Section 14A disallowance on dividend from stock-in-trade fails where income is incidental to trading activity.

Dividend earned incidentally from shares held as stock-in-trade was treated as part of trading activity, so expenditure relatable to that income was not subject to disallowance under section 14A read with Rule 8D. The Tribunal followed its earlier view in the same assessee's case and the Karnataka High Court's principle that dividend from trading stock is incidental, and therefore the Assessing Officer's Rule 8D computation could not be sustained. The disallowance was rejected and the assessee's claim was accepted.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained in respect of dividend income arising from shares held as stock-in-trade.

Analysis: The assessee was engaged in trading in shares and securities and the dividend income was earned from shares held on trading account. The Tribunal followed the co-ordinate bench decision in the assessee's own case for the earlier year and the Karnataka High Court ruling holding that dividend from stock-in-trade is only incidental to trading activity. On that reasoning, expenditure relatable to such incidental dividend income was held not to warrant disallowance under section 14A as computed by the Assessing Officer under Rule 8D. The assessee's own working and the claim that the borrowings were for business trading activity were also consistent with this conclusion.

Conclusion: Disallowance under section 14A read with Rule 8D was not justified and the issue was decided in favour of the assessee.

Ratio Decidendi: Section 14A does not apply to dividend income arising incidentally from shares held as stock-in-trade, and Rule 8D cannot be used to make a further disallowance on that basis.

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