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Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: Shri Amit Shukla, & Shri Ashwani Taneja
आदेश / O R D E R
Per Ashwani Taneja (Accountant Member): These are cross appeals filed by the assessee and department against order of Ld. Commissioner of Income Tax(Appeals), Mumbai, {(in short ‘CIT(A)’}, dated 28.08.2014 passed against assessment order u/s 143(3) of the Act, dated 28.03.2013 for A.Y. 2010-11. First we shall take up appeal of the Assessee in A.Y.2010-11 on the following grounds: “
1.The Ld.CIT(A) erred in law as well as on facts in upholding the addition made by the Ld. A.O. u/s 14A of the I.T. Act in respect of shares held by the appellant as Stock in trade.
2. The Ld. CIT(A) erred in law as well as on facts in not taking cognizance of the fact that the provisions of section 14A read with Rule 8D were not applicable to shares held as stock in trade as the gain from trading in the said shares was taxable as business income and the dividend income, received in respect of some shares was only incidental in nature.
3. The Ld. CIT(A) erred in law as well as on facts in upholding the addition in respect of shares held as stock in trade without appreciating the fact that the provisions of section 14A r.w. Rule 8D apply in case of 'investments' yielding exempt income and the said Rule does not cover 'stock in trade' which yields taxable as well as tax free income. 4.The Ld. CIT(A) erred in law as well as on facts in not appreciating that the entire interest expense incurred by the appellant had a direct nexus with the sale and purchase activity of shares and securities and no part of the same was attributable towards earning of exempt dividend income.
3 Vivek Mehrotra 5. The Ld. CIT(A) erred in law in not talking cognizance of the fact that the Hon’ble ITAT, Mumbai, in the appellant’s own case for A.Y.2008-09 has deleted addition made u/s 14A in respect of shares held as stock in trade on similar facts.”
During the course of hearing, arguments were made by Shri Nitesh Joshi & Shri Rajiv Mehrotra, Authorised Representatives (ARs) on behalf of the Assessee and by Shri Ravinder Sindhu, Departmental Representative (DR) on behalf of the Revenue.
The brief background and facts culled out from the order of the AO are that assessee is an individual and during the year assessee was engaged in the business of share trading and is also a partner in the firm M/s. Rashi Investments. He also has a proprietorship firm in the name of M/s. Khattri Aromas. The AO noted that the assessee had earned a dividend income of Rs.5,51,68,846/- on shares and interest from Relief Bonds of Rs.3,62,55,993/- which was claimed exempt u/s 10(34) of the Act. Thus, AO asked the assessee for making disallowance u/s 14A r.w. rule 8D out of the corresponding expenses. In response, the assessee stated that it had already disallowed the voluntarily a sum of Rs.25,11,095/- in its return u/s 14A of the Act. But, the AO observed that he was satisfied that the assessee's claim of only Rs. 25,11,095/- as expense incurred to e arn incomes of Rs.5,51,68,846/- on shares and interest from relief bonds of Rs.3,62,55,993/- was incorrect. He further observed that the interlacing of activities clearly indicated proximate relationship between incidence of expenditure and consequential earning of exempt income, that live nexus was 4 Vivek Mehrotra obvious given that assessee was having F&O business and was investing in shares at a very high volume. It was also observed that the claim of the assessee that he had no expertise and time to do business in shares was erroneous and counterproductive as he derived income from shares in F & O activity. Therefore the implicit notion of apportionment and attribution as provided in section 14A r.w.r 8D was required to be invoked, as claim of the assessee was erroneous and incorrect. The AO further observed that the assessee's act in not debiting any expense was only an attempt in treating the same as investment activity and enjoying the privileges of exemption. Accordingly, deduction under Rule 8D(2)(iii) was computed, as the assessee had incorrectly not claimed any expenses and also had composite activity of investment and business. The AO further dealt with the submissions of the assessee and observed that in the working given by the assessee u/s 14A of the Act at Rs.25,11,095/- was not determined as per clause (iii) of rule 8D(2) of the Rules. The AO accordingly worked out the disallowance as under: Total interest paid Rs.5,35,93,045/- A Opening Investment Rs.34,38,86,800 Closing Investment Rs.23,13,46,966 Total Rs.57,52,33,766 Average Investment= 57,52,33,766/2 Rs.28,76, 16,883 - B Opening Assets Rs.215,62,68,663 Closing Assets Rs.344,35,03,488 Total Rs. 559,97,72,151 Average Assets=559,97,72,151/2= Rs.279,98,86,075 C
5 Vivek Mehrotra Working of disallowance u/s. 14A of the Income Tax Act, 1961
A x B / C 5,35,93,045 x 28,76,16,883 / 279,98,86,075 = 55,05,318 Direct Expenditure NIL Interest x Average Investment/ Average total assets Rs.55,05,318 0.5% of Average Investment of Rs.28,76, 16,883 Rs. 14,38,084
Rs.69,43,402 Total Disallowance u/s. 14A as per I.T. Act Accordingly, the AO further added an amount of Rs.44,32,307/-. (69,43,402 - 25,11,095) u/s 14A of the Act.
