ORDER

Sanjay Arora, Accountant Member - These are cross appeals, i.e., by the Assessee and the Revenue, in respect of the assessee's assessment for the assessment year (A.Y.) 2008-09 vide order u/s. 143(3) of the Income-tax Act, 1961 ('the Act" herein) dated 30.11.2010, following the order by the first appellate authority, being the Commissioner of Income Tax (Appeals)-8 Mumbai ('CIT(A)' for short) dated 11.05.2011.

The Revenue's Appeal (ITA No. 5163 /Mum/2011)

2. The only issue raised in the Revenue's appeal is the non-allowance of the credit of Securities Transaction Tax (STT) u/s. 88E of the Act in view of the assessee's tax liability for the current year being determined u/s 115 JB of the Act. In view of the Assessing Officer (AO) the said rebate in tax would only arise where the assessee's tax liability is worked out under the regular provisions of the Act. The ld. CIT(A) has allowed the assessee's claim in its respect following the decision by the Tribunal in the case of Horizon Capital Ltd. v. ITO [IT Appeal No. 592(Bang.) of 2010 dated 16.07.2010] discussing the matter in detail vide paras 2.1 to 2.3 (pages 4-8) of his order.

3. We have heard the parties, and perused the material on record. We find no infirmity in the impugned order; the same being rather the consistent view of the Mumbai Benches of the Tribunal. The order by the Tribunal in the case of Horizon Capital Ltd. (supra) has been since confirmed by the high court in The Commissioner Of Income Tax v. Ms. Horizon Capital Ltd, [2012] 17 taxmann.com 8/204 Taxman 59 (Kar.) (Mag.) . We, may, however, clarify that the rebate u/s. 88E is only in respect of the tax chargeable under the head profit and gains of business or profession, and not any other. As such, only as much of tax under the MAT provisions which relates to the income, though based on book profit, attributable to the profits of the assessee's business arising from taxable securities transactions, would stand to be allowed, in view of the qualifying condition of section 88E. This again represents the clear and consistent view of the Tribunal, expressed per its decisions regularly, as in the case of Dy. CIT v. KBII Securities (P.) Ltd. [IT Appeal No. 4999(Mum) of 2011 dated 20.03.2013] and Dy. CIT v. Arcadia Share & Stock Brokers (P.) Ltd. [IT Appeal No. 1515(Mum.) of 2012, dated 20-03-2013]. We decide accordingly.

The Assessee's Appeal (ITA No. 5724/Mum/2011)

4. Coming to the assessee's appeal, the same raises a single issue, i.e., qua the disallowance u/s. 14A read with rule 8D in the sum of Rs. 12,23,627/-. The assessee contests the same on the basis that the investment under reference, i.e., on which the dividend income stands received by it, being shares in different companies, are held by it as stock-in-trade, and not as investment, so that rule 8D(2)(ii) is not applicable, relying for the purpose on the decision in the case of Shankar Trading Co. P. Ltd…. v. Cit [2011] 129 ITD 237/9 taxmann.com 164 (Mum.) (copy on record).

5. Before us, the ld. A.R. also placed reliance on the decision by the hon'ble high court of Karnataka in the case of CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.) . The ld. DR, in response, would submit that the assessment involved in both the cases, i.e., Yatish Trading Co. (P.) Ltd. (supra) and CCI Ltd. (supra), was prior to A.Y. 2008-09, since which, as clarified by the hon'ble jurisdictional high court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) , rule 8D is mandatory. The assessee had suo motu disallowed Rs. 1,22,295/- as expenditure incurred in earning tax-exempt income, and which has been not accepted by the Revenue as no basis there for stood specified, while the Act has provided for a uniform basis for estimation of such expenditure by way of rule 8D, and which therefore has been applied in determining the disallowance u/s. 14A(1). The same, therefore, is required to be upheld.

6. We have heard the parties, and perused the material on record.

6.1 The first issue, therefore, before us is whether the decisions by the hon'ble high court in the case of CCI Ltd.(supra) and Yatish Trading Co. (P.) Ltd. (supra), being for assessment years 2007-08 and 2004-05 respectively, i.e., prior to A.Y. 2008-09, are applicable for the current year as well, i.e., A.Y. 2008-09. The premise of both the decisions, rendered independent of each other, is that where investment under reference is held as stock-in-trade, the dividend income arising on the shares is only incidental to the business of purchase and sale of shares. As such, no expenditure can said to have been incurred in acquiring or holding the shares for the purpose of earning dividend income, i.e., the income which does not form a part of total income under the Act, necessitating disallowance of the expenditure incurred in relation thereto u/s. 14A(1). That being the case, in our view there is no basis in the Revenue's claim that the said decisions being prior to A.Y. 2008-09 would not be applicable for the said year. This is as, irrespective of the year under reference, only the expenditure actually incurred in relation to income not forming part of the total income, which is the subject matter of disallowance u/s. 14A(1). The significance of AY 2008-09, or the year for which the disallowance is being made, is only that with effect from that year rules 8D comes into play so that the estimation of the expenditure, in the absence of the assessee's records exhibiting otherwise, is to be made with reference to the said rule. On the other hand, once it is found, as a matter of fact, that no such expenditure stands incurred, there is no question of any disallowance u/s.l4A(l), toward the estimation of which rule 8D would stand to be invoked. In other words, rule 8D being toward estimation of disallowance to be effected u/s.14A (1) and not qua disallowance u/s. 14A per se, the Revenue's argument, based on the application of Rule 8D for the current year, as against the years for which it was not applicable, so that the decisions for those years would not be apply for the current year, would not hold.

