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Tax on Dividend Income
[Submitted by CA. Dev Kumar Kothari,
B.Com., Grad.CWA, ACS, FCA,
Kolkata, West Bengal]
May 7, 2007
SECTION 14A - DIVIDEND IS PART OF 'TOTAL INCOME' UNDER THE ACT- so
section 14A is not applicable. An analysis in context of entire enactment.
Summary:
Tax on dividend is paid either by the company or the shareholder. In
old scheme tax was paid by shareholders, wherein a large portion of
dividend was exempt from tax. The tax on distribution made all dividends
taxable and tax collected from companies is finally collected tax. As a
consequence to tax on distribution exemption for dividend is granted in
computation of shareholders. Therefore, it is wrong to say that dividend
referred to in section 115 O is not part of taxable income, in the overall
context of tax on income or 'total income' in the Act. Furthermore, shares
are purchased to earn gains by way of appreciation and dividend is merely
incidental. Average yield by way of dividend is about 1%, therefore, no
one will invest in shares merely to receive dividend. Merely because
dividend is earned and it is excluded from income of shareholder that too
because tax is already paid by the company, section 14A should not be
applied to disallow interest and other expenses incurred in connection
with purchasing and holding shares and units of mutual funds, which is
also a systematic and organized activity and share are capital assets of
such business activity just like land, building , furniture and plant and
machinery used in any business sale of which also results profit or gains
or loss under the head 'capital gains'.
Purpose of the Income -tax Act, 1961:
The purpose of the Income-tax, Act 1961 is basically to provide for
provisions relating to determination of taxable income for levy of tax as
may be charged as per any Central Enactment (usually the annual Finance
Act), collection of tax which may be so charged, assessments, appeals,
revisions, recovery, and other related issues for administration of income
tax levy and collection. Though in the preamble it is stated that it is an
Act to consolidate and amend the law relating to income-tax and super tax.
Total income:
In the Income-tax Act, 1961 the expression 'total income' is used to
mean 'taxable income' or 'chargeable income'. In section 14A also the
expression ' which does not form part of total income under this Act' can
mean only such income on which no tax at all is chargeable under the Act
for example, agricultural income, or interest on some tax free bonds etc.
and not such income which are taxed in some other manner or in hands of
some other person. Once income tax is levied in any manner under the Act,
it cannot be said that 'it is does not form part of total income under the
Act' , though it may not be included in particular hands.
Tax on dividend:
As per section 115-O(4), the tax paid by the company at the time of
distribution of profits, shall be treated as the final payment of tax in
respect of the amount of dividend declared, distributed or paid and no
further credit of such tax shall be claimed by the company or by any other
person in respect of the amount of tax so paid.
As per section 115-O (5) no deduction under any other provision of the Act
shall be allowed to the company or a shareholder in respect of the amount
which has been charged to tax under sub-section (1) and the amount of tax
paid thereon.
Similarly, as per section 115 R(4), no deduction under any other provision
of the Act, shall be allowed to the UTI or to a mutual find in respect of
the income distributed to unit holders which has been charged to tax under
sub-section (1) or sub-section (2) of section 115R.
From these provisions it is clear that the dividend paid by the
company, UTI or Mutual Fund which is subjected to tax at the time of
distribution is not to be allowed as an expenditure to the company or the
mutual find and the tax paid by the company, UTI or mutual fund as the
case may be is treated as final payment of tax for which no further credit
or refund can be claimed or allowed to any one.
Exemption under section 10:
Vide section 10 (34) any income by way of dividends referred to in section
115 O is exempted.
Vide section 10 (35) any income received from mutual funds as income
distributed by or on behalf of the fund is considered exempt in hands of
the unit holder. However, any gain arising on transfer of the unit is not
exempt.
Therefore, we find that the provisions imposing tax on distribution of
profits by companies or mutual funds and exemption of corresponding
receipts in hands of share holders or unit holders are directly linked and
closely related provisions. Therefore, it would be wrong to read section
10 (34) and 10 (35) in isolation of section 115O and 115R.
The Income-tax Act is a self-contained code and entire enactment
needs to be considered:
The Income-tax Act, 1961 is a self-contained code and all the provisions
of the Act and particularly the provisions which are related and
consequential to each other needs to be read together and considered as
such in a harmonious manner. One provision cannot be read in isolation
with other provisions. Though some provisions may have limited application
to a particular head of income or to a particular purpose but in that case
it is clearly mentioned expressly or it may be implied by the provisions.
