NMS Consultancy Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 1524/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64407 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 09-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 02-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: R SIVARAMAN
• Keywords: Business income; Business expenditure; Earning of tax free income; Revised return
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO. 1523/MDS/2012 (ASSESSMENT YEAR : 2008-09) M/S MSA SECURITIES SERVICES PRIVATE LIMITED, OLD NO.21, NEW NO.6, 1 ST FLOOR, POSTAL COLONY 4 TH STREET, WEST MAMBALAM, CHENNAI - 600 033. PAN : AAECM6823E (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(3), CHENNAI - 600 034. (RESPONDENT) I.T.A. NO. 1524/MDS/2012 (ASSESSMENT YEAR : 2008-09) M/S NMS CONSULTANCY PRIVATE LIMITED, T-11, K.G. PLAZA, 3 RD FLOOR, NO.41-44, GENERAL PATTERS RD., CHENNAI - 600 002. PAN : AACCN3149G (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI - 600 034 . (RESPONDENT) APPELLANTS BY : SHRI R. SIVARAMAN, ADVOCATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL DATE OF HEARING : 09.10.2012 DATE OF PRONOUNCEMENT : 17.10.2012 I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 2 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS OF THE ASSESSEES, DIRECTED AGAI NST ORDERS DATED 31.5.2012 OF COMMISSIONER OF INCOME TAX (APPE ALS)-V, CHENNAI. THESE APPEALS ARE CONSIDERED TOGETHER SIN CE GROUNDS TAKEN BY THE ASSESSEES ARE SIMILAR. 2. APPEAL IN I.T.A. NO. 1524/MDS/2012 OF ASSESSEE, M/S NMS CONSULTANCY PRIVATE LTD. IS CONSIDERED FIRST FOR DI SPOSAL. 3. GRIEVANCES OF THE ASSESSEE ARE THAT CIT(APPEALS) UPHELD DISALLOWANCE OF INTEREST OF ` 1,38,93,443/- PERTAINING TO CERTAIN INVESTMENTS MADE BY THE ASSESSEE IN ONE M/S SRINGAR AVALLI CONSULTANTS PVT. LTD. AND ALSO HELD THAT SECTION 14 A OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') WAS APPLICABLE ON IN TEREST PAID ON BORROWED FUNDS UTILIZED FOR PURCHASING EQUITY SHARE S. 4. FACTS AS CULLED OUT FROM ASSESSMENT ORDER ARE TH AT ASSESSEE, DEALING IN SHARES AND ALSO DOING INVESTMENT COUNSEL LING, HAD FILED RETURN OF INCOME DECLARING A LOSS OF ` 3,48,57,095/- FOR THE IMPUGNED ASSESSMENT YEAR. SUCH LOSS WAS REDUCED TO ` 3,45,49,595/- THROUGH A REVISED RETURN FILED. DURING THE COURSE OF ASSES SMENT PROCEEDINGS, I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 3 IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD SUBSTANTIAL UNSECURED LOANS COMING TO ` 1,27,13,79,000/- AS AT THE END OF THE RELEVANT PREVIOUS YEAR. ASSESSING OFFICER FURTHER NOTED THAT ASSESSEE HAD INVESTED IN SHARES OF ONE M/S SRINGARAVALLI CON SULTANTS PVT. LTD. FOR A SUM OF ` 10,99,00,000/- AND HAD ALSO PAID SHARE APPLICATION MONEY OF ` 47,51,00,000/- TO THE SAME COMPANY. PROFIT & LOSS ACCOUNT OF THE ASSESSEE SHOWED A SUM OF ` 3,95,63,859/- AS INTEREST CHARGED ON THE LOANS TAKEN BY IT. ASSESSING OFFICE R WAS OF THE OPINION THAT INTEREST ON BORROWED FUNDS INSOFAR AS IT WAS UTILISED FOR ACQUIRING SHARES AND GIVING SHARE APPLICATION MONEY COULD NOT