Ita/200002/2018 Of Shri. Shankarlal Gilada v. The Income Tax Officer

IN THE HIGH COURT OF KARNATAKAKALABURAGI BENCH DATED THIS THE 22 DAY OF JANUARY, 2020 PRESENT. THE HON’BLE MR.JUSTICE G.NARENDAR| AND THE HON’BLE MR.JUSTICE M.NAGAPRASANNAITA No,.200C002 OF 20 BEIT WEE SHRI SHANKARLAL GILADA,H.NO.1-10/5, KHOOBA PLOTS,GULBARGA - 585 0OO2. — APPELLANT (BY SRI G. VENKATESH, ADVOCATE FOR SRI A. SHANKARAND SRI MANJUNATH MALLAYYA SHETTY, ADVOCATES) AND: THE INCOME TAX OFFICER,WARD 3(1) (2),BMTC BUILDING, 6 BLOCK,KORAMANGALA,BENGALURU - 560 095. —. RESPONDENT (BY SRI AMEET KUMAR DESHPANDE, ADVOCATE) THIS INCOME TAX APPEAL IS FILED UNDER SECTION|260A OF THE INCOME TAX ACT, 1961, PRAYING TO.FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATEDABOVE AND ANSWER THE SAME IN FAVOUR OF THEAPPELLANT; ALLOW THE APPEAL AND SETI ASIDE THEFINDINGS THEREIN TO THE EXTENT AGAINST THE APPELLANTIN THE ORDER PASSED BY THE INCOME-TAX APPELLATE.TRIBUNAL IN SMC-C BENCH, BENGALURU IN ITA Nos.1534 &1535/BANG/2016 DATED 24.08.2017 REFERRED TO ASANNEXURE A RELATING TO THE ASSESSMENT YEARS 2012-13.AND 2013-14 ETC., THIS|INCOME.TAX.APPEALCOMING|ONFOR|ADMISSION,NAGAPRASANNAJa ADELIVEREDTHEFOLLOWING:- JUDGMENT Aggrieved by the order dated 24.8.2017 passed in ITA.Nos.1534 & 1535/BANG/2016 by the Income Tax AppellateTribunal, wnereby the TridDunal has dismissed the appeal of theassessee, affirming the order of the Assessment Officer, the.instant Income Tax Appeal is filed. 2. The appellant is an assessee and has been assessed|for tax under various heads namely, house property, captive|income and income from other sources for the assessment.year 2013-14. The appellant filed return of income on23.10.2013 declaring his total income of Rs.10,35,060/- for.the assessment year 2013-14. His statement of computation.of tax was also enclosed to the return that was filed. 3. It is the case of the appellant that he earned the|business income from various partnership firms, in which he isa partner as also, from a proprietorship concern by name.Vishal Concrete Works. The appellant also submitted auditedfinancialstatement of Vishal Concrete Works|for theassessment year 2013-14 as also, a personal balance sheet.drawn as on 31.3.2013. 4. The return of income of the appellant was taken up|for scrutiny and the statutory notices were issued to the. appellant under Sections 143(2) and 142(1) of the Income Tax.Act, 1961 (hereinafter referred to as ‘the Act’ for short). The.appellant appeared and furnished all the details. TheAssessing Officer concluded the proceedings under Section143(3) of the Act and passed an order on 17.11.2015 makingone addition which was disallowance under Section 14A of theAct read with Rule 8D of Income Tax Rules, 1962, (hereinafter|referred to as ‘the Rules’ for short) which resulted in assessingthe income of the appellant at Rs.11,41,690/- as against the.return of income filed at Rs.10,35,060/-. 5. The appellant, aggrieved by the aforementioned|assessment of the Assessing Officer, filed a statutory appeal inTTA.No.55/W-3(1)(3)/CIT(A)/BNG-3/2015-16 beforetheCommissioner of Income Tax (Appeals)-3, Bengaluru, the.Appellate Authority. The Appellate Authority, by his order.dated 22.6.2016, dismissed the appeal confirming the order.passed by the Assessing Officer. Aggrieved by the order passed by the Appellate Authority, the appellant filed ITANos.1534 & 1535/Bang/2016 before the Income Tax AppellateTribunal, Bengaluru, (hereinafter referred to as ‘the Tribunal’.for short) on the following grounds: “7. The learned Commissioner of [ncome-tax(A) erred in passing the order in the manner hedid. 2. The learned Commissioner (A) _ furtheought to have appreciated that no part of borrowedfund were utilized in making investment and furtherAO having not established the nexus betweenborrowed fund and investment, ought to have.deleted the addition tn toto. passed by the Appellate Authority, the appellant filed ITANos.1534 & 1535/Bang/2016 before the Income Tax AppellateTribunal, Bengaluru, (hereinafter referred to as ‘the Tribunal’.for short) on the following grounds: “7. The learned Commissioner of [ncome-tax(A) erred in passing the order in the manner hedid. 