2016 (6) TMI 879 - AT - Income Tax

Disallowance under section 14A - quantification of disallowance under section 14A of the Act on account of expenditure incurred by the assessee in relation to income in the form of dividends, which is exempt from tax - Held that - the shares and securities treated as stock-in-trade cannot be considered for the purposes of working of disallowance under section 14A of the Act r.w. Rule 8D of the Rules. Accordingly, the disallowance under section 14A of the Act quantified by the income tax authorities at ₹ 17,45,347/- is untenable and the working of the disallowance furnished by the assessee during the assessment proceedings at ₹ 2,80,797/- is hereby affirmed. See M/s. India Advantage Securities Ltd 2015 (6) TMI 140 - BOMBAY HIGH COURT

Summary

Issues involved:
Quantification of disallowance under section 14A of the Income Tax Act for expenditure incurred in relation to tax-free dividend income from shares held as stock-in-trade.

Detailed Analysis:

Issue 1: Disallowance under section 14A of the Act
- The appellant, a Private Limited Company, filed an appeal against the addition of &8377; 17,45,347/- made by the Assessing Officer under section 14A of the Income Tax Act for the assessment year 2010-11.
- The Assessing Officer invoked the provisions of section 14A as the appellant earned tax-free dividend income of &8377; 1,11,16,796/- during the relevant year.
- The appellant initially disallowed &8377; 60,000/- suo-moto under section 14A but later furnished a working of disallowance under Rule-8D of the Income Tax Rules, 1962, amounting to &8377; 2,80,797/-.
- The Assessing Officer disagreed with the appellant's calculation and reworked the disallowance at &8377; 17,45,347/-, adding it to the returned income under section 14A.
- The CIT(A) affirmed the Assessing Officer's decision, leading the appellant to appeal to the Tribunal.

Issue 2: Disallowance in relation to income from shares held as stock-in-trade
- The appellant contended that disallowance under section 14A should not apply to income received from shares held as stock-in-trade, citing a decision by the Mumbai Bench of the Tribunal in a similar case.
- The Tribunal referenced various judgments, including a decision by the Hon'ble High Court of Karnataka, to support the appellant's argument.
- The High Court's ruling emphasized that expenditure incurred on borrowings for purchasing trading shares, though incidental to trading, should not be disallowed under section 14A if no expenditure was incurred on earning dividend income from unsold shares.

Conclusion:
- The Tribunal upheld the appellant's plea, following the decision of the Hon'ble High Court, and set aside the CIT(A)'s order.
- The disallowance under section 14A was restricted to &8377; 2,80,797/-, as per the appellant's working during the assessment proceedings.
- Consequently, the appeal of the assessee was partly allowed, and the order was pronounced on 30/10/2015.