BE CONSIDERED AS BUSINESS EXPENDITURE. A PRO RATA DIS ALLOWANCE OF ` 1,38,93,443/- WAS MADE. 5. ASSESSING OFFICER ALSO FOUND FROM PROFIT & LOSS ACCOUNT THAT ASSESSEE HAD RECEIVED DIVIDEND INCOME OF ` 10,11,449/-, WHICH WAS EXEMPT FROM TAX. AS PER THE A.O., THIS CALLED FOR APPLICATION OF SECTION 14A OF THE ACT. TOTAL EXPENDITURE DEBITED IN PROFIT & LOSS ACCOUNT OF THE ASSESSEE FOR RELEVANT PREVIOUS YEAR CAME TO ` 4,57,84,435/-. AS PER THE A.O., EXPENDITURE INCURR ED IN EARNING EXEMPT INCOME COULD NOT BE ALLOWED AND RULE 8D OF I NCOME-TAX RULES, 1962 HAD TO BE APPLIED. HE, THEREFORE, APPL IED SUB-CLAUSE (2) I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 4 OF RULE 8D AND MADE A FURTHER DISALLOWANCE OF ` 2,35,73,989/- FOR INTEREST. WHILE COMPUTING SUCH INTEREST DISALLOWAN CE, ASSESSING OFFICER DEDUCTED FROM THE TOTAL INTEREST OF ` 3,95,63,859/-, THE INTEREST AMOUNT ` 1,38,93,443/- WHICH HE DISALLOWED AS NON-BUSINESS EXPENDITURE. IN OTHER WORDS, WHILE APPLYING THE FO RMULA MENTIONED IN SUB-CLAUSE (2) OF RULE 8D, A.O. TOOK ONLY THE BALAN CE INTEREST AFTER CONSIDERING THE DISALLOWANCE MADE BY HIM FOR NON-BU SINESS EXPENDITURE. UNDER RULE 8D(2)(III), HE MADE A FURT HER DISALLOWANCE TAKING 0.5% OF THE AVERAGE INVESTMENT AND SUCH DISA LLOWANCE CAME TO ` 15,93,169/-. THE EFFECTIVE DISALLOWANCE UNDER RUL E 8D CAME TO ` 2,51,67,158/-. THE ASSESSMENT WAS COMPLETED ACCORD INGLY. 6. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE CIT(A PPEALS). ITS ARGUMENT WAS THAT THE INVESTMENT IN M/S SRINGARAVAL LI CONSULTANTS PVT. LTD. (SCPL) WAS IN THE COURSE OF ITS BUSINESS OF DEALING IN SHARES. AS PER THE ASSESSEE, THE SHARES ACQUIRED I N M/S SCPL FORMED PART OF ITS STOCK-IN-TRADE AND COULD NOT BE CONSIDERED AS AN INVESTMENT WHICH WOULD RESULT IN EXEMPT INCOME. AC CORDING TO ASSESSEE, SALE OF SUCH SHARES WOULD GIVE RISE TO CA PITAL GAINS WHICH WAS INCLUDIBLE IN THE TOTAL INCOME, AND FURTHER, IT HAD GOT CONTROLLING RIGHT IN SUCH COMPANY BY THE ACQUISITION OF SHARES. AS PER THE I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 5 ASSESSEE, THE INVESTMENT WAS MADE FOR BUSINESS EXPE DIENCY AND NOT FOR THE PURPOSE OF EARNING DIVIDEND INCOME. IT WAS , THEREFORE, ARGUED THAT SECTION 14A HAD NO APPLICATION. THUS, THE MAI N CRUX OF ITS ARGUMENT WAS THAT DIVIDEND INCOME WAS ONLY AN INCID ENTAL INCOME, WHEREAS, MAIN INCOME OF THE ASSESSEE WAS ON ACCOUNT OF TRADING IN EQUITY SHARES. 7. HOWEVER, CIT(APPEALS) WAS NOT IMPRESSED. ACCORD ING TO HIM, AMOUNTS SPENT FOR THE PURCHASE OF SHARES IN SCPL AN D SHARE APPLICATION MONEY PAID TO THE SAID COMPANY WERE SHO WN BY THE ASSESSEE AS INVESTMENT IN ITS BOOKS OF ACCOUNTS. I N THE OPINION OF CIT(APPEALS), SUCH INVESTMENT YIELDED DIVIDEND WHIC H WAS EXEMPT FROM TAX. JUST BECAUSE CAPITAL GAINS WOULD ALSO AR ISE WHEN SUCH SHARES WERE SOLD, WOULD NOT ALTER THE POSITION IN A NY MANNER. AS PER THE CIT(APPEALS), THE INTENTION WITH WHICH THE EXPE NDITURE WAS INCURRED WAS NOT A CRITERIA TO BE ADOPTED FOR APPLY ING SECTION 14A OF THE ACT. EXPENDITURE INCURRED BY THE ASSESSEE HAD DIRECT NEXUS WITH