High court ruling on dividend income a relief to the brokers

If a share broker takes a loan to buy shares and pays interest on it, he can adjust this expenditure against total trading profit, including tax-free dividend income, if the dividend income is incidental to his business of buying and selling shares. In such cases, the income-tax department cannot, by applying Section 14 of the Income Tax Act, bifurcate the traders expense (interest on loan) proportionately between trading profit and dividend income and disallow the same on dividend income on the ground that while trading income is taxable, dividend income is exempt under Section 10 of the IT Act. Section 14 A states that any expense incurred on earning exempt income is to be disallowed. This was the sum and substance of a recent High Court of Karnataka ruling in the case of CCI, a distributor of state lotteries and a dealer in shares and securities, versus joint commissioner, income tax. The ruling went in favour of CCI and could provide relief to scores of stock traders who are not allowed to adjust expense against their trading profits on similar grounds.

Regards

Prarthana Jalan