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Income Tax Appellate Tribunal, DELHI BENCH “SMC-2”, NEW DELHI
Before: SHRI H.S. SIDHU
ORDER PER H.S. SIDHU, JM Assessee has filed the Appeal against the Order dated 16.9.2015 passed by the Ld. Commissioner of Income Tax (Appeals)—18, New Delhi pertaining to assessment year 2008-09.
The grounds raised by the assessee read as under:-
That the Ld. CIT(A) erred in sustaining the order passed u/s. 143(3)/263 of the Income Tax Act, by AO, which is bad in law and on the facts of the case.
2. That the Ld. CIT(A) erred in sustaining the disallowance u/s. 14A r.w.r. 8D amounting to Rs. 10,74,056/- (Rs. 11,24,056/- = Rs. 50,000/-) 3. That the Ld. CIT(A) erred in sustaining the interest charged u/s. 234A, 234B, 234C & 234D of the Income Tax Act.
The brief facts of the case are that assessee is an individual engaged in the business of sale and purchase of shares and mutual funds. He filed his return of income of Rs. 33,51,550/- on 30.9.2008 and processed u/s. 143(1) of the I.T. Act, 1961 on same income. Notice u/s. 143(2) of the I.T. Act, 1961 was issued on 8.9.2009 and assessment u/s. 143(3) was completed on 3.12.2010 on the assessed income of Rs. 34,76,550/-. Subsequently, the Ld. CIT, Delhi-XI, New Delhi vide his order dated 7.3.2013 after examining the facts of the case observed that the order dated 3.12.2010 of the AO is erroneous and prejudicial to the interest of revenue and set aside the same for making afresh assessment. Consequent to the order passed by the Ld. CIT, the AO passed a fresh assessment u/s. 143(3)/263 of the Act on 27.3.2014, assessing the income of the assessee at Rs. 44,26,610/-, after making an addition of Rs. 10,74,056/- u/s. 14A read with Rule 8D.
Against the assessment order dated 27.3.2014, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 16.9.2015 has dismissed the appeal of the assessee.
Aggrieved with the aforesaid order of the Ld. CIT(A), assessee is in appeal before the Tribunal.
During the hearing, Ld. Counsel of the assessee has stated that the interest has been paid by the assessee to the financiers who have funded the IPOs as is evident from Page No. 54 & 65 of the Paper Book and there is no dividend income from transaction. He further stated that since the business of the assessee is sale and purchase of shares, all the interest has been paid in relation to normal business income, and cannot be allocated for the purpose of disallowance u/s. 14A read with Rule 8D. He further stated that it is a settled law that the disallowance u/s. 14A read with Rule 8D should only be made with regard to investments and not with the regard to share held as stock-in-trade. It was the further contention that the assesse is in the business of sale and purchase of shares and mutual funds. The shares were held as stock in trade, therefore, provisions of section 14A read with Rule 8D are not applicable. In order to support his contention he relied upon the following case laws:-
- ITAT, Delhi Bench decision in the case of Vidyut Investment Ltd. vs. ITO (2006) 10 SOT 284 (Delhi).
- ITAT, Mumbai decision in the case of Yatish Trading Co. (P) Ltd. vs. ACIT (2011) 129 ITD 237 (Mumbai).
- ITAT, Mumbai in the case of Fiduciary Shares & Stock (P) Ltd. vs. ACIT (2016) 159 ITD 554 (Mumbai)
- Dy. DIT (OSD) vs. Shree Durga Capital Ltd., Mumbai dated 3.8.2015 – ITAT, Mumbai
- ITAT, Mumbai in the case of Devkant Synthetics (India) Ltd. vs. ITO in dated 28.10.2015)
On the contrary, Ld. DR opposed the aforesaid contention of the Ld. Counsel of the assessee and relied upon the orders of the authorities below and requested that the same may be upheld.
