2014 (12) TMI 1152 - AT - Income Tax

Exclusion of stock in trade from average value of investment for the purpose of disallowance made u/ s 14A r.w. Rule 8D (2)(ii) - Held that - When the assessee is in the business of share trading as well as future & option then the expenditure incurred by the assessee in the course of business activity of trading in shares would be considered exclusively for business activity and the same cannot be apportioned being an expenditure incurred for earning the dividend income. The expenditure attributable towards the earning of the exempt income directly related to the dividend income has to be disallowed as the same cannot be claimed against the taxable income of the assessee. Therefore the disallowance computed under Rule 8D of the Income Tax Rules cannot be more than the actual expenditure incurred by the assessee for the dividend income excluding the activity of share trading which is the business activity of the assessee. Even the computation of disallowance arrived as per the Rule 8D should be restricted only to the extent of actual expenditure or to the extent of the expenditure which can be attributable to the activity of the dividend income excluding the business activity of share trading. Accordingly we direct the Assessing Officer to re-compute the disallowance u/s 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of the dividend income excluding the expenditure related to business activity of share trading. - Decided partly in favour of revenue.

Summary

Issues:
1. Disallowance under section 14A regarding stock in trade for investment calculation.
2. Justification of relief to the assessee for disallowance under section 14A.

Issue 1: Disallowance under section 14A regarding stock in trade for investment calculation:
The appeal by the revenue was against the order of CIT(A) for A.Y. 2009-10, challenging the exclusion of stock in trade from the average value of investment for disallowance under section 14A. The assessee, engaged in share trading and commodities, declared income and claimed speculation loss and dividend income. The Assessing Officer disallowed an amount under section 14A using rule 8D, which was challenged by the assessee before CIT(A). The CIT(A) deleted the disallowance based on a Tribunal decision. The Tribunal, after considering various cases, held that expenditure incurred in the course of share trading cannot be apportioned for earning dividend income. The disallowance was restricted to 5% of the calculated amount under Rule 8D(2)(ii) and 10% under Rule 8D(2)(iii) due to the dominant share trading nature of the business.

Issue 2: Justification of relief to the assessee for disallowance under section 14A:
The Tribunal analyzed the nature of share trading as the primary objective and dividend income as incidental. It observed that the turnover from share trading would be significantly higher than investments for earning exempt income. Therefore, the disallowance under Rule 8D(2)(ii) was restricted to 5% of the calculated amount, and under Rule 8D(2)(iii) to 10%. The Tribunal emphasized that the disallowance should not exceed the actual expenditure attributable to dividend income, excluding the share trading business activity. The Assessing Officer was directed to re-compute the disallowance under section 14A accordingly. Ultimately, the appeal of the revenue was partly allowed.

In conclusion, the Tribunal's decision provided detailed reasoning for restricting the disallowance under section 14A, considering the specific business activities and nature of income earned by the assessee. The judgment emphasized the need to align the disallowance with the actual expenditure related to earning exempt income, excluding the core business activities of the assessee.