2. The learned Commissioner (A) _ furtheought to have appreciated that no part of borrowedfund were utilized in making investment and furtherAO having not established the nexus betweenborrowed fund and investment, ought to have.deleted the addition tn toto. 3. The learned Commissioner (A) erred in|confirming the addition u/s 14A r. w. Rule 8D of the.Rules where no expenditure is incurred for earning»exempt income. 4. The learned Commissioner (A) _ furtheought to have appreciated that the AO has made anaddition without recording satisfaction with regard to the claim of the appellant and hence ought to.have deleted the addition in toto. 5.|Withoutprejudice,theadditionISexcessive, arbitrary and unreasonable and liable to-be deleted in toto. 6. For these and other grounds that may be|urged at the time of hearing of the appeal theappellant prays that the appeal may be allowed.” 6. The Tribunal, by its order dated 24.8.2017, dismissedthe appeal filed by the appellant for the assessment years.2012-13 And 2013-14. Being aggrieved by the order passed.by the Tribunal, in the aforementioned appeal, the assesseehas filed the instant appeal. 7. We have heard Sri G. Venkatesh, learned Counsel|appearing for Sri A. Shankar and Sri Manjunath MallayyaShetty, learned counsels for the appellant, Sri. Ameet Kumar.Deshpande, learned Counsel appearing for the respondent. 8. The only issue that arises for our consideration, in thepresent appeal, is concerning the disallowance made by theAssessing Officer for the assessment years 2012-13 and 2013-14 | 9. The appellant has contended that he has made.investments in the shares of companies, which were the taxexempt investments, and the appellant has not earned any tax.exempt incomes during the relevant years, namely, 2012-13.and 2013-14, from any of the tax exempt investments. The.disallowance made by the Assessing Officer under Section 14A.of the Act read with Rule 8D of the Rules for the assessment.year 2012-13 is to the tune of 2,49,694/- and in view of the.disallowance made, the appellant has incurred the interest.expenditure of Rs.32,09,6/2/- on the borrowed funds, which.according to him, is attributable to the investments he hasmade in the shares of variouS companies, which are the taxexempt investments. 10. The appellant contends that the Assessing Officer.has computed the income erroneously and disallowed anamount of Rs.1,16,664/- and Rs.1,33,030/- for the respective|years. The Assessing Officer has completely misconstrued andmisdirected himself on facts, as the disallowance of anyamount under Section 14A of the Act would not arise to thefacts of the case atall. | 11. Learned counsel appearing for the revenue would|seek to justify the orders passed by the Assessment Officer.and tnat of the Tribunal and would submit tnat the issue tnat.is formed for consideration before this Court stands completelycovered by the Judgment of the Apex court in tne case of.Maxopp Investment Ltd. v. Commissioner of Income|Tax, New Delhireported in(2018) 15 SCC 523. | 12. We have given our anxious consideration to the|Submissions made by the learned counsel appearing for the.parties and have perused the material on record. | 11. Learned counsel appearing for the revenue would|seek to justify the orders passed by the Assessment Officer.and tnat of the Tribunal and would submit tnat the issue tnat.is formed for consideration before this Court stands completelycovered by the Judgment of the Apex court in tne case of.Maxopp Investment Ltd. v. Commissioner of Income|Tax, New Delhireported in(2018) 15 SCC 523. | 12. We have given our anxious consideration to the|Submissions made by the learned counsel appearing for the.parties and have perused the material on record. | 13. Tne appellant borrowed money from various sources.and sucn interest bearing funds were utilized for makinginvestment in shares, which according to the appellant, is theincome which is exempt from tax. It is to be noticed that bythe act of the appellant the exempt investments nave.increased from Rs.2,12,0/,696/- for financial year 2010-11 toRs.3,20,04,328/- for financial years 2011-12. Tne factum ofborrowing money from various sources wnhicn Dears interestand utilising the same in making investment in shares is notdisputed by the appellant before the authorities, before the.Tribunal or before tnis Court. Tne