ETHIO PLASTICS PVT.LTD.,BARODA vs. THE DY.CIT.,CIRCLE-1(2), BARODA

By way of its grounds of appeal, the assessee has agitated disallowance of Rs.53,64,309/- made by the Assessing Officer (AO) by invoking section 14A r.w.s.Rule 8D of the Income Tax Rules, 1962.

Aggrieved by the order of the AO as confirmed by the CIT(A), the assessee has preferred appeal before the Tribunal.

The Ld.AR for the assessee at the outset submitted that the assessee is engaged as a dealer of shares and securities. The shares and securities are accordingly held as business inventories from time to time on which dividend are, at times, received. The assessee has declared exempt income of Rs.42,72,571/- received by way of dividend on such inventories. The Ld.AR pointed out that the assessee is primarily engaged in trading of shares and therefore predominant motive towards holding the inventory is attributable to generate profits from trading of shares in course of its business. The dividend received are only incidental to the primary motive of the trading. Therefore, the expenditure incurred by the assessee are attributable to the trading activities and cannot be artificially dissected by resorting to section 14A of the Act. The Ld.AR also placed reliance upon the decision of Coordinate Bench of Tribunal in its own case in ITA No.3033/Ahd/2010 (AY 2006-07) order dated 12/12/2014 and in ITA No.848/Ahd/2012 (AY 2008-09) order dated 10/12/2012 where the disallowance made under

We have perused the case records and considered the rival submissions. The solitary issue in controversy is towards maintainability of disallowance of section 14A where the assessee has earned tax-free dividend income in the course of carrying on business of purchase and sale of shares and securities and where shares and securities in question constituted assessee’s stock in trade. It is the case of the assessee that it did not hold shares and securities with a view to earn tax-free dividend income but traded in such shares. The dividend income arose to the assessee on inventories held from time to time merely as an incidence of such holding and thus in the nature of passive benefit. It is the case of the assessee that expenditure incurred ‘in relation to’ income (dividend) not includible in total income can be disallowed only if it is incurred by the assessee in relation to income exempt from tax. It is the case of the assessee that expenditure have been incurred on trading activities in shares and securities per se, the income from which is chargeable to tax. The dividend income incidentally also arising is only a by-product and

We find that the issue is no longer res integra. The Coordinate Bench has examined the issue in assessee’s own case in AY 2006-07 & 2008-09 and adjudicated in favour of assessee. We also take note of the decision of the Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) approving the view of the Tribunal. Therefore, without elaborating further, we respectfully follow the judicial precedents available on this score and direct the AO to delete the disallowance made under s.14A of the Act with respect to shares and securities held as business assets.

In the result, appeal of the assessee is allowed. This Order pronounced in Open Court on 29/ 11 /2017