DCIT, CIR-12, KOLKATA, KOLKATA vs. M/S DALMIA SECURITIES PVT. LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA BEFORE SHRI A.T.VARKEY, JM & DR. A.L.SAINI, AM आयकर अपील सं./ITA No.325/Kol/2014 (�नधा�रण वष� /Assessment Year:2009-2010) DCIT, Circle-12 Vs. M/s Dalmia Securities Pvt. Ltd. P-7, Chowringhee Square, Ideal Plaza, 11/1, Sarat Bose Rd., Aayakar Bhawan, 7th Floor, Kolkata-700020 Kolkata-700069 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCD 1813 G .. (अपीलाथ� /Appellant) (��यथ� / Respondent) AND Cross Objection No.22/Kol/2014 (�नधा�रण वष� /Assessment Year:2009-2010) M/s Dalmia Securities Pvt. Ltd. Vs. DCIT, Circle-12 Ideal Plaza, 11/1, Sarat Bose P-7, Chowringhee Square, Aayakar Bhawan, 7th Floor, Rd.,Kolkata-700020 Kolkata-700069 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCD 1813 G .. (अपीलाथ� /Appellant) (��यथ� / Respondent)

Revenue by : Shri Rajat Kumar Kureel, JCIT Assessee by : Shri Ashim Chowdhury, AR सुनवाई क� तार�ख / Date of Hearing : 21/12/2016 घोषणा क� तार�ख/Date of Pronouncement 08/02/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned appeal filed by the Revenue, and Cross Objection filed by the Assessee, pertaining to the Assessment Year 2009-2010, are directed against the order passed by ld. Commissioner of Income Tax (Appeals)-XII, Kolkata, in Appeal No.347/XII/12/2011-12, dated 08.11.2013, which in turn arises out of an order passed by the Assessing Officer (AO) Under Section 143(3) of the Income Tax Act 1961, (in short the ‘Act’), dated 29.12.2011.

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its return of income on 23.9.2009 declaring total income at Nil. Later on,

the case was selected for scrutiny u/s.143(3) of the Act, and the AO has

completed the assessment by making the addition u/s. 14A r.w.r.8D of the

Rules at Rs. 64,95,384/-. The AO also disallowed the foreign travelling

expenses partly and also disallowed computer and software expenses.

before the CIT(A), who has deleted the addition made by the AO by

observing the followings :-

5.1.3 Decision: I have carefully considered the submission put forth on behalf of the appellant along with the supporting details/documents, perused the facts of the case including the AO’s observation and findings and other materials brought on record. It is submitted that the company had exempted Dividend income of Rs.58,40,974 from Stock in Trade and Rs.33,85,428 from investments aggregating to Rs. 92,26,402 as per Schedule 15 to the Audited Accounts out of which Rs.47, 13,776/- has been disallowed u/s 94(7) of the Act resulting in Rs.45, 12,626/- which is exempt and does not form part of Total Income. No specific expenses were incurred to earn dividend Income which arose due to holding of shares. The Company deals in shares in Hedging activity and the Opening Stock-in-Trade was Rs.91.67 crore and Closing Stock-in-Trade was Rs.84.88 crore (Schedule-7). In trading activity the Company earned Dividend Income by virtue of holding of shares and no extra efforts are required for earning Dividend which too is variable and the quantum is not certain. In most of the cases, the Dividend is directly credited in the Bank account through ECS. To sum up no specific expenses were required to earn Dividend Income. As regards the disallowance of proportionate interest income under Rule 8D(2)(ii), it is submitted that during the year under appeal, the appellant Company paid interest of Rs.1,96,65,291/- as per Schedule 19 to the Audited Accounts and received interest income of Rs.3,16,07,453/- (including Rs.3,12,11,447 from Fixed Deposit with Banks) as per Schedule 14 to the Audited Accounts resulting in net Interest income of Rs.1,19,42,162/-. The borrowed funds were wholly and exclusively utilized for the Trading Activity of the Company in shares and Mutual Funds and keeping money with Banks in Fixed