3.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and contested the disallowance u/s 14A. The assessee made detailed submissions before Ld. CIT(A) in support of his claim and also relied upon the decisions of the Tribunal in assessee’s own case for A.Ys.2008-09 and 2009-10 wherein the disallowance 14A was deleted in total by the Tribunal. But, Ld. CIT(A) give part relief to the assessee by holding that assessee was maintaining two portfolios i.e. ‘investment’ and ‘business’. It was held by the Ld. CIT(A) that with regard to investment portfolio the assessee had incurred a total expenses of Rs.2,22,867/- towards rates and taxes and STT, which were already disallowed and therefore, no further disallowance was required to be made. But, with regard to the ‘business portfolio’ the disallowance was required to be made the clauses (ii) and (iii) of Rule 8D(2) and directed the AO to work out the disallowance accordingly.
6 Vivek Mehrotra 3.3. Being aggrieved with the said order, the assessee came up in appeal before the Tribunal for the disallowance sustained by Ld. CIT(A) on account of ‘business portfolio’ and revenue came up in appeal before the Tribunal for the disallowance deleted by the Ld. CIT(A) on account of ‘investment portfolio’. During the course of hearing before us, it has been submitted by the Ld. Counsel that disallowance u/s 14A was deleted in total in view by the Tribunal in assessee’s own case for A.Ys. 2008-09 & 2009-10 and also relied upon the judgments of Hon’ble Jurisdictional High Court relied upon by the Tribunal in its orders. He vehemently submitted that even suo moto disallowance made by the assessee was contrary to law and since no tax can be collected without authority of law, the disallowance u/s 14A should be deleted in total in view of correct legal position as has been narrated by the jurisdictional High Court. 3.4. Per contra, Ld. CIT-DR relied upon the orders of the lower authorities and submitted that disallowance made suo moto by the assessee should be retained and balance amount may be deleted. 3.5. We have gone through the facts of this case, orders of the lower authorities, orders passed by the Tribunal in assessee’s own case in earlier orders as well as submissions made by both the parties before us. It is noted that the admitted facts on record are that the assessee has been maintaining two portfolios separately i.e. ‘investment portfolio’ and ‘business portfolio’. Detailed accounts in this regard have been furnished before the lower authorities and there is no dispute on that.
