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2017 (2) TMI 628 - HC - Income TaxDisallowance under Section 14A - - Held that - Tribunal had accepted the submission of the assessee that there was no satisfaction recorded by the Assessing Officer for invoking the provisions of Section 14A read with Rule 8D. In Dhanuka & Sons (2011 (4) TMI 861 - CALCUTTA HIGH COURT ) it was found there was no dispute that part of the income of the assessee from its business was from dividend whereas the assessee was unable to produce any material before the authority below showing the source from which such shares were acquired. That decision is distinguishable on facts as not applicable to this case. We also do not find the Revenue had urged that the expenditure being disallowed was in relation to exempt income not arising in the previous year for application of the said circular to be considered. The Assessing Officer had accepted the correctness of the disallowable expenditure offered by the assessee on its claim of ₹ 25,68,04,353/- as long term capital gain. He did not allow the claim itself treating the said amount as business income to thereafter disallow the offered expenditure. In view of the clear finding of fact regarding the exempt income claimed treated to be business income and the shares held by the assessee having been treated as stock in trade, we do not find the case involves a substantial question of law. - Decided against revenue
Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Treatment of investments as shares stock in trade. 3. Disallowance under Rule 8(D) and applicability of Circular no.5/2014 issued by CBDT. 4. Justification of the order passed against the applicable law. 5. Consideration of material facts on record for the appeal filed by the assessee. Issue 1: Disallowance under Section 14A: The Revenue appealed against the ITAT order deleting disallowance under Section 14A. The Revenue argued that the AO had computed disallowance under Section 14A, but the ITAT erred in law by deleting it. The Revenue relied on Rule 8D for computation and cited the case of Dhanuka & Sons vs. CIT. The Court clarified that Section 14A aims to disallow expenditure related to income not forming part of the total income. The Court emphasized the need for the assessee to disclose the source of acquisition of shares to justify disallowance. Issue 2: Treatment of investments as shares stock in trade: The assessee, engaged in share trading, borrowed money for purchasing shares treated as stock in trade. The senior Advocate argued that no Section 14A disallowance applies as the dividend income was incidental to holding shares. Reference was made to a Karnataka High Court judgment where it was held that Section 14A does not apply if no expenditure was incurred for earning exempt dividend income. The Court noted that the Tribunal accepted the shares as stock in trade, making Rule 8D inapplicable. Issue 3: Disallowance under Rule 8(D) and CBDT Circular: The Revenue questioned the deletion of disallowance under Rule 8(D) and cited CBDT Circular no.5/2014. The senior Advocate contended that Section 14A had no application to the rest of the share trading income treated as business income. The Court found no recorded satisfaction by the AO for invoking Section 14A and Rule 8D, dismissing the Revenue's reliance on the circular. Issue 4: Justification of the order against applicable law: The Court examined the assessment order where the LTCG claimed was treated as business income, leading to no exemption. The Tribunal found no investments, holding all shares as stock in trade, thus ruling out Rule 8D application. The Court dismissed the appeal, stating no substantial question of law arose due to clear factual findings. Issue 5: Consideration of material facts on record: The Court noted that the Revenue did not argue that the disallowed expenditure was in relation to exempt income not arising in the previous year. The AO accepted the correctness of the disallowable expenditure offered by the assessee. With shares treated as stock in trade and exempt income claimed as business income, no substantial question of law was identified, leading to the dismissal of the application and appeal.
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