Bombay HC confirms that Stock-in-trade to be excluded while computing 14A disallowance r.w. Rule 8D

CIT v India Advantage Securities Ltd (ITA No 1131 OF 2013 dated 13.04.2015) BOMBAY HIGH COURT


The assessee had received dividend income of Rs 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. in the course of assessment proceedings 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/-.  

In the first level appellate proceedings, the assessee contended 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

The Department filed an appeal before the Mumbai ITAT against the aforesaid decision of CIT(A).

Mumbai ITAT’s ruling (ITA No. : 6711/Mum/2011):

  • The Revenue has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. American Express Bank Limited 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. 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 Hon’ble High Court of Karnataka have 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. The High Court 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. 
  • 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. Therefore, there is 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 Department preferred an appeal before the Bombay High Court:
High Court’s verdict:
  • We find that the Tribunal has confirmed the order of the Commissioner of Income Tax (Appeals). The figures under the head “Investment” could be taken and some charges apportioned for the purpose of computing the expenses. The Commissioner found from such figures, that only 10% of the income earned could be apportioned towards expenses for earning the dividend income. He, therefore, made a revised disallowance. It is this revised disallowance which has been accepted by the Tribunal.
  • We find that the Commissioner, as also the Tribunal’s order is neither perverse nor vitiated by any error of law apparent on the face of the record. Therefore, this Appeal does not raise any substantial question of lawIt is devoid of merits and is dismissed.

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