So far the provisions relating to tax on distribution of income as
contained in Chapter XIID and XIIE relating to tax on distribution of
profit by companies and mutual funds respectively are concerned, it is
found that the Chapters were inserted by the Finance Act, 1997 w.e.f.
01.06.97 and finance Act, 1999 w.e.f. 01.06.1999 respectively.
Correspondingly S. 10 was amended by insertion of subsection 33 to provide
for exemption of dividend referred to in section 115-O and then amended to
income distributed by mutual funds.
Thereafter an amendment was brought and tax payable by companies on
distributed profit was withdrawn and simultaneously exemption u/s 10 was
also withdrawn. Again these sections were amended w.e.f. from 1.4.2003 and
tax on distributed profit was again imposed and simultaneously exemption
u/s 10 was again reintroduced. From the history of tax on distributed
income and exemption of dividend under section 10 we can observe that
the exemption u/s 10 was granted only when tax was levied at the time of
distribution on the companies and the mutual funds.
Thus, it is clear that tax has all along been charged on dividend, it
is only for the simplicity and easiness to collect that tax has been
levied at the time of distribution and made exempt in hands of recipients
of dividend. The implicit purpose is to tax entire amount of dividend
distributed by companies and not to grant exemption to any dividend.
By tax on distribution entire dividend has been made taxable
When there was no tax u/s 115 O and 115R at the time of distribution
the following categories of dividend declared was fully or partially
exempted:-
- In hands of individuals and Hindu undivided families there was
exemption due to basic exemption.
- In case of individuals and Hindu undivided families there was also
exemption due to deduction provided u/s 80L.
- Dividend paid to the companies was also partially exempted by
application of section 80M.
- Dividend paid to registered charitable institutions, other exempted
institutes , mutual funds etc. whose income was exempt u/s 10 or 11 was
also exempted.
- Dividend declared in favor of the Government was exempt.
- Dividend earned by assesses also became non-taxable because of
reason that the assesses could set off their business loss,
depreciation, loss under other sources etc. against dividend income.
Therefore, it can be seen that prior to tax on distribution a larger
portion of dividend declared and distributed was exempted and no tax was
paid thereon due to some or other exemptions or applicability of set off
of losses.
No exemption on any distribution
As per provisions of section 115-0 and 115-R, there is no exemption on
dividend declared, distributed and paid. The dividend is also not allowed
as expenditure. The tax paid is also not allowed as expenditure. The tax
collected is final tax collected. Therefore, entire amount of dividend
declared, distributed or paid by companies or mutual find is subjected to
compulsory and final tax payment.
Dividend is not exempt under Income-tax Act
In view of above discussion we find that although dividend is not included
in the income of shareholder because of provisions of section 10 but in
fact, the exemption is only because tax is already paid on such dividend
and such payment is final. Earlier when there was no exemption u/s 10 tax
was deducted at source at the time of payment of dividend and the records
shows that a larger part of such TDS was refunded.
Simultaneous amendments in section 115-O, 115-R , Section 80L, 80M and
section 10 clearly indicate that exemption u/s 10 exists only as a matter
of scheme of collection of tax on entire dividend and not as a scheme
to grant exemption. The tax is levied and collected in one or other
form and manner. Therefore, it cannot be said that dividend covered by
section 115-O or 115-R is not taxable under the Act. Dividend is
definitely taxable and tax is collected in bulk at the stage of
distribution instead of from shareholders or unit holders.
The provision can be compared with provisions of clubbing of income.
Suppose an item of income is included in hands of parent or spouse or
other relatives as per provisions of section 64. The same item of income
cannot be included in the income of person to whom the income belongs (
minor child , spouse or relative as the case may be). Does it mean that
the income earned by minor is not taxed merely because it is not included
in income of minor but income of parent? The obvious answer is No. the
income has born tax in hands of parent, therefore, it is a taxable income
in the overall context of the Act.
Similarly tax is paid on dividend by companies or mutual fund as per
the relevant provisions. it does not mean that the dividend is not taxable
or that it has not been included in 'total income', for levy of tax.
Tax under income tax Act:
Under the provisions of the income Tax Act, tax is imposed on income. The
purpose of imposing tax is achieved even when tax is collected at the time
of distribution of income by companies or mutual funds. Therefore, there
is no gain saying that dividend is exempt under the income Tax Act, 1961.