EARNING DIVIDEND INCOME. FURTHER, AS PER THE CIT(A PPEALS), LOANS ON WHICH INTEREST WAS PAID BY THE ASSESSEE, WERE FULLY UTILIZED IN MAKING INVESTMENT AND THEREFORE, EXPENDITURE IN THE NATURE OF INTEREST ON SUCH LOANS, WOULD BE IN CAPITAL FIELD AND COULD NOT BE JUSTIFIED AS ALLOWABLE ON THE REASONS OF BUSINESS EXPEDIENCY. C IT(APPEALS) ALSO I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 6 FOUND THAT RULE 8D CLEARLY SPECIFIED THAT EXPENDITU RE WHETHER DIRECT OR INDIRECT, NOT ATTRIBUTABLE OR RELATABLE TO EARNI NG OF TAXABLE INCOME, HAD TO BE DISALLOWED. ASSESSEE HAVING ADMITTED DIV IDEND INCOME OF ` 10,11,449/-, IT COULD NOT SAY THAT SECTION 14A AND RULE 8D WOULD NOT APPLY. RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P) LTD. (3 26 ITR 1), HE DISMISSED THE APPEAL OF THE ASSESSEE. 8. NOW BEFORE US LEARNED A.R., STRONGLY ASSAILING T HE ORDERS OF LOWER AUTHORITIES, SUBMITTED THAT ASSESSEE WAS DOIN G SHARE BUSINESS BOTH AS INVESTMENT AND TRADE. INVESTMENTS WERE IN THE COURSE OF ITS BUSINESS ONLY. DIVIDENDS WHICH THE ASSESSEE EARNED , WERE ONLY INCIDENTAL. THOUGH ASSESSEE HAD EARLIER SHOWN SUCH AMOUNT AS INVESTMENT, IT HAD CONVERTED IT INTO STOCK-IN-TRADE AT THE BEGINNING OF THE RELEVANT PREVIOUS YEAR. WHETHER INVESTMENT OR STOCK-IN-TRADE, SALE OF SUCH SHARES YIELDED CAPITAL GAINS OR BUSINE SS INCOME, BOTH OF WHICH WERE EXIGIBLE TO TAX. THEREFORE, ACCORDING T O LEARNED A.R., IT COULD NOT BE STATED THAT INVESTMENTS WERE FOR EARNI NG EXEMPT INCOME. IT MIGHT BE TRUE THAT ASSESSEE HAD DIVIDEND INCOME OF ` 10,11,449/-, BUT NEVERTHELESS, SUCH DIVIDEND WAS SMALL WHEN COMP ARED TO THE SHARES ACQUIRED AND THIS ITSELF WOULD SHOW THAT SUC H INVESTMENT WAS I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 7 MADE NOT FOR THE PURPOSE OF EARNING DIVIDEND, BUT O NLY IN THE COURSE OF ITS BUSINESS FOR EARNING CAPITAL GAINS OR BUSINE SS INCOME. SECTION 14A COULD NOT BE APPLIED IN SUCH A SITUATION. 9. IN ANY CASE, ACCORDING TO THE LEARNED A.R., SUBS TANTIAL PORTION OF INVESTMENT MADE IN M/S SCPL WAS BY WAY OF SHARE APPLICATION MONEY. IT COULD NOT BE CONSIDERED THAT SHARE APPLI CATION MONEY WOULD YIELD ANY DIVIDEND AT ALL. LEARNED A.R. POIN TED OUT THAT ASSESSING OFFICER HAD MADE DISALLOWANCE OF INTEREST OF ` 1,38,93,443/- FOR A REASON THAT IT WAS NOT BUSINESS EXPENDITURE. AGAIN, WHEN HE WAS CALCULATING A DISALLOWANCE UNDER RULE 8D, A PART OF THE INTEREST CHARGED TO PROFIT & LOSS ACCOUNT WA S DISALLOWED. THIS ALSO RESULTED IN EXCESS DISALLOWANCE OF INTEREST. LD. CIT(APPEALS) HAD APPLIED SECTION 14A WHILE JUSTIFYING BOTH THE D ISALLOWANCES MADE BY THE A.O., BUT, NEVERTHELESS, IGNORED THE DOUBLE DISALLOWANCE OF INTEREST. RELIANCE WAS PLACED BY THE LEARNED A.R. ON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF S IVA INDUSTRIES & HOLDINGS LTD. V. ACIT (2011) 59 DTR 182, THAT OF SH RIRAM TRANSPORT FINANCE COMPANY LTD. V. ACIT IN I.T.A. NO. 701/MDS/ 2012 DATED 28.6.2012, THAT OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF AVSHESH MERCANTILE P. LTD. V. DCIT (I.T.A. NO. 5779 /MUM/2006 DATED