Income Tax Appellate Tribunal - Mumbai
Smt. Rekha Bharat Chheda vs Acit on 12 July, 2006
Equivalent citations: (2007)110TTJ(MUM)933
ORDER
K.C. Singhal, Judicial Member
1. The following grounds have been raised by the assessee:
Rs. 3,80,302/- Dividend from Indian Companies not allowed as exempt Under Section 10(33) of the Income Tax Act, 1961, and consequently reduced carried forward losses by considering such dividend as business income.
i) On facts and in the circumstances of the case & in law, the learned C.I.T. (Appeal)-XXIII, erred in confirming dis-allowance of Rs. 3,80,302/- made by the Assessing Officer ACIT 23(3) being dividend from Indian Companies as exempt Under Section 10(33) of the Income Tax Act, 1961, and consequently reducing carried forward losses by considering such dividend as business income.
ii) Considering the above facts & legal position, your honour is requested to allow the dividend income as exempt Under Section 10(33) of the income Tax Act 1961
2. Briefly stated, the facts are these: The assessee was engaged in the business of purchase and sale of shares. She declared business loss of Rs. 40,94,017/- and speculation loss of Rs. 3,83,00,505/- for the Assessment Year under consideration. She also received dividends of Rs. 3,80,302/- in respect of traded shares and the same was claimed as exempt Under Section 10(33) of the Income Tax Act, 1961 (Act). The Assessing Officer was of the view that the dividend received by the assessee on traded shares was in the nature of "Business Income" in view of various Supreme Court judgments and, therefore, the same was liable to be adjusted against the business loss declared by the assessee by Rs. 3,80,302/-. Consequently, no income was assessed on account of dividend income separately. The reason for doing so was that the cost of dividend embedded in the purchase cost should be excluded and the same should be set-off against dividend receipt.
3. The matter was carried in appeal before the Learned CIT (A), before whom, it was contended that any income by way of dividend was exempt Under Section 10(33) of the Act irrespective of the fact whether such income is "Business Income" or "Income From Other Sources". It was also submitted that in subsequent assessment year, similar income has been allowed as exempt from taxation. The Learned CIT (A) was of the view that exemption was in respect of the income earned out of dividend and not in respect of gross dividend receipt. He relied on the judgment of the Hon'ble Supreme Court in the case of Distributor Baroda Pvt. Ltd. 115 ITR 120. Proceeding further, he made following observations:
5. ...
In the case of the appellant, shares are treated as stock in trade and sale purchase of shares is treated as business. The dividend received is simply a consequence of holding shares in stock for trading purposes. In such a scenario, the dividend earned by the appellant certainly has a cost in the same manner as any other trading receipt. In case of shares held as investment, the cost is usually minimal. However, in the appellants case the dividend received is in the character of trading receipt and therefore, the expenses attributable to earning the dividend are difficult to separate from the P & L account.
6. The appellant was asked to furnish the copy of the accounts of the appellant, An examination of the P & L accounts shows that there was a loss of Rs. 4,24,63,388/- during the year. The loss arises mainly out of the transaction sale and purchase of shares either by physical delivery or in speculation business. After excluding speculation loss, the net loss according to P & L account would amount to Rs. 42,04,188/-. The dividend income cannot be treated as unrelated to the trading loss in shares. In many cases traders buy shares cum dividend at a higher value and sell the same ex-dividend at a lesser value thereby incurring a loss. This loss however is partially or fully offset by receipt of dividends. Due to this reason dividend income should be added to the income from sale of shares to determine the actual trading profit. In the appellant's case there is a loss even if the dividend income is added to the sale receipts in the trading account. Thus the cost of earning dividend income is negative.
7. Although in the assessment order, the Assessing Officer has not been able to bring out this position clearly, this is what is meant in stating that the cost of dividend income is embedded in the purchase cost of the shares. In my view, the stand taken by the Assessing Officer is justified. The cost of earning is higher than the dividend received. Thus, there would be no income earned out of the dividend received and, therefore, there is no question of any exemption Under Section 10(33) of the I.T. Act.
In view of the above observations, the Learned CIT(A) dismissed the appeal of the assessee. Aggrieved by the same, the assessee is in further appeal before the Tribunal.
