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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
This appeal by the Revenue is directed against the order of the CIT(A)-8, Mumbai dated 13.09.2013 for A.Y. 2010-11.
The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in the business of share broking and investments, filed its return of income for A.Y. 2010-11 on 15.10.2010 declaring total income of `1,35,03,430/-. The case was taken up for scrutiny and the assessment was concluded under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 13.02.2013 wherein the assessee’s income was determined at `7,07,77,860/- in view of the following additions/disallowances: - i) Disallowance under section 14A `37,73,284/- ii) Disallowance under section 94(7) ` 1,14,616/- iii) Disallowance out of various expenses ` 42,126/- iv) Capitalisation in respect of Building and ` 25,000/- Repair expenses v) Disallowance out of motor car expenses ` 25,000/- M/s. Visaria Securities P. Ltd. 2.2 Aggrieved by the order of assessment for A.Y. 2010-11 dated 13.09.2013, the assessee preferred an appeal before the CIT(A)-8, Mumbai. The learned CIT(A) disposed off the appeal vide the impugned order dated 13.09.2013 allowing the assessee partial relief. 3.1 Revenue, aggrieved by the order of the CIT(A)-8, Mumbai dated 13.09.2013 for A.Y. 2010-11, has preferred this appeal raising the following grounds: - “
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s. 14A without appreciating the fact that satisfaction has been recorded by the A.O. that the claim is not correct in relation to the books of account.
2. On the facts and in the circumstances of the case and in law, the impugned order of the Ld. CIT(A) is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored.
3. The appellant craves leave to mend or alter any ground or add a new ground which may be necessary.” 3.2 The learned D.R. for Revenue was heard in support of the grounds raised (supra) 3.3 Per contra, the learned A.R. for the assessee placed support on the findings rendered by the learned CIT(A) in the impugned order, deleting the disallowance of `37,73,284/- under section 14A r.w. Rule 8D made by the Assessing Officer (AO). The learned A.R. for the assessee submitted that this very issue of disallowance under section 14A r.w. Rule 8D was considered by the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 and wherein the Tribunal in its order in had dismissed Revenue’s appeal challenging the CIT(A)’s order of deletion of the disallowance under section 14A r.w. Rule 8D made by the AO. It is submitted that since the facts and circumstances of the case are similar to that of the earlier year, i.e. A.Y. 2009-10, learned CIT(A) has correctly deleted the disallowance of `37,73,284/- made under section 14A r.w. Rule 8D and consequently Revenue’s appeal may be dismissed. In this regard reliance was also placed on the decision of the ITAT Pune Bench in the case of Paresh P. Mehta in ITA No. 1715/PN/2015 dated M/s. Visaria Securities P. Ltd. 18.03.2016 in support of the proposition that no disallowance under section 14A r.w. Rule 8D can be made on shares held as stock-in-trade. 3.4 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The facts of the matter are that the assessee earned tax free dividend income of `24,12,499/- and had suo moto made a disallowance of `2,38,351/- under section 14A of the Act. The AO did not accept the AO’s explanations in the matter and proceeded to work out the disallowance under section 14A r.w. Rule 8D at `40,11,635/- and after reducing the suo moto disallowance of `2,38,351/-, made a net disallowance of `37,73,284/-. On appeal, the learned CIT(A) holding that since the facts and circumstances of the case on this issue were the same as in A.Y. 2009-10, deleted the disallowance made by the AO under section 14A r.w. Rule 8D. On further appeal, we find that the very same issue of disallowance under section 14A r.w. Rule 8D was before a Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10. In its order in dated 13.03.2015, the Coordinate Bench at paras 4 to 6 thereof upheld the order of the learned CIT(A) in deleting the said disallowance holding as under: - “4. We have considered rival contentions and perused the record. Facts in brief are that the assessee is a private limited company engaged in the business of share broking and share trading. During the course of assessment proceedings, the AO observed that during the year under consideration, the assessee earned dividend income of Rs.28,67,950/- and suo moto disallowed an amount of Rs.2,83,396/- in his computation of income which the AO found to be incorrect. The AO asked the assessee as to why disallowance should not be made as per formula given in Rule 8D. In response to it, the assessee submitted its explanation. However, the AO did not convince with the submission of assessee and disallowed Rs.11,34,655/- on account expenditure allocated for earning exempt income.
