TMI Blog2013 (12) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis that the investment under reference, i.e., on which the dividend income stands received by it, being shares in different companies, are held by it as stock-in-trade, and not as investment, so that rule 8D(2)(ii) is not applicable - Held that:- Rule 8D shall apply qua the shares held as stock-in-trade. See ITO vs Daga Capital Management Pvt. Ltd. (2008 (10) TMI 383 - ITAT MUMBAI). The language of rule 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 total investment; the same also yielding taxable income, we have only sought to operationalize the said rule. It would also be appreciated that not doing so would also violate the principle of only net income (from any source) being subject to tax inasmuch as a disallowance for the total interest as per rule 8D(2)(ii) would in effect bring the share trading income to tax without deduction of the interest expenditure allocable or attributable thereto The assessee, in the instant case, has suo motu disallowed ₹ 1,22,295/-. Its argument for non-application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book profit, attributable to the profits of the assessee's business arising from taxable securities transactions, would stand to be allowed, in view of the qualifying condition of section 88E. This again represents the clear and consistent view of the Tribunal, expressed per its decisions regularly, as in the case of Dy. CIT v. KBII Securities (P.) Ltd. [IT Appeal No. 4999(Mum) of 2011 dated 20.03.2013] and Dy. CIT v. Arcadia Share Stock Brokers (P.) Ltd. [IT Appeal No. 1515(Mum.) of 2012, dated 20-03-2013]. We decide accordingly. The Assessee's Appeal (ITA No. 5724/Mum/2011) 4. Coming to the assessee's appeal, the same raises a single issue, i.e., qua the disallowance u/s. 14A read with rule 8D in the sum of ₹ 12,23,627/-. The assessee contests the same on the basis that the investment under reference, i.e., on which the dividend income stands received by it, being shares in different companies, are held by it as stock-in-trade, and not as investment, so that rule 8D(2)(ii) is not applicable, relying for the purpose on the decision in the case of Yatish Trading Co. (P.) Ltd. v. Asst. CIT [2011] 129 ITD 237(Mum.) (copy on record). 5. Before us, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay so that the estimation of the expenditure, in the absence of the assessee's records exhibiting otherwise, is to be made with reference to the said rule. On the other hand, once it is found, as a matter of fact, that no such expenditure stands incurred, there is no question of any disallowance u/s.l4A(l), toward the estimation of which rule 8D would stand to be invoked. In other words, rule 8D being toward estimation of disallowance to be effected u/s.14A (1) and not qua disallowance u/s. 14A per se, the Revenue's argument, based on the application of Rule 8D for the current year, as against the years for which it was not applicable, so that the decisions for those years would not be apply for the current year, would not hold. 6.2 We may next consider the question of the applicability of section 14A to a case where shares, on which dividend income arises, are held as stock-in-trade. We do 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 the tax exempt income. It may impact the head of the income under which the income arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning the dividend inasmuch as all the expenditure which stands incurred is for the purpose of its share trading business, so that no additional expenditure can be said to have 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 consequently, in varying decisions. Toward this, 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.l4A(l). The question, therefore, boils down to determination as to whether this proximate cause would imply a relationship of only first degree, i.e., having a direct nexus as conveyed by the words 'derived from', or would it also include a broader relationship, as indicated by the words 'attributable to', and which would include within its ambit both direct as well as indirect expenditure qua the relevant income. Without doubt, the scope would stand to be gathered from the words employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 to the decision in the case of CIT v. Walfort Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC), that the theory of apportionment of expenditure between the taxable and non-taxable income has, in principle, been now widened under section 14A. The expenditure subject to disallowance u/s.14A would, therefore, mean just that, i.e., any expenditure falling u/ss. 15 to 59 of the Act, where incurred in relation to the tax-exempt income. Again, it clarifies (at pg.137, para 86(e)) that section 14A has brought in material changes, setting aside th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. We have dwelled on the matter at length, as the argument raised moves on the premise that as long as no expenditure stands specifically incurred for earning dividend, no disallowance u/s. 14A(1), where shares are held as stock-in-trade, could be made; the expenditure incurred having been so for the dominant purpose of share trading activity yielding income by way of share trading income. In other words, as long as there is no expenditure that could be said to fall u/.57(iii), no disallowance qua dividend income could be made. There is, we may clarify, no warrant for the classification of the exempt income, either u/c. IV-F or any other, or