INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), MUMBAI, MUMBAI

PDF · subscribers
ITA 4776/MUM/2026Status: DisposedITAT Mumbai15 October 2026AY 2017-1818 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the disallowance of Rs. 20,38,022 under Section 14A read with Rule 8D was unsustainable. It reasoned that while Section 14A might apply even to stock-in-trade, the Assessing Officer and CIT(A) failed to satisfy the mandatory pre-condition of recording satisfaction, having regard to the assessee's accounts, as mandated by Section 14A(2) and (3). The Tribunal emphasized that the Supreme Court judgments in Godrej & Boyce Mfg. Co. Ltd. and Maxopp Investment Ltd. did not dispense with this requirement. The correction of the quantum of disallowance by the CIT(A) did not cure the fundamental defect of non-compliance with the statutory satisfaction requirement. Therefore, the disallowance was deleted. Grounds 1 and 2 were allowed. Grounds 3 and 4, being alternative contentions, were rendered academic. Regarding Ground 5, concerning Section 234C interest, the Tribunal directed the Assessing Officer to verify the computation, provide an opportunity to the assessee, and recompute the interest as per the applicable provisions. Ground 5 was allowed for statistical purposes. Ground 6, regarding the lack of hearing, was disposed of as academic in light of the substantive relief granted. The operative direction was to delete the disallowance of Rs. 20,38,022.

What were the facts?

The assessee, Interactive Brokers (India) Private Limited, filed an appeal for assessment year 2017-18 against an order by the CIT(A) which upheld a disallowance of Rs. 20,38,022 under Section 14A of the Income-tax Act, 1961, read with Rule 8D. The disallowance related to exempt dividend income of Rs. 29,29,111 earned from shares held as stock-in-trade. The Assessing Officer had initially computed the disallowance under Section 14A read with Rule 8D, restricting it to the exempt income. The assessee contended that no disallowance was warranted as the shares were stock-in-trade and the dividend income was incidental to business. The CIT(A) confirmed the disallowance, relying on Supreme Court judgments, but corrected the computation of the average investment. The assessee also disputed the computation of interest under Section 234C and alleged a lack of hearing opportunity before the CIT(A).

What were the issues?

1. Whether the provisions of Section 14A of the Income-tax Act, 1961, are applicable to shares held as stock-in-trade, and if so, whether the disallowance was correctly computed and sustained by the CIT(A)? (Question of law and mixed fact and law, turning on Section 14A and Rule 8D) - Assessee's contention: Section 14A is not applicable to stock-in-trade, and even if applicable, the AO failed to record the requisite satisfaction and the investments were made from own funds without borrowed funds. Reliance was placed on judgments concerning dividend from trading stock. - Revenue's contention: Not explicitly recorded, but impliedly supported the CIT(A)'s order upholding the disallowance. 2. Whether the CIT(A) erred in passing the order without providing an opportunity of being heard to the assessee? (Question of procedure) - Assessee's contention: The CIT(A) failed to provide a hearing despite a specific request. - Revenue's contention: Not recorded. 3. Whether the interest under Section 234C was correctly computed by the Assessing Officer and confirmed by the CIT(A)? (Question of law and mixed fact and law, turning on Section 234C) - Assessee's contention: The interest was incorrectly computed at Rs. 25,94,099 instead of Rs. 25,88,545. - Revenue's contention: Not recorded.

Which sections of the Income-tax Act were involved?

Section 14A,Section 143(3),Section 250,Section 234C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCHES, MUMBAI

Before: SHRI SAKTIJIT DEY & SHRI MAKARAND VASANT MAHADEOKAR

For Respondent: Shri. Rajdeep Singh, Ld. CIT DR

PER MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER: This appeal by the assessee, Interactive Brokers (India) Private Limited, in ITA No.4776/Mum/2026 for assessment year 2017-18, is directed against the order dated 13.02.2026 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [“CIT(A)”], under section 250 of the Income-tax Act, 1961 (“the Act”). The impugned order arises from the assessment order dated 24.12.2019 passed by the Assistant Commissioner of Income-tax, Circle 4(1)(1), Mumbai, under section 143(3) of the Act. 1

