TaxTMI 
TaxTMI 
2018 (10) TMI 1770
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....trading in shares and securities. Besides that it is also engaged in the activities of acquiring interest in business organization of all types, i.e, either singly or by entering into joint ventures in existing and/or new green field ventures in technology and other field. 4. In A.Y. 2012-13, the assessee earned dividend income of Rs. 394.67 lakhs and claimed the same as exempt. The assessee disallowed a sum of Rs. 6,01,184/- u/s. 14A of the Act as expenses incurred in relation to exempt income. In AY 2013-14, the assessee earned dividend income of Rs. 778.13 lakhs and disallowed a sum of Rs. 10.46 lakhs u/s 14A of the Act. It is pertinent to note that the assessee has held all the shares as its Stock in trade, i.e., it did not hold any shares as its investment. The AO noticed that the assessee has not computed disallowance u/s. 14A of the Act in accordance with Rule 8D of the I.T. Rules. He took the view that the assessee should have computed disallowance as per Rule 8D in terms of section 14A of the Act. The discussion made by the Assessing Officer in this regard in AY 2012-13 are extracted below :- 4. Disallowance of expenses u/s 14A of the Act r.w.r 8D of I.T Rules 1962: ....
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....ome not forming part of total income. Contextual interpretation of section 14A clearly suggests that expenditure in relation to exempted income has to be disallowed, even though such expenditure would have been allowable under the computational provisions relating to various heads of income. Hence, section 14A has an overriding effect over the computational provisions under various heads. To hold otherwise would amount to rendering the provisions of section 14A as otiose/redundant which is not permissible in law. Hence, there was no force in the contention of the assessee that no disallowance could be made under section 14A if the deduction was permissible under other provisions of the Act. Consequently, in the case of an assessee carrying on a business activity, any expenditure incurred by him, even though allowable under section 36(1)(iii) or sections 37 or 57, yet can be disallowed under section 14A if such an expenditure has been incurred in relation to the income not forming part of total income. Hence assesses explanation that no interest is disallowable u/s. 14A of the Act, if the same are allowable under any other provisions of the Act is without any merit and the same is r....
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....e Assessing Officer is not satisfied with the claim of the assessee. Rule 8D was notified in the Official Gazette of 24 March 2008. g. The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. However, assesses had claimed deductions in respect of income which was exempt under various provisions of the Act as a result of which the tax incentive given in respect of certain categories of income which were exempt was being utilized to reduce the tax payable on non-exempt income. This being contrary to legislative intent, Section 14A was inserted in order to restore the legal position consistent with Parliamentary intent. Declaratory or curative amendments are construed to be retrospective because they authoritatively set forth the original legislative intent. Parliament placed the matter beyond doubt by legislating upon Section 14A with retrospective effect from 1 April 1962. This was also amplified in CBDT Circular 14 of 2001.....
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....ons of sub-section (2) and (3) of section 14A are procedural in nature hence applicable retrospectively. This is to be noted here that in the above cited case the Delhi Tribunal's Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of section 14A of the Act do not envisage any such exception. The facts and judgment of the case cited above i.e. Cheminvest ltd Vs CIT 317 ITR 86, are squarely applicable to the case under consideration. i) Recently, the CBDT vide Circular No.5 of 2014 dated 11.02.2014 held that the intent of the Legislature is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading ....
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.... has also been considered as part of disallowance under Rule 8D(2)(i) being direct expenditure to earn exempt income. However, the A.O has determined the disallowance under Rule 8D without stating that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure i.e Rs. 601,184/-in relation to exempt income, having regard to the account of the appellant in terms of sub-section 2 of section 14A of the Act. The A.O has not specified what other expenses have been incurred in relation to the exempt income and how the claim of the appellant was not correct In view of the above, I am inclined to hold that the A.O was not correct in invoking Rule 8D and computing disallowance u/s 14A at Rs. 20,15,08,828/-. 7. The assessee also contended that the shares are held by it as Stock in trade and hence the provisions of Rule 8D cannot be applied to it. In this regard, the assessee relied upon the decision rendered by Mumbai bench of Tribunal in the case of India Advantage Securities Ltd (ITA No.1131 of 2013) and the decision rendered by Hon'ble Karnataka High Court in the case of CCI Ltd vs. JCI (250 CTR 291). The assessee also contended that the provisi....
