TaxTMI 
TaxTMI 
2013 (1) TMI 236
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.... on the following submissions:- "Our business is of exporting Goods and Dealing in Shares and Securities. Our main business activities in P.Y. 2007-08 are of exporting goods and F&O business. We have also dealt with Shares & Securities to some extent. The expenses incurred by us are in respect of our regular business activities and Dividend earned by us is return on our inventory. We have not incurred any direct expenses to earn Dividend Income. We require shares for dealing in Derivatives which is our major business activity. We are allowed to carry on this business in large volume depending upon the Margin given by us in the form of shares and also payment of amount of difference in M to M as per SEBI/Stock Exchange Rules. We require huge funds for this business and holding shares for offering Margin and Payment of M to M differences. In view of these facts, we strongly contend that Rule 8D could not be applied to us as it does not take all aspect of our business and therefore, arbitrary in nature. It is very strange that the Rule does not refer to any actual indirect expenditure but the allowance is based on average of the value of Investment. Hence also, t....
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....rchases of shares and securities and thereby, consciously incurred interest and other expenses for business activities which otherwise would have been saved. In the circumstances, I am with no alternative but to draw support from the amendment made by the finance Act 2006 in section 14A and rule 8D inserted by the income Tax (5th amendment) Rules, 2008. In addition thereto, it would be patient here to mention that the recent judgment of Hon'ble ITAT (Special Bench Delhi) in case of Chemivest Ltd and UTI Bank Ltd. (2009) wherein Hon'ble ITAT have given their finding that disallowance u/s 14A would be attracted even if there is no any dividend income earned by the assessee in the said assessment year. Two out of many paras of said judgment are reproduced as under: "43. What one has to see it whatever any expenditure were incurred by an assessee in relating to an income that does not from part of total income of the assessee under this Act, and if the answer is in affirmative than that expenditure cannot be allowed irrespective of fact that it was allowable under different provisions of the Act where a difference pharaseology is used in allo....
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....ct. Therefore, penalty proceedings for concealment of income u/s 271(1)(c) rws 274 of the Act are initiated. 6. Subject to the above remarks and also from the data made available, the total income of assessee company is computed as under:- Income from business or profession as per computation of Income Rs.1,86,68,143/- Add: Disallowance u/s 14A (As discussed in Para 5) Rs.36,39,965/- Rs.2,23,08,108/- Income from other source Rs. 3,550/- Rs.2,23,11,658/- Less: Deduction u/s 80G Rs. 5,00,000/- Total Income Rs.2,18,11,658/-" 5. In appeal assessee made following contention before ld. CIT(A):- Submission dated 6.5.2011: "With reference to the above, it is submitted as under: 1. The appellant before your honour is a Private Limited Company engaged in the business of exporting of trading goods and dealing in share & securities. 2. For the assessment year 2008-09, the appellant filed its return of income on 27/09/2008 declaring total income of Rs.1,81,68,143/-. The hard copy of the return of income has bee....
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....e strongly contend that Rule 8D could not be applied to us as it does not take all aspect of our business and therefore, arbitrary in nature. It is very strange that the Rule does not refer to any actual indirect expenditure but the allowance is based on average of the value of Investment, Hence also, the rule is unequitable and harsh. We also submit that rule 8D has no application in our line of business and it could be attracted when the assessee has incurred expenses to earn exempt income. 7. Rule 8D is not opinion, mandatory but is discretionary Rule 8D could be applied by the LD. AO only when, the A-O having regard to the account of the assessee of a previous year is not satisfied with the (a) correctness of the claim of expenditures by the assessee, Or (b) the claim made by the assessee that no expenditure has been incurred in relation to exempt income for such previous year, the LD. AO has not rejected the correctness of the claim of our expenses but has made the disallowance of expenditures U/R 8D arbitrarily or on suspicious basis. Sir we have already offered for tax Rs.59795/- as disallowance U/s 14A in the return of income furnished by us, and there....
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....the stock in trade as investment made in shares and securities, which is not correct. The appellant submits that since it is in the business of trading in shares and securities, the profit on purchase and sale of shares and securities are taxed as business income, which is not exempt from tax. Thus, it cannot be said that the inventories are to be considered as investment made the income from which is exempt from tax. In fact, it is the other way i.e. the income from the inventories i.e. the stock in trade is liable for taxation as business income and the same is not exempt from tax. Hence, the borrowed funds utilized for the purpose of the business of the appellant cannot be construed to be for making investments, the income from which is exempt from tax, which is not case in the facts and circumstances of the instant case of the appellant. 11. Without prejudice to the above, the appellant submits that being aggrieved by the order of the Hon.ble C.I.T. (Appeals) V, Vadodara, passed in our case for the A. Y.2006-07 we have preferred an appeal before the Hon.ble I.T.A.T., Ahmedabad, and issue involved is same. Hence, Sir please keep the hearing of our appeal fo....
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....appropriate by your kind honor to grant us due justice. The appellant would be pleased to furnish any other information, if any required in the matter." 6. After taking into consideration the submissions of the assessee ld. CIT(A) confirmed the action of the A.O. by observing as under:- "I have considered the submissions and facts of the case. Appellant's contention that dividend income received was not exempt income, due to it already having been subjected to taxation u/s.1150 cannot be accepted. Dividend income is exempt u/s. 10(34) in the hands of appellant whereas tax u/s. 1150 is paid by the company distributing dividend. Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Pvt. Ltd. (2010) 234 CTR (Bom) 1 rejected contention of the assessee that section 14A would not apply to dividend income because dividend had already suffered tax u/s. 1150. Further contention of the appellant is that interest of Rs.43,29,261/- was towards F & 0 and export business and not towards shares and securities, from which it not only earned dividend income but profit far in excess of dividend income. It was held by ITAT's Special B....
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....arate accounts are not available on the expenditure incurred for earning tax free income were prescribed. In view of this, in appellant's case, application of Rule 8D by invoking section 14A(2) is upheld. Appellant's contention challenging the method of apportionment of expenses for the purpose of section 14A by applying Rule 8D due to it being not equitable etc. is not tenable, since legislation framed by the Parliament and subordinate legislation framed by designated authorities has to be implemented as it stands. Bombay High in the case of Godrej & Boyce Manufacturing Co. Pvt. Ltd. vs. DCIT 10) 234 CTR (Bom) 1 held that legislature considered it appropriate to prescribe a particular method in the wake of disputes that occurred between the assesses and the Department. As regards the method to be adopted in computing such expenditure, the legislative choice cannot be held to be arbitrary or oppressive. Further, the rationale for Rule 8D cannot be regarded as capricious, perverse or arbitrary and provisions of Rule 8D are not ultra vires to the provisions of section 14A. Further, Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (2011) held that expression "in relation....
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....e held by the assessee as stock in trade. The intention of assessee was not to earn dividend income and this income being incidental to business of sale of shares, no notional expenditure could be deducted by invoking the provisions of Section 14A of the Act. On similar facts Hon'ble Karnataka High Court in the case of CCI Ltd. vs. Jt. CIT (supra) has held as under:- "When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares that have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares....