Rebate under s.88E allowed against MAT u/s115JB only for tax on taxable securities profits; r.8D applies to stock-in-trade

ITAT MUMBAI allowed rebate under s.88E against MAT liability determined u/s 115JB only to the extent of tax attributable to profits from taxable securities transactions, affirming the bench's consistent view which HC has upheld in earlier precedent. Regarding s.14A read with r.8D, the Tribunal held r.8D applies even to shares held as stock-in-trade; the revenue's disallowance of Rs.12,23,627 was partly deleted and partly confirmed. Result: partial relief to the assessee.

---

---

Issues Involved:
1. Non-allowance of credit of Securities Transaction Tax (STT) under Section 88E of the Income-tax Act, 1961.
2. Disallowance under Section 14A read with Rule 8D for expenses related to exempt income (dividend) on shares held as stock-in-trade.

Detailed Analysis:

1. Non-allowance of Credit of Securities Transaction Tax (STT) under Section 88E:

Revenue's Appeal (ITA No. 5163/Mum/2011):
The Revenue challenged the non-allowance of STT credit under Section 88E, arguing that such credit is only applicable when the tax liability is calculated under regular provisions, not under MAT (Minimum Alternate Tax) provisions. The CIT(A) had allowed the assessee's claim based on the Tribunal's decision in Horizon Capital Ltd. v. ITO, which was upheld by the High Court in CIT v. Horizon Capital Ltd.

Tribunal's Decision:
The Tribunal found no infirmity in the CIT(A)'s order, confirming that the credit under Section 88E is allowable even when tax liability is determined under MAT provisions, but only for the tax attributable to business profits from taxable securities transactions. The Tribunal referenced consistent views from other cases, such as Dy. CIT v. KBII Securities (P.) Ltd. and Dy. CIT v. Arcadia Share & Stock Brokers (P.) Ltd., to support this stance. Thus, the Revenue's appeal was dismissed.

2. Disallowance under Section 14A read with Rule 8D:

Assessee's Appeal (ITA No. 5724/Mum/2011):
The assessee contested the disallowance of Rs. 12,23,627 under Section 14A read with Rule 8D, arguing that the shares generating dividend income were held as stock-in-trade, not as investments, thus Rule 8D(2)(ii) should not apply. The assessee relied on decisions in Yatish Trading Co. (P.) Ltd. v. Asst. CIT and CCI Ltd. v. Jt. CIT.

Tribunal's Decision:
The Tribunal examined whether the decisions in Yatish Trading Co. (P.) Ltd. and CCI Ltd. were applicable for AY 2008-09, given the mandatory application of Rule 8D from that year. It concluded that Section 14A applies irrespective of the purpose for which shares are held (stock-in-trade or investment), and that expenditure related to tax-exempt income must be disallowed. The Tribunal emphasized that Rule 8D is a method for estimating such expenditure, not a basis for disallowance per se.

Specific Points Addressed:
- The Tribunal clarified that Section 14A applies to both direct and indirect expenditures related to tax-exempt income.
- It rejected the argument that no disallowance is necessary if shares are held as stock-in-trade, referencing the Special Bench decision in ITO v. Daga Capital Management (P.) Ltd.
- The Tribunal also addressed the assessee's claim of no specific expenditure incurred for earning dividend income, stating that all business expenses, including indirect costs, must be apportioned between taxable and non-taxable income.
- The Tribunal proposed a 20% allocation of interest expenditure to dividend income, considering the dominant purpose of shareholding is trading.

Separate Judgments:
- The Judicial Member disagreed with the Accountant Member, citing the Karnataka High Court decision in CCI Ltd., which held that no disallowance under Section 14A is applicable for dividend income from shares held as stock-in-trade.
- The Third Member was brought in due to the disagreement and concurred with the Accountant Member, emphasizing the applicability of the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd. and the necessity of disallowance under Section 14A even for shares held as stock-in-trade.

Conclusion:
- The Revenue's appeal was dismissed, affirming the allowance of STT credit under Section 88E.
- The assessee's appeal was partly allowed, with a portion of the disallowance under Section 14A read with Rule 8D being upheld and the rest deleted. The Third Member's decision aligned with the Accountant Member, confirming that disallowance under Section 14A applies to shares held as stock-in-trade.

---