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.... by the said Court in the case of Godrej & Boyce Mfg. Company Ltd, on the issue whether disallowance under Rule 8D could be made where the investment has been made in its stock-intrade. 6.5 I find that the appellant is in the business of trading in shares and securities which are held as stock-in-trade. The investments reflected in Schedule V to the balance sheet as on 31.03.2012 are as under: - SCHEDULE -V INVESTMENTS Painting Rs. 34.87.500 Rs. 34,87,500 This does not include investment in shares. The entire holding of shares and securities are reflected in Schedule VI - current assets, loans and advances- inventories, closing stock of shares, securities and claims of Rs. 22,98,685,4687-. In view of the above said decisions of the High Court of Bombay, in the case of India Advantage Securities Ltd. and HDFC Bank Ltd., it is held that the disallowance worked out under Rule 8D amounting to Rs. 20,15,08,8287-, by considering the closing stock of shares as investments in shares, was not correct. In this case, the appellant has already worked out the disallowance considering the actual expenditure of earning dividend income of Rs. 601,1847- in the return of income. ....
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....erein it was held that the exempt income earned from shares held as stock in trade would attract disallowance. Accordingly the Ld D.R submitted that the exempt dividend income earned from securities held as stock in trade would attract the provisions of Sec.14A of the Act. Accordingly the Ld D.R contended that the assessing officer has rightly computed disallowance by applying provisions of Rule 8D of the I.T Rules. 11. The Ld A.R, on the contrary, submitted that the assessee's main objective in purchase and sale of shares is to earn profit on sale of shares and hence the dividend income earned by it is only incidental income arising on account of holding of shares on the record date prescribed for declaration of dividend. He submitted that all the expenses incurred by the assessee are in connection with trading in shares only. The assessee shall be incurring all the expenses debited to the profit and loss account, even it does not earn any dividend income at all. Accordingly, the Ld A.R submitted that all the expenses are related to trading activity only and none of it is related to dividend income, which is exempt from taxation. The Ld A.R submitted that, despite these facts, t....
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....this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him 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 under section 154, for any assessment year beginning on or before the 1st day of April, 2001." Sub.sec.(2) of sec.14A is relevant for our consideration. The power to disregard the computation made by the assessee is given to the AO under sub.sec(2) of sec. 14A of the Act. It prescribes that the AO can determine the quantum of expenditure to be disallowed only if the Assessing Officer, having....
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....le 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable". (b) Extract from the judgment of Hon'ble Bombay High Court in the case of Reliance Capital Asset Management Ltd. 86 taxmann.com 200 (Bom.) "The Assessing Officer did not specifically record that he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure in relation to the income w....
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....en situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible". (e) Extract from the judgment of Hon'ble Calcutta High Court in the case of REI Agro Ltd. GA No. 3022 of 2013 "The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that "no expenditure" was made by the assessee... the disallowance under section 14A of the Income Tax Act, 1961 is plainly con....
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....vidend, those shares are held by the assessee, though the assessee has to ultimtely trade those shares by selling them to earn profits." (d) Fourthly, the AO has observed that the Hon'ble Delhi High Court has held in the case of Cheminvest Ltd (317 ITR 86) that disallowance u/s 14A can be in a year in which no exempt income has been earned or received by the assessee. This interpretation of the AO is not correct as the Hon'ble Delhi High Court has held otherwise, i.e., no disallowance is required when there is no exempt income. Thus, we notice that the AO has proceeded to invoke the provisions of Rule 8D of the I.T rules, without showing that he was not satisfied with the workings given by the assessee having regard to the accounts of the assessee. Further, the understanding of AO with regard to the disallowance u/s 14A of the Act is inconsistent with the principles laid down by the Hon'ble High Courts and Supreme Court. 16. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the AO was not justified in invoking Rule 8D to compute disallowance u/s 14A, without showing that he was not satisfied with the amount of disallowa....