B.R.Nahar & Sons HUF, Nagda V. The Addl. CIT Range-2, Ujjain

ITA 500/IND/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1529 (ITAT-INDORE)
• Duration Of Justice: 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 07-09-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R A VERMA
• Assessee Lawyers: S S DESHPANDE; VIJAY KANTHED CAS
• Keywords: Business income; Earning of tax free income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL , INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARM A, A.M. PAN NO. : AAFHB6002G I.T.A.NO. 500 /IND/201 2 . A.Y. : 2007 - 08 B.R.NAHAR & SONS, HUF, NAGDA ADDL. CIT, RANGE 2, UJJAIN VS APPELLANT RESPONDENT APPELLANT BY : SHRI S.S.DESHPANDE AND SHRI VIJAY KANTHED, CAS RESPONDENT BY : SHRI R. A. VERMA, SR. DR DATE OF HEARING : 20 . 1 2 .2012 DATE OF PRONOUNCEMENT : 24 . 01 .201 3 O R D E R PER R. C. SHARMA, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) DATED 11.06.2012 FOR THE ASSESSMENT YEAR 2007-08, WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE AS SESSEE :- -: 2: - 2 1. LD. CIT(A) ERRED IN CONFIRMING DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT, 1961, AT RS. 14,52,287/- OUT OF THE TOTAL DISALLOWANCES AT RS. 41,78,605/- MADE U/S 14A BY THE LD. ADDL. CIT, CITING THE REASON THAT THESE MUCH EXPENSES ARE INCURRED AND ARE ATTRIBUTABLE TO EARNING DIVIDEND INCOME (EXEMPT INCOME), WITHOUT APPRECIATING THE FACT OF THE CASE THAT THE APPELLANT IS ENGAGED IN T HE BUSINESS OF DEALING IN SHARES AND SECURITIES WHICH GENERATES TAXABLE AS WELL AS EXEMPT INCOME. 2. THAT THE DISALLOWANCES CONFIRMED BY THE LD.CIT(A ) AT RS. 14,52,287/- OUT OF THE INTEREST PAYMENT IS OTHERWISE ALSO ALLOWABLE U/S 36(1)(III) OF THE INCOME-TAX ACT, 1961. 3. IN THE ALTERNATIVE THE DISALLOWANCE U/S 14A AT R S. 14,52,287/- IS HIGHLY EXCESSIVE AND ARBITRARY. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A DEALER IN SHARES AND SECURITIES AND HAS SHOWN SALES OF SECURI TIES AMOUNTING TO RS. 23,76,38,166/- AND A NET PROFIT OF RS. -: 3: - 3 41,37,274/- WHICH IS INCLUSIVE OF THE DIVIDEND INCO ME OF RS. 19,88,230/-. ASSESSEE HAS CLAIMED INTEREST EXPENSE S OF RS. 1,02,10,807/- IN THE PROFIT AND LOSS ACCOUNT. A SHO W CAUSE NOTICE WAS ISSUED BY ASSESSING OFFICER REQUIRING T HE ASSESSEE TO SHOW-CAUSE AS TO WHY RS. 38,16,416/- AND RS. 3,6 2,189/- SHOULD NOT BE DISALLOWED U/S 14A OUT OF THE INTERES T EXPENSES ON THE BASIS OF RULE 8D(2)(II) AND RULE 8D(2)(III) RESPECTIVELY. 3. IN RESPONSE TO THE ABOVE LETTER OF ASSESSING OFFICE R, THE ASSESSEE SUBMITTED THAT MAIN BUSINESS OF THE ASSESS EE IS TO PURCHASE AND SALE OF SHARES AND NOT TO MAKE ANY INV ESTMENT IN SHARES ON LONG-TERM BASIS. THE INTENTION OF THE ASSESSEE WAS ALWAYS TO HOLD THE SHARES AS STOCK-IN-TRADE AND THE DIVIDEND INCOME WAS ONLY THE BY PRODUCT/INCIDENTAL TO THE RECEIPT OF TRADING ACTIVITY, THEREFORE, THERE IS NO CORRELATION BETWEEN THE EXPENDITURE BY WAY OF INTEREST AND DIVI DEND INCOME, WHICH IS EXEMPT U/S 10(34) OF THE ACT. HOWE VER, THE ASSESSING OFFICER DID NOT AGREE WITH THE ASSESSEES CONTENTION AND HELD THAT THE ASSESSEE HAS EARNED A NET PROFIT OF RS. 41,37,274/- WHICH IS INCLUSIVE OF THE DIVIDEND INCO ME OF RS. 19,88,230/-. THEREFORE, THE PROFIT FROM THE TRADING ACTIVITY -: 4: - 4 COMES TO ONLY RS. 21,49,044/- ( RS. 41,37,272/- - R S. 19,88,230). THUS, DIVIDEND INCOME FORMS A SUBSTANTI AL PART OF THE INCOME EARNED BY THE ASSESSEE. IN FACT, IT CONS TITUTES 48% OF THE INCOME EARNED BY THE ASSESSEE. THEREFORE, CO NTENTION OF THE ASSESSEE THAT IT HAS NOT EXPENDED ANYTHING TOWA RDS EARNING OF DIVIDEND INCOME WAS FOUND TO BE PATENTLY WRONG, AS DIVIDEND INCOME FORMS 48% OF THE TOTAL INCOME EARNE D AND SUB-SECTION (2) OF SECTION 14A IS THEREFORE CLEARLY INVOKED. 4. AFTER DEALING WITH VARIOUS CASE LAWS CITED BY THE ASSESSEE, THE ASSESSING OFFICER REACHED TO THE CONC LUSION THAT DISALLOWANCE WAS WARRANTED U/S 14-A READ WITH RULE 8-D(II)(III) AMOUNTING TO RS. 38,16,416/- AND RS. 3,62,189/-. BY THE IMPUGNED ORDER, AFTER GIVING DETAILED FINDINGS, THE LD. CIT(A) REDUCED THE AMOUNT OF DISALLOWANCE TO RS. 14,52,287 , FOR WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. HOWE VER, REVENUE IS NOT IN APPEAL AGAINST THE RELIEF GIVEN B Y CIT(A). THE PRECISE OBSERVATION AND FINDING OF CIT(A) IN THIS R EGARD IS AS UNDER :- -: 5: - 5 4.6 THE PLAIN MEANING OF SECTION 14A IS THAT NO DEDUCTION CAN BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SECTION 10 PROVIDES FOR INCOMES WHICH SHALL NOT BE INCLUDED IN COMPUTING THE TOTAL INCOME OF THE PREVIOUS YEAR OF ANY PERSON. EXPENDITURE INCURRED IN RELATION TO THE EARNING OF SUCH INCOME HAS TO BE DISALLOWED U/S 14A. THE SUBMISSION THAT THE EXPRESSION 'INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME' UNDER THE ACT, SHOULD BE INTERPRETED TO MEAN INCOME WHICH IS EXEMPT FROM TAX AND ON THIS HYPOTHESIS SECTION 14A WILL NOT APPLY TO DIVIDEND INCOME, BECAUSE THE REVENUE HAS ALREADY RECEIVED ITS SHARE OF TAX U/S 115-0 CANNOT BE ACCEPTED. THE APPELLANT HAS CLAIMED DIVIDEND INCOME EXEMPT U/S 10(34). HENCE, WHEN SECTION 14A DISALLOWS EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IT WOULD INCLUDE CATEGORIES OF INCOME SUCH AS DIVIDEND FROM SHARES AND INCOME FROM MUTUAL FUND WHICH U/S 10 ARE -: 6: - 6 NOT TO BE INCLUDED IN THE TOTAL INCOME. 4.7 SECTION 14A REPRESENTS A SERIOUS ATTEMPT ON THE PART OF PARLIAMENT TO ENSURE THAT THE TAX INCENTIVE TO CERTAIN INCOMES SHOULD NOT BE USED TO REDUCE THE TAX PAYABLE ON TAXABLE INCOME BY DEBITING EXPENSES INCURRED TO EARN NON TAXABLE INCOME AGAINST THE TAXABLE INCOME. IN THE CASE OF THE APPELLANT IT HAS SHOWN DIVIDEND INCOME OF RS. 19,88,230/- WHICH CONSTITUTES 48% INCOME EARNED BY THE APPELLANT. IT COULD NOT BE BYPRODUCT/INCIDENTAL! UNINTENTIONAL RECEIPTS OF TRADING ACTIVITY. SECTION 14A EFFECTUATES IS THAT A SHARE HOLDER SHOULD NOT GET THE BENEFIT BOTH OF AN EXEMPTION U/S 10(34) AND ALSO A DEDUCTION IN RESPECT OF THE EXPENDITURE LAID OUT TOWARDS EARNING TAX FREE INCOME. IF THE DIVIDEND INCOME HAD NOT BEEN EXEMPT U/S 10(34), THE REVENUE WOULD HAVE TAXED SUCH DIVIDEND INCOME AND THE ASSESSEE WOULD HAVE BEEN ENTITLED TO A DEDUCTION IN RESPECT OF ITS EXPENDITURE IN RELATION TO THAT INCOME. SECTION 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME I.E. TO SAY GROSS INCOME (-) EXPENDITURE. 