2006 (7) TMI 245 - AT - Income Tax

Tribunal excludes dividend income from total income under Income-tax Act

Smt. Rekha Bharat Chheda. Versus Assistant Commissioner Of Income-tax, Circle - 23 (3), Mumbai.

The Tribunal allowed the assessee's appeal, holding that dividend income should be excluded from the computation of total income under section 10(33) of ... Dividend Issues Involved:1. Whether Rs. 3,80,302 dividend from Indian Companies is exempt under section 10(33) of the Income-tax Act, 1961.2. Whether the dividend income should be considered as business income and adjusted against the business loss.Issue-wise Detailed Analysis:1. Exemption of Dividend Income under Section 10(33):The primary issue raised by the assessee was the disallowance of Rs. 3,80,302 as exempt dividend income under section 10(33) of the Income-tax Act, 1961. The assessee argued that any income by way of dividend is exempt under section 10(33) irrespective of whether it is classified as 'Business income' or 'Income from other sources.' The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the dividend received on traded shares was in the nature of 'Business Income' and should be adjusted against the business loss. The CIT(A) relied on the Supreme Court judgment in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, concluding that the exemption was in respect of income earned out of dividend, not the gross dividend receipt.2. Classification of Dividend Income as Business Income:The AO and CIT(A) considered the dividend income as business income, arguing that the cost of earning the dividend was embedded in the purchase cost of the shares. The CIT(A) observed that the dividend received was a consequence of holding shares for trading purposes and should be treated as a trading receipt. Consequently, the expenses attributable to earning the dividend were difficult to separate from the Profit & Loss (P&L) account. The CIT(A) further noted that the net loss, after excluding speculation loss, amounted to Rs. 42,04,188, and the dividend income could not be treated as unrelated to the trading loss in shares.Tribunal's Analysis and Decision:The Tribunal examined the legal position and relevant case laws, including the Special Bench decision in Wallfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB), which distinguished between units of mutual funds and shares of a company. The Tribunal agreed that dividend income in the case of dealers in shares partakes the character of 'Business income' but emphasized that income exempt under section 10 should be excluded before computing the total income.The Tribunal noted that the income falling under section 10, not the gross receipt, should be excluded. It highlighted that expenditure incurred in relation to earning the dividend must be considered, and section 14A of the Act disallows such expenditure while computing total income. The Tribunal disagreed with the revenue's contention that the purchase price of shares included the cost of dividend, stating that market rates of shares are governed by various factors, and the price may not necessarily reflect the dividend declared.The Tribunal referred to Supreme Court judgments, including State of Madras v. Gannon Dunkerly & Co. (Madras) Ltd [1958] 9 STC 353 (SC) and Hyderabad Deccan Cigarette Factory v. State of Andhra Pradesh [1966] 17 STC 624, emphasizing the importance of the intention of the parties in a contract of sale. The Tribunal concluded that unless there is evidence that parties intended to buy or sell shares for a price-cum-dividend, it cannot be said that any part of the consideration included the cost of dividend.Burden of Proof:The Tribunal held that the burden was on the revenue to prove that the cost of dividend was included in the sale price of shares. In the absence of any material or evidence to support this assumption, the Tribunal set aside the orders of the lower authorities and deleted the addition sustained by the CIT(A).Conclusion:The Tribunal allowed the assessee's appeal, concluding that the dividend income should be excluded from the computation of total income under section 10(33) of the Income-tax Act, 1961, and should not be adjusted against the business loss.