I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 8 13 TH JUNE, 2012 AND THAT OF HONBLE BOMBAY HIGH COURT I N THE CASE OF CIT V. DELITE ENTERPRISES LTD. (I.T.A. NO. 110 OF 2 009 DATED 26 TH JUNE, 2007). ACCORDING TO HIM, IN THE CASE OF SHRIRAM TR ANSPORT FINANCE COMPANY LTD. (SUPRA), THIS TRIBUNAL HAD CONSIDERED JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. &ORS. V. CIT (2011) 64 DTR 122, WHERE IT WAS CLEARL Y HELD THAT RECORDING OF DISSATISFACTION WITH THE CORRECTNESS O F THE CLAIM OF EXPENDITURE OR CLAIM OF NO EXPENDITURE MADE BY THE ASSESSEE WAS A PRE-REQUISITE FOR INVOCATION OF RULE 8D. IN ANY CA SE, ACCORDING TO LEARNED A.R., HONBLE DELHI HIGH COURT HAD, IN THE LATTER CASE, HELD THAT RULE 8D WOULD APPLY ONLY FROM 24.3.2008 AND NO T PRIOR TO THAT. STRONG RELIANCE WAS PLACED ON THE DECISION OF HONB LE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. V. JCIT (71 DTR 141) FOR ARGUING THAT WHEN SHARES WERE RETAINED, NOT WITH AN INTENTI ON OF EARNING DIVIDEND INCOME AND DIVIDEND INCOME WAS INCIDENTAL, THERE COULD BE NO DISALLOWANCE UNDER SECTION 14A OF THE ACT. 10. PER CONTRA, LEARNED D.R. SUBMITTED THAT INVESTM ENT MADE BY THE ASSESSEE IN M/S SCPL WAS SHOWN BY THE ASSESSEE ITSE LF AS INVESTMENT IN ITS BALANCE SHEET. INVESTMENT HAD AL SO RESULTED IN A DIVIDEND INCOME OF ` 10,11,449/-. IT IS NOT NECESSARY THAT THERE I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 9 SHOULD BE SUBSTANTIAL DIVIDEND INCOME RECEIVED BY A N ASSESSEE FOR APPLICATION OF SECTION 14A. ASSESSEE HAD MADE SUCH INVESTMENT FOR BUILDING UP OF AN INFRASTRUCTURE OF INVESTMENTS, WH ICH WOULD LATER RESULT IN SUBSTANTIAL DIVIDEND INCOME. INTENTION O F THE ASSESSEE WAS TO EARN DIVIDEND INCOME AND DIVIDEND INCOME WAS IND EED EARNED DURING THE RELEVANT PREVIOUS YEAR. ONCE ASSESSEE H AD SHOWN DIVIDEND INCOME AND CLAIMED IT EXEMPT, IT COULD NOT SAY THAT THE INVESTMENTS WERE NOT FOR THE PURPOSE OF EARNING DIV IDEND INCOME BUT FOR SOME OTHER PURPOSE. THEREFORE, ACCORDING TO HI M, THE DISALLOWANCE OF INTEREST AS WELL AS DISALLOWANCE MA DE UNDER RULE 8D WERE JUSTIFIED. REGARDING THE CASE LAWS RELIED ON BY THE ASSESSEE, LEARNED D.R. SUBMITTED THAT THESE WERE RELATED TO Y EARS PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT IN EXI STENCE. LEARNED D.R., THEREFORE, ARGUED THAT THERE IS NO IN FIRMITY IN THE ORDERS OF LOWER AUTHORITIES. 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. FACING SHEET OF THE ASSESSMENT ORDER MENTIONS ASSES SEES BUSINESS AS INVESTMENT COUNSELLING. NEVERTHELESS, AT PARA 1 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER ALSO STATES THAT THE A SSESSEE WAS A DEALER IN SHARES. READ TOGETHER, THIS WOULD CLEARL Y IMPLY THAT ASSESSEE WAS BOTH, DOING INVESTMENT AS WELL AS SHAR E TRADING AS A I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 10 PART OF ITS BUSINESS. ASSESSEE HAD INVESTED A SUM OF ` 10,99,00,000/- IN THE SHARE OF M/S SCPL. IN ADDITI ON, IT HAD ALSO PLACED SHARE APPLICATION MONEY WITH SAME COMPANY TO THE TUNE OF ` 47.51 CRORES. IT IS NOT DISPUTED THAT ASSESSEE HAD RECEIVED A DIVIDEND OF ` 