2016 (12) TMI 45 - AT - Income Tax

Additional disallowance made u/s. 14A r.w. Rule 8D - dividend income earned by the assessee on shares and mutual funds held as stock-in-trade - Held that - The issue raised in the present set of appeals is identical to one adjudicated by the Co-ordinate Bench of the Tribunal in the case of Kunal Polymers Pvt. Ltd. Vs. Dy. Commissioner of Income Tax 2015 (10) TMI 2373 - ITAT PUNE wherein held that assessee has not held the shares for earning dividend income. Dividend income is incidental to the share trading business of the assessee. Thus, no disallowance u/s. 14A is warranted on dividend earned on shares held as stock-in-trade, Also in the case of CCI Ltd. Vs. JCIT (2015 (10) TMI 2373 - ITAT PUNE ) has held that when no expenditure has been incurred by the assessee in earning the dividend income no notional expenditure could be deducted from the said income. The Hon ble High Court further held that when the assessee has not retained shares with the intention of earning dividend and the dividend income is incidental to business of sale of shares no disallowance u/s. 14A of the Act is to be made. - Decided in favour of assessee

Summary

Issues:
- Additional disallowance made under section 14A of the Income Tax Act, 1961 in respect of dividend income earned on shares and mutual funds held as stock-in-trade.

Detailed Analysis:

1. Background: The appellant's appeals were against the Commissioner of Income Tax (Appeals)-II's order for the assessment years 2008-09, 2009-10, and 2010-11 regarding additional disallowance under section 14A of the Income Tax Act, 1961, concerning dividend income on shares and mutual funds held as stock-in-trade.

2. Appellant's Argument: The appellant, engaged in trading shares, mutual funds, bonds, and derivatives, contended that dividend income received on shares held as stock-in-trade is incidental to the trading business. Citing relevant case laws, the appellant argued against the disallowance under section 14A, emphasizing that shares held as stock-in-trade do not warrant such disallowance.

3. Revenue's Position: The Department supported the Commissioner's findings and sought dismissal of the appeals.

4. Tribunal's Findings: The Tribunal noted that the shares and mutual funds held by the appellant were for trading purposes and stock-in-trade, with no investment intent. Referring to a similar case, the Tribunal ruled that no disallowance under section 14A is warranted for dividend income earned on shares held as stock-in-trade.

5. Precedent and Legal Interpretation: The Tribunal relied on the decision of the Co-ordinate Bench and the Hon'ble Karnataka High Court's judgment to support its conclusion that no disallowance should be made under section 14A for dividend income on shares held as stock-in-trade.

6. Conclusion: Considering the facts and legal precedents, the Tribunal set aside the impugned order, allowing the appeals of the assessee and directing the Assessing Officer to delete the disallowance made under section 14A of the Act.

This detailed analysis of the judgment highlights the key issues, arguments presented by both parties, the Tribunal's findings, legal interpretations, and the ultimate conclusion reached in favor of the assessee based on relevant case laws and precedents.