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Income Tax Appellate Tribunal, “D”, BENCH KOLKATA
Before: SHRI S. S. VISWANETHRA RAVI, JM & DR. A. L. SAINI, AM
Per Dr. A. L. Saini: The captioned appeal filed by the assessee pertaining to Assessment Year 2009-10, is directed against an order passed by the Ld. Commissioner of Income Tax (Appeals)-19, Kolkata in Appeal No.353/CIT(A)-19/Wd-8(3)/2014-15 dated 30.06.2017 which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 16.11.2011.
The grievances raised by the assessee are as follows:
“1. That the learned Assessing officer erred in disallowing additional expenses of Rs. 5,10,361 u/s 14A of the Act when the Appellant had suo-moto disallowed Rs. 25,000 u/s 14A of the Act and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the same without appreciating the facts and circumstances of the case.
2. That on the facts and circumstances of the case the ld. Assessing Officer erred in negating the contention of the Appellant that there is no proximate cause for disallowance and considered disallowance of suo-moto expenses by the Appellant as having a proximate cause for disallowance u/s 14A.
Rajeev Goyal Assessment Year: 2009-10 3. That on the facts and circumstances of the case the ld. Assessing Officer erred has not recorded any objective or subjective satisfaction for invoking disallowance u/s 14A of the Act. 4. That the Appellant craves leave to add, supplement, cancel or otherwise amend any of the grounds mentioned hereinabove before or at the time of hearing of the Appeal.”
The facts of the case which can be stated quite shortly are as follows during the assessment proceedings it was noticed by the Assessing Officer that the assessee earned income from dividend and he had also claimed various expenses in the profit and loss account. It was also noted that the assessee had, suo moto, disallowed Rs.25,000/- on account of expenses for earning dividend income on an estimate. The assessee was asked to explain the basis of this disallowance and he also asked to show cause as to why the provisions of section 14A r.w.r. 8D shall not be applied in his case.
In reply, the assessee filed a letter dated 09/11/2011, during the course of hearing on 14/11/2011, where he had stated that “dividend income is just a by- product of the actual business of the assessee”. Thus, the assessee has not incurred any special expenditure for earning such dividend income. Hence, there is no expenditure incurred by the assessee for earning the dividend income in the present case of the assessee no expenditure has been incurred to earn dividend income. All expenses are incurred in the normal course of trading activity and dividend income has been earned as a payback in the course of trading business. A payback cannot constitute an expenditure incurred. The assessee in his submission has also made reference to certain case laws, the main essence of which were that in absence of proximate cause for disallowance, section 14A cannot be invoked. However, Assessing Officer noted that the contention of the assessee is not tenable as there was proximate cause for disallowance in assessee’s case as the assessee himself had disallowed an estimated expenditure on this account, though the assessee submits that the assessee has not incurred any expenditure on this account. An expenditure which has not been incurred cannot be disallowed. The assessee himself disallowed a part of the expenditure but on an estimate basis. But the quantum of disallowance made by the assessee suo moto in the computation not at all satisfactory as compared to the quantum of expenses claimed and Page | 2
Rajeev Goyal Assessment Year: 2009-10 dividend earned. Therefore, Assessing Officer was of the opinion that the provisions of section 14A r.w.r 8D is applicable in assessee’s case.
