TMI Blog2013 (8) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... a separate and complete code in itself, and as long as its ingredients are satisfied, a disallowance in its terms would follow. Expenses are incurred during and in the regular course of business, and with a view to earn income. No direct relationship or correspondence therewith, particularly for costs other than direct costs, on account of a variety of factors, hold. A proximate relationship though exists. Even for direct expenditure, the relationship (with income) cannot be said to be linear, though we are primarily here concerned with allocation of indirect expenditure. All such expenditure is deductible and, therefore, would be required to be apportioned between the taxable and non-taxable incomes where the business generates more than one income stream, at least one of which is not taxable. Clearly, the direct expenditure would stand to be set off against the relevant income/s and the apportionment, in substance, comes into play only for the indirect expenditure. Apportionment of expenses - Rule 8D - Held that:- There could be no quarrel with regard to the allocation of direct expenditure, which in fact states the obvious, and would in any case warrant a disallowance, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ('the Act' hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 05.03.2010. 2. The only issue arising in this appeal is the maintainability in law of the disallowance in the facts and circumstances of the case u/s. 14A read with rule 8D by the Assessing Officer (A.O.) at ₹ 1,40,69,402/-, since restricted by the first appellate authority to ₹ 10 lacs, i.e., the amount disallowed suo motu by the assessee. 3. The brief facts, which are simple and undisputed, are that the assessee-company is a dealer and trader in shares and securities. Its various business segments are: Futures Options (F O) in shares and securities, shares transactions in the cash and derivative markets, speculation business therein (the above classifications may bear some overlapping). Shares in companies and Units of Mutual Funds (MFs) are also held by way of investments, on transfer of a part of which during the year the assessee has in fact disclosed long term capital gain (LTCG) at ₹ 695.91 lacs, claimed tax exempt u/s.10(38) of the Act (PB pages 18-19). The assessee having earned dividend on shares at ₹ 386.10 lacs, claimed allowed tax-exempt u/s.10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng part of total income? Both the parties could not furnish any satisfactory answer, and were amenable to some reasonable basis for allocating such expenditure, i.e., as between the two income streams afore-said arising there-from. 5. We have heard the parties, and perused the material on record. 5.1 We may first address the question as to whether section 14A would apply to the shares held as stock-in-trade; it being admittedly applicable to shares held as investment. This is relevant on two counts. Firstly, the entire basis of the assessee's claim in having made a reasonable disallowance u/s. 14A at ₹ 10 lacs, which it further claims the AO to have not satisfactorily impugned, rests on the dividend income on such shares being not liable to any disallowance u/s. 14A(1). Two, though this aspect has been dealt with in extenso by the special bench of the Tribunal in ITO vs. Daga Capital Management Services Pvt. Ltd. [117 ITD 169 (Mum)(SB), 312 ITR (AT) 1], which should normally be conclusive of the matter (as far as the Tribunal is concerned), the controversy arises in view of decisions as in the case of CCI Ltd. vs. Jt. CIT [2012] 71 DTR (Kar.) 141 and CIT v. Sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hon'ble court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), 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 sec. 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 s.14A' with the hon'ble court proceeding to meet the various arguments advanced, summarizing its findings under the heading 'A summation of our conclusions on the interpretation of the provisions'. This position stands independently observed by the hon'ble Calcutta High Court in Dhanuka Sons (supra). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare trading business, so that no additional expenditure can be said to have been incurred for earning dividend, and which therefore is at nil. In fact, it is this aspect of the matter that has been subject to varying understanding, i.e., between the assessees and the Revenue, resulting in varying decisions. Toward this, we firstly clarify that though no such claim was taken specifically before us; the assessee having in fact disallowed a sum of ₹ 10 lacs, so that it could not possibly assume such a stand. The same, however, forms the basis of the decisions in the case of Smt. Leena Ramachandran (supra) and Yatish Trading Company Pvt. Ltd. (supra) relied upon by it. The algorithm being applicable in the instant case, the said reliance cannot be said to be bad; the assessee's said stand being made in the alternative. In this regard, without doubt a proximate cause is to be established between the expenditure and the relevant income, for it to qualify as an expenditure in relation to an income which does not form part of the total income and, consequently, liable for disallowance u/s.14A(1). The question, therefore, boils down to determination as to whether this proximate c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, which is tax-exempt, be claimed against any other income forming part of the total income, where flowing from a similar or an allied activity? For example, could the interest expenditure on agricultural inputs (seeds, fertilizers, etc.) yielding agricultural produce, which is subject to further processing to generate processed food product/s, be deducted in computing the business income on such products? Certainly not; the same being deductible only in computing agricultural income. As explained in the case of Godrej Boyce (supra), it is only to mitigate and transcend the issues relating to attribution that the provision of section 14A has been brought in place, viz. where one composite indivisible business gives rise to more than one stream of income, of which (at least) one does not form part of the total income. Prior to insertion of section 14A, it was impermissible for the A.O. to apportion the expenditure incurred in relation to such income as between the taxable and the tax- exempt income. That is, the very situation that arises and confronts us in the instant case. This aspect stands amply clarified by the hon'ble court in the said case, stating, with reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinguishing its own decision in the case of CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.); its relevant observations (at placitum 5, pg. 135) reading as under : 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 income. Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine. To the same effect are the observations by the hon'ble court in Dhanuka Sons (supra), stating that the object o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me itself being uncertain both in terms of time and quantum. We have already examined the matter from the legal stand-point, clarifying that all the direct and indirect expenditure shall fall within the scope of the words 'in relation to', as occurring in section 14A(1). We may examine the matter from the factual stand- point also. The expenditure, it may be appreciated, is incurred by the assessee for the purpose of its business of share trading. All the expenditure, therefore, is incurred by the assessee in the regular course of its business, and for its purposes. That represents the input, in terms of an activity/s as well as the attendant costs. The same would, therefore, stand to be deducted from the output in computing the income, be it in the form of share trading income or dividend income, which would also, though tax exempt, bear the character of business income. The dividend income, it needs to be appreciated, also arises from and forms an integral part of the said business. The net result, i.e., output minus the input, would give us the income or loss, as the case may be, from the business. As regards the uncertainty aspect, take the example of a share bought at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors, hold. A proximate relationship though exists. Even for direct expenditure, the relationship (with income) cannot be said to be linear, though we are primarily here concerned with allocation of indirect expenditure. All such expenditure is deductible and, therefore, would be required to be apportioned between the taxable and non-taxable incomes where the business generates more than one income stream, at least one of which is not taxable. Clearly, the direct expenditure would stand to be set off against the relevant income/s and the apportionment, in substance, comes into play only for the indirect expenditure. 5.6 We may now come to the actual apportionment, for which rule 8D has been provided and, as held in the case of Godrej Boyce (supra), is operative w.e.f. A.Y. 2008-09, the current year. Continuing further, with regard to the actual apportionment of costs, we find that r. 8D(2), which provides the formula for apportionment; r. 8D(1) stating the basis for the application of r. 8D itself, consists of three parts, each in relation to a separate set of expenses. The first sub-clause (i) is in respect of direct expenditure relating to income which does not form part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the income, much less its quantum, allocating it on the basis of the income generated or arising would not be appropriate, and neither does rule 8D support the same. Further, that in arriving at the suggested rate of 20%, we have been guided principally by the fact that the share trading is the dominant object of the share-holding. We also consider it pertinent to mention that though the average share-holding may be the same, the share composition, in view of the share trading activity, would vary continuously; the turnover for a year being easily in the range of 4 to 5 times the average share-holding. Accordingly, in arriving at the disallowance u/r. 8D, the amount as per r. 8D(2)(ii) qua shares held as stock-in-trade would stand to be restricted to 20% thereof. As regards the legal mandate for the adjustment aforesaid, we have already clarified of the manifestly incorrect, if not absurd results that would otherwise follow. In fact, in our view, the language of r. 8D(2)(ii) itself provides the mandate inasmuch as it prescribes or authorizes a disallowance only qua investment, income from which is not taxable, so that in limiting the amount worked out with reference to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year except for one switch from a company share to units of a Mutual Fund (HDFC Liquid Fund). Our discussion is, however, only toward the nominality and purport of the charge, and does not in any manner imply of it being confined only to shares held as investment. This is as even though purchased with a short term perspective, the shares are purchased only with profit objective, i.e., as representing a good investment opportunity, so that it is perceived as under-priced, and its market price would appreciate in time, yielding 'good' return and, rather, in a shorter period of time. That is, the investment component or element is inbuilt in any purchase and toward which the allocation of indirect expenditure is prescribed per r. 8D(2)(iii). The fact that trading shares also yield dividend income, which is not taxable, i.e., besides share trading income, is itself relevant and sufficient for attracting the provision of s.14A(1). In fact, an argument to this effect, i.e., r. 8D(2)(iii) as being not applicable to shares held as stock- in-trade, was specifically assumed in the case of Daga Capital (supra). The tribunal rejected the argument, made with reference to the langua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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