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Income Tax Appellate Tribunal, ‘ C’ BENCH : CHENNAI
Before: SHRI ABRAHAM P GEORGE
आदेश / O R D E R
PER ABRAHAM P GEORGE, ACCOUNTANT MEMBER
These are appeals filed by the assessee for assessment years 2013-14 & 2014-15 directed against orders dated 29.06.2017 & 29.09.2017 of the Commissioner of Income-tax (Appeals)-4, Chennai.
Sole issue raised bythe assessee is on a disallowance made by the ld. Assessing Officer u/s.14A of the Income Tax Act, 1961 (in short ‘the Act’), which was confirmed by the Ld.CIT(A). Such & 2698/CHNY/2017 :- 2 -:
disallowance for assessment year 2013-14 came to `53,14,774/- and for assessment year 2014-15 came to `45,69,872/-.
Ld.A.R submitted that assessee was a fashion designer and trader in garments. As per the ld.A.R, assessee had taken substantial term loans from Indian Overseas Bank, which was invested for acquiring shares of a private limited company called M/s.Shilpi Saranya Apparels and M/s.Home Linen Pvt Ltd. As per the ld.A.R, the said company was selling designer sarees through its outlet called “SHILPI”. Contention of ld.A.R was that the investment made by the assessee in the equity shares of the above company was a part of its business strategy and done essentially for furthering its business.
According to him, disallowance u/s.14A could not be made on dividend earned from investments in the said company. Contention of ld.A.R was that investments in shares of M/s.Shilpi Saranya Apparels and M/s.Home Linen Pvt Ltd., was not done by the assessee with any intention of earning dividends, but was only for the purpose of furthering its business of trading in designer garments/sarees, which could be facilitated through outlets run by the said company. Thus, according to him, disallowance u/s.14A for the interest paid by the assessee on term loans, applying Rule-8D(2)(i) of the Income Tax Rules had to be deleted. & 2698/CHNY/2017 :- 3 -:
Per contra, ld.D.R submitted that Hon’ble Apex court in the case of Maxopp Investments Ltd., Vs. CIT (Civil Appeal No.104 to 109 of 2015) dated 12.02.2018 had held that the reason why an assessee invested in equity shares of a company was irrelevant for application of section 14A of the Act. According to him, irrespective of whether the equity shares were held by the assessee as stock in trade or was acquired with an object of getting controlling interest, Sec.14A had to be applied.
Ad Libitum reply of the ld.A.R was that in the very same judgement of Hon’ble Apex Court, relied on by the ld.D.R, it was clearly mentioned that the AO had to record a satisfaction that the claim of the assessee on expenditure relatable to exempt income was incorrect, before proceeding with a disallowance u/s.14A of the Act.
Contention of ld.A.R was that investments made by the assessee in M/s.Shilpi Saranya Apparels and M/s.Home Linen Pvt Ltd., was a part of its business strategy for marketing its designer garments. As per ld.A.R, Sec.14A could not be applied where investments were made for the purpose of furthering business interest and not for earning any dividend income.
We have heard the rival submissions and perused the material on record. What we find is that Authorised Representative of assessee had stated before the ld. Assessing Officer that the interest & 2698/CHNY/2017 :- 4 -:
paid on the term loans debited in its P & L A/c was only towards investments made in acquiring shares of M/s.Shilpi Saranya Apparels and M/s.Home Linen Pvt Ltd. Be that as it may, the judgement of Hon’ble Apex Court in the case of M/s.Maxopp Investments Ltd. (supra) was not available with the ld. Assessing Officer or with the Ld.CIT(A), when they were seized of the issue of disallowance u/s.14A of the Act. What was held by the Hon’ble Apex Court in the said judgement is reproduced hereunder:-
“31. We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above.
In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.
& 2698/CHNY/2017 :- 5 -:
There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend.
We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock- in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not.
Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable.
In this scenario, if expenditure is incurred on earning the dividend income that much of the expenditure which is attributable to the & 2698/CHNY/2017 :- 6 -: dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.
" The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxx xxx xxx
The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A."
The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance & 2698/CHNY/2017 :- 7 -:
(Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force.
The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed.
There is yet another aspect which still needs to be looked into. What happens when the shares are held as 'stock-in-trade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015.
This Circular has already been reproduced in Para 19 above. This Circular takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn.
A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be & 2698/CHNY/2017 :- 8 -: chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.
From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' 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 investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter.
In those cases, where shares are held as stock-in-trade, the main 38 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, though incidentally, which is also an & 2698/CHNY/2017 :- 9 -:
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 and 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 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 & 2698/CHNY/2017 :- 10 -: 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 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 40 hereinabove.
Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”
Considering the exposition made by the Apex Court, I am of the opinion that the question regarding disallowance u/s.14A of the Act requires a re-visit by the ld. Assessing Officer. I set aside the orders of & 2698/CHNY/2017 :- 11 -:
authorities below and remit the issue back to the file of ld. Assessing Officer for consideration afresh in accordance with law.
In the result, both the appeals of the assessee are allowed for statistical purposes Order pronounced on 09th April, 2018, at Chennai.