Jalco Financial Services (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 6219/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1117 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 05-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARUN KUMAR YADAV SENIOR
• Keywords: Business expenditure; Earning of tax free income; Question of law; Rule 8D; Set aside
• Section: 14A; 13; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.6219/DEL./2016 (ASSESSMENT YEAR : 2008-09) M/S. JALCO FINANCIAL SERVICES (P) LTD., VS. DCIT, CIRCLE 13 (1), K-7B, GROUND FLOOR, KALKAJI, NEW DELHI. NEW DELHI 110 019. (PAN : AAACJ2791E) (APPELLANT) (RESPONDENT) ASSESSEE BY : NONE REVENUE BY : SHRI ARUN KUMAR YADAV, SENIOR DR DATE OF HEARING : 02.12.2020 DATE OF ORDER : 18.12.2020 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. JALCO FINANCIAL SERVICES (P) LTD. ( HEREINAFTER REFERRED TO AS THE ASSESSEE) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 23.09.2016 PASSE D BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-5, DELHI QUA T HE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTER ALIA T HAT :- 1. THAT THE ORDER OF THE LD. CIT (A) IS BAD IN LAW AND IS AGAINST THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.6219/DEL./2016 2 2. THAT THE LD. CIT (A) HAS ERRED IN PARTIALLY UPH OLDING THE DISALLOWANCE U/S 14A. 3. THAT HAVING REGARDS TO THE FACT THAT NO DIVIDEND INCOME WAS EARNED ON SHARES HELD AS INVESTMENT, THE ACTION OF THE LD. CIT (A) IN UPHOLDING THE DISALLOWANCE U/S 14A IS SQ UARELY AGAINST THE ORDER OF JURISDICTIONAL HC IN CHEMINVES T LTD. [2015] 378 ITR 33. 4. THAT THE APPELLANT CRAVES THE LEAVE TO ADD, MODI FY, AMEND OR DELETE ANY OF THE GROUNDS OF THE APPEAL AT THE T IME 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 T HE DISALLOWANCE U/S 14A BE SET ASIDE OR ANY OTHER RELI EF, WHICH THIS HON'BLE COURT DEEMS FIT AND PROPER, BE GIVEN. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : DURING THE SCRUTINY PROCE EDINGS, ASSESSING OFFICER (AO) NOTICED THAT THE ASSESSEE CO MPANY HAS EARNED RS.1,79,87,005/- BY WAY OF DIVIDEND AND CLAI MED THE SAME AS EXEMPT INCOME ON THE GROUND THAT SINCE NO DIVIDE ND INCOME HAS BEEN EARNED BY THE ASSESSEE ON THE SHARE HELD AS IN VESTMENT, 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 HONBLE DELHI HIGH COURT IN CASE OF CHEMINVEST LIMI TED VS. CIT (2015) 378 ITR 33 (DELHI). HOWEVER, AO BY RELYING UPON THE CBDT CIRCULAR NO.5/2014 DATED 11.02.2014 WHICH MAKE S DISTINCTION BETWEEN THE DIVIDEND EARNED FROM INVEST MENT AND INCOME FROM INVESTMENT/STOCK-IN-TRADE INVOKED THE P ROVISIONS ITA NO.6219/DEL./2016 3 CONTAINED U/S 14A READ WITH RULE 8D AND PROCEEDED T O MAKE DISALLOWANCE OF RS.88,28,814/- U/S 14A READ WITH RU LE 8D(2)(III). 3. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) BY WAY OF AN APPEAL WHO HAS RESTRICTED THE ADDITION TO RS.74, 57,347/- FROM RS.88,28,814/- MADE BY THE AO BY PARTLY ALLOWING TH E APPEAL. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 4. ASSESSEE HAS NOT PREFERRED TO PUT IN APPEARANCE DESPITE ISSUANCE OF THE NOTICE AND CONSEQUENTLY, WE PROCEED ED TO DECIDE THE PRESENT APPEAL WITH THE ASSISTANCE OF THE LD. D R AS WELL AS ON THE BASIS OF DOCUMENTS AVAILABLE ON THE FILE. 5. