INVESTRICK SECURITIES P (I) P.LTD,MUMBAI vs. DCIT 2(2), MUMBAI

PER BENCH :

2. The grounds of appeal raised in 2007-08 by the assessee in memo of the appeals filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

“I. The Commissioner of Income-tax (Appeals) - 5, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Deputy Commissioner of Income-tax - 2(2), Mumbai (hereinafter referred to as the Assessing Officer) in disallowing a sum of Rs 2,94,880 on account of expenses incurred for earning dividend income by invoking the provisions of section l4A of the Act. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in disallowing the aforesaid amount of Rs 2,94,880 as there is no expenditure incurred in relation to earning dividend income and as such, no disallowance can be made under section 14A.

Without prejudice, the appellants contend that the calculation of proportionate expenses allocated to the earning of exempt income is not in consonance with the provisions of Rule 8D and hence, needs to be calculated as per law.

2. The CIT(A) erred in upholding the action of the Assessing Officer in disallowing a sum of Rs 15,71,714 on account of provision for loss - ESF Account. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance of Rs 15,71,714 inasmuch as such disallowance is not in accordance with law.”

3. Brief facts of the case are that the assessee is in business of trading in shares and securities. It was observed by the A.O. from the return of income filed by the assessee with the Revenue that the assessee had not made any disallowance u/s 14A of the Act r.w. Rule 8D of Income-tax Rules, 1962 though there was dividend income of Rs. 5,35,539/- earned by the assessee and claimed by the assessee to be exempt u/s 10(34) of the Act. The assessee was asked to explain as to why disallowance out of expenditure should not be made u/s 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 with respect to expenditure incurred in relation to the earning of income which does not form part of total income. In reply, the assessee furnished the details and working and disallowance u/s 14A of the Act conceding in principle that the disallowance has to be made . The disallowance was worked out by the AO at Rs. 2,94,880/- keeping in view provisions of Section 14A of the Act read with Rule 8D of Income-tax Rules, 1962, vide assessment order dated 27.12.2009 passed by the AO u/s 143(3) of the Act.

The A.O. further observed that the business of the assessee consists of purchase and sale of shares. It was observed by the AO that while computing business profit the assessee had debited an amount of Rs. 15,71,714/- as provision for loss–ESF account which as per AO is patently in-admissible, these amounts were reduced from the business loss computed , vide assessment order dated 27-10-2009 passed by the AO u/s 143(3) of the Act.

4. Aggrieved by the assessment order dated 27-10-2009 passed by the A.O., the assessee carried the matter in appeal before the ld. CIT(A) wherein the assessee contended before learned CIT(A) that first issue is regarding disallowance of expenditure incurred in relation to earning of income which does not form part of total income as mandated u/s 14A of the Act read with Rule 8D(2)(iii) of the Income-tax Rules, 1962 that no expenditure was incurred in relation to earning of dividend income by the assessee and hence, no disallowance can be made u/s 14A of the Act. The ld. CIT(A) observed that the A.O. has made disallowance u/s 14A of the Act by invoking the provisions of Rule 8D(2)(iii) of Income-tax Rules, 1962 , the disallowance was upheld by ld. CIT(A). The ld. CIT(A) relied on the following case laws while upholding the assessment order dated 27-10-2009 passed by the AO u/s 143(3) of the Act , vide appellate order dated 23-11-2012:-

i) Southern Petro Chemical Industries v. DCIT (2005) 93 TTJ (Chennai) 161. Held, Expenditure attributable to earning of dividends which are exempt under s.10(33)-Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions in which top management is involved-Said decision –making process is very complicated and requires very careful analysis – Thus, proportionate management expenses are required to be deducted while computing the dividend income. ii) DCIT v. S. G. Investments and Industries Ltd (2004) 89 ITD 44 (Cal), Held, expenditure incurred by the assessee in relation to income which does not form part of the total income as mentioned in Sec.14A has to be given a wider meaning and would include both direct and indirect relationship between the expenditure and exempt income. iii) ACIT v. Premier Consolidated Capital Trust (I) Ltd,(2004) 83 TTJ (Mumbai) 843-Held, It is justifiable to attribute a part of the financial and administrative expenses as expenditure incurred in relation to exempted income and disallowing the same in view of the provisions of Sec.14A of Income-tax Act, 1961. iv) ITO v. Daga Capital Management (P) Ltd 119 TTJ (Mum) SB:-Held, there is no iota of doubt that the intention behind with the expression ‘in relation to’ in S.14A is to encompass not only the direct but also indirect expenditure which has any relation to the exempt income. The relation has to be seen between the exempt-income and the expenditure incurred in relation to it and not vice-versa. In order to escape tax applicability of S.14A, onus is on the assessee to prove that expenditure was incurred for earning taxable income.

