The controversy over whether s. 14A can apply to a case where shares (and other securities) are held as stock-in-trade (and not as investment) has been referred to a Third Member. The matter is posted for hearing on Friday, 13th September 2013. Hon’ble U. B. S. Bedi, Judicial Member, is the Third Member.
ITA No.5163/MUM/2011 & ITA No. 5724/MUM/2011 Bench “D” (A.Y. 2008-09]((Cross Appeals in the case of Dy.CIT v. D.H. Securities Pvt. Ltd
Sub: Reference under section 255(4) of the Income Tax Act, 1961.
“Whether on the facts and in the circumstances of the case disallowance under section 14A of the Income Tax Act, 1961 (the Act) can be made where dividend income has been earned on the share held as stock in trade?”
Note: The controversy was first dealt with by the Special Bench in Daga Capital 117 ITD 169 (Mum)(SB). Thereafter, despite the High Court verdicts in CCI Ltd 71 DTR (Kar) 141 & Leena Ramachandran 339 ITR 296 (Ker) holding that s. 14A does not apply to stock-in-trade, some Division Benches have held that s. 14A applies to stock in trade (Damani Estates & American Express Bank) while others have held to the contrary (Yatish Trading, India Advantage, Gulshan Investments & Esquire Pvt. Ltd). It would be appropriate if the controversy is now referred to a 5 Member Special Bench instead of to a Third Member
I do agree,however various appellate pronouncements have endorsed the dis-allowance of 0.5 % or as reasonable as A.O. deems fit.
I fully agree with Mr. Eswar
In my considered opinion, there is no controversy at all on this issue.Disallowance under rule 8D is computed based on the “Average value of Investments” and not “average value of stock-in-trade”. I think that the dissenting member is wrong and to provide the finding that investments and stock -in-trade are distinct, does it require a third member. The earning of dividend is not a parallel activity but incidental to the taxable business activity.Certainly Rule 8 D cannot be imposed and at best, though as an extreme step, a portion of expenditure computed in proportion to the tax-free dividend gained at a fixed percentage say 10% or so can be disallowed.
I fully endorse the views expressed here. The matter should be reffered to a 5 member bench.