5. By the impugned order, the CIT(A) deleted the addition made by the AO after having the following observations :- “2.3 . I have carefully considered the facts of the case .and the contention of the appellant. During the course of assessment proceedings, it is seen that the appellant had earned a tax free dividend income of Rs. 27,66,950/- and suo motto disallowed an amount of Rs. 2,83,396/- being the expenses to earn the exempt income in its computation of income. According to the Assessing M/s. Visaria Securities P. Ltd.
Officer the disallowances should be calculated in accordance with the formula given under Rule 8D of Income Tax Rule, 1962. The Assessing Officer observed that where there is composite use of funds, expenditure cannot be separately calculated and some expenditure need to be allocated to earn the exempt income. By following the decision of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce, the Assessing Officer calculated the expenses disallowable under Rule 80 of the Income Tax Rule. 2.3(a) I find that while calculating the average of investment, the Assessing Officer also included the stock held as stock in trade: The said inclusion is not permissible as stock in trade are not subject matter of disallowance u/s 14A as held by the Hon'ble Karnataka High Court in the case of CCI Ltd. Vs. JCIT - 206 Taxman 563. In this case, the Hon'ble High Court has held that the dividend income was incidental to the business of share trading and the expenditure was not incurred with an intention to earn dividend. Since dividend was earned on unsold portion of shares, no expenditure could be disallowed u/s 14.A which is reproduced below: "When no expenditure. is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived there from is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares yielded dividend, for which the assessee has not Incurred any expenditure al all. Though the dividend income is exempted from payment of tax, if any expenditure incurred in earning dividend income and the' dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that sneak be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside ... " 2.3(b) Further, I find that the Assessing Officer has not made any observation regarding the correctness of the claim of the appellant in respect of the expenditure incurred in relation to the income which does not form its total income under the Act. The inescapable fact is that the appellant had suo motto made some disallowances and the Assessing Officer has not found any defect in the claim made by the appellant in relation to its books of account. The Hon'ble Delhi ITAT in its judgement in the case of M/s. Jindal Photo Ltd. Vs. DCIT has observed as under: "18. Now, as per section 14A(2) of the Act, if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee's total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed; i. e. under Rule 8D of the I. T. Rules. However, in the present case , the assessment order does not evidence any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT (A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO M/s. Visaria Securities P. Ltd. to establish any such expenditure, This onus has not been discharged. In "CIT VS. Hero Cycles" (P&H)323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In "ACIT vs. Eicher Ltd ", 101 TTJ(Del.) 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In "Meruti Udyog vs. DCIT, 92 ITD 119 (Del), it has been held that before making any disallowance u/s.14A of the Act, 'the onus to establish the nexus of the same with the exempt income, is on the revenue. In "Wimco Seedlings Limited v s. DCIT', .107 ITO 267 (Del.) (TM), it has been held that .there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in.
Punjab NationaI Bank vs,DCIT, 103 TTJ908 (Del.); 2. Vidyut lnvestment Ltd. 10 S0T 284 (Del.);and 3. D.J.Mehtavs.ITO,2901T(J238 (Mum.)(AT) 19. 'In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected. 2.3(c) In the light of the foregoing, I find that the Assessing Officer cannot invoke the provisions of section 14A(2) and Rule 8D until and unless he records a satisfaction that the appellant’s claim is not correct in relation to' its books of account Having not done so. the invoking of provisions of Rule 8D are not in order, therefore, the disallowances made by the Assessing Officer are not sustainable to the facts of the appellant’s case. The same are accordingly deleted. This ground of appeal
is allowed.”
6. We have considered rival contentions and found that the CIT(A) has noted that the assessee had earned a tax free dividend income of Rs.27,66,950/- and suo moto disallowed an amount of Rs.2,83,396/- being the expenses to earn the exempt income in its computation of income. The CIT(A) observed that the AO has not found any fault with regard to the correctness of the claim of the assessee in respect of the expenditure incurred in relation to the income which does not form its total income under the Act. After relying on various judicial pronouncements as referred in his appellate order, the CIT(A) found that there is nothing wrong in the disallowance of Rs.2,83,396/- made by assessee himself. In the facts and circumstances of the case we do not find any reason to interfere in the findings recorded by CIT(A) at para 2.3, which resulted into deletion of disallowance of excess disallowance made by AO u/s.14A.” 3.3.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 (supra), we concur with the finding of the learned CIT(A) that the AO has not found any fault with regard to the assessee’s accounts as to the correctness of the assessee’s claim in respect of the expenditure incurred in relation to the income which does not form part of the total income under the Act, and