Is Daga Capital case aaplicable to all share trading?
We haven't heard the last on the subject as is clear from the strong dissenting judgement of Shri. Singal. I think there is a lot of merit in the argument that s. 14A can only apply if you bought shares primarily to earn dividend and not if you are a pure dealer.
Let us see what the HC says on the subject.
Even Rule 8D only speaks on investments only.
It doesnt speak of the situation where the shares are held as Stock-in-trade.
Bhavesh Savla
Keep Smiling,
if dividend is claimed as exempt by shrae trader also, how can 14 A not apply?
One quesiton arises that if the assessee acquires shares in say FY 2007-08 but neither sells them in FY 2008-09 nor has earned dividend in FY 2007-08 then there is no exempt income in that year.
Can the officer still make disallowance saying that in the next year tax-free incomme may be earned.
Can the probable income in the next year be used to disallow this year's expense??
Bhavesh Savla
Keep Smilng.
Yes, why not. Please see the decision of Apex Court reported in 115 ITR 519 ( CIT vs Rajendra Prasad Moody) wherein the Apex Court held that even if the income is not earned during the year under consideration, the expenditure incurred is allowable.Following the said principle, even if the exempted income is not earned during the year under consideration, the relatable expenditure is not allowable. I hope this case law clarifies the issue.
We have to see in what context that decision was rendered.
See Shree Shyamkamal Finance and Leasing Co, 21 SOT 1 where it was held that if no tax-free income is earned in the year, no disallowance in that year u/s 14A ca be made.
Bhavesh Savla
Keep Smiling.
There is one more reason why the expenses of one year can't be disallowed for the expected income of future years.
Suppose the expenses in FY 2008-09 are disallowed for investments made. But neither any Long term Capital gains is earned nor dividend is earned.
Now suppose in FY 2009-10 both the STT and the DDT regime are discontinued. Both the LTCG and the Dividend income will be taxable in the hands of the shareholders.So will the assessee be allowed the expenses disallowed in FY 08-09??
If not then it will be very unfair to the assessee.
So I feel that the expenses should be disallowed for a particular year only if tax-free income is earned in the year.
Bhavesh Savla
Keep Smiling.
This argument leads to the conclusion that agricultural expenses debited to P & L account cannot be disallowed during the year in which no agricultural income is received. However, I didnot go thru the decision reported in 20 sot 1. I will come back again after going thru the said decision. The logic appears to be not logical and therefore not acceptable.
Agricultural expenses are a seperate class of expenses by themselves The Govt is barred by the Constitution itself to tax Agri income. It can't be compared to any income.
You can also refer to Sir Kikabhai Premchand 24 ITR 506 which says:
"We are of opinion that the learned Attorney-General's second contention is unsound because, for income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future."
Bhavesh Savla
Keep Smiling.
Even now I am not convinced. So far my observation says that agricultural income is exempted u/s 10(1) and the devidend is exempted u/s 10(34) and the long term capital gains arisen on account of transfer of listed securities are exempted u/s 10(38) and I dont find any special status for agricultural income granted by constitution. Please enlighten me under what section the special status is granted. As it is mentioned each year is a separate unit and the income of a particular year is taxed and the expenses incurred during that year are only allowable from the said income. Therefore, there is no strength in argument that the expenses incurred during this year should be allowed on the basis of estimation that the exemption granted to dividend hitherto will be lifted next year and when the income in the form of devidend is received, the same is taxable. Since this year devidend which is not taxable is just not received, the expenses cannot be allowable on the plea that in future devidend will lose its exemption. In future, if devidend is made taxable, the relatable expenses incurred during that year are only allowable. No way the expenses incurred last year are allowed. This is for the time being my opinion. I have no objection, if somebody corrects me.
I find no merit in the argument that the expenses should be disallowed even if there may be no income.
If the source suddenly becomes taxable, then it will be a double blow to the assessee.
As regards the case law quoted by you in Rajendra Prasad 115 ITR 519 the SC has nowhere gone into the issue of the expenses and income being of different A.Ys .It has merely said that expenses should be allowed if any income-earning activity takes place during the year regardless of the fact that it yields profit or not.
Pls read the case quoted by me again i.e. Sir Kikabhai Premchand 24 ITR 506 which woud clearly support my case.
Also Shree Shyamkamal Finance 21 SOT 1 has directly dealt with the issue and has given reasons for its judgment.
But the issue is not far from litigation. I think that Section 14A will become another 80HHC.
Keep Smiling.
14A speaks of disallowance of expenditure in relation to earning income which does not form part of the total income. It appears only when such income is to be computed under Chapter IV the question of disallowance will arise. Hence if there is no such income is included in the computation of total income, no disalloance could be made.
The purpose of 14A to me appears the avoidance of double deduction of expenses. Though part of the expenses debited to Profit & Loss a/c pertains to earning of income which does not form part of the total income, the assessee claims gross income falling under INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME while claiming the expenses under the heads of taxable income. Hence what is sought to be disallowed is those expenses which are incurred for earning income which do not form part of the total income. Rule 8D has completely sidelined the issue.
Exactly.
Rule 8D has completely gone ahead of its object.
This is not surprising because in Mr. Chidambaram's tenure most of the tax laws have gone beyond their object.
How do u justify .5 % of the Avg. Investments.
Suppose I dont have any Opening Investments. I purchase on April 10 and sell off in Feb 15. I earn a huge dividend income during that period, then the above clause will not apply.
But if I dont sell off during the Current year and sell it off in April Next F.Y. then the clause will be applicable even if I dont earn a single extra paisa of Dividend income.
Bhavesh
Keep smiling
how can it exceed tax free income?
though different members have expressed dissent, I have been consistently arguing that though exemtped income is not received in the year, the related expenditure is not allowable. Now this issue has been set at rest by the special bench constituted for this purpose in Bombay, the decision of which is available on Taxindiaonline.com. I hope the discussion will stop here regarding this issue.
I think I have wrongly quoted the decision in the above mentioned reply. The correct decision is
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH 'B' SPECIAL BENCH: NEW DELHI
Before Shri. R P Garg, VP, A D Jain and Rajpal Yadav, JM
ITA No. 87/Del/2008
Assessment Year: 2004-05
M/s Cheminvest Ltd
Max House, 1 Dr Jha Marg, New Delhi -
110003
PAN NO: AAACC0912A
ITO, Ward 3(3), New Delhi
which is available on this site also.
With regards..................................,
I would disagree that the matter has been laid to rest by Cheminvest by the Delhi ITAT.
Further,with due respect, Cheminvest also has one more strange logic. It says that the Rule 8D is to be applied automatically in case of tax free income. One need not go into the nature of different expenses.
This is actually contradictory to the language used in section 14A (2).
KINDLY read CHEMINVEST LTD v/s ITO 124 TTJ 577(DELHI)(SB).
I have already read it.
With due respect, the logic does seem strange that you directly go for Rule 8D rather than first compel the AO to express dissatisfaction with the claims of the Assessee.