2023 (10) TMI 459 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - AO observed that in the instant case the assessee has not maintained any separate account and nor furnished any documentary evidence of expenses towards earning exempt income - HELD THAT - As in view of the judgment of Maxopp case 2018 (3) TMI 805 - SUPREME COURT wherein it has been held that when the shares are held as 'stock-in-trade', by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax, which triggers the applicability of Section 14A which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share Stock Brokers (P.) Ltd. case 2010 (7) TMI 15 - SUPREME COURT Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. Accordingly, in view the above observations by Hon ble Supreme Court in Maxopp case (supra) and in the case of Gajanan Enterprises 2020 (2) TMI 17 - ITAT MUMBAI we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law holding that the provisions of section 14A of the Act are applicable and thereby restricting the disallowance to the extent of dividend income earned by the assessee. Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Applicability of Section 14A to investments held as stock-in-trade.

Summary:

Issue 1: Disallowance under Section 14A of the Income Tax Act
The assessee, engaged in trading shares and bonds, earned exempt income of Rs. 1,77,00,024/-. The Assessing Officer (AO) observed that the assessee had not maintained separate accounts for expenses related to earning exempt income and made a disallowance of Rs. 2,04,57,396/- under Section 14A r.w.r. 8D. On appeal, the CIT(A) restricted the disallowance to the extent of the exempt income earned by the assessee, as per judicial precedents.

Issue 2: Applicability of Section 14A to investments held as stock-in-trade
The assessee argued that investments held as stock-in-trade should not be subject to disallowance under Section 14A. The CIT(A) held that even if investments are held as stock-in-trade, the provisions of Section 14A apply if the income earned is exempt. This position was supported by the Supreme Court's judgment in the case of Maxopp Investment Ltd., which clarified that the applicability of Section 14A is triggered even when shares are held as stock-in-trade and certain dividend income is incidentally earned.

Judgment:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the Supreme Court in Maxopp Investment Ltd. had established that Section 14A applies to shares held as stock-in-trade, and expenses must be apportioned between taxable and non-taxable income. The appeal of the assessee was dismissed, affirming that the disallowance under Section 14A cannot exceed the exempt income earned.