S. 14A applies Irrespective of whether Shares are held as Stock-in-Trade or to Gain Control: SC [Read Judgment]

The Supreme Court in the case of Maxopp Investment Ltd. versus Commissioner of Income Tax, New Delhi, ruled that the fact that whether the shares are held to gain control or as stock in trade is immaterial to decide the application of section 14A of the Income Tax Act.

Justice A.K. Sikri explained the provision of Section 14 under the Chapter IV of the Income Tax Act, 1961 and noted that any expenditure incurred in earning that income which does not form part of the total income, such expenditure shall also not be allowed as deduction.

Assessee- appellant is in the business of finance, investment and dealing in shares and securities. It holds shares in two portfolios as the investment in the capital account and as the trading asset for the purpose of acquiring and retaining of control over investee group.

The sale of shares results profit or loss on investment is returned as income under the head capital gain whereas profit or loss on sale of securities held as trading assets intention of acquiring, exercising and retaining control over investee has been regularly offered and assessed to tax as business income under the head ‘profits and gains of business or profession’.

Consistent with this treatment, the appellant filed its return of income declaring Rs.78,90,430/-. interest expenditure debited in P&L account which is relatable to the investment of shares in Max India Pvt Ltd yields tax-free dividend income was disallowed under section 14A on the ground that shares were acquired for gaining control, not with the motive of earning the dividend.

Therefore, AO worked out the disallowance under Section 14A of the Act and on appeal commissioner of Income Tax (Appeals) upheld the order of the AO. Consequently Appellant approached on further appeal before ITAT, the bench pressed the decision of Special Bench of the ITAT in the case of Daga Capital Management (Private) Ltd wherein dismissed the appeal of Appellant, held that investment in shares amounted to gain control hasn’t any motive of business and, therefore, interest expense incurred for acquiring shares in group companies was hit by the provisions of Section 14A of the Act. By following the same ITAT held that the provisions of Section 14A of the Act were held to be attracted to the facts of the case.

Thereafter Assessee preferred an appeal under Section 260A of the Act to the High Court. The Delhi High court ruled that proportionate disallowance of the expenditure incurred by the assessee is maintained.

The Court pressed subsection (2) of 14A which empowers the AO to detach from the provision by invoking Rule 8D of the Income Tax Rules which has a retrospective effect prescribes a method and also relied on the judgment of Delhi High Court in the case of Maxopp Investment Ltd. and that of Punjab and Haryana High Court in State Bank of Patiala.

Finally, the Court observed that “Here, the case is decided in favor of the assessee also on the ground that 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. This view has already been upheld by this Court in Civil Appeal No. 2165 of 2012 (Commissioner of Income Tax, Mumbai v. M/s. Essar Teleholdings Ltd. through its Manager), pronounced on January 31, 2018, that the said Rule is prospective in nature. On this ground alone, these appeals of the Revenue fail as it is not necessary to go into the other issues”.