14A not applicable where dividend is received from shares held as stock-in-trade – Mum ITAT


Oasis Securities Ltd. v DCIT IT APPEAL NO. 8009 (MUM.) OF 2011 dtd 20.02.13 (Mumbai ITAT)

Background:

The assessee company is engaged in the activity of stock broking and providing financial services. The assessee earned tax-free dividend income of Rs. 1,73,580 and the same has been claimed as exempt. The AO has stated that assessee has not allocated any expense incurred for earning of such tax-free income. Assessee stated that no expenditure has been incurred to earn the exempted income. However, AO did not agree with above contention of assessee and by applying r. 8D disallowed the same as per sec. 14A of the Act

Assessee’s contentions:

  • Assessee utilized the borrowed money for investment in IPO and interest was paid to Birla Global Finance Co. Ltd. and Kotak Mahindra Investment Ltd. for the loans taken. 
  • The said shares on allotment were immediately sold and profit/loss on said shares has been assessed by the AO under the head “Business income”.
HELD:
  • It is not disputed that borrowed money was invested in IPO. The borrowed money, which was utilized in investment in IPO, was considered as stock-in-trade
  • Hon’ble Karnataka High Court in the case of CCL Ltd. v. Jt. CIT [2012] 206 Taxman 563 held that when the assessee has not retained the shares with the intention of earning dividend income and the dividend income is incidental to the sale of shares which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deduction.
  • Considering above decision of Hon’ble High Court (supra) and the fact that shares in which the borrowed money was invested are trading shares, the disallowance of interest under sec. 14A as made by learned CIT(A) cannot be made in relation to stock-in-trade.
Other Issue:
Where assessee engaged in business of stock broking, earned bank interest on the margin money given in form of fixed deposits to obtain bank guarantee in favour of NSE so that assessee could have trading limits in cash market segments of NSE, such interest was taxable as business income.

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