6.2 We may next consider the question of the applicability of section 14A to a case where shares, on which dividend income arises, are held as stock-in-trade. We do not think that the purpose for which the shares are purchased and held would in any manner impact the applicability of section 14A, which gets attracted on incurring the expenditure in relation to the tax exempt income. It may impact the head of the income under which the income arising therefrom would stand to be assessed, i.e., were it to be taxable, but nothing more. The same is irrelevant as section 14A is independent of the head of the income under which the tax exempt income would be otherwise liable to tax. In fact, the dividend income has been specifically provided under the statute for being assessable u/s.56, so that the fact that it arises in respect of shares held as stock-in-trade, i.e., as a part of the business income, and as such there is under the circumstances not even a change in the head of income, as would generally be the case, would be of no consequence. Succinctly put, section 14A would come into play irrespective of the head of income under which the income not forming part of the total income would be otherwise liable to be assessed. The hon'ble court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), after examining the genesis of the provision of section 14A, held that the same has been enacted to overcome the incidence of non-disallowance of expenditure - in view of the judicial precedents by the apex court - where there is a one indivisible business giving rise to taxable as well as exempt incomes. That is, as in the instant case, where the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income. Therefore, to say that section 14A would not apply as shares are held as stock-in-trade would again not hold. Reference in this context may be drawn to the decision by the Special Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169/[2008] 26 SOT 603 (Mum)(SB) , wherein this issue stands deliberated at length, being, rather, the issue under reference. The larger Bench has clarified that the expenditure in relation to the tax exempt incidental income is not immune to section 14A, which would apply irrespective of the fact that the shares are held as stock-in-trade (refer paras 24, 25 & 26).

6.3 Next, we may examine the assessee's claim that no disallowance u/s. 14A(1) would arise as no expenditure at all has been incurred in relation to the tax exempt dividend income; the same arising only incidentally to its share trading activity, i.e., on shares being retained for the time being, and being held as on the record date, yield dividend, the quantum of which is again uncertain. That is, no specific expenditure has been incurred for earning the dividend inasmuch as all the expenditure which stands incurred is for the purpose of its share trading business, so that no additional expenditure can be said to have incurred for earning dividend, and which therefore is at nil. In fact, it is this aspect of the matter that has been subject to varying understanding, i.e., between the assessees and the Revenue, resulting consequently, in varying decisions.

Toward this, without doubt a proximate cause is to be established between the expenditure and the relevant income, for it to qualify as an expenditure in relation to an income which does not form part of the total income and, consequently, liable for disallowance u/s.l4A(l). The question, therefore, boils down to determination as to whether this proximate cause would imply a relationship of only first degree, i.e., having a direct nexus as conveyed by the words 'derived from', or would it also include a broader relationship, as indicated by the words 'attributable to', and which would include within its ambit both direct as well as indirect expenditure qua the relevant income. Without doubt, the scope would stand to be gathered from the words employed by the statute, i.e., 'in relation to'. In our clear view, the said words would, and for more than one reason, signify a broader relationship, i.e., of a first as well as second degree. The first and the foremost is a choice of words itself, which are to be primarily considered for ascertaining the legislative intent. They indicate a connection or association, i.e., in the sense or meaning conveyed by the word 'relation' as used in common parlance. A strict correspondence, where so envisaged, would have been brought out by use of restrictive words, as, for example, 'derived from'. Rather, what better than to use the words 'direct expenditure' or 'direct costs' itself. The concept of the direct and indirect expenditure is fairly well understood under the Act; in fact being employed and defined in some provisions, as in Explanation to section 80-HHC. The scope of the words 'in relation to', stands also examined by the special bench in the case of Daga Capital Management (P.) Ltd. (supra). It clarified that the words have to be interpreted contextually, and that in the instant case the answer is provided by S.14A (2) itself, i.e., in accordance with the method as may be prescribed (refer para 23.6).

