2012 (11) TMI 458 - AT - Income Tax

Disallowance of expenses in relation to the exempt income u/s. 14A - held that - The High Court observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus there being a direct judgment of a Hon ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capital Management P. Ltd. (2008 (10) TMI 383 - ITAT MUMBAI).

Summary

Issues: Disallowance of expenses in relation to exempt income u/s.14A of the I.T. Act.

Analysis:
1. The Revenue appealed against the CIT(A)'s order regarding the disallowance of expenses in relation to exempt income u/s.14A of the I.T. Act for the A.Y. 2008-09. The AO disallowed expenses amounting to Rs. 48,73,483/- under Rule 8D, comprising interest expenditure and other expenses, related to exempt dividend income received by the assessee.

2. The CIT(A) agreed with the assessee's contention that disallowance u/s.14A should only apply if there was expenditure related to exempt income. The CIT(A) excluded stock-in-trade from the computation of disallowance under Rule 8D, limiting the disallowance to Rs. 47,247/-. The Revenue challenged this decision before the Tribunal.

3. The Revenue argued that section 14A applied to dividend income from trading shares, citing precedents. The assessee relied on judgments emphasizing that disallowance under section 14A did not apply to dividend income from trading shares. The Tribunal analyzed conflicting decisions and observed that the High Court of Karnataka held that expenses incurred on borrowings for trading shares were not subject to disallowance u/s.14A.

4. The High Court's judgment in CCL Ltd. vs. JCIT clarified that expenses incidental to trading shares, even if leading to dividend income, were not to be disallowed u/s.14A. The Tribunal's decision to disallow expenses proportionately was not upheld by the High Court. The High Court emphasized that intention to earn dividend income was not the primary purpose of holding shares for trading. Following this judgment, the Tribunal upheld the CIT(A)'s decision to delete the disallowance u/s.14A related to stock-in-trade.

5. Considering the direct judgment of the High Court of Karnataka and the precedent set by the Tribunal in a similar case, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the disallowance u/s.14A. The decision was based on the specific circumstances regarding the treatment of expenses in relation to dividend income from trading shares.

In conclusion, the Tribunal's decision aligned with the High Court's ruling, emphasizing that disallowance under section 14A does not apply to dividend income from trading shares, especially when the primary purpose of holding such shares is for trading activities rather than earning dividend income.