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIV E FOR THE REVENUE TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. UNDISPUTEDLY, THE ASSESSEE HAS EARNED RS.1,79,87 ,005/- BY WAY OF DIVIDEND DURING THE YEAR UNDER ASSESSMENT AN D CLAIMED THE SAME AS EXEMPT INCOME ON THE GROUND THAT IT HAS NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDEND INCOME FROM THE SH ARES HELD IN STOCK-IN-TRADE AND WITH REGARD TO SHARES HELD AS IN VESTMENT, IT DID NOT EARN ANY DIVIDEND INCOME AND AS SUCH NO DISALLO WANCE U/S 14A READ WITH RULE 8D IS CALLED FOR AND RELIED UPON THE DECISION ITA NO.6219/DEL./2016 4 RENDERED BY HONBLE DELHI HIGH COURT IN CASE OF CHEMINVEST LIMITED (SUPRA). DURING THE COURSE OF APPELLATE PROCEEDIN GS, ASSESSEE COMPANY HAS GIVEN THE DETAIL OF ITS KEY VA LUE OF INVESTMENT AND STOCK-IN-TRADE AS PER BALANCE-SHEET WHICH IS EXTRACTED FOR READY PERUSAL AS UNDER :- PARTICULARS AMOUNT (RS.) VALUE OF INVESTMENT AS AT 1.4.2007 15,20,68,225 VALUE OF INVESTMENT AS AT 31.3.2008 39,53,68,225 AVERAGE VALUE OF INVESTMENT 27,37,18,225 VALUE OF STOCK-IN-TRADE AS AT 1.4.2007 1,85,27,13,4 27 VALUE OF STOCK-IN-TRADE AS AT 31.3.2008 1,13,02,25, 462 AVERAGE VALUE OF STOCK-IN-TRADE 1,49,14,69,444 AVERAGE VALUE OF INVESTMENT + STOCK- IN-TRADE 1,76,57,62,891 (AS COMPUTED BY THE AO IN ORIGINAL ASSESSMENT 7. LD. DR FOR THE REVENUE ASSISTED THE BENCH BY REL YING UPON THE CBDT CIRCULAR (SUPRA) & DECISION RENDERED BY HONBLE SUPREME COURT IN MAXOPP INVESTMENT LTD. VS. CIT IN CIVIL APPEAL NOS.104-109 OF 2015 JUDGMENT DATED 12.02.201 8 AND CONTENDED THAT PROVISIONS CONTAINED U/S 14A OF THE ACT ARE APPLICABLE TO EXPENDITURE IN RELATION TO EXEMPT INC OME FROM STRATEGIC INVESTMENT/ STOCK-IN-TRADE. WE HAVE PERUS ED THE DECISION RENDERED BY HONBLE 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 STRA TEGIC ITA NO.6219/DEL./2016 5 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 BUSIN ESS 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 LI GHT 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 RECOGNIS ED THAT AS PER SECTION 14A(1) OF THE ACT, DEDUCTION OF THAT EXPEND ITURE IS NOT TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE W HICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDI BLE IN TOTAL INCOME THAT HAS TO BE DISALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WITH THE EXEMPTED INCOME, THEN SU CH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELAT ED TO THE INCOME THAT IS EXEMPTED FROM TAX, AND SUCH EXPENDITURE WOU LD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFERENTLY, SUC H EXPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED AS PART OF THE TOTAL INCOME. 