Shri Zaver Virjibhai Mandalia v.
ACIT
The assessee is an Individual engaged in the business as Jewellery
valuer and also engaged in the trading of shares, securities, mutual funds and
has income from share business. The assessee filed his return of income showing
loss of Rs.86,72,520/-, in the course of scrutiny AO observed that assessee had
purchased/allotted units of Rs.11,50,04,800/- and had made sales of units of
Rs.9,88,98,039. The assessee had also earned dividend income of Rs.1,44,72,449.
The A.O. also observed that the assessee had claimed interest expenses of
Rs.6,50,456/- being the interest paid to Kotak Mahindra Investments Pvt. Ltd.
The assessee had made investments in Mutual funds by borrowing the amount from
Kotak Mahindra Investments Ltd. A.O. was of the view that the investments were
made with a motive to earn dividend which are exempt u/s. 10(33). He also
observed that the transaction of purchase and redemption was structured
together. He was of the view that the expenses on account of interest incurred
was towards cost to earn dividend income. Since the assessee had borrowed the
amount from Kotak Mahindra and the borrowed amount was fully utilised for
purchasing units, the dividend of which was exempt u/s.10(33), the interest
expenses was required to be disallowed u/s. 14A of the Act. He accordingly,
disallowed the interest expenses of Rs.6,50,456/- and added it to the total
income of the assessee and the order of AO was upheld by the CIT(A).
Assessee on further appeal before
ITAT
The ITAT bench observed that AO
also held that assessee is in the business of purchase/sale of shares, and
while framing assessment u/s.143(3) the loss of Rs.1,51,21,196/- incurred on
the sale/purchase of units have been treated as business loss. In view of the
aforesaid facts, it can be stated that assessee is in the business of purchase
and sale of shares. Once the purchase and sale of shares is held to be a
business activity, the interest paid thereon has to be treated as business
expenses in view of the Hon’ble High Court decision in the case reported in (1976)
42 TAXATION 105 (GUJ) thus following the decision of, in the present facts of
the case the interest expenses incurred by the assessee has to be treated as
business expenses and no disallowance can be made u/s.14A. We accordingly direct
the deletion of the disallowance made by A.O. Thus this ground of assessee is
allowed.
Also
Read: Yatis Trading Co. (P.) Ltd. vs. ACIT held “that interest on borrowed funds used for
trading activity is an allowable expenditure u/s. 36(1)(iii) and the same
cannot be treated as expenditure for earning dividend income which incidental
to trading activity. When the real purpose and intent to use the borrowed funds
was for trading activity and if incidentally resulted some dividend income on
the shares purchased for trading then the same would not change the purpose,
nature and character of the expenditure. Thus when the said expenditure
(interest) incurred for trading activity then the same cannot be said to have
been incurred for earning the dividend in come. As per the basic principle of
taxation only the net income i.e. gross income minus expenditure 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 Sec. 14A means dominant and immediate connection or nexus.
Thus in order to disallow the expenses 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 A.O. 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.”
No comments:
Post a Comment