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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
सुनवाई क� तार�ख /Date of Hearing : 29-07-2016 घोषणा क� तार�ख /Date of Pronouncement : 03-08-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee company, being 17-10-2012 passed by learned Commissioner of Income Tax (Appeals)- 8, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10 , the appellate proceedings before the learned CIT(A) arising from the assessment order dated 22-12-2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”) for the assessment years 2009-10 respectively.This matter was ITA 7068/Mum/2012 2 argued and heard at length on 10-3-2016 and later kept for clarification which was heard finally on 29-07-2016.
2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) in 2009-10 reads as under:-
“(1). The learned Assessing Officer has not given reasonable opportunity of being heard to the appellant. The learned AO has erred in disallowing expenditure of Rs.41,515/- on ad-hoc basis on the grounds that the same is relating to speculation business. (2) The learned assessing officer has erred in disallowing Rs.3,38,556/- u/s 14A. (3) The learned AO has erred in adjusting the refund against previous dues. (4) The learned AO has erred in giving credit of T.D.S. for lesser amount than what actually is. (5) The appellant prays that the penalty proceedings u/s 271(1)(c) may be dropped and due justice may be given to the appellant. (6) The appellant prays that your honour to grant relief from payment of interest under Section 234A,B,C,D as applicable and oblige.”
The assessee company has also raised an additional grounds of appeal and prayed that these additional grounds raised by the assessee company be admitted as the grounds raised are legal and goes to the root of the matter . It was submitted that these additional grounds could not be raised earlier inadvertently and unintentionally. The additional grounds raised by the assessee company are:
ITA 7068/Mum/2012 3
“5.1 The Income tax officer-4(2)(2) , Mumbai [ “the AO”] erred in treating the loss of Rs. 37,31,368/- as Speculation Loss under Explanation to Section 73 of the Income Tax Act,1961[ “the Act”]
5.2 It is submitted that in the facts and the circumstances of the case, and in law, such action of AO was bad in law and hence deserves to be reversed.”
The Learned DR objected to the admission of the additional ground as the same was not raised originally while filing memo of appeal by the assessee company with the Tribunal. We have considered rival contentions and perused the material on record. In our considered view, the additional ground deserves to be admitted as it is purely an legal ground and are hereby directed to be admitted in accordance with the judgment of Hon’ble Supreme Court in the case of NTPC v. CIT (1998) 229 ITR 383(SC).
The brief facts of the case are that the assessee company is member of Bombay Stock Exchange Limited. During the previous year relevant to the assessment year, the assessee company carried out the business of dealing in Equity Shares and Securities.
During the course of assessment proceedings u/s 143(3) read with Section143(2) of the Act , the assessee company submitted revised computation of income showing business income at Rs.11,26,763/- and speculation loss of Rs.37,31,368/- . In the original return of income filed with the Revenue, the assessee company has not shown the speculation loss of Rs.37,31,368/-. The AO treated the speculation loss under explanation to Section 73 of the Act and allowed it to be carried forward as speculation loss , ITA 7068/Mum/2012 4 vide assessment order dated 22.12.2011 passed by the AO u/s 143(3) of the Act.