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 2. The assessee has raised the following grounds of appeal: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of Rs. 20,38,022 made under section 14A of the Act without appreciating that the provisions of section 14A were not applicable to the facts of the present case. 2. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance made under section 14A read with Rule 8D, despite the fact that the Ld. AO did not record any requisite satisfaction, having regard to the accounts of the Appellant, as mandated under section 14A(2) of the Act. 3. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance under section 14A read with Rule 8D, without appreciating that the investments were held as stock-in-trade and the exempt income earned therefrom was incidental to the business activity of the Appellant, and therefore, no disallowance under section 14A was warranted. 4. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962, without appreciating that the Appellant does not have any borrowed funds and that the investments yielding exempt income were made out of the Appellant’s own funds. 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the incorrect computation of interest under section 234C of the Act at Rs. 25,94,099 instead of Rs 25,88,545 as computed by the Appellant in the income-tax return filed for AY 2017-18. 6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in passing the order without providing an opportunity of being heard even though such opportunity was specifically requested by the Appellant The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to law.

3.

Briefly stated, the assessee is engaged in stockbroking activities and is registered with the Securities and Exchange Board of India as a stockbroker in the cash, equity and currency derivatives segments. As recorded in the statement of facts reproduced in the appellate order, the assessee also undertakes proprietary trading in listed securities. The assessee filed its return of income on 29.11.2017 declaring total income of

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED Rs.2,05,54,46,430/-. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS, and notice under section 143(2) dated 16.08.2018 was issued and served upon the assessee.

4.

During the assessment proceedings, the Assessing Officer noticed that the assessee had earned exempt dividend income of Rs.29,29,111/- without making any disallowance under section 14A of the Act. By notice under section 142(1) dated 17.11.2019, the assessee was called upon to explain why disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962, should not be made. In its submission dated 25.11.2019, the assessee stated that the dividend had been received from shares held as stock- in-trade and that no expenditure had been incurred for earning such dividend income. Accordingly, the assessee contended that no disallowance was warranted. Thereafter, the Assessing Officer issued a further show-cause letter dated 11.12.2019, in response to which the assessee reiterated its earlier submissions.

5.

The Assessing Officer did not accept the explanation of the assessee and proceeded to compute the disallowance under section 14A read with Rule 8D. In the computation set out in paragraph 5.4 of the assessment order, expenditure directly relating to exempt income was taken at nil. The Assessing Officer adopted the annual average of the monthly averages of the relevant opening and closing balances at Rs.40,25,48,114/- and computed one per cent thereof at Rs.40,25,481/-. However, the disallowance under the normal provisions was restricted to the exempt dividend income of Rs.29,29,111/-. The assessment was completed under section 143(3) of the Act on 24.12.2019 determining total income, after rounding off, at Rs.2,05,83,75,540/-.

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 6. Aggrieved, the assessee preferred an appeal before the learned CIT(A). On the issue of disallowance under section 14A, the assessee reiterated that the shares yielding dividend income were held as stock-in- trade in the course of its proprietary trading business. It was submitted that the dividend income was incidental to the trading activity and that no expenditure had been incurred specifically for earning such income. Without prejudice, the assessee disputed the computation adopted by the Assessing Officer and furnished a month-wise working showing the annual average of the monthly averages at Rs.20,38,02,187/-, one per cent of which worked out to Rs.20,38,022/-.

7.

The learned CIT(A), in the discussion appearing at page 13 of the appellate order, referred to the judgment of the Hon’ble Supreme Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC) and recorded that “the Assessing Officer must record satisfaction, having regard to the accounts that the claim of the assessee regarding expenditure relating to exempt income is incorrect, before applying the prescribed method.” The learned CIT(A) further relied upon Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) and observed that “the dominant purpose of holding shares is not determinative and section 14A may apply even where shares are held as stock-in-trade. However, only expenditure having proximate nexus with earning of exempt income can be disallowed.” On this basis, the learned CIT(A) held that the mere fact that the shares were held as stock-in-trade did not exclude the applicability of section 14A, since holding such shares formed part of the overall business apparatus involving administrative, managerial, compliance and accounting functions.

