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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2007-08. The appeal is directed against the order of the Commissioner (Appeals) – 35, Mumbai and arises out of the order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:-
i. Learned Commissioner of Income Tax (Appeals) erred in confirming the order of the Learned Assessing Officer in treating profit on sale of shares to the time of Rs. 92,38,459/- which are squared off within 6 months as Business Income as against ‘’Short Term Capital Gain’’ as claimed by the appellant.Appellant submits that in view of facts and circumstances of the case as well as in law the said treatment of profit on sale of shares as Business Income as against Short Term Capital Gain on sale of shares as claimed by the appellant is bad in law and the said profit ought to have been taxed as short term capital gain on sale of shares. ii. Learned Commissioner of Income Tax (Appeals) erred in confirming the order of learned Assessing Officer erred in disallowing a sum of Rs. 7,11,594/- u/s 14A of the Act. Appellant submits that in view of facts and circumstances of the case as well as in law the said disallowance u/s 14A of the Act is bad in law and deserves to be deleted. iii. Learned Commissioner of Income Tax (Appeals) erred in confirming the order of Learned Assessing Officer in disallowing a sum of Rs. 1,93,737/- u/s 94(7) of the Act. Appellant submits that in view of facts and circumstances of the case as well as in law the said disallowance u/s 94(7) of the Act is bad in law and deserves to be deleted. iv. Learned Commissioner of Income Tax (Appeals) erred in confirming the order of Learned Assessing Officer of disallowing a sum of Rs. 40,500/- out of interest expenses.
Briefly stated the facts are that the assessee, a Doctor by profession filed his return of income for the A.Y. 2007-08 on 12.10.2007 declaring total income of Rs. 70,95,200/-. Besides professional income, the assessee derives income from share trading.
We now begin with the 1st ground of appeal. The assessee has shown Short Term Capital Gains (STCG) of Rs. 1,51,88,155/- on sale of shares and securities. The Assessing Officer (AO) was not convinced with the explanation filed by the assessee before him and held the STCG of Rs. 92,38,459/- in respect of gain / loss from the scrips held upto 6 months as business income. The learned CIT(A) upheld the above order of the AO.
3.1 Before us, the learned counsel of the assessee relied on the judgment of the Hon'ble Bombay High Court in assessee’s own case i.e. CIT vs. Dr. Ramesh C. Shah (ITA No. 1063 of 2011) and order of the Tribunal in (i) Ramesh C. Shah vs. Addl. CIT (ITA No. 1553/Mum/2013) for the A.Y. 2009-10, (ii) ACIT vs. Dr. Ramesh C. Shah (ITA No. 727/Mum/2012) for the A.Y. 2008-09 and (iii) DCIT vs. Dr. Ramesh C. Shah (ITA No. 2234/Mum/2008) for the A.Y. 2004-05.
3.2 On the other hand, the learned DR relied on the order of the learned CIT(A).
3.3 We have heard the rival submissions and perused the relevant material on record. We find that the assessee has been investing in shares for the last more than ten years. He has always shown the shares purchased as ‘Investment’ in the balance sheet for all the years and valued the same at cost. The gains arising from sale of shares was also classified by the assessee as capital gains only. The assessee has earned dividend of Rs.28,37,719/- during the financial year 2006-07 relevant to the impugned assessment year. Details of dividend earned by the assessee in the last six years are as under:
Financial year Amount of dividend ( Rs.) 2001-02 3,13,966/- 2002-03 8,60,268/- 2003-04 8,36,126/- 2004-05 12,12,238/- 2005-06 14,89,625/- 2006-07 28,37,719/-
The assessee’s dividend income has increased over the years which shows that he is an investor.
3.4 The Department, in two scrutiny assessment of the assessee for the A.Y. 2001-02 and 2002-03, accepted the investment in shares and the income arising there from as capital gains.
3.5 We find from the decisions relied on by the learned counsel in the assessee’s own case that the share transactions have been held as capital gains and not as income from business. We may refer to the judgement of the Hon'ble Bombay High Court which reads as under:
“The CIT(A) as well as the Tribunal found as a matter of fact that considering the CBDT circular and the test laid down therein the income earned on sale of shares would have to be taxed as gain from short term capital gain and not as business income. The Tribunal found that almost 95% of the funds for investment in shares belongs to the assessee. Further, the shares were always shown as investment in his balance sheet and considered to be an investment. The dividend earned was Rs. 8.36 lacs on the investment of Rs. 2.77 crores also establishes that the intention of the respondent was to earn dividend income. Moreover, as observed by the CIT(A) the respondent-assessee was a busy Doctor and would not have time to deal in share transaction on day to day basis. Thus, the Tribunal on the above facts concluded that income earned on sale of shares held for less than six months are to be taxed under the head Capital Gain. Moreover, we are informed that even for the earlier assessment years gain on sale of shares has been taxed by the revenue as short term capital gain and not as business income. In view of the fact that the decision of the Tribunal taxing the gain made on sale of shares under the capital gain is based on a concurrent finding of fact, no question of law arises. Thus, we do not entertain this appeal.” 3.6 We find that the Co-ordinate Bench of the Tribunal in the case of the assessee for the A.Y. 2004-05, A.Y. 2008-09 and A.Y. 2009-10 have held the share transactions as capital gains and not as income from business.