7 Vivek Mehrotra Under these circumstances, before discussing the legal position with regard to disallowance u/s 14A, we find it appropriate to refer to the decisions of the Tribunal in assessee’s own case for A.Ys.2008-09 & 2009-10. It is noted that in A.Y. 2008-09 the Tribunal vide its order dated 11.01.2013, in & 6563/Mum/2011 held that no disallowance would be made in the case of the assessee on ‘investment portfolio’ as well as ‘business portfolio’. The relevant observations given in the order are reproduced below: “We have perused the records and considered the rival contentions carefully. The dispute raised in these appeals is regarding disallowance of expenses under section 14A in relation to exempt income. The assessee has received exempt income in the form of dividend from personal investment as well as dividend income from trading in shares. It also received tax free interest from relief bonds. The assessee has claimed that it had made separate accounts including separate bank accounts and balance sheets for personal investments and trading activities in which expenses relating to these two activities have been shown separately. CIT(A) has given a clear finding that the assessee had made separate accounts and balance sheets for the two activities. Nothing has been produced before us to controvert the finding of the CIT(A). Therefore, the claim of the assessee that separate accounts including bank accounts and balance sheets had been maintained for the two activities have to be accepted. With regard to personal investment for which separate account has been maintained CIT(A) has given a clear finding that investments had been made from own funds. The investments in RBI relief bonds and LIC had been made in earlier years and since the assessee having vast experience in these matters was personally handling these investments, there were no expenses required. Similarly the shares which were of unlisted group companies held for the purpose of retaining control over these companies, did not require any day to day expenses. CIT(A), therefore, has given a clear finding that no expenses had been 8 Vivek Mehrotra incurred in relation to personal investments and these factual findings have not been controverted before us by producing any material. Therefore, order of CIT(A) in relation to deleting disallowance of expenses in relation to personal investment is reasonable and upheld. 5.1 CIT(A) has however disallowed expenses relating to trading activity as per Rule 8D. No doubt, it is true that Rule 8D was applicable for the relevant assessment year. However, the issue is whether the disallowance of any expenses can be made under Section 14A in relation to trading in shares. The department has placed reliance on the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. (supra), in which it has been held that section 14A would apply even to the dividend income for trading in shares. However, subsequently the Hon'ble High Court of Karnataka in the case of CCI Ltd. vs JCIT (supra), have, in relation to trading shares held that the assessee had not retained shares with the intention of earning dividend income which was only incidental to the shares remained unsold by the assessee. The High Court, therefore, held that no disallowance of expenses was required in relation to dividend from trading shares. Recently, Mumbai Bench of the Tribunal in the case of DCIT vs. M/s. India Advantage Securities (supra), have held that in view of the judgment of Hon'ble High Court of Karnataka in case of CCI Ltd. vs. JCIT (supra), the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. could not be followed and no disallowance could be made of expenses in relation to dividend received from trading shares. In view of this position the order of CIT(A) in relation to disallowance in respect of trading shares cannot be upheld. We, therefore, set aside the order of CIT(A) and deleted the disallowance upheld by him in relation to trading in shares.
In the result, the appeal of the assessee is allowed and that by the revenue is dismissed.” 3.6. It is further noted that identical issue came up before the Tribunal in A.Y. 2009-10. The AO did not make any disallowance on account of ‘investment portfolio’. The disallowance was made by the AO u/s 14A on account of 9 Vivek Mehrotra ‘business portfolio’ for shares held in stock-in-trade which was deleted by the Ld. CIT(A). The Revenue carried the matter before the Tribunal and Tribunal upheld the order of Ld. CIT(A) and dismissed the appeal of the revenue by following order of A.Y. 2008-09 and also the judgment of Hon’ble Bombay High Court in the case of India Advantage Securities Ltd. 380 ITR 471 (Bom); relevant part of the order is reproduced below for ready reference: “10. We have heard the ld. D.R. We have observed that the Mumbai Tribunal in assessee’s own case for the assessment year 2008-09 in vide orders dated 11-01-2013 set aside the order of CIT(A) and deleted the disallowance upheld by the CIT(A) in relation to trading in share. We have also noted that in the recent judgment of Hon’ble High Court of Bombay in the case of HDFC Bank Ltd. v. DCIT vide Writ Petition No. 1753 of 2016 dated February, 25, 2016 [2016] 67 taxmann.com 42 (Bombay) has approved the proposition that no disallowance of expenditure can be made u/s 14A of the Act with respect to the shares held by tax payers as stock-intrade whereby the decision of the Mumbai Tribunal in India Advantage Securities Limited (2013) TaxPub(DT)2301(Mum-Trib.) was confirmed by Hon’ble Bombay High Court in ITA No. 1131/31 decided on 31-04- 2014 ((2016) 380 ITR 0471 (Bom.) ) whereby Hon’ble Bombay High Court held that no substantial question of law arise from the decision of Mumbai Tribunal in the case of India Advantage Securities Private Limited. Respectfully following the above binding judicial precedents of Hon’ble Bombay High Court in India Advantage Securities Private Limited and HDFC Bank Limited (supra) and decision of Hon’ble Karnataka High Court in the case of CCI Limited(supra) , we dismiss the appeal filed by the Revenue. We order accordingly.” 3.7. During the course of hearing before us, both the parties agreed that facts are same in this year as well and therefore, the orders of the earlier years need to be followed. The only