4. The Learned Counsel for the Assessee has contended before us that incomes which are exempt Under Section 10 of the Act are not to be included in the total income of the assessee and consequently such income do not enter in the computation of total income. Accordingly, it has been submitted that the dividend income being exempt Under Section 10(33) of the Act, has to be excluded from the Profit & Loss A/c and only thereafter the profit or loss arising from the business has to be computed. In view of this legal position, it was submitted by him that question of setting-off such income against the business loss does not arise. On the other hand, the Learned D.R has submitted that the assessee not only acquired the shares but also acquired the right to receive dividend and, therefore, the purchase price paid by the assessee was composite one i.e., partly for shares and partly for receiving dividends. Thus, the cost of dividend must be adjusted against the dividend income in the case of dealers in shares. In view of this submission, it was prayed that order of the Learned CIT(A) be confirmed.
5. At the outset, we may mention that neither of the parties has referred to any case law in support of their submissions. We are also aware of the Special Bench decision in the case of Wallfort Shares & Stock Brokers Ltd. 96 ITD 1 (SB), wherein similar issue arose with reference to purchase of sale of units of mutual fund. In that case also, the Revenue had contended that where units were purchased as units cum dividend, the price included cost of dividend. This contention was rejected by the Special Bench by holding that price of units was based on NAV of mutual fund and not on the dividend announced. However, the Bench, in Para-106, itself made a distinction between the units of mutual fund and shares of a company. It was observed that trading in shares was based on various factors impacting demand and supply while trading in units was based on NAV of mutual fund. Accordingly, it could not be said that purchase price of units included cost of dividend. In view of the same, we are of the view that the decision of Special Bench cannot be applied to the present case and its applicability has to be restricted to the case of units of mutual funds only.
6. Rival submissions of the parties have been considered carefully. There cannot be any dispute to the legal position that dividend income in the case of dealers in shares partakes the character of "Business Income" irrespective of the fact that such income is assessable under the head "Income From Other Sources" [Western State Trading Co. Pvt. Ltd. v. CIT 80 ITR 21 (SC)]. It is also equally true that computation of income under various heads is required to be made to determine the total income chargeable to tax (Section 14 of the Act). However, Section 10 of the Act provides that, income specified therein shall not be included while computing the total income. Therefore, income exempt from taxation Under Section 10 shall have to be excluded before computing the total income. To that extent, we are in agreement with the contention of Mr. Vora, Learned Counsel for the Assessee.
6. However, it is pertinent to note that it is the income falling Under Section 10 which is to be excluded and not the gross receipt. Income cannot be determined unless the expenditure incurred from earning the receipt is taken into consideration. As a necessary corollary, first, income is to be determined from a particular source and then if such income is exempt Under Section 10, then it shall not be considered for computing total income. Accordingly, we are unable to accept the contention of Mr. Vora that gross dividend should be excluded from the computation of total income. Further, Section 14A of the Act also provides that the expenditure, incurred in relation to the income not includible in the total income, shall not be allowed as deduction while computing to total income. Thus, if any expenditure is incurred by the assessee in relation to dividend income exempt Under Section 10(33) of the Act, shall not be allowed as deduction while computing the profit or loss of trading business carried on by the assessee. To that extent, we are in agreement with Mr. Maheshwari, Learned D.R appearing for the Revenue.
7. The question which remains for our consideration is whether can it be said that any expenditure was incurred by the assessee in relation to the dividend income. The case of the Revenue is that, when the shares were purchased by the assessee as trader, she paid not only the price of shares but also for the dividend declared by the companies. We are unable to accept such contention of Mr. Maheshwari. Market rate of shares in the stock market are governed by various factors prevailing at that time. The price of shares, sometimes, may crash despite the declaration of dividend by the company. Conversely, the rate may go up despite no declaration of dividend. Thus, fall or increase in rates may not be attributable to declaration of dividend. In our opinion, the answer of this question would depend on the facts of each case coupled with the legal position under contract of sale.
