[CCI Ltd. v. JCIT (Kar.), ITA No. 359 of 2011 dated 28-2-2012]
The assessee was in the business as a dealer in shares and securities. In the relevant year, the assessee had earned dividend income of Rs.46,67,190. The assessee had incurred an expenditure of Rs.28 lakh as broking charges for availing interest-free loan of Rs.14 crore for converting partly-paid shares into fully-paid shares. The Assessing Officer estimated the expenditure incurred on earning the dividend income at Rs.27,24,330 u/r. 8D and disallowed the same u/s.14A of the Income-tax Act, 1961. The Tribunal held that the Assessing Officer was not right in attributing the entire broking commission as relatable to earning of dividend income only. The broking expenditure has to be considered as business expenditure, as well. The Tribunal directed the Assessing Officer to bifurcate all the expenditure proportionately and allow the expenditure in accordance with law.
The assessee filed appeal before the Karnataka High Court and raised the following question of law:
“Whether the provisions of section 14A are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income?”
The Karnataka High Court decided the question in favour of the assessee and held as under:
“(i) 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 assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all.
(ii) Though the dividend income is exempt from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions.
(iii) In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.”
