2015 (8) TMI 1252 - AT - Income Tax

Case clarifies disallowance rules for interest on shares, excludes stock-in-trade.

The case addressed issues related to disallowance under section 14A and Rule 8D for interest expenditure used in trading shares, deletion of disallowance ... Disallowance made u/s.14A - CIT(A) deleted the addition - whether the shares held by an assessee under the head stock in trade can be considered for making disallowance u/s.14A of the Act r.w.rule 8D of Rules? - Held that:- The issue has been conclusively decided in the case of India Advantage Securities Ltd.(2015 (6) TMI 140 - BOMBAY HIGH COURT) wherein clearly held that the disallowance if any to be made u/s.14A and rule 8 D could only be made with regard to investments and not for the shares held as stock in trade.In the case under consideration, the FAA had followed the decision of Tribunal delivered in the case of Yatish Trading Co.Pvt.Ltd.(2010 (11) TMI 183 - ITAT, MUMBAI ). The view taken by the Tribunal has been upheld by the Hon’ble Bombay High Court in the case of India Advantage Securities Ltd. (supra). Respectfully, following the judgment of the Hon’ble Court we decide the effective ground of appeal against the AO. - Decided in favour of assessee. Issues:1. Disallowance under section 14A read with rule 8D for interest expenditure used for trading in shares.2. Deletion of disallowance made under section 14A of the Act.3. Applicability of Rule 8D to investments and stock in trade for disallowance under section 14A.Issue 1: Disallowance under section 14A read with rule 8D for interest expenditure used for trading in shares:The Assessing Officer (AO) raised the issue of whether the Commissioner of Income-tax (Appeals) was justified in directing the AO to re-compute the disallowance under section 14A, considering interest expenditure debited to the profit and loss account used for trading in shares by the assessee. The AO disallowed an amount under section 14A and Rule 8D of the Income-tax Rules, 1962, adding it to the total income of the assessee. However, the First Appellate Authority (FAA) held that disallowance under section 14A was not applicable to interest expenditure used for trading in shares shown as stock in trade in the balance sheet. The FAA directed the AO to recompute the disallowance based on this interpretation.Issue 2: Deletion of disallowance made under section 14A of the Act:The AO had made a disallowance under section 14A of the Act, as the assessee had earned dividend income that did not form part of the total income. The AO disallowed a specific amount and added it to the total income of the assessee. However, the FAA held that the disallowance under section 14A was not applicable to the interest expenditure used by the assessee for trading in shares shown as stock in trade in the balance sheet. The FAA relied on the decision of Yatish Trading Co. Pvt. Ltd. and directed the AO to recompute the disallowance, resulting in the deletion of the initial disallowance made under section 14A.Issue 3: Applicability of Rule 8D to investments and stock in trade for disallowance under section 14A:The main issue before the Appellate Tribunal was whether shares held by an assessee under the head stock in trade could be considered for making a disallowance under section 14A of the Act read with Rule 8D of the Rules. The Tribunal noted that the Hon'ble Bombay High Court had conclusively decided that disallowance under section 14A and Rule 8D could only be made concerning investments and not for shares held as stock in trade. The Tribunal followed the decision of Yatish Trading Co. Pvt. Ltd., which was upheld by the Hon'ble Bombay High Court in the case of India Advantage Securities Ltd. Based on this, the Tribunal decided the effective ground of appeal against the AO, resulting in the dismissal of the appeal filed by the AO.In conclusion, the judgment clarified the applicability of disallowance under section 14A and Rule 8D concerning interest expenditure used for trading in shares, the deletion of disallowance made under section 14A, and the distinction between investments and stock in trade for the purpose of disallowance under section 14A. The decision was based on the interpretation of relevant legal provisions and precedents set by higher courts.