4.8 THE DIVIDEND INCOME EARNED BY THE -: 7: - 7 APPELLANT FROM SHARES IN A. Y. 2007-08 DID NOT FORM PART OF THE TOTAL INCOME IN VIEW OF THE PROVISIONS OF SECTION 10(34) AND HENCE, THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO EARNING OF THAT INCOME HAS TO BE APPORTIONED AND DISALLOWED U/S 14A(1) EVEN THOUGH, RULE 8D HAS NO APPLICATION TO THE RELEVANT YEAR. ASSESSING OFFICER WAS DUTY BOUND TO COMPUTE THE DISALLOWANCE BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THE SIMILAR VIEW IS HELD BY HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE CO. LTD. VS. DCIT AND ANR. (2010) 234 DTR (BORN.). 4.9 SINCE DIVIDEND INCOME DOES NOT FORM PART OF THE TOTAL INCOME, THE EXPENDITURE THAT IS INCURRED IN THE EARNING OF SUCH INCOME CANNOT BE ALLOWED EVEN THOUGH, IT IS OF A NATURE SPECIFIED IN SS. 15 TO 59. THE SIMILAR VIEW IS HELD BY HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE CO. LTD. VS. DCIT AND ANR. (2010) 234 DTR (BOM.). THE CONCLUSION IS DRAWN BY THE HON'BLE HIGH COURT FROM THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. WALLFORT SHARE AND STOCK BROKERS PVT. LTD. 326 ITR 1 (SC). THE OBSERVATION OF HON'BLE -: 8: - 8 SUPREME COURT IS REPRODUCED AS UNDER.- 'IF AN INCOME LIKE DIVIDEND INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH THE NATURE SPECIFIED IN SS. 15 TO 59, BUT RELATED TO THE INCOME NOT FORMING THE PART OF THE TOTAL INCOME COULD NOT BE ALLOWED AGAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPOSE OF CHARGEABILITY TO TAX.' HAVING OBSERVED THIS, THE SUPREME COURT HELD THAT THE THEORY APPORTIONING EXPENDITURE BETWEEN TAXABLE AND NON TAXABLE INCOME HAS NOW, IN PRINCIPLE, BEEN WIDENED U/S 14A. AS A RESULT OF ENACTMENT OF SECTION 14A NO EXPENDITURE CAN BE ALLOWED AS A DEDUCTION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, EVEN IN THE CASE OF COMPOSITE AND INDIVISIBLE BUSINESS, WHICH RESULTS IN THE EARNING OF TAXABLE AND NON TAXABLE INCOME, IT WOULD BE NECESSARY TO APPORTION THE EXPENDITURE INCURRED BY THE ASSESSEE. ONLY THAT PART OF THE EXPENDITURE WHICH IS INCURRED IN RELATION TO INCOME WHICH FORM PART OF THE TOTAL INCOME CAN BE ALLOWED, THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF -: 9: - 9 THE TOTAL INCOME HAS TO BE DISALLOWED. IN THE CASE OF THE APPELLANT IT IS HAVING TAXABLE AND NON TAXABLE INCOME FROM THE TRADING IN SHARES, HENCE, KEEPING IN VIEW THE OBSERVATION OF HON'BLE SUPREME COURT PROPORTIONATE EXPENSES HAVE TO BE DISALLOWED. 