Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

The assessee received exempt income in the form of dividend from personal investments and also from shares held for trading. It also received tax free interest from relief bonds. The assessee maintained separate accounts including separate bank accounts and balance sheets for personal investments and trading activities in which expenses relating to these two activities were shown separately.

In the course of assessment proceedings, on being asked to show cause as to why expenses relating to such income should not be disallowed u/s. 14A of the Act, the assessee submitted that from the separate accounts maintained, it is clear that personal investments were made out of profit earned in the past and not from borrowings. It also contended that no expenses were incurred in respect of such investment. As regards shares held for trading it was contended that the provisions of section 14A are not applicable. The AO relying on the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. (ITA No. 8057/Mum/2003) held that section 14A does apply even to shares held as stock-in-trade. The AO disallowed the expenses in respect of both shares held as personal investment as well as shares held for trading.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that, on facts, no disallowance was to be made in respect of shares held as personal investments. As regards shares held for trading he held that the provisions of section 14A are applicable and disallowance made by the AO was confirmed by him.

Aggrieved, both the assessee and the Revenue, preferred an appeal to the Tribunal.

Held

The Tribunal noted that the CIT(A) had given a clear finding that the assessee maintained separate accounts including separate bank accounts and balance sheets for the two activities. He gave a finding that the personal investments were made out of own funds, investments in RBI Relief Bonds and LIC had been made in earlier years and since the assessee was having vast experience in these matters, he was personally handling these investments, there were no expenses required. Similarly, the shares which were of unlisted group companies held for the purpose of retaining control over these companies, did not require any day to day expenses. The Tribunal confirmed the action of the CIT(A) in holding that no disallowance is called for in relation to shares held as personal investments.

As regards the shares held for trading, the Tribunal noted that subsequent to the decision of the Special Bench of ITAT in the case of Daga Capital Management Pvt. Ltd. (supra), in which it has been held that section 14A would apply even to dividend income for trading in shares, the Karnataka High Court in the case of CCI vs. JCIT (250 CTR 290)(Kar) has in relation to trading shares held that the assessee had not retained shares with the intention of earning dividend income which was only incidental to shares which remained unsold by the assessee. The High Court held that no disallowance of expenses was required in relation to dividend from trading shares. The Tribunal also noted that the Mumbai Bench of the Tribunal in the case of DCIT vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011, Assessment Year: 2008-09; order dated 14-9-2011) held that in view of the judgment of the Karnataka High Court in the case of CCI Ltd. vs. JCIT, the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd., could not be followed and no disallowance could be made of expenses in relation to dividend received from trading in shares. The Tribunal set aside the order of CIT(A) and deleted the disallowance upheld by him in relation to trading in shares.

 The appeal filed by the assessee was allowed and the appeal filed by the Revenue was dismissed.