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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T. VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini, AM:
The captioned appeal filed by the assessee, pertaining to assessment year 2010-11, is directed against the order passed by the Commissioner of Income Tax (Appeal)-23, Kolkata, in appeal no. 08/CIT(A)-23/DCIT, Cir-6/16-17, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the ‘Act’) dated 28/03/2013.
The grounds of appeal raised by the assessee are as follows:
For that on the facts of the case, the order passed by the Ld. C.I.T(A)-23, Kolkata is completely arbitrary, unjustified and illegal.
2 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 2. For that on the facts of the case, the Ld. C.I.T(A) was wrong in dittoing the order of the A.O. and confirming the disallowance of entrance fees paid to club amounting to Rs.551,500/- which is completely arbitrary, unjustified and illegal. 3. For that on the facts of the case, the Ld. C.I.T(A) was wrong in dittoing the order of the A.O. and confirming the disallowance of Rs. 16,85,08,240/- u/s 40(a)(ia) for non-deposit of TDS, which is completely arbitrary, unjustified and illegal. 4. For that on the facts of the case, the Ld. CIT(A) was wrong in disallowance of u/s. 40(a)(ia) amounting to Rs. 16,85,08,240/- as the expenses were paid during the year under section 40(a)(ia), although section 40(a)(ia) is only applicable to amount payable, therefore, the whole addition is completely arbitrary, unjustified and illegal. 5. For that on the facts of the case, the Ld. CIT(A) was wrong in restricting the disallowance u/s. 14A amounting to Rs.1.58 crores by invoking Rule 8D(2)(iii), but shares are held as stock-in-trade to the assessee bank, therefore, the disallowance of Rs.1.58 crores u/s. 14A is completely arbitrary, unjustified and illegal. 6. For that the charging interest u/s 234D is mechanically wrong and illegal. 7. For that the assessee reserves the right to adduce any further ground or grounds, evidence or evidences on hearing of appeal. 3. Ground no. 1 raised by the assessee is general in nature and hence does not require adjudication.
Ground No. 2 raised by the assessee relates to disallowance of entrance fees of Rs. 551,500/-.
Brief facts qua the issue are that during the scrutiny proceedings AO noticed that assessee bank has debited in its Profit& Loss account a sum of Rs. 5,51,500/- as club entrance fees. The AO was of the view that since assessee did not file satisfactory reply therefore he treated these expendituresin the natureof capital and added back with total income of the assessee.
On appeal, the ld. CIT(A) confirmed the addition made by the Assessing Officer.Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
3 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 7 . The ld. Counsel has reiterated the submissions made before the ld CIT(A).On the other hand, ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that ld CIT(A) has confirmed the addition made by AO holding that entrance fees paid to club is for taking corporate membership which provids enduring benefit to the assessee.
The ld Counsel submitted before us that the entrance fees cannot be treated as a capital expenditure as no asset is created against the said expenditure. Thus, the said expenditure is allowable as revenue expenditure.Business organizations like company, firm, bank, co-operative society etc. functions through human agencies which may be directors or other officers of business organization. Therefore, business organization provide facility to their officers to attend and avail services of clubs. Clubs make company or other business organization as its member. This is generally called as corporate membership. The expenses may be in nature of entrance fees, annual fees, life membership fees and reimbursement of actual expenses etc. The purpose of the expenditure is to have a suitable platform for meeting people and getting advantages of meeting many people at a time to maintain old contacts and also to make new contacts. The main purpose of the organization is to induce its officers to attend such places for maintaining and making contacts for the benefit of business. Even if some personal advantage is obtained by officers, it will be in nature of maintaining good relations with officers and in nature of staff welfare expenses. Therefore, the expenses are incurred wholly and exclusively for the purpose of business. By obtaining membership for a period of more than one year, there may be an advantage which is in the field of revenue benefit and not for obtaining any capital asset or
4 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 obtaining benefit in capital field. Therefore, such expenses will be of revenue nature. For that assessee relied on the judgment of the Hon`ble Delhi High Court in the case of CIT vs. Samtel Color Ltd. [2009-TMI-32263-Delhi High Court] vide judgment dated January 30, 2009 in IT Appeal no. 1153 of 2008, wherein the Hon`ble Delhi High Court had occasion to consider allowability of corporate membership fees of clubs as allowable business expenditure. We find merit in the submissions of the ld counsel and direct the AO to treat entrance fees paid to club as revenue expenditure.
