STARWAR COMTRADE P.LTD,MUMBAI vs. ASST CIT CIR 3(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the orders,dated 30/10/2014 of the CIT (A)-7,Mumbai the assessee has filed the appeals for the above-mentioned Assessment Years(AY.s.).Issue involved in all the appeals is about disallowance made u/s.14A of the Act.So,we are adjudicating both the appeals by single order. The details of dates of filing of returns,returned incomes and assessed income etc. can be summarised as under in the tabular form: A.Y. ROI filed Assessed Returned Income(Rs.) Assessment dt. on Income(Rs.) 2010-11 20.09.2010 (-)Rs.2.28 Crores 28.12.2012 (-)7,04,116/- 2011-12 16.09.2011 Nil - 2,61,14,570/- ITA/7291/MUM/2014-AY. 2010-11: 2.Effective ground of appeal

is about disallowance made under section 14. A of the Act read with rule 8D of the Income Tax Rules, 1962 (Rules), amounting to Rs.2.21 crores.Assessee-company is engaged in the business of trading in shares, securities, derivatives and commodities. 2.1.During the assessment proceedings,the AO found that assessee had received dividend income of Rs. 17.60 lakhs in respect of the shares held by it,that it had claimed the dividend income as exempt from tax.He held that the provisions of 1

7291/M/14starwar section 14A of the Act were applicable for disallowance of expenditure incurred in relation to exempt income.The AO directed the assessee to furnish details of expenditure incurred in relation to income which did not form part of total income and to explain as to why disallowance in that regard should not be made as per the methodology divided in Rule 8D.In its reply, the assessee contended that it was into share trading and investment activity, that it had held the shares as stock in trade, that disallowance under Rule 8D was not applicable. It relied upon the case of Yatish Trading Company Private Ltd.(129ITD237).

2.2.After considering the submission of the assessee the AO held that the provisions of section 14A stipulated that disallowance of expenses incurred in relation to exempt income had to be made, that no exception, such as dividend being mean or incidental income, had been carved out in the provision, that the relation of expenses for disallowance was with the exempt income irrespective of the source or nature of the exempt income, there was no reason to hold that where the dividend income was arising out of the stock in trade the provisions of section 14A would not be applicable.Invoking the provisions of Rule 8D of the Rules,the AO made a disallowance of Rs. 2, 21, 87, 808/-.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, it was argued that assessee did not disallow any some under section 14A of the Act,that in respect of dividend amount of Rs.17.65 lakhs it did not incur any expenditure,that the expenditure incurred by it were in the nature of business expenditure, that it was a Trader in shares and securities, that the dividend income arising to it was incidental to business being in the nature of exempt income. The assessee relied upon the case of Yatish Trading Company Private Ltd.(supra), CCI Ltd.(250 CTR 291) and Leena Ramachandran(339ITR 296). It was further argued that the stock in trade held by the assessee could never be equated with the investment, that 7291/M/14starwar stock in trade was a business asset, that the investments would be for earning long-term benefit including appreciation of assets, that no disallowance under section 14 A could be made on shares held as stock in trade. The assessee filed the details of dividend earned during the year and stated that number of dividend received was only five that to prove ECS directly, that there was only one major dividend received that was on account of shares of orbit Corporation. After considering the submission of the assessee and the assessment order, the FAA held that rule 8D (2) (ii) would apply to shares held as stock in trade as well.Referring to various case laws,the FAA upheld the order of the AO.

4.During the course of hearing before us,the Authorised Representative(AR) stated that assessee had not claimed any expenditure against the exempt income, that the dividend income was received for the stock in trade held by the assessee,that the provisions of section 14A were applicable to the shares held as investments. With regard to the additional grounds raised,he stated that the AO had made the disallowance of Rs.2.12 crores under the head interest expendi - ture,that the assessee had not incurred any dismiss expenditure to or exempt income.He relied upon the cases of India Advantage Securities Ltd. (380 ITR471),HDFC Bank Ltd.(383 ITR 529).The Departmental Representative left the issue to the discretion of the bench.

5.We have heard the rival submissions and perused the material before us. We find that during the year under consideration the assessee had and exempt income of Rs. 17.60 lakhs, that the AO had made disallowance under the head interest expenditure(Rs.2.12 crores) and twisted event other expenditure (Rs. 9.06 lakhs),that the assessee was holding shares under the head stock in trade also, that the FAA had confirmed the disallowance made by the AO who had applied the Rule 8D of the Rules.In our opinion,before making any disallow - ance invoking the provisions of section 14 A the first thing to be determined is 7291/M/14starwar to find out as to how much expenditure was claimed by an assessee to or exempt income.If no expenditure is claim by the assessee to earn the income which does not form part of the taxable income,no disallowance could be made. The basic purpose to introduce the section 14A of the Act was to deny the assessee to claim double benefit in the form of claiming expenditure against the exempt income.Therefore, for invoking the provisions of said section two basic facts have to be established i.e. earning of exempt income and incurring of expenditure by an to earn such income. In the case under consideration the AO has not given any detail about the expenditure incurred by the assessee for earning dividend income during the income under appeal.Secondly, no disallowance u/s. 14A can be made,if the exempt income is part of the business income if it is arising out of the business assets. In the case under consideration the assessee was having inventories Rs.16.28 crores as on 31.3.2010. The AO has not brought on record as to how much expenditure was incurred by the assessee to earn dividend income on the investments made by it. We find that the issue of non taxability of exempt income with regard to stock in trade has been decided by the Hon'ble Bombay High Court in the case of Advantage Securities Ltd.(supra),has held that disallowance of expenses can be made which are incurred for earning dividend. For that purpose, the figures under the head “Investment” could be taken.Similar view have been expressed in the cases relied upon by the assessee.Respectfully following the above judgments, effective Ground of appeal is decided in favour of the assessee.

6.Second Ground of appeal is about sustaining notional disallowance to the book profit computed u/s. 115JB of the Act.Treating the second ground as consequential,we allow it for statistical purposes.

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