S. 14A applies even if the securities are held as stock-in-trade. Article 7(3) limitation applies to all expenditure & not only to s. 44C H.O. expenditure
The Tribunal had to consider two issues (i) Whether the provision in Article 7(3) of the India-USA DTAA that a deduction for expenses, including a reasonable allocation of executive and general administrative expenses, would be allowed “in accordance with, and subject to the limitations of, the taxation laws of India” would apply to all expenses or only to executive & general admin expenses and (ii) whether s. 14A applied to tax-free income on securities held as stock-in-trade. HELD by the Tribunal:
(i) The qualification in Article 7(3) of the DTAA that the expenses will be allowed “in accordance with the provisions of and subject to the limitations of the taxation laws of that State” applies to all expenditure incurred for the business of the PE and not merely to s. 44C alone. The fact that the assessee’s interpretation was accepted in earlier year does not mean that it cannot be departed with;
(ii) S. 14A talks of making disallowance of expenses incurred in relation to an income not chargeable to tax. No exception, such as the dividend being main or incidental income, has been carved out in the provision. The relation of expenses for disallowance is with the exempt income irrespective of the source or nature of the exempt income. When the legislature in its wisdom has not spelt out any exception coming in the way of applicability of s. 14A, it is wholly impermissible to artificially find any such exception contrary to the language of the provision and the intention of the legislature. Accordingly. s. 14A applies even if the securities are held as stock-in-trade (Leena Ramachandran 339 ITR 296 (Ker) distinguished).