10,11,449/-. HOWEVER, THERE IS NO FINDING BY THE ASSESSING OFFICER THAT THE SAID DIVIDEND INCOME HAD COME FROM SHARES HELD IN M/S SCPL. AT PARA 2 OF THE ASSESSMEN T ORDER, IT IS CLEARLY MENTIONED THAT ASSESSEE HAD CONVERTED ITS I NVESTMENT IN SHARES INTO STOCK-IN-TRADE ON 1.4.2007, WHICH IS TH E FIRST DAY OF RELEVANT PREVIOUS YEAR. ASSESSEE HAD ALSO RETURNED SHORT-TERM CAPITAL GAINS ON THE SALE OF SHARES EFFECTED BY IT. ACQUIS ITION OF SHARES IN M/S SCPL, WHETHER AS INVESTMENT OR AS STOCK-IN-TRAD E, IN SUCH CIRCUMSTANCES, COULD NOT BE CONSIDERED AS SOMETHING DONE OUTSIDE THE COURSE OF BUSINESS OF THE ASSESSEE. THEREFORE, THE FINDING OF THE CIT(APPEALS) THAT PRO RATA INTEREST ON FUNDS RELATA BLE TO SUCH INVESTMENT WAS AN OUTGO IN CAPITAL FIELD IS, IN OUR OPINION, INCORRECT. AN ASSESSEE CAN TAKE ANY AMOUNT OF LOAN FOR THE PUR POSE OF ITS BUSINESS AND SUCH LOANS CAN BE USED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS OR CURRENT ASSETS. AS LONG AS SUCH FI XED ASSETS AND CURRENT ASSETS WERE RELATABLE TO ITS BUSINESS, INTE REST ON LOANS PAID FOR ACQUIRING SUCH ASSETS ARE NOTHING BUT BUSINESS EXPENDITURE OF THE I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 11 ASSESSEE. THEREFORE, THE VIEW OF THE A.O. THAT INT EREST RELATABLE TO BORROWED FUNDS ATTRIBUTABLE TO INVESTMENT OF SHARES OF M/S SCPL AND FOR PLACING SHARE APPLICATION MONEY WITH THE SAID C OMPANY COULD NOT BE CONSIDERED AS BUSINESS EXPENDITURE, CANNOT BE AC CEPTED. SIMILARLY, THE VIEW OF THE CIT(APPEALS) THAT SUCH I NTEREST EXPENDITURE COULD BE IN THE CAPITAL FIELD ALSO CANNOT BE ACCEPT ED. REASON FOR DISCOUNTING BOTH THESE VIEW IS THAT ALL THESE SHARE S WERE ACQUIRED AND SHARE APPLICATION MONEY PLACED WITH M/S SCPL ON LY IN THE COURSE OF BUSINESS OF THE ASSESSEE. 12. THIS LEAVES US WITH THE ASPECT OF APPLICATION O F SECTION 14A OF THE ACT. AS ALREADY MENTIONED BY US, ASSESSEE HAD EARNED BOTH DIVIDEND INCOME AS WELL AS SHORT-TERM CAPITAL GAINS . DIVIDEND INCOME WAS CLAIMED AS EXEMPT UNDER INCOME-TAX ACT. WHAT W E FIND IS THAT A SUM OF ` 47.51 CRORES WAS PLACED BY THE ASSESSEE WITH M/S S CPL AS SHARE APPLICATION MONEY. TILL SUCH PERIOD SHARE AP PLICATION MONEY GOT CONVERTED INTO SHARES, ASSESSEE WAS NOT ENTITLE D TO ANY DIVIDEND. THERE IS NO CASE FOR THE REVENUE THAT ASSESSEE HAD RECEIVED ANY INTEREST ON SUCH SHARE APPLICATION MONEY. SHARE AP PLICATION MONEY, TILL SUCH POINT OF TIME IT WAS CONVERTED INTO SHARE S, WILL NOT YIELD ANY INCOME WHATSOEVER, WHETHER EXEMPT OR NOT. WHEN THE RE IS NO I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 12 POSSIBILITY OF EARNING OF ANY INCOME AT ALL, THERE CAN BE NO DISALLOWANCE UNDER SECTION 14A OF THE ACT. SUB-SEC TION (1) OF SECTION 14A CLEARLY BARS DEDUCTION BEING ALLOWED ON EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF TOTAL INCOME. THUS, WHEN THERE IS NO POSSI BILITY OF ANY INCOME ARISING TO THE ASSESSEE FROM THE INVESTMENT, QUESTI ON OF APPLICATION OF 14A(1) WOULD NOT ARISE AT ALL. 13. CIT(APPEALS) HAS GIVEN A FINDING THAT INTENTION WITH WHICH SHARES WERE ACQUIRED IS NOT A CRITERION FOR