TMI Blog2013 (2) TMI 758X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 -- ₹ 1,20,000) without appreciating that no direct or indirect expenditure was attributable to earning of exempt income as the assessee was carrying on business of trading in shares and securities. 2. The learned CIT(A) erred in not appreciating that Rule 8D cannot be invoked facts of present case as the shares are held as stock in trade, secondly the investment in shares of subsidiary company of ₹ 70,000/- was made out of own funds of ₹ 24.61 Crores and no interest expenditure was incurred, however without prejudice the assessee had offered ₹ 1,20,000/- in Tax Audit Report / Return of Income being expenditure incurred for earning exempted income, therefore there cannot be any notional disallowance. 3. The learned CIT(A) failed to appreciate that the borrowings made were utilised for the purpose of assessee's business i.e. trading in shares, hence interest expenditure of ₹ 1,68,45,167/- was allowable u/s. 36(1)(iii) of the Act. 2. Briefly stated the facts are that assessee, in the relevant assessment year, was engaged as dealer in shares and securities. During the course of assessment proceedings, the Assessing Officer noticed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the assessee. It is a settled proposition at the level of Hon'ble High Court of Karnataka that the provision of section 14A has no application to the dividend income arising out of the shares held as stock-in-trade which is an undisputed fact in the present case. 6. Hon'ble Karnataka High Court has examined the issue and held that the earning of dividend income out of the shares held on trading account is merely an incidental income as the assessee is always want those shares to be parted or sold and only the unsold shares is the source of such incidental dividend income. In such case, the provisions of section 14A are not applicable. This being a direct judgment of Hon'ble High Court of Karnataka on this issue in the present case, the same has to be followed in preference to the decision of Special Bench in the case of M/s. Daga Capital Management Pvt. Ltd. (supra). We have considered the principle of judicial hierarchy. We have also perused para 5 and 6 of the decision of the Tribunal in the case of M/s. India Advantage Securities Ltd (supra) which considered the said judgment of Honble High Court of Karnataka for deciding the issue in favour of the assessee. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from trading in shares. 6. However, the Hon'ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s 14A of the IT Act in the case of CCL Ltd. vs. JCIT (supra). The assessee in that case was distributor of state lotteries and dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the AO and confirmed by the Ld CIT (A). The Tribunal agreed with the authorities below that the expenditure relation to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s 14A of the IT Act. The Tribunal however, had observed that the entire broking commissions was relatable to earning of dividend income as the loan had been utilized for the purchase of shares and the profit shown from the sale of shares had been offered as business income. The Tribunal, therefore directed the AO to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the High Court. The High Court noted that 63% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investment which had to be considered for the purpose of disallowance. However, in the case under consideration, the AO incorrectly adopted the figures of opening and closing balance of stock in trade. Thus, in my considered view, the opening and balance of stock in trade was not required to be considered for working out the disallowance as per formula provided in Rule 8D. As per interpretation of the provisions of Rule 8D, it was only the opening and closing balance of investment which was required to be considered for working the disallowance. The appellant's average value of investment during the year was only at ₹ 35,000/- only, the indirect expenditure disallowance as per clause (ii) of Rule 8D(2) was working out at ₹ 3240/- only. Consequently, the O.5% of average value of investment of ₹ 35,000/- was working out to ₹ 2000/- only. In the facts and circumstances, the disallowance as per formula provided in Rule 8D was required to be worked out as under:- (i) Direct interest expenditure Rs. Nil (ii) Indirect interest expenditure ₹ 340/- (i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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