2015 (1) TMI 777 - AT - Income Tax

Tribunal Limits Disallowance to Actual Dividend Expenses

DCIT Circle 3(1), Mumbai Versus M/s Derive Trading Pvt. Ltd.

The Tribunal upheld that the disallowance under Section 14A should not exceed the actual expenditure for earning dividend income, excluding share trading ... Dis allowance u/s. 14A, Rule 8D(2)(ii) in respect of speculation business - interest costs for earning dividends - Held that:- If the conclusion arrived at by the Tribunal in the case of the assessee itself for Assessment Year 2009-10 is analyzed with the facts of the present Assessment Year, uncotrovertedly the disallowance computed under Rule 8D of the Income Tax Rules cannot be more than the actual expenditure incurred by the assessee for the dividend income excluding the activity of share trading which is the business activity of the assessee. The computation of disallowance arrived at as per Rule 8D of the Rules should be restricted only to the extent of actual expenditure or to the extent of the expenditure which can be attributable to the activity of the dividend income excluding the business activity of share trading. Thus, we direct the Assessing Officer to re-compute the disallowance u/s 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of dividend income excluding the expenditure related to business activity of share trading. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance under Section 14A, Rule 8D(2)(ii) concerning speculation business.2. Disallowance under Section 14A, Rule 8D(2)(iii) concerning average investments.3. Justification of ad-hoc disallowance by the assessee versus mandatory application of Rule 8D by the Assessing Officer (AO).Detailed Analysis:1. Disallowance under Section 14A, Rule 8D(2)(ii) concerning speculation business:The Revenue contended that the disallowance under Section 14A, Rule 8D(2)(ii) should be computed at Rs. 8,82,64,345/- as opposed to the nil amount computed by the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] failed to appreciate that interest costs for earning dividends, whether incidental or not, must be disallowed.The Tribunal analyzed the issue by referencing the assessee's own case for Assessment Year 2009-10, where it was established that disallowance computed under Rule 8D cannot exceed the actual expenditure incurred for earning dividend income, excluding the share trading business activity. The Tribunal upheld that the interest on borrowed funds used for trading activity is an allowable expenditure under Section 36(1)(iii) and cannot be treated as expenditure for earning dividend income, which is incidental to trading activity.2. Disallowance under Section 14A, Rule 8D(2)(iii) concerning average investments:The Revenue argued that the CIT(A) erred in not appreciating that the disallowance under Section 14A, Rule 8D(2)(iii) equivalent to 1/2 % of the average investments was correctly made by the AO at Rs. 42,78,828/-, rather than the ad-hoc disallowance of Rs. 5,00,000/- offered by the assessee.The Tribunal referenced the assessee's case for Assessment Year 2009-10, where it was held that the disallowance under Rule 8D(2)(iii) should be scaled down to 10% of the amount calculated by the AO. This was based on the principle that the primary object of holding shares is trading, and the dividend income is incidental. Consequently, the managerial/administrative expenses related to dividend income should be proportionately reduced.3. Justification of ad-hoc disallowance by the assessee versus mandatory application of Rule 8D by the AO:The Revenue maintained that the ad-hoc disallowance of Rs. 5 lakhs made by the assessee lacked any basis and that the application of Rule 8D is mandatory when the AO is not satisfied with the correctness of the disallowance made by the assessee.The Tribunal reiterated that the disallowance under Rule 8D should not exceed the actual expenditure incurred for earning dividend income, excluding the business activity of share trading. The Tribunal directed the AO to re-compute the disallowance under Section 14A, ensuring it is restricted to the actual expenditure attributable to earning dividend income, excluding the share trading business activity.Conclusion:The Tribunal directed the AO to re-compute the disallowance under Section 14A, ensuring it is limited to the actual expenditure attributable to earning dividend income, excluding the expenditure related to the business activity of share trading. The appeal of the Revenue was disposed of accordingly.