With respect to the second issue, the ld. CIT(A) observed that disallowance has been made with respect to the provision for loss on open position in futures and options to the tune of Rs. 15,71,714/-, and the calculation of the same are as under:-

S Scrip Contract No. Date of Rate Rate as Profit/loss No. size of purchase on Difference lots 31.3.07 1 Gujarat 2062 245 23.03.07 110.28 Ambuja Gujarat 2062 243 29.03.07 104.07 Ambuja Total 488 107.19 105.65 (1.54) (1,547,098) 2 Reliance 150 160 29.03.07 1369.13 1368.1 (1.03) (24,616)

The ld. CIT(A) relied upon CBDT Instruction No. 3 of 23.03.2010 and observed that since the provision is a mere notional loss, the same is not allowable , hence learned CIT(A) dismissed the appeal of the assessee by affirming the addition made in the assessment order dated 27.10.2009 passed by the AO u/s 143(3) of the Act, vide appellate order dated 23.11.2012 passed by learned CIT(A).

5. Aggrieved by the appellate order dated 23.11.2012 passed by the ld. CIT(A), the assessee is in appeal before the tribunal.

6. None appeared on behalf of the assessee, hence, we proceed to dispose of the appeal after hearing ld. D.R. .

We have observed that this appeal has been fixed from time to time since April 2014. The counsels who were appointed by the assessee to argue this appeal are all qualified Chartered Accountants namely CA Rajiv Khandelwal, CA Neelkanth Khandelwal and CA. Hetal Panchal . The said Chartered Accountants were appointed by the assessee company vide Power of Attorney dated 18th March, 2014 executed in favour of these Chartered Accountants, which is placed in file . The said Chartered Accountants duly accepted the appointment on 18-03-2014 itself to attend to this appeal before the tribunal. We have observed that said counsels have sought adjournments on one pretext or another from time to time or they have not attended the hearing on the dates fixed for hearing by the tribunal , which we will explain in details hereinafter. We have observed that on 01-12-2014, the adjournment was sought on the ground that CA Neelkanth Khandelwal, who is briefed in the matter has to attend marriage in family on 01-12-2014 (letter of adjournment dated 01-12-2014 placed in file). The adjournment was granted by tribunal and matter was fixed for hearing on 07-01-2015. Then , again on 16-09- 2015, letter of adjournment dated 16-09-2105 was filed on the pretext that CA Rajiv Khandelwal, who is briefed in the matter has twisted his ankle and has been advised rest for a day, letter of adjournment is placed in file. The tribunal again acceded to the request for adjournment of the counsel of the assessee and adjournment was granted by the tribunal and matter was fixed for hearing for 18.11.2015. Thereafter, again on 4-01-2016, letter of adjournment dated 04-01-2016 was filed on the ground that CA Rajiv Khandelwal who is briefed on the matter is on vacation, letter of adjournment is placed in file. The tribunal again acceded to the request for adjournment of the assessee’s counsel and matter was fixed for hearing on 15-02-2016. Again on 15-02-2016 when the matter was called for hearing, letter of adjournment dated 11-2-2016 was already filed with Registry on 11-02-2016 by assessee’s counsel seeking adjournment on the pretext that CA Neelkanth Khandelwal who is briefed in the matter is on vacation, letter of adjournment is placed in file. The tribunal again acceded to their request of adjournment and the matter was fixed for hearing on 09-05-2016, letter of adjournment is placed in file. Similarly, we have also painfully observed and noted from order sheet entries in file that there was non-compliances and non appearances by respective counsels on the dates of hearing held on 08-06-2015, 12-08-2015, 25-05-2016, 22-06-2016, 21-07-2016, 19-09-2016 and 13-12-2016, wherein none attended on behalf of assessee’s counsel nor any application for adjournment was moved before the tribunal. Thus, from the above, it is evidently clear that the counsels of the assessee have accepted the engagements/appointment to represent assessee before the tribunal vide Power of Attorney dated 18th March, 2014 but they have conducted the appearances and compliances before the tribunal in a very lax and casual manner which is not expected from the Senior counsels who are qualified professionals. We are pained to write these lax and casual approach on the part of the counsel of the assessee but at the same time we sincerely hope and believe that the assessee as well as the counsels will take this matter of non-appearances before the tribunal in a true and right spirit so that there could be early and quick dispensation of justice which is mandate of the tribunal. The said frequent adjournments on frivolous grounds or non- appearances of the assessee or its counsels cost time and resources of the country. If counsels after accepting appointment does not want to represent the assessee before the tribunal due to any reason whatsoever, then as per established standards and procedures, they should make a request before the tribunal to withdraw their Power of Attorney with copy to assessee instead of continuing with such appeals . We hope that our comments will be taken in true spirit by learned counsels and they will ensure due compliance at the time of hearing before the tribunal and help in quick disposal of the appeals by the tribunal.

