Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether AO Can Disallow Expenditure U/s. 14A From Dividend Of Shares Held As Stock-in-trade?

QUERY: Mr. S. is holding certain shares on investment account as well as stock-in-trade. For A.Y. 2013-14, he has not received any dividend income on the shares held as investment.

A. The Assessing Officer wants to invoke section 14A read with Rule 8D with respect to all the shares. Mr. S. wants to know:

(i) Whether section 14A applies when the shares are held as stock-in-trade?

(ii) Whether section 14A applies when no tax free dividend income is received during the year?

B. The Dept. now intend to apply/follow the Circular No. 5/2014 dated February 11, 2014 issued by the CBDT, as per which the disallowance u/s. 14A is required to be made even in absence of any exempt income received during the year.
ANSWER: • As per ITO v. Daga Capital Management Pvt. Ltd [312 ITR (AT) Mumbai (SB)], section 14A is applicable to both i.e. when the shares are held as stock-in-trade and investment.

• In Godrej and Boyce Mfg Co. Ltd. v. DCIT [328 ITR 81] the Bombay High Court has held that the expression “income which does not form part of total income” is confined to section 10 and attract the disallowance u/s. 14A. The expression must receive its plain and grammatical construction and refers to income which is not includible in computing the total income of the assessee under the Act. So, if no tax free dividend income is received during the year, section 14A is not applicable as per the above decision.

• The CBDT circular is binding on the Income tax authorities except CIT(A) in exercise of his appellate functions. The Supreme Court in UCO Bank v. CIT [237 ITR 889] has held that the circular issued under this section cannot affect the assessee in an adverse manner.

Posted in Income-tax

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