2015 (12) TMI 386 - AT - Income Tax

Addition u/s 14A - CIT(A) deleted the addition - AO submitted that the assessee made the investment and had not bifurcated the investment and stock-in-trade. Therefore, the addition was rightly made by the AO by making the disallowance u/s 14A - Held that - In the present case, it is an admitted fact that the provisions of Rule 8D of the IT Rules, 1962 are not applicable for the year under consideration because those rules are applicable for the assessment year 2008-09. It is also not in dispute that if any expenditure is incurred for earning the dividend income which is exempt from payment of tax, the said expenditure cannot be deducted against the taxable income. However, in the present case, the assessee had not retained the shares with the intention of earning dividend income. The investment was incidental to his business of sale of shares. Therefore, the ld.CIT(A) was justified in holding that the AO wrongly apportioned the expenditure incurred by the assessee in acquiring the shares to the expenditure of dividend income and making the disallowance u/s 14A of the Act. In the present case, the assessee did not make the fresh investment and even out of the stock-in-trade 75% of the shares were sold during the year which clearly shows that bulk of the shares which were purchased earlier, were sold and the income derived from those shares was offered to tax as Business income , the shares which could not be sold remained with the assessee and yielded the dividend for which the assessee had not incurred any expenditure at all. Therefore, the ld.CIT(A) rightly deleted the addition made by the AO. No valid ground to interfere with the findings of the ld.CIT(A). - Decided in favour of assessee.

Summary

Issues:
Department's grievance against deletion of addition under section 14A of the Income Tax Act, 1961.

Analysis:
1. The Department appealed against the deletion of an addition of Rs. 13,63,477 made by the Assessing Officer under section 14A of the Income Tax Act, 1961.
2. The assessee initially filed a return showing an income of Rs. 2,40,000 and a business loss of Rs. 1,24,48,564. The assessment was completed with certain additions and disallowances under section 14A.
3. The CIT(A) deleted the major addition but confirmed the disallowance under section 14A. The matter was then taken to the ITAT Delhi Bench 'D' which set aside the CIT(A) order and restored it to the AO.
4. The AO observed that the assessee had investments in shares and received exempt Dividend Income, claiming interest on loans as well. The AO disallowed a sum under section 14A, initiating penalty proceedings under section 271(1)(c) for furnishing inaccurate income particulars.
5. The assessee contended that no expenditure was incurred for earning the dividend income, hence section 14A was not applicable. The CIT(A) considered the submissions and deleted the addition, emphasizing that the investment was incidental to the business of selling shares.
6. The Department appealed, arguing that the addition was justified as the assessee had not bifurcated investments and stock-in-trade. The counsel for the assessee reiterated that no disallowance was made in the succeeding year and Rule 8D provisions were not applicable.
7. The ITAT noted that Rule 8D was not applicable for the relevant year and held that the expenditure incurred by the assessee in acquiring shares was not solely for earning dividend income. As the shares were not retained for earning dividends but were part of the business, the CIT(A) rightly deleted the addition made by the AO.
8. Consequently, the appeal of the Department was dismissed, upholding the CIT(A)'s decision to delete the addition under section 14A.

This detailed analysis highlights the key arguments, decisions, and reasoning presented in the legal judgment regarding the Department's appeal against the deletion of an addition under section 14A of the Income Tax Act, 1961.