Rule 8D not applicable to shares held as stock in trade. Calcutta High Court upheld ITAT judgment deleting disallowance made us 14A for interest expenditure
ABCAUS Case Law Citation:
ABCAUS 1144 (2017) (02) HC
Date/Month of Pronouncement: February, 2017
Important Case Laws Cited/relied upon:
Dhanuka & Sons vs. CIT
CCI Ltd. vs. JCIT
Brief Facts of the Case:
The assessee was a private limited company and was engaged in the business of share trading. During the relevant assessment year, the assessee had claimed long term capital gain of Rs. 25,68,04,353/- from sale of shares as being exempt income. The assessee had itself offered disallowance of Rs. 37,28,966/- under Rule 8Dtowards dividend income earned. The Assessing Officer (AO) treated the claim of long term capital gain as business income denying the exemption claimed. The assessee did not object to that. However, the Assessing Officer, applied Rule 8D and computed the disallowance for interest expenditure at Rs. 2,53,86,296/-under Section 14A the Income Tax Act, 1961 (“the Act”).
The matter travelled to the Tribunal and the ITAT deleted the disallowance.
Contentions of the Respondent assessee:
It was contended that the interest was paid on money borrowed for the purpose of purchasing shares. Thus the expenditure of interest on borrowings was relatable to the share trading business. The shares had been taken as stock in trade of the assessee which yielded dividend income. There was no expenditure incurred in earning the dividend income which is only incidental to the assessee holding on to the shares as stock in trade.
Also, the assessee placed reliance on the judgment of the High Court of Karnataka in which the substantial question of law that arose was whether the provisions of Section 14A of the Act are applicable to expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation. The said substantial question of law was answered in favour of the assessee and against the Revenue.
It was also submitted that he Assessing Officer did not record reasons to show that any expenditure by way of interest during the previous year was not directly attributable to the share trading income.
Observations made by the High Court:
The Hon’ble High Court observed that the Tribunal had found that the assessee did not have any investment and all the shares were held as stock in trade as was evident from the orders of the lower authorities. The ITAT had held that once, the assessee has kept the shares as stock in trade, the rule 8D of the Rules will not apply.
The Hon’ble Court observed that The Assessing Officer had accepted the correctness of the
disallowable expenditure offered by the assessee on its claim of Rs.25,68,04,353/- as long term capital gain. He did not allow the claim itself treating the said amount as business income to thereafter disallow the offered expenditure.
In view of the clear finding of fact regarding the exempt income claimed treated to be business income and the shares held by the assessee having been treated as stock in trade, the Court did not find that the case involved a substantial question of law.
The appeal was dismissed.