33) THERE IS NO QUARREL IN ASSIGNING THIS MEANING TO SECTION 14A OF THE ACT. IN FACT, ALL THE HIGH COURTS, WHETHER I T IS THE DELHI HIGH COURT ON THE ONE HAND OR THE PUNJAB AND HARYANA HIG H COURT ON THE OTHER HAND, HAVE AGREED IN PROVIDING THIS INTER PRETATION TO SECTION 14A OF THE ACT. THE ENTIRE DISPUTE IS AS TO WHAT INTERPRETATION IS TO BE GIVEN TO THE WORDS IN RELA TION TO IN THE GIVEN SCENARIO, VIZ. WHERE THE DIVIDEND INCOME ON THE SHA RES IS EARNED, THOUGH THE DOMINANT PURPOSE FOR SUBSCRIBING IN THOS E SHARES OF THE INVESTEE COMPANY WAS NOT TO EARN DIVIDEND. WE HAVE TWO SCENARIOS IN THESE SETS OF APPEALS. IN ONE GROUP OF CASES THE MAIN PURPOSE FOR INVESTING IN SHARES WAS TO GAIN CONTROL OVER THE IN VESTEE COMPANY. OTHER CASES ARE THOSE WHERE THE SHARES OF INVESTEE COMPANY WERE HELD BY THE ASSESSEES AS STOCK-IN-TRADE (I.E. AS A BUSINESS ACTIVITY) AND NOT AS INVESTMENT TO EARN DIVIDENDS. IN THIS CO NTEXT, IT IS TO BE ITA NO.6219/DEL./2016 6 EXAMINED AS TO WHETHER THE EXPENDITURE WAS INCURRED , IN RESPECTIVE SCENARIOS, IN RELATION TO THE DIVIDEND INCOME OR NO T. 34) HAVING CLARIFIED THE AFORESAID POSITION, THE F IRST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS T O WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SERVIC E BY THE ASSESSEES WOULD APPLY WHILE INTERPRETING SECTION 14A OF THE A CT OR WE HAVE TO GO BY THE THEORY OF APPORTIONMENT. WE ARE OF THE OP INION THAT THE DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHAR ES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSE SSEE LIKE MAXOPP INVESTMENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GAIN CONTROL OF THE INVESTEE COMPANY. HOWEVER, THAT DOES NOT APPEAR TO BE A RELEVANT FACTOR IN DETERMINING THE ISSUE AT HA ND. FACT REMAINS THAT SUCH DIVIDEND INCOME IS NON-TAXABLE. IN THIS S CENARIO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INC OME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO THE DIV IDEND 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 APPORTIONM ENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPLE WHICH IS E NGRAINED 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 D OES 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 APPLICABILI TY OF SECTION 14A.. XXX XXX XXX THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14 A. 35) THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBS ERVED THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE ACT, TH E LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BU SINESS WHICH HAD ELEMENTS OF BOTH TAXABLE AND NON-TAXABLE INCOME , THE ENTIRE EXPENDITURE IN RESPECT OF SAID BUSINESS WAS DEDUCTI BLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPEN DITURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. THE PRINCIPLE OF APPORTIONMENT WAS MADE AVAILABLE ONLY WHERE THE BUS INESS WAS DIVISIBLE. IT IS TO FIND A CURE TO THE AFORESAID PR OBLEM THAT THE LEGISLATURE HAS NOT ONLY INSERTED SECTION 14A BY TH E FINANCE (AMENDMENT) ACT, 2001 BUT ALSO MADE IT RETROSPECTIV E, I.E., 1962 WHEN THE INCOME TAX ACT ITSELF CAME INTO FORCE. THE AFORESAID INTENT WAS EXPRESSED LOUDLY AND CLEARLY IN THE MEMO RANDUM ITA NO.6219/DEL./2016 7 EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2001 . WE, THUS, AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT, AND AR E NOT INCLINED TO ACCEPT THE OPINION OF PUNJAB & HARYANA HIGH COURT W HICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID REASONING WO ULD BE APPLICABLE IN CASES WHERE SHARES ARE HELD AS INVEST MENT IN THE