S. 14A does no apply to shares held as stock-in-trade. Disallowance on notional basis is invalid

CCI Ltd vs. JCIT (Karnataka High Court)

The assessee availed of an interest-free loan of Rs.14 crores and paid brokerage of Rs.28 lakhs for purchasing shares. The shares were held as stock-in-trade and the assessee earned dividend of Rs. 46.67 lakhs thereon. The assessee claimed that no expenditure had been incurred to earn the dividend though the AO made a disallowance of Rs. 27.34 lakhs u/s 14A & Rule 8D. The Tribunal held that the brokerage on the loan, though incidental to the trading of shares, was indirectly incurred to earn dividend and had to be disallowed u/s 14A. On appeal by the assessee, HELD by the High Court allowing the appeal: