ACIT-10(1)(1), MUMBAI vs. M/S.IDL SPECIALTY CHEMICALS LIMITED (NOW AMALGAMATED WITH M/S. HINDHUJA VENTURES LIMITED), MUMBAI

On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in holding that no disallowance can be made u/s 14A of the Act in respect of exempt income earned from securities held as stock in trade ignoring the fact that the core business of the assessee is related to pesticides and share trading is not even remotely included in the object of the company as is apparent from its ITAs No. 868/Mum/2018 submission before Hon'ble High Court during its filing for change of registered office and for amalgamation process.

At the outset, the learned Sr. Departmental Representative stated that this issue is squarely covered in favour of Revenue and against assessee by the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. [2018] 402 ITR 640 (SC), wherein Hon’ble Supreme Court held as under: - “39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, ITAs No. 868/Mum/2018 though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.

We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing ITAs No. 868/Mum/2018 to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in- trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue ITAs No. 868/Mum/2018 challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove."

When a query was put to the learned Counsel for the assessee he stated that ‘yes’ the issue is covered against the assessee by the decision of Hon’ble Supreme Court on the issue of disallowance of expenses relatable to exempt income earned from securities to held as stock in trade.

We have heard rival contentions and gone through the facts and circumstances of the case. Briefly stated facts are that the assessee has earned dividend income of ₹ 1,31,01,000/- & the AO made disallowance of expenses relatable to this exempt income by invoking the provisions of section 14A of the Act read with Rule 8D(i),(ii) and (iii) by noting in Para 3.3 as under :-

The CIT(A) deleted the addition by stating that the assessee is holding the shares as stock in trade and not as investments and hence, disallowance made by invoking the provisions of section 14A of the Act are not applicable to the exempt income derived from shares hold as stock in trade and hence, he deleted the disallowance. Aggrieved, now Revenue is in appeal before Tribunal.