By TIOL News Service

MUMBAI, DEC 13, 2013: THE issue before the Bench is - Whether any disallowance of expenditure u/s 14A is warranted if dividend income is earned on the shares held as stock in trade. And the verdict goes against the assessee.

Facts of the case

The assessee, a company, is engaged in the business of trading in shares and therefore its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. On the date fixed for hearing, assessee's counsel filed an application for adjournment on the ground that two of the partners of the CA firm, who had briefed the counsel, had gone out of station and therefore the case may be adjourned. But when the counsel for the assessee was asked to show whether this firm of CA had been engaged by the assessee through any POA having been executed in their favour, the assessee's counsel was unable to show the same. Therefore the request for adjournment was turned down in the absence of any power of attorney executed by the assessee in favour of the firm of the CAs. The counsel for the assessee was given the option to proceed with his arguments. At this juncture, assessee's counsel had filed written submissions along with copies of the decisions in support of the case of the assessee and prayed that the matter may be decided accepting the view taken by the Judicial Member.

According to the assesssee, the accrual of dividend from such shares, which was exempt from tax, was merely incidental to holding of shares held as stock in trade and not as investment. It was submitted that no expenditure/interest can be disallowed u/s 14A by relating the same to the dividend income because no expenditure was incurred with the view to earn dividend. Assessee also relied on the computation of disallowance under Rule 8D read with Section 14A as worked out by the A.O. in which the A.O. himself had noted that the assessee had not incurred any direct or indirect expenditure relating to exempt income, i.e., dividend, but had still invoked section 14A under the last clause which was a presumptive disallowance and not an actual disallowance. Assessee's ounsel had submitted that the issue under appeal was covered by the decision of the Karnataka HC in the case of CCI Ltd. Vs Jt. CIT in (2012-TIOL-251-HC-KAR-IT). It was also submitted that the Judicial Member, while deciding the issue in favour of the assessee, had taken note of the decision in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs CIT (2010-TIOL-564-HC-MUM-IT), and adverse decision in CIT Vs Daga Capital Management Pvt Ltd. (2008-TIOL-509-ITAT-MUM-SB). It was further submitted that the Judicial Member had chosen to follow the above referred later direct decision of the Karnataka HC in CCI Ltd. Vs CIT in favour of the assessee. It was also clarified that the Bombay HC decision in the case of Godrej & Boyce Manufacturing Co. Ltd. was applicable only where shares were held as investment and not where the shares are held by the assessee as stock in trade while Special Bench decision in the case of Daga Capital Management Pvt. Ltd. was applicable where shares are held as stock in trade. It was further submitted that it was well settled that once the authority higher than the Tribunal had expressed an opinion on the issue before the tribunal, it was not permissible to rely upon a contrary decision of the tribunal including decision of a Special Bench.

On the other hand, the Revenue's counsel had submitted that Rule 8D was brought on the statute book with effect from 2008-09 and that the assessment year involved in the matter under appeal was also AY 2008-09. It was submitted that decisions rendered in Yatish Trading Co. Pvt. Ltd. and CCI Ltd. related to assessment years prior to AY 2008-09 and therefore were not applicable. It was further submitted that the jurisdictional HC in the case of Godrej & Boyce Manufacturing co. Ltd. Vs DCIT (2010-TIOL-564-HC-MUM-IT) had held that Rule 8D was mandatory from 2008-09 onwards. The assessee had suo motu disallowed Rs. 1,22,295/- as expenditure incurred in earning exempt income which had been not accepted by the Revenue as the disallowance was required to be worked out on the basis of Rule 8D. The AO therefore proceeded to make disallowance as provided under Rule 8D read with section 14A.

Held that,

++ the matter under appeal relates to AY 2008-09. It is accepted by both the parties that the assessee is a dealer in shares and that the shares were held by it as stock in trade. The issue under appeal is squarely covered by the principles laid down by the jurisdictional High Court in Godrej & Boyce Manufacturing Co. as also by the judgment of the Calcutta High Court in Dhanuka & Sons and by the decisions of this Tribunal in JCIT v. American Express Bank and DCIT v. Damani Estates and Finance in which the issue under appeal has been elaborately considered. It may be relevant to mention that the Judicial Member himself is a party to the order passed by this Tribunal in American Express Bank, which has been followed by the AM. The aforesaid judgments relate to the assessment years after the insertion of Rule 8D in the Income-tax Rules. In my considered view, the AM has rightly, after careful consideration of all the relevant aspects of the case, followed the aforesaid decisions. The AM has rightly observed that the judgment of the Karnataka High Court in CCI is not a solitary judgment on the issue under appeal in as much as the issue under appeal has also been considered for the relevant AY by the Calcutta High Court also as also by the Division Benches of this Tribunal;

++ the assessee has mainly relied upon the decision of the Karnataka High Court in the case of CCI Ltd. and other tribunal decisions including three decisions in which CCI Ltd.'s decision has been followed. There is nothing in the said judgment of the Karnataka High Court to show that the judgment of the jurisdictional High Court in Godrej & Boyce was brought to its notice or considered by it. On the other hand, the said judgment of the jurisdictional High Court has been, as rightly observed by the AM, duly considered by the Calcutta High Court, which has subsequently been followed by the Division Benches of this Tribunal in American Express Bank and Damani Estates & Finance. In view of the foregoing, it is held that disallowance under section 14A can be made in conformity with law even in cases where dividend income has been earned on the shares held as stock in trade. I concur with the order passed by the AM as also the reasoning given by him in support of his order. The matter shall now go back to the Division Bench for passing appropriate order in conformity with the majority opinion.

(See 2013-TIOL-1057-ITAT-MUM-TM)