2013 (12) TMI 1305 - AT - Income Tax

Disallowance u/s 14A - Held that - The provisions of Section 14A are attracted whether or not the shares are held as stock in trade or as investments, even though the provisions of rule 8D(2)(ii) and (iii) cannot be invoked in such a case , and even though the provisions of rule 8D(2)(i) are much narrower in scope than the scope of Section 14A - The matter was restored for fresh adjudication.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act.

Analysis:
The appeal by the revenue was against the CIT(A)'s order regarding the disallowance of Rs.48,50,808 made under section 14A of the Income Tax Act for the assessment year 2008-09. The Assessing Officer (AO) disallowed the amount based on Rule 8D, considering the dividend income earned by the assessee. The AO included direct expenses and interest paid by the assessee in the disallowance calculation. However, the assessee argued that Rule 8D should not be applied to the value of stock-in-trade as it is not an investment. The CIT(A) agreed with the assessee, considering the small investment amount of Rs.5,00,000 and estimated the expenses on the total stock amount at 0.5%. The CIT(A) calculated the average value of investment and upheld a disallowance of Rs.6,53,488 for expenditure related to earning dividend income. The net addition after adjustments was Rs.6,53,488, reducing the initial disallowance amount. The revenue appealed against this order.

The Tribunal noted that various decisions supported the assessee's argument that disallowance under Rule 8D cannot be applied to dividend income from shares held as stock-in-trade. The Tribunal referred to a previous decision where it was held that Rule 8D should not be invoked when exempt income yield assets are not held as investments. The Tribunal agreed with the CIT(A)'s approach and confirmed the disallowance upheld. However, the nature of shares held by the assessee needed further examination by the AO to determine if they were stock-in-trade or investments. The issue was remitted back to the AO for factual examination.

In conclusion, the Tribunal allowed the revenue's appeal for statistical purposes, directing the AO to re-examine the nature of shares held by the assessee and make necessary computations in accordance with the law.