submission is that wnen tne.borrowed money is utilised for making investment in shares.and the income derived from such investments being exempt.from tax, the disallowance under Section 14-A by the.Assessing Officer is contrary to law. This submission of the learned counsel appearing for the appellant is unacceptable tous as the Apex Court in the case ofMaxopp Investment Ltd.v. Commissioner of Income Tax, New Delhireported in(2018) 15 SCC 523,|considering the judgments rendered byvarious High Courts interpreting Section 14-A of the Act and.noiding that disallowance under 14-A can be invoked only ifthere is nexus between the borrowed funds which bearinterest and investment from tne Dporrowed funds to tne extentof such investment made from the borrowed funds. Tne Apex.Court at paragraphs 40 to 50 has held as follows: “AO.WehavegivenOUT|thoughtfulconsideration to the arguments of the counsel for.the parties on botn sides, in the light of variousjudgments which have been cited before us, some.of which have already been taken note of above. 41,In the first instance, it needs to be)recognised that as per Section 14-A(1) of the Act,deduction of that expenditure is not to be allowedwhicn nas been incurreaq by tne assessee in relation to income which does not form part of the.total income unaer this Act”. Axiomatically, it Is-that expenditure aione whicn nas been incurred in.relation to the Income which [Is [ncludible in totalincome that has to be disallowed. If an expenditureincurred hesno causal connection with the'exempted income, then sucn an expenditure wouldobviously be treated as not related to the income.that is exempted from tax, and such expenditurewould be allowed as business expenditure. To put itdifferently,SUCDNexpenaiturewouldthen|be|considered as incurred in respect of other income.which ts to be treated as part of the total income. 47,There is no quarrel in assigning this)meaning to Section 14-A of the Act. In fact, all theHigh Courts, whether it is the Delhi High Court on-the one hand or the Punjab and Haryana High Courton the other hand, have agreed in providing this.interpretation to Section 14-A of the Act. The entire.dispute is as to what interpretation is to be given to.the words in relation to” in the given scenario viz.where the dividend income on the shares Is earned,though the dominant purpose for subscribing in. those shares of the investee company was not to.earn dividend. We have two scenarios in these setsof appeals. In one group of cases the main purposefor investing in shares was to gain control over the.investee company. Other cases are those where the.Shares of investee company were held by the.assessees as stock-in-trade (i.e. as a businessactivity) and not as investment to earn dividends.In this context, it is to be examined as to whethertheexpenaitureWasincurred,In|respectivescenarios, in relation to the dividend income or not. those shares of the investee company was not to.earn dividend. We have two scenarios in these setsof appeals. In one group of cases the main purposefor investing in shares was to gain control over the.investee company. Other cases are those where the.Shares of investee company were held by the.assessees as stock-in-trade (i.e. as a businessactivity) and not as investment to earn dividends.In this context, it is to be examined as to whethertheexpenaitureWasincurred,In|respectivescenarios, in relation to the dividend income or not. 43,Having clarified the aforesaid position, thefirst and foremost issue that falis for considerationis aS to whether the dominant purpose test, which.is pressed into service by the assessees wouldapply while interpreting Section 14-A of the Act orwe have to go by the theory of apportionment. Weare of the opinion that the dominant purpose for.which the investment into shares is made by anassessee may not be relevant. No doubt, tneassessee like Maxopp Investment Ltd. may Nave.made the investment in order to gain control of the’investee company. However, that does not appear to be a relevant factor in determining the issue at.hand. Fact remains tnet such dividend income Isnon-taxable. In this scenario, if expenditure is-incurred on earning the dividend income, that muchof the expenditure which is attributable to