7. The ld. D.R. submitted that the assessee has earned dividend amount of Rs. 5,35,539/- which has been claimed to be exempt u/s 10(34) of the Act. The A.O. disallowed an amount of Rs. 2,94,880/- by invoking provisions of section 14A of the Act r.w.r. 8D(iii) of Income-tax Rules, 1962 which has been later upheld by the ld. CIT(A).

“Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires—

[(d) an eligible transaction in respect of trading in derivatives referred to in clause a[(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;] shall not be deemed to be a speculative transaction; **** **** [Explanation.—For the purposes of this clause, the expressions— (i) “eligible transaction” means any transaction,— (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;]”

Thus, the eligible transactions are carved out of speculative transactions vide insertion of clause (d) to Section 43(5) of the Act by Finance Act, 2005 w.e.f. 01-04-2006. Hence, the matter needs to be set aside to the file of the A.O. for the denovo determination of the issue on merits for verifying whether the said transactions carried out by the assessee falls within the mandate of Section 43(5)(d) of the Act read with explanation 1 to be covered as business loss vis-à-vis speculative loss and the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of previous year. Reference may be drawn to the decision of the Mumbai benches of the tribunal in the case of Inventurus Knowledge Services (P.) Ltd. v. ITO (2016)156 ITD 727(Mum.-trib), wherein the tribunal allowed marked to market losses by holding as under:

“9. Thus in view of our above foregoing discussions, we allow the appeal of the assessee company on following reasons:— 1. That the assessee company has entered into derivative transactions in foreign currency through recognised stock exchange and has complied with the other conditions as stipulated in Section 43(5) read with proviso(d) and Explanation 1 to the said Section 43(5) of the Act for which cogent material is brought on record.

complies with the provisions of Section 43(5) of the Act read with proviso (d) and Explanation 1 of the Section 43(5) of the Act and is exempt to be categorised as speculation loss and further hold that the said loss as at the date of financial statement as at 31st March 2009 arising due to adverse movement in exchange rate between United States Dollars vis-a-vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 is not a notional or contingent loss rather it is a ascertained liability which has crystallized on the date of Balance Sheet as at 31st March 2009 and can be computed with reasonable certainty and accuracy, hence allowable as non-speculation loss. We order accordingly”.

The AO is also directed to verify that the said marked to market losses so allowed to the assessee are duly factored / reflected by way of reduction in the opening stock of derivative contract valuation for the succeeding year so that there is no duplicity in claiming the said loss by the assessee in the immediately succeeding year when the said derivative contracts are finally concluded/completed. In the result, appeal of the assessee is allowed for statistical purposes. We order accordingly.

Now, we shall take up assessee’s appeal in for assessment year 2008-09.

“1. The Commissioner of Income-tax (Appeals) - 5, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Income-tax Officer - 2(2)(1), Mumbai (hereinafter referred to as the Assessing Officer) in disallowing a sum of 87,56,848 on account of expenses incurred for earning dividend income by invoking the provisions of section 14A read with rule 8D of the Act.

The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in disallowing the aforesaid amount of Rs. 87,56,848 inasmuch as the same is not in accordance with the prescription of section 14A read with rule 8D of the Act.

Without prejudice, the appellants contend that the calculation of proportionate expenses allocated to the earning of exempt income is not in consonance with the provisions of Rule 8D and hence, needs to be calculated as per law.

2. The CIT(A) erred in upholding the observation of the Assessing Officer that short-term capital gains of Rs. 67,27,044 is business income.

