Friday, July 26, 2013

Whether when dividend income is incidental to business of sale of shares, which

 

Whether when dividend income is incidental to business of sale of shares, which remained unsold, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to extent of dividend income and should be disallowed - NO: Karnataka HC

BANGALORE, APRIL 11, 2012: THE issues before the Bench are - Whether when dividend income is incidental to the business of sale of shares, which remained unsold with the assessee, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to the extent of dividend income and should be disallowed and Whether when the assessee takes loan and purchases shares and earns dividend income on unsold shares, any notional interest expenditure is to be disallowed. And the answer goes in favour of the assessee.

Facts of the case

Assessee is a distributor of state lotteries and a dealer in shares and securities. The assessee earned dividend income of Rs.46,67,190/- from shares of certain companies and 93% of shares of M/s Kurlon Ltd., and further the assessee has purchased 24,000 fully paid shares from M/s.Kurlon Ltd., and converted its stock of partly paid shares into fully paid shares by paying the outstanding amount of Rs.8/- per share, which worked out to Rs.5,27,97,016/-. To pay for the conversion cost, the assessee had entered into agreement with M/s.Kitchen Appliances Pvt. Ltd., to avail interest free loan of Rs.14/-crores and had paid Rs.28/- lakhs to one Sri.A.S.Krishna Iyer for brokering this loan. The Assessing Officer held that this expenditure was directly attributable to the earning of the dividend income and disallowed the same. He further considered the business expenditure claimed by the assessee and estimated the expenditure incurred by the assessee on earning of the dividend income at Rs.27,24,330/- under Rule 8D of the Income Tax Rules and disallowed the same as relatable to earning of the exempt income.

The Commissioner of Income (Appeals) confirmed the said order. In appeal, the Tribunal was of the view that the assessee had taken interest free loan from M/s.Kitchen Appliances Pvt. Ltd,, and what was disallowed, was the expenditure relatable to the broking of this loan as the expenditure for earning of dividend income from these shares. It was not only the direct expenditure, which was disallowable under Section 14A in relation to exempt income, but even indirect expenditure was to be disallowed proportionately. The expenditure, which was relatable to earning of dividend income though incidental to the trading of shares, was also to be disallowed under Section 14A of the Income Tax Act. However, the Tribunal found that the Assessing Officer attributed the entire broking commission as relatable to earning of dividend income only, which was not correct. The loan had been utilized for the purchase of shares and the profit earned by sale of these shares was offered as business income. Hence, the broking expenditure had to be considered as business expenditure, as well and allowed the appeal accordingly. The Assessing Officer was directed to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.

On appeal to the HC, the Counsel for the assessee contended that the assessee had incurred expenditure for purchasing shares. 63% of the shares so purchased were sold and the income derived therefrom was offered to tax as business income. The remaining 37% of the shares remained unsold. Those shares yielded dividend. The assessee had not incurred any expenditure to. earn the said dividend income. Therefore, no expenditure could be attributed to the said dividend income and the said expenditure cannot be disallowed and the assessee was entitled to the benefit of deduction of the entire expenditure incurred in respect of purchase of shares.

Per contra, the Counsel for the Revenue pointed out that admittedly when shares retained by the assessee had yielded dividend, when the dividend income was exempted from payment of income tax proportionately, the expenditure incurred in acquiring that dividend also should be excluded from expenditure. In that view of the matter, the orders passed by the authorities are legal and valid.

Held that,

++ 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 has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted 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;

++ 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.

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