2017 (3) TMI 1548 - AT - Income Tax

Disallowance u/s.14A - whether the expenditure eligible to stock in trade can be disallowed invoking the provisions of section 14 A r.w.r.8D? - Held that - We find that in the cases relied upon by the AR it has been clearly held that no disallowance u/s.14A r.w.r 8D of the Rules can be made for the securities held as stock in trade. The reason behind it is not difficult to understand. Income arising from the business of an assessee is taxed under the head business and profession. So all the expenses have to be considered while computing the business income. On the other hand if the securities are held as investment and an assessee earns exempt income same can be subjected to disallowance as envisaged by the provisions of section 14A. In the case under consideration the assessee is dealing in shares and F &O segments and offering its income under the head business income. Therefore in our opinion the FAA was not justified in confirming the disallowance made for expenses incurred with regard to stock in trade. Reversing his order we decide the effective ground of appeal in favour of the assessee.

Summary

Issues involved:
Challenging disallowance under section 14A r.w.r. 8D of the Income Tax Rules, 1962.

Analysis:
The judgment pertains to an appeal filed by an assessee, a company engaged in computer software development and consultancy, against the order of the CIT (A)-21, Mumbai. The primary issue revolves around the disallowance of ?21.13 lakhs under section 14A r.w.r. 8D (2) (ii) (iii) of the Income Tax Rules, 1962. The Assessing Officer (AO) determined the income of the assessee at ?39.90 lakhs, disallowing a substantial amount based on Rule 8D calculations, despite the assessee's initial disallowance of ?3.11 lakhs on its own. The crux of the matter lies in whether expenses related to stock in trade can be disallowed under section 14A r.w.r. 8D, considering the nature of the assessee's business activities involving shares and F & O segments.

Upon appeal before the First Appellate Authority (FAA), the assessee argued that the disallowance exceeded the exempt income earned and that Rule 8D should not apply to stock-in-trade scenarios. The FAA, citing precedents, upheld the AO's decision. However, during the ITAT hearing, the AR referenced cases supporting the non-applicability of disallowance under section 14A r.w.r. 8D to securities held as stock in trade. The tribunal concurred with this view, emphasizing that expenses related to stock in trade should be considered while computing business income, not subjected to disallowance under section 14A. As the assessee operated in the shares and F & O segments under the business income head, the tribunal reversed the FAA's decision, ruling in favor of the assessee.

In conclusion, the ITAT Mumbai allowed the appeal filed by the assessee, setting aside the disallowance under section 14A r.w.r. 8D. The judgment highlights the distinction between expenses related to investments and those linked to stock in trade, emphasizing the treatment of such expenses in the computation of business income. The decision provides clarity on the applicability of section 14A r.w.r. 8D to different types of assets held by the assessee, ensuring a fair and accurate assessment of taxable income in line with relevant legal provisions.