TaxTMI 
TaxTMI 
2023 (10) TMI 459
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.... The appellant craves leave to add, amend or alter the aforesaid ground of appeal at the time of hearing, if the need arise." 3. The brief facts of the case are that the assessee is engaged in the business of trading in shares and bonds, earning brokerage income, other stock broker services etc. and is a Member of the Bombay Stock Exchange. During the course of assessment the Assessing Officer observed that assessee has earned exempt income of Rs. 1,77,00,024/-. The assessee, in the return of income, made a suo moto disallowance of Rs. 75,488/- under Section 14A of the Act. The Assessing Officer observed that the assessee had claimed total interest expenditure of Rs. 2,53,72,667/-, which is not attributable to any particular of income of the assessee. The Assessing Officer observed that in the instant case the assessee has not maintained any separate account and nor furnished any documentary evidence of expenses towards earning exempt income. Accordingly, the Assessing Officer made a disallowance of Rs. 2,04,57,396/- under Section 14A of the Act r.w.r. 8D. 4. In appeal, the assessee submitted that it is engaged in the business of trading in shares and bonds etc. and a large numbe....
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....ectfully following the judgment in the case of Maxopp Investment referred supra it is held that the exempt income earned by the appellant on the shares/securities/instrument and other investment held as stock-in-trade would attract the provisions of Section 14A of the Act and such investments will form a part of the aggregate of investments for the purpose of computing the disallowance as per the formula contained in Rule 8D of the Rules. Since appellant has not maintained separate records or has not apportionment the expenses between the taxable and exempt income the expense related to the earning of exempt income cannot be ascertained form the accounts. Therefore, AO was fully justified in computing the disallowance u/s. 14A by applying the formula contained in Rule 8D of the Income Tax Rules 1961. Accordingly, the action of the AO to this extent is confirmed. 5.7 However, in the appellant's case the disallowance made in more than the exempt income claimed and allowed. The total exempt income claimed and allowed is Rs.1,77,00,024/- as per the impugned assessment order. The disallowance made u/s. 14A cannot exceed the exempt income claimed as has been held by Hon'ble Gujarat Hig....
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....o, as certain dividend income is incidentally earned. However, by the provisions of Section 10(34) of the Act, dividend income is not included in the total income and is exempt from tax. Hence, the expenditure incurred in acquiring those shares will have to be apportioned, based on the facts of each case, between taxable and non-taxable income as held in the case of Walfort Share and Stock Brokers P Ltd. The Hon'ble Supreme Court made the following observations, while passing the order: "JUDGMENT OF PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA 18. This case arose in the context where exempt income in the form of dividend was earned by the Bank from securities held by it as its stock in trade. The assessee filed its return declaring an income of about Rs.670 crores which was selected for scrutiny. The return showed dividend income exempt under section 10(34) and (35) of about Rs.11.07 crores and net interest income exempt under section 10(15)(iv) (h) of about Rs.1.12 crores. The total exempt income claimed in the return was, therefore, Rs.12,19,78,015/-. The assessee while claiming the exemption contended that the investment in shares, bonds, etc. constituted its s....
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....e that the assessee is engaged in the purchase and sale of shares as a trader with the object of earning profit and not with a view to earn interest or dividend. The assessee does not have an investment portfolio. The securities constitute the assessee's stock-in-trade. The Department, in fact, rightly accepted, as a matter of fact, that the dividend and interest earned was from the securities that constituted the assessee's stock-in-trade. The same is, in any event, established. The assessee carried on the business of sale and purchase of securities. It was supported by Circular No.18, dated November 02, 2015, issued by the CBDT, which reads as under:- ........ 23. According to the High Court, what is to be disallowed is the expenditure incurred to "earn" exempt income. The words 'in relation to' in Section 14A must be construed accordingly. Applying that principle to the facts at hand, the High Court concluded as under: "Now, the dividend and interest are income. The question then is whether the assessee can be said to have incurred any expenditure at all or any part of the said expenditure in respect of the exempt income viz. dividend and interest that aros....
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..... 38. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-intrade' and not as 'investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that....
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.... on the computing of the disallowance under Sec. 14A r.w. Rule 8D. We find that it is the claim of the Ld. A.R that as the exempt dividend income yielding shares were held by the assessee company as 'stock-in-trade' therefore, no disallowance under Sec. 14A r.w. Rule 8D was called for in its case. In our considered view, the aforesaid contention of the Ld. A.R is absolutely misconceived and cannot be accepted. On a perusal of judgment of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi, we find, that the Hon'ble Apex Court had disapproved the dominant purpose test that was pressed into service by the assessee for the purpose of interpreting the scope and gamut of Sec. 14A of the Act. Infact, the Hon'ble Court had subscribed to the theory of the apportionment which was made available by the legislature by inserting Sec. 14A vide the Finance (Amendment) Act, 2001 with retrospective affect from 01.04.1962. In the aforesaid judgment, the Hon'ble Apex Court had inter alia observed that where shares are held by an assessee as stock-in-trade, the earning of exempt dividend income on the same would trigger the applicability of Sec. 14A of the Act. Acco....
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....n the case of M/s Vora Financial Services P. Ltd. Vs. ACIT-2(3)(1), Mumbai, wherein an ad hoc disallowance had been preferred as against that worked out under Sec. 14A r.w. Rule 8D(2), having been rendered without considering the aforesaid judgment of the Hon'ble Apex Court in the case of Maxopp Investment Ltd. (supra) would also not be binding. We thus finding no infirmity in the order of the CIT(A) who had rightly sustained the disallowance computed by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), therein uphold the same. 8. Resultantly, the appeal filed by the assessee is dismissed. 9. The Ld. Counsel for the assessee cited several decisions in support of his contention that provisions of Section 14A do not apply to shares held as "stock-in-trade". However, it is a well settled law that a decision of a High Court would have binding force in the State in which the Court has jurisdiction but not outside that State. Decisions of the High Court are only binding on subordinate Courts, Authorities and Tribunals situated within its jurisdictional territory. We observe that in the case of CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727, the Bombay High Court observed thus (at ....