CAMELOT TRADING P.LTD,MUMBAI vs. JCIT (OSD) CEN CIR 39, MUMBAI

The grounds raised by the assessee pertain to the solitary issue of disallowance of expenditure made under section 14A r/w rule 8D.

Brief facts are, the assessee a company is engaged in the business of shares and securities. For the assessment year under consideration, the assessee filed its return of income on 17th September 2009, declaring nil income after claiming loss of ` 5,01,75,288. During the assessment proceedings, the Assessing Officer noticing that in the relevant previous year, the assessee has earned exempt income by way of dividend amounting to ` 9,357, whereas, it has not disallowed any expenditure attributable to such income called upon the assessee to explain why expenditure incurred relating to exempt income should not be disallowed in terms of rule 8D. Though, in response to the show cause notice the assessee submitted that there is no investment activity by assessee, hence, provisions of section 14A are not applicable, however, the Assessing Officer rejecting assessee’s claim that the shares were held as stock– in–trade proceeded to disallow an amount of ` 4,56,800 by applying rule 8D. The assessee challenged the disallowance before the first appellate authority.

Before the learned Commissioner (Appeals) also, the assessee submitted that, since, the shares from which dividend income was earned were held as stock in trade, no disallowance under section 14A can be made. However, the learned Commissioner (Appeals) did not find merit in the submissions of the assessee. Further, though, the 3 Camelot Trading Pvt. Ltd.

Learned Authorised Representative submitted, the share transaction is carried on by the assessee as a trading activity and not as investment. He submitted, the assessee has shown the shares held as its stock–in–trade in the books of account. Therefore, no disallowance under section 14A can be made. The next contention of the learned Authorised Representative is, the assessee has sufficient interest free fund available with it to take care of the investments made in the shares. Therefore, no disallowance of interest expenditure can be made. Without prejudice to the aforesaid contention, the learned Authorised Representative submitted, in no case, the disallowance under section 14A r/w rule 8D can exceed the exempt income earned by the assessee.

Learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).

We have heard rival contentions and perused the material available on record. The first contention of the learned Authorised Representative before us is the shares are held as stock–in–trade, hence, no disallowance under section 14A can be made. In this context, we have examined the Balance Sheet of the assessee as at 31st March 2009, and found that the shares and securities held by the assessee are shown as stock–in–trade. As per the settled legal principle, shares and securities held as stock–in–trade have to be excluded for computing disallowance under section 14A r/w rule 8D. Therefore, we direct the Assessing Officer to examine this aspect and exclude the shares and securities held as stock–in–trade for computing disallowance under section 14A r/w rule 8D. As far as the disallowance of interest expenditure under rule 8D(2)(ii) is concerned, it is the contention of the assessee that it has sufficient interest free fund available with it to take care of investment in shares and securities. Considering the aforesaid submissions of the assessee, we direct the Assessing Officer to verify this aspect and if it is found that the interest free fund available with the assessee is sufficient to take care of investments made in the shares and securities, no disallowance of interest expenditure under rule 8D(2)(ii) should be made. Further, we

In the result, assessee’s appeal is allowed for statistical purposes. Order pronounced in the open Court on 09.11.2017