The appellants contend that on the facts and in the circumstances of the case and in law, the action of the CIT(A) in upholding the observation of the Assessing Officer in holding the impugned capital gains arising on sale of short-term capital assets as business income is not tenable in law.

3. The CIT(A) erred in upholding the action of the Assessing Officer in disallowing a sum of Rs. 56,916 on account of provision for loss - ESF Account.

The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance of Rs. 56,916 inasmuch as such disallowance is not in accordance with law and generally accepted accounting principles.

The appellants contend that the CIT(A) ought not to have upheld the action of the Assessing Officer in charging interest under section 234A inasmuch as the return of income has been filed within the time prescribed by section 139(1) of the Act.

The appellants further, contend that the CIT(A) ought not to have upheld the action of the Assessing Officer in charging interest under sections 234A and 234B inasmuch as -

(a) the Assessing Officer has not given an opportunity to the appellants before charging the said interest as required by the principles of nature justice,

(b) the charging of interest is not in accordance with law.”

C = Average total asset 61,04,00,400 82,42,546 iii) 0.5% of average investment 4,67,821 Total disallowance u/s 14A as per Rule 87,56,848 8D(2)

The disallowance u/s 14A of the Act of 1961 was worked out by the AO at Rs. 87,56,848/- and added back to the total income of the assessee, vide assessment order dated 29-12-2010 passed by the AO u/s 143(3) of the Act.

“Ground No. 2 : Disallowance u/s 14A r.w.r. 8D(2)(i)(ii) & (iii) – Rs. 46491/- /Rs. 8242536/- / Rs. 4,67,821/- respectively

The AO had disallowed an amount of Rs. 8756848/- u/s 14A r.w.r. 8D (i)(ii)&(iii) - Rs. 46491/-, Rs. 82,42,536/- and Rs.4,67,821/- respectively.

(a) Amount directly relatable to earning exempt dividend income amounting to Rs. 46,491/- is clearly disallowable u/s 14A r.w.r. 8D(2)(i). The disallowance of Rs. 46,491/- is therefore upheld.

(b) In r/o of disallowance of Rs. 82,42,536/- u/s 14A r.w.r. 8D(ii)

• The financial results are as under:

31-03-2008 31-03-2007 Unsecured loans 821,088,103 214,862,723 Investment 170,838,962 16,289,526 Total share holder funds 77,232,291 85,3057,709

The details of unsecured loans on which interest is paid is as under:

Indiabulls Services Ltd. Rs.492,551,415 Esquire Pvt. Ltd., Rs. 27,730,413 • A perusal of the aforesaid facts clearly reveals that though the investment have increased from Rs. 1.62 crs to Rs. 17.08 crs, the share holders funds have decreased from Rs. 8.5 crs to Rs. 7.72 crs. On the other hand, unsecured loans carrying interest have increased.

• The appellant was asked that since there were no surplus funds for investments in securities income from which is exempt - why the disallowance u/s 14A r.w.r. 8D(2)(ii) should not be made? The appellant could not produce the bank statement to show that on the date of investments in securities having tax free income - the appellant was having surplus funds.

• Under the overall facts and circumstances of the case, the appellant has failed to discharge its onus that interest free funds have not been used for investments in securities income from which is exempt.

• The disallowance made by the AO as per Sec.14A r.w.r. 8D(2)(ii) is therefore called for.

• The disallowance of Rs. 82,42,536/- made by the AO is therefore upheld.

(c) Disallowance u/s 14A r.w.r. 8D(2)(iii) - Rs. 4,67,821/-

• The appellant has substantial amount of investments in securities income from which is exempt. Besides, the appellant is also having purchases and sales of securities, dividend income from which is exempt, which is being shown by the appellant as stock in trade. The same is also covered u/s 14A r.w.r. 8D(2)(iii).