thedividend income has to be disallowed and cannot betreated as business expenditure. Keeping this.objective behind Section 14-A of the Act in mind,theSaidProvisionhas.tO.beinterpreted,particularly, the word ‘in relation to the income”that does not form part of total income. Consideredin this hue, the principle of apportionment. ofexpenses comes into play as that is the principlewhnicn is engrained in Section 14-A of tne Act. Thisis so neld in Walfort Snare and Stock Brokers (P)-Ltd. [CIT v. Walfort Share and Stock Brokers (P).Ltd., (2010) 8 SCC 137 : (2010) 326 ITR 1] ,relevant passage whereof is already reproducedabove, for the sake of continuity of discussion, we_would like to quote the following few linestherefrom: (SCC p. 151, paras 34 & 36). "34, ... The next phrase is, ‘in relation tincome which does not form part of total)Income under this Act’. It means thet if an. income does not form part of the _ totaincome, then the related expenditure is\outside the ambit of the applicability of.Section 14-A. OK O 356.ThetheoryOf|apportionmentOf|expendituresbetween|taxableandNof-taxable (sic income) has, in principle, been|now widened under Section 14-A.” 44The Delhi High Court, therefore, correctly|observed that prior to introduction of Section 14-A.of the Act, the law was that wnen an assessee hada composite and indivisible business whicn hadelements of both taxable and non-taxable income,the entire expenditure in respect of tne saidbusiness was deductible and, in sucn a case, theprinciple of apportionment of the expenditure’relating to the non-taxable income did not apply.Tne principle of apportionment was made availabieonly wnere tne business was divisible. It is to find a.cure to the aforesaid problem that the legislaturehas not only inserted Section 14-A by the Finance.(Amendment)Act,ZOO] butalsomadeIt retrospective f.e. 1962 when the Income Tax Act.Itself came Into force. [Tne eaforesaidqd intent expressed loudly and clearly in the Memorandumexplaining the provisions of the Finance Bill, 2001.We, thus, agree with the view taken by the DelhiHigh Court, and are not inclined to accept theopinion of the Punjab and Haryana Hign Court.which went by dominant purpose theory. Theaforesaid reasoning would be applicable in caseswhere sheres are held as Investment in theinvestee company, may be for the purpose ofNavingcontrolling|interesttherein.On|that|reasoning, appeals of Maxopp Investment Ltd. as—well as similar cases where shares were purchasedby the assessees to nave controlling interest in the.investee companies have to fail and are, therefore,dismissed. retrospective f.e. 1962 when the Income Tax Act.Itself came Into force. [Tne eaforesaidqd intent expressed loudly and clearly in the Memorandumexplaining the provisions of the Finance Bill, 2001.We, thus, agree with the view taken by the DelhiHigh Court, and are not inclined to accept theopinion of the Punjab and Haryana Hign Court.which went by dominant purpose theory. Theaforesaid reasoning would be applicable in caseswhere sheres are held as Investment in theinvestee company, may be for the purpose ofNavingcontrolling|interesttherein.On|that|reasoning, appeals of Maxopp Investment Ltd. as—well as similar cases where shares were purchasedby the assessees to nave controlling interest in the.investee companies have to fail and are, therefore,dismissed. 45,There is yet anotner aspect whicn. still)needs to be looked into. What happens when the.Shares are held as ‘stock-in-trade’ and not as'‘Investment’, particularly, by the banks? On this-specific aspect, CBDI has issued Circular No.18/2015 dated 2-11-2015. 46.This circular has already been reproducedin para 27 above. This circular takes note of the.judgmentOf|thisCourtin Nawanshanercase [CIT v. Nawansnanar Central Coop. Bank Ltd.,(2007) 15 SCC 611 : (2007) 289 ITR 6: (2007)160 Taxman 48] wherein it is held that investmentsmade by a banking concern are part of the businessor banking. Tnerefore, the income arising from such.investments is attributable to business of bankingfalling under the head ‘profits and gains of businessand profession”. On that basis, the circular containsthe decision of the Board that no appeal would befiled on this ground by the officers of tne.Department and if the appeals are