The amount of disallowance u/s 14A was calculated by Assessing Officer which is given below:
1) As per rule 8D(2)(i) Rs.24,306/- 2) As per rule 8D(2)(ii) Nil 3) As per rule 8D(2)(iii) Rs.5,11,055/- 0.5% of average of investment Rs.5,35,361/- Relating to section 14A as on 31.03.2008 & 31.03.2009 Less: Already disallowed Rs.25,000/- Rs.5,10,361/-
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing Officer observing the following:
“4. Decision: I have gone through the contention of the assessee, the order passed by the Assessing Officer and the submissions made by the appellant. The decision of this appeal is given as under: The only ground of appeal relates to the issue of disallowance of Rs.5,35,361/- u/s 14A of the I.T. Act. The Assessing Officer disallowed the aforesaid expenditure on the ground that there was income from dividend and the appellant had filed return of income at a loss of Rs.1,98,87,000/-. The Assessing Officer worked out 0.5% of average of investment relating to section 14A as on 31.03.2008 and 31.03.2009. The plea of the appellant was that: “he was engaged in the business of trading in stocks and shares. The appellant has sold and purchased shares during the relevant previous year. The shares have been purchased for the purpose of trading and earning income thereby and not for earning dividend. Dividend income is just a by-product of the actual business of the assessee.” Perusal of the profit & loss a/c shows that the appellant has claimed purchase of shares of Rs.26,29,81,180/- and also converted its investment into stock-in-trade to the tune of Rs.3,14,79,152/- during the year. But no sales was disclosed. Only closing stock of Rs.6,06,71,868/- has been shown. By valuing its stock the appellant has shown loss of Rs.2,22,97,365/-. Perusal of trading and profit and loss a/c show that appellant was not doing any real business. Only investment and its revaluation at the end of the year has been made resulting into losses. He has converted its investments into stock-in-trade Page | 3
Rajeev Goyal Assessment Year: 2009-10 during the year where dividend is received during the year. Hence keeping shelter as doing business of trading of share and earning dividend on that account only is not true. The dividend has arisen just because of dividend which are shown converted into stock in trade while filing the return. Keeping in view of the aforesaid facts, the disallowance made by the Assessing Officer is hereby upheld and the ground of appeal is dismissed.”
5. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. The ld. Counsel for the assessee has relied on the submissions made before the authorities below whereas the ld. DR for the Revenue relied on the stand taken by the Assessing Officer.
6. We have given a careful consideration to the rival submissions and perused the materials available on record, we note that assessee is a trader in shares and is showing income from share transactions and business income. The assessee has earned dividend income and income from mutual fund during the previous year and suo moto disallowed an expenses of Rs.25,000/- as related to exempt income u/s 14A of the Act. However, the Assessing Officer has disallowed Rs.5,35,361/- u/s 14A of the Act r.w.r. 8D of the I.T. Rules, on the ground that the calculation of disallowance should be made as per Rule 8D of the I.T. Rules. The assessee has suo moto made disallowance on an estimated basis which the Assessing Officer had considered statutorily. We note that during the relevant previous year, the shares have been purchased for the purpose of trading and earning income thereby and not for earning dividend. Dividend income is just a by-product of the actual business of the assessee. Thus, the assessee has not incurred any special expenditure for earning such income. Therefore, there is no expenditure incurred by the assessee for earning the dividend income. We note that the Ld. Commissioner of Income Tax Appeals had confirmed disallowance on the ground that no sales was made and the assessee was not doing any business. We note that the assessee has submitted before us the tax audit report and audited accounts of the assessee wherein we note that the assessee has been doing business in shares and has shown closing stock of shares and securities to the tune of Rs.6,06,71,868/-. We note that the object of the assessee is to earn the business income not the dividend income. Therefore, the provision of section 14A r.w.r 8D do not apply to the assessee under consideration. Hence, we are of the view, that Page | 4
Rajeev Goyal Assessment Year: 2009-10 since shares and securities are held by assessee as stock-in-trade, and main object of the assessee is to earn business income and not the dividend income, therefore, disallowance u/s 14A r.w.r. 8D should not be made and for that we rely on the judgment of Hon’ble High Court of Calcutta in the case of CIT vs. GKK Capital Markets (P) Ltd, of 2015 dated 10.02.2017, wherein it was held that no disallowance u/s 14A should be made when shares which yielded tax free income are held as stock-in-trade. Therefore, respectfully following the ratio laid down by the Hon’ble High Court of Calcutta in the case of GKK Capital Markets (P) Ltd. (supra), we delete the addition to the tune of Rs.5,10,361/-.
In the result, the appeal filed by the assessee is allowed.
Order is pronounced in the open court on 19.12.2018.