The ITAT Kolkata in a recent ruling held that the provisions of section 14A of the Income Tax Act can be invoked to make a disallowance on account of expenditure incurred in relation to the exempt income in the form of dividends received by the assessee on the shares held as stock-in-trade.The main parts of the order is given below.
The assessee in the present case is a Company, which is engaged in the business of dealing in shares and securities. The return of income forthe year under consideration was f i led by it on 24.09.2009 declaring total income at ‘nil’. In the said return, dividend income of Rs.92,64,034/- received during the year under consideration was claimed to be exempt by the assessee and a disallowance of Rs.1,20,000/- was offered under section 14A on account of the expenditure incurred in relation to the said exempt income. The Assessing Officer having regard to the accounts of the assessee was not satisfied with the correctness of the disallowance offered by the assessee under section 14A on account of expenditure in relation to exempt income. He, therefore, invoked Rule 8D and computed the disallowance to be made under section 14A on account of the expenditure incurred in relation to the exempt income at Rs.2,43,90,464/-. Accordingly, the difference of Rs.2,42,70,464/- was added by the Assessing Officer to the total income of the assessee.
The disallowance made by the Assessing Officer under section 14A read with Rule 8D was challenged by the assessee in the appeal filed before the ld. CIT(Appeals). It was contended on behalf of the Revenue that the Revenue’s appeal relating to the disallowance under section 14A on account of expenditure in relation to the earning of exempt dividend income received on shares held as stock-in-trade is squarely covered in favor of the Revenue by the decision of the Hon’ble Calcutta High Court in the case of Dhanuka & Sons –vs. – CIT (2011) 339 ITR 319.
The assessee on the other hand, strongly supported the impugned order of the ld. CIT(Appeals) holding that section 14A and Rule 8D have no application to make a disallowance on account of expenditure in relation to the exempt dividend income which is earned on shares held as stock-in-trade and not investment. He also cited by the decision of the Hon’ble Kerala High Court in the case of CIT – vs. – Smt. Leena Ramachandran [339 ITR 296 (Ker.)] relied upon by the ld. CIT(Appeals) in his impugned order, wherein it was held that the assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on the funds borrowed and utilized for the acquisition of shares as stock-in-trade and the disallowance under section 14A is attracted only when the acquisition of shares is in the form of investment and the benefit derived by the assessee is only in the form of dividend income, which is exempt from tax. He also relied on the decision of the Hon’ble Karnataka High Court in the case of CCI Limited – vs. – JCIT [206 Taxman 563], wherein it was held that when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed under section 14A.
While concluding the appeal, section 14A read with Rule 8D is held to be applicable in the case of the assessee. However, the Tribunal directed the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration.
The second issue raised by the Revenue was that ld.CIT(Appeals) has erred in treating the interest income of Rs.52,84,430/- asbusiness income of the assesese instead of income from other sources. Regarding this, it was observed that “As submitted on behalf of the assessee before the ld. CIT(Appeals) as well as before us, there was a direct nexus between the earning of interest income in question as well as the business income of the assessee, inasmuch as the same was earned on Fixed Deposits kept by the assessee as margin money with NSE through its broker in order to enable it to trade in Future & Options. The interest income earned on the said Fixed Deposits thus was directly attributable to the business of the assessee and the ld. CIT(Appeals), in our opinion, is fully justified in treating the same as business income of the assessee instead of income from other sources by relying on the decision of the Hon’ble Supreme Court in the case of Govinda Choudhury & Sons (supra) as well as the decision of the Hon’ble Karnataka High Court in the case of Chinna Nachimuthu Constructions (supra).” Therefore, the second issue was decided in favor of the assessee.
Read the full text of the order below.
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