NIRMAL N KOTECHA,MUMBAI vs. CIT(28), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the orders,dated 27/03/2015,of the CIT(A)-28,Mumbai,the Assessing Officer (AO)and the assessee have filed cross-appeals for the above-mentioned assessment year. Assessee,an individual,filed his return of income on 30/09/2009, declaring total loss of Rs. 4. 70crores.The AO completed the assessment,u/s.143(3) of the Act,on 29/12/2011,determining his income at Rs. 49.29 crores. ITA/3567/Mumbai/2015: 2.Effective ground of appeal, raised by the AO and sixth ground of appeal raised by the assessee,is about disallowance made u/s.14A of the Act read with Rule 8D of the Income Tax Rules,1962 (Rules). 2.1.During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs.16.41 lakhs,that he had paid interest of Rs.3.07crores to brokers on the out- standing amount due to them, that he had made disallowance of Rs.5 lakhs only u/s.14A of the Act.The AO observed that the shares from which dividend income arose were purchased using the borrowed funds on which interest was paid, that some expenses must have been incurred for earning the income. He considered all the shares as stock in trade and also held that same were to be taken into consideration for computing the disallowance in view of the

3700&3567/M/15 Nirmal N. Kotecha decision of Special Bench of the Tribunal in the case of Daga Capital Management Private Ltd (117 ITD 169).He computed the disallowance under Rule 8D(2) (i) at Rs.5 lakhs, under Rule 8D(2)(ii) at Rs.2.08 crores and under Rule 8D(2)(iii) at Rs. 23.91 lakhs.Thus,total disallowance u/s.14 A read with Rule 8D of the Rules,was computed at Rs.2.32 crores.

2.2.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA) and made elaborate submissions before him. After considering the available material,the FAA held that the assessee was a Trader in shares, that certain dividend income had been earned by him on the shares during the year under consideration, that the AO had held that the shares constituted the stock in trade of the business of the assessee, that the AO had recorded sufficient reason as to why he was not satisfied with the correctness of the claim of the assessee regarding the amount of expenditure to be disallowed in relation to the income which did not form part of the total income. Referring to the order of the Tribunal in the case of DH Securities Private Limited (ITA/5724/Mumbai/2001 dated 27/11/2013, AY.2008-09), the FAA held that disallowance as per the method in Rule 8D (2) (ii) should be restricted to 20% of Rs. 2.08 crores (Rs. 41.79 lakhs), that the disallowance under Rule 8D (2) (i) and Rule 8D (2)(iii) should be restricted to Rs.5 lakhs and Rs.23.91 lakhs respectively. In short,he restricted the disallowance to the extent of Rs.70.71 lakhs.

2.3.During the course of hearing before us,the Departmental Representative(DR) supported the order of the AO.The Authorised Representative(AR) argued that the assessee had,on its own, made a disallowance of Rs. 5 lakhs while computing the total income,that the AO had further made a disallowance of Rs.5.47 lakhs under the head unlisted expenses, that the AO had wrongly assumed that investment in shares was out of the borrowed funds, that he assumed average investment in shares at Rs.47.83 crores, that averge value of investment of Rs. 19.19 crores did not earn any dividend income,that same were required to be excluded from the average value of investment a base for disallowance as per Rule 8D (2) of the Rules, that no disallowance could be made u/s.14 A in case of the shares held in stock-in-trade (Rs. 23.16 crores),that the value of average investment in shares should be reduced by the average value of shares held as stock, that the assessee had own capital of Rs.85.43 crores,that the interest-free capital exceeded the average investment in shares,that no interest disallowance would be made under Rule 8D of the Rules, that the AO had made the disallowance of Rs. 5.47 lakhs, that the disallowance u/s.14A read with Rule 8D of the Rules could not have exceeded the amount of Rs. 16.41 lakhs, being exempt dividend income.He referred to the 2

3700&3567/M/15 Nirmal N. Kotecha cases of India Advantage Securities Ltd. (380 ITR 471),HDFC Bank Ltd. (366 ITR 505), Maxopp Investments Ltd.(374 ITR 272) and Everest Canto Cylinders Ltd. (378 ITR 57).

2.4.We have heard the rival submissions and perused the material before us. We find that assessee had shown dividend income of Rs.16,48,785/-,that he himself had made a disallowance of Rs.10.97 lakhs in the return of income filed by him, that the AO made a disallowance of Rs. 2.37 crores, that the FAA reduced the disallowance to Rs.70.71 lakhs, that the assessee had stock-in-trade of the shares worth Rs.23.16 crores, that he had own capital of Rs.85,43,06,528/-, that the capital far exceeded the average investment in shares.In our opinion, proportionate disallowance u/s.14 A read with Rule 8D cannot exceed the exempt income i.e. Rs.16.41 lakhs. No disallowance under the head interest expenditure can be made,considering the availability of interest free funds.Besides stock-in-trade cannot be considered for computing the 14A disallowance.

