{"id":2905,"date":"2011-03-28T14:16:25","date_gmt":"2011-03-28T08:46:25","guid":{"rendered":"http:\/\/itatonline.org\/archives\/?p=2905"},"modified":"2011-03-28T14:16:25","modified_gmt":"2011-03-28T08:46:25","slug":"yatish-trading-co-pvt-ltd-vs-acit-itat-mumbai-no-s-14a-disallowance-of-interest-on-borrowed-funds-used-to-buy-shares-if-shares-held-for-trading-purposes","status":"publish","type":"post","link":"https:\/\/itatonline.org\/archives\/yatish-trading-co-pvt-ltd-vs-acit-itat-mumbai-no-s-14a-disallowance-of-interest-on-borrowed-funds-used-to-buy-shares-if-shares-held-for-trading-purposes\/","title":{"rendered":"Yatish Trading Co Pvt Ltd vs. ACIT (ITAT Mumbai)"},"content":{"rendered":"\n\n
Click here to download the judgement (yatish_trading_14A_shares_trading.pdf) <\/strong> <\/a><\/p><\/td>\n<\/tr>\n<\/table>\n


\nNo s. 14A disallowance of interest on borrowed funds used to buy shares for trading purposes
\n<\/strong><\/p>\n

The assessee, engaged in trading<\/em> and investment<\/em> of shares, received tax-free dividend<\/em> income of Rs. 2.98 crores in AY 2004-05. The AO invoked s. 14A and disallowed the interest on borrowings, administrative and other expenses on proportionate basis. In appeal, the CIT (A) upheld the disallowance but directed that it should be computed as per Rule 8D. On appeal to the Tribunal, HELD:<\/p>\n

(a) Rule 8D does not apply prior to AY 2008-09 (Godrej & Boyce<\/a><\/strong> 328 ITR 81 (Bom) followed);<\/p>\n

(b) The expression \u201cin relation to\u201d in s. 14A means dominant and immediate connection or nexus with the exempt income<\/em>. In order to disallow expenditure u\/s 14A, there must be a live nexus between the expenditure incurred and the tax-free income<\/strong>. Disallowance cannot be made on presumptions and estimation<\/strong> by the AO. Notional expenditure can be apportioned<\/strong> for the purpose of earning income if there is no actual expenditure incurred \u201cin relation to\u201d the tax-free income; <\/p>\n

(c) On facts, the business of the assessee predominantly was trading in shares though it also had investments in shares. The AO has not disputed the assessee\u2019s claim that the dividend had been received on shares purchased for trading purposes<\/strong>. Interest on borrowed funds used for trading activity is allowable u\/s 36(1)(iii) and it cannot be treated as expenditure for earning dividend income which is incidental to the trading activity. If the real purpose was to use borrowed funds for trading purposes and incidentally there is tax-free dividend, it cannot be said that the interest has been incurred for earning the dividend income<\/em><\/strong> (Wallfort Share & Stock Brokers<\/a><\/strong> 326 ITR 1 (SC), Godrej & Boyce<\/strong><\/a><\/strong> 234 DTR 1 (Bom), Emraid<\/strong> 284 ITR 586 (Bom), Leena Ramchandranan<\/a><\/strong> (Ker) & Eicher <\/strong>101 TTJ (Del) 369 followed);<\/p>\n

(d) Though, as held in Godrej & Boyce<\/a><\/strong> 234 DTR 1 (Bom), it is implicit within s. 14A that expenditure incurred for an indivisible purpose has to be apportioned, this principle of apportionment is applicable only where it is not possible to determine the actual expenditure incurred \u201cin relation to\u201d tax-free income. When it is possible to determine the actual expenditure \u201cin relation to\u201d the exempt income or where no expenditure is incurred \u201cin relation to\u201d the exempt income, the principle of apportionment embedded in s 14A has no application<\/em><\/strong>;<\/p>\n

(e) As regards the disallowance of administrative expenditure, the AO\u2019s basis of disallowance based on the ratio of taxable income and dividend is wrong because the expenditure did not depend on the profit or loss arising from the business activity<\/em>. If the expenditure is apportioned on the basis of income, then in the case of no income, no expenditure can be assigned. In case of transaction of purchase and sale of shares, the reasonable basis for apportionment of administrative expenditure should be the volume and nature of the transaction under different activities<\/strong>. There cannot be an equal basis for apportionment of admin expenses between delivery based transactions and non-delivery based transactions etc. <\/p>\n

\n

Note<\/strong>: In Catholic Syrian Bank<\/a><\/strong> it was held that prior to Rule 8D, admin expenses cannot be disallowed. See also Godrej Agrovet<\/a> (ITAT Mumbai), Maharashtra Seamless<\/a><\/strong> (ITAT Delhi) & Hero Cycles<\/a><\/strong> 323 ITR 518 (P&H)\n<\/div>\n","protected":false},"excerpt":{"rendered":"

On facts, the business of the assessee predominantly was trading in shares though it also had investments in shares. The AO has not disputed the assessee\u2019s claim that the dividend had been received on shares purchased for trading purposes<\/strong>. Interest on borrowed funds used for trading activity is allowable u\/s 36(1)(iii) and it cannot be treated as expenditure for earning dividend income which is incidental to the trading activity. If the real purpose was to use borrowed funds for trading purposes and incidentally there is tax-free dividend, it cannot be said that the interest has been incurred for earning the dividend income<\/em><\/strong> (Wallfort Share & Stock Brokers<\/a><\/strong> 326 ITR 1 (SC), Godrej & Boyce<\/a><\/strong> 234 DTR 1 (Bom), Emraid<\/strong> 284 ITR 586 (Bom), Leena Ramchandranan<\/a><\/strong> (Ker) & Eicher <\/strong>101 TTJ (Del) 369 followed)<\/p>\n

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