2017 (9) TMI 562 - AT - Income Tax

Disallowing u/s 14A r.w.r. 8D - expenditure incurred to earn exempt Dividend income u/s. 10(34) - Held that - We do not find any merits in the arguments of the assessee for the reason that the assessee fails to substantiate its claim of shares held as stock in trade with any evidence. We observe that the assessee has filed its financial statements for the assessment year 2008-09. On perusal of the financial statement we find that the assessee s main activity is to manufacture and trading in chemicals. We further observe that the assessee has made substantial investments in mutual funds. We further notice that the total dividend income earned during the year is out of mutual funds. Therefore, we are of the view that there is no merit in the claim of the assessee that it has earned dividend income from the shares held as stock in trade. We further notice that the assessee has made a turnover of ₹ 1.75 crores from share trading; however, there is no corresponding purchases appeared in the schedule of purchases. We further observe that the assessee has disclosed inventory of closing stock held at the end of the financial year which mainly consists of stock held from its manufacturing activity, but there is no stock of shares and securities, therefore, we are of the view that the assessee has failed to prove that it is involved in the activity of purchase and sale of shares and accordingly, the claim of the assessee that the provisions of section 14A r.w.r. 8D cannot be applied, is rejected. Though assessee claims to have used interest free funds, it failed to file necessary information to justify its claim. We further observe that the CIT(A) has already considered the claim of the assessee and set aside the issue to the file of the AO for further verification to ascertain whether the assessee is having interest free funds as on the date of investment. Therefore, we uphold the finding of the CIT(A) and restore the issue to the file of the AO and direct the AO to examine the availability of interest free funds, if any, as on the date of investment. Appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of expenditure incurred to earn exempt Dividend income u/s. 10(34) under Section 14A read with Rule 8D.

Analysis:

Issue 1: Disallowance of expenditure incurred to earn exempt Dividend income u/s. 10(34) under Section 14A read with Rule 8D

The appellant, engaged in manufacturing and trading of chemicals, filed its return for AY 2007-08, declaring income of ?39,68,480. The AO observed dividend income of ?24,15,335 claimed as exempt u/s 10(34) without any disallowance of related expenditure. The AO invoked Section 14A r.w.r. 8D, disallowing interest paid on loans and expenses incurred towards earning exempt income at ?5,32,585, supported by the decision in Godrej & Boyce Mfg Co Ltd vs CIT. The CIT(A) directed the AO to verify the availability of interest-free funds for investments. The CIT(A) upheld the disallowance under Rule 8D(2)(iii) due to the failure to prove earning dividend income from shares held as stock in trade. The appellant contended that no interest expenditure should be disallowed as it used interest-free funds and no specific expenditure was incurred for dividend income. The Tribunal upheld the AO's decision, stating the appellant failed to substantiate its claim of shares held as stock in trade and the main activity being manufacturing and trading in chemicals. The Tribunal directed the AO to verify the availability of interest-free funds for investments.

In conclusion, the Tribunal dismissed the appeal, upholding the disallowance of expenditure incurred to earn exempt Dividend income u/s. 10(34) under Section 14A read with Rule 8D. The Tribunal found no merit in the appellant's claims regarding interest-free funds and specific expenditure for dividend income, directing the AO to verify the availability of interest-free funds for investments and upholding the disallowance under Rule 8D(2)(iii) for the AY 2008-09 onwards.