Expenditure incurred in acquiring dividend income should be excluded from deduction when no expenditure is incurred by the assessee in earning the dividend income.

N. Kumar , J.—The assessee is a distributor of state lotteries and a dealer in shares and securities. The assessee has earned dividend income of Rs. 46,67,190/- from shares of certain companies and 93% of shares of M/s. Kurlon Ltd., and further the assessee has purchased 24,000 fully paid shares from M/s. Kurlon Ltd., and converted its stock of partiy paid shares into fully paid shares by paying the outstanding amount of Rs. 8/- per share, which worked out to Rs. 5,27,97,016/-. To pay for the conversion cost, the assessee has entered into agreement with M/s. Kitchen Appliances Pvt. Ltd., to avail interest free loan of Rs. 14/- crores and had paid Rs. 28/- lakhs to one Sri. A.S. Krishna Iyer for brokering this loan. The Assessing Officer held that this expenditure was directly attributable to the earning of the dividend income and disallowed the same. He further considered the business expenditure claimed by the assessee and estimated the expenditure incurred by the assessee on earning of the dividend income at Rs. 27,24,330/- under Rule 8D of the Income Tax Rules and disallowed the same as relatable to earning of the exempt income. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income (Appeals), who confirmed the said order. Aggrieved by the said two orders, the assessee preferred an appeal to the Tribunal. The Tribunal was of the view that the assessee has taken interest free loan from M/s. Kitchen Appliances Pvt. Ltd, and what is disallowed, is the expenditure relatable to the broking of this loan as the expenditure for earning of dividend income from these shares. It is not only the direct expenditure, which is disallowable under Section 14A in relation to exempt income, but even indirect expenditure is to be disallowed proportionately. The expenditure, which is relatable to earning of dividend income though incidental to the trading of shares, is also to be disallowed under Section 14A of the Income Tax Act However, the Tribunal found that the Assessing Officer attributed the entire broking commission as relatable to earning of dividend income only, which is not correct. The loan has been utilized for the purchase of shares and the profit earned by sale of these shares is offered as business income. Hence, the broking expenditure has to be considered as business expenditure, as well and allowed the appeal accordingly. The Assessing Officer was directed to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law. Aggrieved by the said order, the assessee is in appeal. The substantial question of law that arises for consideration in this appeal is:

Whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation?

2. The learned Counsel for the assessee assailing the impugned order of the authorities contended that the assessee has incurred expenditure for purchasing shares. 63% of the shares so purchased are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares remained unsold. Those shares yielded dividend. The assessee has not incurred any expenditure to earn the said dividend income. Therefore, no expenditure could be attributed to the said dividend income and the said expenditure cannot be disallowed and the assessee is entitled to the benefit of deduction of the entire expenditure incurred in respect of purchase of shares. The authorities have not properly appreciated the Section 14A of the Income Tax Act and committed a serious error in passing the impugned order.

3. Per contra, the learned Counsel for the revenue pointed out that admittedly when shares retained by the assessee has yielded dividend, when the dividend