Section 14a disallowance read with rule 8d

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jhalak tank (Querist)
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13 July 2015 Dear All

One of my client is dealing in stock market as a trader and his main expense is huge interest on unsecured loan and income is profit from trading activity and dividend received from mutual fund and he is not maintaining any MF units investment in mutual fund at the end of the year.

so how can i disallow interest which claim towards exempt income.

B.COM, ACA, DISA Namrata

B.COM, ACA, DISA Namrata (Expert)
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13 July 2015 Disallowance where shares are held as stock-in-trade � Special Bench of the ITAT Mumbai had taken a view in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 that disallowance is to be made in respect of shares held as stock-in-trade also. The aforesaid view has been subject matter of controversy and discussion in other cases. It is being claimed by the assessees that since shares held as stock-in-trade are held as part of its business asset and income arising on sale and purchase of shares is in the nature of business income, which is taxable, no disallowance on account of interest as well as other expenditure in relation to such holding can be made. Dividend income is only incidental income in such cases. This controversy has been considered by the Courts and various Benches of the Tribunals and almost a consistent view is now emerging that no disallowance can be made under section 14A of the Income-tax Act where shares are held as stock-in-trade. In this regard reference can be made to decisions in the following cases:�
CIT Vs. Smt. Leena Ramachandran [2011] 199 Taxman 122 (Mag.)/10 taxmann.com 109 (Ker.)
CCI Ltd. Vs. Jt. CIT [2012] 206 Taxman 563/20 taxmann.com 196 (Kar.)
Apoorva Patni Vs. Addl. CIT [2012] 54 SOT 9 (URO)/24 taxmann.com 223 (Pune.)
CIT v. India Advantage Securities Ltd. [IT Appeal No. 6711 (Mum.) of 2011, dated 14-9-2012]
Esquire (P.) Ltd. Vs. Dy. CIT [IT Appeal No. 5688 (Mum.) of 2011, dated 29-8-2012]
CIT vs. Gulshan Investment Co. Ltd. [2013] 31 taxmann.com 113 (Kol.)
In the context of above controversy language of Rule 8D of the Income Tax Rules is also very important. The language used in Rule 8D for the purpose of disallowance is �Investments�. Investments cannot include shares held as stock-in-trade. Investments would imply only the shares which have been held as investments. Accordingly, the language of Rule 8D also supports the proposition that no disallowance is called for in a case where shares are held as stock-in-trade.

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jhalak tank

jhalak tank (Querist)
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13 July 2015 but madam what he is doing is that he start investing in Mutual fund from mid of April 2014 and redeemed all the balance unit of Mutual Fund towards the end of the year say near by 25th March and earned 3 to 4 lacs of dividend income from Mutual fund investment and Interest Expense on loan is near by 50 lacs now how can i disallowed portion of Interest expenses which is not directly related to Mutual fund Investment.

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