already filed,they snould be withdrawn. A reading of tnis circularwould meake it clear thet the issue was as towhether income by way of interest on securitiesShall be chargeable to income tax under the head“Income from other sources’ or it is to fall under.the head profits and gains of business andprofession”. The Board, going by the decision ofthis|Courtin Nawanshahercase [CIT v. Nawansnanar Central Coop. Bank Ltd., (2007) 15 SCC 611 : (2007) 289 ITR 6: (2007)160 Taxman 48], clarified that it has to be treateqas income falling under the head _ profits and gainsof business and profession”. The Board also went to.the extent of saying that this would not be limitedonly|to.cooperativesocieties/banksClaimingdeduction under Section 80-P(2)(a)(i) of the Act.butwouldalsobe.applicable.ionallbanks/commercial banks, to which the BankingRegulation Act, 1949 applies. 4/,From this, the Punjab and Haryana High|Court pointed out that tnis circular carves out a.distinction|between|“sStock-in-trade’and|“Investment” and provides that if the motive behindpurchase and sale of shares is to earn profit, then.the same would be treated as trading profit and ifthe object is to derive income by way of dividend.then the profit would be said to have accrued frominvestment. To this extent, the High Court may be-correct. At the same time, we do not agree witn the.test of dominant intention applied by the Punjab>and Haryana High Court, which we have alreadydiscarded. In that event, the question is as to on. whet basis those cases are to be decided where thesnares of other companies are purchased by tne.dSSCSSCCESd]S“sStock-in-trade’andnotd]S“Investment”, We proceed to discuss this aspecthereinafter. whet basis those cases are to be decided where thesnares of other companies are purchased by tne.dSSCSSCCESd]S“sStock-in-trade’andnotd]S“Investment”, We proceed to discuss this aspecthereinafter. 438In those cases, wnere snares are held as|stock-in-trade, the main purpose is to trade inthose snares and earn profits therefrom. However,we are not concerned witn those profits whichwould naturally be treated as ‘income” under thehead“profitsand|gainsfrombUSINeESSandprofession”. What happens is that, in the process,wnen the shares are held as _stock-in-trade’,certain dividend Is also earned, though incidentally,which is also an income. However, by virtue ofSection 10(34) of the Act, this dividend income is—not to be Included in tne total Income and Is'exempt from tax. This triggers the applicability ofSection 14-A of the Act which [Is based on thetheory of apportionment of expenditure betweentaxable and non-taxable income as held In WealfortShareand|StockBrokers|(P)|Ltd. case [CIT v. Walfort Share and Stock Brokers (P) Ltd., (2010) 8 SCC 137 : (2010) 326 ITR 1].Tnerefore, to that extent, depending upon the factsof eacn case, the expenditure incurred in acquiring—those shares will have to be apportioned. 49,We note from the facts In State Bank of|Patiala case [CIT v. State Bank of Patiala, (2017)391 ITR 218 (P&H)] that the AO, while passing the.assessment order, had already restricted tnedisallowance to the amount which was claimed @asexempt income by applying the formula containedin Rule 8-D of the Rules and holding that Section14-A of the Act would be applicable. In spite of thisexercise of apportionment of expenditure carried:out by the AO, CIT(A) disallowed the entire.deduction of expenditure. That view of the CIT(A).was clearly untenable and rightly set aside by ITAT.Tnerefore, on facts, the Punjab and Haryana HighCourt has arrived at a correct conclusion by.affirming the view of ITAT, though we are not.subscribing to the theory of dominant intentionapplied by the Hign Court. 