Rule 8D – Applicability to shares held trading vs investment banking controlling interest or as stock-in-trade: The argument that S. Rule 8D will not apply if the “dominant intention” of the assessee was not to earn dividends but to gain control of the company or to hold as stock-in-trade is not acceptable. 14A applies irrespective of whether the shares are held to gain control or as stock-in-trade. However, incidentally income was also generated in the form of dividends as well.
The holding of investment in group companies representing controlling interest, amounts to carrying on business, as held in thevarious cases. Section 56 of the Act, the nature of dividend income has to be ascertained on the facts of the case. Basing their case on the aforesaid principles, it was argued that when the shares were acquired, as part of promoter holding, for the purpose of acquiring controlling interest in the company, the dominant object is to keep control over the management of the company and not to earn the dividend from investment in shares. Section 14A would not be attracted.
Axiomatically, it is that expenditure alone which has been incurred in relation to the income33which is includible in total income that has to be disallowed. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on theone hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. We have two scenarios in these sets of appeals.
In one group of cases the main purpose for investing in shares was to gain control over the investee company. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply.
The principle of apportionment was made available only where the business was divisible. Act, 2001 but also made it retrospective, i. 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001.