2019 (1) TMI 275

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.... the assessing officer are as under:- * That the Ld. AO erred in disallowing proportionate interest of Rs. 1,02,00,000/- on the borrowed fund utilized by the appellant in acquiring the shares which were held by it as investment. * That since no dividend was received by the appellant from the shares held as investment, the Ld. AO erred in disallowing proportionate interest of Rs. 1,02,00,000/- apparently applying the provisions of Section 14A of the IT Act. * That without prejudice to Grounds No.1 and 2 the disallowable proportionate interest of Rs. 96,00,000/- is excessive inasmuch as conversion of stocks and inventory to investments amounting to Rs. 8.50 crores took place on 31.03.2005 and not on 01.04.2004." The AR of the appellant during the appellate proceedings furnished written submissions as under:- '1. In reference to the above the appellant would like to submit that the share trading was its business for the year under appeal. Purchase and sale of shares was carried out with the motive of earning profits an not dividend income. for the said purposes the appellant would like to point out that shares in the year under appeal were ....

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....of the paper book) 2.2 Further, the appellant company would like to submit that the aforesaid fact was intimated to the Ld. AO by its letter dated 18.12.2007. The Ld. AO has not raised any question relating to the said letter dated 18.12.2007 submitted by the assessee. (copy of the letter dated 1812.2007 is enclosed at pages 28- 29 of the paper book) 2.3 From the aforesaid discussion, it is clear that the Ld. AO has disallowed the interest of Rs. 1,02,00,000/- on the wrong premise that the shares valued at Rs. 8.5 crores was no more a business asset from the beginning of the financial year : 2004-05. 3. On the basis of this contention, the assessee submits that since assessee is dealing in trading in shares, the question of disallowance of interest does not arise. The assessee submits that if there is any borrowed money for the purpose of business purpose, the same shall be allowable u/s.36(1)(iii) of the Income Tax Acct, 1961. 3.1 It must be borne in mind that in the instant case, the assessee is a trader dealing specifically in shares and that his business is trading in shares. His income, therefore form trading in shares is required to be asse....

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....s remained unsold with the assessee. It is those unsold shares have yielded divided, for swhich, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the share has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside." (order copy enclosed) * Yatish Trading Co. P ltd vs. ACIT 1(3),Mumbai (ITA No.456/Mum/2009) The Hon'ble ITAT, Mumbai had held that: "The AO disallowed the administrative expenditures on the basis of the ratio of the taxable income and dividend i....

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.... [2012] 24 Taxmann 223 (Pune) The Hon'ble ITAT Pune Bench had held that: "Where no expenditure is canvassed to have been incurred by the assessee in earning dividend income, no notional expenditure can be deducted by invoking section 14A of the Act. Further in a case when assessee has not retained shares with the intention of earning dividend income and dividend income is incidental to the business of sale of shares, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of divided income, so as to be disallowed." Thus on the basis of the above decisions it can be concluded that no disallowance u/.s. 14A can be made in the case of trader of shares. The said case of the assessee falls within the ambit of the decisions quoted above and hence no disallowance of interest can be made u/s.14A as well as section 36(1)(iii). 4.2 Furthermore, it may be noted that disallowance u/s. 14A can be made only when there is tax free income i.e. dividend income. in the said case it is evident from the Profit and Los Accounts of the appellant company that the appellant has not earned any tax free income i.e. d....

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....oceedings and made disallowance. The interest was disallowed while considering the share capital and reserve and surplus and unsecured loans. The AO has also considered the conversion of share held in stock to investment. I agree with the AO. in view of above, the order of the AO is upheld and these grounds of appeals re dismissed." 3. We have given our thoughtful consideration to rival contentions. Some key facts emerge from the instant lis. This assessee is a company engaged in real estate development as well as trading insecurities. Mr. Tulsiyan is very fair in stating that assessee had in fact borrowed interest bearing funds which were invested in securities in issue. We notice from assessment order dated 28.12.2007 that the Assessing Officer disallowed 12% interest on borrowed funds of Rs. 8.5 crores coming to Rs.1,02,00,000/- in view of the reason that the taxpayer had converted its opening stock of shares worth of Rs.8.5 crores to investments. He thus invoked proportionate interest disallowance for the reason that said conversion took place on 01.04.2004. All this resulted in impugned proportionate interest disallowance for whole of the relevant previous year. The CIT(A)'....