M/S SUNRISE INDUSTRIAL TRADERS LTD.,MUMBAI vs. CIT (A)-6, MUMBAI

Briefly stated, the assessee company which is engaged in the business of share trading & investment, future & options had e-filed its return of income for A.Y 2016-17 on 20.08.2016, declaring a total income of Rs. 2,45,23,607/-. The return of income was processed as such under Sec. 143(1) of the Act.

During the course of the assessment proceedings, it was observed by the A.O that the assessee during the year under consideration had derived tax free interest income of Rs. 85,65,717/- and dividend income of Rs.1,29,04.216, which was claimed as exempt. It was observed by the A.O that the assessee had made a suo motto disallowance of Rs. 1 lac under Sec. 14A of the Act. It was further observed by the A.O that the quantum of disallowance offered by the assessee under Sec. 14A was not reasonably placed as against the substantial amount of exempt income earned by it during the year in question. Accordingly, the A.O worked out the disallowance as per the methodology contemplated in Sec. 14A r.w Rule 8D(2)(iii) at Rs. 12,49,996/-. After making a further disallowance of Rs. 11,49,996/- under Sec. 14A of the Act, the A.O computed the income of the assessee under the normal provisions at Rs. 2,56,73,570/-. Also, the A.O considering the disallowance computed under Sec. 14A r.w Rule 8D, therein, reworked out the „book profit‟ under Sec. 115JB at Rs. 2,66,01,680/-.

Aggrieved, the assessee assailed the disallowance computed by the A.O under Sec. 14A r.w Rule 8D before the CIT(A). Before the CIT(A), the assessee worked out the disallowance under Sec.14A as per the methodology contemplated in Rule 8D(2)(iii) at Rs. 3,78,077/-. The assessee while computing the “average value of investments” for the purpose of working out the disallowance under Rule 8D(2)(iii) had considered only the non-current investments and had excluded the current trading stock. It was the claim of the assessee before the CIT(A) that the provisions of Rule 8D(2) would not apply to the shares which were held by it as stock-in-trade and also the investments which had not yielded any exempt income during the year in question. After deliberating on the facts of the case, it was observed by the CIT(A) that the assessee was into a mixed activity, viz. making investments; and the business of M/s Sunrise Industrial Traders Ltd. Vs. CIT(Appeals)-6, Mumbai A.Y 2016-17 trading in shares and future and options. Insofar the claim of the assessee that for the purpose of working out the disallowance under clause (iii) of Rule 8D(2) only those investments which had yielded exempt income during the year in question were to be considered, the same did find favour with the CIT(A). However, the CIT(A) was no inclined to accept the claim of the assessee that the provisions of Sec. 14A r.w Rule 8D would not apply to the shares which were held by the assessee as stock-in-trade of its business of trading in shares. It was observed by the CIT(A) that that though it was the claim of the assessee that it was maintaining two separate set of accounts – one for the shares kept as stock- in-trade and the other held as non-current assets, however, the said fact was not borne from the records. The CIT(A) was of the view that when there was a mixed business having combined accounts, a proposition that the stocks held by the assessee as stock-in-trade was liable to be excluded from the computation of disallowance as per clause (iii) of Rule 8D(2) was not acceptable and was liable to be rejected. Accordingly, the CIT(A) declined to accept the assessee‟s claim that the shares which were held by it as stock-in-trade were to be excluded for the purpose of computing the “average value of investments” while working out the disallowance under Sec. 14A r.w Rule 8D(2)(iii). As regards the addition of the disallowance worked out under Sec. 14A r.w Rule 8D for the purpose of computing the „book profit‟ under Sec. 115JB of the Act, the CIT(A) drawing support from the order of the ITAT, Special bench in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (2017) 165 ITD 0027 (Delhi) (SB) directed the A.O to vacate the adjustment so made by him while computing the „book profit‟ under Sec.115JB of the Act.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. Sole contention of the ld. Authorised Representative (for short “A.R”) for the assessee before us is that while computing the “average value of investment” for the purpose of working out the disallowance under Sec.

Per contra, the ld. Departmental representative (for short “D.R”) relied on the orders of the lower authorities.

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the assessee‟s counsel to drive home her claim. As observed by us hereinabove, the solitary issue involved in the present appeal is as to whether or not the shares held by the assessee as stock-in-trade of its business of trading in shares were to be excluded while computing the “average value of investments” within the meaning of Sec. 14A r.w Rule 8D(2)(iii). Observing, that the shares though held as stock-in-trade by the assessee were to be included while computing the “average value of investments” as per Rule 8D(2), the A.O had computed the disallowance under Sec. 14A r.w Rule 8D(2)(iii) at Rs. 12,49,996/-. On the other hand, the assessee holding a view to the contrary had not included the shares which were held by the assessee as stock-in-trade while computing M/s Sunrise Industrial Traders Ltd. Vs. CIT(Appeals)-6, Mumbai A.Y 2016-17 the disallowance under Sec. 14A r.w Rule 8D(2)(iii). A such, it is the claim of the ld. A.R that as the exempt dividend income yielding shares were held by the assessee company as „stock-in-trade‟ of its business of trading in shares, the same, thus, were not to be included while computing the “average value of investment” as per Rule 8D(2)(iii). In our considered view, the aforesaid contention of the Ld. A.R is absolutely misconceived and cannot be accepted. On a perusal of the judgment of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi (2018) 402 ITR 0640 (SC), we find that the Hon‟ble Apex Court had disapproved the dominant purpose test that was pressed into service by the assessee for the purpose of interpreting the scope and gamut of Sec. 14A of the Act. In fact, the Hon‟ble Court had subscribed to the theory of apportionment that was made available by the legislature by inserting Sec. 14A vide the Finance (Amendment) Act, 2001 with retrospective affect from 01.04.1962. In its aforesaid judgment, the Hon‟ble Apex Court had inter alia observed that where shares are held by an assessee as stock-in-trade, the earning of exempt dividend income on the same would trigger the applicability of Sec. 14A of the Act. Accordingly, the Hon‟ble Apex Court had „set aside‟ the dominant purpose test which was relied upon by the High Court. For the sake of clarity, the observation of the Hon‟ble Supreme Court in the case of Maxopp Investment Ltd. (supra) is reproduced as under : “39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as „income‟ under the head „profits and gains from business and profession‟. What happens is that, in the process, when the shares are held as „stock-in-trade‟, certain dividend is also earned, though incidentally, which is also an income. However by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be opportioned.” Accordingly, in terms of our aforesaid observations, we are of the considered view that no infirmity emerges from the order the CIT(A) who had rightly M/s Sunrise Industrial Traders Ltd. Vs. CIT(Appeals)-6, Mumbai A.Y 2016-17 concluded that the shares held by the assessee as stock-in-trade were to be considered for the purpose of computing the “average value of investment” within the meaning of Sec. 14A r.w Rule 8D(2)(iii). At the same time, we herein direct that only those shares held by the assessee as stock-in-trade which had yielded exempt dividend income during the year in question are to be included for the purpose of computing the “average value of investments” while working out the disallowance under Sec. 14A r.w Rule 8D(2)(iii). As regards the reliance placed by the Ld. A.R on the orders of the coordinate benches of the Tribunal, the same not being consistent with the view taken by the Hon‟ble Apex Court in the case of Maxopp Investment Ltd. (supra) would thus not be binding as a judicial precedent. We, thus, finding no infirmity in the order of the CIT(A) who principally had rightly sustained the disallowance computed by the A.O under Sec.14A r.w. Rule 8D(2)(iii), therein uphold the same.

Resultantly, the appeal filed by the assessee is disposed off in terms of our aforesaid observations.