If it is argued that tax on distribution of dividend is not a tax on
income earned by way of dividend by shareholders or unit holders, then it
is felt that the provisions may be ultravirse the purpose of the
Income-tax Act, as well as our constitution. By imposing tax at the stage
of distribution itself, it is assumed that there is element of taxable
income in the dividend distributed, and to keep a balanced overall tax
rate for collection relatively lower rate of tax has been imposed on
distributed income.
Section 14A vis-à-vis dividend
Section 14A was inserted by the Finance Act, 2001 with retrospective
effect from 1.4.1962 and a proviso thereto was inserted by the Finance
Act, 2002 with retrospective effect from 11.5.2001. The section as stands
now reads as follows:-
Expenditure incurred in relation to income not includible in total
income.
14A. For the purposes of computing the total income under this Chapter,
no deduction shall be allowed in respect of expenditure incurred by the
assessee in relation to income which does not form part of the total
income under this Act:
[Provided that nothing contained in this section shall empower the
Assessing Officer either to reassess under section 147 or pass an order
enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for any
assessment year beginning on or before the lst day of April, 2001.]
A reading of the above section clearly shows that this provision will
apply only when the particular expenditure is in relation to only such
types of income, which do not form part of total income under all
provisions of the Act. The expression 'total income' is used in the
context of 'taxable income'. Once we find that dividend suffers a payment
of tax, it cannot be said that dividend is an exempt income and does not
form part of the total income under the whole Act.
The expression 'total income', has been used in the context of taxable
income. In Section 14A it is not stated that the expenses will not be
allowed when any income does not form part of the total income of an
assessee. Rather the words used are 'does not form part of the total
income under this Act'. Thus, the clear meaning is that when the income is
not exigible to tax under the Act in any manner, then only section 14A
would apply.
Merely because dividend is not included in income of the person who
receivd it does not mean that the dividend is not included in total income
( meaning chargeable or taxable income) under the Act.
Thus, section 14A can be applied in relation to only such income which
does not attract tax liability in any manner under the Act. For example,
agricultural income is one such income which cannot be taxed under the
income tax Act by the Central Government. Or some other income which does
not attract tax in hands of any person - the recipient or the payer can
only be considered to be subject to section 14A.
Merely because the dividend is exempted u/s 10 while computing income
of share holder it cannot be said that section 14A would be applicable.
Section 10 cannot be read in isolation of other special provisions under
which tax is imposed and collected on dividend.
Therefore, it appears that in the context of such income which bears
tax at the time of distribution, the context require that the expression
total income as used in section 14A should not be confined to the total
income of an assessee. Rather, it must be looked from the point of view of
income which has been subjected to tax under any provision of the Act, and
therefore, the section needs to be interpreted in a manner to restrict its
applicability in respect of only such income which is not at all taxable
at any stage and no where under the Income Tax Act.
Section 4:
In this regard section 4, which is a charging section, is relevant.
According to S.4 tax is charged where any Central Act enacts that income
tax shall be charged for any assessment year at any rate ---. Now tax on
distributed profits are also charged as per Central Act, tax on
shareholders who receive dividend is also charged as per such Central Act.
In case of distributed profits the basis of tax is the amount of dividend
distributed. Therefore, for this purpose and in this context it can be
said without any doubt that dividend distributed is the 'total income' or
'chargeable income' or 'taxable income' on which tax is paid under section
115O or 115R, as the case may be.
This factual position also becomes clear when we notice that the rate
of tax on dividend paid to different types of assesses is different. This
is because the average rate of tax on different types of assesses is
different. Therefore, the rate of tax on distributed profits has been kept
low in case of individuals and HUF who enjoys basic exemption and lower
rate as per slab of income. On other hand rate of tax is higher in case of
companies and firms who do not enjoy any basic exemption and there is flat
rate of tax on their income.
Dividend as compared to other exempted incomes:
There are several other types of income which are exempted under the
Income Tax Act, from being included in total income at any stage and in
any hand. Most of incomes prescribed in Chapter III are such which are not
at all taxed at any stage and in any hand.
Apparently cases of tax in hands of other persons are income received
from HUF and firm. The income may be taxable in hands of HUF or it may be
exempt due to basic exemption in hands of HUF, the income received by
member will be exempt (except when S. 64(2) is applicable), share in
profit of firm which is assessed in hands of firm is exempt in hands of
partner.