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Deposit Accounts in the name of BSE & NSE to avail Margin limit for Trading Activity and nothing out of it can be attributed to acquiring any assets income from which do not form part of total Income. Moreover, the value of Investment (Schedule-6) as on 01/04/2008 was 41,47,02,711/- which reduced to Rs.30,96,14,444/- as on 31/03/2009 resulting in reduction of Rs 10,50,88,267 during the year. Thus no portion of the borrowed funds were utilized to acquire Investments income from which was exempt. The opening and closing Capital and Reserves & Surplus of the Company were Rs.113,13,71,857 and Rs.96,59,73,576 respectively which were own interest free funds. It is stated that the opening of investments of Rs.30,96,14,445 were acquired out of non interest bearing fund as has been held in Assessment Year 2008-09 (supra) and during the year under appeal the investments reduced by Rs.10,50,88,267 which were also available to the Company and accordingly during the year there was surplus of Rs.1,19,42,162 as against net out go of Rs.1,40,690/- in Interest account in Assessment Year 2008-09 which stands accepted by Department. Since there is no change in facts of the case in Assessment Year 2008-09 and 2009-10 no disallowance of interest is tenable. Reliance is also placed on the decision of the Hon'ble Supreme Court in case of Radhasoami Satsang [193 ITR 321 (SC). That during the year the Company acquired following three shares for Rs.1,26,91,320 out of own funds and sale of Mutual Fund Units as will be evident from enclosed statement showing details of purchases and Bank Statements:-

Quantity Company Amount 1,34,064 GKW Ltd Rs.78,08,570 18,325 India Hotel Ltd. Rs.12,82,750 3,60,000 Dalmia Insurance Brokers Rs.36,00,000 (P) Ltd.

Thus, it is contended that no interest bearing funds were utilized to acquire shares during the year income from which is exempt and does not form part of Total Income. Hence no interest can be disallowed and the disallowance of Rs.46,84,591/- is untenable which should be deleted.

Hence, as per the appellant the disallowance under Rule 8D(2)(ii) is Nil. However, the AO has not accepted the explanation offered by the appellant and without giving any finding regarding the incurrence of expenses for the same has disallowed Rs.46,84,591/- as proportionate interest expenses incurred by the appellant for earning the exempt income.

After considering the appellant's submission and perusing the entire facts, I am inclined to agree with the contention of the appellant that no interest bearing funds were utilized to acquire shares during the year, income from which is exempt and does not form part of Total

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Income and therefore no interest can be disallowed under Rule 8D(2)(ii). Moreover, I find that the jurisdictional lTAT in the case of DClT vs. Trade Apartment (ITA No. 1277 /Kol/2011) has held that in case of proportionate disallowance of interest expense, the netting of such interest income to be considered and when the interest income credited to P&L account exceeded the interest expenditure incurred by the appellant, no interest expenditure was left which could be disallowed u/s 14A of the Act. It is also seen that the order passed in the case of DCIT vs. Trade Apartment has also been followed by the Hon'ble ITAT, Kolkata in the case of Bishwanath Pasari Vs. ACIT in ITA No. 1682/Kol/2011. Therefore, in view of the decisions of the Hon'ble ITAT, Kolkata, as in the appellant's case net interest has been credited, I am of the view that no disallowance of the interest can be made under Rule 8D(2)(ii).

Now coming to the disallowance of indirect administrative expenses incurred for earning the exempt dividend income under Rule 80(2)(iii), I am of the view that the decision of the Hon'ble jurisdictional ITAT, Kolkata dated 19/06/2013 in the case of REI Agro Ltd vs.DCIT is applicable. In that case, the Honb'le ITAT,Kokata has held that for making disallowance u/s 14A read with rule 8D in respect of the income which is exempted & does not form port of the total income, the only investment which has given rise to the exempted income should be taken into consideration and not the entire investment made by the assessee. Thus, it is observed that from the statement furnished by the appellant showing average value of Investments (out of total investments) from which dividend of Rs.33,85,428/- was received, worked out to Rs.33,09,30,653/- (as against Rs.362158578/- as per AO) and 0.5 % of which is worked out at Rs.16,54,653/-, as against Rs.1810793/- as per AO.

In view of the above facts and circumstances of the case and respectfully following the decision of the Hon'ble ITAT, Kolkata(supra), on perusal of the details of working made and furnished on the above basis, it is found that in the instant case of the appellant, in my opinion, the average value of investment worked out at Rs.33,09,30,653/- ( instead of Rs. 36,21,58,578/- as per the AO) requires to be taken into account for the purpose of computing disallowance under Rule 8D(2) (iii) and thus, 0.5% of the average value of such investment of Rs.33,09,30,653/- comes to Rs.16,54,653/-. Thus, the .AO is directed to restrict the disallowance u/s 14A of the Act under Rule 8D(2)(iii) to Rs.16,54,653/- as worked out by the appellant. However, as the details of the working furnished to arrive at this figure by the appellant in this respect requires verification from the records, the AO is directed to verify the same and decide accordingly. Thus, this ground of appeal is partly allowed.”