• Under these facts and circumstances the disallowance made by the AO u/s 14A r.w.r. 8D(2)(iii) is called for. This view has also been upheld in various case laws. i) Southern Petro Chemical Industries Vs. DCIT (2005) 93 TTJ (Chennai) 161- Held, Expenditure attributable to earning of dividends which are exempt under s.10(33)-Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions in which top management is involved-Said decision -making process is very complicated and requires very careful analysis- Thus, proportionate management expenses are required to be deducted while computing the dividend income- ii) DCIT V. S. G. Investments and Industries Ltd (2004) 89 ITD 44 (Cal), Held, “expenditure incurred by the assessee in relation to income which does not form part of the total income" as mentioned in Sec.14A has to be given a wider meaning and would include both direct and indirect relationship between the expenditure and exempt income. iii) ACIT V. Premier Consolidated Capital Trust (I) Ltd,(2004) 83 TTJ (Mumbai) 843-(Held, It is justifiable to attribute a part of the financial and administrative expenses as expenditure incurred in relation to exempted income and disallowing the same in view of the provisions of Sec.14A of Income-tax Act,1961 ). . iv) ITO Vs. Daga Capital Management (P) Ltd 119 TTJ (Mum) SB:- Held, there is no iota of doubt that the intention behind with the expression ‘in relation to' in S.14A is to encompass not only the direct but also indirect expenditure which has any relation to the exempt income. The relation has to be seen between the exempt- income and the expenditure incurred in relation to it and not vice - versa. In order to escape tax applicability of S.14A, onus is on the assessee to prove that expenditure was incurred for earning taxable income.

3.2 In the light of the ratio laid down in aforesaid cases, the disallowance of expenses of Rs. 4,67,821/- is as per sec. 14A r.w. Rule 8D(2)(iii). The disallowance made by the A.O. is upheld.

3.3 This ground of appeal is therefore dismissed.”

16. With respect to second issue as to the treatment of short term capital gains of Rs. 67,27,044/- as business income, the learned CIT(A) observed that the total amount of scrips sold are of value Rs. 13,38,36,535.62 while scrip bought are to the tune of Rs. 12,71,09,491.62 resulting in a profit of Rs. 67,27,044/- during the year. It was observed by learned CIT(A) that holding period is not very large which in many cases varied from 28 to 84 days. It was observed that substantial amount of interest bearing loans were raised which increased from 21 crores to 82 crores and hence facts in the instant year are different from preceding year as there are substantial interest bearing funds which were raised by the assessee for business purposes. Thus, learned CIT(A) vide appellate order dated 24.11.2012 confirmed the treatment of short term capital gains as business income of the assessee.

17. Aggrieved by the appellate order dated 24.11.2012 passed by the ld. CIT(A), the assessee is in appeal before the tribunal.

With respect to the second issue of treating short term capital gains as business income , the learned DR submitted that facts in the instant year are distinguishable vis-à-vis facts of immediately preceding year as substantial interest bearing funds are raised by the assessee during the previous year relevant to the assessment year. The learned DR submitted that the assessee itself is claiming the shares as stock-in-trade , and hence the profits arising from sale of shares were rightly treated by Revenue as business income. The ld. D.R. supported the orders of the ld. CIT(A).

With respect to the next disallowance of treating short term capital gains of Rs. 67,27,044/- as business income . It is observed that the assessee is in business of trading in shares. The assessee has sold shares of Rs. 13,38,36,535.62 against scrips bought of Rs. 12,71,09,491.62 , the ld. CIT(A) held that the holding period was not very large and in many cases it varies from 28 to 84 days. It was also observed by the authorities below that huge amount of interest bearing funds were raised by the assessee which increased from Rs. 21 crores to Rs. 82 crores during instant assessment year. We do not find any infirmity in the well reasoned order of the ld. CIT(A) treating the profit of Rs. 67,27,044 /- shown by the assessee as business income and not short term capital gain keeping in view the factual matrix of the case and more-so the assessee is engaged in the business of trading in shares and stocks. Thus, we are not inclined to interfere with the well reasoned order of learned CIT(A) which we confirms/sustain. We order accordingly.

21 Ground No 4 is with respect to leviability of interest u/s 234A and 234B of the Act by the AO which has been stated to be upheld by learned CIT(A) as per the contentions of the assessee in ground no 4 filed with appeal memo. The leviability of interest u/s 234A and 234B is consequential in nature. We have observed that this ground was not adjudicated by learned CIT(A) albeit the assessee did raised this ground before learned CIT(A) vide ground no. 7 in appeal memo filed with learned CIT(A). In our considered view, this matter also need to be restored to the file of the AO for de-novo determination of the issue on merits . Needless to say that the AO shall grant sufficient and reasonable opportunity of being heard to the assessee in accordance with principle of natural justice in accordance with law and the assessee shall be allowed to submit relevant evidences/explanations in its defense by the AO. We order accordingly.

Order pronounced in the open court on 24th February, 2017. आदेश क� घोषणा खुले �यायालय म� �दनांकः 24-02-2017 को क� गई ।