Case Law Details
Hon’ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s. 14A of the I.T. Act in case of CCL Ltd. vs. JCIT (supra). The assessee in that case was distributor of state lotteries and a dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the A.O. and confirmed by the Ld.CIT(A). The Tribunal agreed with the authorities below that the expenditure relatable to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s. 14A of the I.T. Act. The Tribunal however, had observed that the entire broking commission was not relatable to earning of dividend income as the loan had been utilised for the purchase of shares and the profit shown from the sale of shares had been offered as business income. The Tribunal, therefore, directed the A.O. to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the Tribunal. The High Court noted that 63% of shares which were purchased were sold and income derived was offered to tax as business income. The remaining 30% of shares which remained unsold had reverted to dividend income for which the assessee had not incurred any expenditure at all. The High Court also observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus there being a direct judgment of a Hon’ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capital Management P. Ltd. (supra). Infact, we note that the Tribunal in the case of Ganjam Treading Co. Ltd. (supra) has already considered this situation and held that in view of the judgment of Hon’ble High Court of Karnataka in the case of CCL Ltd. Vs. JCIT (supra) the disallowance of interest in relation to the dividend received from trading shares cannot be made. We, therefore, see no infirmity in the order of the Ld. CIT(A) in deleting the disallowance u/s. 14A computed by the A.O. in relation to the stock-in-trade. The order of the Ld.CIT(A) is accordingly upheld.
INCOME TAX APPELLATE TRIBUNAL , MUMBAI
ITA No. : 6711/Mum/2011 Assessment Year: 2008-09
DCIT
Vs.
M/s. India Advantage Securities Ltd.
Date of Pronouncement : 14.09.2012
ORDER
Per Rajendra Singh, A.M.:
This appeal by the Revenue is directed against the order dated 25.07.2011 of CIT(A), Mumbai for the A.Y. 2008-09. The only dispute raised by the Revenue in this appeal is regarding the disallowance of expenses in relation to the exempt income u/s. 14A of the I.T. Act.
2. The facts in brief are that the A.O. during the assessment proceedings noted that the assessee had received dividend income of Rs. 1,40,859/- which was exempt from tax. The assessee had however, not made any disallowance of expenses relating to exempt income. The A.O., therefore, computed the disallowance u/s. 14A as per Rule 8D which come to Rs.48,73,483/- consisting of interest expenditure of Rs.39,00,174/- and other expenses of Rs.9,73,309/-. The A.O. thus disallowed a sum of Rs.48,73,483/- and added to the total income.
3. The assessee disputed the decision of the A.O. and submitted before the Ld. CIT(A) that the disallowance u/s. 14A could be made only if the A.O. was satisfied that the assessee had incurred any expenditure in relation to the exempt income. It was pointed out that the interest expenditure had been claimed by the assessee as deduction u/s.36(1)(iii). It was also submitted that the shares had been shown as stock-in-trade in the books of accounts and, therefore, such stock-in-trade could not be taken into account while computing the disallowance under Rule 8D. The CIT(A) was satisfied by the explanation given and agreed that the disallowance under Rule 8D could be made only with respect to investment and not in stock-in-trade. It was noted by him that the investments made by the assessee were only to the tune of Rs.50,000/-. The A.O. had however, adopted the figure of stock inventory appearing at schedule-6 amounting to Rs.25,81,52,042/- which was trading stock and which had to be excluded. The Ld.CIT(A) accordingly excluded the stock-in-trade from the purview of computation of disallowance of expenses under Rule 8D. He accordingly computed the disallowance both direct expenses and indirect expenses at Rs.47,247/- and disallowance was upheld only to that extent and the balance addition made by the A.O. was deleted. Aggrieved by the said decision, the Revenue is in appeal before the Tribunal.
