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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA, AM & SHRI AMARJIT SINGH, JM
O R D E R
PER AMARJIT SINGH, JM:
The revenue has filed the present appeal against the order dated 16.03.2016 passed by the Commissioner of Income Tax (Appeals) - 8, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011- 12.
The revenue has raised the following grounds:- “
1. "On the facts and circumstances of the case and in law, the Ld. CIT{A) erred in deleting the addition of Rs.12,74,59,362/- made by Assessing Officer on account of mark to market loss A.Y.2011-12 claimed by the assessee in derivative transactions without appreciating the fact that the loss claimed on the basis of value of derivative as on 31st March is merely a notional loss and the actual loss or the profit in respect of such derivative transactions would get crystallized only at the time of settlement of such transactions." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing relief of Rs.4,61,69,227/- u/s.!4A r.w. Rule 8D(2)(ii), without appreciating that the A.O. had categorically recorded his not being satisfied with the correctness of the claim of assessee in terms of provisions of sec,14A(2) when he said that "the assessee has failed to prove that no part of the interest bearing funds has been used for making such investment." 3. "On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing relief of Rs.4,61,69,227/- u/s.!4A r.w. Rule 8D(2)(ii), without appreciating that once the A.O. recorded satisfaction in terms of sec.14A(2), working of disallowance in accordance with Rule 8D in full consonance is mandatory". 4. "The appellant prays that the order of CIT (A) on the above ground be set aside and that of Assessing Officer be restored."
3. The brief facts of the case are that the assessee company filed its return of income on 24.09.2011 declaring total income to the tune of Rs.7,09,97,876/-. The case was selected for scrutiny, therefore, notice u/s 143(2) of the Act dated 31.07.2012 was issued and served upon the assessee. Subsequently, notice u/s 142(1) of the Act was also issued and served upon the assessee. The assessee company is a member broker of Multi-commodity Exchange of India Limited, National Commodity and Derivatives Exchange Limited and Indian Commodity Exchange Limited. During the year under consideration, the company is engaged in trading, settlement and other activities of commodities exchanges for itself and on behalf of its clients. It also trades in physical commodities across various states in India. The assessee made the provision for loss on Equity Index option, Equity commodity future, Equity future, Currency Future & Index ITA No. 4259/M/2016 A.Y.2011-12 Future amounting to the tune of Rs.12,74,59,362/- which was disallowed and added to the income of the assessee. The assessee also received the dividend income of Rs.17,82,797/- which has been shown as exempt u/s 10(34) of the I.T. Act. The assessee suo-moto disallowed an amount of Rs.7,88,606/-. The Assessing Officer applied the provision of Section 14A r.w. Rule 8D of the Act and assessed the expenditure to incur the earn the exempt income to the tune of Rs.4,69,57,833/- and the total income of the assessee was assessed to the tune of Rs.23,66,94,210/-. Thereafter, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeal before us.
ISSUE NO.1:- 4. Under this issue, the revenue has challenged the deletion of the addition to the tune of Rs.12,74,59,362/- mark to market loss claimed by the assessee in derivative transaction. The contention of the revenue is that the CIT(A) has wrongly allowed the claim of the assessee which was in fact in the nature contingent and liability was not crystallized at the time of make such investment. However, on the other hand, Ld. Representative of the assessee has placed reliance upon the order passed by the CIT(A) in question. Before going further we deemed it is necessary to advert the finding of the CIT(A) on this issue on record:- “This ground pertains to disallowance of provision on Mark to Market on trading of derivative instrument of Rs.12,74,59,362/- by treating it as notional loss. This issue has been dealt with under para 4 of assessing officer’s. Essentially, he has treated the same as notional loss for which liability has not crystallised and has held it as non deductible.
ITA No. 4259/M/2016 A.Y.2011-12 I find that this is covered issue in favour of the appellant in jurisdictional Mumbai ITAT in the following cases relied upon by the appellant. Edelweiss Capital Limited vs ITO [ITA 5324/Mum/2007] Edelweiss Securities Limited vsAddll. CIT [ITA 2193/Mum/2009] DClTvs ECL Finance Limited [ITA 7656/Mum/2Q11] DCIT vs Edelweiss Securities Limited [ITA 7792/Mum/2012] DCIT vs Kotak Mahindra Investment Limited [ITA 1502/Mum/2012] Shri Ramesh Kumar Damani vsAddll. CIT [ITA 1443/Mum/2009] M/s. Ekansha Enterprises P. Ltd vs DCIT [ITA 809/M/2012] ACIT vs Suryakant D. Nissar [ITA 2750/Mum/2010 DCIT vs Edelweiss Securities Limited [ITA 5939/Mum/2011] 5-2.3 In view of direct decisions on the issue from jurisdictional ITAT. the disallowance of Rs. 12,74,59,362/- made on this account is deleted. This ground of appeal is allowed.”