Thus applying corollary of HUF and Firm it can be said that dividend
which bears tax at the stage of distribution itself is not exempt while
computing total income under the Act though it may not be included in
income of recipient.
Shareholding is not only for earning dividend
On a long term analysis of price earning ratio of the overall share
market capitalization, we find that earning by way of dividend is hardly
1.5 to 2%. There are large number of companies which do not declare any
dividend. If we consider average market capitalization at BSE and total
amount of dividend declared by all companies, the yield by way dividend
will not be more than 1%. Therefore, it is clear that shares are not
purchased merely to earn the dividend, rather, the purpose of earning
dividend though implicit, comes much after in priority. The purpose of
investment in shares can be given priority as follows:-
- To diversify portfolio of investment in liquid, appreciating assets
with a greater element of risk. And to diversify in different sectors of
economy, different industries and different companies thereby to reduce
risk and have a balance portfolio.
- To earn capital gains by way of short term to long term capital
gains;
- To have a controlling stake in companies and to manage companies
(this will apply to investment as promoter or controller of company);
- To earn by taking advantages of cyclical movement in profitability
of industry.
- To earn by way of intra day trading as a hedging activity and
keeping portfolio active and performing.
- To earn dividend.
Thus we find that earning of dividend is last in priority. In fact many
wise investors find it more advantageous to sell shares and units cum
dividend to fetch higher price. In many cases it is noticed that while
selling shares cum dividend, one may realize many times more by way of
price than dividend. A share sold cum dividend of Rs. 5/- at a price of
say Rs.125/- may be available at a price of Rs.100-110 or even lower after
some days when it becomes ex dividend. Thus, by sacrificing dividend of
Rs.5/- one may earn Rs.10-25 or more extra by way of price realization by
selling share cum dividend. This is because:
- Before the date of book closure or record date there is usually
short supply and
Extra demand for shares so price is increased.
- After book closure and record date, there is selling pressure and
supply increase.
- Some investors have fancy of earning dividend as they consider it
tax free.
Taxable earnings in hands of share holders:
Even in hands of share or unit holders the earnings by way of share
trading as trading profit or speculative profit is taxable. The profit by
way of capital gains is also taxable by way of income tax and now by way
of Security Transaction Tax and / or Income tax. Similarly, profits
derived by managing or controlling companies is also taxable as income
form business or profession or other sources. The dividend is also taxable
may be in the hands of the recipient or in the hands of dividend
distributor. Therefore, it can be said that any direct or indirect income
derived by purchasing, holding, transferring shares in companies or units
of mutual fund is taxable in one or other form under the Income Tax Act ,
and it is wrong to say that dividend is exempt all together.
Distribution policy:
It is worth to note that good companies devise dividend policy in such
a manner as to maximize shareholders wealth. Where it is considered that
the company can deploy funds in more effective manner and by deployment of
Funds Company can increase shareholders worth, the company may not pay
dividend or pay lower dividend. In most of cases profits are ploughed back
( fully or partly) and it forms part of shareholders funds. Increased
shareholders funds added advantages of improving book value per share and
earning per share. When company's share quote at substantially higher
price to book value ratio and at higher price earning ratio, the share
price may improves much higher by such retention.
For a simple example, suppose a company's share is quoted at price to
book value ratio of 10.
The present book value is Rs.30 including to date profits.
The present market price is Rs. 30 X 10 = 300
Suppose the company declare dividend of Rs. 3 per share in that case
book value per share shall come down to Rs.27 and therefore revised market
price of share would be 27 X 10 = 270/-
In this case the shareholder will loose Rs. 30 in market price per
share and gain Rs.3 by way of dividend, therefore there would be a loss of
Rs.27 to the shareholder. In such a situation it may be preferable for the
company and its shareholders to retain maximum profits.
However, for maintaining goodwill and market price of shares it is also
necessary to pay some regular dividend. Market price of shares is based on
number of factors including book value, earning per share, dividend per
share and profits retained per share etc. which reflects current scenario
and past performance. Furthermore it is also dependent on future prospects
of the company. Therefore, dividend policy is also based on all these
factors. The same being very complex, and not very relevant to reach the
desired point, is not discussed in this write-up.