The AO also observed that the assessee company has in the revised computation of income not worked out expenses attributable to speculation loss incurred by the assessee company. The assessee company was asked by the AO to give the working of the expenses for speculation , the assessee company submitted that the assessee company is engaged in business of broking activity as well share trading in the name of its clients and also in its own name. The total turnover of the assessee company for the year ended 31- 03-2009 was Rs.153 crores and Rs. 5.60 crores is turnover pertaining to its own name. Thus, it was submitted that ratio of own turnover to total turnover is 3.64%. Out of the total expenses debited to Profit and Loss account , most of them are fixed in the nature and out of that Rs.1665/- belongs to its own turnover as only transaction charges of Rs.45,748/- are variable in nature. It was submitted that in previous scrutiny assessment proceedings, the AO disallowed proportionate expenses relating to the assessee company’s own turnover but in appeals it was allowed. The assessee company gave details of proportionate expenses as under: (i) Salary Rs. 25,000.00 (ii) Telephone Rs. 8,720.00 (iii) Postage Rs. 194.00 (iv) Stock Exchange Exp. Rs. 1,431.00 (v) General Expenses Rs. 1,089.00 (vi) STT Paid Rs. 1,716.00 (vii) Transaction Charges Rs. 739.00 (viii) Electricity Charges Rs. 2,626.00 -------------------- Rs. 41,515.00 -------------------- ITA 7068/Mum/2012 5 The AO treated Rs.41,515/- as expenses attributable to the speculation transactions and the same were added to the speculation loss and the same was allowed to be carried forward vide assessment order dated 22.12.2011 passed by the AO u/s 143(3) of the Act.
Similarly, the AO observed that during the previous year relevant to the assessment year, the assessee company has earned dividend income from shares of Rs.2,81,541/- and claimed the same as exempt u/s 10(34) of the Act . However, the expenses attributable for earning of such tax-free income is to be disallowed as per Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The assessee company submitted that if the income arises under any head of income from many items which are exempt from tax , entire permissible expenditure in earning such income under this head is deductible and if the tax-payer carries on the business into various ventures , some are having taxable income and other do not and if business is one and indivisible , the entire expenditure of such business would be allowed as deduction . It was also submitted by the assessee company that if substantial investment is made in shares and securities which yielded dividend, disallowance u/s 14A of the Act cannot be made in respect of the fact that the books of accounts are not separately made for by bifurcating taxable and non taxable income. Thus, it was submitted that in absence of any precise formula for proportionate disallowance , no disallowance can be called for in respect of administration cost attributable to earning of such tax free income.
The AO rejected the contentions of the assessee company and held that as per Section 14A of the Act no deduction shall be allowed in respect of expenditure incurred by the assessee company in relation to the income which does not form part of the total income under the Act. The AO invoked provisions of Section 14A(2) of the Act and held that if the AO is not satisfied with the correctness of the claim of the assessee company, the AO may compute the ITA 7068/Mum/2012 6 expenditure with regard to the earning of exempt income as per the method prescribed. The AO held that the CBDT has prescribed vide its notification dated 24.03.2008, the method for calculating such expenditure in relation to the exempt income. The AO referred to Rule 8D of Income Tax Rules, 1962 and held that whenever there is a composite use of funds and expenditure cannot be separately calculated but still the expenditure needs to be allocated for the purposes of calculation of expenditure u/s 14A of the Act. The disallowed Rs.3,38,556/- u/s 14A read with Rule 8D of Income Tax Rules, 1962, whereby disallowance under Rule 8D(2)(ii) was made of Rs.2,28,105/- and Rs.1,10,451/- was made under Rule 8D(2)(iii) of Income Tax Rules,1962, vide assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act.
Aggrieved by the assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act, the assessee company filed appeal before the learned CIT(A).
Before the learned CIT(A), the assessee company contended that the AO has erred in disallowing the expenses of Rs.41,515/- on ad-hoc basis . It was submitted that most of the expenses are fixed in nature and relating to non- speculative business.It was submitted that there is hardly any expenditure which relate to the speculative business. The learned CIT(A) held that the assessee company itself has submitted the details of proportionate expenses attributable to speculation expenses, aggregating to Rs.41,515/- and hence the contentions of the assessee company were rejected by the learned CIT(A) vide appellate orders dated 17/10/2012 whereby the assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act was upheld.
ITA 7068/Mum/2012 7 The assessee company did not contest before the learned CIT(A) the treatment of loss of Rs.37,31,368/- as speculation loss under explanation to Section 73 of the Act.
The learned CIT(A) also confirmed the assessment orders u/s 143(3) of the Act dated 22.12.2011 passed by the AO with respect to additions of Rs.3,38,556/- being made u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962, vide appellate orders dated 17/10/2012 passed by the learned CIT(A).
