A disallowance u/s 14A & Rule 8D has to be made even in respect of securities that are held as stock-in-trade by the assessee. However, the disallowance has to be computed by taking into consideration only those shares which have yielded dividend income in the year under consideration
(i) The issue that arises for our consideration in the present context is whether the provisions of section 14A can be invoked to make a disallowance on account of expenditure incurred in relation to the exempt income in the form of dividend received by the assessee on the shares held as stock-in-trade.
(ii) Admittedly the assessee is into the business of share trading predominantly and all the shares have been classified as stock in trade. All the expenses either directly or indirectly have been incurred for the business of the assessee including the finance charges on the borrowed fund. The dividend income earned on the shares held as stock in trade is incidental income of the assessee. The predominant income of the assessee is from the trading of shares which has already been offered to tax. Indeed the assessee while carrying out its activities has earned income in the form of dividend which is exempted from tax under section 10(34) of the Act.
(iii) However on this aspect the provisions of the act are fairly clear which states that the expenses incurred by the assessee in relation to exempted income will be disallowed from the income of taxable activities. In the case on hand there is no dispute that the assessee has earned exempted income and therefore the expenses incurred in relation to such income has to be disallowed. In the instant case the assessee has not disallowed any expenses on the ground that the assessee has not claimed any exemption of dividend income under section 10(34) of the Act rather the dividend income was offered to tax. Therefore the ld. AR argued that no disallowance under section 14A of the Act is warranted.
(iv) However we disagree with the contention of the learned AR on the ground that the intention of the legislature is to collect tax on the income which is chargeable to tax. The revenue is not authorized to collect the tax on those activities which are not chargeable to tax under the Act. It is the duty of the Revenue to exclude those items of income from the taxable income which are not chargeable to tax in spite of the fact that the assessee has offered the same to tax. In this connection we rely in the judgment of the Hon’ble Supreme Court of India in the case of The relevant extract of the case UNITED COMMERCIAL BANK vs. COMMISSIONER OF INCOME TAX (1999) 156 CTR 0380 : (1999) 240 ITR 0355 (1999) 106 TAXMAN 0601 whereby Hon’ble SUPREME COURT OF INDIA held as under :
“for the purpose of income-tax whichever method is adopted by the assessee a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance sheet required to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the ITO as well as the assessee to point out the true and proper income while submitting the IT return.”
(v) Now coming to the facts of the case we find that the controversy whether the disallowance is to be made under section 14A of the Act in relation to those shares which are held as stock in trade has been settled by the Hon’ble Calcutta High Court in the case of Dhanuka & Sons Vs. CIT (2011) reported in 339 ITR 319. The relevant extract of the order is reproduced below:
“The object of s. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. There is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which shares were acquired. The mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.”
(vi) In view of the above we find that the provisions of section 14A of the Act are very much attracted on those investments which are held as stock in trade.
(vii) However before us, the ld. counsel for the assessee has raised an alternative contention that even if section 14A read with Rule 8D is held to be applicable in the case of the assessee, the Assessing Officer may be directed to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Since this issue raised by the ld. counsel for the assessee as an alternative contention is squarely covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of REI Agro Ltd. v. Dy. CIT  35 taxmann.com 404/144 ITD 141 (Kol.), we direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted.