CBDT declares that no disallowance for exempt income if the securities are stock-in-trade

The Special Jurisdiction (Income Tax) of the Hon’ble High Court at Calcutta, Original side, with reference to the circular dated 11.02.2014 passed by the Central Board of Direct Taxes held that no disallowance for exempt income if the securities are held as stock-in-trade.

The judgment was passed by the bench comprising of Justice Anuradha Bose and Justice Arindam Sinha , in G.A. no.1150 of 2015 being I.T.A. no.52 of 2015 in the case of Commissioner of Income Tax, Kolkata-2, vs. M/s. G.K.K. Capital Markets (P) Limited .

No disallowance for exempt income- Date of judgment:

The judgment was passed on 10.2.2017.

Pleaders engaged:

Ms. Gutgutia, Adv. appeared on behalf of the Revenue and Mr. Khaitan, learned Sr. Adv. appeared on behalf of the Assessee.

Disallowance for Exempt Income- Background of the appeal-

The Revenue preferred the aforesaid appeal against the order dated 14.10. 2014 passed by the Income Tax Appellate Tribunal at Kolkata in ITA no.805/KOL/2012 relating to the assessment year 2008-09.

Ms. Gutgutia, the learned advocate appearing on behalf of the Revenue and urged that in the calculation of total income the assessee had claimed Rs.25, 68, 04,353/- towards  long term capital gain as exempt income.

Applying the provisions of Rule 8D of the Income Tax Rule, the Assessing Officer computed dis allowance under the provisions of the Act.

The Tribunal erred in law in deleting the said dis allowance. The Tribunal handed up a calculation sheet providing the process of calculation that has to be made for dis allowable expenditure by applying Rule 8D (i),(ii) and (iii). The sheet also contained the calculation made for the assessee.

disallowance for exempt income
Some examples of disallowance for exempt income

Why there should be disallowances for exempt Income- Issues raised by the Revenue:

The issues raised by the Revenue were as follows:

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i) Whether in the circumstances of the case the Learned Tribunal erred in law in allowing the appeal filed by assessee by deleting the dis allowance under Section 14A computed according to Rule 8D of the Income Tax Act, 1961.

ii) Whether on the facts of the case the Learned Tribunal was not justified in law in holding investments as shares stock in trade?

iii) Whether on the facts of the case the Learned Tribunal erred in holding that dis allowance of Rs.8, 83, 49,955/- under Rule 8(D) was not required, ignoring the Circular no.5/2014 issued by CBDT, which provided that dis allowance Section 14A, can be invoked even if no exempt income was received during a period?

iv) The impugned order was liable to be set aside as it was passed against the law and without appreciating facts.

v) Whether the Learned Tribunal erred as it allowed the appeal filed by assessee without consideration of material facts on record regarding the inquiry made by Assessing Officer and the same should be set aside?”

Arguments of the parties:

The learned counsel relied upon a judgment passed by this court in the case of Dhanuka & Sons vs. C.I.

The learned advocate appearing on behalf of the revenue supported the judgment passed by the Tribunal and contended that the assessee failed to produce any material to support its contention, as such, the Assessing Officer rightly assessed the deductible income based on proportion.

It was submitted that the same was in conformity with Rule 8D of the Income tax Rule and accordingly the order passed by the Tribunal should not interfered with.

After hearing the learned counsel appearing on behalf of the parties and after going through the materials on record and the judgments referred by Mr. Khaitan, it was held that the Hon’ble Apex Court in the case of CIT v. T reported in (2011) 12 taxmann.com 227 (Cal) and in Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, held that in case of a single indivisible business giving rise to taxable income as well as exempt income, the entire expenses incurred towards the said business would have to be allowed even if a part of the income earned from the said business is exempt from tax, section 14A of the Act was enacted to overcome such judgments.

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It was pointed out that the object of section 14A of the Act was to disallow the direct and indirect expenses incurred for an income that does not form part of the total income.

It was held that there was no dispute that part of the income of the assessee from its business was from a source that was exempt from tax.

The assessee was unable to produce material before the lower authorities showing the source from which its shares were acquired.

Mr. Khaitan contended that for the last few years before the relevant year, no new share was acquired and thus, the loan taken for which the interest was payable by the assessee was not for acquisition of old shares as such, the lower authorities erred in law in giving benefit of proportionate deduction.

It was held that the only fact that the shares were old and not acquired recently was immaterial. The assessee was required to show the source of acquisition of the shares by producing relevant materials that they were acquired from the funds that were available in the hands of the assessee at that point of time without availing any loan.

If the shares were purchased from the amount of loan, the assessee requires to show by the production of documents that such loaned amount had already been repaid and for the said assessment year, no interest is payable by the assessee for acquiring them.

In the absence of any such material furnished by the assessee, it was held that the lower the authorities rightly held that proportionate amount should be disallowed for the total income and the income that was exempt. It was further pointed out that the assessing authority had a reasonable approach in assessment.

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The Circular no.5/2014 of the CBDT dated 11th February, 2014 was relied upon.

The judgment:

It was held that for invoking dis allowance under Section 14A, it was not material that the assessee should have earned the exempt income during the relevant financial year.

In view of the above, the Central Board of Direct Taxes, while exercising its powers under section 119 of the Act clarified that Rule 8D along with section 14A of the Act provided for dis allowance of the expenses even in cases where the assessee in a particular financial year has not earned any exempt income.

In view of the finding of fact relating to the exempt income claimed to be business income and the shares held by the assessee being considered as stock-in-trade, it was held by the Hon’ble High Court at Calcutta that the case did not involve a substantial question of law.

The appeal was thus dismissed.

Also read: No Disallowance for Non deduction of TDS if the assessee has paid Income Tax as due on it