RAMCHAND K. POPLEY,MUMBAI vs. DCIT 13(1)(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 18/12/2015 of the CIT (A)-21,Mumbai, the assessee has filed the present appeal.Assessee,an individual, filed his return of income on 28/09/2012,declaring total income at Rs.47.50 lakhs.The Assessing Officer (AO) completed the assessment u/s. 143(3) of the Act,on 13/02/2015, determining the income of the assessee at Rs.47,50,000/-.

2.The effective ground of appeal is about upholding the disallowance of Rs.17.17 lakhs made by the AO u/s.14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (Rules). During the assessment proceedings, the AO found that the assessee was engaged in share trading and speculative business in shares and securities, that it had shown loss under the head business income at Rs. 5.49 crores, that he had returned speculation business of Rs. 63.31 lakhs,that the said income was set off against the business loss,, that he had earned dividend income of Rs. 55.29 lakhs from the share purchased in his trading business. The AO directed the assessee to furnish the details of disallowance made, if any u/s.14A r.w.Rule 8D of the Rules. After considering the submission of the assessee, the AO held that investment as such was a complex process, that it always required continuous understanding to invest the amount in order to the income either in nature of dividend and/or profit gains, that it could not be ruled out that administrative and indirect expenses were required to be used for earning the exempt income, that the expenditure incurred towards earning could not be limited to salary of the employees, that the term expenditure, occurring in section 14. A, would not take in its sweep only direct expenses,that it included all forms of expenditure, that 908/Mum/16-Ramchand K. Popley the section was quite clear that any expenditure incurred by the assessee in relation to the exempt income was to be disallowed. Accordingly the AO completed the disallowance u/s.14 A read with Rule 8D at Rs.17, 17, 746/-.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him the assessee argued that he had incurred an expenditure of Rs.65.42 lakhs for the year under consideration under the heads STT (Rs. 53.45 lakhs) service tax (Rs. 4.88 lakhs) stamp duty charges (Rs. 1.56 lakhs),other charges (4.80 lakhs), Demat charges (Rs.12,530),Portfolio Management Expenses(Rs.39,186/-),Audit fees (Rs.20, 225/-), that the expenditure claimed, except for auditor’s fee,was in the nature of transaction cost incurred for purpose of buying and selling the securities,that the expenditure incurred was for carrying out business activity and was allowable u/s.36 or 37 of the Act, that same could not be disallowed u/s.14 A or Rule 8D, that the assessee did not acquire shares and securities to earn dividend income,that the dominant objective was to earn profit on sale of the shares,that the dividend income was only incidental,that there is no mention of any expenses having been incurred in relation to exempt income,that the FAA, while deciding the appeals for the assessment years 2009-10 and 2011-12 had partly allowed the appeal filed by the assessee wherein the same issue had been agitated.

3.1.After considering the submission of the assessee and the assessment order, the FAA held that dividend was earned by the assessee from the mutual funds, that an amount of Rs. 3.11 crores was claimed exempt u/s.10 (35), that the dividend on shares, amounting to Rs.55.29 lakhs, was claimed exempt u/s.10 (34), that the total dividend received by the assessee for the year under consideration was Rs.73.08 lakhs, that out of the said amount the assessee had reduced and amount of Rs.17.79 lakhs as per section 94 (7), that receipt from the LIC, amounting to Rs. 23.13 lakh was claimed exempt u/s.10 (10 B), that total amount of income claimed as exempt was Rs.3.90 crores, that against the said exempt income the AO had disallowed Rs.17.71 lakhs only, that the claim of the assessee was that it had no intention of earning and that the exempt income on dividends were incidental,that the assessee had earned exempt income, if the same was incidental to trading in shares he had to offer such income as business income, that the assessee intended to take advantage of exemption, that the assessee had reinvested in UTI Treasury Advantages Fund, that the AO was correct in holding that the claim that no expense was incurred in earning exempt income was not acceptable, that if an activity gave rise to two streams of income it could not be left to the discretion of the assessee 2

908/Mum/16-Ramchand K. Popley to claim that no cost was incurred for one stream and cost was incurred only for the other stream of income, that the expenditure incurred was, and for both the streams, that the disallowance computed was about 5% of the exempt income, that it was not unreasonable or excessive. Finally he upheld the order of the AO and dismissed the appeal filed by the assessee.

4.During the course of hearing before us, the Authorised Representative (AR) argued that facts of the earlier assessment year and the subsequent assessment years were identical, that the FAA had not brought on record any distinguishing feature for not following the earlier year’s order of his predecessor, that the assessee had made a disallowance of Rs.17.79 lakhs as per the provisions of section 94 (7) of the Act. He referred to the pages 25- 32 of the paper book.The Departmental Representative (DR) supported the order of the FAA.

5.We have heard the rival submissions and perused the material available on record. We find that the AO had made the disallowance considering the average value of investments at the beginning and at the end of the year, that he had not assigned any reason for making the disallowance. In our opinion,disallowance u/s. 14A r.w.Rule 8D of the Rules can be made if the assessee claims expenditure against the exempt income. In the case under consideration, the only expenditure claimed by the assessee with regard to exempt income is auditor’s fee. The other items of expenditure are directly related to the business activities of the assessee. Payments made under the head STT paid, De-mat charges, PM expenses cannot be held to be items of expenditure that were in any way related to the earning of exempt income. The FAA had surprisingly over looked the basic fact of non-incurring of expenditure. He has not given any reason for not following the order of his predecessors for the earlier year. We agree that principles of res-judicata are not applicable in Income tax proceedings.But,principle of consistency demands that until and unless there are different facts and circumstances revenue authority should not take a diagonally opposite stand as compared to earlier years. We find that facts and circumstances of earlier years were identical to earlier years and in earlier year the FAA had sustained disallowance @ 10% of the audit fee, depreciation and other charges. We find that during the year under consideration the assessee has not claimed depreciation therefore, the disallowance has to be restricted to two items only i.e., audit fee and other charges. The AO is directed to restrict the disallowance @ 10% on these two items. Partially reversing the order of the FAA, we decide the first ground of the assessee in part.

908/Mum/16-Ramchand K. Popley