S.14A does not apply to shares held as stock-in-trade

Karnataka High Court

CCI Ltd vs. JCIT, ITA NO. 359 of 2011, Date of Decision 28.02.2012

HC held that When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares, which remained unsold by the assessee. It cannot be said that the expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and that should be a disallowance u/s 14A.

It was held that Section 14A disallowance cannot be made when the intention behind expenditure is not to earn exempt income (dividend in this case). Further no expenditure should be calculated on notional basis under rule 8D, when expenditure is incurred in the normal course of business and not related with exempt income earned.\

The Punjab and Harayana High court in the case of Hero Cycles Ltd.  also held on a similar line that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the Act on estimate basis.

However, the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.  held that the AO could adopt a reasonable basis to identify the expenditure in relation to the earning of exempt income when the AO is not satisfied by the claim of the taxpayer that no expenditure are incurred in relation to exempt income.

Further, recently the Delhi High Court in the case of Maxopp Ltd.  held that even if the interest expenditure has been incurred not to earn dividend income but to acquire a controlling stake in the course of normal business, the same would be subject to disallowance under Section 14A of the Act.

Since there are various conflicting High Court decisions on disallowance under Section 14A of the Act, the matter may get resolved at the Supreme Court level.