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2020 (5) TMI 89 - ITAT DELHIDisallowance u/s 14A - assessee received dividend income from investment including shares which were held as stock-in-trade - HELD THAT:- First ground being the exempt income earned on stock-in-trade will not attract disallowance under section 14A of the act in view of the decision in the case of CCI Ltd Vs JCIT [2012 (4) TMI 282 - KARNATAKA HIGH COURT]. However, in the case of Maxopp Investment Ltd [2018 (3) TMI 805 - SUPREME COURT] after considering the decision of the Hon’ble Karnataka High Court in the case of CCI Ltd held on the shares held as stock-in-trade , an assessee earn profit or loss on trading of the those share and additionally earn dividend also. The Hon’ble Supreme Court has directed to apportion expenses towards exempt dividend income from stockin- trade as well as profit earned on trading of stock-in-trade and the expenses apportioned toward exempt income are only held as liable for disallowance. Accordingly , the Assessing Officer is required to apportion the part of expenses related to exempt dividend income and consider that part for disallowance only . CIT(A) has deleted the disallowance in view case of CIT Vs Reliance Utilities and Power Ltd [2009 (1) TMI 4 - BOMBAY HIGH COURT] if there are sufficient interest-free funds available, it can be presumed that investment had been made out of from such funds and thus no disallowance for interest is required - As seen that exempt income is not only from the equity shares kept as stock-in-trade but also from interest received on bonds. The same has been invested in compliance of the Reserve Bank of India (RBI) Rules. But once exempt income is earned, then interest for corresponding borrowing would be liable for disallowance. Thus, the assessee is required to demonstrate not only investment in shares had been out of interest free funds but investment in Bonds was also made out interest free own funds. We feel it appropriate to restore this issue to the file of the learned Assessing Officer for deciding a fresh in view of our finding above and in accordance with law. The assessee shall provide all details of the investment in assets yielding exempt income as well as own funds and funds borrowed. The assessee shall also provide details of apportionment of interest expenses in relation to a stock-in-trade towards earning dividend income as well as towards earning trading profit - ground No. 1 of the appeal of the Revenue is accordingly allowed for statistical purposes. Disallowance u/s 36(1)(iii) - as per AO interest paid on short-term borrowings for the equity shares held as a stock in trade, dividend income from which has been claimed as exempt, is not allowable in terms of section 36(1)(iii) of the Act being incurred not for business purposes - HELD THAT:- This issue has been decided in favour of the assessee by the Tribunal in assessment year 2011-12, but in view of the decision of the Hon’ble Supreme Court in the case of Maxopp investment Ltd (supra), the issue requires reconsideration. It is undisputed that any expenditure related to exempted income cannot be allowed under the head profit in gains of the business. Under the head profit in gains of the business expenses related to the business income are only to be allowed as per the provisions of the Act. In the instant case, the assessee has claimed dividend income from the stock-in-trade as exempt but profit from trading of such stock-in-trade is taxable under the head profit in gains of the business. In the case of Maxopp investment Ltd (supra) as directed to apportion such interest expenses towards exempted dividend income and towards trading income. The entire interest expenditure corresponding to stock-in- trade cannot be allowed to the assessee as business expenditure. 4.3 The portion of the interest expenses related to earning of the exempted dividend income has to be disallowed. Since the issue in dispute of apportionment of interest expenses corresponding to stock-in-trade has already been restored to the file of the Assessing Officer, while deciding the disallowance under section 14A read with rule 8D of the income tax rules, this issue being connected is also restored to the file of the learned Assessing Officer for deciding a fresh in accordance with law. This ground of the appeal is also allowed for statistical purposes. Disallowance on account of provision for diminution in market value of stock-in- trade - AO observed that the assessee made a provision for diminution in market value of the stock which had already been added back while computing the book profit under section 115JB - whether diminution or reduction in price of the stock-in-trade can be allowed while computing business income? - HELD THAT:- There is no dispute that the assessee is at liberty to value its stock at cost or market value, whichever is lower as per consistent method of accounting, and such reduction if any , in value of the shares held as stock-in-trade will be allowed . But, if such a provision is made outside the trading account ( only while computation of income) then same may not be allowable. In the facts of the case , it is not clear whether the provision for diminution in value of stock-in-trade has been made out of the trading account or within the trading account , therefore, we feel it appropriate to restore the issue to the file of the AO for verifying the facts from the books of accounts and other records of the assessee and decide the issue in dispute afresh in accordance with law. We order accordingly. The ground of the appeal is accordingly allowed for statistical purpose.
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