8.

The learned CIT(A) also considered the Tribunal’s order in the assessee’s own case for assessment year 2009-10. However, the learned CIT(A) observed that the legal position had subsequently been clarified by the Hon’ble Supreme Court in Maxopp Investment Ltd. (supra), and that the 4

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED principle of consistency could not override binding Supreme Court jurisprudence. Accordingly, the applicability of section 14A was upheld in principle, subject to the disallowance being determined by correctly applying the prescribed method.

9.

The assessee is in appeal before us against the impugned order.

10.

Before us, the learned Authorized Representative (AR) submitted that the principal controversy concerns the applicability of section 14A read with Rule 8D to shares held as stock-in-trade. He invited our attention to paragraph 5.1 of the assessment order, wherein the Assessing Officer had recorded the explanation furnished by the assessee. The relevant paragraph reads as under: “5.1 The assessee has earned dividend income at Rs.29,29,111/-. However, assessee has not made disallowance u/s 14A in the computation of income. During the course of assessment proceedings, vide notice u/s 142(1) 17.11.2019 assessee was asked to explain as to why disallowance u/s.14A r.w.r. 8D of the I. T. Act should not be made. In response the assessee vide submission dated 25.11.2019 submitted that it has earned exempt income in the form of dividend form the shares held as stock in trade. There are no expenses that the company has incurred to earn this dividend income. Accordingly, no disallowance should be made u/s 14A of the Act read with Rule 8D. Assessee has relied upon various judicial pronouncements.” 11. Thus, the learned AR drew our attention to the explanation recorded in the assessment order that the dividend income arose from shares held as stock-in-trade and that the assessee had incurred no expenditure for earning such income. He further invited our attention to page 13 of the order of the learned CIT(A), containing the discussion concerning the applicability of section 14A to shares held as stock-in-trade.

12.

In support of his contention concerning dividend income received from shares held as stock-in-trade, the learned AR further relied upon the judgment of the Hon’ble Delhi High Court in Principal Commissioner of Income-tax v. PNB Housing Finance Ltd. [2023] 146 taxmann.com 445 (Delhi), [2024] 461 ITR 476 (Delhi), rendered on 07.09.2022 in ITA 5

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED No.308/2022. He relied upon the discussion in paragraph 6 concerning the applicability of section 14A to dividend income arising from shares held as stock-in-trade. The relevant extract reads as under: “The Supreme Court after deliberating on the object and purpose of section 14A, conclusively held that in cases where shares are held by assessee as stock-in- trade, the dividend earned on the said shares is incidental and would not attract the provisions of section 14A of the Act.” 13. The learned AR placed reliance on the aforesaid decision in support of the assessee’s contention that the dividend income in the present case arose from shares held as stock-in-trade in the course of its business.

14.

The learned AR also relied upon the subsequent order of the Hon’ble Supreme Court in Principal Commissioner of Income-tax v. PNB Housing Finance Ltd. [2023] 157 taxmann.com 465 (SC), [2024] 461 ITR 481 (SC), whereby the Revenue’s special leave petition against the aforesaid judgment was dismissed.

15.

The learned AR further relied upon the order of the Co-ordinate Bench in Mirae Asset Capital Markets (India) Private Limited v. Income Tax Officer, Ward 4(3)(1), Mumbai, in ITA No.2099/Mum/2025 for assessment year 2020-21, dated 04.11.2025. In that case, the Co-ordinate Bench considered the disallowance under section 14A in respect of dividend income arising from shares and securities held as stock-in-trade.

16.

Per contra, the learned departmental representative relied upon the orders of the Assessing Officer and the learned CIT(A).

17.

