PALLAVI MANOJ DESAI,MUMBAI vs. ADDL CIT 22(1)(4), MUMBAI

Brief facts of the case are that the assessee filed return of income on 12.10.2010 declaring total income of Rs.19,46,470/-. The assessee was engaged in the business of sales and purchase of shares and securities. The case of the assessee was selected for scrutiny and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO observed that the assessee has claimed interest expenses against the business income without making any disallowance u/s 14A of the Act as being attributable to exempt income. Accordingly, after giving show cause notice to the assessee calculated the disallowance at Rs.4,57,153/- at the rate of 0.5% of the average investment and framed assessment vide order dated 16.3.2013 by making disallowances including the disallowance under section 14A of Rs.4,57,153/-. Aggrieved by the order of AO, the assessee preferred an appeal before the 3 ld. CIT(A), who also dismissed the appeal of the assessee by observing and holding as under (para 2.2): “2.2. I have carefully considered the submission of the appellant. According to section 14A, for the purpose of computation of total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the appellant in relation to the income which does not form part of the total income under the Income Tax Act. It is a fact that the appellant had incurred expenditure in the form of interest in respect of investment on which she had not earned dividend during the year. In working out the disallowance u/s.14A, she had excluded the interest relating to the investment on which dividend had not been earned during the year. The Hon'ble ITAT in the .case of Chem Invest. Ltd. Vs. ITO [121 ITD 318] had held that "when the expenditure of interest is incurred in relation to income which does not form part of the total income, it has to suffer the disallowance irrespective of the fact that whether any income is earned by the assessee or not. Section 14A does not envisage any such exemptions." This is so even if interest on borrowing for the purchase of shares is allowable u/s 57 as the expenditure incurred for earning or making income or u/s.36(1)(iii) as the expenditure incurred wholly and exclusively for the purpose of business. It has also been held that the term 'expenditure incurred in relation to income used in section 14A is still wider than the 'expenditure incurred for the purpose of business'. It has also been stated as follows "it is thus clear that, from whatever angle one may look at the- transaction, result is the same viz. when the dividend is not taxable at all, the interest pertaining to that would also not be allowable because there is no taxable income of the assessee against which such interest can be allowed". In view of the above decision of the Special Bench of Hon'ble ITAT, I am of the considered view that the expenditure incurred being the interest on the funds borrowed for investments in the shares of the appellant is not allowable u/s.14A, if the dividend from the investments had not been received. The decision of the High Court of Delhi in CIT V/s Holcim India (P) Ltd (57 Taxmann. 28) cited by the appellant in support of her claim is actually deferent from the case of the appellant”

The ld. AR vehemently submitted that the assessee is engaged in the business of trading in shares and securities and has not made any purchases or sale as investments. All the shares and securities which were unsold at 4 the end of the year was shown as closing stocks in the final accounts prepared by the assessee. The ld. AR further submitted that during the year the assessee has earned exempt income to the tune of Rs.5,97,673/-. The ld. Counsel further stated that since the assessee was not an investor but a trader in shares and accordingly shown all the sales-purchases of shares and securities in the profit and loss account for the year 31.3.2010 filed at page No.4 of the paper book. Finally, the ld. AR submitted that the provisions of section 14A read with rule 8D were not applicable to the case of the assessee as the assessee was a trader in shares and securities. In defense of his arguments the ld. AR relied on the decision of Mumbai Bench of the Tribunal in the case of DCIT V/s M/s India Advantages securities Ltd in dated 14.9.2012, wherein the Hon’ble Bench has held that no disallowance is to be made u/s 14A in case of the assessee is a trader.

The ld. DR on the other hand, relied upon the orders of authorities below.

We have carefully considered the rival submissions including the orders of authorities below and case law relied upon by the assessee. We find from the copies of opening and closing stock of shares and security, profit and loss account and balance sheet filed at no.2-4 that the assessee is a trader in shares and securities and has not made any purchase as an 5 investor. We are inclined to accept the submissions of the assessee the disallowance under section 14A read with rule 8D cannot be invoked in case of business of trading and securities and similar view has been taken by the Tribunal in the case of DCIT V/s India Advantages securities Ltd (supra) the fund . It has been held that section 14A read with rule 8D is not applicable in case of trading in shares and securities as has been cited above. The operative part of the decision is reproduced below : “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 14A 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 14A 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. TheTribunal 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 6 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 hadbeen 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.”