INVESTEE COMPANY, MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTEREST THEREIN. ON THAT REASONING, APPEALS OF MAX OPP INVESTMENT LIMITED AS WELL AS SIMILAR CASES WHERE SHARES WERE PURCHASED BY THE ASSESSEES TO HAVE CONTROLLING INTEREST IN THE INVES TEE COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSED. 36) THERE IS YET ANOTHER ASPECT WHICH STILL NEEDS TO BE LOOKED INTO. WHAT HAPPENS WHEN THE SHARES ARE HELD AS STO CK-IN-TRADE AND NOT AS INVESTMENT, PARTICULARLY, BY THE BANKS? ON THIS SPECIFIC ASPECT, CBDT HAS ISSUED CIRCULAR NO. 18/2015 DATED NOVEMBER 02, 2015. 37) THIS CIRCULAR HAS ALREADY BEEN REPRODUCED IN P ARA 19 ABOVE. THIS CIRCULAR TAKES NOTE OF THE JUDGMENT OF THIS COURT IN NAWANSHAHAR CASE WHEREIN IT IS HELD THAT INVESTMENT S MADE BY A BANKING CONCERN ARE PART OF THE BUSINESS OR BANKING . THEREFORE, THE INCOME ARISES FROM SUCH INVESTMENTS IS ATTRIBUTABLE TO BUSINESS OF BANKING FALLING UNDER THE HEAD PROFITS AND GAINS O F BUSINESS AND PROFESSION. ON THAT BASIS, THE CIRCULAR CONTAINS T HE DECISION OF THE BOARD THAT NO APPEAL WOULD BE FILED ON THIS GROUND BY THE OFFICERS OF THE DEPARTMENT AND IF THE APPEALS ARE ALREADY FI LED, THEY SHOULD BE WITHDRAWN. A READING OF THIS CIRCULAR WOULD MAKE IT CLEAR THAT THE ISSUE WAS AS TO WHETHER INCOME BY WAY OF INTERE ST ON SECURITIES SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD I NCOME FROM OTHER SOURCES OR IT IS TO FALL UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS AND PROFESSION. THE BOARD, GOING BY THE D ECISION 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 S AYING 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 POINT ED OUT THAT THIS CIRCULAR CARVES OUT A DISTINCTION BETWEEN STOCK-IN-TRADE AND INVESTMENT AND PROVIDES THAT IF THE MOTIVE BE HIND 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 IN COME BY WAY OF DIVIDEND THEN THE PROFIT WOULD BE SAID TO HAVE ACCR UED FROM INVESTMENT. TO THIS EXTENT, THE HIGH COURT MAY BE C ORRECT. AT THE SAME TIME, WE DO NOT AGREE WITH THE TEST OF DOMINAN T INTENTION APPLIED BY THE PUNJAB AND HARYANA HIGH COURT, WHICH WE HAVE ALREADY DISCARDED. IN THAT EVENT, THE QUESTION IS A S TO ON WHAT BASIS THOSE CASES ARE TO BE DECIDED WHERE THE SHARES OF O THER COMPANIES ARE PURCHASED BY THE ASSESSEES AS STOCK-IN-TRADE AND NOT AS INVESTMENT. WE PROCEED TO DISCUSS THIS ASPECT HER EINAFTER. ITA NO.6219/DEL./2016 8 39) IN THOSE CASES, WHERE SHARES ARE HELD AS STOCK -IN-TRADE, THE MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EARN P ROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERNED WITH THOSE PROFITS WH ICH WOULD NATURALLY BE TREATED AS INCOME UNDER THE HEAD PR OFITS AND GAINS FROM BUSINESS AND PROFESSION. WHAT HAPPENS IS THAT , IN THE PROCESS, WHEN THE SHARES ARE HELD AS STOCK-IN-TRADE, CERTA IN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALLY, WHICH IS ALSO AN INCOM E. HOWEVER, BY VIRTUE OF SECTION 10 (34) OF THE ACT, THIS DIVIDEND INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME AND IS EXEMPT FROM TAX . THIS TRIGGERS THE APPLICABILITY OF SECTION 14A OF THE ACT WHICH I S BASED ON THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXA BLE AND NON- TAXABLE INCOME AS HELD IN WALFORT SHARE AND STOCK B ROKERS P LTD. CASE. THEREFORE, TO THAT EXTENT, DEPENDING UPON THE FACTS OF EACH CASE, THE EXPENDITURE INCURRED IN ACQUIRING THOSE S HARES WILL HAVE TO BE APPORTIONED. 