We have considered the rival submissions, examined the orders of the authorities below and perused the judicial precedents relied upon by the learned AR and referred to by the learned CIT(A). The principal controversy concerns the sustainability of the disallowance under section 14A read with Rule 8D, restricted by the learned CIT(A) to Rs.20,38,022/-, in respect of dividend income received from shares held as stock-in-trade. 6

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 18. The factual position emerging from the assessment order is that neither the Assessing Officer nor the learned CIT(A) rejected the description of the dividend-yielding shares as stock-in-trade. The learned CIT(A), however, sustained the applicability of section 14A on the reasoning that holding such shares formed part of the overall business apparatus involving administrative, managerial, compliance and accounting functions. The controversy must, therefore, be examined by distinguishing the applicability of section 14A in principle from the fulfilment of the statutory conditions for determining a disallowance under Rule 8D.

19.

Section 14A(2) requires the Assessing Officer, having regard to the accounts of the assessee, to examine the correctness of the assessee’s claim concerning expenditure incurred in relation to exempt income before resorting to the prescribed method. Section 14A(3) expressly extends this requirement to a case where the assessee claims that no such expenditure has been incurred. Consequently, the absence of a suo motu disallowance does not dispense with the examination contemplated by section 14A(2). Equally, receipt of exempt income does not, by itself, authorise automatic application of Rule 8D.

20.

The learned CIT(A) referred to the judgment of the Hon’ble Supreme Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (supra). The significance of that judgment extends beyond recognition of the applicability of section 14A to exempt dividend income. It also explains the statutory condition that must precede determination of the disallowance. The relevant paragraph reads as under: “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.” 21. The relevant opening portion of paragraph 38 further states: “In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received.” 22. Thus, the aforesaid judgment requires an examination of the assessee’s claim with reference to its accounts and disclosure of the reasons for rejecting that claim. Although the assessment year and the factual circumstances considered therein were different, the requirement explained by the Hon’ble Supreme Court concerning section 14A(2) and (3) directly governs the present controversy. The learned CIT(A), having referred to this judgment, was required to examine whether that condition had actually been fulfilled in the assessment order.

23.

The other judgment relied upon by the learned CIT(A) is Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (supra). This judgment must be considered in its entirety. It rejects the proposition that the dominant purpose for acquiring shares conclusively determines the applicability of section 14A. At the same time, it recognizes the distinct factual setting in which shares are held as trading stock and reiterates the requirement of recording satisfaction before applying the prescribed mechanism.

24.

The relevant paragraphs of Maxopp Investment Ltd. read as under:

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED “39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.” 25. Paragraph 41 further provides: “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” 26. The above observations do not support an absolute proposition that section 14A can never apply where shares are held as stock-in-trade. Paragraph 39 expressly contemplates apportionment depending upon the facts of each case. However, the judgment equally does not authorize a disallowance merely because dividend income has arisen. The nature of the holding, the expenditure claimed and the statutory requirement preceding application of Rule 8D must all be examined. The observations concerning satisfaction in paragraph 41, read with section 14A(3) and Godrej & Boyce Mfg. Co. Ltd. (supra), apply also where the assessee’s claim is that no expenditure was incurred.

27.

We accordingly agree with the learned CIT(A) to the limited extent that classification of shares as stock-in-trade cannot, by itself, constitute an absolute immunity from section 14A. Nevertheless, that proposition does not resolve the present appeal. The further and decisive question is whether the Assessing Officer recorded the requisite dissatisfaction with the assessee’s claim, having regard to its accounts, before applying Rule 8D.

28.

On examining the assessment order, we find that paragraph 5.1 records the assessee’s explanation that the dividend arose from shares held as stock-in-trade and that no expenditure was incurred for earning it. Paragraph 5.2 rejects the explanation by stating that the contention was “not found to be acceptable” and “not tenable”. Paragraph 5.3 substantially recites the statutory provision. Paragraph 5.4 then proceeds on the basis that, once section 14A is considered applicable, the disallowance should be worked out under Rule 8D. These observations do not disclose any examination of the

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED accounts demonstrating why the assessee’s claim of nil expenditure was incorrect.

29.

