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| DATE: | (Date of pronouncement) |
| DATE: | March 28, 2011 (Date of publication) |
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| Click here to download the judgement (yatish_trading_14A_shares_trading.pdf) |
No s. 14A disallowance of interest on borrowed funds used to buy shares for trading purposes
The assessee, engaged in trading and investment of shares, received tax-free dividend income of Rs. 2.98 crores in AY 2004-05. The AO invoked s. 14A and disallowed the interest on borrowings, administrative and other expenses on proportionate basis. In appeal, the CIT (A) upheld the disallowance but directed that it should be computed as per Rule 8D. On appeal to the Tribunal, HELD:
(a) Rule 8D does not apply prior to AY 2008-09 (Godrej & Boyce 328 ITR 81 (Bom) followed);
(b) The expression “in relation to” in s. 14A means dominant and immediate connection or nexus with the exempt income. In order to disallow expenditure u/s 14A, there must be a live nexus between the expenditure incurred and the tax-free income. Disallowance cannot be made on presumptions and estimation by the AO. Notional expenditure can be apportioned for the purpose of earning income if there is no actual expenditure incurred “in relation to” the tax-free income;
(c) On facts, the business of the assessee predominantly was trading in shares though it also had investments in shares. The AO has not disputed the assessee’s claim that the dividend had been received on shares purchased for trading purposes. Interest on borrowed funds used for trading activity is allowable u/s 36(1)(iii) and it cannot be treated as expenditure for earning dividend income which is incidental to the trading activity. If the real purpose was to use borrowed funds for trading purposes and incidentally there is tax-free dividend, it cannot be said that the interest has been incurred for earning the dividend income (Wallfort Share & Stock Brokers 326 ITR 1 (SC), Godrej & Boyce 234 DTR 1 (Bom), Emraid 284 ITR 586 (Bom), Leena Ramchandranan (Ker) & Eicher 101 TTJ (Del) 369 followed);
(d) Though, as held in Godrej & Boyce 234 DTR 1 (Bom), it is implicit within s. 14A that expenditure incurred for an indivisible purpose has to be apportioned, this principle of apportionment is applicable only where it is not possible to determine the actual expenditure incurred “in relation to” tax-free income. When it is possible to determine the actual expenditure “in relation to” the exempt income or where no expenditure is incurred “in relation to” the exempt income, the principle of apportionment embedded in s 14A has no application;
(e) As regards the disallowance of administrative expenditure, the AO’s basis of disallowance based on the ratio of taxable income and dividend is wrong because the expenditure did not depend on the profit or loss arising from the business activity. If the expenditure is apportioned on the basis of income, then in the case of no income, no expenditure can be assigned. In case of transaction of purchase and sale of shares, the reasonable basis for apportionment of administrative expenditure should be the volume and nature of the transaction under different activities. There cannot be an equal basis for apportionment of admin expenses between delivery based transactions and non-delivery based transactions etc.
Note: In Catholic Syrian Bank it was held that prior to Rule 8D, admin expenses cannot be disallowed. See also Godrej Agrovet (ITAT Mumbai), Maharashtra Seamless (ITAT Delhi) & Hero Cycles 323 ITR 518 (P&H)
AO is absolutely wrong in invoking Sec 14A Rule 8D as far as Dividend on Stock in trade in concerned.
AO need to show clear nexus with interest and other expenses as far as income from investment LTCG is concerned.
not sure if he can really invoke the section in STCG.
Dividend is a relief granted by an act of parliament. The object of the DDT was to facilitate ease and exemption in StCG and LTCG was allowed in lieu of STT and etc.
Argument is simple , and argument does not involve DDT or STT , it is plain and simple that parlianment allowed a relief , now application of this relief by an assessee cannot be used as a tool to trap and tax.
Act would have barred its benefit to selected few if it wanted to do so. The parliament is learned enough. Parliament never wished its action of relief be used as a bait to trap and tax more by CBDT.
CBDT is abusing its powers to superimpose its whims and academic nuisance on the wisdom , belief and act of parliament.
The Section was meant to apply itself in agriculture type of income and disallow claim of interest and other expenses incurred in harvesting which are set off against other taxable income while total sale proceed of harvest was recorded as tax exempt income.
Nexus has to be clear and human, it should not be arbitrary , high handed , and certainly should not use the relief of Act allowed as a tool to tort.
Every single word in this judgement is very important and the comments made by the ITAT members are very valuable.