4. Before us, the ld. DR appearing for the Revenue assailed the order of the Ld.CIT(A). It was submitted that the provisions of section 14A were applicable even in relation to the dividend income received from the trading in shares as held by the Special Bench of the Tribunal in the case of ITO vs. M/s. Daga Capital Management P. Ltd. (117 ITD 169). He also referred to the latest decision of the Tribunal dated 08.08.2012 in ITA No.5904 & 6022/Mum/2000 in the case of M/s. American Express Bank Limited. The ld. AR for the assessee, on the other hand, submitted that issue was covered in favour of the assessee by the latest judgment of the Hon’ble High Court of Karnataka in the case of CCL Ltd. Vs. JCIT (250 CTR 291) in which it has been held that no disallowance could be made u/s. 14A in respect of dividend income received from the shares held as trading stock. It was pointed out that following the said judgment, the Mumbai Bench of the Tribunal in the case of Ganjam Treading Co. P. Ltd. in the order dated 20.07.2012 in ITA No.3724/Mum/2005 have held that the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capital Management P. Ltd. (supra) was not applicable in the case of dividend received from trading shares. The ld. AR for the assessee also relied on the decision of the Tribunal in the case of Yatish Trading Co. (P) Ltd. vs. ACIT (129 ITD 237) and the decision in the case of Prakash K. Shah & Securities P. Ltd. vs. ACIT in ITA No.3339/Mum/2010.
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding the disallowance of expenses u/s. 14A in relation to the exempt dividend income received from shares held on trading account. The A.O. disallowed the expenses holding that the provisions of section 1 4A were applicable even in relation to the dividend received from the trading shares. The Ld.CIT(A) has however held that the provisions of section 1 4A will not apply to the shares held on trading account. The Revenue has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. American Express Bank Limited (supra) in which the Tribunal has held that the expenditure u/s. 14A has to be disallowed even in respect of dividend income received from trading shares. The Tribunal followed the decision of the Special Bench of the Tribunal in the case of ITO vs. Daga Capital Management Pvt. Ltd. (supra). The assessee in that case had relied on the judgment of Hon’ble High Court of Kerala in the case of CIT vs. Smt. Leena Ramachandran (339 ITR 296) to argue that the disallowance could not be made in relation to the dividend received from trading shares. The Tribunal had however, distinguished the said judgment of Hon’ble High Court of Kerala on the ground that in that case the acquisition of shares with the borrowed funds was for the purpose of controlling the company. Therefore, even though the purpose for acquiring the shares was business, the High Court had upheld the disallowance u/s. 14A of the I.T. Act. The Tribunal also noted that the High Court in that case had only observed that the interest paid on borrowed funds utilised for acquiring shares could be allowed as deduction u/s.36(1)(iii) only if shares were held as stock-in-trade. These observations were only obiter dicta and not the ratio decidendi of the judgment. The ratio decidendi of the judgment was disallowance of interest u/s. 14A which had been upheld by the Tribunal. The Tribunal, therefore, did not accept the arguments based on the judgment of Hon’ble High Court of Kerala in the case of Smt. Leena Ramachandran (supra) which was not directly on the issue of disallowance of expenses in relation to the dividend income received from trading in shares.
6. However, the Hon’ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s. 14A of the I.T. Act in case of CCL Ltd. vs. JCIT (supra). The assessee in that case was distributor of state lotteries and a dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the A.O. and confirmed by the Ld.CIT(A). The Tribunal agreed with the authorities below that the expenditure relatable to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s. 14A of the I.T. Act. The Tribunal however, had observed that the entire broking commission was not relatable to earning of dividend income as the loan had been utilised for the purchase of shares and the profit shown from the sale of shares had been offered as business income. The Tribunal, therefore, directed the A.O. to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the Tribunal. The High Court noted that 63% of shares which were purchased were sold and income derived was offered to tax as business income. The remaining 30% of shares which remained unsold had reverted to dividend income for which the assessee had not incurred any expenditure at all. The High Court also observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus there being a direct judgment of a Hon’ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capital Management P. Ltd. (supra). Infact, we note that the Tribunal in the case of Ganjam Treading Co. Ltd. (supra) has already considered this situation and held that in view of the judgment of Hon’ble High Court of Karnataka in the case of CCL Ltd. Vs. JCIT (supra) the disallowance of interest in relation to the dividend received from trading shares cannot be made. We, therefore, see no infirmity in the order of the Ld. CIT(A) in deleting the disallowance u/s. 14A computed by the A.O. in relation to the stock-in-trade. The order of the Ld.CIT(A) is accordingly upheld.
7. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on this 14th day of September, 2012.