40) WE NOTE FROM THE FACTS IN THE STATE BANK OF PA TIALA CASES THAT THE AO, WHILE PASSING THE ASSESSMENT ORDER, HA D ALREADY RESTRICTED THE DISALLOWANCE TO THE AMOUNT WHICH WAS CLAIMED AS EXEMPT INCOME BY APPLYING THE FORMULA CONTAINED IN RULE 8D OF THE RULES AND HOLDING THAT SECTION 14A OF THE ACT WOULD BE APPLICABLE. IN SPITE OF THIS EXERCISE OF APPORTIONMENT OF EXPEN DITURE CARRIED OUT BY THE AO, CIT(A) DISALLOWED THE ENTIRE DEDUCTION O F EXPENDITURE. THAT VIEW OF THE CIT(A) WAS CLEARLY UNTENABLE AND R IGHTLY SET ASIDE BY THE ITAT. THEREFORE, ON FACTS, THE PUNJAB AND HA RYANA HIGH COURT HAS ARRIVED AT A CORRECT CONCLUSION BY AFFIRM ING THE VIEW OF THE ITAT, THOUGH WE ARE NOT SUBSCRIBING TO THE THEO RY OF DOMINANT INTENTION APPLIED BY THE HIGH COURT. IT IS TO BE KE PT IN MIND THAT IN THOSE CASES WHERE SHARES ARE HELD AS STOCK-IN-TRAD E, IT BECOMES A BUSINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARNED OR NOT BECO MES IMMATERIAL. IN FACT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INVESTEE COMPANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASS ESSEE, THOUGH THE ASSESSEE HAS TO ULTIMATELY TRADE THOSE SHARES BY SE LLING THEM TO EARN PROFITS. THE SITUATION HERE IS, THEREFORE, DIFFEREN T FROM THE CASE LIKE MAXOPP INVESTMENT LTD. WHERE THE ASSESSEE WOULD CON TINUE 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 AN D THE ASSESSEE ALONE. THEREFORE, EVEN AT THE TIME OF INVESTING INT O THOSE SHARES, THE ASSESSEE KNOWS THAT IT MAY GENERATE DIVIDEND INCOME AS WELL AND AS AND WHEN SUCH DIVIDEND INCOME IS GENERATED THAT WOU LD BE EARNED BY THE ASSESSEE. IN CONTRAST, WHERE THE SHARES ARE HELD AS STOCK-IN- TRADE, 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 B Y THE REVENUE CHALLENGING THE JUDGMENT OF THE PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA ALSO FAIL, THOUGH LAW IN T HIS RESPECT HAS BEEN CLARIFIED HEREINABOVE. 41) HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2 ) OF THE ACT, READ WITH RULE 8D OF THE RULES, WE ALSO MAKE IT CLE AR THAT BEFORE ITA NO.6219/DEL./2016 9 APPLYING THE THEORY OF APPORTIONMENT, THE AO NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES WHERE THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT ACCEPTING THE SAID APPORTIONMENT. IN THAT EVENTUALITY, IT WILL HAVE TO RECORD ITS SATISFACTIO N TO THIS EFFECT. FURTHER, WHILE RECORDING SUCH A SATISFACTION, NATUR E OF LOAN TAKEN BY THE ASSESSEE FOR PURCHASING THE SHARES/MAKING TH E INVESTMENT IN SHARES IS TO BE EXAMINED BY THE AO. 42) CIVIL APPEAL NO. 1423 OF 2015 IS FILED BY M/S. AVON CYCLES LIMITED, LUDHIANA, WHEREIN THE AO HAD INVOKED SECTI ON 14A OF THE ACT READ WITH RULE 8D OF THE RULES AND APPORTIONED THE EXPENDITURE. THE CIT(A) HAD SET ASIDE THE DISALLOWA NCE, WHICH VIEW WAS UPTURNED BY THE ITAT IN THE FOLLOWING WORDS: ...ADMITTEDLY THE ASSESSEE HAD PAID TOTAL INTEREST OF RS.2.92 CRORES OUT OF