2014 (2) TMI 1067 - AT - Income Tax

Disallowance u/s 14A of the Act r.w Rule 8D of the Rules - Dividend Income - Whether the disallowance u/s 14A r/w rule 8D can be with regard to the dividend earned on the shares held as stock-in-trade Held that - The decision in DH SECURITIES PVT LTD Versus DEPUTY COMMISSIONER OF INCOME TAX 2013 (12) TMI 720 - ITAT MUMBAI and GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT followed - even though the shares have been held as stock-in-trade, the dividend income earned on such shares has to be examined for the purpose of disallowance under section 14A - the disallowance under section 14A has to be worked out even when the dividend income has been accrued on the shares held as stock-in-trade - Once the shares which yield tax exempt dividend income, then it cannot be held that under the formula, the entire interest expenditure is to be disallowed under the said formula as these shares are also held as stock-in-trade, which yields trading income which is taxable - while arriving at the disallowance of rule 8D, disallowance of interest expenditure should be restricted to 20% of the exempt income i.e., dividend income thus, the order of the CIT(A) set aside Decided partly in favour of Assessee.

Summary

Issues:
Challenge to disallowance under section 14A of the Income Tax Act, 1961 for the assessment year 2008-09.

Detailed Analysis:

Issue 1: Disallowance under section 14A
The appellant challenged the disallowance of Rs. 7,66,741 under section 14A of the Income Tax Act, 1961. The appellant, engaged in trading of spices, general merchant, and purchase/sale of shares, earned dividend income on shares held as stock-in-trade. The Assessing Officer applied rule 8D for disallowance as the appellant did not attribute any expenses for earning the exempt income. The appellant argued that as shares were held as circulating capital for business, no disallowance should apply. The Commissioner (Appeals) confirmed the disallowance citing precedent. The appellant contended that no disallowance should apply as all income was business income, relying on tribunal decisions. The Departmental Representative argued in favor of disallowance under section 14A. The Tribunal analyzed the issue and concluded that disallowance under section 14A must be worked out even if dividend income is earned on shares held as stock-in-trade. The Tribunal scaled down the disallowance of interest expenditure to 20% of the exempt income, following a detailed analysis and precedent. Consequently, the impugned order was set aside, and the appeal was partly allowed.

Conclusion:
The Tribunal ruled in favor of the appellant, setting aside the disallowance under section 14A and allowing the appeal partly by restricting the interest expenditure disallowance to 20% of the exempt income.