held as stock-in-trade is business income in the sense that the dividend is realised from the trading asset, but, at the same it has to be brought in mind that part of the business income in the nature of dividend is not includible in the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions and reasons as to why those decisions are not of any help to the plea of the assessee before us. S. No ITA No. Facts of the case Decision of ITAT Comments 1. 1215/Mum./02 (A.Y. 1998-99) dated 21-8-2006 Chikki Fertilizers Trading and Agencies (P.) Ltd. Ad hoc disallowance of Administrative expenses attributable to earning of tax-free dividend income was made by the Assessing Officer invoking provisions of section 14A of the Act Administrative expenses disallowed were not incurred in earning tax-free dividend income (para 6 of the order) A decision on facts of it s own case. Therefore does not help the case of the assessee. 2. 4585/Mum./02 (A.Y. 1999-2000) dated 31-8-2006 Kudrat Investment Leasing (India) (P.) Ltd. -do- -do- (para 7 of the order) -do- S. No ITA No. Facts of the case Decision of ITAT Comments 3. 1219/Mum./02 (A.Y. 1998-99) dated 30-3-2007 Avhesh Mercantile (P.) Ltd. -do- Disallowance cannot be made on ad hoc basis without establishing nexus between ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara 3 of the order) -do- 11. 1213/Mum./2002 (A/Y. 1998-99) dated 29-7-2005 Sandoz Textiles Securities (P.) Ltd. -do- -do- (para 7 of the order) -do- 12. 1214/Mum./2002 (A.Y. 1998-99) dated 7-10-2005 Hansdhwani Trading Co. (P.) Ltd. -do- -do- (para 9 of the order) -do- 13. 2722/Mum./2005 (A.Y. 2002-03) dated 21-2-2007 Sainara Properties (P.) Ltd. -do- -do- (para 6 of the order) -do- 14. 1218/Mum./2002 (A.Y. 1998-99) dated 5-12-2005 Parasakthi Trading Co. (P.) Ltd. -do- -do- (para 4 of the order) -do- 15. 4716/Mum./2003 (A.Y. 1999- 2000) dated 16-10-2007 Vatayan Synthetics (P.) Ltd. -do- -do- (para 6 of the order) -do- S. No ITA No. Facts of the case Decision of ITAT Comments 16. 6479/Mum./2002 (A.Y. 1999- 2000) dated 27-1-2006 Kanakdhara Traders (P.) Ltd. -do- -do- (para 7 of the order) -do- 17. 1198/Mum./2002 (A.Y. 1998-99) dated 25-4-2005 Reliance Consolidated Enterprises (P.) Ltd. -do- -do- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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