Summary
Interpreting Section 14A in the exempt-dividend setting before it, the Supreme Court rejected the dominant-purpose test for shares acquired for control or held as stock-in-trade. Expenditure attributable to exempt income had to be apportioned, with the Assessing Officer recording the required dissatisfaction before rejecting the assessee’s allocation. Maxopp’s appeals failed; the State Bank of Patiala result was sustained on its facts despite rejection of its reasoning. Other appeals received the specified separate dispositions.
Issues
- Whether acquisition for control or trading excluded expenditure from Section 14A disallowance.
- What apportionment and recorded-satisfaction requirements applied.
- How the bank stock-in-trade and pre-Rule 8D appeals should be disposed of.
Provisions considered
- Section 14A, Income-tax Act, 1961Rejected dominant purpose as the governing test; required attribution and apportionment of expenditure connected with exempt income, with recorded dissatisfaction before displacing the assessee’s apportionment. (¶¶ 11, 32, 33, 34, 35, 39, 40, 41)
- Rule 8D, as reproduced in the judgment, Income-tax Rules, 1962Discussed the prescribed apportionment method and its prospective application; rejected retrospective use in the specified earlier-year appeals. (¶¶ 12, 41, 42, 43)
Held
- Only expenditure causally connected with exempt income is disallowed. Acquisition of shares to obtain or retain control does not remove the need to apportion expenditure attributable to exempt dividends. Section 14A displaced the earlier indivisible-business approach; the dominant-purpose test was rejected. (¶¶ 32, 33, 34, 35)
- Shares held as stock-in-trade are not categorically excluded. Even incidental exempt dividends trigger attribution of expenditure according to the facts. The CBDT banking circular addressed the head of income and did not establish a dominant-intention exemption from Section 14A. (¶¶ 36, 37, 38, 39)
- The State Bank of Patiala outcome was sustained on its facts: the Assessing Officer had already apportioned expenditure and limited disallowance to exempt income, whereas the appellate Commissioner disallowed the entire expenditure. The latter approach was untenable. The Court rejected the High Court’s dominant-purpose reasoning while dismissing the Revenue’s appeals in those cases. (¶ 40)
- Before rejecting the assessee’s own apportionment and applying the prescribed mechanism, the Assessing Officer must record the requisite dissatisfaction having regard to the accounts and examine the nature of borrowing used to purchase the shares. (¶¶ 11, 12, 41)
- Avon Cycles’ appeal failed on the recorded mixed-funds finding and apportionment. The specified Revenue appeals involving retrospective application of Rule 8D failed because the rule was prospective, consistently with Essar Teleholdings; other issues in those appeals did not require decision. (¶¶ 42, 43)
- The concluding order dismissed the listed assessee appeals and the specified Revenue appeals, but allowed the Revenue appeal arising from Diary No. 41203 of 2017. The batch was therefore not disposed of uniformly in favour of either side. (¶ 44)
Result
Listed assessee appeals, including Maxopp and Avon Cycles, dismissed; specified Revenue appeals also dismissed. Revenue appeal arising from Diary No. 41203 of 2017 allowed, as separately directed in paragraph 44.