Ground nos. 3 and 4 raised by the assessee relate to disallowance of Rs. 16,85,08,240/- u/s 40(a)(ia) of the Act for non-deposit of TDS.
Brief facts qua the issue are that in the course of assessment proceedings the AO noticed that the assessee has not deposited TDS on payments made amounting to Rs. 16,85,08,240/- which was required to be deposited within due time to the Central Govt, Accounts. Hence, the AO made addition of Rs. 16,85,08,240/- u/s 40(a)(ia) of the Act.
Aggrieved by the order of the Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the order of the Assessing Officer. Aggrieved, the assessee is in appeal before us.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. Before us, ld. Counsel for the assessee has reiterated the submissions made before the ld. CIT(A) and on the other hand the ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
5 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 We note that the said TDS was paid before the filing of return of income u/s. 139(1) of the I.T. Act, therefore no addition should be made for that we rely on the judgement of Hon’ble Calcutta High Court in the case of CIT vs. Virgin Creations GA 3200/2011 wherein it was held that the said TDS should be allowed.Respectfully following the decision of jurisdictional High Court, we hold that since the assessee has deducted and deposited tax on contractual payments under consideration before the due date of filing of return of income, disallowance u/s 40(a)(ia) is not warranted, therefore, we delete the disallowanceof Rs. 16,85,08,240/-
Ground no. 5 raised by the assessee relates to disallowance u/s 14A amounting to Rs. 1. 58 crores.
14.When this appeal was called out for hearing, learned counsel for the assessee invited our attention to the order dated 19.11.2018, passed by the Division Bench of Delhi Tribunal in the case of Nice Bombay Transport (P) Ltd,in ITA No.1331/Del/2012for the Assessment Year 2008-09 whereby the issue relating to section 14A read with rule 8D in respect of shares held in stockhas been discussed and adjudicated in favour of assessee. Learned counsel for the assessee submitted that the present issue is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench.
Learned Departmental Representative relied upon the orders of the authorities below.
16.We see no reasons to take any other view of the matter than the view so taken by the Division Bench of ITAT, New Delhi vide order dated 19.11.2018. In this order, the Tribunal has inter alia observed as follows: “6. We have carefully considered the submissions and perused the records. There is no denial of the assertions by the assessee that the assessee is engaged in the business of trading in share and all the shares are held by the assessee company as part of its stock-in-trade and not as an investment as is evidenced by the balance sheet of the company. However, Ld. AO recorded that a profit
6 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 making company pays dividend to its shareholders who have invested some money to its shares, whether the Shareholder is a trader of share or not. Ld. AO further noted that the assessee company has purchased units from the mutual funds under the Dividend Reinvestment Plan and earned day to day dividend in the shape of units and value of the purchase account had increased by such units and the motive of the assessee company is clear to earn the dividend income. Ld. AO further observed that for a trader of shares, two types of gains are available, simultaneously. Firstly, earning profit from the settling of shares at higher prices from its cost price and secondly is the dividend income and without making investments, the assessee could not have earned dividend income.
Thus, as per Ld. AO the investments and dividend are integral part of financial transactions, and they are inseparable. One cannot claim that investment in shares is made only for earning trading benefits or for having dividend income only, because both the gains are existing simultaneously. Ld. AO further noted that in the same way, the expenditure incurred by way of interest on the money taken on loan for investment/purchase of shares cannot be segregated as the expenditure incurred exclusively for investment/purchase of shares. Actually, the expenditure has been incurred for having both the benefits. Thus, it is amply clear that the expenditure incurred by way of payment of interest has direct link with the dividend income and hence, disallowance as per section 14A of the I.T. Act.
Assessee placed reliance on the decision reported in the case of Vora Financial Services (P). Ltd. vs. ACIT, Mumbai by the ITAT, Mumbai Bench (2018) 96 com88 (Mum-Trib) wherein, it was held that where a major portion of dividend income had been received as shares held as stock-in-trade, it cannot be appropriate to apply the provisions of Rule 8D. It is further argued by the Ld. Autherized Representative that whatever the expenses that are debited to the profit and loss account are the business expenses relating to trading of the shares and not additional expense whatsoever made.
Further reliance is placed on the decision of the Hon’ble Kerala High Court in the case of CIT vs. Smt. Leena Ramachandran (2010) 235 CTR 512 (Ker.) for the principle that the assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on borrowed funds utilized for the acquisition of shares, when the shares held as stock-in-trade which arise if the assessee is engaged in the trading of shares.