4.10 THE CONTENTION OF THE APPELLANT THAT DIVIDENDS TAXED IN THE HANDS TO DOMESTIC COMPANY U/S 115-0, IF HELD TAXABLE AGAIN IN THE HANDS OF A SHARE HOLDER WOULD AMOUNT TO DOUBLE TAXATION. THERE IS NO MERIT IN THIS CONTENTION, BECAUSE ADDITIONAL TAX IS A TAX ON THE PROFITS OF THE COMPANY WHICH IS DISTRIBUTED AS DIVIDEND, WHEREAS TAX IN HANDS OF THE SHARE HOLDER IS A TAX ON DIVIDEND INCOME. A COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS DISTINCT TAXABLE ENTITY AND HAS TO PAY TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT OF ITS SHARE HOLDERS. INCOME FROM DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME U/S 10(34). THE EXPENDITURE. INCURRED IN RELATION TO EARNING SUCH INCOME CANNOT BE ALLOWED U/S 14A. -: 10: - 10 4.11 THE CONTENTION OF THE APPELLANT THAT THE DISALLOWANCE/APPORTIONMENT OF INTEREST U/S 14A IN RESPECT OF TRADING OF SHARES DOES NOT ARISE AS THE INTEREST . PAYMENT ON BORROWED FUNDS USED FOR TRADING ACTIVITY, IN THE CASE OF TRADER IN SHARES IS AN ALLOWABLE EXPENDITURE U/S 36(1)(III) AND THE SAME CANNOT BE TREATED AS THE EXPENDITURE FOR EARNING THE DIVIDEND INCOME, WHICH IS INCIDENTAL TO THE TRADING ACTIVITY. THE CONTENTION OF THE APPELLANT IS NOT CORRECT. IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD. 117 ITD 169, THE MUMBAI SPECIAL BENCH OF IT AT WAS EXAMINING THE CASE OF A DEALER IN SHARES. THE BENCH TOOK A MAJORITY VIEW 'THAT SECTION 14A APPLIES TO ALL HEADS OF INCOME AND AIMS AT DISALLOWING EXPENDITURE INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME EVEN THOUGH, SUCH EXPENDITURE MAY BE ALLOWABLE UNDER ANY OTHER PROVISION E.G. SECTION 36(1 )(III) AND THAT SECTION 14A BEING A SPECIAL PROVISION SHALL PREVAIL OVER THE GENERAL PROVISIONS. IT HELD THAT SECTION 14A HAS BEEN INSERTED TO CLARIFY THE INTENTION OF THE LEGISLATURE, AS IT ALWAYS WAS THAT NO DEDUCTION IS ALLOWABLE IN RESPECT OF ANY -: 11: - 11 EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME AND THAT CONTRARY VIEWS EXPRESS BY COURTS ARE NO MORE RELEVANT AND BINDING.-------- THE ITAT HELD THERE IS NOT EVEN AN IOTA OF DOUBT THAT THE INTENTION BEHIND USING THE EXPRESSION 'IN RELATION TO' IN SECTION 14A IS TO ENCOMPASS NOT ONLY THE DIRECT BUT, ALSO THE INDIRECT EXPENDITURE WHICH HAS ONLY RELATION TO THE EXEMPT INCOME. IT HELD THAT INTEREST ON CAPITAL BORROWED FOR INVESTMENT IN SHARES HAS A DOMINANT AND IMMEDIATE CONNECTION WITH DIVIDEND INCOME, EVEN THOUGH: THE SHARES MAY BE HELD AS STOCK IN TRADE AND THAT THE SAME IS DISALLOWABLE AS PER PROVISIONS OF SECTION 14A. IN ORDER TO ESCAPE THE APPLICABILITY OF SECTION 14A, ONUS, HAS BEEN HELD TO BE UPON THE ASSESSEE TO PROVE THAT EXPENDITURE WAS INCURRED FOR EARNING TAXABLE INCOME. ------SECTION 14A DOES NOT MAKE ANY DISTINCTION BETWEEN INCIDENTAL AND MAIN INCOME AND IS ATTRACTED EVEN WHERE SHARES ARE HELD AS STOCK IN TRADE AND THE INCOME NOT FORMING PART OF TOTAL INCOME IS INCIDENTAL TO THE MAIN INCOME OF PROFIT EARNED FROM TRADING IN SHARES.' -: 12: - 12 HENCE, IT IS EVIDENT FROM THE DECISION OF THE MUMBAI SPECIAL BENCH ITAT THAT SECTION 14A IS APPLICABLE TO ALL HEADS OF INCOME AND DOES NOT MAKE ANY DISTINCTION BETWEEN INCIDENTAL AND MAIN INCOME AND IS ATTRACTED EVEN WHERE SHARES ARE HELD AS STOCK IN TRADE. 