Disallowance u/s 14A required a finding of incurring of expenditure and where it was found that for earning exempted income, no expenditure had been incurred, disallowance u/s 14A could not stand. In the present case, as seen, the AO has not established any nexus whatsoever between the borrowed funds and the investment made. Therefore, Hero Cycles (supra), is applicable.
There is no requirement in Section 147 or Section 148 or Section 149 that the reasons recorded should also accompany the notice issued under Section 148. The requirement in Section 149(1) is only that the notice under Section 148 shall be issued. There is no requirement that it should also be served on the assessee before the period of limitation
Coming to the revenue’s objection that the assessee borrowed the funds from Indiabulls Financial Services Ltd., in our view, this cannot constitute a factor as in none of the case laws or CBDT circular it has been held that borrowings will not be allowed in investment transactions. In our view the investment in capital assets also can be carried out by way of borrowed funds. There being no bar notified by the law, judicial pronouncement or CBDT Circular, we are unable to accept this view.
In the present case, the assessee is an employee and is in service of a company. He has salaried income. The assessee had also made purchases and had sold securities. He is maintaining two separate portfolios i.e. investment portfolio and trading portfolio. The Assessing Officer has admitted the said position in the assessment order.
The correct sequence, in our considered opinion, for making any disallowance u/s. 14A is to, firstly, examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income. If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate.
In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction namely book profits under Section 115JB of the Act.
Gujarat High Court in CIT vs. Rewashanker A. Kothari, (2006) 283 ITR 338 (Guj.), after examining earlier judgments on the question has laid down several parameters’ tests which have to be applied to find out when income from transactions in shares’ securities should be treated as income from business or the gain which has to be taxed under the head “capital gains”. The parameters/tests are as under:-
There is no force in the Revenue’s claim that the assessee was not required to make any payment to its AE for resolving warranty claims. The assessee has the right to enter into an arrangement according to which its business interests are protected. It is the prerogative of the assessee to decide the business expediency.
Due consideration of the provisions of s.37 and s.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible.
Other items of income or capital may not be taxed in the State of source or situs; as a rule they are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from the alienation of shares or securities (paragraph 5 of Article B), private sector pensions (Article 18), payments received by a student for the purposes of his education or training (Article 20), and capital represented by shares or securities (paragraph 4 of Article 22). Profits from the operation of ships or aircraft
