TaxTMI 
TaxTMI 
2017 (2) TMI 125
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.... of the Income Tax Act (for short - 'the Act') apply where the exempt income such as dividend or interest is earned from securities held by the assessee as its stock-in-trade. The assessee had raised other issues as well. The Tribunal having decided the above question in favour of the assessee did not decide the other issues. 3. As we have also decided the question in favour of the assessee, it follows that section 14A is inapplicable altogether. The appeal must, therefore, be dismissed. Had we decided the issue against the assessee, we would have remanded the matter to the Tribunal for its decision on the other aspects, such as, whether the investments and securities yielding exempt income were from interest free funds/assessee's own funds or from interest bearing funds as the Tribunal had not decided the same. 4. The respondent filed a return declaring an income of about Rs. 670 crores which was selected for scrutiny. The return showed dividend income exempt under section 10(34) and (35) of about Rs. 11.07 crores and net interest income exempt under section 10(15)(iv)(h) of about Rs. 1.12 crores. The total exempt income claimed in the return was, therefore, Rs. 12,19,78,015....
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.... Assessing Officer as there was no legal provision either in section 14A or rule 8D to limit the disallowance to the amount of dividend received. Expenditure incurred in respect of earning taxable income alone can be allowed as deduction and expenses incurred in relation to exempt income were not to be allowed as a deduction. The application of rule 8D by the Assessing Officer was also upheld. 7. The Tribunal set aside the order of the Assessing Officer and of the CIT (Appeals). The contention on behalf of the assessee was that as it held the securities as stock-in-trade the income earned therefrom was only incidental to its business and that, therefore, the provisions of section 14A were not attracted. The Tribunal referred to a CBDT Circular No.18/2015 dated 02.11.2015 which states that income arising from investment of a banking concern is attributable to the business of banking which falls under the head "Profits and gains of business and profession". The circular states that shares and stock held by the bank are stock-in-trade and not investment. Referring to certain judgments, which we will also refer to, and the earlier orders of the Tribunal, it was held that if shares a....
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....on-SLR securities is income from other sources." 2. Clause (id) of sub-section (1) of Section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head "Income from Other Sources", if, the income is not chargeable to income-tax under the head "Profits and Gains of Business and Profession". 3. The matter has been examined in light of the judicial decisions on this issue. In the case of CIT Vs Nawanshahar Central Cooperative Bank Ltd. [2007] 160TAXMAN 48(SC), the Apex Court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and Gains of Business and Profession". 3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 4. In the light of the Supreme Court's decision in the matter, the issue is well settled. Accordingly, the Board has decided that ....
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....e by the assessee in the case before us are part of its banking business and the income arising from trading in the securities is attributable to the business of the bank/assessee falling under the head "Profits and gains of business". Further the securities dealt with in the course of such trading constitutes the assessee's stock-in-trade. 15. Mr. Bansal then contended that as the shares, bonds, debentures, etc. purchased by the assessee constituted its stockin- trade, the provisions of section 14A were not applicable. The submission is well founded. 16. Section 14A, in so far as it is relevant, reads as under:- "14-A.Expenditure incurred in relation to income not includible in total income.-For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee unde....
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....n 115-O; ...... ..... ..... ...... ...... ...... ....... (35) any income by way of- (a) Income received in respect of the units of a Mutual Fund specified under clause (23D); or (b) income received in respect of units from the Administrator of the specified undertaking; or (c) income received in respect of units from the specified company: ...... ..... ..... ...... ...... ......." Section 10 provides, inter alia, that income by way of dividend, referred to in section 115-O, is not to be included in computing the total income. Thus, the language of section 10 itself indicates that dividend referred to therein, is income and for that reason section 10 provides that such income shall not be included in computing the total income of the previous year. 20. Thus, dividend and interest arising out of the securities is income and if expenditure is incurred in relation to such income, no deduction can be allowed in respect thereof. The question, however, is whether any expenditure was incurred by the assessee to earn this exempt income. 21. Before going further, it would be useful to refer to the judgment of the Supreme Court relied upon by Mr. K....
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....sidered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14-A of the Act? According to the Department, the differential amount between the purchase and sale price of the units constituted "expenditure incurred" by the assessee for earning tax-free income, hence, liable to be disallowed under Section 14-A. As a result of the dividend payout, according to the Department, the NAV of the mutual fund, which was Rs. 17.23 per unit on the record date, fell to Rs. 13.23 on 27-3-2000 (the next trading date) and, thus, Rs. 4 per unit, according to the Department, constituted "expenditure incurred" in terms of Section 14-A of the Act. In its return, the assessee, thus, claimed the dividend received as exempt under Section 10(33) and also claimed set-off for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. The insertion of Section 14-A with retrospective effect is a serious attempt on the part of 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 ....
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..... 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 (sic income) has, in principle, been now widened under Section 14-A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14- A refer to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see Sections 30 to 37). Every payout is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. (emphasis supplied) 22. As noted by the Supreme Court, the intention of the Parliament, therefore, was not to allow ....
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....s to read the words "expenditure incurred" in Section 14-A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the incomings of the business in ascertaining the true profits. A return of investment or a payback is not such a debit item as explained above, hence, it is not "expenditure incurred" in terms of Section 14-A. Expenditure is a payout. It relates to disbursement. A payback is not an expenditure in the scheme of Section 14-A. For attracting Section 14-A, there has to be a proximate cause for disallowance, which i....
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....in respect of the exempt income viz. dividend and interest that arose out of the securities that constituted the assessee's stock-in-trade. The answer must be in the negative. The purpose of the purchase of the said securities was not to earn income arising therefrom, namely, dividend and interest, but to earn profits from trading in i.e. purchasing and selling the same. It is axiomatic, therefore, that the entire expenditure including administrative costs was incurred for the purchase and sale of the stock-in-trade and, therefore, towards earning the business income from the trading activity of purchasing and selling the securities. Irrespective of whether the securities yielded any income arising therefrom, such as, dividend or interest, no expenditure was incurred in relation to the same. 27. The securities were the assessee's stock-in-trade. Mr. Bansal, as noted earlier, submitted that the assessee did not hold the securities to earn dividend or interest, but traded in them and the dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom and would not, therefore, be subject to the provisions of section 14A. Mr.Bansal's re....
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....ever, is a financial consideration not with a view to earning the dividend or interest but with a view to assessing the price at which the security ought to be acquired, retained and sold. In other words, such dividend or interest is an aspect that the assessee takes into consideration for incurring the expenditure for the purpose of acquiring the stock-in-trade and dealing with it thereafter as well as for the sale thereof. This is entirely different from saying that the expenditure is incurred for earning the dividend or interest. 29. Once it is found that no expenditure was incurred in earning this income, there would be no further expenditure in relation thereto that falls within the ambit of section 14A. All that the assessee does thereafter i.e. after dividend and interest is received is to protect, preserve and utilize the same. The expenditure incurred in that regard would be to administer and manage the same. In other words, such expenditure cannot be said to be for the purpose of earning the same. An amount once received as income loses its character as income and thereafter forms a part of the assets or wealth of the assessee. There is no concept, such as, once an inc....