INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Shares held as stock-in-trade -

Assessee was engaged in business of trading of share and units of mutual funds. AO made certain disallowance under section 14A, read with rule 8D, of 1962 Rules in respect of dividend earned by assessee on shares. Assessee submitted that it was engaged in the business of trading in shares and those shares were part of its stock-in-trade and not an investment. It was further submitted that dividend income was only incidentally earned by assessee company and interest was paid by assessee on funds borrowed by it for acquiring its stock-in-trade and had to direct correlation with the dividend income earned by it. CIT(A) having rejected assessee's submissions, confirmed disallowance made by AO. Held: AO recorded that a profit making company pays dividend to its shareholders who have invested some money to its shares, whether the shareholder is a trader of share or not. He further noted that assessee had purchased units from the mutual funds and earned day-to-day dividend in the shape of units and value of the purchase account had increased by such units and the motive of the assessee company was clear to earn the dividend income. The Court held that disallowance under section 14A in respect of the dividend earned on the shares as stock-in-trade was deleted, because such shares were held during the business activity of assessee and it was only by a quirk of fate that when the investee company declared dividend, those shares were held by assessee though assessee has to ultimately trade those shares by selling them to earn profits.

Followed :Maxopp Investment Ltd. v. CIT 2018 TaxPub(DT) 1403 (SC) : (2018) 402 ITR 640 (SC)Relied :Vora Financial Services (P.) Ltd. v. Asstt. CIT 2018 TaxPub(DT) 4132 (Mum-Trib) : (2018) 171 ITD 646 (Mum.-Trib)

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