Long term capital gain and security transaction tax (STT)
With effect from 1.10.04, security transaction tax has been imposed and
when a transfer of share or unit of mutual fund bears STT then only
exemption in case of long term capital gains is allowed. Therefore, it is
clear that the STT is in lieu of long term capital gain tax on shares and
units. The scheme of STT is also designed to tax all long term capital
gains and to have an easy method of collection and there is no scope for
any refund. Whereas when long term capital gain tax was imposed it was
found that in many cases no tax was payable because of indexed cost being
more than sale value, brought forward long term capital loss or short term
capital loss, set off of losses under other heads of income etc. Whereas
when STT is levied the tax is collected whether there is a profit or a
loss in the transaction. Therefore, in the context of overall taxation of
long term capital gains also it can be said that the long term capital
gains are not fully exempt from tax though it may be exempt from
Income-tax but every purchase and sale is subject to STT.
Where transaction is not subject to STT e.g in case of off market
deals, STT is not chargeable and the transaction is subject to normal
provisions of tax on capital gains.
For an example we can consider sale of quoted shares sold through
private negotiations on 'spot delivery' basis and not through stock
exchange. In such case the sale will not be subject to STT and the gains
arising will also not be exempt. Therefore, it is clear case that STT is
in lieu of income tax.
Shares purchased as stock-in-trade
In case of a trader in share he purchases shares for the purpose of
trading. Therefore, capital is borrowed for the purpose of share business
and it is capital borrowed for the purpose of business and therefore,
interest payable on such borrowed capital shall be allowable u/s 36 and
such interest cannot be disallowed by applying section 14A although
dividend earned, if any, will be exempt in hands of recipient.
Shares purchased for controlling companies
Shares purchased by persons as promoter, manager or controller of
companies is acquisition of shares for the purpose of business and
profession of promoting, managing or controlling companies. Therefore,
interest payable on capital borrowed for purchasing shares by such persons
will be allowable and section 14A cannot be applied though dividend
received may not be taxable, if the company has paid tax under section 115
O.
In this regard we can consider another issue of deemed dividend under
section 2(22)(e), by way of loan , advance etc. such dividend is not
considered dividend for the purpose of section 115 O vide explanation
given at the end of the Chapter XII D. Therefore, such dividend is not a
dividend referred to in section 115 O. accordingly the shareholder is
liable to include such dividend in his total income and pay tax.
Shares purchased to derive capital gains
When shares are purchased as an investor the immediate purpose is to
gain out of fluctuation in price of shares over short to long period.
Short term capital gains are taxable. While purchasing shares, one cannot
envisage the period of holding if the price appreciates the investor will
not wait for share becoming a long term capital asset. From the statistics
of high and low price during 52 weeks period it is apparent that the price
may go up several times or may come down several times. Therefore, when
share is purchased it cannot be assumed that share is purchased to gain
long-term capital gain only. Therefore, even purchase of share by
investors is basically to earn capital gains mostly, within short term
which is taxable and in case of long term capital gain also there is tax
by way of STT or if the shares are not sold through stock exchange then
also long term capital gain tax will be payable. In case of unquoted
shares the sale through stock exchange and the levy of STT is out of
question and therefore in that case long term capital gain will be
taxable. Furthermore, the future is contingent the shares, which are
quoted and traded on a stock exchange today, may not be treated or remain
quoted at the stock exchange in long term. The cases of de listing of
companies, suspension of trading of shares is not uncommon. Many shares
which were highly traded sometimes ago are now suspended, de listed or not
traded for some other reason. Therefore, it cannot be assumed that the
shares are purchased only to derive income by way of dividend and long
term capital gain, which are exempt u/s 10.
Therefore, for whatever purpose share may be purchased it cannot be said
that shares were purchased to earn tax-free income. No wise man will
purchase shares to earn 1- 2% of investment by way of dividend. If the
capital is borrowed to purchase shares, it cannot be said that interest is
an expenditure incurred to earn income by way of dividend, which is not
included in total income under the Act and which has not suffered tax. The
commitment of interest begun at the time of borrowing and not when a
dividend is earned. Similarly the opportunity to earn by deploying funds
in other manner is lost once money is invested in shares. Payment of
interest or loss of other earnings take place even when on dividend is
earned. Therefore, it cannot be said that interest is expenditure to earn
dividend.
Even if it is so said, it cannot be said that the dividend is not
included in 'total income' / chargeable income or taxable income under the
Act, when we find that tax is finally and compulsorily collected at the
time of distribution.
