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II. Direct Taxes Case Laws:
1. Maxopp
Investment Ltd. Vs Commissioner of Income Tax, Civil Appeal Nos.
104-109 of 2015 and others, Date of Judgment: 12.02.2018, Supreme Court
of India
Issue:
Whether,
for the purpose of Section 14A of the Income Tax Act, 1961, the
dominant or main object of purchasing shares and securities would be a
relevant consideration in determining as to whether expenditure incurred
is ‘in relation to’ the dividend income?
Held: No
Brief Facts:
The
assessee is engaged, inter alia, in the business of finance, investment
and dealing in shares and securities. The assessee holds
shares/securities in two portfolios, viz. (a) as investment on capital
account; and, (b) as trading assets for the purpose of acquiring and
retaining control over investee group companies, particularly Max India
Ltd. Any profit/loss arising on sale of shares/securities held as
‘investment’ is returned as income under the head ‘capital gains’,
whereas profit/loss arising on sale of shares/securities held as
‘trading assets’ (i.e. held, inter alia, with the intention of
acquiring, exercising and retaining control over investee group
companies) has been regularly offered and assessed to tax as business
income under the head ‘profits and gains of business or profession’. The
assessee filed return for AY 2002-03, declaring income of
Rs.78,90,430/-No part of the interest expenditure of Rs.1,16,21,168/-
debited to the profit and loss account, to the extent relatable to
investment in shares of Max India Limited was considered disallowable
u/s 14A of the Act on the ground that shares in the said company were
acquired for the purposes of retaining controlling interest and not with
the motive of earning dividend. As such, dividend of Rs.49,90,860/-
earned on shares of Max India Ltd. was only incidental to the holding of
such shares.
Held:
The Hon’ble Apex Court held that:
i)
The dominant purpose for which investment in shares is made may not
be relevant while interpreting Section 14A. This reasoning would be
applicable in cases where shares are held as investment in the investee
company, may be for the purpose of having controlling interest therein.
Test of dominant intention as applied by the Punjab and Haryana High
Court in Pr. CIT v. State Bank of Patiala (2017) 391 ITR 218 is
discarded.
ii)
The P&H High Court in Pr. CIT v. State Bank of Patiala (supra) is
correct in pointing out that CBDT Circular No. 18/2015 dated 02-11-2015
carves out a distinction between ‘stock-in-trade’ and ‘investment’ and
provides that if the motive behind purchase and sale of shares is to
earn profit, then the same would be treated as trading profit and if the
object is to derive income by way of dividend then the profit would be
said to have accrued from investment.
iii)
Where shares are held as ‘stock-in-trade’, certain dividend is also
earned, though incidentally, which is also an income. This triggers
applicability of Section 14A which is based on the theory of
apportionment of expenditure between taxable and non-taxable income as
held in CIT Vs Walfort Share and Stock Brokers P Ltd. 326 ITR 1 (SC).
Therefore, to that extent, depending upon the facts of each case, the
expenditure incurred in acquiring those shares will have to be
apportioned.
iv)
The AO needs to record satisfaction that having regard to the kind of
the assessee, suo moto disallowance under Section 14A was not correct.
Further, while recording such a satisfaction, nature of loan taken by
the assessee for purchasing the shares/making the investment in shares
is to be examined by the AO.
v)
Rule 8D of the Rules is prospective in nature and could not have been
made applicable in respect of the Assessment Years prior to 2007 when
this Rule was inserted.
(Please click here for Judgment)
2. M/s. Abhipra Capital Ltd. Vs. DCIT (Inv.), I.T.A. No. 676/2005, Date of Decision: 15.02.2018, High Court of Delhi
Issue:
Whether
members’ fee of Rs.5 Lacs paid by the appellant to the National Stock
Exchange was in the nature of a capital expenditure?
Held: Yes
Brief facts:
The
appellant assessee was incorporated on 28th September, 1994 deals in
shares in stock markets, merchant banking and other financial services.
The appellant had paid Rs.5,00,000/- to the National Stock Exchange in
A.Y. 1996-97 as a non-adjustable deposit for acquisition of membership.
The appellant had treated the payment of Rs.5,00,000/- as revenue
expenditure, which was not accepted by the Assessing Officer, who held
that the payment was non-recurring in nature and had given rise to an
enduring benefit, as it was the initial payment for membership of
National Stock Exchange, without which the applicant could not be given
membership. So, it would qualify as capital expenditure. He held that
the aforesaid expenditure could be allowed as a deduction equal to
1/10th of the total expenditure, in 10 equal annual installments, and
accordingly, Rs. 50,000/- was allowed as deduction and the balance
amount of Rs.4,50,000/- was disallowed and added to the computation of
income. The CIT(A) has deleted the addition on the ground that the
appellant assessee had completed first year of business in the year
ending 31st March, 1995, i.e. A.Y.1995- 96, and accordingly the year in
question, i.e. 1996-97, was the second year of business. It was held
that expenditure was for expansion of business in the same line. Rs.
5,00,000/- was like subscription fee paid to the National Stock
Exchange, which should not be treated as capital expenditure. The
hon’ble ITAT reversed the order of CIT(A). The appellant assessee, being
aggrieved, filed an appeal before the Hon’ble High Court.
Held:
The
Hon’ble Court held that a fixed sum of Rs.5,00,000/- was a one time
payment and is not an annual subscription fee without payment of which,
the appellant-assessee could not have acquired membership of NSE. On
acquisition of membership, the appellant acquired right to trade in
shares and act as a broker. It enabled the assessee to acquire an asset
to earn income in that year and in future. Membership brought into
existence an advantage for all times. Also, Rs 5,00,000/- represents
money paid to procure a permanent right in the form of a license to
carry on trade. Therefore, it was expenditure to bring business into
existence. This expenditure would not be revenue but capital in nature.
Further, the expenditure made was for acquiring and bringing into
existence an asset or advantage of enduring benefit and not for running
business to produce more profits. The expenditure incurred was for
acquisition of property and rights of a permanent character. The
enduring advantage was in the capital field.
Hence, the appeal was held against the assessee and in favour of the revenue.
(Please click here for Judgment)
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