2019 (5) TMI 1131 - HC - Income Tax

Addition made u/s. 14A r.w.r. 8D upto the exempt income earned by the assessee - HELD THAT - It not disputed by the appellant-revenue that the issue involved herein is concluded by the decision of this Court in The Pr. Commissioner of Income Tax, Patiala v. State Bank of Patiala 2017 (5) TMI 843 - PUNJAB AND HARYANA HIGH COURT wherein it was held that the amount of disallowance under Section 14A of the Act was restricted to the amount of exempt income only and not at a higher figure. Also see MAXOPP INVESTMENT LTD. VERSUS COMMISSIONER OF INCOME TAX, NEW DELHI AND PRINCIPAL COMMISSIONER OF INCOME TAX-I VS. D.B. CORP LTD. 2018 (3) TMI 805 - SUPREME COURT whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits - Decided against revenue.

Summary

Issues:
1. Interpretation of Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Application of the decision in ITA-270-2016 regarding the restriction of disallowance under Section 14A to the exempt income earned by the assessee.
3. Consideration of the Supreme Court ruling in Civil Appeal Nos. 104-109 of 2015 (Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi) regarding the apportionment of expenditure in cases where shares are held as stock-in-trade.

Analysis:
The High Court heard an appeal by the revenue challenging the order of the Income Tax Appellate Tribunal (ITA) regarding the addition made under Section 14A of the Income Tax Act, 1961. The Tribunal had restricted the disallowance under Section 14A of the Act read with Rule 8D of the Rules up to the exempt income earned by the assessee for the assessment year 2011-12. The assessee, engaged in various business activities, had initially filed a return declaring 'nil' income and faced additions by the Assessing Officer under Section 14A, which were later deleted by the Commissioner of Income Tax (Appeals). The High Court noted that the issue was settled by a previous decision (ITA-270-2016) where it was held that the disallowance under Section 14A should be limited to the amount of exempt income only, not exceeding that figure. Furthermore, the Court referenced a Supreme Court ruling (Civil Appeal Nos. 104-109 of 2015) emphasizing the importance of apportioning expenditure correctly, especially in cases where shares are held as stock-in-trade, distinguishing them from cases where shares are retained for control over the investee company. The Court dismissed the appeal, affirming the Tribunal's decision based on the legal precedents cited.

In conclusion, the judgment clarified the application of Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, emphasizing the restriction of disallowance to the exempt income earned by the assessee. It also highlighted the significance of correctly apportioning expenditure in cases involving shares held as stock-in-trade, in line with established legal principles and previous judicial decisions. The Court's decision aligned with the legal interpretations provided by earlier rulings, ensuring consistency and adherence to the law in matters of income tax assessment and disallowances.