By K. B. Bhujle, Advocate
Principal CIT vs. State Bank of Patiala; [2017] 78
taxmann.com 3 (P&H):
The assessee held shares and securities as stock-in-trade and
not for earning dividend. Incidentally, the assessee earned dividend which was
exempt from tax. For the A. Y. 2008-09, the assessee claimed that no
disallowance was warranted u/s. 14A of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”), as the shares were
held as stock-in-trade and not as investment for earning dividend. The learned
Assessing Officer rejected the claim and made disallowance u/s. 14A applying
Rule 8D. The Tribunal allowed the assessee’s claim and deleted the addition.
On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under:
“i) What is of vital importance in the above
judgment are the observations emphasised by us. Each of them expressly states
that what is disallowed is expenditure incurred to “earn” exempt
income. The words “in relation to” in section 14A must be construed
accordingly. Thus, the words “in relation to” apply to earning exempt
income. The importance of the observation is this.
ii) We have held that the securities in question
constituted the assessee’s stock-in-trade and the income that arises on account
of the purchase and sale of the securities is its business income and is
brought to tax as such. That income is not exempt from tax and, therefore, the
expenditure incurred in relation thereto does not fall within the ambit of
section 14A.
iii) Now, the dividend and interest are income.
The question then is whether the assessee can be said to have incurred any
expenditure at all or any part of the said expenditure in respect of the exempt
income viz. dividend and interest that arose out of the securities that
constituted the assessee’s stock-in-trade. The answer must be in the negative.
The purpose of the purchase of the said securities was not to earn income
arising therefrom, namely, dividend and interest, but to earn profits from
trading in i.e. purchasing and selling the same. It is axiomatic, therefore,
that the entire expenditure including administrative costs was incurred for the
purchase and sale of the stock-in-trade and, therefore, towards earning the
business income from the trading activity of purchasing and selling the
securities. Irrespective of whether the securities yielded any income arising
therefrom, such as, dividend or interest, no expenditure was incurred in
relation to the same.
iv) In CCI Ltd. vs. JCIT [2012] 250 CTR 291
(Karn), the Karnataka High Court held that when the assessee has not
retained shares with the intention of earning dividend income and that the
dividend income is incidental to the business of sale of shares 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
deduction.
v) A financial decision of an assessee that
trades in securities may and, in fact, would factor in the dividend or interest
that the securities it acquires as its stock-in-trade yields or is likely to
yield. Such a decision would be taken for acquisition, retention and disposal
of the securities. That, however, is a financial consideration not with a view
to earning the dividend or interest but with a view to assessing the price at
which the security ought to be acquired, retained and sold. In other words,
such dividend or interest is an aspect that the assessee takes into
consideration for incurring the expenditure for the purpose of acquiring the
stock-in-trade and dealing with it thereafter as well as for the sale thereof.
This is entirely different from saying that the expenditure is incurred for
earning the dividend or interest. Once it is found that no expenditure was
incurred in earning this income, there would be no further expenditure in
relation thereto that falls within the ambit of section 14A.”