2.5.The question of quantum of disallowance is subject matter of ground of appeal number six, filed by the assessee,as stated earlier.As the issue raised by the AO and the assessee are interconnected,so, we would like to decide the issue in the subsequent paragraph. We find that the assessee had on its own made disallowance of Rs. 5 lakhs.In our opinion, there was no justification for enhancing the disallowance by the AO/FAA.Considering the principles laid down by the cases referred to by the assessee i.e. India Advantage Securities Ltd. (supra), HDFC Bank Ltd.(supra)and Maxopp Investments Ltd,(supra) and the peculiar facts and circumstances of the case under appeal,we decide the effective ground of appeal filed by the AO against him.Ground of appeal No.6,raised by the assessee is allowed.

ITA/3700/Mum/2015: 3.First effective ground of appeal(GOA-1,2,7& 9),filed by the assessee,deals with not admitting additional evidences/additional ground of appeal and violation of principles of natural justice. 3rdground deals with service of notice u/s.143 (2) of the Act.Next 2 grounds are about treatment to be given to the share transactions entered into by the assessee. The assessee had claimed Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) with regard to the shares sold during the year under appeal.The AO/FAA treated the share transactions under the head business income.Ground number 5 is also indirectly related with the heads of income under which income was assessed i.e. capital gains or business

3700&3567/M/15 Nirmal N. Kotecha income.Next ground deals with disallowance made u/s.14 A of the Act,that we have already adjudicated in the earlier paragraphs of our order. 3.Before deciding the issue of treating the assessee a trader or an investor on merits,we would like to deal with first effective ground of appeal.Before us,the AR argued that the FAA had not considered the additional ground of appeal filed by the assessee for contesting the invalidity of assessment,that the notice u/s.143 (2), dated 29/09/2010, was not served on the assessee within the statutory time as prescribed by the Act, that the AO had not issued the notice u/s.143(2)that was served upon him, that the FAA did not consider that vital aspect. With regard to additional evidences it was stated that the FAA had not admitted the application filed for submitting additional evidences, that the AO had referred to the ex parte order of the SEBI, dated 23/04/2009 to decide the issue against the assessee, that on 11/ 03/ 2015 he had filed an application under Rule 46A of the Rules,that the FAA did not acknowledge the application, that on 17/03/2015 he sent the application by speed post, that the contention of the FAA that application for filing additional evidences was furnished after the conclusion of hearing on 17/03/2015 was baseless,that the additional evidences were necessary for disposal of the appeal on merits, that the assessee should be allowed to rely on such evidences, that there was serious violation of principles of natural justice.The DR left the issue to the discretion of the Bench.

4.2.In our opinion,during the appeal proceedings,an assessee should be given reasonable opportunity of hearing,as so many issue may crop up after he receives the assessment order. FAA is the first stage where he can explain his case as to how the tax demand raised in his case is not legally sustainable.Sometimes,he may raise additional grounds or submit addi - tional evidences to demonstrate that stand taken by the AO cannot be confirmed on facts or as per the provisions of law.Such ground/evidences may go to the root of the matter.Due importance should be given to additional ground or fresh evidences.In Rule 46A of the Rules the FAA has been authorised to admit new evidences.It is a discretionary power.But, discretion has to be used judiciously. In the present case,the FAA rejected the additional evidences and grounds without a reasonable cause.The demand has arisen as the AO had held,that the assessee was a trader not an investor,with regard to his share transactions.There was no justification for not admitting additional ground about service of notice u/s.143 (2) of the Act.Similarly,the additional evidences should have been taken on record before deciding the issue.In our opinion,it would be violation of principles of natural justice if a matter is decided against an assessee without taking into consideration the material that may support 4

3700&3567/M/15 Nirmal N. Kotecha his stands.So,deciding the effective ground of appeal in favour of the assessee,in the interest of justice,we restore back the issue to the file of the FAA for fresh adjudication. He is directed to admit additional ground as well as additional evidences that were raised/submitted before him during the appellate proceedings.He would decide the matter after hearing the assessee.Effective ground of appeal is decided in favour of the assessee,in part.

5.We are not adjudicating Ground of appeal 4 and 5,that deal with the merit of the case,as we have restored back the issue to the file of the FAA. 6.Ground No. 8 and 9 are consequential in nature,hence are not being adjudicated.