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TMI Blog2014 (8) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... ated, the principle of apportionment of expenses as provided under section 14A of the Act is upheld – Decided against Assessee. Stock in trade – Disallowance under Rule 8D(2)(iii) – Held that:- The issue relating to the disallowance u/s 14A in relation to shares held in stock in trade was decided in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] - section 14A is attracted even in the case of dividend income from shares held as stock in trade – Decided against Assessee. - ITA No. 2035/M/2013 - - - Dated:- 31-7-2014 - Shri B. R. Baskaran And Shri Sanjay Garg,JJ. For the Petitioner : Shri Dharmesh Shah, A. R. For the Respondent : Shri Sanjeev Jain, D. R. ORDER Per Sanjay Garg, Judicial Member: The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] dated 29.01.13 relevant to assessment year 2009-10. The assessee has taken the following grounds of appeal: 1. The Learned Commissioner of Income Tax (Appeals)8 has erred in confirming the disallowance at the rate of 0.50% of the average value of such investments (whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance under section 14A. On the other hand, the ld. D.R. while relying upon the finding of the lower authorities has stressed that the disallowance has rightly been made by lower authorities under Rule 8(2)(iii) in relation to the administrative and managerial expenses incurred in making the investments for the purpose of earning of exempt income. 5. We have considered the rival submissions of the ld. representatives. In our view, the contention of the ld. A.R. that the disallowance under Rule 8(2)(iii) in respect of administrative and managerial expenses out of the common pool of expenses in relation to exempt income is to be made even if no exempt income is earned out of such investments. Rule 8(2)(iii) is clear in this respect which for the sake of convenience is reproduced as under: an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 6. A perusal of the above rule shows that for the purpose of calculation of disallowance under this rule, the value of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the nature and scope of section 14A has observed that the basic principle of taxation is to tax net income i.e. gross income minus expenditure. Expenditure incurred can be allowed only to the extent that is relatable to the earning of taxable income. While observing so, the Hon ble High Court has taken into consideration the memorandum explaining the provisions of the Finance Bill of 2001 vide which the section 14A was enacted, which for the sake of convenience is extracted below: The Memorandum explaining the provisions of the Finance Bill of 2001 provided the following rationale for the insertion of Section 14A: Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the nonexempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat tax incentives to certain incomes was being used to reduce the tax payable on the nonexempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. 9. The Hon ble Bombay High Court, in para 24 of the judgment, has laid down the principles while analysing from the provisions of section 14A as well as the decision of the Hon ble Supreme Court in the case of Walfort Share Stock Brokers Pvt. Ltd. (supra), which for the sake of reference are reproduced as under: The following principles would emerge from Section 14A and the decision in Walfort: a) The mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; c) The principle of apportionment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14 A of the Act. 11. In view of our above discussion of the matter, we do not find any force in the contention of the ld. A.R. in respect of the ground No.1 and the same is accordingly dismissed. Ground No.3: 12. Vide ground No.3, the assessee has raised the contention that no disallowance is liable to be made under rule 8(2)(iii) in respect of dividend income earned from shares held as stock in trade. In support of his contention he has reliaed upon the decision of the Hon ble Karnataka High Court in the case of CCI Ltd. vs. JCIT (2012) 250 CTR (Kar) 291 wherein the Hon ble Karnataka High Court has held that in a case where the assessee has not retained shares with the intention of earning dividend income but for the purpose of business/trading in shares and the dividend income was incidental no disallowance is attracted under section 14A of the Income Tax Act. 13. We may observe that the issue relating to the disallowance under section 14A in relation to shares held in stock in trade was discussed by the coordinate bench of Mumbai Tribunal in the case of D.H. Securities (P) Ltd. vs. DCIT (2014) 41 taxmann.com 352 and the matter was referred to the Third Me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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