We are conscious that satisfaction under section 14A(2) need not be recorded in any prescribed form. Nor must the Assessing Officer quantify every component of expenditure before invoking Rule 8D, since the Rule itself provides the method of quantification. Nevertheless, the assessment order must disclose an objective basis, arising from the accounts and the explanation furnished, for rejecting the assessee’s claim. In the present case, the Assessing Officer has neither identified any expenditure or category of expenditure relatable to the exempt dividend nor explained, with reference to the accounts, why expenditure claimed against taxable business income required apportionment. Indeed, the component of expenditure directly relating to exempt income was taken at nil in his own computation. That circumstance is not independently conclusive, but it reinforces the need for a reasoned examination before an indirect expenditure disallowance is imposed.

30.

The learned CIT(A)’s observation that holding trading shares involves administrative, managerial, compliance and accounting functions also does not supply the missing examination. Such functions may form part of the assessee’s taxable stockbroking and trading business. Their existence, without an examination of the expenditure reflected in the accounts and its relationship with the exempt income, does not establish that the assessee’s claim is incorrect. The appellate order does not identify any account entry, expenditure pool or other factual material supporting the proposed attribution. A general description of the business apparatus cannot, in the circumstances of this case, substitute for the examination required by section 14A(2).

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 31. We next consider the judgment relied upon by the learned AR in Principal Commissioner of Income-tax v. PNB Housing Finance Ltd. [2023] 146 taxmann.com 445 (Delhi), [2024] 461 ITR 476 (Delhi). The relevant portion of paragraph 6 reads as under: “6. With respect to the challenge of the deletion of the disallowance made under section 14A of the Act, this issue is no longer res integra. It is an admitted fact that the exempt income was earned by the assessee from the investment held by it as stock-in-trade. This issue has been conclusively determined by the Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640/[2018] 15 SCC 523. In this matter, the Supreme Court was concerned with a batch of appeals which also included a challenge to the judgment of the Punjab and Haryana High Court Pr. CIT v. State Bank of Patiala [2017] 78 taxmann.com 3/245 Taxman 273/391 ITR 218 and the facts of the said case are para materia to the case in hand. In the case of State Bank of Patiala, (supra) the AO restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in rule 8-D and holding that section 14A of the Act would be applicable. The CIT(A) issued a notice of enhancement under section 251 of the Act and disallowed the entire expenditure claimed by the assessee therein instead of restricting the disallowance to the amount which was claimed as exempt income. The ITAT set aside the order of the AO as well as CIT(A). The High Court upheld the order of the ITAT and dismissed the appeal filed by the Revenue. The Supreme Court after deliberating on the object and purpose of section 14A, conclusively held that in cases where shares are held by assessee as stock-in-trade, the dividend earned on the said shares is incidental and would not attract the provisions of section 14A of the Act.” 32. After reproducing the Supreme Court’s observations and referring to the subsequent decision discussed therein, the Hon’ble High Court recorded in paragraph 7.1: “7.1 The law settled by the aforesaid judgments of the Supreme Court is squarely applicable facts of the present case as there is no dispute that the exempt income was earned from stock-in-trade.” 33. The aforesaid judgment is relevant because the Hon’ble Delhi High Court considered dividend income arising from stock-in-trade in the hands of a housing finance company and granted relief after examining Maxopp Investment Ltd. (supra). Thus, the assessee’s contention concerning the trading character of the shares cannot be rejected merely by referring to

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED Maxopp Investment Ltd. as though that judgment necessarily mandates a disallowance in every such case. At the same time, the observations in PNB Housing Finance Ltd. must be read in their factual setting and consistently with the complete reasoning of the Hon’ble Supreme Court. We therefore regard the decision as supporting the assessee’s contention concerning incidental dividend income from trading stock, while resting our conclusion in the present case principally on the unfulfilled requirement of section 14A(2) and (3).

34.

