Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-4, Kolkata [in short the ld CIT(A)] in Appeal No.254/CIT(A)- 4/Circle-12/Kol/14-15 dated 17.08.2015 against the order passed by the DCIT, Circle- 12, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 15.03.2013 for the Assessment Year 2010-11.
The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance of Rs. 64,18,322/- made by the ld. AO u/s 14A of the Act read with Rule 8D of the Rules, in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a limited company engaged in the business of share broking and dealing, investment and trading in shares and securities, depository operations , research and management and merchant banking. The return of income for the assessment year 2010-11 was filed by the assessee on 22.09.2010
2 M/s Dalmia Securities Pvt. Ltd. A.Yr.2010-11 declaring total income of Rs. 1,22,28,320/-. The assessee earned dividend income of Rs. 12,08,39,575/- and claimed the same as exempt in the return of income. The assessee did not disallow any expenditure u/s 14A of the Act in the return of income. The ld. AO not satisfied with the reply given by the assessee arrived at the disallowance u/s 14A of the Act in the sum of Rs. 6418332/- by applying second and third limb of Rule 8D(2) of the Rules.
Before the Ld. CIT(A), the assessee pleaded that no satisfaction was recorded by the ld. AO in terms of Section 14A(2) of the Act read with Rule 8D(1) of the Rules having regard to the accounts of the assessee. It was pleaded that the reasoning given by the ld. AO for rejection of the claim of the assessee was very vague and was not supported with cogent materials brought on record. The assessee also pleaded that it had earned dividend income of Rs. 11,75,01,741/- on shares and units of mutual fund held as stock- in-trade and Rs. 33,37,834/- on shares held as investments. The assessee also pleaded that out of the total dividend income of Rs. 12,08,39,575/-, a sum of Rs. 11,36,71,890/- was disallowed voluntarily by the assessee u/s 94(7) of the Act. It was pleaded that no specific expenses were incurred by the assessee to earn dividend income. It was also pleaded that the entire expenditure incurred and debited in the profit and loss account were made for the purpose of trading activity of dealing in shares and securities etc. and accordingly are not entitled for the purpose of disallowance u/s 14A of the Act. The assessee also furnished with facts and figures before the Ld. CIT(A) that it had sufficient own funds in its kitty and that the investments were made only out of own funds and not out of any borrowed funds. In support of this, the assessee placed reliance on its balance sheet wherein the share capital and reserves and surplus of the company were reflected at Rs. 96.59 crores and 114.09 crores respectively, whereas the investment as on 01.04.2009 was Rs. 30.96 crores and 29.75 crores as on 31.03.2010. The borrowed funds were not utilized for making investments. Accordingly, it was pleaded that in the instant case, no disallowance under the second limb of Rule 8D(2) 2
3 M/s Dalmia Securities Pvt. Ltd. A.Yr.2010-11 of the Rules could be made. It was also pleaded that the shares held as stock-in-trade would be outset the ambit of disallowance u/s 14A of the Act. Without prejudice to the preliminary argument that the ld. AO had not recorded satisfaction having regard to the accounts of the assessee with cogent material, the assessee stated that only investments which yielded dividend income alone could be taken into account for the purpose of working out disallowance u/s 14A of the Act read with Rule 8D of the Rules. In support of this proposition, it placed reliance on the decision of this Tribunal in the case of REI Agro Limited reported in 144 ITD 141.
The Ld. CIT(A) deleted the entire addition made in the sum of Rs. 64,18,332/- u/s 14A of the Act read with Rule 8D of the Rules by observing that the ld. AO had not recorded proper satisfaction for invoking the provision of section 14A of the Act read with Rule 8D(1) of the Rules that the amount of claim for expenses incurred by the assessee for earning exempt income is not correct having regard to the accounts of the assessee. Aggrieved the Revenue is in appeal before us on the following grounds: 1. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by overlooking the fact that in the assessment the AO had show caused vide order sheet dated 12.09.2012 and that the contention made by the assessee against the said show cause was not accepted by the AO by quoting the reasons which is mentioned in the order of assessment.
2. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by ignoring that issuing of show cause and non-acceptance of contention against such show cause is itself a satisfaction of the AO that the account of the assessee was not correct as it failed to compute any amount of disallowance towards earning of exempt income in its computation of income in the relevant assessment year.
3. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by ignoring the fact that assessee’s business was only dealing in shares and securities, so, it cannot be justified that the whole of the expenses was relating to business of trading of shares of the assessee and no expense was incurred for earning exempt income.
