TMI Blog2017 (2) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A. Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee’s stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same. Once it is found that no expenditure was incurred in earning this income, there would be no further expenditure in relation thereto that falls within the ambit of section 14A. All that the assessee does t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt under section 10(34) and (35) of about ₹ 11.07 crores and net interest income exempt under section 10(15)(iv)(h) of about ₹ 1.12 crores. The total exempt income claimed in the return was, therefore, ₹ 12,19,78,015/-. The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its stock-intrade; that the investment had not been made only for earning tax free income; that the tax free income was only incidental to the assessee s main business of sale and purchase of securities and, therefore, no expenditure had been incurred for earning such exempt income; the expenditure would have remained the same even if no dividend or interest income had been earned by the assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The assessee also contended that in any event it had acquired the securities from its own funds and, therefore, section 14A was not applicable. 5. The Assessing Officer restricted the disallowance to the amount which was claimed as exempt income and added the same to the assessee s income by applying section 14A. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of business and profession . The circular states that shares and stock held by the bank are stock-in-trade and not investment. Referring to certain judgments, which we will also refer to, and the earlier orders of the Tribunal, it was held that if shares are held as stock-in-trade and not as investment even the disallowance under rule 8D would be nil as rule 8D(2)(i) would be confined to direct expenses for earning the tax exempt income. 8. In view of the issue involved, it is necessary to refer to the facts only briefly. 9. The CIT (Appeals) by the said notice for enhancement under section 251 enquired of the assessee its obligation to maintain the securities. The assessee rightly replied that the investment in shares and bonds was not made under any obligation under the Banking Regulation Act, 1949, but that it was dealing in shares and bonds as a trader which was permitted by section 6 of the Banking Regulation Act, 1949. The assessee was, in view of section 6 of the Banking Regulation Act, 1949, entitled to purchase and sell such securities. Section 6 specifies the forms of business in which banking companies may engage. Sub-section (1) permits a banking company in add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies . 4. In the light of the Supreme Court s decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned. (emphasis supplied) 12. The Circular carves out a distinction between stock-intrade and investment and provides that if the motive behind purchase and sale of shares is to earn profit then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from the investment. If the assessee is found to have treated the shares and securities as stock-in-trade, the income arising therefrom would be business income. A loss would be a business loss. Thus, as submitted by Mr. Bansal, an assessee may have two portfolios, namely, investment portfolio and a trading portfolio. In the case of the former, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income under this Act: Provided that nothing contained in this section shall empower the assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April, 2001. 17. Under section 14A, an expenditure can be disallowed only if it is incurred by the assessee in relation to income exempt from tax. The dividend or interest from the assessee s stock-in-trade i.e. the securities was exempt from tax in view of sections 10(15)(iv)(h),(34) and (35). This was incidental to its business of banking. The business income on account of the assessee trading in the securities is assessable under the head Profits and gains of business and profession . The expenditure incurred in relation to stock-in-trade arising as a result of investment in shares and debentures is deductible under sections 28 to 37. There is a distinction between stock-in-trade and investment. The object of earning profit from trading in securities is different from the object of earning income, such as, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion, however, is whether any expenditure was incurred by the assessee to earn this exempt income. 21. Before going further, it would be useful to refer to the judgment of the Supreme Court relied upon by Mr. Klar and Mr. Bansal. Both the learned counsel submitted that the point stands concluded in their favour by the judgment of the Supreme Court in Commissioner of Income-Tax vs. Walfort Share and Stock Brokers P. Ltd. , [2010] 326 ITR 1 (SC). The judgment we find supports the assessee, although it dealt with an entirely different type of case. In that case, the assessee earned income mainly from share trading and brokerage. It purchased the mutual funds on 24.03.2000 which was shortly before the record date and earned dividend of about ₹ 1.82 crores. The NAV stood reduced from ₹ 17.23 to ₹ 13.23 per unit three days later on 27.03.2000 on account of the dividend payment. The assessee then sold the units for an amount of about ₹ 5.90 crores and received incentive of about ₹ 23.77 lacs. The assessee claimed the dividend received by it of about ₹ 1.82 crores to be exempt from tax under section 10(33) and also claimed a set off of about S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 14-A with retrospective effect is a serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income ( see Circular No. 14 of 2001 dated 22-11-2001). In other words, Section 14-A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14-A, the expenditure incurred in respect of exempt income was being claimed against the taxable income. The mandate of Section 14-A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14-A is that certain incomes are not includible while computing total income as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. (emphasis supplied) 22. As noted by the Supreme Court, the intention of the Parliament, therefore, was not to allow deduction in respect of any expenditure by the assessee in relation to income which does not form part of the total income under the Act. Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. As also held by the Supreme Court, the mandate of section 14A clearly is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and, at the same time, avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The Supreme Court held that if an income like dividend income is not a part of the total income, the expenditure/deduction, though of the nature specified in sections 15 to 59 but related to the income not forming part of total income, could not be allowed against other income includable in the total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, hence, it is not expenditure incurred in terms of Section 14-A. Expenditure is a payout. It relates to disbursement. A payback is not an expenditure in the scheme of Section 14-A. For attracting Section 14-A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Payback or return of investment is not such proximate cause, hence, Section 14-A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14-A cannot be invoked. In our view, return of investment cannot be construed to mean expenditure and if it is construed to mean expenditure in the sense of physical spending still the expenditure was not such as could be claimed as an allowance against the profits of the relevant accounting year under Sections 30 to 37 of the Act and, therefore, Section 14-A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14-A. (emphasis supplied) 25. Thus, what the Supreme Court held was that a payback in the scheme of section 14A is not an expenditure incurred in terms of section 14A. Expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not hold the securities to earn dividend or interest, but traded in them and the dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom and would not, therefore, be subject to the provisions of section 14A. Mr.Bansal s reliance on a judgment of the Karnataka High Court in CCI Ltd. vs. Joint Commissioner of Income-tax, Udupi Range , [2012] 250 CTR 291 (Karnataka) is well founded. Paragraph-5 thereof reads as follows:- 5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anage the same. In other words, such expenditure cannot be said to be for the purpose of earning the same. An amount once received as income loses its character as income and thereafter forms a part of the assets or wealth of the assessee. There is no concept, such as, once an income always an income. 30. It is not necessary to refer to Mr. Bansal s further submissions in support of this issue. We will, therefore, only note them. Mr. Bansal submitted that the computational provision of rule 8D is applicable to investments and not stock-in-trade. Rule 8D, therefore, would not come into play in relation to exempt income by way of dividend and interest from stock-in-trade and, accordingly, section 14A would not be applicable in relation to incidental income by way of tax free income, namely, interest or dividend which is exempt under sections 10(15)(iv)(h),(34) and (35). The term investment does not include stock-in-trade. He relied upon Accounting Standard (AS) 13, issued by the Institute of Chartered Accountants of India, to contend that there is a distinction between investment and stock-in-trade. Stock-in-trade is not investment as per clause 3.1 of AS 13. Rule 8D refers only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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