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2013 (1) TMI 236 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - assessee is engaged in the business of exporting goods and dealing in shares and securities - Held that - No dispute about the fact that assessee was dealing in shares and securities and shares were held by him in stock in trade and therefore in view of the decision of Karnataka High Court in the case CCI Ltd. vs. Jt. CIT (2012 (4) TMI 282 - KARNATAKA HIGH COURT) and Apoorva Patni vs. ACIT 2012 (9) TMI 828 - ITAT, PUNE wherein held that when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income, thus no disallowance u/s 14A was called for - in favour of assessee
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act. 2. Applicability of Rule 8D in cases where shares are held as stock-in-trade. 3. Determination of interest expenses related to exempt income. Issue-Wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act: The assessee was aggrieved by the confirmation of the addition of Rs.36,99,760/- made by the Assessing Officer (A.O.) by disallowing expenses under Section 14A read with Rule 8D. The A.O. observed that the company had shown exempt dividend income of Rs.59,79,502/-. The A.O. contended that the assessee had blocked its funds for purchasing shares and securities, thereby incurring interest and other expenses that should be disallowed under Section 14A. The A.O. relied on the amendment made by the Finance Act 2006 and Rule 8D, along with the judgment of the ITAT Special Bench in the case of Chemivest Ltd. and UTI Bank Ltd., which held that disallowance under Section 14A would be attracted even if no dividend income was earned in the said assessment year. 2. Applicability of Rule 8D in cases where shares are held as stock-in-trade: The assessee argued that Rule 8D should not be applied as it does not consider all aspects of their business, where shares and securities are held as stock-in-trade and not as investments. The assessee contended that the dividend income was incidental to their main business activity of trading in shares and securities. The CIT(A) rejected this contention, citing the ITAT Special Bench decision in Daga Capital Management Services Pvt. Ltd., which held that Section 14A applies even when dividend income is incidental to the business of trading in shares. 3. Determination of interest expenses related to exempt income: The assessee claimed that they had sufficient interest-free funds to cover the inventory of shares and securities, and thus, the interest expenses should not be disallowed. However, the CIT(A) noted that the assessee did not provide evidence to show that the shares were acquired from interest-free funds. The CIT(A) upheld the application of Rule 8D, stating that the assessee did not maintain separate accounts to prove that borrowed funds were not used for investments yielding exempt income. Judgment: The Tribunal found that the assessee was engaged in the business of dealing in shares and securities, holding shares as stock-in-trade. The Tribunal referred to the Karnataka High Court decision in CCI Ltd. vs. Jt. CIT, which held that when no expenditure is incurred in earning dividend income, no notional expenditure could be deducted under Section 14A. The Tribunal also cited the ITAT Pune Bench decision in Apoorva Patni vs. ACIT, which supported the view that no disallowance under Section 14A is warranted when dividend income is incidental to the business of trading in shares. Conclusion: The Tribunal concluded that since the assessee's intention was not to earn dividend income and the dividend income was incidental to their business of trading in shares, no notional expenditure could be deducted by invoking Section 14A. Consequently, the addition made by the A.O. and sustained by the CIT(A) was deleted, and the assessee's appeal was allowed.
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