8. In case of a dealer in shares, unlike investors, shares are not purchased with the object of earning any dividend. Generally, the object is to earn profit on the sale of shares when the price rises in the market. The market price of shares is governed by various forces prevailing in the market and dividend factor may be one of them. The declaration of dividend may or may not be relevant in determining the market price. The company may not declare the dividend yet the price of shares may go on rising on account of overall performance of the company. On the contrary, the rate of share may not increase despite declaration of dividend. A company may not be doing well but may declare the dividend out of existing reserves to please the shareholders. In such case, market price of shares may not increase. The political situation in the country and international relations may also affect the share market. Further, the dividend factor may be insignificant as compared to market price of share and this may not affect the market rate. For example, a share (having face value of Rs. 10/-) may be quoted at Rs. 900/- before declaration of dividend of Rs. 5/- per share. Such insignificant value of dividend may not affect the price at all. Therefore, it cannot be said that whenever shares are purchased, dividend factor is included in the price. Unless there is evidence that parties intended to buy or sell shares for a price cum dividend, in our opinion, it cannot be said that any part of consideration included cost of dividend.
9. In a contract of sale, what is relevant is the intention of the parties. The consideration paid by the buyer must relate to the goods delivered or services rendered. Merely because something passes along with subject matter intended under the contract would not mean that any part of the consideration related to that element. It would be appropriate to illustrate our point of view with reference to few decisions of the Apex Court.
10. In the case of State of Madras v. Gannon Dunkerly & Co. 9 STC 353 SC, the respondent was engaged in the construction of buildings. State of Madras levied sales tax on the value of the materials used by the respondent in execution of the building contracts. The Constitution Bench of the Hon'ble Supreme Court had to consider the question whether building contract included the sale of materials used in such contract. Their Lordships held that the consideration paid was for construction of building and, therefore, no part of consideration could be considered as price of raw materials exigible to sales tax. Their Lordships, at Pages-377-37$, observed as under:
We are accordingly of the opinion that on the true interpretation of the expression "sale of goods" there must be an agreement between the parties for the sale of the very goods in which eventually property passes. In a building contract, the agreement between the parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefore receive payment as provided therein, and as will presently be shown there is in such an agreement neither a contract to sell the materials used in the construction, nor does property pass therein as movables. It is therefore impossible to maintain that there is implicit in a building contract a sale of materials as understood in law.
However, Their Lordships also clarified that parties could enter into composite contract - one part for supply of material and the other part for services to be rendered. In such case, the State would be justified in levying sales tax on the value of ,material supplied. This can be seen from the following observations at Pages-387-388:
It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment.
11. In the case of Hyderabad Deccan Cigarette Factory v. State of Andhra Pradesh 17 STC 624, the Apex Court had to consider the question whether there was sale of packing material in which cigarettes were sold. Their Lordships at Page-628, observed as under:
In the instant case, it is not disputed that there were no express contracts of sale of the packing materials between the assessee and its customers. On the facts, could such contracts be inferred? The authority concerned should ask and answer the question whether the parties in the instant case, having regard to the circumstances of the case, intended to sell or buy the packing materials, or whether the subject-matter of the contracts of sale was only the cigarettes and that the packing materials did not form part of the bargain at all, but were used by the seller as a convenient and cheap vehicle of transport. He may also have to consider the question whether, when a trader in cigarettes sold cigarettes priced at a particular figure for a specified number and handed them over to a customer in a cheap card board container of insignificant value, he intended to sell the cardboard container and the customer intended to buy the same? It is not possible to state as a proposition of law that whenever particular goods were sold in a container the parties did not intend to sell and buy the container also. Many cases may be visualized where the container is comparatively of high value and sometimes even higher than that contained in it. Scent or whisky may be sold in costly containers. Even cigarettes may be sold in silver or gold caskets. It may be that in such cases the agreement to pay an extra price for the container may be more readily implied.
The perusal of the above observations of Their Lordships clearly reveals that it is the intention of the parties which is relevant and not the material or element which incidentally passes under the contract. Such intention may be express or implied but nothing can be inferred on suspicion.