for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when it will be sold and at what rate1? The answers to both lie only in the womb of future. What is certain though is the incurring of the cost at ₹ 100/-, with profit motive, and which would, therefore, need to be deducted, irrespective of the time and value for which the share is sold. It is this, a direct cost, which would therefore stand to be deducted in determining the income or loss, as the case may be, on sale, as and when it occurs. Uncertainty as to both the timing as well as the quantum of income that would finally inure, obtains, but that would not in any manner detract from the fact that expenditure by way of purchase cost stands incurred and in relation to such income or loss. Being a direct expenditure, the same would not be attributed against any other income, including the dividend income. The assessee's argument qua the uncertainty of dividend income, is, therefore, to no consequence, the same being not relevant. It is only the shares acquired in the normal course of business as a part of stock-in-trade, as are held on the record date, which yield dividend income, and which, therefore, though tax exempt, is as much a part of the business income as any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment Co. Ltd. [2013] 142 ITD 89 (Kol.). This argument was specifically taken before the Special Bench in the case of Daga CapitalManagement (P.) Ltd. (supra), and rejected by the Tribunal, clarifying that the words used are 'value of investment' and not 'held as investment'. We may reproduce the relevant part of the order for the sake of better clarity: (pg. 233 of the report in ITD) 23.9 The learned Counsel for the assessee .. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as Stock-in-trade' or 'Investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as investment. Continuing further, with regard to the actual apportionment of costs, we find that rule 8D(2), which provides the formula for apportionment; rule 8D(1) stating the basis for the application of rule 8D itself, consists of three parts, each in relation to a separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n being different. However, considering that the dominant objective of the share holding, which in our view should be dispositive of the matter, is the share trading income, we propose a ratio of 20% toward the tax exempt dividend income. One could argue that the percentage suggested by us is ad hoc or not scientific. We have already explained that an indirect expenditure, including interest, has no direct relation with 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 though the average share holding would 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 under rule 8D, the amount as per rule 8D(2)(ii) would stand to be restricted to 20% thereof. Further, as regards the legal m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is no more res integra and is covered in favour of the assessee by the solitary available decision rendered by Hon'ble Karnataka High Court in the case of CCI Ltd. (supra). In the said case it has been held that no disallowance can be made under section 14A of the Income-tax Act, 1961 (the Act) in respect of dividend income received from the shares which are held as stock-in-trade. The said decision has been consistently followed by various Benches of Mumbai ITAT as follows: 1. Dy. CIT v. India Advantage Securities Ltd., [IT Appeal No.6711 (Mum.) of 2011, dated 14/09/2012.] 2. Ambit Securities Broking (P.) Ltd., v. Addl. CIT [IT Appeal No. 7856(Mum) of 2011, dated 6-07-2013] 3. N.D. Nissar v. ACIT, [IT Appeal No.8542(Mum.) of 2010, dated 26-06-2008]. The only decision rendered by Mumbai ITAT contrary to aforementioned decision is in the case of American Express Bank Ltd. (supra), in which following the Special Bench decision in the case of Daga Capital Management (P) Ltd., (supra), it has been held that disallowance u/s. 14A can be made in respect of dividend income arising out of shares held as stock-in-trade. However, later on Mumbai Benches in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by the Tribunal. The Tribunal therefore, did not accept the arguments based on the judgment of Hon'ble High Court of Kerala in the case of Smt. Leena Ramachandran (supra) which was not directly on the issue of disallowance of expenses in relation to the dividend income received from trading in shares. 6. However, the Hon'ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s.14A of the IT. Act in case of CCL Ltd. v. JCTT (supra). The assessee in that case was distributor of state lotteries and a dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the A.O. and confirmed by the ld. CTT(A). The Tribunal agreed with the authorities below that the expenditure relatable to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s.14A of the LT. Act. The Tribunal however, had observed that the entire broking commission was not relatable to earning of dividend income as the loan had been utilised for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... series of abovementioned decisions of ITAT which have duly considered the decision of Special Bench in the case of Daga Capital Management (P) Ltd. (supra) and Division Bench decision in the case of American Express BankLtd. (supra), it has to be held that disallowance under section 14A cannot be made in respect of dividend income earned on shares held as stock-in-trade. 