7.Aggrieved by the appellate orders dated 17/10/2012 passed by the learned CIT(A), the assessee company filed second appeal with the Tribunal.
8. The learned Counsel for the assessee company contended that the assessee company did not claimed in return of income speculation loss but the said claim was made during the assessment proceedings. The assessee company submitted that loss of Rs.37,31,368/- was treated as speculation loss in view of explanation to Section 73 of the Act. The assessee company relied upon decision of Hon’ble Bombay High Court in the case of CIT v. HSBC Securities and Capital Market India Private Limited, (2012) 208 taxman 439(Bombay) to contend that the loss shall be allowed as normal business loss. The assessee company submitted that the assessee company is broker in shares. It is submitted that Section 73 of the Act has been amended by the Finance Act, 2014 w.e.f 01-04-2015 and the amendment shall take effect retrospectively when Section 73 of the Act was introduced in 1977. There was a lacuna in the Section 73 of the Act which was removed by the legislature by the amendment brought in by Finance Act 2014. It is a deeming provision and effect is to be given with retrospective effect. The learned counsel for the assessee company relied on the decision of Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township Private Limited (2015) 377 ITR 635(Del. HC) whereby ITA 7068/Mum/2012 8 Hon’ble Delhi High Court has held that second proviso to Section 40(a)(ia) of the Act is declaratory and curative and has retrospective effect with effect from 01-04-2005 when the Section 40(a)(ia) of the Act was brought into the Statute. The learned counsel submitted that there was undue hardship which was removed by legislature and hence amendment to Section 73 of the Act be treated as retrospective in nature and not prospective. With respect to expenses of Rs.41,515/- treated to have been incurred for earning speculative income(loss), it was submitted that the same may be decided in the same manner as the treatment of speculative loss sought by the assessee company vide additional ground filed with the Tribunal.
With respect to ground no. 2 concerning disallowance of Rs.3,38,556/- u/s 14A of the Act. It was submitted that the assessee company has received Rs.2,81,541/- as dividend income , while disallowance of Rs.3,38,556/- has been made u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962.It was submitted that the assessee company has share capital and reserves of Rs.3.39 crores as at 31-03-2009 , while the investments are to the tune of Rs.3.19 crores.It was submitted that net owned funds are more than the investments made and hence there will be presumption that the assessee company has invested its owned fund in making investments and hence interest expenditure cannot be disallowed under Rule 8D(2)(ii) of the Income Tax Rules, 1962. The assessee company relied upon the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited(2009) 313 ITR 340(Bom. HC) . The learned counsel of the assessee company drew our attention to audited financial statements of the assessee company to contend that the interest income was earned of Rs.36.51 lacs while the assessee paid interest of Rs.3.72 lacs to contend that the interest on net basis is infact earned by the assessee company and no disallowance is warranted. The audited financial statements are placed in the paper book filed with the Tribunal. It is also contended that the dividend income is earned on the ITA 7068/Mum/2012 9 shares held as stock in trade and the income on sale and purchase of shares held as stock in trade are to be excluded for the purposes of computing disallowance u/s 14A of the Act.It is contended that the investment as reflected in audited financial statement in Schedule ‘E’ comprises of shares held by the assessee in Bombay Stock Exchange (BSE) of Rs 1.22 crores and FDR held by the assessee company was Rs.1.97 crores as at 31-03-2009. It was submitted that the FDR is yielding taxable interest income and the same shall be excluded while computing disallowance u/s 14A of the Act .It was submitted that investment in BSE is strategic investment held by the assessee company and the same should be excluded while computing disallowance. The assessee company also relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Limited(2015) 94 CCH 0002(Del.HC). It was submitted that the assessee company rightly did not offer any disallowance and the entire disallowance made by the AO needs to be deleted.
