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2020 (5) TMI 89 - AT - Income TaxDisallowance u/s 14A - assessee received dividend income from investment including shares which were held as stock-in-trade - HELD THAT - First ground being the exempt income earned on stock-in-trade will not attract disallowance under section 14A of the act in view of the decision in the case of CCI Ltd Vs JCIT 2012 (4) TMI 282 - KARNATAKA HIGH COURT . However, in the case of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT after considering the decision of the Hon ble Karnataka High Court in the case of CCI Ltd held on the shares held as stock-in-trade , an assessee earn profit or loss on trading of the those share and additionally earn dividend also. The Hon ble Supreme Court has directed to apportion expenses towards exempt dividend income from stockin- trade as well as profit earned on trading of stock-in-trade and the expenses apportioned toward exempt income are only held as liable for disallowance. Accordingly , the Assessing Officer is required to apportion the part of expenses related to exempt dividend income and consider that part for disallowance only . CIT(A) has deleted the disallowance in view case of CIT Vs Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT if there are sufficient interest-free funds available, it can be presumed that investment had been made out of from such funds and thus no disallowance for interest is required - As seen that exempt income is not only from the equity shares kept as stock-in-trade but also from interest received on bonds. The same has been invested in compliance of the Reserve Bank of India (RBI) Rules. But once exempt income is earned, then interest for corresponding borrowing would be liable for disallowance. Thus, the assessee is required to demonstrate not only investment in shares had been out of interest free funds but investment in Bonds was also made out interest free own funds. We feel it appropriate to restore this issue to the file of the learned Assessing Officer for deciding a fresh in view of our finding above and in accordance with law. The assessee shall provide all details of the investment in assets yielding exempt income as well as own funds and funds borrowed. The assessee shall also provide details of apportionment of interest expenses in relation to a stock-in-trade towards earning dividend income as well as towards earning trading profit - ground No. 1 of the appeal of the Revenue is accordingly allowed for statistical purposes. Disallowance u/s 36(1)(iii) - as per AO interest paid on short-term borrowings for the equity shares held as a stock in trade, dividend income from which has been claimed as exempt, is not allowable in terms of section 36(1)(iii) of the Act being incurred not for business purposes - HELD THAT - This issue has been decided in favour of the assessee by the Tribunal in assessment year 2011-12, but in view of the decision of the Hon ble Supreme Court in the case of Maxopp investment Ltd (supra), the issue requires reconsideration. It is undisputed that any expenditure related to exempted income cannot be allowed under the head profit in gains of the business. Under the head profit in gains of the business expenses related to the business income are only to be allowed as per the provisions of the Act. In the instant case, the assessee has claimed dividend income from the stock-in-trade as exempt but profit from trading of such stock-in-trade is taxable under the head profit in gains of the business. In the case of Maxopp investment Ltd (supra) as directed to apportion such interest expenses towards exempted dividend income and towards trading income. The entire interest expenditure corresponding to stock-in- trade cannot be allowed to the assessee as business expenditure. 4.3 The portion of the interest expenses related to earning of the exempted dividend income has to be disallowed. Since the issue in dispute of apportionment of interest expenses corresponding to stock-in-trade has already been restored to the file of the Assessing Officer, while deciding the disallowance under section 14A read with rule 8D of the income tax rules, this issue being connected is also restored to the file of the learned Assessing Officer for deciding a fresh in accordance with law. This ground of the appeal is also allowed for statistical purposes. Disallowance on account of provision for diminution in market value of stock-in- trade - AO observed that the assessee made a provision for diminution in market value of the stock which had already been added back while computing the book profit under section 115JB - whether diminution or reduction in price of the stock-in-trade can be allowed while computing business income? - HELD THAT - There is no dispute that the assessee is at liberty to value its stock at cost or market value, whichever is lower as per consistent method of accounting, and such reduction if any , in value of the shares held as stock-in-trade will be allowed . But, if such a provision is made outside the trading account ( only while computation of income) then same may not be allowable. In the facts of the case , it is not clear whether the provision for diminution in value of stock-in-trade has been made out of the trading account or within the trading account , therefore, we feel it appropriate to restore the issue to the file of the AO for verifying the facts from the books of accounts and other records of the assessee and decide the issue in dispute afresh in accordance with law. We order accordingly. The ground of the appeal is accordingly allowed for statistical purpose.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. 3. Disallowance on account of provision for diminution in market value of stock-in-trade. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961: The first issue pertains to the deletion of a disallowance of ?3,92,60,000/- made under Section 14A of the Act. The assessee, a Non-Banking Financial Company (NBFC), received dividend income and interest on bonds, both claimed as exempt. The Assessing Officer (AO) computed a disallowance of ?426.85 lakhs under Rule 8D of the Income Tax Rules, 1962, which included ?392.62 lakhs under Rule 8D(2)(ii) and ?34.25 lakhs under Rule 8D(2)(iii). The CIT(A) deleted the disallowance under Rule 8D(2)(ii), citing that the securities were held as stock-in-trade and thus no interest could be attributed to their acquisition. The CIT(A) also noted that the assessee had sufficient interest-free funds to cover the investments. However, the Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd., held that expenses must be apportioned between exempt and non-exempt income. The Tribunal restored the issue to the AO for reconsideration, directing the assessee to provide details of investments and funds. 2. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961: The second issue involves the deletion of a disallowance of ?30,61,000/- under Section 36(1)(iii) of the Act. The AO disallowed the interest paid on short-term borrowings used for acquiring equity shares held as stock-in-trade, arguing that the dividend income from these shares was exempt. The CIT(A) deleted the disallowance, stating that the interest expenditure was related to the business of the assessee. The Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd., held that interest expenses must be apportioned between exempt dividend income and taxable trading income. The Tribunal restored the issue to the AO for reconsideration, directing the assessee to provide details of the apportionment of interest expenses. 3. Disallowance on account of provision for diminution in market value of stock-in-trade: The third issue concerns the deletion of a disallowance of ?6,56,24,600/- on account of provision for diminution in market value of stock-in-trade. The AO disallowed the provision, considering it an unascertained liability. The CIT(A) allowed the provision, referencing previous decisions that such provisions are allowable if the stock is valued at cost or market value, whichever is lower. The Tribunal agreed that the assessee is allowed to value its stock at cost or market value, but noted that it was unclear whether the provision was made within the trading account or outside it. The Tribunal restored the issue to the AO for verification from the assessee's books and records. Conclusion: The appeal of the Revenue is allowed for statistical purposes, with all issues being restored to the AO for fresh consideration in accordance with the Tribunal's directions. The order was pronounced in the open court on 1st May, 2020.
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