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2014 (9) TMI 1215 - AT - Income TaxDisallowance u/s 14A read with Rule 8D - Grievance of the Revenue is that the ld. CIT(A) has held that when shares are kept as inventories disallowance u/s 14A of the Act is not called for - HELD THAT - This issue is covered in favour of assessee by the decision of the Hon ble Karnataka High Court in the case of CCI Ltd. vs JCIT 2012 (4) TMI 282 - KARNATAKA HIGH COURT held that when the shares are not retained for earning the dividend income and the dividend income is incidental to its business of sale of shares disallowance u/s 14A of the Act is not called for. In this case also we find the ld. CIT(A) has held that when the shares were kept on trading account no disallowance us 14A of the Act is called for. We find that in such circumstances there is no infirmity in the order of ld. CIT(A) in view of the precedence as above. Furthermore the ld. CIT(A) has given a clear basis for the computation of disallowance confirmed by him. The Revenue has not been able to point out any infirmity in the same. Hence revenue s claim that the ld. CIT(A) should not have held that shares held as stock in trade do not attract disallowance u/s 14A of the Act is not sustainable. Accordingly in the background of the aforesaid discussion and precedent we uphold the order of ld.CIT(A) on this account. Disallowance under the head Penalty - Sum paid to Stock Exchange for delay in payment of the dues - HELD THAT - We find that the ld. CIT(A) has passed an order following the decision of ITAT Kolkata Bench. The Tribunal has clearly found that when sum have been paid to Stock Exchange for delay in payment of the dues and for various other obligations arising out of carrying on business activities the penalty charges cannot be said to be for infringement of any law were paid to compensate for delay in payment of the dues to the Stock Exchange and for various other obligations. In these circumstances we do not find any infirmity in the order of the ld. CIT(A). Accordingly we uphold the same.
Issues:
1. Disallowance u/s 14A of the Act 2. Deletion of disallowance under the head Penalty Analysis: Issue 1: Disallowance u/s 14A of the Act The Assessing Officer (AO) computed a disallowance u/s 14A amounting to Rs. 41,69,459 based on the total investment and inventories of the assessee company's dividend income. However, the ld. CIT(A) observed that inventories of shares should not be considered for disallowance under section 14A since the assessee was a dealer in shares, and trading in securities was a principal business activity. The ld. CIT(A) noted that the turnover in securities far exceeded the dividend income received, thus justifying the exclusion of inventories for disallowance purposes. Additionally, the ld. CIT(A) accepted the assessee's voluntary disallowance under another section of the Act, leading to a reduced exempted income amount. The ld. CIT(A) also addressed direct expenditure related to earning exempt income, restricting the disallowance to Rs. 9,79,228 instead of the initial amount calculated by the AO. The Tribunal upheld the ld. CIT(A)'s decision based on a precedent and the clear basis provided for the disallowance calculation. Issue 2: Deletion of disallowance under the head Penalty The AO disallowed a sum of Rs. 5,73,839 as penalty charges paid by the assessee, considering them as infringing expenses under Section 37. However, the ld. CIT(A) noted that the penalties were compensatory expenses, not for infringement of law, and cited a previous Tribunal decision supporting this view. The ld. CIT(A) examined the details of penalties paid to the Stock Exchange and allowed Rs. 4,25,650 as expenditure under Section 37(1) of the Income-tax Act, 1961, except for an amount where the assessee did not provide details. The Tribunal upheld the ld. CIT(A)'s order, emphasizing that the penalties were for delays in payment and other business obligations, not for legal violations, thus justifying their treatment as allowable expenses. In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions of the ld. CIT(A) on both issues.
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