I have heard both the parties and perused the relevant records available with me, especially the orders passed by the revenue authorities and the case laws cited by the Ld. Counsel of the Assessee. I find that the AO has made the addition by disregarding the submissions of the assessee 3 that the assessee has not incurred any expenditure in order to earn any exempt income. The AO has further ignored the explanation offered by the assessee that the interest expenditure incurred by the assessee is in respect of the funds borrowed for the IPOs. I note that the AO has invoked the provisions of rule 8D holding that the implication of the said rule is automatic and has nothing to do with the earning of income during the year under consideration. Thereafter, the Ld. CIT(A) has further sustained the addition made by the AO by holding that even if the exempt income earned during the year is incidental to the main objective of the business of the assessee, and also when the expenditure has no direct or proximate connection to the exempt income, the addition u/s. 14A read with Rule 8D is required to be made. Therefore, the Ld. CIT(A) has upheld the addition made by the AO by holding that the provisions of section 14A are also applicable in case of stock-in-trade. I find that during the year under consideration, assessee had a long term capital gain of Rs. 54,74,924/- alongwith dividend income on mutual funds and shares for Rs. 46,55,903. I further note that the assessee has incurred bank charges and interest expense amounting to Rs. 19,42,045.95 during the year under consideration, complete details were filed by the assessee before the AO as well as Ld. CIT(A) and no loan has been taken by the assessee during the year as is evident from the balance sheet of the assessee. The said interest has been paid by the assessee to the financiers who have funded the IPOs as is evident from the records, and there is no dividend income from transaction. Since the business of the assessee is sale and purchase of shares, all the interest has been paid in relation to normal business income, and cannot be allocated for the purpose of disallowance u/s. 14A read with Rule 8D. I find considerable cogency in the contention of the Ld. Counsel of the assessee that it is a settled law that the disallowance u/s. 14A read with Rule 8D should only be made with regard to investments and not with the regard to share held as stock-in-trade. I am in further agreement with the contention of the Ld. Counsel of the assessee that the assesse is in the business of sale and purchase of shares and mutual funds and the shares were held as stock in trade, therefore, provisions of section 14A read with Rule 8D are not applicable. My aforesaid view is fully supported by the following decisions:- a) Delhi Tribunal in the case of Vidyut Investment Ltd. v. ITO [2006] 10 SOT 284 (Delhi), has held as under:
"The dividend earned by the assessee was merely incidental to the holding of shares for a particular period when the dividend was declared. As per the accounts, the stock of shares held as stock-in-trade was merely Rs. 21.27 lakhs. The shares were purchased merely for trading in the same and not for earning dividend thereon. Thus, it could not be said that the expenses on interest were incurred or the depository/custodial charges were incurred merely to earn dividend income. The intention was to earn the profit on share trading and not to earn dividend income. Thus, the provisions of section 14A could not be invoked to hold that the expenses by way of interest and depository/custodial charges were incurred in relation to dividend income which did not form part of the total income. [Para 2.5]' b) ITAT, Mumbai in the case of Yatish Trading Co. (P.) Ltd. v. ACIT [2011] 129 ITD 237 (Mumbai), has held as under:
"It is pertinent to note that the interest on borrowed funds used for trading activity is an allowable expenditure under section 36(1)(iii) and the same cannot be treated as an expenditure for earning the dividend income which is incidental to the trading activity. [Para 34] Thus, undisputedly, when the real purpose and intent to use the borrowed funds was for trading activity and if incidentally it resulted in some dividend income on the shares purchased for trading, then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure (interest) was incurred for trading activity then the same could not be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income, i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income had to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression 'in relation to' used in section 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure under section 14A there must be a live nexus between the expenditure incurred and the income not forming the part of the total income. As held by the Delhi Bench of the Tribunal in the case of Escort Ltd. (supra), disallowance cannot be made on the basis of presumption and estimation of the Assessing Officer. No notional expenditure can be apportioned for the purpose of earning income, unless there is an actual expenditure 'in relation to' earning the income not forming the part of the total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income then no disallowance can be made under section 14A merely because 6 some tax exempt income is received incidentally. In case of a dealer in shares and securities the primary object and intention 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 also incidentally yields some dividend income on the shares held by him as. stock-in-trade such dividend income is not intended at the time of purchase of such shares and, accordingly, there is no live connection between the expenditure incurred and the dividend income. [Para 35]' c) ITAT Mumbai in the case of Fiduciary Shares & Stock (P.) Ltd. v. ACIT [2016] 159 ITD 554 (Mumbai - Trib.), has held as under:
"The issue for adjudication is as to whether the shares held by the assessee-company under the head 'stock-in-trade' are to be considered for making disallowance under section 14A, read with rule 8D. The Jurisdictional Court in the case of CIT v. India Advantage Securities Ltd. IT Appeal No. 1131 of 2013 dated 17- 3-2015 has held that disallowance, if any, to be made under section 14A, read with rule 80 should only be made with regard to investments and not with regard to shares held as stock-in- trade. [Para 4.4.1] Following the decisions of the Bombay High Court. in the case of India Advantage Securities Ltd. (supra), it is held that the disallowance under section 14A, read with Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore the Assessing Officer is directed to delete the disallowance made under section 14A, read with rule 8D. [Para 4.4.2] d) In Devkant Synthetics (India) Pvt. Ltd. Versus ITO [ITA No. 2663, 2664 and 2665/Mum/2015 Dated: - 28 October 2015] – ITAT Mumbai has held as under:-
"We notice that the Hon'ble Karnataka High Court has clearly held in the case of CCI Ltd (2012 (4) TMI 282 - KARNATAKA HIGH COURT) that the shares held as stock in trade should be excluded for the purpose of disallowance of the Act, since they cannot be said to be the “investment" made for the purpose of earning dividend income. In the case of India Advantage Securities Ltd (2015 (6) TMI 140 - BOMBAY HIGH COURT), the Hon'ble Bombay High Court has noticed that the CIT(A) took into account the words of the Rule and found that the figures as derived by the Assessing officer cannot be taken into consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head "Investment" could be taken and some charges apportioned for the purpose of computing expenses. Thus the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made.
8.1. In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, I delete the addition in dispute and accordingly decide the issue in dispute in favour of the assessee and against the Revenue.
In the result, the Appeal filed by the Assessee stands allowed.
Order pronounced in the Open Court on 18/10/2016.