2014 (8) TMI 241 - AT - Income Tax

Tribunal upholds disallowances under Income Tax Rule, emphasizing expenses related to taxable income.

The Tribunal dismissed the assessee's appeal in its entirety, upholding the disallowances under Rule 8D(2)(iii) of the Income Tax Rules. The decision was ... Disallowance u/s 14A - Average rate of investment under Rule 8D(2)(iii) disallowed @ 0.50% - Held that:- The disallowance u/s 14A read with Rule 8D is to be made not only in respect of income which does not form part of the total income but also in respect of income which shall not form part of the total income that the section 14A(1) is enacted to ensure that the expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income, which means that the expenses which are not incurred not for the purpose of earning of taxable income cannot be allowed for the computation of net income - Relying upon CIT., Mumbai Versus M/s. Walfort Share & Stock Brokers P. Ltd. [2010 (7) TMI 15 - SUPREME COURT] - even if from the investments made, no exempt income has resulted but the expenditure cannot be said to be incurred for earning of taxable income, it cannot be allowed while computing the taxable income - Where there is a hotchpotch of funds and the expenditure both for investments and business purposes are incurred from the common pool and cannot be segregated, the principle of apportionment of expenses as provided under section 14A of the Act is upheld – Decided against Assessee. Stock in trade – Disallowance under Rule 8D(2)(iii) – Held that:- The issue relating to the disallowance u/s 14A in relation to shares held in stock in trade was decided in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] - section 14A is attracted even in the case of dividend income from shares held as stock in trade – Decided against Assessee. Issues Involved:1. Disallowance under Rule 8D(2)(iii) of the Income Tax Rules for investments yielding no exempt income.2. Disallowance under Rule 8D(2)(iii) for Growth schemes with no provision for dividends.3. Inclusion of Stock In Trade while calculating disallowance under Rule 8D(2)(iii).Detailed Analysis:Ground No.1: Disallowance under Rule 8D(2)(iii) of the Income Tax Rules for investments yielding no exempt income.The assessee contended that no disallowance under Rule 8D(2)(iii) of the Income Tax Rules should be made for investments that did not yield any exempt income during the assessment year. The representatives of both parties presented their arguments, with the assessee relying on the decisions in 'REI Agro Ltd. vs. DCIT' and 'CIT vs. Shivam Motors (P) Ltd.' The Tribunal, however, upheld the disallowance, clarifying that Rule 8D(2)(iii) mandates disallowance based on the average value of investments, regardless of whether they yielded exempt income. The Tribunal referenced the case 'Sitsons India (P.) Ltd. vs. ACIT' to support this interpretation. The Tribunal also considered the jurisdictional High Court's judgment in 'Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT,' which emphasized that expenses incurred in relation to exempt income must be disallowed to ensure only expenses related to taxable income are allowed. Consequently, the Tribunal dismissed the assessee's contention.Ground No.2: Disallowance under Rule 8D(2)(iii) for Growth schemes with no provision for dividends.The assessee did not press this ground, and thus, it was dismissed.Ground No.3: Inclusion of Stock In Trade while calculating disallowance under Rule 8D(2)(iii).The assessee argued that no disallowance should be made under Rule 8D(2)(iii) for dividend income earned from shares held as stock in trade, citing the 'CCI Ltd. vs. JCIT' decision. The Tribunal, however, referred to the coordinate bench's decision in 'D.H. Securities (P) Ltd. vs. DCIT,' which, after considering the 'CCI Ltd.' case, held that section 14A applies even to dividend income from shares held as stock in trade. The Tribunal relied on the jurisdictional High Court's decision in 'Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT' and the Kolkata High Court's decision in 'Dhanuka & sons vs. CIT,' which support the applicability of section 14A in such cases. Therefore, the Tribunal dismissed this ground as well.Conclusion:The appeal of the assessee was dismissed in its entirety, with the Tribunal upholding the disallowances made under Rule 8D(2)(iii) of the Income Tax Rules. The order was pronounced in the open court on 31.07.2014.