Tribunal dismisses revenue appeal on Rule 8D(2)(iii) for shares, allows assessee's appeal on section 41(1) disallowance.

The Tribunal dismissed the revenue's appeal concerning the applicability of Rule 8D(2)(iii) on shares held as stock in trade, citing a High Court judgment that Rule 8D does not apply in such cases. Additionally, the Tribunal allowed the assessee's appeal on the disallowance under section 41(1) of the Income Tax Act for AY 2010-11, directing the deletion of the amount as there was no remission or cessation of liability confirmed by the Director's statement.

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Issues:
1. Applicability of Rule 8D(2)(iii) on shares held as stock in trade.
2. Disallowance under section 41(1) of the Income Tax Act.

Issue 1: Applicability of Rule 8D(2)(iii) on shares held as stock in trade

The case involved cross-appeals by the revenue and the assessee against the order of the Ld. CIT(A) for AY 2010-11. The revenue contended that Rule 8D(2)(iii) should apply to disallow expenses for earning exempt income, citing a recent ITAT, Mumbai Bench decision. The AO computed expenses under Rule 8D, which the Ld. CIT(A) partially allowed based on the absence of borrowed funds for acquiring shares. The Tribunal upheld the decision, stating that Rule 8D does not apply when shares are held as stock in trade, citing a High Court judgment. The revenue's appeal was dismissed.

Issue 2: Disallowance under section 41(1) of the Income Tax Act

The AO added a principal amount and interest under sections 28(iv) and 41(1) after finding discrepancies in unsecured loans. The Ld. CIT(A) reduced the addition, but both the revenue and the assessee appealed. The Tribunal noted the history of loans and their transfer to M/s. MCL due to amalgamation. The assessee did not pay interest post-merger due to disputes, and the loan creditor confirmed the receivables. The Director of M/s. MCL expressed hope for recovering the amount partially. The Tribunal observed that there was no remission or cessation of liability in the AY 2010-11, as confirmed by the Director's statement. Therefore, the Tribunal directed the deletion of the amount under section 41(1), allowing the assessee's appeal and dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal regarding Rule 8D(2)(iii) and allowed the assessee's appeal on the disallowance under section 41(1) of the Income Tax Act for AY 2010-11.

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