The subsequent proceedings in Principal Commissioner of Income- tax v. PNB Housing Finance Ltd. [2023] 157 taxmann.com 465 (SC), [2024] 461 ITR 481 (SC) are also material. By order dated 14.12.2023 in SLP (Civil) Diary No.48358 of 2023, the Hon’ble Supreme Court observed: 1. There is a huge delay of 350 days in filing this Special Leave Petition. The reasons seeking condonation of delay are not explained to the satisfaction of this Court. 2. Further we find that the High Court has applied a judgment of this Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC)/[2018] 15 SCC 523, and has granted relief to the respondent-M/S PNB Housing Finance Ltd. 3. We are, therefore, not inclined to condone the delay or/and interfere in the matter on merits. 4. Hence, the Special Leave Petition is dismissed. 35. The nature of this order must be stated accurately. The special leave petition was dismissed in the circumstances recorded therein, including the unexplained delay. It would therefore be inappropriate to describe it as a detailed appellate adjudication laying down an unrestricted exemption for every holding of trading shares. Nevertheless, the Hon’ble Supreme Court expressly noticed that the High Court had applied Maxopp Investment Ltd. and declined interference on the terms recorded in its order. The subsequent proceedings consequently do not support the suggestion that the relief granted by the High Court was contrary to Maxopp Investment Ltd. 13

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 36. The learned AR also relied upon the order of the Coordinate Bench in Mirae Asset Capital Markets (India) Private Limited v. Income Tax Officer, Ward 4(3)(1), Mumbai, ITA No.2099/Mum/2025 for assessment year 2020-21, dated 04.11.2025. The Bench noted that the assessee therein was engaged in trading in listed securities and considered the factual character of the shares and securities yielding dividend income. After discussing PNB Housing Finance Ltd. and the other decision referred to in that order, the Bench held in paragraph 16: “16. As already stated, the facts in the present case supports the claim that the exempt earning assets in assessee's case are held as stock in trade and therefore in our considered view the ratio laid down in the above judicial precedence is applicable to assessee's case. Further the fact that the assessee suo-motu has made disallowance under section 14A cannot be a hindrance to the allowing the claim of the assessee since the legal position as held in the above decisions support the claim of the assessee that the provisions of section 14A is not applicable to its case. Accordingly we direct the AO to delete the disallowance made under section 14A of the Act.” 37. This decision is relevant to the assessee’s contention that the distinction concerning trading stock is not confined to banking companies. However, the factual particulars noted in that order, including sale during the year of the securities yielding dividend, cannot be imported into the present appeal. Its relevance lies in the consideration of dividend arising from genuine trading stock in a securities business and the relief granted on the facts examined therein. Our conclusion accords with the relief granted by the coordinate Bench, but is independently supported by the statutory requirement and the binding judgments in Godrej & Boyce Mfg. Co. Ltd. and Maxopp Investment Ltd.

38.

The learned CIT(A) also referred to the Tribunal’s decision in the assessee’s own case for assessment year 2009-10 and observed that consistency could not override binding Supreme Court jurisprudence. We agree with that general proposition. However, adherence to Supreme Court

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED jurisprudence requires application of the entire governing principle, including the requirement of satisfaction preceding invocation of Rule 8D. The reference to Maxopp Investment Ltd. does not permit that requirement to be omitted. The relief in the present appeal, therefore, does not rest merely on consistency with an earlier assessment year.

39.

We further find that the learned CIT(A)’s correction of the monthly average computation addresses only the quantum of the disallowance. Acceptance of the assessee’s alternative working at Rs.20,38,022/- cannot be treated as acceptance by the assessee that a disallowance was legally warranted. An alternative computation furnished without prejudice does not dispense with the statutory condition for invoking Rule 8D. Likewise, restricting a disallowance to the amount of exempt income cannot validate a computation undertaken without fulfilment of that condition.

40.

For assessment year 2017-18, the amended Rule 8D introduced by Notification No.43/2016 dated 02.06.2016 prescribed, inter alia, one per cent of the annual average of the monthly averages of the relevant opening and closing balances. The applicable provision was Rule 8D(2)(ii), rather than the earlier provision prescribing one-half per cent of the average investment value. The amendment changed the computation mechanism; it did not dispense with the examination and satisfaction contemplated by section 14A(2) and (3). Our conclusion therefore does not depend upon application of the earlier version of Rule 8D.

