TaxTMI 
TaxTMI 
2020 (12) TMI 774
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.... HC in Cheminvest Ltd. [2015] 378 ITR 33. 4. That the appellant craves the leave to add, modify, amend or delete any of the grounds of the appeal at the time of hearing. PRAYER:- In view of the facts and circumstances of the case, the appellant prays that the order of the Ld. CIT (A) upholding the disallowance u/s 14A be set aside or any other relief, which this Hon'ble Court deems fit and proper, be given." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : During the scrutiny proceedings, Assessing Officer (AO) noticed that the assessee company has earned Rs. 1,79,87,005/- by way of dividend and claimed the same as exempt income on the ground that since no dividend income has been earned by the assessee on the share held as investment, no disallowance is called for under section 14A of the Income-tax Act, 1961 (for short 'the Act') in view of the decision rendered by Hon'ble Delhi High Court in case of Cheminvest Limited vs. CIT (2015) 378 ITR 33 (Delhi). However, AO by relying upon the CBDT Circular No.5/2014 dated 11.02.2014 which makes distinction between the dividend earned from investment and income from ....
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....provisions contained u/s 14A of the Act are applicable to expenditure in relation to exempt income from strategic investment/ stock-in-trade. We have perused the decision rendered by Hon'ble Supreme Court in Maxopp Investment Ltd. (supra)wherein it is held that,"disallowance u/s14A is applicable to the expenditure relating to exempt income from strategic investment/ stock-in-trade and the dominant purpose for which the investment into shares is made by the assessee may not be relevant and as such if expenditure is incurred for earning exempt income, then such expenditure which is attributable to the exempt income has to be disallowed and cannot be treated as business income." 8. Operative part of the judgment in Maxopp Investment Ltd. (supra) is extracted for ready perusal as under :- "31) We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above. 32) In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been....
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....ct remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxx xxx xxx The theory of apportionment of expenditure between taxabl....
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....ey should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court ....
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.... In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-intrade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. ....