50.It is to be kept in mind that In those caseswnere snares are held as _ ‘Sstock-in-trade’, becomes a business activity of the assessee to dealin those shares as a business proposition. Whetherdividend is earned or not becomes immeterial, I[nfact, it would be a guirk of fate that when the.investee company deciared dividena, those snares.are held by the assessee, though the assesseehasto ultimately trade those shares by selling them to—earn profits. Tne situation hnere is, _ tnerefordifferent from the case like Maxopp Investment.Ltd. [Maxopp Investment Ltd. v. CIT, 2011 SCCOnLine Del 4855 : (2012) 347 ITR 272] where the.assessee would continue to hold those sheres @as Itwants to retain control over the investee company.In that case, whenever dividend is declared by the.investee company that would necessarily be earnedby the assessee and tne assessee alone. [Tnerefore,even at tne time of investing into those snares, the.assessee knows that it may generate dividendincome as well and as and when such dividend|income is generated that would be earned by theassessee. In contrast, wnere the snares are held asSstock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those.snares whenever the snare price goes up in order.to earn profits. In the result, the appeals filed bythe Revenue challenging the judgment of thePunjab and Haryana High Court in State Bank ofPatiala [CIT v. State Bank of Patiala, (2017) 391.ITR 218 (P&H) also fail, thougn law in this respecthas been clarified hereinabove. ” The Apex Court has considered every facet and parameters ofdisallowance in terms of Section 14-A of the Act. The Tribunal.on re-appreciation of the entire material has held as follows: situation. The main purpose is to liquidate those.snares whenever the snare price goes up in order.to earn profits. In the result, the appeals filed bythe Revenue challenging the judgment of thePunjab and Haryana High Court in State Bank ofPatiala [CIT v. State Bank of Patiala, (2017) 391.ITR 218 (P&H) also fail, thougn law in this respecthas been clarified hereinabove. ” The Apex Court has considered every facet and parameters ofdisallowance in terms of Section 14-A of the Act. The Tribunal.on re-appreciation of the entire material has held as follows: “6. Regarding disallowance of interest inA.Y.7Z017-13Of|Rs.116,664/-outOf|Interestexpenaiture, this is the contention of tne learnedAR of the assessee that interest free fund availableon 31.03.2012 in the form of capital is Rs.632.88Lacs as against investment on that date ofRs.320.04 lacs and therefore, no disallowance out.of interest is called for u/s 14A. In this regard, Ifind that as per Rule 8D, in the case of Mixed fundsas in the present case, if the assessee establishedthat investment is having direct nexus with interest free funds than to the extent of such investment,no disallowance out of interest expenditure is calledfor. Similarly, if the assessee establishes direct.nexus between interest bearing fund and its use forearning taxable income than also, interest on such.borrowings is to be disregarded for proportionatedisallowance out of interest expenditure. Similarly,if the AO establishes direct nexus between interest|bearing borrowed funds and investment than to.that extent, entire interest expenditure is to be.disallowed and not proportionate interest. But in.respect of the interest bearing borrowed funds, for.which direct nexus is not established by the AOwith investment or by assessee with taxableincome, proportionate disallowance has to be madeas per Rule 8D. In the present case, no side hasestablisheddhlydirectnexusandtherefore,|proportionate disallowance made by the AO as perRule 8D ts justified and no interference is called foron this aspect also.” | The Tribunal, on consideration of the rival submissions clearly|notices that the Assessing Officer has established that there is direct nexus between the borrowed funds which bear interest.and investment made out of those borrowed funds and to that.extent, the entire interest expenditure is to be disallowed. | 14. In the light of the law laid down by the Apex Court inthe afore-stated case which is interpreting the very provisionsthat are called in question in the case at hand, which is.rendered after considering all the judgments of various HighCourts on the same issue, we find that the Assessing Officer,the Appellate Authority and the Tribunal have considered all.the relevant records and on facts nave arrived at a correct.conclusion. Therefore, no interference is called for, more)particularly, when the orders passed by the AssessmentOfficer as affirmed by the Appellate Authority and the Tribunalare just and proper. No substantial question of law arises forour consideration in this appeal. ������������������������������������������������������������� ��������������������� �&��