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2013 (3) TMI 393 - AT - Income TaxDisallowance u/s 14 A r.w.r. 8D - as per CIT(A) the provisions of rule 8D donot come into play in this case as the shares are not held as 'investments' - Held that - The provisions of rule 8D can never be applied in a case where exempt income yield assets are not held as investments, and that the related assets, i.e. shares, having been held as stock in trade all along, there is no occasion to invoke rule 8 D. There is no infirmity in this approach, nor do revenue authorities stand to lose anything by this approach canvassed by the assessee. Quite to the contrary of what DR perceives to be advantageous to the AO, in case the application of rule 8 D was to be upheld, there would have been no disallowance at all since not only that no investments were held by the assessee, admittedly there are no direct expenses are incurred on earning of the dividends and as such in all the three segments of disallowance under rule 8D(2) i.e. 8D (2) (i), (ii) and (iii), there will be zero disallowance. As against this zero disallowance under rule 8D, the CIT(A) has upheld disallowance to the extent of ₹ 1,57,227 in respect of indirect expenses attributed to the earning of dividends, and it has even the case of revenue that this disallowance for indirect expenses is unfair or unreasonable - confirm the conclusions of CIT(A) and decline to interfere in the matter.
Issues:
1. Disallowance under section 14A of the Income Tax Act, read with rule 8D, in the case of assessee holding shares as stock in trade. 2. Condonation of delay in filing the appeal. 3. Interpretation of Rule 8D in relation to expenditure not forming part of total income. 4. Application of Section 14A in cases where shares are held as stock in trade. Analysis: Issue 1: Disallowance under section 14A of the Income Tax Act The Assessing Officer challenged the correctness of the Commissioner (Appeals)'s order regarding the disallowance under section 14A of the Income Tax Act. The Assessing Officer computed the disallowance under section 14A read with Rule 8D due to the assessee's dividend income and interest paid. The CIT(A) upheld the disallowance under section 14A for indirect expenses related to earning dividend income, even though Rule 8D was deemed inapplicable as the shares were held as stock in trade. The disallowance was partially allowed by the CIT(A) based on the Kerala High Court and ITAT Mumbai judgments. The Tribunal confirmed the CIT(A)'s decision, emphasizing that Section 14A applies regardless of how shares are held, while Rule 8D's provisions are limited in scope. Issue 2: Condonation of delay The appeal was time-barred by 10 days, but the Assessing Officer filed a condonation petition supported by an affidavit. The delay was condoned by the Tribunal, and the appeal was heard on its merits. Issue 3: Interpretation of Rule 8D The Tribunal analyzed Rule 8D, emphasizing that its provisions apply when shares are held as investments, not as stock in trade. The Tribunal cited the Supreme Court's ruling that when computation provisions fail, the charging provisions cannot be applied. It clarified that under Rule 8D, disallowance is limited to direct expenses if shares are held as stock in trade, while Section 14A applies to both direct and indirect expenses. Issue 4: Application of Section 14A The Tribunal confirmed that Section 14A is applicable irrespective of how shares are held, while Rule 8D's provisions are narrower in scope. It upheld the CIT(A)'s decision to disallow indirect expenses related to earning dividend income, emphasizing that Rule 8D cannot be invoked when shares are held as stock in trade. The Tribunal dismissed the appeal, affirming the CIT(A)'s conclusions. In conclusion, the Tribunal upheld the disallowance under Section 14A for indirect expenses, clarified the application of Rule 8D, and emphasized that Section 14A applies universally, while Rule 8D's provisions are limited in cases where shares are held as stock in trade.
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