Mutual Fund Stock-in-Trade Investments Must Be Excluded while Computing Disallowance u/s 14A: ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ), held that mutual fund investments treated as stock-in-trade must be excluded while computing disallowance under Section 14A of the Income Tax Act, 1961, and consequently remanded the matter to the Assessing Officer (AO) for factual verification and fresh computation.

Hincon Holdings Limited, a non-banking financial company engaged in lending and investment activities, filed its return of income for Assessment Year 2017-18 declaring total income of ₹19,67,980. The case was selected for scrutiny, and the AO computed income at ₹36,91,080 by making a disallowance of ₹17,23,096 under Section 14A read with Rule 8D of the Income Tax Rules.

The disallowance was based on the AO’s calculation of average investments, including non-current investments. On appeal, the Commissioner of Income Tax (Appeals) confirmed the order of the AO, leading the company to file a further appeal before the Tribunal challenging the computation of disallowance and the inclusion of investments that did not yield exempt dividend income.

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Counsel Priyanka Jain appeared for the appellant and submitted that dividend income of ₹11,93,263 was earned during the year from mutual fund investments recorded as stock-in-trade, and no direct expenditure was incurred for earning such income. It was argued that on these facts no disallowance under Section 14A should be made. Further, contended that while computing disallowance under Rule 8D, the AO incorrectly considered investments that did not generate exempt income and also included investments held as stock-in-trade.

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The bench comprising Judicial Member, Sandeep Gosain held that the AO must examine the factual position regarding the nature of investments and recompute the disallowance under Section 14A accordingly. The Tribunal reiterated that for the purpose of computing disallowance under Section 14A read with Rule 8D, only investments yielding exempt income should be considered and investments held as stock-in-trade should be excluded.

Noting that certain crucial arguments were not placed before lower authorities and required factual verification, the Tribunal restored the issue to the AO to verify whether the mutual fund investments were held as stock-in-trade and recompute the disallowance in accordance with law. The appeal was allowed for statistical purposes.

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