Ground No 3 & 4 –It was submitted that the assessee company did not wish to persue ground no 3 and 4 and the same may be dismissed as withdrawn.
Ground No 5 and 6-It is submitted that these grounds are consequential in nature.
The learned DR on the other hand submitted that the amendment in Section 73 of the Act was made by Finance Act 2014 w.e.f. 01-04-2015 which is prospective and cannot be held to be retrospective . It was contended by learned DR that the authorities below have rightly considered speculation loss of Rs.37,31,368/- as it was hit by explanation to Section 73 of the Act. The ld. DR submitted that matter with respect to disallowance of expenditure under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 can be set aside to the file of AO for examination and verification of the claim of the ITA 7068/Mum/2012 10 assessee company. The learned DR relied upon the orders of the learned CIT(A) on other issues.
We have considered the rival contentions and perused the material on record including the case laws relied upon by the rival parties. We have observed that the assessee company is engaged in the business of dealing in shares whereby the assessee company is buying shares on its own account, and also on account of clients whereby the assessee company is getting income from brokerage and commission. The assessee company’s main business is dealing in shares. With respect to delivery based transaction of sale and purchase of shares on its own account, the assessee company has incurred loss of Rs.37,31,368/- which was claimed as speculative loss in the revised computation of income filed with the AO during assessment proceedings u/s 143(2) read with Section 143(3) of the Act as the same was hit by explanation to Section 73 of the Act. The AO treated the said loss as speculation loss and allowed it to be carried forward . The assessee company did not contested the same before the learned CIT(A) . The assessee company relied upon decision of CIT v. HSBC Securities and Capital Markets Private Limited(supra) . We have observed that the assessee company case is squarely covered by this decision of Hon’ble Bombay High Court. The asssessee company has income from business of Rs.11,26,763/- from non- speculation business , while income from trading from shares on its own account is loss of Rs. 37,31,368/- and hence on net basis there is a loss under the head ‘Income from business or profession’ , while there is dividend income of Rs.2,81,545/- earned by the assessee company under the head ‘income from other sources’ which is claimed exempt and hence the assessee company will fall within the purview of exception carved out in the explanation to Section 73 of the Act and consequently the assessee company would not be deemed to be carrying on speculation business for the purpose of Section 73(1) of the Act . The relevant extracts of the decision of Hon’ble ITA 7068/Mum/2012 11 Bombay High Court in the case of CIT v. HSBC Securities and Capital Market India Private Limited, (2012) 208 Taxman 439(Bom. HC.) is reproduced hereunder: “8. In the present case, section 73 would not apply in view of the fact that the explanation thereto, does not operate in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of "interest on securities", "income from housing property", "capital gains" and "income from other sources". We have set out the relevant part of the assessment order which indicates that in the relevant year, the income from other sources was the only chargeable income, as the respondent had suffered a business loss otherwise. In that view of the matter, the judgment of the Division Bench of this Court in the case of Darshan Securities (P.) Ltd. (supra) supports the respondent's case. In that case, during the relevant assessment year, the assessee had a loss of about Rs. 2.33 crores in the share trading and had dividend income of about Rs. 4.80 lacs. The Division Bench held in paragraphs 6, 7, 8 and 9 as under :- "6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to a company whose gross total income consists mainly of income which is ITA 7068/Mum/2012 12 chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" or a company whose principal business is of banking or the granting of loans and advances.
The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be set off against the income from any other source under the head of profits and gains of business or profession.
In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub-Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has ITA 7068/Mum/2012 13
arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub-Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is carrying on a speculation business within the meaning of the explanation, sub- section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub-section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub-Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so ITA 7068/Mum/2012 14 computed consists mainly of income which is chargeable under the heads referred to in the explanation.
9. Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs. 2.25 crores and the loss in share trading of Rs. 2.23 crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs. 4.7 lacs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1)."