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appeal before us and assessee has also raised cross objections:

Grounds of appeals taken by the Revenue are as follows:

1) For that the Commissioner of Income Tax (Appeals) erred in

confirming disallowance of Rs.16,54,653/- under Rule 8D (2) (iii) of

the Income Tax Rules read with section 14A of the Act. The

Commissioner of Income tax (Appeals) failed to appreciate the fact

that the said disallowance was made on a percentage basis with

reference to the value of investment held by the appellant and was

not with relation to any expenditure incurred directly or indirectly in

relation to earning of any income.

2) For that the Commissioner of Income Tax (Appeals) failed to

appreciate the fact that the disallowance under section 14A of the

Act can only be made of expenditure incurred by an assessee in

relation to the income which does not form part of total income

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under the Act and the disallowance as made in accordance with

Rule 8D (2) (iii) of the Income Tax Rules is beyond and in excess of

the provisions of Section 14A of the Act and as such is liable to be

deleted.

5.Although, in this appeal the Revenue has raised three grounds of

appeal but at the time of hearing the main grievance of the Revenue

has been confined to the issue of additions deleted by the ld.CIT(A),

which were made by the Assessing Officer Under Section 14A Read

with rule 8D (2) (ii) and Rule 8D (2) (iii) of the I.T. Rules.

The solitary grievance of the assessee in cross objection is that the

disallowance under Rule 8D (2) (iii) was made by ld CIT(A) on a

percentage basis with reference to the value of investment held by

the assessee and it was not with relation to any expenditure incurred

directly or indirectly in relation to earning of any income.

5.1 The Ld AR submitted that during the year under appeal, the assessee

company paid interest of Rs.1,96,65,291 as per Schedule 19 to the Audited Accounts and received interest income of Rs.3,16,07,453/- (including Rs.3,12,11,447 from Fixed Deposit with Banks) as per Schedule 14 to the Audited Accounts resulting in net Interest income of Rs.1,19,42,162/-. The borrowed funds were wholly and exclusively utilized for the Trading Activity of the Company in shares and Mutual Funds and keeping money with Banks in Fixed Deposit Accounts in the name of BSE & NSE to avail Margin limit for Trading Activity and nothing out of it can be attributed to acquiring any assets income from which do not form part of total Income.

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Ld. AR further submitted that without considering the aforesaid

submissions the Assessing Officer disallowed Rs. 46,84,591 as per rule

8D(2)(ii) which is wrong and untenable on the following grounds:-

a) That During the year the Company paid interest of Rs.1,96,65,291 as per Schedule 19 to the Audited Accounts and received interest income of Rs.3,16,07,453/- (including Rs.3,12,11,447 from Fixed Deposit with Banks) as per Schedule 14 to the Audited Accounts resulting in net Interest income of Rs.1,19,42,162/-. b) That opening of investments of Rs.30,96,14,445 were acquired out of non interest bearing fund as has been held in Assessment Year 2008-09 and during the year under appeal the investments reduced by Rs.10,50,88,267 which were also available to the Company and accordingly during the year there was surplus of Rs.1,19,42,162 as against net out go of Rs.1,40,690 in Interest account in Assessment Year 2008-09, which stands accepted by Department. Since there is no change in facts of the case in Assessment Year 2008-09 and 2009-10 no disallowance of interest is tenable. Reliance is placed on the decision of the Hon'ble Supreme Court in case of Radhasoami Satsaog [193 ITR 321 (SC). c) That during the year the Company acquired following three shares for Rs.1,26,91,320 out of own funds and sale of Mutual Fund Units as will be evident from enclosed statement showing details of purchases and Bank Statements:- Quantity Company Amount 1,34,064 GKW Ltd Rs.78,08,570 18,325 India Hotel Ltd. Rs.12,82,750 3,60,000 Dalmia Insurance Brokers Rs.36,00,000 (P) Ltd.

Thus no interest bearing funds were utilized to acquire shares during the year income from which is exempt and does not form part of Total Income. Hence no interest can be disallowed and the disallowance of Rs.46,84,591 is untenable which should be deleted. Regarding ground No.2 taken by Revenue for disallowance under Rule 8D (2) (iii) ( the assessee is in cross objections also),which relates to disallowance of Rs18,10,793 being 0.5% of Average value of Investment as per Rule 8D(2)(iii) on the ground that the facilities and the set up of the Company has also been used to manage the investments. The Dividend has been earned from these investments. Hence a part of the total expenses has been incurred and utilized for the purpose of the dividend income.

