The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) held that Section 14A of Income Tax Act,1961 applies when shares are held as “stock -in-trade” for the purpose to trade in those shares and earn profits.
The assessee Wealth First Portfolio Managers Pvt. Ltd. is engaged in the business of trading in shares and bonds, earning brokerage income, other stock broker services etc. and is a Member of the Bombay Stock Exchange.
The Assessing Officer (AO) observed that assessee has earned exempt income of Rs. 1,77,00,024/-. The assessee, in the return of income, made a suo moto disallowance of Rs. 75,488/- under Section 14A of the Act. The Assessing Officer observed that the assessee had claimed total interest expenditure of Rs. 2,53,72,667/-, which is not attributable to any particular of income of the assessee.
The 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. Accordingly, the Assessing Officer made a disallowance of Rs. 2,04,57,396/- under Section 14A of the Act
Aggrieved by the order the assessee filed an appeal before the Commissioner of Income Tax (Appeals)[CIT(A)] and the assessee submitted that it is engaged in the business of trading in shares and bonds etc. and a large number of investments were held by the assessee as “stock-in-trade”, which yielded exempt income.
The CIT(A) did not accept the contention of the assessee and held that even if a particular stock / instrument is held as “stock-in-trade” and the income earned out of such investment is exempt as per the provisions of the Act, the provision of Section 14A of the Income Tax Act would be applicable.
Accordingly, CIT(A) held that in view of various judicial precedents, the disallowance made under Section 14A of the Income Tax Act cannot exceed the exempt income claimed by the assessee.
Further aggrieved the assessee filed an appeal before the Tribunal
The Authorised Representative of the assessee submitted that the brief issue for consideration is whether the dividend income earned on shares held by the assessee as “stock-in-trade” comes within the purview of disallowance under Section 14A of the Income Tax Act.
The Departmental Representative (DR) placed reliance on the observations made by CIT(A) in the appellate order.
The Bench comprising of Smt. Annapurna Gupta, Accountant Member and Siddhartha Nautiyal, Judicial Member relied on the decision of Supreme Court in the case of Maxopp Investment Ltd. wherein it has been held that when the shares are held as ‘stock-in-trade’, by virtue of Section 10 (34) of the Income Tax 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 of the Income Tax Act 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.
Accordingly, in view the above observations by Supreme Court in Maxopp case and in the case of Gajanan Enterprises , the Tribunal is of the considered view that CIT(A) has not erred in facts and in law holding that the provisions of section 14A of the Income Tax Act are applicable and thereby restricting the disallowance to the extent of dividend income earned by the assessee.
Hence the appeal of the assessee was dismissed.
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