Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Disallowance U/s. 14A Can Be Made, If No Tax Free Income Earned By The Assessee?

QUERY: What is the implication of section 14A vis-a vis holding of shares, if

(i) No tax free dividend is received at all during the year.

(ii) Shares are held as stock-in-trade

(iii) Shares are held solely and exclusively as a promoter and for controlling interest.

(iv) The assessee had obtained loan but the funds are mixed.
ANSWER: (i) In Shankar Chemicals Works vs. DCIT [47 SOT 121], the Ahmedabad Tribunal has held that, if any expenditure has been incurred for earning exempt income, same has to be disallowed even if there is no actual earning of any exempt income. If interest bearing borrowed funds are utilised for purpose of investment in shares and there is no receipt of dividend income or if there is only meagre dividend income, even then whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. However, the Chennai Tribunal in Siva Industries & Holding Ltd. vs. ACIT [46 SOT (12)] has held, that, once there is no claim of income which does not form part of the total income under the Act, there cannot be any disallowance in relation to any investment which may or may not give rise to any income which does not form part of the total income. In the instant case, it was noticed that none of the investments made by the assessee had generated any dividend income which had been claimed by the assessee as not to form part of the total income. Since the assessee did not have any income which formed part of the total income nor had the assessee made such a claim, no disallowance under section 14A could be made. Similar view has been expressed by the Punjab and Haryana High Court in CIT v. Lakhani Marketing Inc. (49 taxmann.com 257) and Bombay High Court in Godrej and Boyce Mfg. Ltd. v. DCIT (328 ITR 81).

(ii) Yes, The Special Bench in Daga Capital Management (P) Ltd. [312 ITR (AT) 1 (Mum)] has dealt with mechanism of calculation of disallowance under section 14A which is applicable to all types of assessees, whether they hold shares as investment or stock-in-trade. [(See ITO vs. Sanatan Textiles Ltd. (2010) 4 ITR (Trib) 593 (Mum)].

(iii) Yes, In Maxopp Investment Ltd. vs. CIT [203 Taxman 364 (Delhi)], the Tribunal has held that any expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A in as much as the dividend received on such shares does not form part of the total income.

(iv) In CIT vs. Catholic Syrian Bank Ltd. [237 ITR 164 (Ker)], it has been observed that where the assessee had invested in bonds, shares and securities which yielded tax free dividend and interest to assessee but had not maintained separate accounts for such investments, proportionate disallowance made by the Assessing Officer was justified. [See also CIT vs. Dhanalakshmy Bank Ltd. (10 Taxmann.com 213 (Ker)].

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