By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
fiogf49gjkf0d
Facts: The assessee-company was engaged in the business of trading in shares and securities as well as in investment in shares and securities. During the relevant previous year the total income credited by the assessee to the P & L A/c was Rs.39.03 crores which included dividend income of Rs.2.99 crores. The assessee also debited an amount of Rs.10.68 crores which includes administrative expenses, interest and financial charges, etc.
The Assessing Officer disallowed the proportionate interest and financial charges u/s.14A. Upon further appeal, the CIT(A) directed to recompute the disallowance u/s.14A keeping in view the principles laid down in Rule 8D.
Held:
Since the assessment year under consideration is A.Y. 2004-05, the provisions of Rule 8D cannot be applied.
When the real purpose and intent to use the borrowed funds were for trading activity and if incidentally it resulted some dividend income on the shares purchased for trading, then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure incurred for trading activity, then the same cannot be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income has to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression ‘in relation to’ used in section 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure u/s.14A there must be a live nexus between the expenditure incurred and the income not forming part of the total income. Disallowance cannot be made on the basis of presumption and estimation of the AO. No notional expenditure can be apportioned for the purpose of earning income unless there is an actual expenditure ‘in relation to’ earning the income not forming the part of the total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then as such no disallowance can be made u/s.14A merely because some tax-exempt income is received incidentally. In case of dealer in shares and securities the primary object and intention for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale also incidentally yields some dividend income on the shares held by him as stock-in-trade, such dividend income is not intended at the time of purchase of such shares and accordingly there is no live connection between the expenditure incurred and dividend income.
As held by the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, 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. However, the principle of apportionment is applicable only in the cases where it is not possible to determine the actual expenditure incurred ‘in relation to’ the income not forming part of the total income. But when it is possible to determine the actual expenditure ‘in relation to’ the exempt income or no expenditure has been incurred ‘in relation to’ the exempt income, then the principle of apportionment embedded in section 14A has no application.
