2016 (6) TMI 884 - AT - Income Tax

Tribunal rules stock-in-trade shares exempt from disallowance under section 14A

The Tribunal allowed the assessee's appeal, ruling that disallowance under section 14A r/w rule 8D cannot be imposed on shares and securities held as ... Disallowance made under section 14A on shares and securities held as stock–in–trade - Held that:- Shares and securities held as stock–in–trade cannot be considered for the purpose of disallowance under section 14A r/w rule 8D. See R.R. Chokhani Stock Broker Pvt. Ltd. [2016 (6) TMI 879 - ITAT MUMBAI] Issues:Disallowance under section 14A of the Income Tax Act, 1961 r/w rule 8D of the Income Tax Rules, 1962.Analysis:1. The judgment pertains to an appeal against an order related to the disallowance made under section 14A of the Income Tax Act, 1961 r/w rule 8D of the Income Tax Rules, 1962 for the assessment year 2010-11. The assessee, engaged in share trading and stock brokerage, declared total income with exempt dividend income. The Assessing Officer disallowed an expenditure of Rs. 30,000 towards earning exempt income, not based on rule 8D, resulting in a disallowance of Rs. 9,87,346. The assessee challenged this disallowance before the Commissioner (Appeals).2. The primary contention before the Commissioner (Appeals) was that the shares held as stock-in-trade, generating taxable business income, should not be considered for disallowance under section 14A r/w rule 8D. However, the Commissioner (Appeals) relied on a Special Bench decision and held that even shares held as stock-in-trade can be included for disallowance under section 14A r/w rule 8D.3. The Tribunal analyzed the submissions and referred to a previous decision where it was held that shares and securities treated as stock-in-trade cannot be considered for disallowance under section 14A r/w rule 8D. Based on this precedent, the Tribunal concluded that no disallowance can be made on shares and securities held as stock-in-trade for business purposes. Consequently, the Tribunal deleted the addition made by the Assessing Officer and upheld by the Commissioner (Appeals), allowing the assessee's appeal.4. The Tribunal's decision was based on the principle that the disallowance under section 14A r/w rule 8D cannot be imposed on shares and securities held as stock-in-trade for business activities. By following the established precedent, the Tribunal set aside the Commissioner (Appeals)'s order and directed the Assessing Officer to restrict the disallowance under section 14A to a specific amount, deleting the excess disallowance. As a result, the assessee's appeal was allowed, and the disallowance amount was reduced significantly.5. In conclusion, the Tribunal's judgment clarified the treatment of shares and securities held as stock-in-trade concerning disallowance under section 14A r/w rule 8D, providing a favorable decision for the assessee and emphasizing the importance of adhering to established legal principles in tax assessments.