In fact, this question had fallen for consideration in the case of Maxopp investment Ltd versus CIT (2018) 91 taxman.com 154 (SC), wherein the Hon’ble Apex Court considered two cases wherein the question of apportionment of expenditure had arisen and predominant intent of investment in shares was pleaded, though an different facts, on the ground that the objective of investing in shares was not to the dividend income, but to either retain controlling interest
7 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 over the company in which the investment was made or to earn the profit from trading in shares. The question was whether the disallowance under section 14 A of the Act could be invoked in the cases where exempt income was earned from shares held as “trading assets” or “stock in trade”. The first case relates to Maxopp investment Ltd and the second case relates to the case of State Bank of Patiala. In the case of Maxopp investment Ltd the assessee company is in the business of finance, investment and was dealing in shares and securities; that they held the shares and securities, partly as investments on the “capital account” and partly as “trading assets” for the purpose of acquiring and retaining control over its group companies, primarily Max India Ltd.; and that the profits resulting on the sale of shares held as trading assets were duly offered to tax as business income of the assessee. In the case of State Bank of Patiala the assessee the exempt income in the form of dividend was earned by the bank from securities held by an stock in trade.
The Hon’ble Supreme Court was considering the question that has arisen under varied circumstances where the shares/stocks were purchased of a company for the purpose of gaining control over the said company or as “stock in trade”, though incidentally income is also generated in the form of dividends as well.
It was argued before the Hon’ble Apex Court that though incidentally income was also generated in the form of dividends, the dominant intention for purchasing the shares was not to earn the dividend income but to acquire and retain the controlling the business in the company in which shares were invested, or for the purpose of trading in the shares as business activity.
After considering the entire case law on this aspect in the light of the peculiar facts involved in both the matters, the Hon’ble Apex Court vide paragraph No. 39 and 40 held as follows:- 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 apportioned.
40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the
8 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of that view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.
It is, therefore, clear from the above observations of the Hon’ble Apex Court that depending upon the facts of each case, the expenditure incurred in acquiring the shares will have to be apportioned. Hon’ble Apex Court held that the tribunal and the Hon’ble High Court of Punjab and Haryana arrived at a correct conclusion by setting aside the disallowance under section 14 A of the Act in respect of the dividend earned on the shares held as stock in trade, because such shares were held during the business activity of the assessee and it is only by a quirk of fate that when the investee company declared dividend, those shares were held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits.
Hon’ble Apex Court made a clear distinction of this case from the case of Maxopp investment Ltd were the assessee knew that whenever dividend would be declared by the investee company such dividend would necessarily be earned by the assessee and assessee alone, and it would be in the common knowledge of the assessee that such shares would generate dividend income as well as and when such dividend income is generated that would be earned by the assessee Hon’ble Apex Court in unequivocal terms held that in contrast, where the shares are held as stock in trade, this may not be necessarily a situation and the main purpose was to liquidate those shares whenever the share price goes up in order to earn profits. In the words of the Hon’ble Apex Court, the situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would
9 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 continue to hold those shares as it wants to retain control over the investee company.
Hon’ble Apex Court, therefore, while rejecting the theory of dominant purpose in making investment in shares- whether it was to acquire and retain controlling interest in the other company or to make profits out of the trading activity in such shares – clearly made a clear distinction between the dividend earned in respect of the shares which were acquired by the assessee in their exercise to acquire and retain the controlling interest in the investee company, and the shares that were purchased for the purpose of liquidating those shares whenever the share price goes up, in order to earn. It is, therefore, clear that though not the dominant purpose of acquiring the shares is a relevant for the purpose of invoking the provisions under section 14 A of the Act, the shares held as stock in trade stand on a different pedestal in relation to the shares that were acquired with an intention to acquire and retain the controlling interest in the investee company.
In the circumstances and respectfully following the aforesaid binding precedent, we are of the considered opinion that Application of Rule 8D to the facts of the case is not correct, hence, the addition on this account is hereby directed to be deleted.”
We note that the issue is squarely covered in favour of assessee by the judgment of Co-ordinate Bench of ITAT New Delhi in the case of Nice Bombay Transport Pvt. Ltd. (supra) therefore, respectfully following the judgment of Co-ordinate Bench, we delete the addition of Rs. 1.58 crores.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 19.02.2020
Sd/- Sd/- (A.T. VARKEY) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER �दनांक/ Date: 19/02/2020 (SB, Sr.PS)
10 United Bank of India ITA No.74/Kol/2018 Assessment Year:2010-11 Copy of the order forwarded to: 1. United Bank of India 2. ACIT, LTU-1, Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.