Secondly, in fact, the provision of section 14A would itself not be required to be enacted if only direct expenditure was contemplated for exclusion and/or disallowance. This is for the simple reason that the direct expenditure incurred for earning an income not forming part of the total income would even otherwise, i.e., even in the absence of section 14A, not stand to be allowed in computing the total income. This is because the principle of only the net (and not gross) income (from any source or activity) being liable to tax is axiomatic in tax jurisprudence. Could, one may ask, the expenditure on an activity yielding only one income which is tax-exempt, be claimed against any other income forming part of the total income, where flowing from a similar or an allied activity? For example, could the interest expenditure on agricultural inputs (seeds, fertilizers, etc.) yielding agricultural produce, which is subject to further processing to generate processed food product/s, be deducted in computing the business income on such products? Certainly not. As explained in the case of Godrej & BoyceMfg. Co. Ltd. (supra), it is only to mitigate and transcend the issues relating to attribution that the provision of section 14A has been brought in place, viz. where one composite indivisible business gives rise to more than one stream of income, of which (at least) one does not form part of the total income. Prior to insertion of section 14A, it was impermissible for the A.O. to apportion the expenditure incurred in relation to such income as between the taxable and tax exempt income. That is, the very situation that arises and confronts us in the instant case. This aspect stands amply clarified by the hon 'ble court in the said case, stating, with reference to the decision in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC) , that the theory of apportionment of expenditure between the taxable and non-taxable income has, in principle, been now widened under section 14A. The expenditure subject to disallowance u/s.14A would, therefore, mean just that, i.e., any expenditure falling u/ss. 15 to 59 of the Act, where incurred in relation to the tax-exempt income. Again, it clarifies (at pg.137, para 86(e)) that section 14A has brought in material changes, setting aside the argument made with reference to consistency and definiteness in approach of the Revenue.

The argument as being advanced in the instant case stood also raised in the case of Daga CapitalManagement (P.) Ltd. (supra); in fact, finding favour with the dissenting member of the constitution, though did not find approval of the larger Bench. The said decision stands impliedly approved in Godrej & BoyceMfg. Co. Ltd. (supra); the hon'ble court striking it down insofar only as the retrospective operation of rule 8D is concerned. In fact, as its reading would show, Rule 8D putting in place or articulating a method for estimating the expenditure that can be regarded as relating to income that does not form part of the total income, was also responsible for the hon'ble court for holding that the said rule is not retrospective. Further, what better proof of pudding than in its eating? Rule 8D, which only seeks to give effect to the provision of section 14A(1), since held as constitutionally valid by the hon'ble court, only seeks to apportion not only direct but also indirect expenditure, so that the latter also falls within the scope of the words 'in relation to' occurring in section 14A(1). Reference in this context may also be drawn to the discussion by the hon'ble court under the head lC5 The order of restoration passed by the Tribunal' at pages 134 to 137 of the judgment. Repelling the argument that investment in shares yielding tax free dividend income has been made out of the own funds, so that no interest expenditure has been incurred in relation to the dividend income, it clarified that the said fact was no longer dispositive of the matter, and that, even so, a disallowance in respect of interest would have to be made, and no presumption of investment of own funds, on ground of its sufficiency, could be drawn, distinguishing its own decision in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) ; its relevant observations (at placitum 5, pg. 135) reading as under :

"In all these decisions, the Tribunal held that no nexus had been established between borrowed funds and investments by the assessee in dividend yielding shares/income yielding mutual funds. Now assuming that this is so, the only conclusion which emerges is that the assessee had utilized its own funds for the purpose of making the investments. The fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. Even if the assessee has utilized its own funds for making investments which have resulted in income which does not form part of the total income under the Act, the expenditure which is incurred in the earning of that income would have to be disallowed. That is exactly a matter which the Assessing Officer has to determine."

We have dwelled on the matter at length, as the argument raised moves on the premise that as long as no expenditure stands specifically incurred for earning dividend, no disallowance u/s. 14A(1), where shares are held as stock-in-trade, could be made; the expenditure incurred having been so for the dominant purpose of share trading activity yielding income by way of share trading income. In other words, as long as there is no expenditure that could be said to fall u/.57(iii), no disallowance qua dividend income could be made. There is, we may clarify, no warrant for the classification of the exempt income, either u/c. IV-F or any other, or for that matter the expenditure which is to be disallowed, under any specific section. The exempt income falls under Chapter III, which precedes Chapter IV, providing for the heads of income, which is only toward classifying the income forming part of the total income under different heads of income for the purpose of computing the same. The exempt income, on the other hand, does not, therefore, enter the computation process and, accordingly, does not fall under, nor is required to be allocated to, any specific head of income. That is, the dividend income may well have been, in some circumstances, assessable as business income, to no effect or consequence. Likewise, the expenditure to be disallowed could fall under any of the sections, i.e., from section 15 to section 59. The disallowance of expenditure is governed completely by section 14A, which is a separate and complete code in itself, and as long as its ingredients are satisfied, a disallowance in its terms would follow.

