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2016 (8) TMI 682 - AT - Income TaxDisallowance under section 14A - Held that - A person may make investment in shares and the shares so purchased may be held either as stock-in-trade or investment. The word investment in Rule 8D refers to the making of purchase of shares and not holding it as investment. The applicability of Rule 8D to compute the disallowance to be made under section 14A on account of expenditure in relation to the exempt dividend income earned by the assessee from shares held as stock-in-trade thus was upheld by the Tribunal in its Third Member decision rendered in the case of DH Securities (P.) Ltd. (2015 (9) TMI 373 - ITAT MUMBAI) and respectfully following the same, we reject the contention of the ld. counsel for the assessee that the disallowance in the case of the assessee can be restricted only to direct expenses incurred in relation to the earning of exempt dividend income by applying Rule 8D(2)(i). We direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted. Interest income - business income or income from other sources - Held that - There was a direct nexus between the earning of interest income in question as well as the business income of the assessee, inasmuch as the same was earned on Fixed Deposits kept by the assessee as margin money with NSE through its broker in order to enable it to trade in Future & Options. The interest income earned on the said Fixed Deposits thus was directly attributable to the business of the assessee and the ld. CIT(Appeals), in our opinion, is fully justified in treating the same as business income of the assessee instead of income from other sources by relying on the decision of the Hon ble Supreme Court in the case of Govinda Choudhury & Sons (1992 (4) TMI 8 - SUPREME Court) as well as Chinna Nachimuthu Constructions (2007 (11) TMI 40 - HIGH COURT, KARNATAKA ).
Issues Involved:
1. Deletion of disallowance under section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules. 2. Classification of interest income as business income instead of income from other sources. Issue-Wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A: The primary issue concerns the deletion of an addition of ?2,42,70,464/- made by the Assessing Officer (AO) as a disallowance under section 14A read with Rule 8D. The assessee, a company engaged in share trading, declared a nil total income and claimed ?92,64,034/- as exempt dividend income, offering a disallowance of ?1,20,000/- under section 14A. The AO, dissatisfied with the disallowance offered, invoked Rule 8D and computed a higher disallowance of ?2,43,90,464/-, adding the difference of ?2,42,70,464/- to the total income. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, reasoning that the shares were held as stock-in-trade and not as investments. The CIT(A) relied on the Karnataka High Court's decision in CCI Limited vs. JCIT and the Kerala High Court's decision in CIT vs. Smt. Leena Ramchandran, which held that disallowance under section 14A is not applicable when shares are held as stock-in-trade. The Revenue argued that the issue is covered by the Calcutta High Court's decision in Dhanuka & Sons vs. CIT, which supports the disallowance under section 14A even for shares held as stock-in-trade. The Tribunal, considering the binding nature of the Third Member decision in D.H. Securities (P.) Ltd. and the principles laid down by the Calcutta High Court in Dhanuka & Sons, upheld the applicability of section 14A for shares held as stock-in-trade. However, the Tribunal accepted the alternative contention of the assessee that the disallowance should be computed by considering only those shares which yielded dividend income during the year, as per the decision in REI Agro Ltd. vs. DCIT. Thus, the AO was directed to recompute the disallowance accordingly. The Revenue's ground on this issue was partly allowed. 2. Classification of Interest Income: The second issue involved the classification of interest income of ?52,84,430/-. The AO assessed this income under "income from other sources," while the assessee claimed it as business income. The CIT(A) accepted the assessee's claim, noting that the interest was earned on fixed deposits kept as margin money with NSE through the broker for trading in Future & Options (F&O). The CIT(A) relied on the Supreme Court's decision in CIT v. Govinda Choudhury & Sons and the Delhi High Court's decision in CIT vs. Koshika Telecom Ltd., which support the classification of such interest as business income when it is inextricably linked to the business activities. The Tribunal upheld the CIT(A)'s decision, agreeing that the interest income was directly attributable to the business of the assessee and should be assessed as business income. Consequently, the Revenue's ground on this issue was dismissed. Conclusion: The appeal by the Revenue was partly allowed, with the Tribunal directing a recomputation of disallowance under section 14A by considering only those shares that yielded dividend income, while upholding the CIT(A)'s decision to classify the interest income as business income.
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