4 M/s Dalmia Securities Pvt. Ltd. A.Yr.2010-11 6. The ld. DR drew our attention to para 2.4 to 2.5 of the assessment order wherein the ld. AO had duly recorded subject to satisfaction as to why is rejecting the claim of the assessee and resorting to computation of disallowance by applying method prescribed in Rule 8D of the Rules. Hence, he argued that the disallowance deleted by the Ld. CIT(A) on this account is unwarranted. He placed reliance on the decision of Hon’ble Delhi High Court in the case of India Bulls Financial Service Ltd. vs. DCIT dated 06.12.2016 for the assessment year 2009-10 wherein it was held that merely because the ld. AO did not expressly record his dissatisfaction with the assessee working, does not mean that he cannot make the disallowance. The ld. AO need not do such lip service and formerly record dissatisfaction. It is sufficient if the order shows due application of mind to all aspects. In respect to this, the ld. AR reiterated the submissions made before the Ld. CIT(A) and further placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. reported in 366 ITR 505 (Bom) wherein it was held that no disallowance of interest under the second limb of Rule 8D(2) of the Rules could be made if it is proved that the assessee is having sufficient own funds with it. With regard to non-recording of satisfaction he placed reliance on the decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. reported in 380 ITR 652 (P&H) wherein it was held that the satisfaction to be recorded by the ld. AO must be based on credible and relevant evidence and that the ld. AO cannot by recording general observation, particularly where the assessee has denied using interest bearing funds, proceed to infer that the interest bearing funds must have been used to earn exempted income. He pleaded that the said case also held that Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the AO records satisfaction, on the basis of clear and cogent material, should an order be passed u/s 14A of the Act disallowing such a claim. He also drew our attention that the general observation made by the ld. AO in para 2.4 was only with regard to shares held as investment and not for shares held as stock-in-trade. With regard to reliance placed on the decision of Hon’ble Delhi High Court (supra) he said that the said 4
5 M/s Dalmia Securities Pvt. Ltd. A.Yr.2010-11 decision is squarely distinguishable on facts, inasmuch as in that case, the ld. AO had made elaborate analysis having regard to the accounts of the assessee for rejecting the claim of the assessee in terms of section 14A read with Rule 8D(1) of the Rules. Whereas in the instant case before us, the ld. AO had not made any analysis to reject the claim of the assessee by making specific reliance to the books of accounts of the assessee.
We have heard the rival submissions. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. At the outset, we find that the ld. AO had duly recorded his satisfaction as to why the claim of the assessee that no expenses were incurred for earning exempt income is not acceptable. The ld. AO has clearly brought out his mind for applying the provisions of Rule 8D of the Rules for making disallowance u/s 14A of the Act. Hence, the preliminary objection raised by the ld. AR in this regard is rejected. However, we find from the balance sheet of the assessee, which was placed before the Ld. CIT(A) and remain undisputed before us, we hold that the assessee has sufficient own funds and hence respectfully following the decision of Hon’ble Bombay High Court in the case of HDFC Bank (supra), we hold that no disallowance of interest is to be made under the second limb of Rule 8D(2) of the Rules. We also find that the assessee has got dual portfolio, i.e certain shares were held as stock-in-trade and certain shares were held as investments The Hon’ble Calcutta High Court in the case of G.K.K. Capital Markets Ltd. in G.A No.1150 of 2015 ITAT No.52 of 2015 dated 10th February, 2017 had held that the provisions of section 14A read with Rule 8D of the Rules cannot be made applicable in respect of shares held as stock-in-trade . We also find that this Tribunal in the case of REI Agro Limited reported in 144 ITD 141 had held that only investments which had yielded exempt income should be considered for working out the disallowance under Rule 8D of the Rules. Respectfully following the aforesaid decisions, we direct the ld. AO to re-compute the disallowance u/s 14A of the Act read with Rule 8D of the Rules only by considering the 5
6 M/s Dalmia Securities Pvt. Ltd. A.Yr.2010-11 shares and mutual funds held as investments which had yielded dividend income during the year, under third limb of Rule 8D(2) of the Rules. For the sake of clarity, we reiterate that no disallowance of interest is to be made under second limb of Rule 8D(2) of the Rules in the facts of the instant case. Accordingly, grounds raised by the Revenue are partly allowed.
In the result, the appeal of the revenue is partly allowed.
Order pronounced in the Court on 07.03.2018
Sd/- Sd/- [A.T. Varkey] [ M.Balaganesh ] Judicial Member Accountant Member Dated : 07.03.2018 SB, Sr. PS Copy of the order forwarded to:
1. 1. DCIT, Circle-12(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, 7th Floor, Kolkata-700069.
2. M/s Dalmia Securities Pvt. Ltd., Ideal Plaza, 11/1, Sarat Bose Road, 3rd Floor, Kolkata-700020.
3. C.I.T(A)- , Kolkata 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.