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Friday, April 6, 2012

S. 14A does no apply to shares held as stock-in-trade. Disallowance on notional basis is invalid


The assessee availed of an interest-free loan of Rs.14 crores and paid brokerage of Rs.28 lakhs for purchasing shares. The shares were held as stock-in-trade and the assessee earned dividend of Rs. 46.67 lakhs thereon. The assessee claimed that no expenditure had been incurred to earn the dividend though the AO made a disallowance of Rs. 27.34 lakhs u/s 14A & Rule 8D. The Tribunal held that the brokerage on the loan, though incidental to the trading of shares, was indirectly incurred to earn dividend and had to be disallowed u/s 14A. On appeal by the assessee, HELD by the High Court allowing the appeal:

When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares, which remained unsold by the assessee. It cannot be said that the expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and that should be a disallowance u/s 14A.

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