9. In the circumstances, the appeal is dismissed but with no order as to costs.”
Respectfully following the above decision of the Hon’ble jurisdictional High Court , we hold that the loss of Rs.37,31,368/- incurred by the assessee company on share trading carried on by it on its own behalf shall not be hit by the deeming fiction of explanation to Section 73 of the Act and shall be treated as normal business loss to be set aside against the other non- speculative business income and other income as per provisions of the Act. This disposes of the ground no 1 raised by the assesee company as well additional ground raised by the assessee company. We would like to clarify that in view of our above decision, we have refrained from answering the question of law raised by the assessee with respect to retrospectivity of amendment brought in by Section 73 of the Act which was amended by ITA 7068/Mum/2012
15. Finance Act,2014 w.e.f 01-04-2015 and has left the said question open. We order accordingly.
Ground No 2 pertains to the disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 of Rs.3,38,556/-. The assessee company has received Rs.2,81,541/- as dividend income. We have observed that the assessee company has share capital and reserves of Rs.3.39 crores as at 31- 03-2009 , while the investments are to the tune of Rs.3.19 crores. It was submitted before us that the net owned funds are more than the investments made and hence there will be presumption that the assessee company has invested its own fund in making investments and hence interest expenditure cannot be disallowed under Rule 8D(2)(ii) of the Income Tax Rules, 1962. The assessee company relied upon the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited(2009) 313 ITR 340(Bom. HC) . We are agreeable with the contentions of the assessee company in view of the decision of Hon’ble Bombay High Court decision in the case of Reliance Utilities and Power Limited (supra) , CIT v. HDFC Bank Limited in of 2012 (366 ITR 505(Bom. HC) ) and CIT v. HDFC Bank Limited(WP no. 1753 of 2016)((2016) 67 taxmann.com 42(Bom.HC), the disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 is not warranted and we order deletion of the disallowance under Rule 8D(2)(ii) of Income Tax Rules, 1962 to the tune of disallowance of interest expenditure of Rs.2,28,105/- made by the AO and as sustained by the learned CIT(A) . It is contended that the investment as reflected in audited financial statement in Schedule ‘E’ comprises of shares held in Bombay Stock Exchange of Rs 1.22 crores and FDR held by the assessee company was Rs.1.97 crores as at 31- 03-2009. It was submitted that the FDR is yielding taxable interest and the same shall be excluded . We are agreeable with the contention of the assessee company that the fixed deposit held by the assessee company which yielded ITA 7068/Mum/2012 16 taxable interest income cannot be included for computing the disallowance of expenditure u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 . We are also agreeable with the proposition of the assessee company that shares held as stock in trade are not to be included for the purposes of disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 while computing investments for computing disallowance u/s 14A of the Act, we have observed that the AO did not include the shares held as stock in trade while computing disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 and no prejudice is caused to the assessee company It was submitted that investment in BSE is strategic investment held by the assessee company and the same should be excluded while computing disallowance. The assessee company also relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Limited(2015) 94 CCH 0002(Del.HC). It was submitted that rightly the assessee did not offer any disallowance and the entire disallowance made by the AO needs to be deleted. We are not inclined to agree with the assessee company that investment made by the assessee company in BSE as strategic investment is to be excluded while computing disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view the mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee as contemplated u/s 14A(2) of the Act and hence the matter is to be decided on each case based on the facts of the case. We have duly considered the judicial decisions relied upon by the assessee company. Reference is drawn to the decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under:
ITA 7068/Mum/2012 17
“12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 234 CTR 1. The assessee company has made average investments of Rs. 14.44 crores computed as per rule 8D(2)(iii) of Income Tax Rules,1962 . The investments made by the assessee company includes the investment of Rs.19.37 crores made in 100% subsidiary company.