APPLICA TION OF SECTION 14A OF THE ACT. IN OUR OPINION, INTENTION OF THE ASSES SEE CANNOT BE TREATED AS IRRELEVANT WHEN ASSESSEE ADMITTEDLY WAS A DEALER IN SHARES AND WAS ALSO IN RECEIPT OF SHORT-TERM CAPITAL GAINS ON ACCOUNT OF ITS SHARE DEALINGS. ASSESSEE, BEING A TRADER IN SHARE, EVEN IF THE SHARES WERE HELD AS A PART OF ITS INVESTMENT, SUCH HOLDING OF S HARES COULD STILL BE CONSIDERED ONLY AS A PART OF ITS BUSINESS. WHEN SU CH HOLDINGS WERE CONSIDERED AS PART OF ITS BUSINESS, WHETHER THE INT ENTION FOR SUCH HOLDING OF SHARES WAS TO RECEIVE THE BENEFIT OF DIV IDEND HAS TO BE SEEN FROM THE FACTS AND CIRCUMSTANCES. ALL ALONG A SSESSEES PLEA WAS THAT SUCH SHARES WERE HELD BY IT AS A PART OF I TS BUSINESS AND NOT FOR THE PURPOSE OF EARNING DIVIDEND INCOME. NOW TH E QUESTION BOILS I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 13 DOWN TO THE RELEVANCE OF THE INTENTION OF THE ASSES SEE INSOFAR AS APPLICATION OF SECTION 14A IS CONSIDERED. 14. THOUGH LEARNED D.R. DID NOT RELY ON THE DECISIO N OF MAXOPP INVESTMENT LTD. (SUPRA) OF HONBLE DELHI HIGH COURT , IT IS VERY RELEVANT SINCE LD. CIT(APPEALS) HAS MENTIONED THAT ONE OF TH E CLAIM MADE BY THE ASSESSEE BEFORE HIM WAS THAT SHARES WERE HELD F OR HAVING CONTROLLING INTEREST. ARGUMENT OF THE ASSESSEE IN MAXOPP INVESTMENT LTD. (SUPRA) ALSO WAS THAT SUCH SHARES WERE HELD AS A PART OF ITS BUSINESS FOR ACQUIRING CONTROL OVER THE COMPANIES I N WHICH IT WAS HOLDING THE SHARES. HONBLE DELHI HIGH COURT REJEC TED THIS LINE OF REASONING AND HELD THAT EVEN IF SHARES WERE ACQUIRE D FOR GETTING CONTROLLING INTEREST, STILL SECTION 14A APPLIED, IF DIVIDEND INCOME IS RECEIVED FROM SUCH SHARES AND SUCH DIVIDEND INCOME WAS CLAIMED EXEMPT. THEIR LORDSHIP HELD THAT THE WORDS IN REL ATION TO USED IN SECTION 14A WAS A VERY BROAD EXPRESSION AND WIDE IM PORT HAVING DIRECT AND INDIRECT SIGNIFICANCE DEPENDING ON CONTE XT. NEVERTHELESS, THEIR LORDSHIP OBSERVED THAT IF AN A.O. REJECTED A CLAIM OF TAXPAYER THAT NO EXPENSES WERE INCURRED OR A PARTICULAR AMOU NT ALONE WAS EXPENDED FOR EARNING THE EXEMPT INCOME, THE A.O. WO ULD HAVE TO GIVE COGENT REASONS FOR DOING SO. AT THIS JUNCTURE , IT WILL BE INAPPROPRIATE IF WE DO NOT DO A REALTIME CHECK OF T HE DECISION OF I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 14 SPECIAL BENCH OF THIS TRIBUNAL IN CHEMINVEST LTD. V . ITO (121 ITD 318), WHERE AN ARGUMENT WAS RAISED THAT UNLESS INCO ME IS EARNED AND CLAIMED AS EXEMPT, SECTION 14A CANNOT BE APPLIE D. REPULSING THIS LINE OF REASONING, SPECIAL BENCH HELD THAT FOR APPLICATION OF SECTION 14A, IT WAS NOT NECESSARY THAT ACTUAL EARNI NG OF EXEMPT INCOME WAS NECESSARY, BUT THE INTENTION TO EARN SUC H EXEMPT INCOME BY VIRTUE OF THE INVESTMENT WOULD SUFFICE. 