Disallowance under section 14A for mutual fund investments remanded to AO; exclude stock-in-trade and consider only exempt income.

Disallowance under section 14A regarding investments in mutual funds turns on classification of investments as stock in trade and on consideration only of investments that yield exempt income; the tribunal remanded the matter to the assessing officer for factual verification of records to ascertain whether the investments were held as stock in trade, and directed exclusion of such stock in trade from the 14A disallowance computation. The officer is further directed to compute disallowance taking into account only those investments that actually yielded exempt income.

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Issues: Whether the disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 should be upheld where (i) dividend-yielding investments are held as stock-in-trade and (ii) investments that did not yield exempt income during the year were included in computing average investments.

Analysis: The issue concerns (i) exclusion of investments held as stock-in-trade from computation of disallowance under section 14A r.w.r. Rule 8D and (ii) whether only investments yielding exempt income in the relevant year must be considered for computing the average value under Rule 8D(2)(ii). The Tribunal relied on precedent holding that investments held as stock-in-trade are to be excluded for section 14A computation and that only those investments which yielded exempt income are relevant for computing disallowance. Because the points regarding stock-in-trade status and which investments yielded exempt income were not previously adjudicated by the lower authorities, factual verification by the Assessing Officer is necessary before final computation under Rule 8D.

Conclusion: The appeal is allowed for statistical purposes by excluding from section 14A computation investments held as stock-in-trade if factual verification so shows, and by directing the Assessing Officer to consider only investments that yielded exempt income for computing disallowance under Rule 8D.

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