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The ld AR for the assessee submitted that Rule 8D(2)(iii) is to disallow notional expenses which were not incurred and claimed. As such no expenses should be disallowed under Rule 8 D/(2)(iii) which over rides the main section 14A of the I. T. Act for disallowance of expenses incurred to earn exempt income and as such Rule 8D(2)(iii) is illegal and unconstitutional. The ld AR pointed out that the Assessing Officer has not specifically pointed out any direct expense and has not given any finding regarding the correctness of the claim of the assessee that no expenditure has been incurred for earning exempt income.

The Ld AR submitted that, there may be certain indirect expenses incurred that may be attributed indirectly. Consequentially the Company has estimated a sum of Rs. 92,264/- as disallowance in terms of section 14A of the I. T. Act, 1961 being 1 % Rs.92,26,402 being Dividend received.In view of the above only disallowance u/s.14A is 92,264/- as offered by the company.

In addition to this the AR for the assessee has relied on the following judgments:

(1).M.S. Trade Apartment Ltd. ITA No.1277/Kol/2011 , A.Y. 2008-09, dated 30.03.2012: “As ld.CIT(A) has rightly observed, once there is no net interest expenditure, as is the case before us-upon setting off interest credited to profit and loss account, no part of interest debited can be disallowed as attributable to earning tax free dividend”

(2).M/s Jiwrajka Associates Pvt Ltd, ITA No. 2362/M/2013, A.Y.2009-10, dated 26.06.2014: “Under the facts and circumstances of the case, in our view, the ld CIT(A) rightly held that the assessee was right in his action in netting the interest received against the interest paid”.

(3). Daga Capital Management (P) Ltd.-ITAT Mumbai,117 ITD 169 (2009): “Dominant and immediate connection refers to first degree of relation between the two things. However, it would cease to be dominant connection if the degree of relationship slips from first to second. There is a dominant and immediate connection between the expenditure incurred by the assessee in the shape of interest on borrowings for purchase of shares and the dividend income. It is only due to the investment in the shares that the dividend income has resulted in. Such investment results into two incomes, viz., the profit on its sale and the dividend. Both these incomes fall on the same platform and are the direct result of investment. If a person invests in the shares from which dividend income is earned and thereafter such dividend is deposited in the bank from where the interest income results, in such a situation the relation between the interest paid by the assessee on the borrowed funds for the purchase of shares with the dividend income is dominant and immediate, being that of the first degree but the relation of such interest paid with the interest income earned on the amount invested in the bank, would be of second degree, being indirect and non-immediate. Therefore, the assessee's submission, that the expenditure of interest on investment in shares had direct and proximate link with the profit or loss from trading of shares and indirect link

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with the dividend income which was earned incidentally and, hence, no disallowance was warranted, had no force. [Para 23.8] The assessee's submission that section 14A would be applicable only when the shares are held as an investment and not as stock-in-trade, was devoid of merit for the reason that the reference in rule 8D(2) (ii ) is to 'the value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as 'stock-in-trade' or 'investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as an investment. [Para 23.9]”

5.2. On the other hand, ld. DR for the revenue has primarily reiterated

the stand taken by the AO, which we have already noted in our earlier

para and is not being repeated for the sake of brevity.

5.3. Having heard the rival submissions, perused the material on record,

we are of the view that there is merit in the submissions of the assessee,

as the proposition canvassed by ld. AR for the assessee are supported by

various judgments cited above and the facts narrated by him above. As

the ld. AR for the assessee submitted that the assessee company paid

interest of Rs.1,96,65,291/- and received interest of Rs.3,16,07,453/- and

after offsetting the interest paid with interest income received the resulting

net interest income comes to Rs.1,19,42,162/-. There is no interest

expenditure after offsetting hence there should not be any disallowance.

