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2017 (3) TMI 261 - AT - Income TaxAddition u/s 14A - whether the provisions of section 14A can be invoked to make a disallowance on account of expenditure incurred in relation to the exempt income in the form of dividend received by the assessee on the shares held as stock-in-trade? - Held that - Disallowance is to be made under section 14A of the Act in relation to those shares which are held as stock in trade has been settled in the case of Dhanuka & Sons Vs. CIT 2011 (4) TMI 861 - CALCUTTA HIGH COURT as held that the provisions of section 14A of the Act are very much attracted on those investments which are held as stock in trade. The provisions of section 14A of the Act are very much attracted on those investments which are held as stock in trade. However before us, the ld. counsel for the assessee has raised an alternative contention that even if section 14A read with Rule 8D is held to be applicable in the case of the assessee, the Assessing Officer may be directed 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. Since this issue raised by the ld. counsel for the assessee as an alternative contention is squarely covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of REI Agro Ltd. (2013 (9) TMI 156 - ITAT KOLKATA), 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.
Issues Involved:
1. Applicability of Section 14A of the Income Tax Act, 1961, for disallowance of expenses related to exempt income. 2. Classification of dividend income as business income or exempt income. 3. Computation of disallowance under Rule 8D of the Income Tax Rules. Issue-wise Detailed Analysis: 1. Applicability of Section 14A of the Income Tax Act, 1961, for Disallowance of Expenses Related to Exempt Income: The assessee, a private limited company engaged in trading shares and securities, earned dividend income of ?41,375 during the assessment year 2010-11. The Assessing Officer (AO) observed that the assessee neither showed this dividend income as income from other sources nor claimed any exemption under Section 10(34) of the Act. The AO invoked Section 14A read with Rule 8D to disallow expenses related to earning this exempt income, resulting in a disallowance of ?42,29,872. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance under Rule 8D(2)(ii) and (iii) but upheld the disallowance of direct expenses under Rule 8D(2)(i), reasoning that the shares were held as stock-in-trade and not as investments. The CIT(A) relied on the jurisdictional Tribunal's decision in DCIT vs. Gulshan Investment Company Ltd., which held that Rule 8D(2)(ii) and (iii) do not apply when shares are held as stock-in-trade. 2. Classification of Dividend Income as Business Income or Exempt Income: The assessee argued that the dividend income should be classified as business income since the shares were held as stock-in-trade. However, the CIT(A) and the Tribunal held that Section 14A applies irrespective of whether the shares are held as stock-in-trade or investments. The Tribunal cited the Hon'ble Calcutta High Court's decision in Dhanuka & Sons vs. CIT, which clarified that Section 14A disallows expenses incurred in relation to exempt income, even if the shares generating such income are held as stock-in-trade. 3. Computation of Disallowance under Rule 8D of the Income Tax Rules: The Tribunal addressed the alternative contention raised by the assessee that the disallowance under Rule 8D should be computed by considering only those shares which yielded dividend income during the year. This contention was supported by the Tribunal's decision in REI Agro Ltd. vs. Dy. CIT, which was affirmed by the Hon'ble Calcutta High Court. The Tribunal directed the AO to recompute the disallowance under Rule 8D by considering only the shares that yielded dividend income in the relevant assessment year. Conclusion: The Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal. The Tribunal upheld the applicability of Section 14A for disallowing expenses related to exempt income, even when shares are held as stock-in-trade. However, it directed the AO to recompute the disallowance under Rule 8D by considering only those shares that yielded dividend income during the year. The order was pronounced on 03.03.2017.
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