TMI Blog2010 (10) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... PER VIJAY PAL RAO,JM This appeal by the assessee is directed against the order dated 16.04.2009 of the learned CIT(A)-IV, Mumbai for the assessment year 2005-06. 2. The assessee has raised the following grounds in this appeal : 1. The ld. CIT(A) erred in directing the AO to recomputed disallowance u/s 14A of the Act being alleged expenditure incurred for earning dividend income by applying Rule 8D of the Rules 1962. 2. It is submitted that in the fact and the circumstances of the case, and in law such direction was beyond and/or in excess of the jurisdiction of the ld. CIT(A). In the result the appeal by the assessee is partly allowed for statistical purposes. 3. The ld. CIT(A) erred in directing the AO to apply rule 8D of the Rules to the case of the appellant. 3. From the grounds of appeal following two issue arises i) whether in the facts and circumstances of the case, the provisions of section 14A are applicable when the dividend was received by the assessee on the shares which were acquired in the course of assessee s business and income from which is taxable; ii) whether the provisions of Rule 8D are applicable in the case of the assessee. . 4. Issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred in relation to tax free income within the meaning of section 14A. When the assessee has held shares as stock-in- trade then the dividend income is only an incidental because the purpose of holding the shares was not for earning the dividend income and therefore the allocation of such expenditure between the business income and the dividend income is not possible and permissible. 8. The ld. AR has relied upon the decision hon. Supreme Court in the case of CIT V/s Indian Bank Limited reported in (1965) 56 ITR 77(SC), CIT V/s New India Investment Corporation Ltd (113 ITR 778(Cal ), CIT V/s Devenport and Co Pvt. Ltd 158 ITR 348 (Cal ), CIT V/s Anniversary Investments Agencies Ltd 175 ITR 199(Cal). He has further submitted that no part of the business expenditure can be attributed to earning the dividend income.0 The borrowing of the assessee by way of overdraft form the bank was not for the purposes of acquiring shares with the object of earning dividends on those shares, but the object of the borrowings was to purchase shares for the purpose of the assessee s business namely buying and selling of shares and securities with a view to earning profits. The object of the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a case of dealer in shares. In case of a dealer, the business expenses are incurred in relation to earning taxable income, that is, profit or loss arising from regular dealing in shares. As such, they cannot be regarded as in relation for earning dividend income. The proximate cause is between the expenses and the taxable business income and not between the expenses and the tax free dividend income. The assessee had not made any investment in shares for the purpose of earning dividend. No doubt, the assessee had received dividends but it was incidental receipts, as the assessee purchased shares for the purposes of selling the same and during that process the assessee received some dividend. Therefore, it could not be said that the assessee was dealing in the transact ions which were exempt from tax. 10.On the other hand, the learned DR has submitted that the provisions of section 14A are attracted when the assessee has earned the income which is not included in the total income irrespective of the fact whether such exempt income desired by the assessee or incidental, when the assessee has claimed such income as exempt u/s 10. Dividend is not in the hand of the assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income. The Hon Supreme Court in the case of CIT v Wallfort Share and Stock Brokers Pvt. Ltd (supra) in paragraph 17 has held as under : .. . Therefore, one needs to read the words expenditure incurred in Section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the total income for the purpose of chargeability to tax. As stated above, the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/ expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not expenditure incurred in terms of Section 14A. Expenditure is a pay-out. It re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applies even for the purposes of Section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established which is the relationship of the expenditure with income which does not form part of the total income a disallowance has to be effected. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under Section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation Insertion of Sub-sections (2) and (3) to Section 14A : The Hon. High Court has further observed and summarized the conclusion in paragraph 43 as under : A Summation of our conclusions on the interpretation of the provisions: 43. In order to conclude the discussion on this aspect of the case, we would proceed to recapitulate our conclusions. (i) Section 14A was enacted by Parliament in order to overcome the judgments of the Supreme Court in the case of Indian bank, Maharashtra Sugar and Rajasthan Warehousing Corporation in which it was held that in the case of a composite and indivisible busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all the relevant facts and circumstances; (v) .. (vi) .. (vii) .. (viii) (ix) (x) (xi) .. (xii) . (xiii) Income from dividend and similarly, income from mutual funds do not form part of the total income under Section 10(33). The expenditure incurred in relation to earning such income cannot be allowed under Section 14A; (xiv) In order to determine the quantum of the disallowance, there must be a proximate relationship between the expenditure and the income which does not form part of the total income. Once such a proximate relationship exists, the disallowance has to be effected. All expenditure incurred in the earning of income which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court in Walfort and it would not be permissible to restrict the provisions of Section 14A by an artificial method of interpretation. C.2 A plain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. 15. Accordingly, this issue is decided against the assessee. 16. The next issue is applicability of Rule 8D. The amendment whereby Rule 8D has been introduced in statute has been held prospective by the Hon.jurisdictional High Court in the decision in the case of Godrej and Boyce Mfg Co. Ltd v. Dy CIT (supra) in paragraphs 69,70,71 as under : 69. For the reasons which we have noted earlier, we have come to the conclusion that the provisions of Rule 8D shall have no application to Assessment Year 200203 which is the year under consideration in this case. At the same time, as we have noted, Section 14A(1) would have to be given effect to. The principle underlying Section 14A(1) is that no deduction can be claimed in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. The div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be appropriate to allow the position to be changed in a subsequent year. Reliance was also sought to be placed upon the decisions of the Karnataka (1992) 193 ITR 321 (SC). High Court in Commissioner of Income Tax v. Sridev Enterprises; of a Division Bench of this Court in Commissioner of Income Tax v. Reliance Utilities and Power Ltd.44 and on the decision of the Supreme Court in Munjal Sales Corporation v. Commissioner of Income Tax. 71. Now before we deal with the judgments on which reliance has been placed, it is necessary to appreciate the basis of the decisions of the Tribunal for Assessment Years 1998-99,1999-2000 and 2001-02. In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares / income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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