WHICH INTEREST PAID ON TERM LOAN RAIS ED FOR SPECIFIC PURPOSE TOTALS TO RS.1.70 CRORES AND BALAN CE INTEREST PAID BY THE ASSESSEE IS RS.1.21 CRORES. THE FUNDS U TILIZED BY THE ASSESSEE BEING MIXED FUNDS AND IN VIEW OF THE P ROVISIONS OF RULE 8D(2)(II) OF THE INCOME TAX RULES THE DISAL LOWANCE IS CONFIRMED AT RS.10,49,851/-, WE FIND NO MERIT IN THE AD HOC DISALLOWANCE MADE BY THE CIT (APPEALS) AT RS.5,00,000/-. CONSEQUENTLY, GROUND OF APPEAL RAIS ED BY THE REVENUE IS PARTLY ALLOWED AND GROUND RAISED BY THE ASSESSEE IN CROSS-OBJECTION IS ALLOWED... TAKING NOTE OF THE AFORESAID FINDING OF FACT, THE H IGH COURT HAS DISMISSED THE APPEAL OF THE ASSESSEE OBSERVING AS UNDER: IN THE PRESENT CASE, AFTER EXAMINING THE BALANCE-S HEET OF THE ASSESSEE, A FINDING OF FACT HAS BEEN RECORDED T HAT THE FUNDS UTILIZED BY THE ASSESSEE BEING MIXED FUNDS, T HEREFORE, THE INTEREST PAID BY THE ASSESSEE IS ALSO AN INTERE ST ON THE INVESTMENTS MADE. SUCH BEING A FINDING OF FACT, WE DO NOT FIND THAT ANY SUBSTANTIAL QUESTION OF LAW ARISES FO R CONSIDERATION OF THIS COURT. AFTER GOING THROUGH THE RECORDS AND APPLYING THE PR INCIPLE OF APPORTIONMENT, WHICH IS HELD TO BE APPLICABLE IN SUCH CASES, WE DO NOT FIND ANY MERIT IN CIVIL APPEAL NO. 1423 OF 2 015, WHICH IS ACCORDINGLY DISMISSED. 9. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND FOL LOWING THE JUDGMENT OF HONBLE SUPREME COURT IN MAXOPP INVESTMENT LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT WHEN AS SESSEE COMPANY ITA NO.6219/DEL./2016 10 HAS ADMITTEDLY EARNED THE DIVIDEND INCOME OF RS.1,7 9,87,005/- AND HAS INCURRED ADMINISTRATIVE AND OPERATIVE EXPENSES AND SHARE TRADING EXPENSES TO THE TUNE OF RS.3,14,48,275/- AS AGAINST THE TOTAL TRADING OF SHARES CARRIED OUT DURING THE YEAR FROM WHICH PROFITS HAVE BEEN EARNED TO THE TUNE OF RS.2,39,19,454/-, A PPORTIONMENT OF THE EXPENDITURE QUA STRATEGIC AND NON-STRATEGIC INV ESTMENT IN SHARES HAS TO BE MADE AND DISALLOWANCE BY WAY OF APPLYING RULE 8D (2)(III) ON THE AVERAGE VALUE OF STOCK-IN-T RADE IS NOT APPLICABLE. SO, APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED AND AO IS DIRECTED TO COMPUTE THE DISALLOWANCE BY WAY O F APPORTIONMENT OF EXPENDITURE INCURRED BY THE ASSESS EE IN RELATION TO EXEMPT INCOME BY SEGREGATING THE EXPENDITURE QUA STRATEGIC AND NON-STRATEGIC INVESTMENT IN SHARES. ORDER PRONOUNCED IN OPEN COURT ON THIS 18 TH DAY OF DECEMBER , 2020. SD/- SD/- (ANIL CHATURVEDI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE DAY 18 TH OF DECEMBER, 2020 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-5, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT ITA NO.6219/DEL./2016 11 NEW DELHI. DATE OF DICTATION : 03.12.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER: 03.12.2020 DATE ON WHICH THE APPROVED DRAFT COME TO SR.PS/PS : DATE ON WHICH FAIR ORDER SENT TO MEMBER FOR SIGNATU RE : DATE ON WHICH THE FAIR ORDER COMES BACK AFTER PRONO UNCEMENT TO THE SR.PS/PS : DATE ON WHICH ORDER IS UPLOADED : DATE ON WHICH THE FILE GOES TO THE BENCH CLERK : DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE AR FOR SIGNA TURE ON THE ORDER DATE OF DESPATCH OF THE ORDER