10 Vivek Mehrotra distinction made out by the Ld. DR was that in the year before us the assessee had made voluntary disallowance of Rs.25,11,095/- on account of proportionate expenses. 3.8. Per contra, Ld. Counsel vehemently opposed the arguments of Ld. DR by submitted that additions and disallowance can be made only in accordance with law. The ‘taxable income’ must be computed in accordance with the provisions of the Act only and therefore, with a view to bring the return of income and computation of taxable income filed by the assessee in line with the orders of the Tribunal of earlier years and legal position as clarified by Hon’ble Bombay High Court and Hon’ble Karnataka High Court, the disallowance u/s 14A should be deleted in full. 3.9. We have considered the submissions made before us on this aspect also. The situation that has emerged before us is that in view of the decision of the Tribunal of earlier years as well as judgments of Hon’ble Bombay High Court in the case of India Advantage Securities Ltd. (supra) and HDFC Bank Ltd. v. DCIT and judgment of Hon’ble Karnataka High Court in the case of CCI Limited (supra), the disallowance u/s 14A should be deleted for both the portfolios i.e. ‘investment’ as well as ‘business’. The only hitch with regard to disallowance made under ‘business portfolio’ is that assessee had himself made a voluntary disallowance. 3.10. We have considered this aspect in the given facts carefully. It is well settled position of law that taxable income of an assessee has to be computed strictly in accordance with the provisions of Income Tax Act, 1961 as explained by the 11 Vivek Mehrotra courts from time to time. Thus, disallowance/additions if any can be made only in accordance with law. Neither any item of receipts can be brought to tax nor can any expenditure be allowed/disallowed, merely on the basis of consent or acquiescence or waiver of any party or otherwise. It could be done only in accordance with the provisions of law. In this regard, we can also take support from the judgment of Hon’ble Delhi High Court in the case of CIT vs. Bharat General Reinsurance Co. Ltd. 81 ITR 303 wherein it was held that merely because an assessee has returned a particular income for a particular year, the ITO does not get jurisdiction to assessee the same if in fact that income did not belong to the assessee in that assessment year. It was held in the said case that an assessee can subsequently resile from its return if it is found by the assessee that return filed was not in accordance with law. It is well accepted position that principle of estoppel has no application under the income tax proceedings. We also rely upon the judgment of Hon’ble Bombay High Court in the case of Sanchit Software and Solutions Pvt. Ltd. v. CIT 25 taxmann.com 123 (Bom) wherein it was held that income tax department cannot take advantage of mistake of the assessee. We are also reminded of the circular issued by the Central Board of Revenue no.14 dated 11.04.1955 wherein it was instructed to the AOs that no undue advantage should be taken of the ignorance of the assessee and taxable income and tax payable thereon should be computed fairly and in accordance with law. The circular has been taken note of by many courts in their judgments while deciding the identical
12 Vivek Mehrotra issues wherein taxpayers have paid more tax than actually due as per law. In this regard, we shall also like to make a mention of Article 265 of Constitution of India which says that ‘no tax can be collected except by the authority of law’. Thus, in the given facts of the case before us and the aforesaid legal position and we find that the disallowance made by the AO u/s 14A on account of ‘business portfolio’ deserves to be deleted in total and therefore, we direct the AO to give relief accordingly. Grounds raised by the assessee are allowed. 3.11. As a result appeal of the assessee is allowed. Now, we shall take up Revenue’s appeal in
The revenue is aggrieved with the action of Ld. CIT(A) in deleting the disallowance on account of ‘investment portfolio’ held by the assessee. It is noted that this issue has already been discussed by us in earlier part of our order wherein it was noted that in view of the decisions of Tribunal of earlier years, the impugned disallowance deserves to be deleted. It is noted that the total expenses of Rs.2,22,867/- towards rates and taxes and STT only needs to be disallowed as has been held by the Ld. CIT(A) also. We find the order of the Ld. CIT(A) to be in accordance with law as well as in line with the decisions of the Tribunal of earlier years rendered in assessee’s own case. No distinction has been made on facts or legal position. Thus, issue stands covered with the order of the Tribunal of earlier years. Thus, in view of facts discussed by us in earlier part of order, we do not find any substance in the appeal filed by the revenue, and same is hereby dismissed.
13 Vivek Mehrotra 5. In the result, the appeal filed by the assessee is allowed and appeal filed by the revenue is dismissed.
Order pronounced in the open court on 10th August, 2016.