Coming to the submission of assessee that these are strategic investments and no disallowance made towards the administrative expenses. We would like to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax. No doubt , the returns can also come by way of divestments of these investments but normally strategic investments are made with long term horizon where objective is to set up business and growth of these business over a long period of time. In these type of strategic investments, the investor has to normally devote significant time to plan, execute and monitor these investments regularly and periodically to ensure that these strategic investments are turned viable and profitable. These ITA 7068/Mum/2012 18
Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments . Our view is fortified by the following decisions :
The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under:
"The insertion of section 14A with retrospective effect is the serious attempt on the part of the 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 ITA 7068/Mum/2012 19 words, section 14A 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 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A 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 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this ITA 7068/Mum/2012 20
Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. 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. Further,section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. 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 includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, ITA 7068/Mum/2012 21 etc. in respect of which allowances are provided for (see sections 30 to 37).
The ITAT,Mumbai in the case of ACIT v. Citicorp Finance (India ) Limited (2007)108 ITD 457 has negated the contention of the assessee that it had incurred no expenditure for earning high dividends as under:
"It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the ITA 7068/Mum/2012 22 case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. Income Tax Officer (2004) 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. SG Investments &Industries Ltd. (2004) 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or ITA 7068/Mum/2012 23 earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In Asstt.CIT v. Premier Consolidated Capital Trust (I). Ltd. (2004) 83 TTJ (Mum.) 843, the Mumbai Bench of this Tribunal has held that the assessing officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A."
3. The ITAT, Chennai Bench has held in the case of Southern Petro Chemicals Industries v. DCIT(2005) 3 SOT 157 as under:
" We have considered the rival submissions and perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of Rs. 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep ITA 7068/Mum/2012 24 track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. The Hon'ble Supreme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under:
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. (1973) 90 ITR 348 (Bom) to the assessment year in question without considering the effect of the amendment operative from Ist April, 1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses ?"
Thus, when the decision of the Honble Bombay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In view of the aforementioned ITA 7068/Mum/2012 25 discussion and keeping in view the submissions of the learned Departmental Representative, we restore this matter to the assessing officer to verify the quantum of deduction claimed by the assessee in earlier years under section 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes
4. The ITAT, Kolkatta Bench in recent reported judgment in Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in pronounced recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962.
Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962.
The assessing officer has disallowed by computing the indirect expenditure being administrative and other in-direct expenses after invoking Rule 8D(2) (iii) of Income Tax Rules ,1962.
We, therefore, hold that the assessing officer has rightly invoked the provisions of section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 for disallowing the expenditure of Rs. 7,22,027/- towards administrative and other indirect expenses which was affirmed by the ITA 7068/Mum/2012 26
CIT(A ) and the same is also hereby affirm by us as we have found no infirmity in the orders of the authorities below. We order accordingly.”
Respectfully following the above decision of the Co-ordinate Benches of Mumbai ITAT in the case of Uma Polymers Limited in dated 30-09-2015, and also of the decision of Kolkatta Tribunal Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced on 13th May 2015 whereby Kolkatta Tribunal has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962., we hold that the investment made by the assessee company in Bombay Stock Exchange shall attract disallowance u/s 14A of the Act having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act keeping in view Rule 8D(2)(iii) of the Income Tax Rules, 1962,.We are therefore inclined to set aside the matter to the file of the AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962. The assessee company relied upon decision of Hon’ble Delhi High Court in the case of Cheminvest Limited(supra) while in the said case the Hon’ble Delhi High Court has laid down that there can be no disallowance u/s 14A of the Act if there is no exempt income received or receivable by the tax-payer. In the instant appeal, the assessee company did received the exempt income vide dividend income from shares of Rs. 2,81,541/- . This disposes off ground no 2 of the assessee company. We order accordingly.
ITA 7068/Mum/2012 27 Ground No. 3 and 4 – The assessee company did not press these grounds and these grounds are dismissed as not pressed.
Ground No 5 & 6 are consequential and does not need adjudication.
In the result, assessee company appeal in 2009-10 is partly allowed .
Order pronounced in the open court on 3rd August , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 03-08-2016 को क� गई ।