A possible way out
As discussed earlier shares may be purchased as a share-trader in that
case capital borrowed for purchasing shares shall be for the purpose of
business and interest will be allowable. Even purchase of shares by
investors is basically to gain out of capital gains - which are taxable.
On change of circumstances, if required, stock-in-trade of share may be
transferred to investment account and held as capital asset. Considering
legal provision that a holding period of one year makes shares and units
as long-term capital asset a reasonable period of one month can be
considered to change the character of shares or units to investment
account from trading account. Therefore, a policy decision may be taken
that if any share or unit is held for more than 30 days, then it will be
consider as an investment - a capital asset. In such a case interest paid
on capital borrowed at the time of purchasing of the shares or units as
stock- in- trade will be allowable though subsequently such shares or
units may be treated as capital asset.
Investment in shares ,units , bonds, debentures, saving certificates and
even fixed deposits is a systematic and organized activity. This also
requires organized and specialized actions. Services of experts are
available for such business also. Thus, the investment activity is also a
business or professional activity.
Decisions of ITAT :
In ACIT vs. Dakshes S. Shah decided by Mumbai Bench ITAT 272 ITR (AT)
131 the assessee had made investment in shares by obtaining loans in
earlier years. The Assessing Officer disallowed the interest of
Rs.4,97,090/- payable to an investment company for the assessment year
1998-99 on the ground that the dividend income had been excluded from the
computation of taxable income by virtue of its being exempt from tax under
the provisions of section 10(33) read with section 115-O of the Income-tax
Act, 1961. Since the dividend income was not chargeable under the head
"Income from other sources" the Assessing Officer disallowed the interest
expenditure referable to the investment under section 57 of the Act.
However, the Commissioner (Appeals) allowed the interest payable amounting
to Rs.4,97,090/-. On appeal by revenue before the ITAT, the Tribunal while
allowing appeal held, that dividend income was exempt from tax by virtue
of the provisions of section 10(33). Section 14A expressly prohibits
allowance of such claims. If the intention of the Legislature was only to
collect the tax from the recipients of the dividend through the medium of
the company, then there should have been a provision whereby the company
should not be made to pay tax in respect of that part of the dividend,
which was attributable to the assessee who has no taxable income. In the
absence of such a provision it could not be said that the tax was
collected from the company though the Legislature intended to collect tax
from the recipients of the dividends. Section 14A is couched in specific
terms which did not leave any room for doubt or dispute with regard to the
fact that in order to claim deduction of expenditure in relation to a
particular income, the assessee has to show that the said income forms
part of the total income. Hence, the assessee was not entitled to claim
deduction of the interest referable to the amount borrowed for the purpose
of investment in shares.
The Revenue filed appeal before the Tribunal and contended that in view
of section 14A inserted by the Finance Act, 2001 with retrospective effect
from 1.4.62 interest payment cannot be allowed. The Tribunal considered
the provisions of section 14A, the memorandum explaining the provisions in
the Finance Act, 2001 which read as follows:-
"No deduction for expenditure incurred in respect of exempt income
against taxable income.
Certain incomes are not includible while computing the total income as
these are exempt under various provisions of the Act. There have been
cases where deductions have been claimed in respect of such exempt
income. This in effect means that the tax incentive given by way of
exemptions to certain categories of income is being used to reduce also
the tax payable on the non-exempt income by debiting the expenses
incurred to earn the exempt income against taxable income. This is
against the basic principles of taxation whereby only the net income,
i.e., gross income minus the expenditure, is taxed. On the same analogy,
the exemption is also in respect of the net income. Expenses incurred
can be allowed only to the extent they are relatable to the earning of
taxable income."