41.

The subsequent amendment to section 14A by the Finance Act, 2022, concerning expenditure relating to exempt income even where such income has not accrued, arisen or been received, also does not alter the decisive issue before us. In the present case, exempt dividend income was admittedly received. More significantly, the requirement contained in sub-sections (2) and (3) was not removed by that amendment. No determination of the

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED temporal operation of the amendment is necessary for disposing of this appeal.

42.

Ground No.4 refers to the absence of borrowed funds and the use of the assessee’s own funds. We need not return a separate factual finding on that contention because the disallowance before us was computed under the amended percentage-based provision and, in any event, fails for want of the preceding statutory examination. Our conclusion is not founded upon an assumption, unsupported by an independent examination of the financial statements, concerning the source of funds.

43.

On a cumulative consideration of the record, we find that the assessee furnished a specific explanation concerning the trading character of the shares and the absence of expenditure incurred for earning dividend income. The Assessing Officer rejected that explanation through general conclusions and proceeded directly to the prescribed formula. The learned CIT(A) corrected the computation but did not establish, with reference to the accounts, why the assessee’s claim required rejection. The deficiency concerns the substantive condition for invoking Rule 8D and cannot be resolved merely by substituting a lower numerical amount.

44.

Accordingly, applying the principles explained by the Hon’ble Supreme Court in Godrej & Boyce Mfg. Co. Ltd. and Maxopp Investment Ltd., and having regard to the decisions relied upon by the learned AR concerning dividend from trading stock, we hold that the disallowance sustained in the present case is unsustainable. The order of the learned CIT(A) is set aside to this extent, and the Assessing Officer is directed to delete the disallowance of Rs.20,38,022/-. Ground Nos.1 and 2 are allowed. In view of deletion of the entire surviving disallowance, the alternative contentions in Ground Nos.3 and 4 do not require further adjudication and are disposed of as academic.

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED 45. Ground No.5 concerns interest under section 234C charged at Rs.25,94,099/- against Rs.25,88,545/- computed by the assessee in its return. Interest under section 234C is required to be determined with reference to the tax due on the returned income, subject to the adjustments prescribed by that provision. It cannot be increased merely by substituting assessed income for returned income. 234C The exact figure requires verification of the return, the relevant tax credits and the dates and amounts of advance-tax payments. We therefore direct the Assessing Officer to verify these particulars, provide the assessee an opportunity to explain its computation and recompute the interest in accordance with the provision applicable to assessment year 2017-18. If the assessee’s computation is found correct, the excess interest shall be deleted. This verification shall remain confined to the computation of interest under section 234C. Ground No.5 is allowed for statistical purposes.

46.

Ground No.6 challenges the absence of an opportunity of hearing before the learned CIT(A). Since the substantive disallowance has been deleted and the surviving computation issue has been directed to be verified after granting the assessee an opportunity, no separate adjudication of this procedural ground is necessary. Ground No.6 is disposed of as academic.

47.

In the result, the appeal of the assessee is partly allowed, with Ground No.5 allowed for statistical purposes.

Order pronounced in the open court on 15.10.2026.

Sd/- Sd/- SAKTIJIT DEY MAKARAND VASANT MAHADEOKAR VICE PRESIDENT ACCOUNTANT MEMBER

Mumbai Dated: 15.10.2026

ITA No. 4776/MUM/2026 INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED

Copy to: INTERACTIVE BROKERS (INDIA) PRIVATE LIMITED, 502A TIMES SQUARE, ANDHERI 1 KURLA ROAD, MUMBAI, INDIA, MUMBAI-400059, MAHARASHTRA ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1), MUMBAI, 2 640, 6TH FLOOR, AAYKAR BHAVAN, MAHARISHI KARVE ROAD, MUMBAI, MUMBAI-400020, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE

More judgments on Section 14A

All 15,875 judgments and leading authorities on Section 14A →

Recent GST High Court judgments

Search GST case law →