4.12 THE APPELLANT HAS PLACED RELIANCE ON THE DECISIONS AS CITED ABOVE, THE FACTS OF THEM ARE DISTINGUISHABLE. IN THE CASE OF CIT VS. SMT. LEENA RAMCHANDRAN, M/S. HOMEFIT ITA NO. 1784 OF 2009 DATED 14-06-2010, THE ISSUE WAS BEFORE THE HON'BLE KERALA HIGH COURT WAS RELATED TO ACQUISITION OF SHARES WITH BORROWED FUNDS FOR THE PURPOSE OF CONTROLLING THE COMPANY WHICH WAS ENGAGED IN LEASING BUSINESS. THE ASSESSEE CONTENDED THAT UTILIZATION OF BORROWED FUNDS WAS FOR BUSINESS PURPOSE ENTITLING HER FOR DEDUCTION OF INTEREST U/S 36(1)(III) OF INCOME TAX ACT. THE A. O. HELD THAT THE ASSESSEE HAS MADE INVESTMENTS WAS UTILIZING BORROWED FUNDS IN THE FORM OF ACQUISITION OF SHARES IN THE COMPANY AND THE ONLY BENEFIT ASSESSEE GOT WAS DIVIDEND INCOME. THE A. O. HAS DISALLOWED THE CLAIM OF INTEREST AS THE DIVIDEND INCOME DOES NOT FORM PART OF THE -: 13: - 13 TOTAL INCOME. THE HON'BLE COURT HAS CONFIRMED THE ORDER OF THE A.O. THUS, THE SAID JUDGMENT DOES NOT SUPPORT THE CONTENTION OF THE APPELLANT. 4.13 IN THE CASE OF M/S CCI LTD. VS. JCIT ITA NO. 359 OF 2011 DATED 28-02-2012 CITED BY THE ASSESSEE HON'BLE KARNATAKA HIGH COURT HAS ALLOWED THE PAYMENT OF BROKERAGE FOR INTEREST FREE LOAN TAKEN BY THE APPELLANT FOR ACQUIRING THE SHARES. IN THIS CASE, THE ASSESSEE HAS SOLD 63% SHARES WHICH WERE PURCHASED AND INCOME DERIVED THERE FROM IS OFFERED TO TAX AS BUSINESS INCOME. THE ASSESSEE HAS EARNED THE DIVIDEND FROM 37% RETAINED AND UNSOLD SHARES. THE ISSUE OF PAYMENT OF INTEREST WAS NOT DECIDED BY THE HON'BIE COURT. THUS, THE SAID JUDGMENT IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 4.14 IN THE CASE OF M/S YATISH TRADING CO. VS. ACIT ITA NO. 456/MUM/2009, HON'BLE ITAT HAS ALLOWED INTEREST EXPENDITURE AGAINST THE TAXABLE INCOME AND TAKEN A VIEW THAT THE EXPENDITURE WHICH WAS INCURRED FOR EARNING THE TAXABLE BUSINESS INCOME HAS TO -: 14: - 14 BE ALLOWED AGAINST THE TAXABLE INCOME AND THE QUESTION OF APPORTIONMENT OF THE SAID EXPENDITURE DOES NOT ARISE, AS THE SAME CANNOT BE SAID TO HAVE BEEN INCURRED FOR EARNING THE DIVIDEND INCOME. BUT, THE VIEW TAKEN BY THE HON'BLE ITAT IS CONTRARY TO THE VIEW TAKEN BY HON'BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE CO. LTD. VS. DCIT AND ANR. (2010) 234 DTR (BORN.) AND HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WALLFORT SHARE AND STOCK BROKERS PVT. LTD. 326 ITR 1 (SC). THE VIEW TAKEN BY THE HON'BLE SUPREME COURT AND MUMBAI HIGH COURT THAT SECTION 14A IS IMPLICIT WITHIN IT A NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR THE COMPOSITE/INDIVISIBLE BUSINESS WHICH RECEIVES TAXABLE AND NON TAXABLE INCOME. MOREOVER, MUMBAI SPECIAL BENCH OF ITAT IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD. 117 ITD 169, HAS TAKEN A MAJORITY VIEW THAT SECTION 14A IS APPLICABLE IN THE CASE OF DEALER IN SHARES AND IS APPLICABLE TO ALL HEADS OF INCOME AND DOES NOT MAKE ANY DISTINCTION BETWEEN INCIDENTAL AND MAIN INCOME AND IS ATTRACTED -: 15: - 15 EVEN WHERE SHARES ARE HELD AS STOCK IN TRADE. 