2013 (12) TMI 648 - AT - Income Tax

Revenue's Appeal Allowed for Statistical Purposes, Disallowance under Section 14A Referred Back for Fresh Adjudication

The Revenue's appeal against the CIT (A)'s order restricting disallowance under Section 14A of the IT Act was allowed for statistical purposes. The ... Disallowance u/s 14A – Held that:- Following M/s. CCI Ltd., vs. JCIT [2012 (4) TMI 282 - KARNATAKA HIGH COURT] – The provisions of section 14A are not made applicable to the case of dividend earned out of the shares held as stock-in-trade - 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 assessee is liable to prove that the exempt income earned by him is out of the stocks held for trading purpose – The matter restored to the files of AO. Issues:1. Disallowance under Section 14A of the IT Act.2. Applicability of Rule 8D of IT Rules 1962.3. Interpretation of provisions regarding exempt income from shares held as stock-in-trade.Issue 1: Disallowance under Section 14A of the IT ActThe Revenue filed an appeal against the order of the CIT (A) restricting the disallowance under Section 14A of the IT Act. The AO had initially disallowed Rs. 2,36,02,861/-, which was reduced by the CIT (A) to Rs. 8,65,564/-. The Revenue contended that irrespective of the nature of income, expenditure on exempt income is not deductible under Section 14A, and Rule 8D of the IT Act should be applied. The assessee argued that the shares in question were acquired for trading purposes, and the dividend earned was incidentally earned from shares held as stock-in-trade, hence Section 14A should not apply.Issue 2: Applicability of Rule 8D of IT Rules 1962During the assessment proceedings, the AO invoked Section 14A and computed the disallowance by applying Rule 8D of the IT Rules 1962. The assessee challenged this computation, leading to the appeal before the Tribunal. The Tribunal considered the arguments presented by both parties and examined various decisions, including judgments of the ITAT and High Courts. It was emphasized that the assessee must demonstrate that the exempt income earned is from stocks held for trading purposes. The Tribunal decided to refer the issue back to the AO for fresh adjudication in light of the relevant judgments.Issue 3: Interpretation of provisions regarding exempt income from shares held as stock-in-tradeThe assessee contended that the provisions of Section 14A should not be applied to dividend income earned from shares held as stock-in-trade. The Tribunal referred to the judgment of the Hon'ble High Court of Karnataka in a similar case, which held that Section 14A does not apply to dividend earned from shares held as stock-in-trade. The Tribunal acknowledged the need for the assessee to establish that the exempt income was derived from trading stocks. Consequently, the Tribunal set aside the issue for the AO to reexamine after granting a reasonable opportunity to the assessee.In conclusion, the appeal filed by the Revenue was allowed for statistical purposes, and the issue of disallowance under Section 14A and the applicability of Rule 8D were referred back to the AO for fresh adjudication based on the principles established in relevant judgments.