6.4 We may also address the assessee's other arguments in the matter. The first one is that the dividend being incidental, no expenditure can be said to have a proximate relationship therewith; the income itself being uncertain both in terms of time and quantum. We have already examined the matter from the legal standpoint, clarifying that all the direct and indirect expenditure shall fall within the scope of the words 'in relation to', as occurring in section 14A(1). We shall now examine the matter from the factual standpoint. The expenditure, it may be appreciated, is incurred by the assessee for the purpose of its business of share trading. All the expenditure, therefore, is incurred by the assessee in the regular course of its business, and for its purposes. That represents the input, in terms of an activity/s as well as the attendant costs. The same would, therefore, stand to be deducted from the output in computing the income, be it in the form of share trading income or dividend income, which would also, though tax exempt, bear the character of business income. The dividend income, it needs to be appreciated, also arises from and forms an integral part of the said business. The net result would give us the income/loss, as the case may be, from the business. As regards the uncertainty aspect, take the example of a share bought at Rs.100 (say). Could it be said as to when it will be sold and at what rate1? The answers to both lie only in the womb of future. What is certain though is the incurring of the cost at Rs.100/-, with profit motive, and which would, therefore, need to be deducted, irrespective of the time and value for which the share is sold. It is this, a direct cost, which would therefore stand to be deducted in determining the income or loss, as the case may be, on sale, as and when it occurs. Uncertainty as to both the timing as well as the quantum of income that would finally inure, obtains, but that would not in any manner detract from the fact that expenditure by way of purchase cost stands incurred and in relation to such income or loss. Being a direct expenditure, the same would not be attributed against any other income, including the dividend income. The assessee's argument qua the uncertainty of dividend income, is, therefore, to no consequence, the same being not relevant. It is only the shares acquired in the normal course of business as a part of stock-in-trade, as are held on the record date, which yield dividend income, and which, therefore, though tax exempt, is as much a part of the business income as any other. The shares have been bought for the business, which activity has overhead costs and, further, being retained, entail holding cost as well. To say that no separate effort has been made for earning dividend income misses the point that the effort or activity is one, integral activity of purchase and holding the shares, which though generates two separate streams of income. Even so, is it necessary that every item of income should require a separate and distinct effort in its respect? Interest, where borrowed capital is employed, is incurred. But could one sayhow much income by way of share trading profit it would generate? Of course not. The dividend being received only on such shares being held as stock-in-trade, to say that no separate effort has been made and, therefore, the cost incurred in its respect is, therefore, nil, is not correct on facts. In sum, expenses are incurred during the course of and in the regular course of business, and with a view to earn income. No direct relationship or correspondence therewith, particularly for costs other than direct costs, on account of a variety of factors, hold. A proximate relationship though exists. Even for direct expenditure, the relationship (with income) cannot be said to be linear, though we are primarily here concerned with allocation of indirect expenditure. All such expenditure is deductible and, therefore, would be required to be apportioned between the taxable and non-taxable incomes where the business generates more than one income stream. Clearly, the direct expenditure would stand to be set off against the relevant income/s and the apportionment, in effect, comes into play only for indirect expenditure.

6.5 We may now come to the actual apportionment, for which rule 8D has been provided and, as held in the case of Godrej & BoyceMfg. Co. Ltd. (supra), operative w.e.f A.Y. 2008-09. At the outset, though, we may set at rest an argument by the assessee that rule 8D, which is mandatory, would not apply in a case where the shares are held as stock-in-trade. That is, even though section 14A may be applicable, rule 8D would not be inasmuch as words used in the rule, specifying the apportionment formula, is the 'value of investment', so that it would apply only where the shares are held as investment. Reliance has been placed in the matter on the decision in the case of Dy. CIT v. Gulshan Investment Co. Ltd. [2013] 142 ITD 89/31 taxmann.com 113 (Kol.) . This argument was specifically taken before the Special Bench in the case of Daga CapitalManagement (P.) Ltd. (supra), and rejected by the Tribunal, clarifying that the words used are 'value of investment' and not 'held as investment'. We may reproduce the relevant part of the order for the sake of better clarity: (pg. 233 of the report in ITD)

"23.9 The learned Counsel for the assessee…………….. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as investment."

