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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
AadoSa / O R D E R महावीर स िंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
This appeal filed by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-29, Mumbai [in short CIT(A)], Appeal No. CIT(A)-29/IT-491/AC-19(3)/16-17 vide order dated 11.04.2017. The Assessment was framed by the Asst. Commissioner of 2 Income Tax, Circle 19(3), Mumbai (in short ‘ACIT/ ITO / AO’) for the A.Y. 2013-14 vide order dated 26.02.2016 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses relatable to exempt income under section 14A of the Act read with Rule 8D of the Rules. For this Revenue has raised the following grounds: - “1. Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in holding that the expenses debited in P&L account of the assessee concern has no direct nexus with the earning of exempt income, particularly when the dividend income was actually generated from shares held as stock-in-trade, thus clearly establishing that the expenses debited to P&L Account has direct nexus with the earning of exempt income as well as taxable income arising from shares?
2. Whether on the facts and in the circumstances of the case and in law, the IA. CIT(A) has erred in excluding PMS Management Fees, SIT, Demat charges. Service Tax, charges relating to share trading and derivatives, legal and professional fees for advising portfolio of shares and other related services and custodian/ transaction charges, while computing the disallowance of 3 proportionate expenses under Rule 8D(2)(i) of the Income Tax Rules, 1962, particularly when the most of the dividend income has arisen from shares held as stock-in-trade?
3. Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) has erred restricting the disallowance under Rule 8D(2(iii) to 10% of the amount equivalent to one-half per cent of the average of the value of investment, when the Income Tax Rules have not 'yen any such mandate for such a reduction arbitrarily?".”
3. Briefly stated facts are that the assessee received dividend income of ₹ 53,25,586/-. The AO noted this fact and required the assessee to explain as to why the expenses be not disallowed under rule 8D(2)(i) and 8D(2)(iii). The assessee contended before the AO that the provisions of section 14A of the Act does not apply where shares are held as stock-in- trade but the AO was not convinced and he invoked the Rule 8D(2)(i) and disallowed the sum of ₹ 40,25,111/- and AO also disallowed the administrative expenses under Rule 8D(2)(iii) being 0.5% of average value of investment at ₹ 38,19,393/-. Therefore, the AO disallowed the expenses relatable to exempt income at ₹ 78,44,504/- and after reducing the expenses which is already disallowed by assessee at ₹ 2750, the difference of ₹ 78,41,753/- was added to the returned income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) deleted the addition by following the decision of Hon’ble Karnataka High court in the case of CCI Limited vs. JCIT [2012] 20 taxmann.com 196 (Karnataka) that no disallowance can be made with 4 regard to shares held as stock in trade. The CIT(A) deleted the disallowance vide Para 3.3.1 to 3.3.4 as under: - “3.3.1. The Hon'ble ITAT, Mumbai in the case of DCIT vs. India Advantage Securities Ltd. while relying upon the judgement of Hon'ble High Court of Karnataka in the case of CCI Ltd. vs. KIT has held that no disallowance u/s. 14A r.w. Rule 80 car be made in relation to dividend received with regard to shares held as stock in trade. This has been referred to and confirmed by the Hon’ble Bombay High Court while deciding the case of HDFC Bank Ltd. cited supra.
3.3.2. In view of the binding judgement of the jurisdictional High Court, the disallowance made by the AO u/s.14A r.w.Rule 8D cannot be upheld as the appellant had no share in shares as investment but the entire investment from dividend s earned is held as stock in trade.
3.3.3 My predecessor CIT(A) has decided the issue for the preceding assessment year i.e. A.Y.2012-13 whereby he followed the judgement of Hon'ble ITAT, Mumbai in the case of D.H. Securities Pvt. Ltd. and Ramkumar Venogopal Investments, and has restricted the disallowance to 10% of the working under Rule 5 8D(2)(iii) and 50% of the working under 8D(2)(i). However, this order was passed on 15.1.2016 when he did not have the benefit of the decision of the Jurisdictional High Court in the case of HDFC Bank Vs. DCII which was passed on 25.2.2016 and a judgement of the jurisdictional High court is binding on all the lower authorities.
3.3.4. Respectfully following the judgement of the Jurisdictional High Court, the disallowance made by the AO is deleted. These grounds of appeal are allowed.”
Aggrieved, now Revenue is in appeal before us.
Coming to the first aspect that the assessee has suo moto disallowed a sum of ₹ 2,751/-, the learned Counsel for the assessee before us argued that the AO has not recorded any satisfaction for invoking the provisions of Rule 8D(2)(i) and Rule 8D(2)(iii) of the Act as tohow the disallowance made by assessee suo moto is not as per the accounts of the assessee. The learned Counsel for the assessee pointed out that the AO could not point out from the accounts of the assessee which are the expenses relatable to exempt income. According to the learned Counsel, there is no satisfaction recorded by the AO as is evident from the assessment order. Secondly, the learned Counsel for the assessee stated that no doubt the issue of stock-in-trade is now settled by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. [2018] 402 ITR 640 (SC), but he argued that the expenses relatable to direct expenses under Rule 8D(2)(i), as noted by the AO, are the expenditure for carrying out its business of trading in share and 6 securities, wherein the assessee has earned income more than the ₹ 5 crores. The learned Counsel stated that the expenses of security transaction tax, demat charges, PMS management fee, service tax, custodian and transaction charges, other charges, legal and profession fee are attributable to the regular business of the assessee and the total expenditure incurred on that account is ₹ 58,24,335/-. Even the investment is at ₹ 10,00,287/- and stock in trade is 81,54,42,178/-. According to the learned Counsel, the assessee has earned income from investments at ₹ 5,07,88,694/-. Dividend income is only ₹ 53,25,586/- and hence, according to him, the some expenses can be attributed towards demat charges and legal and professional expenses which assessee has itself attributed amounting to ₹ 2751/-. As regards to the administrative expenses disallowed by AO under Rule 8D(2)(iii), there is no expenses involved in earning this exempt income and hence, nothing can be attributed to the same. The learned Counsel for the assessee filed the following details for computing the disallowance: - “Disallowance under section 14A Particulars Amount (Rs.).
Investments as on 31.3.2012 1,00,033 Investment as on 31.3.2013 10,00,287 Average Value of investments 5,50,160/- 14 A disallowance @0.5% average value of inv. 2751”