The Ld. AR for the assessee also submitted that the borrowed funds were

wholly and exclusively utilized for the trading activity of the company in

shares and mutual funds and keeping money with Banks in Fixed Deposit

Accounts in the name of BSE & NSE to avail Margin limit for Trading

Activity and nothing out of it can be attributed to acquiring any assets

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income from which do not form part of total Income. Thus, no portion of

borrowed funds were utilized to acquire shares during the year. Ld. AR

also pointed out that the opening of investments of Rs.30,96,14,445 were

acquired out of non interest bearing fund as has been held in Assessment

Year 2008-09 and during the year under appeal the investments reduced

by Rs.10,50,88,267 which were also available to the Company and

accordingly during the year there was surplus of Rs.1,19,42,162 as

against net out go of Rs.1,40,690 in Interest account in Assessment Year

2008-09, which stands accepted by Department. This way, the ld. AR for

the assessee has stated that no interest bearing funds were utilized to

acquire shares during the year, income from which is exempt and does

not form part of Total Income and, therefore, no interest can be disallowed

under rule 8D(2)(ii). Hence, ld CIT(A) has rightly deleted the addition of

Rs.46,84,591/-. Accordingly, we confirm the order passed by the ld

CIT(A).

Regarding disallowance under rule 8D(2)(iii), ( For this the assessee is

also in cross objections), ld. AR submitted that decision of ITAT Kolkata in

the case of REI Agro Ltd vs. DCIT, order dated 19/06/2013 (supra) is

applicable. In that case the ITAT has held that for making disallowance

under r.w.rule 8D in respect of income which is exempt and does not form

part of total income, the only investment which has given rise to the

exempt income should be taken into consideration and not the entire

investment made by the assessee. Therefore, the average value of the

11 ITA No.325/14 & CO No.22/14 Dalmia Securities Pvt. Ltd

investments from which dividend of Rs.33,85,428/- was received worked

out to Rs.33,09,30,653/- and 0.5% of which is worked out at

Rs.16,54,653/-.However, as the details of the working furnished to arrive

at this figure by the assessee in this respect requires verification from the

records,( as the ld CIT(A) also held in his order), the AO is directed to

verify the same and decide accordingly. Thus, this ground of appeal [Rule

8D (2) (iii)] is allowed for statistical purposes.

Considering the factual position and the case law cited above, we are of

the view that the order passed by ld. CIT(A) is in accordance with the

provisions of law and precedents applicable, therefore does not require

any interference. Therefore, we confirm the order passed by ld. CIT(A) in

respect of disallowance deleted by him under Rule 8D(2)(ii) at

Rs.46,84,591/-. The disallowance restricted by the CIT (A) under section

14A r.w.r. 8D(2) (iii) at Rs.16,54,563/- is allowed for statistical purposes

5.4. In the result, appeal filed by the Revenue on all the grounds are

dismissed.

Assessing Officer U/s 14A, r.w.r 8D(2)(iii). The ld.CIT(A) has already

considered the judgment of ITAT –Kolkata in REI Agro Vs. DCIT (supra)

and reduced the addition from Rs. 18,10,793/- to Rs.16,54,653/- and

allowed the appeal for statistical purposes.

The solitary grievance of the assessee in cross objection is that the

disallowance under Rule 8D (2) (iii) was made by ld CIT(A) on a

12 ITA No.325/14 & CO No.22/14 Dalmia Securities Pvt. Ltd

percentage basis with reference to the value of investment held by the assessee and it was not with relation to any expenditure incurred directly or indirectly in relation to earning of any income. Since, we have dismissed the appeal of the Revenue, therefore the cross objections filed by the assessee become infructuous and accordingly dismissed. 6.1.In the result, the cross objections filed by the assessee are dismissed.

Order pronounced in the open court on this 8/02/2017.

Sd/- Sd/- (A.T.VARKEY) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक Dated 08/02/2017 �काश �म�ा/Prakash Mishra,�न.स/ PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant- DCIT, Circle-12, Kolkata 1. 2. ��यथ� / The Respondent.-M/s Dalmia Securities Pvt. Ltd. 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु�त / CIT �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Asstt. Registrar) आयकर अपील�य अ�धकरण, कोलकाता / ITAT, कोलकाता

13 ITA No.325/14 & CO No.22/14 Dalmia Securities Pvt. Ltd

Date Initial 1. Draft dictated on 02.01.2017 Sr.PS 2. Draft placed before author 03.01.2017 Sr.PS (dictation pad has been enclosed along with this original file) 3. Draft proposed & placed before the JM/AM second member 4. Draft discussed/approved by Second JM/AM Member. 5. Approved Draft comes to the Sr.PS/P Sr.PS/PS S 6. Kept for pronouncement on Sr.PS 7. File sent to the Bench Clerk Sr.PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.