Share expense ruling to further lower returns

A Mumbai Income Tax Appellate Tribunal’s ruling that expenditure attributed to earning dividend income will not be allowed as deduction under Section 14-A of the Income Tax Act will reduce the returns from stock investments and trades. Companies that park money in equities or mutual funds will be also be hit, say experts.

The last week’s ruling, in the case of the Income Tax Department versus Daga Capital Management, effectively disallows exemption on dividend income.

The ruling may hit traders who invest in stocks apart from their normal businesses. This judgment in hand, it is learnt that the I-T department is preparing to issue demand notices to various assesses for tax recovery. A special Bench of the tribunal laid down three basic principals.

First, expenditure attributed to earning of dividend income will not be allowed. This means interest on funds used for investment as well as expenditure incurred for earning cannot be deducted from income for calculating tax liability. Those having other assets apart from dividend income or profit from share investment will also be affected.

Second, the ruling will be applicable to all open and live cases since 1962. That means it will be implemented from retrospective effect.

Finally, it will also apply to trading in equities.

“Those companies that have investments in mutual funds or equity shares and are earning a dividend yield of 1-2 per cent of the investment amount will face heavy disallowance in respect of the interest payment on loans which have largely been used for their core business activities,” said Dilip V Lakhani, a tax advisor to companies.

He said the rule 14-A doesn’t make any distinction between the actual interest paid on investment in shares as well as units of mutual funds and interest paid for core business activity.

This means companies that earn much less from their equity investments and may have incurred losses in the current bad market would suffer pro-rata disallowance of the interest which is paid on their loan used for combined activities.