3.7 Facts being similar, we follow the above decisions and allow the 1st ground of appeal.
We now come to the 2nd ground of appeal. It relates to the disallowance of Rs. 7,11,594/- by the A.O. u/s 14A read with rule 8D of IT Rules 1962. During the impugned assessment year the assessee received dividend income of Rs. 28,37,719/- and claimed exemption u/s 10(34) of the Act. The assessee has also computed Long Term Capital Gains (LTCG) of Rs. 5,17,12,834/- and claimed exemption u/s 10(38) of the Act. The AO observed that the assessee has not disallowed any expenditure against the above exempt income. The AO asked the assessee during the course of assessment proceeding to explain as to why disallowances should not be made u/s 14A of the Act. The assessee submitted before the AO that he had not incurred any expenditure other than the one reflected in the capital account in respect of LTCG on sale of shares. Further Rule 8D was not applicable in A.Y. 2007-08 and hence should not be applied in the present case. As regards interest, it was submitted that the assessee had not borrowed any amount for investments in shares and hence question of computing proportionate interest does not arise. It was stated that loan from Standard Chartered Bank was specifically for purchase of Nursing Home at Borivili. Also loan from ICICI Bank was specifically for purchase of car used in the profession of the assessee. Other private loans were utilised for professional purpose. However, the AO was not convinced with the above explanation of the assessee and made a disallowance of Rs. 7,11,594/- u/s 14A r.w. Rule 8D. On appeal the learned CIT(A) agreed with the above computation of the AO and confirmed the same.
4.1 Before us, the learned counsel of the assessee submits that it has been held by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81(Bom) that Rule 8D is not retrospective in operation. Rule 8D is applicable w.e.f. 2008-09.
Without prejudice, it is stated that in the assessee’s own case for A.Y. 2006-07, the ITAT had directed the AO to compute disallowance u/s 14A on some reasonable basis. The learned counsel submits that out of total expenses of Rs. 95,31,652/- debited to the P&L Account, Rs. 86,05,411/- is direct expense incurred for the purpose of running his own clinic. Balance amount to the tune of Rs. 9,33,741/- is indirect expenses which are in nature of common expenses. The common expenses after disallowance come to Rs. 6,83,743/-. Even if disallowance of expenses has to be made u/s 14A, then disallowance has to be restricted to 10% of the above sum which comes to Rs. 68,374/-.
4.2 On the other hand, the learned DR relies on the order passed by the learned CIT(A).
4.3 We have heard the rival submissions and perused the relevant material on record. We find that the AO has worked out the disallowance u/s 14A r.w.r. 8D. The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. (supra), it has been held that Rule 8 D is not retrospective. The Hon’ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income.
4.4 Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Thus the second ground of appeal is partly allowed.
We come to 3rd ground of appeal. It relates to the disallowance of Rs. 1,93,737/- made by the AO u/s 94(7) out of business loss claimed by the assessee on the plea that the loss incurred on sale of securities to the extent of dividend income earned is not allowable, which was confirmed by the learned CIT(A).
5.1 The learned counsel of the assessee submits that if the loss is treated as Short Term Capital Loss (STCL) then the said loss ought to be disallowed to the extent of dividend income. On the other hand, the learned DR supports the order passed by the learned CIT(A).
5.2 Having heard the rival submissions and perused the relevant material on record, we find the correct position of related loss as under:
Particulars Disallowance u/s 94(7) Short Term Capital Loss 37,560/- Business Loss 1,56,177/- Total 1,93,737/-
There is merit in the contentions of the learned counsel of the assessee that in case, loss for scrips held for 6 months is treated as STCL, then the disallowance u/s 94(7) must also be made out of STCL and not out of business loss. In view of the above, the order of the learned CIT(A) on the above issue is set aside and the AO is directed to restrict the disallowance to Rs. 1,56,177/- under the business head and adjust the balance of Rs. 37,560/- against STCL under capital gains head. Thus the 3rd ground of appeal is partly allowed.
The 4th ground of appeal relates to the order of the learned CIT(A) confirming the disallowance of Rs. 40,500/- made by the AO out of interest expenses. The assessee has debited Rs. 40,410/- in the P&L Account on account of interest on loan. During the course of assessment proceeding, the AO asked the assessee to establish the nexus of interest bearing unsecured loans with the business of the assessee. As the assessee failed to prove the direct nexus of borrowed funds with the business / profession of the assessee, the AO made a disallowance of the above sum of Rs. 40,500/-.
6.1 Before us, the learned counsel of the assessee submits that in the present case the assessee had sufficient own funds at his disposal for advancing interest free loans. It is stated by him that 99.46% of the total funds at his disposal are own funds. It is submitted that all funds have gone into common pool of funds and nexus with interest bearing funds having been utilised for advancing interest free loan cannot be established. However, as almost 99.46% of funds are interest free funds, considering loan is advanced not out of 99.46% of funds but out of 0.32% of funds is devoid of rationality. Reliance was placed by him on the judgement of the Hon'ble Bombay High Court in CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340. On the other hand, the learned DR relies on the order passed by the learned CIT(A).
6.2 Having heard the rival submissions and perused the relevant material on record, we find that (i) 99.46% of funds is interest free funds (ii) 0.32% of funds is interest free borrowed funds and (iii) 0.22% is interest bearing funds bearing in a common pool of funds. In the case of Reliance Utilities & Power Ltd. (supra), it is held that “if there be interest-free funds available to an assessee to meet its investments and at the same time the assessee has raised a loan, it can be presumed that the investments were from the interest-free funds available.” We follow the ratio laid down in the above judgement and delete the disallowance of Rs. 40,500/- made by the AO. Thus the 4th ground of appeal is allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 13/04/2017