2016 (10) TMI 988 - AT - Income Tax

Disallowance u/s. 14A read with Rule 8D - AO has invoked the provisions of rule 8D holding that the implication of the said rule is automatic and has nothing to do with the earning of income during the year under consideration - CIT(A) has upheld the addition made by the AO by holding that the provisions of section 14A are also applicable in case of stock-in-trade - Held that - As during the year under consideration, assessee had a long term capital gain of ₹ 54,74,924/- alongwith dividend income on mutual funds and shares for ₹ 46,55,903. Also further note that the assessee has incurred bank charges and interest expense amounting to ₹ 19,42,045.95 during the year under consideration, complete details were filed by the assessee before the AO as well as Ld. CIT(A) and no loan has been taken by the assessee during the year as is evident from the balance sheet of the assessee. The said interest has been paid by the assessee to the financiers who have funded the IPOs as is evident from the records, and there is no dividend income from transaction. Since the business of the assessee is sale and purchase of shares, all the interest has been paid in relation to normal business income, and cannot be allocated for the purpose of disallowance u/s. 14A read with Rule 8D. Find considerable cogency in the contention of the Ld. Counsel of the assessee that it is a settled law that the disallowance u/s. 14A read with Rule 8D should only be made with regard to investments and not with the regard to share held as stock-in-trade. The assessee is in the business of sale and purchase of shares and mutual funds and the shares were held as stock in trade, therefore, provisions of section 14A read with Rule 8D are not applicable. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D.
2. Interest charged under sections 234A, 234B, 234C & 234D of the Income Tax Act.

Issue 1: Disallowance under section 14A read with Rule 8D:
The case involved an appeal against an order passed by the Ld. Commissioner of Income Tax (Appeals) regarding disallowances made under section 14A read with Rule 8D. The Assessing Officer (AO) had assessed the income of the assessee at a higher amount after making an addition under section 14A. The Ld. CIT(A) had dismissed the appeal of the assessee, leading to the appeal before the Tribunal. The crux of the matter was whether the provisions of section 14A were applicable to shares held as stock-in-trade. The assessee argued that since the business involved sale and purchase of shares, all interest payments were related to normal business income and not for earning exempt income. The assessee relied on various case laws to support this contention. The Tribunal analyzed the submissions and case laws cited, emphasizing that disallowance under section 14A should only be made concerning investments and not shares held as stock-in-trade. The Tribunal noted that the assessee had incurred bank charges and interest expenses during the year, with no loans taken, and all interest payments were related to normal business income. Relying on the case laws cited, the Tribunal held that the provisions of section 14A read with Rule 8D were not applicable to shares held as stock-in-trade. Consequently, the Tribunal deleted the addition in dispute, deciding the issue in favor of the assessee.

Issue 2: Interest charged under sections 234A, 234B, 234C & 234D of the Income Tax Act:
The second issue pertained to the interest charged under sections 234A, 234B, 234C & 234D of the Income Tax Act. The assessee had argued that the interest paid to financiers who funded the IPOs was related to normal business income and not for earning exempt income. The Tribunal, after considering the arguments and case laws presented, concluded that the interest expenditure incurred by the assessee was in respect of funds borrowed for IPOs and not for earning exempt income. The Tribunal highlighted that the provisions of Rule 8D were automatic according to the AO, but the Tribunal disagreed, emphasizing the need for a direct or proximate connection between expenditure and exempt income for disallowance under section 14A. Ultimately, the Tribunal ruled in favor of the assessee, deleting the addition in dispute related to interest charges under sections 234A, 234B, 234C & 234D of the Income Tax Act.

In conclusion, the Tribunal allowed the appeal filed by the assessee, deleting the additions made under section 14A read with Rule 8D and the interest charged under sections 234A, 234B, 234C & 234D of the Income Tax Act. The decision was based on the principle that disallowances under section 14A should be specific to investments and not applicable to shares held as stock-in-trade, as supported by various case laws cited during the proceedings.