Continuing further, with regard to the actual apportionment of costs, we find that rule 8D(2), which provides the formula for apportionment; rule 8D(1) stating the basis for the application of rule 8D itself, consists of three parts, each in relation to a separate set of expenditure. The first sub-clause (i) is in respect of direct expenditure relating to income which does not form part of the total income. The second, i.e., sub-clause (ii), concerns the interest expenditure (other than that directly attributable to any particular income or receipt), while sub-clause (iii), which is qua indirect expenditure, provides for an amount equal to one half per cent of the average value (as appearing in the books of account) of the investment, income from which does not form part of the total income. The rule is self- explanatory. There could be no quarrel with regard to the allocation of direct expenditure, which in fact states the obvious, and would in any case warrant a disallowance, i.e., even in the absence of the rule. Similarly, the part of the rule prescribing the ratio in respect of indirect expenditure (rule 8D(2)(iii)) cannot be altered on account of (say) hardship. This is as the rule prescribes the same as the ratio of indirect expenditure required to support an investment. In fact, the same, at 0.5%, is very nominal, recommending itself to an easy acceptance, eschewing the charge of being harsh. It is the third component, qua interest expenditure in rule 8D(2)(ii), which, however, presents a problem in the instant case. This is as the same, as would be readily seen, seeks to quantify the interest on the investments, income from which is not taxable, on a proportionate basis, and which though is not only understandable, but as appropriate and justifiable as a general formula could be. However, in the instant case, shares, which yield the tax exempt dividend income, interest qua which is to be disallowed, being held as stock-in-trade, also yield share trading income, which is taxable. Therefore, to say that the entire interest relatable to the average share holding is to be attributed to the tax exempt dividend income would be patently incorrect on facts. That, in fact, the shares are bought and held primarily for share trading income, further accentuates the apparent incongruity of the situation arising on the mechanical application of r. 8D(2)(n). Clearly, therefore, the amount as per rule 8D(2)(ii) would need to be scaled down, bifurcating the expenditure so arrived at as between these two incomes. As regards the ratio of such scaling down, no hard and fast rule for the purpose would hold, each fact situation being different. However, considering that the dominant objective of the share holding, which in our view should be dispositive of the matter, is the share trading income, we propose a ratio of 20% toward the tax exempt dividend income. One could argue that the percentage suggested by us is ad hoc or not scientific. We have already explained that an indirect expenditure, including interest, has no direct relation with the income, much less its quantum, allocating it on the basis of the income generated or arising would not be appropriate, and neither does rule 8D support the same. Further, that in arriving at the suggested rate of 20%, we have been guided principally by the fact that the share trading is the dominant object of the share holding. We also consider it pertinent to mention though the average share holding would be the same, the share composition, in view of the share trading activity, would vary continuously; the turnover for a year being easily in the range of 4 to 5 times the average share holding. Accordingly, in arriving at the disallowance under rule 8D, the amount as per rule 8D(2)(ii) would stand to be restricted to 20% thereof. Further, as regards the legal mandate for the same, we have again already clarified of the manifestly incorrect, if not absurd results that would otherwise follow. In fact, in our view, the language of rule 8D(2)(ii) itself provides the mandate inasmuch as it prescribes or authorizes a disallowance only qua investment income from which is not taxable, so that in limiting the amount worked out with reference to the total investment; the same also yielding taxable income, we have only sought to operationalize the said rule. It would also be appreciated that not doing so would also violate the principle of only net income (from any source) being subject to tax inasmuch as a disallowance for the total interest as per rule 8D(2)(ii) would in effect bring the share trading income to tax without deduction of the interest expenditure allocable or attributable thereto. We decide accordingly.

6.6 Before parting with the matter, we may clarify, as would also be evident from a reading of this order, that in deciding the issue under reference, we have been guided primarily by the decision by the hon'ble high court in the case of Godrej & BoyceMfg. Co. Ltd. (supra). The same being by the jurisdictional high court, is judicially binding. That answers our departure from the decisions in the case of Yatish Trading Co. (P.) Ltd. (supra) and CCI Ltd. (supra); the latter in fact having been rendered without considering the decision in the case of Godrej & BoyceMfg. Co. Ltd. (supra). We are in fact, in deciding on the applicability of s.14A as well as rule 8D, in a case where shares are held as stock-in-trade, supported by the decision in the case of Jt. CIT v. American Express Bank Ltd. [2012] 138 ITD 288/24 taxmann.com 50 (Mum.) .

7. The assessee, in the instant case, has suo motu disallowed Rs. 1,22,295/-. Its argument for non-application of s.l4A(l) is thus even otherwise infirm. The disallowance by the Revenue, per rule 8D, works to Rs. 12,23,627/-, a part of which stands to be deleted and the balance confirmed, as indicated above. Under the circumstances, the assessee gets part relief. We decide accordingly.

8. In the result, the Revenue's appeal is dismissed, and the assessee's appeal is partly allowed.

I.P.Bansal, Judicial Member - In view of my respectful disagreement with the order passed by ld. Brother I proceed to pass separate order. In my opinion the issue raised in the present appeal is no more res integra and is covered in favour of the assessee by the solitary available decision rendered by Hon'ble Karnataka High Court in the case of CCI Ltd. (supra). In the said case it has been held that no disallowance can be made under section 14A of the Income-tax Act, 1961 (the Act) in respect of dividend income received from the shares which are held as stock-in-trade. The said decision has been consistently followed by various Benches of Mumbai ITAT as follows:

The only decision rendered by Mumbai ITAT contrary to aforementioned decision is in the case of American Express Bank Ltd. (supra), in which following the Special Bench decision in the case of Daga Capital Management (P) Ltd., (supra), it has been held that disallowance u/s. 14A can be made in respect of dividend income arising out of shares held as stock-in-trade.

However, later on Mumbai Benches in the case of India Advantage Securities Ltd.,(supra) has observed that the decision of Hon'ble Karnataka High Court in the case of CCI Ltd.(supra) was directly on the issue and the same was to be followed in preference to the decision of Special Bench in the case of Daga Capital Management (P) Ltd. (supra). The relevant portion of the decision of Mumbai ITAT in the case of India Advantage Securities Ltd. (supra) is reproduced below:

"5. We have perused the records and considered the rival contentions carefully. The dispute is regarding the disallowance of expenses u/s.14A in relation to the exempt dividend income received from shares held on trading account. The A.O. disallowed the expenses holding that the provisions of section 14A were applicable even in relation to the dividend received from the trading shares. The ld. CIT(A) has however held that the provisions of section 14A will not apply to the shares held on trading account. The Revenue has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of American Express Bank Limited (supra) in which the Tribunal has held that the expenditure u/s.14A has to be disallowed even in respect of dividend income received from trading shares. The Tribunal followed the decision of the Special Bench of the Tribunal in the case of ITO v. Daga Capital Management Pvt. Ltd. (supra). The assessee in that case had relied on the judgment of Hon'ble High Court of Kerala in the case of CIT v. Smt Leena Ramachandran [2011] 339 ITR 296 to argue that the disallowance could not be made in relation to the dividend received from trading shares. The Tribunal had however, distinguished the said judgment of Hon'ble High Court of Kerala on the ground that in that case the acquisition of shares with the borrowed funds was for the purpose of controlling the company. Therefore, even though the purpose for acquiring the shares was business, the High Court had upheld the disallowance u/s.l4A of the I.T. Act. The Tribunal also noted that the High Court in that case had only observed that the interest paid on borrowed funds utilised for acquiring shares could be allowed as deduction u/s.36(l)(iii) only if shares were held as stock-in-trade. These observations were only obiter dicta and not the ratio decidendi of the judgment. The ratio decidendi of the judgment was disallowance of interest u/s.l4A which had been upheld by the Tribunal. The Tribunal therefore, did not accept the arguments based on the judgment of Hon'ble High Court of Kerala in the case of Smt. Leena Ramachandran (supra) which was not directly on the issue of disallowance of expenses in relation to the dividend income received from trading in shares.

6. However, the Hon'ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s.14A of the IT. Act in case of CCL Ltd. v. JCTT (supra). The assessee in that case was distributor of state lotteries and a dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the A.O. and confirmed by the ld. CTT(A). The Tribunal agreed with the authorities below that the expenditure relatable to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s.14A of the LT. Act. The Tribunal however, had observed that the entire broking commission was not relatable to earning of dividend income as the loan had been utilised for the purchase of shares and the profit shown from the sale of shares had been offered as business income. The Tribunal, therefore, directed the A.O. to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the Tribunal The High Court noted that 63% of shares which were purchased were sold and income derived was offered to tax as business income. The remaining 30% of shares which remained unsold had reverted to dividend income for which the assessee had not incurred any expenditure at all The High Court also observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus there being a direct judgment of a Hon'ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of Daga Capital Management P. Ltd. (supra). In fact, we note that the Tribunal in the case of Ganjam Treading Co. Ltd. (supra) has already considered this situation and held that in view of the judgment of Hon'ble High Court of Karnataka in the case of CCL Ltd. v. JCTT (supra) the disallowance of interest in relation to the dividend received from trading shares cannot be made. We, therefore, see no infirmity in the order of the ld. CTT(A) in deleting the disallowance u/s,14A computed by the A.O. in relation to the stock-in-trade. The order of the ld. CIT(A) is accordingly upheld."

2. It may be mentioned that the aforementioned decision in the case of India Advantage Securities Ltd. (supra) is dated 14/09/2012 and it has subsequently been followed consistently by the other Benches of the Mumbai ITAT. It may also be mentioned here that Mumbai Tribunal in the case of American Express Bank Ltd. (supra) did not consider the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra), which was available on the date when the appeal in the case of American Express BankLtd. (supra) was decided. Therefore, in my opinion the decision in the case of American Express BankLtd. (supra) was rightly not followed in the subsequent decisions of Mumbai ITAT. In my considered opinion, to maintain consistency with the series of abovementioned decisions of ITAT which have duly considered the decision of Special Bench in the case of Daga Capital Management (P) Ltd. (supra) and Division Bench decision in the case of American Express BankLtd. (supra), it has to be held that disallowance under section 14A cannot be made in respect of dividend income earned on shares held as stock-in-trade.

3. It may also be mentioned here that the decision of Hon*ble Bombay-High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) is not directly on the issue relating to disallowance under section 14A in a case where dividend income is earned in relation to shares which are held as stock-in-trade. As against that the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) is directly on the issue and it is a solitary decision rendered by any High Court on the issue which is relevant in the present appeal. According to well-established principle of law it is neither desirable nor permissible to pick out a word or a sentence from the judgement of a Court, divorced from the context of the question under consideration and treating it to be complete "law" declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the question which were before the Court. A decision of the Court takes its colour from the question involved in the case in which it was rendered and, while applying decision to a later case, the Courts may carefully try to ascertain true principle laid down by the decision of the Court and not to pick out words or sentences from the judgment, divorced from the context of the question being considered by the Court, to support their reasoning. Reference in this regard can be made to the decision of Hon'ble Supreme Court in the case of Commissioner Of Income Tax v. Sun Engineering Works (P) Ltd., [1992] 198 ITR 297/64 Taxman 442 . Therefore, it cannot be said that the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) is applicable to the issue raised in the present appeal as the said decision was not rendered in the context of question that whether or not disallowance u/s.14A can be made in relation to dividend income earned on the shares held on stock-in-trade.