Before parting with this decision, we may mention that in the above case, it was the contention of assessee that price of cigarettes remained the same whether sold in container or not. But the Tribunal had rejected such contention on the ground that value of the packing material must have been taken into consideration while fixing the price. Thus, it was held that there was implied sale of packing material. However, such finding did not find favour with the Apex Court. Their Lordships at Page 630, observed as under:
This passage indicates that the Tribunal rejected the contention on the ground that the value of the packing materials must have been taken into consideration in fixing the price of the cigarettes. But that reasoning does not answer the contention that howsoever the price was fixed, the cigarettes were sold, whether packed in cardboards or wooden boxes, in or outside the State of Andhra Pradesh, at the same rate, The High Court also held that though there was no express contract to sell the packing materials and the packets separately, such a contract was implicit in the contract for the for the sale of the goods. This implied agreement was based on the fact that the packed cigarettes were sold at a price and on the surmise that in fixing the price the assessee might have taken into consideration the cost of all the materials used in the packing. The High Court also ignored the aforesaid contention of the assessee. It also did not consider the relevant material to come to the conclusion that the assessee agreed to sell the packing materials to the customers.
Thus, Their Lordships held that mere consideration of cost of packing material while fixing the price of cigarette was not relevant for holding that there was sale of packing material. It is the intention of parties which is relevant. The above view was reiterated in the case of Commissioner of Taxes v. Prabhat Marketing Co. 19 STC 84.
12. The combined reading of the above judgments clearly reveals that contract of sale must provide, expressly or impliedly, that consideration is paid either for the specified goods to be transferred or services to be rendered or for both. If there is no such contract, then no part of the consideration can be attributed to any other element which is incidental to the performance of the contract. Thus, under a contract of sale, whether consideration paid for sale of shares included in cost of dividend would depend on the facts of each case. Nothing can be inferred on suspicion.
13. The legal position, as enunciated above, is further strengthened by the Supreme Court judgment in the case of CIT v. India Discount Co. Ltd. 75 ITR 191. In that case, the assessee, a dealer in shares, purchased 11,900 shares of a company from a share broker against a total consideration of Rs. 1,12,576/-, which included arrears of dividend pertaining to earlier years amounting to Rs. 43,925/-. The said amount of dividend was received by the assessee during the year under consideration and the same was credited to Profit & Loss A/c. However, the assessee claimed that there was no income by way of dividend since the amount of dividend was nothing but realization of the price paid which was included in the purchase price of shares. The matter reached the Apex Court and Their Lordships held that the assessee had entered into a contract not only to purchase the shares but the arrears of dividends also and this clearly implied that the price paid by him was not only for the shares but also for the sum of Rs. 43,925/- which was going to be realized in the form of arrears of dividends. Hence, the sum of Rs. 43,925/- was not income of the assessee which could be assessed in its hands. This judgment clearly shows that if there is a contract between the parties and the intention of the parties is to purchase the element of dividend along with shares, then such cost of purchase of dividend will have to be adjusted against the dividend received. Impliedly, it means that where shares are purchased without any intention of purchasing the dividend element, then the entire dividend received should be considered as income and no cost can be attributed to such dividend. In view of this legal position, let us now proceed to adjudicate the issue on merits.
14. In the case of Deccan Cigarette Factory (supra), the Apex Court held that burden was on the Revenue to prove that there was sale of packing material also under contract of sale of cigarettes. In Maruti Udyog Ltd. 92 ITD 119, the Tribunal at Page-171 held that Under Section 14A, the burden is on the Revenue to prove that conditions for disallowance are satisfied. Thus, in the present case, the burden was on the Revenue to prove that cost of dividend was included in the sale price of shares when purchased by the assessee. In the present case, the Assessing Office has not referred to any material for coming to the conclusion that cost c dividend was included in the price of shares purchased by the assessee Without making any enquiry, the Assessing Officer proceeded on the assumption that purchase price of shares included cost of dividend. Such assumption, not based on any material / evidence, cannot be held to be valid. Thus, we are unable to uphold the orders of lower authorities. It the absence of any material / evidence, it cannot be held that cost on dividend was included in the price of shares paid by the assessee. The order of the Learned CIT(A) is, therefore, set aside and consequently the addition sustained by him is deleted.
15. In the result, assessee's appeal stands allowed.
Pronounced on 12th July, 2006.