3. It may also be mentioned here that the decision of Hon*ble Bombay-High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra) is not directly on the issue relating to disallowance under section 14A in a case where dividend income is earned in relation to shares which are held as stock-in-trade. As against that the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) is directly on the issue and it is a solitary decision rendered by any High Court on the issue which is relevant in the present appeal. According to well-established principle of law it is neither desirable nor permissible to pick out a word or a sentence from the judgement of a Court, divorced from the context of the question under consideration and treating it to be complete law declared by the Court. The judgment mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benches which were neither cited nor referred to at the time of hearing, or even before the authorities below, without confronting them to the parties, in view of the settled-principles of natural justice, applied by the Hon'ble Jurisdictional High Court in, inter alia, the case of Naresh K Pahuja v. ITAT [2009] 224 CTR (Bom) 284 ? (2) Whether the judgment of the Hon 'ble Karnataka High Court in CCI Ltd. v Jt CIT [2012] 250 CTR 291 (Kar.), which has not considered the applicability of the judgment of the Hon 'ble Jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom) to the issue under appeal, can be followed, as it has been in the decisions referred to by the ld. JM in his dissenting order, or is the said judgment of the Hon'ble Jurisdictional High Court, which has since been followed by the Hon'ble Calcutta High Court in Dhanuka Sons v. CIT [2011] 339 ITR 319 (Cal), continues to hold the field in respect of the issue under appeal? (3) Whether the decision by the Hon 'ble Karnataka High Court in CCI Ltd. (supra) is the solitary judgement by a High Court, as observed by the ld .JM in his dissenting order, notwit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had briefed the counsel, have gone out of station to attend Jain Festival and therefore the case may be adjourned. But when the counsel for the assessee was asked to show whether this firm of CA has been engaged by the assessee through any power of attorney having been executed in their favour, the ld. A.R. was unable to show the same. Therefore the request for adjournment was turned down in the absence of any power of attorney executed by the assessee in favour of the firm of the CAs. The ld. counsel for the assessee was given the option to proceed with his arguments. At this juncture, the ld. counsel for the assessee filed written submissions along with copies of the decisions in support of the case of the assessee and prayed that the matter may be decided accepting the view taken by the ld. Judicial Member. 6. The issue in this appeal relates to disallowance made by the AO u/s 14A read with Rule 8D of a sum of ₹ 12,23,627/-. It is the case of the assessee that it is engaged in the business of trading in shares and therefore its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. According to the assesssee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary decision of the Tribunal including decision of a Special Bench. Reliance was placed on Tej International (P.) Ltd. v. Dy. CIT (2000) 69 TTJ (Del.) 650) and the decision in the case of CIT v. Smt. Godavari Devi Saraf [1978] 113 ITR 589(Bom.). 8. The assessee also relied upon the decisions in the case of Yatish Trading Co. (P.) Ltd. (supra), and Prakash K Shah Securities (P.) Ltd. v. Addl. CIT [IT Appeal No. 3339 (Mum.) of 2010, dated 29.09.2011]. Apropos the decisions of this Tribunal in the case of Daga Capital Management (P.) Ltd. (supra) and American Express Bank Ltd. (supra) and of the Bombay High Court in Godrej Boyce Mfg. Co. Ltd. (supra) on which reliance has been placed by the Revenue, it was submitted that they were not applicable in view of the decision of the Karnataka High Court in CCI Ltd. (supra). According to the assessee, it is not open to pick out a few words or sentences from the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd., which, on the facts of the case, is not applicable. For this proposition, reliance was placed on the decisions in the case of Sun Engineering Works (P.) Ltd. (supra), Goodyear India Ltd. v. St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant aspects of the case, followed the aforesaid decisions. The ld. AM has rightly observed that the judgment of the Hon'ble Karnataka High Court in CCILtd. (supra) is not a solitary judgment on the issue under appeal inasmuch as the issue under appeal has also been considered for the relevant assessment year by the Hon'ble Calcutta High Court also as also by the Division Benches of this Tribunal. 11. The assessee has mainly relied upon the decision of the Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) and other Tribunal decisions including three decisions in which CCI Ltd.'s decision has been followed. There is nothing in the said judgment of the Hon'ble Karnataka High Court to show that the judgment of the Hon'ble jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd. (supra) was brought to its notice or considered by it. On the other hand, the said judgment of the Hon'ble jurisdictional High Court has been, as rightly observed by the ld. AM, duly considered by the Hon'ble Calcutta High Court, which has subsequently been followed by the Division Benches of this Tribunal in American Express Bank Ltd. (supra) and DamaniEstat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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