Sec 14A r.w. rule 8D not applies if assessee has kept shares as stock in trade

Relevant Extract of the Judgment

Mr. Khaitan, learned senior Advocate appeared on behalf of the assessee and demonstrated from the assessment order that the Assessing Officer had treated the claim of long term capital gain as business income. The assessee did not object to that. In such situation there could be no application of Section 14A for disallowance of expenditure incurred to earn exempt income.

He submitted the assessee is engaged in the business of share trading. Money was borrowed for the purpose of purchasing shares. The expenditure of interest on borrowings was relatable to the share trading business. The shares had been taken as stock in trade of the assessee which yielded dividend income. There was no expenditure incurred in earning the dividend income which is only incidental to the assessee holding on to the shares. He relied on an unreported judgment dated 28^th February, 2012 of the High Court of Karnataka in the case of CCI Ltd. vs. JCIT in which the substantial question of law that arose was whether the provisions of Section 14A of the Act are applicable to expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation. The said substantial question of law was answered in favour of the assessee and against the Revenue. Nevertheless, he submitted, the assessee in this case had not disputed the expenditure of Rs.37,28,966/- disallowed as per Rule 8ID on account of dividend income. Since no other exempt income had been allowed by the Assessing Officer, disallowance of further expenditure as concurrently deleted by the CIT and the Tribunal was incorrectly done since Section 14A had no application to the rest of the share trading income of the assessee, the same having been treated as business income.

He submitted further, in any event the Assessing Officer did not record reasons to show that any expenditure by way of interest during the previous year was not directly attributable to the share trading income. Thus, there could be no application of Rule BD(2) (ii).

He drew attention to paragraph 5 of the impugned order to submit that the Tribunal had accepted the submission of the assessee that there was no satisfaction recorded by the Assessing Officer for invoking the provisions of Section 14A read with Rule BD. The Tribunal had said so in the case of CIT V. REI Agro Ltd. and this court by its order dated 23^rd December, 2013 dismissed the appeal preferred therefrom by the Revenue. He submitted further, the said circular relied upon by the Revenue also had no application to the facts of this case.

We find from the assessment order the Assessing Officer said, inter alia, as follows:-

“In the computation of total income, the assessee has claimed LTCG of Rs.25,58,04,353/- as exempt. Since Long Term Capital Gain of Rs.25,80,33,811/- is treated as business income, no such exemption is allowed.”

The Tribunal in the impugned order had found that the assessee does not have any investment and all the shares are held as stock in trade as is evident from the orders of the lower authorities. On those facts the Tribuanl held:-

“Once, the assessee has kept the shares as stock in trade, the rule 8D of the Rules will not apply.”

In Dhanuka & Sons (supra) it was found there was no dispute that part of the income of the assessee from its business was from dividend whereas the assessee was unable to produce any material before the authority below showing the source from which such shares were acquired. That decision is distinguishable on facts as not applicable to this case. We also do not find the Revenue had urged that the expenditure being disallowed was in relation to exempt income not arising in the previous year for application of the said circular to be considered. The Assessing Officer had accepted the correctness of the disallowable expenditure offered by the assessee on its claim of Rs.25,68,04,353/- as long term capital gain. He did not allow the claim itself treating the said amount as business income to thereafter disallow the offered expenditure.

In view of the clear finding of fact regarding the exempt income claimed treated to be business income and the shares held by the assessee having been treated as stock in trade, we do not find the case involves a substantial question of law. The application and appeal are thus dismissed.