2014 (8) TMI 1014 - AT - Income Tax

Disallowance u/s.14A in relation to dividend income on shares held as stock-in-trade - Held that - Taking into consideration the fact that the primary object of holding the shares is trading and the dividend income is incidental and further that due to continuous activity of sale and purchase of the shares, the annual turnover would be much higher in case of share trading as compared to the investments made for the purpose of earning of exempt income, even the disallowance @ 20% of the amount calculated under Rule 8D(2)(ii) will be on higher side. We feel that it will be appropriate if the said disallowance is restricted to 5% of the amount so arrived. So far the disallowance under Rule 8D(2)(iii) is concerned, since in the share trading activity, investment is not made for the purpose of earning exempt income, hence, the managerial/administrative expenses in relation to dividend income calculated under Rule 8D(2)(iii) are also required to be scaled down which we think that should be restricted to 10% of the amount so calculated under Rule 8D(2)(iii). In view of our above observations, the disallowance u/s.14A read with Rule 8D is, accordingly, restricted to 5% of the amount arrived at under Rule 8D(2)(ii) and 10% of the amount calculated by the A.O. under Rule 8D(2)(iii). - Decided partly in favour of assessee

Summary

Issues:
1. Disallowance under section 14A in relation to dividend income on shares held as stock-in-trade.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of a specific amount under section 14A of the Income Tax Act. The main contention was that since the shares were held as stock-in-trade, the intention was not to earn dividend income but for the business of share trading. The appellant argued that no disallowance should be made under section 14A as the dividend income was incidental to the main business. Reference was made to a decision by the Hon'ble Karnataka High Court to support this argument.

The issue of disallowance under section 14A in relation to shares held as stock-in-trade was previously discussed by the Mumbai Tribunal in another case and referred to the Third Member. The Tribunal referred to decisions of the Hon'ble jurisdictional High Court of Bombay and the Hon'ble Kolkata High Court, concluding that section 14A is applicable even to dividend income from shares held as stock-in-trade. It was observed that the expenditure incurred for share trading includes an investment component, making it liable for apportionment under section 14A, regardless of whether exempt income was actually earned. The Tribunal differentiated and discussed the decision of the Hon'ble Karnataka High Court relied upon by the assessee.

The Tribunal further noted that shares held as stock in trade yield both tax-exempt dividend income and taxable income. It was emphasized that shares were primarily bought and held for trading purposes. Therefore, the Tribunal held that the interest disallowance under Rule 8D(2)(ii) needed to be scaled down as the income from share trading is taxable. A specific percentage for the disallowance under Rule 8D(2)(ii) was proposed, considering the dominant object of share trading and turnover. Direct expenses were not subject to disallowance under section 14A when the purpose of share trading is trading itself, as seen in a similar decision by a Co-ordinate Bench of the Tribunal.

Considering the primary objective of holding shares for trading, the Tribunal restricted the disallowance under Rule 8D(2)(ii) to 5% of the calculated amount. Similarly, the managerial/administrative expenses under Rule 8D(2)(iii) were also scaled down to 10% of the calculated amount. Thus, the disallowance under section 14A read with Rule 8D was limited based on the Tribunal's observations, resulting in a partial allowance of the assessee's appeal.