No Disallowance u/s 14A for Dividend on Stock -in-Trade : Mumbai ITAT

In the continuing saga of disallowance u/s 14A and for the purpose of computation of disallowable amount under Rule 8D of Income Tax Rule, two recent judgments- one from Kolkata ITAT and another from Mumbai ITAT- are welcome relief for many tax payers specially those who have to bear the burnt of
disallowance under section 14A despite the fact that they primerly deal in shares .

Relief from Disallowance u/s 14A -Judgment 1

1. Champion Commercial Co. Ltd vs ACIT ,Cir 10,I.T.A. No.: 644/ Kol. / 2012  in which Kolkata Tribunal held that for the purpose of computation of disallowance u/s 14A , the amount of interest which is directly related to earning exempt income , as well as earning taxable income , have to be excluded . In other words, only the amount of interest which can not eb associated with either for earning exempt income or taxable income , can only be apportioned as per formula given in Rule 8D.
The Kolkata  Tribunal held  in its order dt 21/09/2012 as under

We make it clear that common interest expenses which are to be allocated in terms of the formula under rule 8D(2)(ii) will only be such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor are directly attributable to borrowings specifically used for taxable incomes or receipts. With these directions, the matter stands restored to the file of the Assessing Officer. [ Para 19 ]

 Second Order of Relief under section 14A

ITAT Mumbai vide its order 14/09/2012 in DCIT Vs M/s. India Advantage Securities Ltd. ITA No : 6711/Mum/2011 confirmed the order of CIT (A) who ordered for exclusion of value of closing stock –in trade from computation of disallowable amount under Rule 8D as he held that the section 14A has no application for dividend received on stock-in-trade.
The facts in brief are that the A.O. during the assessment proceedings for Assessment Year 2008-09 , noted that the assessee had received dividend income of  2 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., 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/-. The A.O. thus disallowed a sum of Rs.48,73,483/- and added to the total income.
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 Tribunal Held , on appeal from the income tax department , confirmed the finding of CIT (A) by holding that the order of Karanatka High court to have precedence over Daga judgment by Special Bench of ITAT, Mumbai. Here is the excerpt of the order

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 had been 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 (sic). 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.

Author’s Note on ITAT decision on Disallowance u/s 14A

Both the aforesaid orders on ITAT- Mumabi as well as Kolkata Bench – which has taken into account the various High Court and Special Bench orders in consideration shows that after the earth shattering decision by Special Bench in Daga Investment and Delhi tribunal in Cheminvest case 124 TTJ 577 , the assessees are fighting hard and arguing on the legality and forcing courts to draw proper inference and meaning of the words and rules given in section 14A and Rule 8D . From these decision , immediately , all should take tow steps

1. While computing disallowance , exclude interest pertaining to exempt income and clearly identifiable taxable income.
2. While computing Rule 8D , do not include the stock in trade of shares in asset value .