4.15 THE QUANTUM OF DISALLOWANCE U/S 14A DETERMINED ON THE BASIS OF PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. ONCE SUCH A PROXIMATE RELATIONSHIP EXISTS, THE DISALLOWANCE HAS TO BE EFFECTED. FOR THIS THE A. O. WOULD HAVE TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL THE RELEVANT FACTS AND CIRCUMSTANCES. IN THE CASE OF THE APPELLANT IT HAS SHOWN DIVIDEND INCOME OF RS. 19,88,230/-, WHICH CONSTITUTES 48% INCOME EARNED BY THE APPELLANT. THE PROPORTIONATE DISALLOWANCE HAS TO BE THUS MADE IN PROPORTION OF THE DIVIDEND INCOME EARNED VIS-A-VIS TOTAL RECEIPTS. FOR WORKING OF THE DISALLOWANCE THE TRADING ACCOUNT IS RE- CASTED BY CIT(A). THE A. O. HAS DISALLOWED EXPENSES U/S 14A AT RS. 41,78,605/- BY APPLYING RULE 8D, WHICH IS NOT APPLICABLE FOR THE PRESENT YEAR AS DISCUSSED ABOVE. THE APPELLANT HAS -: 16: - 16 UTILIZED BORROWED FUNDS OF RS. 5.28 CRORES ON WHICH IT HAS PAID INTEREST OF RS. 1.02 CRORES. IT IS HAVING OWN FUNDS OF RS. 64.60 LACS ONLY. THE INCOME OF THE APPELLANT HAS BEEN SUBSTANTIALLY REDUCED AFTER REDUCING THE DIVIDEND INCOME FROM THE TOTAL INCOME. THE APPELLANT HAS CLAIMED ALL THE EXPENSES AGAINST TAXABLE 'INCOME AND TREATED DIVIDEND INCOME ONLY A BYPRODUCT OF TAXABLE INCOME. BYPRODUCT COULD NOT BE THE MAJOR PORTION OF THE INCOME I.E. 48% IN THE CASE OF THE APPELLANT, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS AN ESTABLISHED FACT THAT APPELLANT HAS UTILIZED BORROWED FUNDS FOR EARNING THE DIVIDEND INCOME. THEREFORE, THERE IS PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME. HENCE THE PROPORTIONATE DISALLOWANCE IN THE CASE OF THE APPELLANT AS WORKED ABOVE AT RS. 14,52,287/- IS CONFIRMED AND APPELLANT GETS RELIEF OF RS. 27,26,318/- (I.E RS. 41,78,605/- (-) RS. 14,52,287/-). 5. AGAINST THE ABOVE ORDER OF CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. -: 17: - 17 6. SHRI S. S. DESHPANDE, C. A. APPEARED ON BEHALF OF T HE ASSESSEE AND CONTENDED THAT RULE 8D WAS NOT APPLICA BLE FOR THE ASSESSMENT YEAR 2007-08 IN SO FAR AS IT WAS INT RODUCED EXPRESSLY W.E.F. 24.2.2008 AND IT CANNOT BE HELD TO BE OPERATIVE RETROSPECTIVELY FROM THE DATE OF INSERTIO N OF THE PROVISIONS OF SECTION 14A. RELIANCE WAS PLACED ON T HE DECISION OF SUDHIR GENSET LIMITED, 134 TTJ 78, MINDA INVESTM ENT LIMITED, 138 TTJ 240, CONTINENTAL CARRIERS P.LTD., 138 TTJ 249. RELIANCE WAS ALSO PLACED ON THE DECISION OF MU MBAI HIGH COURT IN THE CASE OF GODREJ BOYCE COMPANY, 234 CTR 1, WHEREIN AT PARA 74(V), IT WAS STATED THAT DESPITE T HE ABOVE EXPRESS LEGAL POSITION, THE LD. ASSESSING OFFICER H AS APPLIED THE RULE 8D IN CASE OF THE ASSESSEE. THE SAME IS INVALI D. CONSEQUENTLY, THE ADDITION MADE ON THE BASIS OF RUL E 8-D IS ALSO INVALID. 7. FURTHER, THE LD. AUTHORIZED REPRESENTATIVE SUBMITT ED THAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST U/S 36(1)(III) ON BORROWED FUNDS UTILIZED FOR ACQUI SITION OF SHARES ONLY IF SHARES ARE HELD AS TOCK IN TRADE. -: 18: - 18 8. THE LD. AUTHORIZED REPRESENTATIVE FURTHER SUBMITTE D THAT THE ASSESSEE HAS ALWAYS SHOWN THE BUSINESS PRO FIT IN SHARE TRADING DIVISION AND HAS NEITHER CLAIMED EXEM PTION U/S 10(38) RELATING TO LONG TERM CAPITAL GAINS ON S HARES HELD AND SOLD EVEN AFTER ONE YEAR AND ALSO NOR PAID CONC ESSIONAL RATE OF TAX @ 10.00% AS PER THE PROVISION OF SECTIO N 111A RELATING TO SHORT TERM CAPITAL