15. PITTED AGAINST THE ABOVE ARE THE JUDGMENTS OF H ONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. (SUPRA ) DATED 28.2.2012 AND THAT OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT V. DELITE ENTERPRISES (I.T.A. NO. 110 OF 2009 DATED 26 TH JUNE 2009). IN THE FORMER CASE, ASSESSEE HAD SPENT ` 27.24 LAKHS AS BROKERAGE FOR ARRANGING LOANS, WHICH WERE UTILISED FOR ACQUIRING SHARES IN ONE M/S KURLON LTD. AND CERTAIN OTHER COMPANIES. IT EARNED DIVIDEND INCOME OF ` 46.67 LAKHS AND A.O. HELD ` 27.24 LAKHS AS EXPENSES RELATING TO EARNING EXEMPT INCOME AND MADE A DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN FURTHER APPEALS OF ASSESSEE, THIS T RIBUNAL HELD THAT IN ADDITION TO DISALLOWANCE OF BROKERAGE, A.O. OUGHT H AVE MADE A DISALLOWANCE FOR THE PART OF INDIRECT EXPENSES UNDE R SECTION 14A, AS WELL. WHEN THE MATTER REACHED THE HONBLE HIGH COU RT, IT WAS HELD I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 15 THAT WHEN THE SHARES WERE RETAINED NOT WITH AN INTE NTION OF EARNING DIVIDEND INCOME AND DIVIDEND INCOME WAS INCIDENTAL TO ASSESSEES BUSINESS OF SELLING SHARES, WHICH AROSE ON SHARES R EMAINING UNSOLD, IT COULD NOT BE SAID THAT EXPENDITURE INCURRED IN A CQUIRING THE SHARES HAD TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INC OME AND SHOULD BE DISALLOWED. IT WAS HELD BY HONBLE KARNATAKA HIGH COURT AT PARA 5 OF ITS JUDGMENT, AS UNDER:- 5. WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED FROM THE SAID INCOME. IT IS NOT THE CASE OF THE AS SESSEE RETAINING ANY SHARES SO AS TO HAVE THE BENEFIT OF DIVIDEND. 63% OF SHARES, WHICH WERE PURCHASED, ARE SOLD AND THE INCOME DERIV ED THEREFROM IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAININ G 37% OF THE SHARES ARE RETAINED. IT HAS REMAINED UNSOLD WITH T HE ASSESSEE. IT IS THOSE UNSOLD SHARES HAVE YIELDED DIVIDEND, FOR W HICH, THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AT ALL. THOUGH THE DIVIDEND INCOME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE IS INCURRED IN EARNING THE SAID INCOME, THE SAID EXPENDITURE ALSO CANNOT BE DEDUCTED. BUT IN THIS C ASE, WHEN THE ASSESSEE HAS NOT RETAINED SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME AND THE DIVIDEND INCOME IS INCIDENT AL TO HIS BUSINESS OF SALE OF SHARES, WHICH REMAINED UNSOLD B Y THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPORTIONED TO THE EXTENT OF DIVID END INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROACH OF THE AUTHORITIES IS NOT IN C ONFORMITY WITH THE STATUTORY PROVISIONS CONTAINED UNDER THE ACT. THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE. I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 16 IN OTHER WORDS, HONBLE KARNATAKA HIGH COURT HELD T HAT THERE COULD BE NO DISALLOWANCE WHEN SHARES WERE HELD NOT WITH A N INTENTION OF EARNING DIVIDEND INCOME. 16. IN THE CASE OF DELITE ENTERPRISES (SUPRA), HON BLE BOMBAY HIGH COURT AFFIRMED A DECISION OF THE MUMBAI TRIBUNAL HO LDING THAT WHEN EXEMPT INCOME IS NOT THERE, THERE CANNOT BE A DISAL LOWANCE UNDER SECTION 14A OF THE ACT. OF COURSE, THIS DECISION W AS IN RELATION TO INTEREST PAYMENT FOR FUNDS USED FOR INVESTMENT IN C APITAL OF A PARTNERSHIP FIRM, WHICH WAS DISALLOWED FOR A REASON THAT SHARE INCOME FROM A FIRM WAS EXEMPT UNDER SECTION 10(2A) OF THE ACT. MUMBAI TRIBUNAL IN THE CASE OF AVSHESH MERCANTILE P . LTD. (SUPRA), PLACED ON RECORD BY LEARNED A.R., HELD THAT REFUSAL OF HONBLE