TaxTMI 
TaxTMI 
2015 (1) TMI 777
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....ome tax (Appeals) has failed to appreciate that the disallowance u/s 14A, Rule 8D(2)(iii) equivalent to ½ % of the average investments has been rightly made by the Assessing Officer at Rs. 42,78,828/- as against the adhoc disallowance of Rs. 5,00,000/- offered by the assessee which has not basis. iii. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income tax (Appeals) has failed to appreciate that the adhoc disallowance of Rs. 5 lakhs made by the assessee is without any basis, and that the application of Rule 8D is justified given the facts and circumstances of the case. The ld. Commissioner of Income tax (Appeals) has failed to appreciate that the application of Rule 8D is mandatory when the A.O. is not satisfied with the correctness of disallowance made by the assessee. iv. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. 2. At the time of hearing, Shri Akhilendra Yadav, ld. counsel for the Revenue defended the conclusion arrived at in the assessment order by submitting that the ld. Commissioner of Income tax (Appeals) granted relief ignoring the facts ....
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....ed AO however rejected the contention of the Appellant on the ground that the provisions of Rule 8D(2) & (iii) does not make any distinction as to whether the investment made in shares/securities is of the nature of 'Stock in Trade' or 'Investment'. He also relied upon the decision of Hon'ble ITAT Special Bench (Mumbai) in the case of Capital Management Pvt. Ltd. In this context we seek to rely on the following two latest decision which supports the view that when the shares were held as Slack In Trade disallowance u/s 14A cannot be made: . i) Yatish Trading Co. (P) Ltd. Vs. ACIT 50 DTR (Mumbai) (Trib)158 : (2011) 129 1TD 237 ii) Kerla High Court in case of CIT Vs. Leela Ramchandran, ITA No.1784 of 2009 5.1) Disallowance of Interest U/S 14A. at Rs. 8,82,64,3451- under rule 8D 2(ii):- In this context it is submitted that Appellant made the borrowings during the course of share trading business consisting of Future and Option and trading in shares and commodities. The interest debited to the Profit and Loss account is Rs. 11,34,67,539/-. The interest on borrowed funds used for trading activity is an allowable expenditure under s. 36(1)(iii) and the same cann....
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....shows that the borrowed funds were utilized in the form of Stock in Trade for the purpose of speculation business of the assessee. Hence the borrowed funds has direct nexus with speculation business, therefore, the interest paid on borrowed funds directly relates to the speculation business." In view of the above the Learned AO is not justified in making disallowance of Interest of Rs. 8,82,64,345/- u/s 14A r.w. Rule 8D (2)(ii)." 2.2. We are also reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 10/12/2014 for ready reference:- "4. We have heard the Ld. DR as well as Ld. AR and considered the relevant material on record. The Ld. DR has relied upon the decision of this Tribunal in the case of D.H. Securities Ltd. Vs. DCIT (41 taxmann.com 352)and submitted that it has been held that section 14A is applicable even in the case of trading in shares so far as the dividend income from the shares held as stock in trade is concerned. 5. On the other hand, the Ld. Authorized Representative has submitted that in the latest decision dated 27.08.2014 of this Tribunal in the case of Ramkumar Venugopal Investments Pvt. Ltd. Vs. ACIT in ITA no. 6324//Mum....
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....the Act. The decision of the Hon'ble Karnataka High Court relied upon by the assessee has been duly discussed and distinguished in the Third Member Case of "D.H. Securities (P) Ltd. vs. DCIT"(supra). However, it has been further observed in the said Third Member decision of the Tribunal that the shares which yield tax exempt dividend income, interest qua which is to be disallowed, when held as stock in trade, yield taxable income also. In fact, the shares are bought and held primarily for the purpose of earning income from trading in shares. Hence, while calculating the interest disallowance under Rule 8D(2)(ii), the disallowance of the entire amount is not justified. The Tribunal therefore held that the amount calculated as per Rule 8D(2)(ii) would need to be scaled down as the income earned from share trading is offered for taxation. The tribunal observed that while scaling down the said amount no hard and fast rule can be applied and the same can be determined only on adhoc basis. The Tribunal also observed that where the share trading is the dominant object of purchase and sale of shares, the turnover of the year would be very high in comparison to the available share holding ....