5. On appraisal of the above said finding, we noticed that the issue is squarely covered by the judgments mentioned above and accordingly the CIT(A) allowed the claim of the assessee. Further the assessee also placed reliance upon the decision of the Hon’ble ITAT in the case of for the A.Y. 2008-09 in which the matter of controversy has been adjudicated in favour of the assessee. The relevant para no. 8 is hereby reproduced below as under:-
The second issue (Ground no.3) raised by the revenue relates to the allow ability of the provision of mark-to-market loss. AO disallowed the loss for the reason that the loss on the last date of the financial year was in the nature of non-crystalised loss and was in nature of contingent liability. On this issue, after considering the submissions of the assessee, vide para 10.1 of his order, CIT(A) granted relief considering the binding decisions on the issue. Aggrieved, Revenue is in appeal before the Tribunal. After hearing both the parties on this issue and on perusal of the said decision of the CIT(A), we find, the conclusions drawn by the CIT(A) in this regard are fair and reasonable and it does not call for any interference. Accordingly, Ground no. 3 is dismissed.
ITA No. 4259/M/2016 A.Y.2011-12
In view of the above mentioned decision, it is quite clear that the CIT(A) has rightly allowed the claim of the assessee which nowhere required any interfere with at this appellate stage. Accordingly, this issue is decided in favour of the assessee against the revenue.
ISSUE NO.2:-
Under this issue the revenue has challenged the allowing of relief to the tune of Rs.4,61,69,227/- u/s 14A r.w. Rule 8D(2)(ii) of the Act. The Assessing Officer assessed the expenditure incurred to earn the exempt income to the tune of Rs.4,61,69,227/- . In appeal, the CIT(A) restricted the addition to the extent of Rs.7,88,606/-. Before going further it is necessary to advert the finding of the CIT(A) on this issue on record:-
This pertains to disallowance of Rs.4,69,57,833/- u/s 14A of the I.T. Act, 1961 r.w. Rule 8D as against Rs.7,88,606/- suo moto disallowance made by the appellant. The assessing officer hhas discussed this issue at para 5 of his order. He has reproduced the appellant’s submission before him vide its letter dated 28.01.2014. The appellant has essentially taken the same arguments before the assessing officer as in its contentions above. Hence detailed mention of the same is not made here. 5.3.2. The assessing officer has rejected entire contention of the appellant at para 5.3 with a blank remark, it is difficult to accept the hypothesis that the company has incurred expenses only of Rs.7,52,268/- as worked out in its computation, for earning dividend and for the investments made. Thereafter, he has proceeded to make sweeping and generalized statements about how investment decisions are very complex, capital cost is represented by interest, certain administrative expenses could also be attributable to earning of dividend income, etc. Finally, he held that the appellant did not establish the claim that its investments were made out of own funds primarily because the appellant did not submit documentary evidence of utilization of borrowed funds and sources of investment. ' A.Y.2011-12 5.3.3 I find that the AO has not even dealt with a single factual or legal argument/contention made by the appellant. He has also not explained the reasons he has ignored or differed from various rulings of jurisdictional courts that were cited by the appellant. He has not given any finding of facts to support his decision to apply Rule 8D with regard to the accounts of the appellant nor to differentiate the instant case from those adjudicated by higher judicial authorities and relied upon by the appellant. In my opinion, the assessing officer has applied Rule 8D in arbitrary and mechanical manner. He has ignored the legal position that the assessing officer has to explicitly express his dissatisfaction with the methodology used by the assessee for reaching an amount that it is disallowing suo moto under section 14A. This rejection of the assessee is own computation must be done "having regard to the accounts of the assessee". In other words, the assessing officer has to expressly referred to accounts of the assessee and show how and why, in his opinion, the computation/reasoning given by the assessee is incorrect/unjustifiable. In the instant case, the assessing officer has not discussed with the reasoning/justification is given by the appellant at all and reached a decision under the erroneous understanding that section 14 A r.w Rule 8D triggers automatically whenever assessee claims that no expenditure has incurred to earn exempt income. 5.3.4 This action of the assessing officer goes against the letter and spirit of several decisions of higher courts ruling mentioned below: • Union Bank of India v. ACIT, wherein the Hon'ble Members following the decision in the case of Wimco Seedlings Ltd. v. DCIT, 107 ITD 267 (Delhi) (TM), held that only expenditure, which has been proved to have been incurred in relation to the earning of tax free income, can be disallowed, and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. • B.S.E.S, Ltd. v. DCIT (Mum.), wherein the Hon'ble Members following the Special Bench decision in Punjab State Industrial Development Corporation Ltd. v. DCIT, 102 ITD 1, held that when the AO has not placed any material on record to controvert the contention of the assessee that no .expenditure has been incurred for earning the exempt income, there is no justification to disallow proportionate business expenses on estimate basis. A.Y.2011-12 • CIT vs. M/s. Hero Cycles Ltd. 323 ITR 518 wherein Hon'ble Punjab & Haryana High Court in case of