HIGH COURT TO ENTERTAIN THE QUESTION IN THIS REGARD RAIS ED BY THE REVENUE IN DELITE ENTERPRISES (SUPRA), GAVE THE STAMP OF AUTHO RITY ON THE PROPOSITION OF LAW ENUNCIATED BY THE TRIBUNAL IN TH E SAME CASE. 17. IN THE CASE BEFORE US ALSO, ASSESSEE WAS IN THE BUSINESS OF DEALING IN SHARES AND INVESTMENT COUNSELING. WHEN SHARES HELD BY IT AS INVESTMENTS WERE SOLD, IT HAD ADMITTED CAPITAL G AINS ALSO. AGAINST AN INVESTMENT OF ` 10,99,00,000/- FOR EQUITY SHARE IN M/S SCPL AND SHARE APPLICATION MONEY OF ` 47,51,00,000/- PLACED WITH THE SAME I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 17 COMPANY, THE TOTAL DIVIDEND EARNED WAS A MINISCULE AMOUNT OF ` 10,11,449/-. THERE IS NO FINDING WHETHER EVEN THIS DIVIDEND HAD COME FROM SUCH SHAREHOLDING. THUS, FACTS CLEARLY I NDICATE THAT ASSESSEE HAD ACQUIRED OR PURCHASED THE SHARES NOT W ITH AN INTENTION OF EARNING ANY DIVIDEND. IN OUR OPINION, LD. CIT(A PPEALS) FELL IN ERROR WHEN HE HELD THAT WHETHER SHARES WERE ACQUIRED TO E ARN GAINS ON SALE THEREOF OR TO HAVE CONTROLLING INTEREST, WERE IRRELEVANT FACTORS. THE CIRCUMSTANCES, ON THE OTHER HAND, CLEARLY SHOW THAT DIVIDEND RECEIVED WAS ONLY INCIDENTAL TO ASSESSEES BUSINESS OF DEALING IN SHARES. DECISIONS OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. (SUPRA) AND THAT OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF DELITE ENTERPRISES (SUPRA) DEFINITELY COME TO TH E AID OF THE ASSESSEE. WHEN TWO REASONABLE CONSTRUCTIONS CAN BE GIVEN TO A SECTION, THEN THE ONE WHICH HELPS THE ASSESSEE HAS TO BE GIVEN PREFERENCE, BY VIRTUE OF DECISION OF HONBLE APEX C OURT IN THE CASE OF CIT V. VEGETABLE PRODUCTS LTD. (88 ITR 192). IN TH E CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT DISALLOWANCE UNDE R SECTION 14A WAS NOT WARRANTED. THE ACQUISITION OF SHARES AND P LACING SHARE APPLICATION MONEY WERE IN THE COURSE OF BUSINESS OF THE ASSESSEE AND A DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT ALSO COULD NOT HAVE BEEN MADE. INTEREST PAID ON LOANS ALSO COULD NOT BE CONSIDERED I.T.A. NO. 1523/MDS/12 I.T.A. NO. 1524/MDS/12 18 AS AN OUTFLOW OF CAPITAL NATURE, SINCE IT WAS NOT I N THE NATURE OF ANY PRE-INCORPORATION OR PRE-OPERATIVE EXPENSES. WE TH US HAVE NO HESITATION IN DELETING THE DISALLOWANCES MADE. 18. NOW COMING TO APPEAL OF THE ASSESSEE IN I.T.A. NO. 1523/MDS/2012, WE FIND THAT THE FACT SITUATION IS V ERY MUCH SIMILAR TO ASSESSEE IN I.T.A. NO. 1523/MDS/2012. HOWEVER, HER E ASSESSEE IS AGGRIEVED ONLY ON THE DISALLOWANCE OF ` 2,38,203/- MADE BY THE A.O. UNDER SECTION 14A OF THE ACT, WHICH WAS SUSTAINED B Y CIT(APPEALS). FOR THE SAME REASON AS STATED BY US AT PARAS 11 TO 17 ABOVE, WE ALLOW THE APPEAL OF ASSESSEE HERE ALSO. 19. TO SUMMARIZE THE RESULT, THE APPEALS FILED BY B OTH THE ASSESSEES ARE ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON WEDNESDAY, THE 17 TH OF OCTOBER, 2012, AT CHENNAI. SD/- SD/- (S.S. GODARA) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 17 TH OCTOBER, 2012. KRI. COPY TO: APPELLANTS/RESPONDENT/CIT(A)-V, CHENNAI-34 / CIT, CHENNAI-III, CHENNAI-34/D.R./GUARD FILE