2015 (12) TMI 894 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Held that - The assessee is a stock trader and not holding any investment in shares and securities then so far as interest expenditure is concerned, the same cannot be attributable or allocable for earning the dividend income which is only an incidental income and not intended income of the activity of the assessee being trading in shares and securities. We find that in a series of decisions, this Tribunal has decided this issue by holding that no disallowance u/s 14A can be made on account of the expenditure incurred for trading in shares & securities merely because the assessee earned the incidental dividend income. The interest expenditure is exclusively incurred for trading activity and, therefore, cannot be said to be an expenditure incurred for composite activity yielding taxable and non taxable income and accordingly, the same cannot be attributed /allocated in respect of dividend income in the hands of the assessee. As regards the other expenses, we find that the Assessing Officer has not pointed out any expenditure debited to the P&L Account which has any proximate nexus with the dividend income. The entire expenditure debited to the P&L account has a direct nexus with the trading activity of the assessee, therefore, the disallowance made by the assessee on its own is proper and just and no further disallowance on account of administrative expenses is justified. In view of the above discussion, we delete the addition made by Assessing Officer u/s 14A. - Decided in favour of assessee.

Summary

Issues:
Whether the CIT(A) erred in upholding the disallowance made by the Assessing Officer u/s 14A r.w.r 8D.

Analysis:
The appeal was against the order of the CIT(A) for A.Y. 2009-10. The assessee raised grounds challenging the disallowance made by the Assessing Officer under section 14A. The assessee, engaged in trading shares and securities, earned dividend income of Rs. 10,70,360, claimed as exempt under sections 10(34) and 10(35). The Assessing Officer disallowed Rs. 9,71,849 u/s 14A r.w.r 8D, including interest and other expenses. The CIT(A) upheld the disallowance. The assessee argued that no expenditure was incurred for earning the dividend income as it was incidental to trading activity. The assessee contended that interest income exceeded interest payment, hence no disallowance was warranted. The assessee challenged the jurisdiction of the Assessing Officer to invoke rule 8D(2) without rejecting the voluntary disallowance made. Various case laws were cited to support the contentions.

The Tribunal noted that the assessee was a stock trader without holding investments, making interest expenditure not attributable to dividend income. Citing precedents, the Tribunal held that no disallowance under section 14A could be made for expenses related to trading in shares just because of incidental dividend income. Referring to specific cases, the Tribunal emphasized that expenditure for earning dividend income, though incidental to trading, need not be disallowed under section 14A. The Tribunal upheld the CIT(A)'s decision to delete the disallowance u/s 14A, following the judgment of the Hon'ble Karnataka High Court and previous Tribunal decisions. The interest expenditure was deemed exclusively for trading activity, not for composite income, hence not allocable to dividend income. No proximate nexus between other expenses and dividend income was found, justifying the assessee's self-disallowance. Consequently, the addition made by the Assessing Officer u/s 14A was deleted, and the appeal by the assessee was allowed.

In conclusion, the Tribunal ruled in favor of the assessee, holding that the disallowance u/s 14A was not justified given the nature of the assessee's trading activities and the incidental nature of the dividend income. The decision was based on legal precedents and the specific circumstances of the case, ultimately leading to the deletion of the disallowance made by the Assessing Officer.