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2019 (1) TMI 275 - AT - Income TaxDisallowance u/s 36(1)(iii) of proportionate interest - Held that - DR fails to dispute the clinching fact that neither the Assessing Officer nor the CIT(A) have examined the said vital date of the impugned conversion of assessee s stock-in-trade to investment whilst computing the proportionate disallowance in issue dispute the fact that the taxpayer s statement of fact had made it clear that actual date of conversion was 31.03.2005 only. We therefore deem it appropriate to restore this sole substantive ground back to the Assessing Officer for factual verification of date of the stock-in-trade shares to investments in issue to be followed by necessary computation of the proportionate interest disallowance as per law after affording adequate opportunity of hearing to the assessee. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Disallowance of proportionate interest under Section 36(1)(iii) of the Income Tax Act, 1961. 2. Applicability of Section 14A of the Income Tax Act, 1961. Detailed Analysis: 1. Disallowance of Proportionate Interest under Section 36(1)(iii): The primary issue in this case revolves around the disallowance of ?1,02,00,000/- as proportionate interest on borrowed funds used by the appellant for acquiring shares held as investments. The Assessing Officer (AO) disallowed this interest, presuming that the shares were converted from stock-in-trade to investments on 01.04.2004. The appellant contended that the conversion occurred on 31.03.2005, not 01.04.2004, as evidenced by the company's ledger accounts and a Board Resolution dated 28.02.2005. The appellant argued that the AO's presumption led to an erroneous disallowance of interest for the entire financial year 2004-05. The appellant further submitted that the share trading was its business, and the income from such activities should be taxed under "Profit & Gains from Business or Profession," making the corresponding expenses allowable as business expenses under Section 36(1)(iii). The appellant emphasized that the borrowed funds were used for business purposes, and hence, the interest on such borrowings should be deductible. The Tribunal noted that neither the AO nor the Commissioner of Income Tax (Appeals) [CIT(A)] examined the vital date of conversion of shares from stock-in-trade to investments. Therefore, the Tribunal restored this issue to the AO for factual verification of the conversion date and necessary computation of the proportionate interest disallowance as per law. 2. Applicability of Section 14A: The appellant argued that Section 14A, which disallows expenditure incurred in relation to earning exempt income, should not apply in their case. The appellant maintained that the shares were held as stock-in-trade, not as investments, and the primary motive was to earn profits from trading, not dividend income. The appellant cited several judicial precedents to support the contention that Section 14A does not apply to traders in shares where the dividend income is incidental to the business of trading in shares. The appellant also highlighted that no dividend income was earned during the relevant assessment year, and hence, no disallowance under Section 14A should be made. The appellant referred to the decision of the Bombay High Court in CIT vs. M/s Delite Enterprises, which held that no disallowance under Section 14A can be made when no exempt income is earned during the year. The Tribunal did not provide a separate ruling on the applicability of Section 14A, as the primary issue was the factual determination of the conversion date of shares. However, the Tribunal's decision to restore the matter to the AO for factual verification implicitly acknowledges the need to re-examine the applicability of Section 14A in light of the correct conversion date. Conclusion: The Tribunal restored the issue of proportionate interest disallowance under Section 36(1)(iii) to the AO for factual verification of the conversion date of shares from stock-in-trade to investments. The Tribunal directed the AO to recompute the proportionate interest disallowance based on the verified conversion date and in accordance with the law, after providing adequate opportunity of hearing to the appellant. The appeal was accepted for statistical purposes.
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