Thereafter the Tribunal held as follows:-
Section 14A is part of Chapter IV. In other words, it applies to
expenditure referable to any head of income referred to in section 14 of
the Act, 1961. The contention of learned counsel is that dividend income
is not exempt from tax but the Legislature intended to collect the tax
indirectly by deducting tax in the hands of the company. I am unable to
appreciate the contention of the assessee. There are lakhs of shareholders
whose income falls below the taxable limit and in their case there may not
be any assessable income which is liable to tax even if dividend income is
held to be taxable in the hands of such assesses. Hence, if the intention
of the Legislature is only to collect the tax from the recipients of the
dividend through the medium of the company, then there should have been a
provision whereby the company should not be made to pay tax in respect of
that part of dividend, which is attributable to assesses who has no
taxable income. In the absence of such a provision it cannot be said that
the tax is collected from the company though the Legislature intended to
collect tax from the recipients of the dividends. At any rate, section 14A
is couched in specific terms which does not leave any room for doubt or
dispute with regard to the fact that in order to claim deduction of
expenditure in relation to a particular income, the assessee has to show
that the said income forms part of the total income. Thus, looking at from
any angle, I am of the opinion that the assessee is not entitled to claim
deduction of the interest referable to the amount borrowed for the purpose
of investment in shares. No doubt, learned counsel raised an alternative
plea that the shares as and when they are sold, the income/loss is
assessable to tax under the head "capital gains" in which event,
expenditure has to be allowed as deduction. However, it may be noticed
that the assessee has not sold any shares till date and so far as this
year is concerned, the contention of the assessee is academic. The case
laws cited by the learned Authorised Representative are distinguishable on
facts, particularly in the light of section 14A of the Income-tax Act,
1961.
On consideration of the above, the order of the Commissioner of
Income-tax (Appeals), on this issue, was reversed and the order of the
Assessing Officer is upheld.
There are many other cases decided by the Tribunal in which the learned
Tribunal has taken similar view that dividend earned being exempt u/s 10
(33), expenses incurred for earning dividend cannot be allowed in view of
section 14A. Some of the decisions are referred to below:
Mohan T.Advani Finance P. Ltd V ITO (2006) 9 SOT 675 (MUM.)
Everplus securities & finance P. Ltd V Dy. CIT (2006) 101 ITD 151
(Delhi)
Punjab National Bank V Dy. CIT (2006) 103 TTJ (Delhi) 908.
Dy.CIT V S.G.Investment & Industries Ltd (2004) 84 TTJ (Kol) 143/ 89 ITD
44 (KOL).
Case of a share trader - purpose being trading gain expenses were
allowed:
In case of Vidyut Investment Ltd V ITO (2006) 10 SOT 284 (Delhi) the
Tribunal held that where shares were held as trading stock with a view to
earn trading profits, earning of dividend was incidental to share trading
and therefore, the Assessing Officer was not justified in disallowing a
par to expenses by invoking section 14A.
Authors point of view on Tribunals orders:
In view of author with due respect to the tribunals section 14A was
applied merely on the ground that dividend earned was not included in the
income of assessee. It is felt that section 14A has not been interpreted
correctly and a very narrow view has been taken ignoring the purpose of
purchasing and holding of shares as appreciation and deriving gains which
will be taxable in due course.
As noted earlier dividend earning is merely incidental to share holding
and not the sole purpose of holding shares. Furthermore, tax on dividend
is paid by company in lieu of shareholders, which is result of the
legislative intention to collect tax on all dividend payments and to
simplify collection and achieve finality of collection. It is not the case
that the tax is not levied or cannot be levied due to some other policy
reasons.
In view of the author it can be put in other manner that the
legislative intention is to consider entire amount of dividend distributed
as a taxable income which is part of 'total income' but because tax is
paid separately by the company, at source, so it is excluded while making
individual computations of share holders. Tax on distribution is
apparently to make a final collection on dividend to whomsoever paid
without granting any exemption for any reason and without granting any
credit for tax paid by companies.
With due respect the author feels that the cases before the Tribunal
were nor properly argued and / or considered and they requires
reconsideration in view of reasoning as discussed in this write-up.
The author is of the view that what is applicable in case of a share
trader is equally applicable in case of investor also. Investment is also
a systematic and organized activity and is in nature of an adventure in
nature of commerce. Therefore, investment is also a business. In case of a
business or profession also certain incomes may fall under heads of income
other than business or profession. For example, gains on sale of fixed
assets used in business fall under the head 'capital gains', because the
asset was a capital asset and not a trading asset. Similarly investments
are capital assets of investment business, the gains may be taxable under
the head 'capital gains', yet the assets are held in the course of
business of investment. Therefore, so far purpose of holding of shares is
concerned, there is no difference in holding as stock-in-trade or as
investment. Accordingly authors view is that in overall context of the
provisions and the purpose of holding of shares and securities, section
14A should not be applied to investor merely because dividend earned is
not included in taxable income of shareholder assessee.
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