has held that whether in a given situation any expenditure was incurred which was to be disallowed was a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A was not accepted. It was held that disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand. • Pukhraj Chunilal Bafna v. Dy. CIT [2014] 65 SOT 187/47 taxmann.com 288 (Mum. -Trib.) it was held that the Assessing Officer to trigger rule 8D had not to be satisfied with the correctness of claim of the assessee as regards expenditure in relation to exempt income. Hence, without examining the nature of expenditure disallowed by the assessee or correctness of allowance/disallowance, the Assessing Officer could not invoke rule 8D. 5.3.5 Now coming to the facts of the case which are not disputed by the assessing officer, it is noted that the appellant has received dividend income of Rs. 17,82,797/-which is claimed exempt under section 10 (34) of the Act. This dividend was received on shares held as stock in trade. 5.3.6 A reference is made to the decision of Mumbai Tribunal in the case of Yatish Trading Co. (P) Ltd. v. ACiT [2011] 129 ITD 237 (Mum), wherein relying on the decision of CIT v. Waifort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC) and followed by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT[2010] 234 CTR 001 (Bom), it was held as under: "In case of dealer in shares and securities the primary object and intent ion for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of the shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale a/so incidentally yield some dividend income on the shares held by him as stock-in-trade such dividend income is not intended at the time of purchases of such shares and accordingly there is no live connection between the expenditure incurred and dividend income. The similar view was taken by the Hon. Kerala High Court in the case of CIT V/s Smt .Leena Ramchandranan..." 5.3.7 Similar ratio has been held in the following judicial precedents:
ITA No. 4259/M/2016 A.Y.2011-12 • DCIT vs. India Advantage Securities Limited (Mum I TAT) (ITA No.6711/Mum/2011) (Confirmed by Bombay High Court); • CCl Limited vs JCIT 250 CTR 291 (Kar); • Ganjam Trading Co. P. Ltd. (ITA No.3724/Mum/2005, dated 20 July 2012); • Prakash K. Shah & Securities P. Ltd. v. ACIT (ITA No.3339/Mum/2010); • CIT vs Leena Ramchandran 339 ITR 296 (Kar); and . Ethio Plastics Pvt. Ltd. vs. DCIT (Ahd ITAT) (l.T.A. No.848/Ahd/2012). Devkant Synthetics (India) Pvt Ltd V/s ITO-3(1)(2) in and 2665 of 2015 dated 28.10,2015 Thus, it is very clear that in the instant case where dividend has been received on account of shares held as stock in trade the courts have decided that no disallowance under section 14 A of the Act can be made. 5.3.8 Moreover, it is an undisputed fact that the appellant's own funds in form of share capital and reserves is much higher than investment capable of generating exempt income. It has therefore to be presumed that the investment was made out of interest free own funds. The ratio of following cases apply squarely to the appellants case: CIT Vs. HDFC Bank Ltd. (ITA 330/2012 Bom High Court) CIT Vs. Reliance Utilities and Power Ltd. (313 ITR 340) HDFC Bank Ltd. V DCIT in Writ Petition no. 1753 of 2016 dt. 25.02.2016 Bombay High Court 5.3.9. I find that the appellant had made a detailed explanation of the methodology adopted by it for arriving at the suo moto disallowance of Rs.7,88,606/- and the same have been quoted under para 5.2 of the assessing officer order internal para 2.4.1 at page 30-31. The assessing officer has neither disputed the amounts not given any cogent reason for rejecting the method of computation used by the appellant. In view of this, and in view of the legal position on this issue as propounded in the judgements cited above, I direct the assessing officer to restrict the disallowance to the suo moto amount of Rs.7,88,606/- and balance disallowance under section 14A of the Act is deleted. This ground of appeal is allowed.”
ITA No. 4259/M/2016 A.Y.2011-12
On appraisal of the above said finding, we noticed that the assessee earned the exempt income of Rs.17,82,797/- which has been claim as exempt u/s 10/34 of the Act. The said dividend was received on share held as stock in trade. The CIT(A) on the basis of the decision cited in the said order has held that the where dividend has been received on account of share held as stock in trade no disallowance u/s 14A of the Act can be made. It was also noticed that the assessee’s own share capital and reserves is much higher than investment. The CIT(A) has relied upon the judgments cited as CIT Vs. Reliance Utilities Power Ltd. (313 ITR 340)etc. mentioned in the said order. The appellant has suo-moto disallowed the expenses to the tune of Rs.7,88,606/-. Nothing came into notice that the facts are distinguishable at this stage. The CIT(A) has passed the order on the basis of judicial pronouncement mentioned therein. Moreover, Hon’ble ITAT has also decided the matter of controversy in the case of for the A.Y. 2008-09 dated 16.12.2016. The finding of the said order is not required to be reproduced because almost all the case law which has been discussed by CIT(A) has been considered while deciding the issue in question. This issue has been squarely covered by the said decision mentioned in the said order. Taking into account all the facts and circumstances of the case, we are of the view that the CIT(A) has passed the order judiciously and correctly which is not required to interfere with at this appellate stage. Therefore, this issue is decided in favour of the assessee against the revenue. ISSUE NO.3 to 5:- 9. Issue no. 3 to 5 are formal in nature which nowhere required for any adjudication.
ITA No. 4259/M/2016 A.Y.2011-12