4. In view of the above discussions, I am of the opinion that the claim of the assessee is to be Upheld and appeal filed by the assessee is allowed.

5. So far as it relates to departmental appeal I agree with the decision given by ld. Brother. Accordingly, the departmental appeal is dismissed.

THIRD MEMBER ORDER

U.B.S Bedi, Judicial Member (As a Third Member) - The aforesaid appeal was heard initially by a Division Bench. There were however differences of opinion between the Members constituting the Division Bench. On a reference made by them, the Hon'ble President has nominated me as Third Member in terms of the provisions of section 255(4) of the Income-tax Act.

2. The ld. Judicial Member has referred the following point of difference:

"Whether on the facts and in the circumstances of the case disallowance under section 14A of the I. T. Act, 1961 (the Act) can be made where dividend income has been earned on the shares held as stock-in-trade? "

3. The ld. Accountant Member however felt that the point of difference referred by the ld. Judicial Member did not represent their points of difference correctly. He therefore referred the following points of difference.

4. Cross-appeals, i.e., appeal bearing I.T.A. No. 5l63/Mum/20ll by the Department and another appeal bearing I.T.A. No. 57245/Murn/2011 by the assessee, were filed before this Tribunal for the assessment year 2008-09. A consolidated order was proposed by the ld. Accountant Member. The ld. Judicial Member agreed with the order disposing of Department's appeal bearing I.T.A. No. 5163/Mum/2011. He however differed from the view taken by the ld. Accountant Member in the assessee's appeal bearing I.T.A. No. 5724/Mum/20l l. Both of them consequently proceeded to refer their points of difference to the Hon'ble President, which have been already been stated earlier in this order.

5. On the date fixed for hearing, the ld. counsel for the assessee filed an application for adjournment on the ground that two of the partners of the CA firm, who had briefed the counsel, have gone out of station to attend Jain Festival and therefore the case may be adjourned. But when the counsel for the assessee was asked to show whether this firm of CA has been engaged by the assessee through any power of attorney having been executed in their favour, the ld. A.R. was unable to show the same. Therefore the request for adjournment was turned down in the absence of any power of attorney executed by the assessee in favour of the firm of the CAs. The ld. counsel for the assessee was given the option to proceed with his arguments. At this juncture, the ld. counsel for the assessee filed written submissions along with copies of the decisions in support of the case of the assessee and prayed that the matter may be decided accepting the view taken by the ld. Judicial Member.

6. The issue in this appeal relates to disallowance made by the AO u/s 14A read with Rule 8D of a sum of Rs. 12,23,627/-. It is the case of the assessee that it is engaged in the business of trading in shares and therefore its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. According to the assesssee, the accrual of dividend from such shares, which is exempt from tax, is merely incidental to holding of shares held as stock-in-trade and not as investment. It was submitted that no expenditure/interest can be disallowed u/s 14A by relating the same to the dividend income because no expenditure was, as a matter of fact, incurred with the view to earn dividend. The assessee also relies on the computation of disallowance under Rule 8D read with Section 14A as worked out by the A.O. in para 5.4 at page 3 of the assessment order in which the A.O. himself, according to the assessee, has noted that the assessee has not incurred any direct or indirect expenditure relating to exempt income, i.e., dividend, but has still invoked section 14A under the last clause which is a presumptive disallowance and not an actual disallowance. Supporting the view of the ld. Judicial Member, it was submitted on behalf of the assessee that the issue under appeal was covered by the decision of the Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) as also many other decisions of different Benches of this Tribunal, namely, India Advantage Securities Ltd. (supra), Ambit Securities Broking (P.) Ltd. (supra) for the assessment year 2008-09 and N D Nissar (supra), 06.02.2013 and 26.06.2011 respectively. It was also submitted that the ld. Judicial Member, while deciding the issue in favour of the assessee, has taken note of the decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), and adverse decision in Daga Capital Management (P.) Ltd. (supra) as well as in American Express Bank Ltd. (supra). It was further submitted that the ld. Judicial Member has chosen to follow the abovereferred later direct decision of the Hon'ble Karnataka High Court in CCI Ltd. (supra) in favour of the assessee. It was also clarified that the Hon'ble Bombay High Court decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), is applicable only where shares are held as investment and not where the shares are held by the assessee as stock-in-trade while Special Bench decision in the case of Daga Capital Management (P.) Ltd. (supra) is applicable where shares are held as stock-in-trade.