GAIN ON SALE AND P URCHASE OF SHARES. THE ASSESSEE HAS PAID TAX ON THE ENTIRE INC OME FROM SALE AND PURCHASE OF SHARES AT NORMAL RATE OF TAX. THAT IN THE CASE OF DEALER IN SHARES AND SECURITIES, THE PROVIS IONS OF SUB SECTION 14A OF THE ACT DO NOT APPLY AS THE PROFIT A RISING FROM THE SALE OF SHARES IS CHARGEABLE TO TAX AND THE DIV IDEND INCOME, IF ANY, IS ONLY INCIDENTAL/BY PRODUCTS/UNIN TENTIONAL RECEIPT IN CARRYING ON SUCH BUSINESS. THE ENQUIRY U /S 14A SHOULD START ONLY WITH REFERENCE TO THE EXPENDITUR E INCURRED AND NOT WITH REFERENCE TO THE INCOME. THE EXPENDIT URE INCURRED MUST RELATE TO THE TAX FREE INCOME, IF SEC TION 14A IS TO BE INVOKED. IF THE EXPENDITURE INCURRED BY THE ASSE SSEE PRODUCES THE TAXABLE INCOME THEN SUCH EXPENDITURE I S ALLOWABLE AS DEDUCTION U/S 36(1)(III) AND NO DISALL OWANCE CAN -: 19: - 19 BE MADE U/S 14A OF THE ACT, SINCE SUCH EXPENDITURE WOULD NOT HAVE ANY CONNECTION WITH THE TAX FREE INCOME. RELIA NCE IS PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. INDIAN BANK LTD., 56 ITR 77 ( S.C.) AND IN THE CASE OF CIT VS. MAHARASHTRA SUGAR MILLS LTD., 82 IT R 452 (S.C.) 9. ON THE OTHER HAND, THE LD. SR. DR SUPPORTED THE ORD ER OF THE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS U TILIZED INTEREST BEARING FUNDS FOR EARNING EXEMPT INCOME, T HEREFORE, THE CIT(A) HAS CORRECTLY WORKED OUT THE AMOUNT OF DISALLOWANCE U/S 14A. HE INVITED OUR ATTENTION TO T HE DETAILED FINDING RECORDED BY THE LD.CIT(A), WHILE DEALING WI TH EACH ARGUMENT OF THE LD. AUTHORIZED REPRESENTATIVE . 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FOUND FROM RECORD THAT THE ASSESSEE IS ENGAGED IN SHARE D EALING. IN THE RETURN OF INCOME, ASSESSEE HAS SHOWN PROFIT ON SALE OF SHARES AS WELL AS DIVIDEND INCOME, WHICH WAS CLAIME D AS EXEMPT U/S 10(34). BY APPLYING PROVISIONS OF SECTIO N 14A, THE ASSESSING OFFICER MADE DISALLOWANCE OF RS. 41,78,60 5/- OUT OF -: 20: - 20 TOTAL INTEREST EXPENDITURE OF RS. RS. 1.02 CRORES O N THE PLEA THAT THE ASSESSEE WAS EARNING TAX FREE INCOME, WHER EIN SUCH INTEREST BEARNING FUNDS WERE UTILIZED. THE ASSESSIN G OFFICER HAS ALSO APPLIED RULE 8-D. BY THE IMPUGNED ORDER, T HE CIT(A) FOUND THAT EVEN THOUGH RULE 8D IS NOT APPLICABLE, H OWEVER, BY FOLLOWING THE VERDICT LAID DOWN BY HON'BLE BOMBAY H IGH COURT IN THE CASE OF GODREJ BOYCE CO. LTD., 234 DTR HELD THAT REASONABLE DISALLOWANCE OF INTEREST IS WARRANTED EV EN DURING THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION, W HEN RULE 8D WAS NOT APPLICABLE. THE CIT(A) ALSO FOLLOWED THE VERDICT OF HON'BLE SUPREME COURT IN THE CASE OF IN THE CASE OF WALLFORT SHARES AND STOCK BROKERS PRIVATE LIMITED, 326 ITR 1 , AND HELD THAT APPORTIONMENT OF INTEREST IS REQUIRED WHERE TH E ASSESSEE WAS IN RECEIPT OF TAXABLE AND TAX FREE INCOME BOTH. WE FOUND THAT THE CIT(A) HAS ELABORATELY DEALT WITH EACH AND EVERY OBJECTION OF THE LD. AUTHORIZED REPRESENTATIVE WIT H REFERENCE TO THE CASE LAWS CITED BY HIM. THE CIT(A) HAS ALSO CATEGORICALLY DISTINGUISHED THE CASE LAWS CITED BY THE LD. AUTHORIZED REPRESENTATIVE, WHICH