2012 (4) TMI 282 - HC - Income Tax

Shares as stock-in-trade: dividend from unsold shares not subject to s.14A disallowance when no separate dividend expense

HC held for the assessee: where shares are held as stock-in-trade and dividend arises incidentally from unsold shares, expenditures incurred for trading ... Disallowance of business expenditure assuming it be expenditure falling u/s 14A - assessee dealing in share and securities earned profit on sale and shares and dividend on shares held as stock in trade - proportionate brokerage expenses paid on trading of shares and other business expenditure dis-allowed u/s 14A - Held that:- When the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income – Decided in favor of assessee. Issues:Application of Section 14A of the Income Tax Act to expenses incurred by the assessee in the course of its business.Analysis:The judgment revolves around the interpretation and application of Section 14A of the Income Tax Act to expenses incurred by the assessee in the course of its business. The assessee, a distributor of state lotteries and dealer in shares and securities, earned dividend income from certain companies. The Assessing Officer disallowed the expenditure related to earning the dividend income, attributing it directly to the dividend income. The Commissioner of Income (Appeals) and the Tribunal upheld this decision. However, the Tribunal found that the entire broking commission was incorrectly attributed solely to earning dividend income. The Tribunal held that indirect expenditure related to earning dividend income should also be proportionately disallowed under Section 14A. The Tribunal directed the Assessing Officer to bifurcate the expenditure and allow it in accordance with the law.The substantial question of law in this appeal was whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business, merely because the assessee also had dividend income. The assessee argued that as it had not incurred any expenditure to earn the dividend income, no expenditure could be attributed to it, and thus, the entire expenditure incurred in purchasing shares should be deductible. On the other hand, the revenue contended that when shares retained by the assessee yielded dividend income, the expenditure incurred in acquiring that dividend should be excluded. The revenue argued that the orders passed by the authorities were legal and valid.The court, after considering the arguments, held that since the assessee had not incurred any expenditure to earn the dividend income, no notional expenditure could be deducted from it. The court noted that the dividend income was incidental to the business of selling shares that remained unsold by the assessee. Therefore, it was concluded that the expenditure incurred in acquiring the shares should not be apportioned to the extent of dividend income and disallowed from deductions. The court found that the approach of the authorities was not in line with the statutory provisions and set aside the impugned orders in favor of the assessee. The appeal was allowed, and the substantial question of law was answered in favor of the assessee and against the revenue.