Section 14A disallowance not attracted to securities held as stock-in-trade by a banking assessee.

Where a banking assessee holds securities as stock-in-trade in the ordinary course of business, dividend or similar exempt income is only incidental to the trading activity, so section 14A read with Rule 8D is not attracted on that basis. The Tribunal noted that the Revenue did not dispute the factual position that the securities were held as stock-in-trade, and applied the settled principle that expenditure relatable to such incidental exempt income cannot be disallowed under Rule 8D. The disallowance was therefore deleted.

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Issues: Whether disallowance under section 14A read with Rule 8D could be sustained in respect of securities held by a banking assessee as stock-in-trade and yielding exempt income.

Analysis: The assessee was a banking company and the securities generating exempt income were held in the ordinary course of banking business as stock-in-trade. The Tribunal noted that the Revenue did not dispute this factual position. It relied on the principle that where shares or securities are held as stock-in-trade, the dominant activity is trading and the earning of dividend or similar exempt income is only incidental. The Tribunal followed the binding view that in such circumstances section 14A is not attracted and expenditure relatable to the exempt income cannot be disallowed under Rule 8D.

Conclusion: The disallowance under section 14A read with Rule 8D was deleted and the issue was decided in favour of the assessee.

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