ARE AGAINST THE PR OPOSITION OF LAW LAID DOWN BY THE HON'BLE SUPREME COURT IN T HE CASE OF -: 21: - 21 WALLFORT SHARES AND STOCK BROKERS PRIVATE LIMITED ( SUPRA) AND I.T.A.T. SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT PRIVATE LIMITED, 117 ITD 169. CONTENTION OF LD. AUT HORIZED REPRESENTATIVE THAT DIVIDEND INCOME EARNED BY THE ASSESSEE WAS INCIDENTAL, THEREFORE, NO DISALLOWANCE CAN BE M ADE AGAINST SUCH INCIDENTAL INCOME. FROM THE RECORD, WE FOUND T HAT DIVIDEND INCOME SO EARNED BY THE ASSESSEE WAS 48 % OF THE TOTAL INCOME, THE SAME, THEREFORE, CANNOT BE SAID T O BE INCIDENTAL. FURTHERMORE, SECTION 14A CLEARLY PROVID ES FOR DISALLOWANCE OF ANY EXPENDITURE AGAINST THE EXEMPT INCOME. THE QUANTUM OF DISALLOWANCE U/S 14A IS TO BE DETERM INED ON THE BASIS OF PROXIMATE RELATIONSHIP BETWEEN THE EXP ENDITURE AND INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOM E. HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE CO.LT D. (SUPRA) HAVE CLEARLY HELD THAT EVEN THOUGH RULE 8D HAS NO APPLICATION TO THE RELEVANT YEAR, BUT THE ASSESSING OFFICER WAS DUTY BOUND TO COMPUTE THE DISALLOWANCE BY APPLYING REASONABLE METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IN THE INSTANT CASE, SIN CE THE DIVIDEND INCOME DOES NOT FORM PART OF THE TOTAL INC OME, -: 22: - 22 EXPENDITURE THAT IS INCURRED IN EARNING OF SUCH INC OME CANNOT BE ALLOWED EVEN THOUGH IT WAS OF A NATURE SPECIFIED IN SECTION 15 TO 59 OF THE INCOME-TAX ACT, 1961. HON'BLE SUPRE ME COURT IN THE CASE OF WALLFORT SHARES (SUPRA) HAVE CLEARLY HELD THAT WHERE INCOME LIKE DIVIDEND INCOME IS NOT A PART OF TOTAL INCOME, THE EXPENDITURE THOUGH OF THE NATURE SPECIF IED IN SECTION 15 TO 59, BUT RELATED TO THE INCOME NOT FOR MING PART OF TOTAL INCOME COULD NOT BE ALLOWED AGAINST OTHER INC OME INCLUDIBLE IN TOTAL INCOME FOR THE PURPOSE OF CHARG EABILITY TO TAX. AS A RESULT OF ENACTMENT OF SECTION 14A, NO EX PENDITURE CAN BE ALLOWED AS A DEDUCTION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. T HUS, EVEN IN CASE OF COMPOSITE AND INDIVIDUAL BUSINESS WHICH RES ULTS IN EARNING OF BOTH TAXABLE AND NON TAXABLE INCOME, IT WOULD BE NECESSARY TO APPORTION THE EXPENDITURE INCURRED BY THE ASSESSEE AND ONLY THAT PART OF EXPENDITURE WHICH IS INCURRED IN RELATION TO INCOME WHICH FORMED PART OF TOTAL IN COME CAN BE ALLOWED. AFTER APPLYING THE PROPOSITION OF LAW LAID DOWN BY HON'BLE SUPREME COURT AND HON'BLE BOMBAY HIGH COURT AND THE I.T.A.T. SPECIAL BENCH, THE CIT(A) HAS CORRECTL Y COMPUTED -: 23: - 23 THE DISALLOWABLE PORTION OF INTEREST, WHICH WORKED OUT TO BE RS. 14,52,287/- OUT OF TOTAL DISALLOWANCE OF RS. 4 1,78,605/- AS COMPUTED BY THE ASSESSING OFFICER. WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF THE CIT(A), ACCORDINGLY, THE SAME IS UPHELD. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMIS SED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2013. SD/ - SD/ - (JOGINDER SINGH) ( R. C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 24 TH JANUARY, 2013. 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