7. It was further submitted that it is well-settled that once the authority higher than the Tribunal has expressed an opinion on the issue before the Tribunal, it is not permissible to rely upon a contrary decision of the Tribunal including decision of a Special Bench. Reliance was placed on Tej International (P.) Ltd. v. Dy. CIT [2001] 118 Taxman 59 (Delhi)(Mag.) and the decision in the case of Commissioner Of Income-Tax, Vidarbha v. Smt. Godavari Devi Saraf [1978] 113 ITR 589 (Bom.) .

8. The assessee also relied upon the decisions in the case of Yatish Trading Co. (P.) Ltd. (supra), and Prakash K Shah & Securities (P.) Ltd. v. Addl. CIT [IT Appeal No. 3339 (Mum.) of 2010, dated 29.09.2011]. Apropos the decisions of this Tribunal in the case of Daga Capital Management (P.) Ltd. (supra) and American Express Bank Ltd. (supra) and of the Bombay High Court in Godrej Boyce Mfg. Co. Ltd. (supra) on which reliance has been placed by the Revenue, it was submitted that they were not applicable in view of the decision of the Karnataka High Court in CCI Ltd. (supra). According to the assessee, it is not open to pick out a few words or sentences from the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd., which, on the facts of the case, is not applicable. For this proposition, reliance was placed on the decisions in the case of Sun Engineering Works (P.) Ltd. (supra), Goodyear India Ltd. v. State of Haryana, [1991] 188 ITR 402 (SC), Commissioner Of Income-Tax…Applicant; v. Sudhir Jayantilal Mulji…. [1995] 214 ITR 154/[1996] 84 Taxman 205 (Bom.) , CIT v. Kamla Devi Rathi [1995] 213 ITR 177/82 Taxman 548 (Pat.) , Gujarat State Cooperative Bank Ltd. v. CIT [2001] 250 ITR 229/119 Taxman 160 (Guj.) and Commissioner Of Income-Tax v. K. Ramakrishnan. [1993] 202 ITR 997 (Ker.) .

9. The ld. D.R., in reply, submitted that Rule 8D was brought on the statute book with effect from 2008-09 and that the assessment year involved in the matter under appeal was also AY 2008-09. He submitted that decisions rendered in Yatish Trading Co. (P.) Ltd. (supra) and CCI Ltd. (supra) related to assessment years prior to AY 2008-09 and therefore were not applicable. He submitted that the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) has held that Rule 8D is mandatory from 2008-09 onwards. The assessee has suo motu disallowed Rs. 1,22,295/- as expenditure incurred in earning exempt income which has been not accepted by the Revenue as the disallowance was required to be worked out on the basis of Rule 8D. The AO therefore proceeded to make disallowance as provided under Rule 8D read with section 14A.

10. I have heard both the parties, carefully considered their submissions including the authorities referred to by them and the orders passed by both the Members constituting the Division Bench. The matter under appeal relates to AY 2008-09. It is accepted by both the parties that the assessee is a dealer in shares and that the shares were held by it as stock-in-trade. The issue under appeal is squarely covered by the principles laid down by the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) as also by the judgment of the Hon'ble Calcutta High Court in M/S. Dhanuka & Sons v. Commissioner Of Income-Tax, (Central)-1 [2011] 339 ITR 319/12 taxmann.com 227/201 Taxman 105 and by the decisions of this Tribunal in American Express BankLtd. (supra) arid Dy. CIT v. Damani Estates and Finance(P.) Ltd. [IT Appeal No. 3029 (Mum.) of 2012, dated 17-1-2013] in which the issue under appeal has been elaborately considered. It may be relevant to mention that the ld. Judicial Member himself is a party to the order passed by this Tribunal in American Express Bank Ltd., (supra) which has been followed by the ld. AM. The aforesaid judgments relate to the assessment years after the insertion of Rule 8D in the Income-tax Rules. In my considered view, the ld. AM has rightly, after careful consideration of all the relevant aspects of the case, followed the aforesaid decisions. The ld. AM has rightly observed that the judgment of the Hon'ble Karnataka High Court in CCILtd. (supra) is not a solitary judgment on the issue under appeal inasmuch as the issue under appeal has also been considered for the relevant assessment year by the Hon'ble Calcutta High Court also as also by the Division Benches of this Tribunal.

11. The assessee has mainly relied upon the decision of the Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) and other Tribunal decisions including three decisions in which CCI Ltd.'s decision has been followed. There is nothing in the said judgment of the Hon'ble Karnataka High Court to show that the judgment of the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) was brought to its notice or considered by it. On the other hand, the said judgment of the Hon'ble jurisdictional High Court has been, as rightly observed by the ld. AM, duly considered by the Hon'ble Calcutta High Court, which has subsequently been followed by the Division Benches of this Tribunal in American Express Bank Ltd. (supra) and DamaniEstates & Finance (supra).

12. In view of the foregoing, it is held that disallowance under section 14A of the I-T Act, 1961 can be made in conformity with law even in cases where dividend income has been earned on the shares held as stock-in-trade. I concur with the order passed by the ld. AM as also the reasoning given by him in support of his order. The matter shall now go back to the Division Bench for passing appropriate order in conformity with the majority opinion.

SUNIL