ACIRA CONSULTANCY PVT. LTD,MUMBAI vs. ITO 5 (1)(4), MUMBAI

Facts are narrated from the appeals of the assessee in AY 2014-15 for the sake of convenience. AY 2014-15.

The assessee in appeal has assailed the order of CIT(A) on two counts: (1) Disallowance of interest under section 14A r.w.r. 8D(2)(ii). (2) Denial of exemption on dividend under section 10(34) of the Income Tax Act, 1961 (in short ‘the Act’).

On the other hand, Sh. Mehul Jain representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee.

We have heard the submissions made by rival sides and have examined the orders of authorities below. Ground No.1 of appeal is with respect to disallowance made under section 14A r.w.r. 8D of the Act. The limited prayer of the assessee is that for computing disallowance under Rule 8D only dividend yielding shares should be considered for computing average value of investments. The Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra) has held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year. We find that in AY 2012-13, the Co-ordinate Bench of Tribunal in assessee’s own case in ITA No. 1273/Mum/2019 (supra) has restored this issue back to the file of AO for re-computing disallowance under section 14A in accordance with the aforesaid decision of Special Bench. Accordingly, this issue is restored to the file of AO to re-compute disallowance under section 14A r.w.r. 8D in line with the decision of Special Bench. Hence, ground no.1 of the appeal is allowed for statistical purpose in the aforesaid terms.

The next issue in appeal is denial of exemption under section 10(34) of the Act on dividend. The assessee received dividend income on shares borrowed by the assessee from its associates to further pledge the same as collateral security against unsecured loan taken from Rubfila International Ltd. The assessee claimed dividend received on said shares as exempt under section 10(34) of the 6 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) & 1275/M/2019 (AYs 2014-15 & 2015-16) Act. The AO denied exemption and held dividend income taxable under the head “Income from other Sources”. The assessee in order to substantiate genuineness of transaction i.e. borrowing of shares from its associates and pledging the same to Rubfila International Ltd. furnished copies of the Demat Account statement of the lenders of the shares and confirmations from the said lenders. A perusal of the transaction statements of the lenders of the shares and Demat transaction statement of the assessee would show live nexus of the transfer of shares from Demat Account of the lenders of the shares to the Demat Account of the assessee and further pledged of those shares shortly thereafter. It was during the period when these borrowed shares were reflected in the Demat Account of the assessee that the dividend was declared by the companies. Since, the assessee happened to be the owner of shares in the register of shareholders of the respective companies, dividend was received by the assessee in respect of the shares held by the assessee. It is pertinent to mention here that for the companies declaring dividend, it is immaterial whether the shares are held in the capacity of owner or a borrower. As long as the name of the holder of shares is registered in the register of shareholders on the record date, the dividend by the companies would be disbursed to the registered holder of those shares. At the time of distribution of dividend, the companies are under obligation to deduct tax under section 115O of the Act. Once, dividend income is subject to tax at the time of distribution, the same cannot be brought to tax in the hands of recipient.

In the instant case, we find that the authorities below have failed to appreciate the transaction of borrowing of shares by the assessee and subsequent pledged of the same as security twoards unsecured loan taken by the assessee. The Demat Account of the assessee clearly depicts the transaction of transfer of shares in the name of assessee and their subsequent pledge. Though, 7 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) & 1275/M/2019 (AYs 2014-15 & 2015-16) from the transaction in the Demat Account, it is not emanating whether the shares have been purchased by the assessee or they have been borrowed by the assessee, however, the confirmations filed by the lenders of the shares support assessee’s theory of borrowing of shares.

The argument put forth by the assessee that exemption under section 10(34) is available qua the dividend income and not qua owner of the shares has force. We are in agreement with the aforesaid proposition. Irrespective of the fact whether the shares are held in the capacity of real owner or the beneficial owner, the recipient of dividend would be eligible for claiming exemption under section 10(34) of the Act. We find support to our above view from the decision in the case of SSKI Investors Services Pvt. Ltd. Vs. DCIT (supra). Thus, we hold assessee eligible for claiming exemption under section 10(34) of the Act on dividend income in respect of the shares reflected in its Demat Account on the date of declaration of dividend, de-hors, the fact whether those shares are borrowed or purchased by the assessee. Consequently, the assessee succeeds on ground no.2.

In the result, the appeal of assessee is partly allowed in the terms aforesaid. ITA No. 1275/Mum/2019 for AY 2015-16.

The ld. AR of the assessee submitted that the solitary issue raised in the appeal for AY 2015-16 is in respect of disallowance of interest under section 14A r.w.r. 8D(2)(ii) of the Act. The ld. AR submitted that the short prayer with respect to disallowance under Rule 8D(2) is for considering only dividend yielding investments in line with the decision of Special Bench in the case of Vireet Investments Pvt. Ltd. (supra). The ld. AR further submitted that the AO while 8 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) & 1275/M/2019 (AYs 2014-15 & 2015-16) computing disallowance under section 14A r.w.r. 8D has disallowed excess direct expenses. The other expenditure claimed by the assessee is Rs. 23,021/- excluding Demat charges. Demat charges have already been excluded under Rule 8D(2)(i), hence, disallowance of other expenses as per Rule 8D(2)(ii) were restricted to Rs. 23,021/- only.

On the other hand, Sh. Mehul Jain representing the Department vehemently supported the assessment order and the order of CIT(A) on this issue.

Both sides heard, orders of the authorities below examined. The assessee in appeal has assailed computation of disallowance under section 14A r.w.r. 8D(2) on two counts: (i) While computing disallowance, only dividend yielding shares during the relevant period should be considered. We find merit in the above prayer of the assessee. The Special Bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra) has held that for computing average value of investment only dividend yielding investments during the year be considered. The AO is directed to compute disallowance in respect of average value of investments in line with the decision of Special Bench (supra). (ii) The second prayer of the assessee as emanating from ground no.2 is restricting of disallowance under Rule 8D(2)(iii) to Rs. 23,021/- i.e. to the extent the “other expenditure” claimed by the assessee. We do not find favour with the second prayer made by the assessee. Rule 8D prescribes standard method for computing disallowance to be made under section 14A of the Act. While computing disallowance under Rule 8D(2)(i), the