No s. 14A and Rule 8D disallowance can be made for shares held as stock-in-trade

The Tribunal had to consider whether s. 14A and Rule 8D applied to shares held as stock-in-trade by the assessee. It noted that though in American Express Bank, the Tribunal followed Daga Capital Management 117 ITD 169 & distinguished Leena Ramachandran 339 ITR 296 (Ker) & held that s. 14A applies also to a trader in shares, the Karnataka High Court has held in CCL Ltd 250 CTR 291 that disallowance of expenses incurred on borrowings made for purchase of trading shares cannot be made u/s.14A. It held that as this is a direct judgment of a High Court on the issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in Daga Capital Management (or that in American Express Bank). It was accordingly held that disallowance of interest in relation to the dividend received from trading shares cannot be made. On appeal by the department to the High Court HELD dismissing the appeal:

(i) One can at best disallow the expenses which are incurred for earning dividend income. For that purpose, the figures under the head “Investment” could be taken and some charges apportioned for the purpose of computing the expenses. The Commissioner found from such figures, that only 10% of the income earned could be apportioned towards expenses for earning the dividend income. He, therefore, made a revised disallowance. It is this revised disallowance which has been accepted by the Tribunal. We do not find that both the questions of law can be termed as substantial simply because the first one is covered against the Revenue by a Judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy.CIT Both the authorities in this case have followed this Judgment and applied Section 14A of the Income Tax Act, 1961 and Rule 8D of the Income Tax Rules, 1962. They have been applied correctly. The first question is, therefore, not a substantial question of law at all;

(ii) The second question pertains to the application of the Rule and which raises a pure factual issue. We find that the Commissioner, as also the Tribunal’s order is neither perverse nor vitiated by any error of law apparent on the face of the record, and as noted above. Therefore, this Appeal does not raise any substantial question of law. It is devoid of merits and is dismissed.