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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Revenue by : Shri Satya Pal Kumar (D.R.) Assessee by : None सुनवाई क� तार�ख /Date of Hearing : 14-01-2016 घोषणा क� तार�ख /Date of Pronouncement : 16-03-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the Revenue, being 05-11-2011 passed by the learned Commissioner of Income Tax (Appeals)- 32, Mumbai (Hereinafter called “the CIT(A)”), the appellate proceedings before the CIT(A) arose from the assessment order dated 28.12.2011 passed by the learned assessing officer (Hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”), for the assessment year 2009-10.
At the time of hearing before us, none appeared on behalf of the assessee Therefore, we proceed to dispose of the appeal after hearing the ld. D.R.
ITA 915/Mum/2013 2
The grounds raised by the Revenue in the memo of appeal filed with the Tribunal read as under:-
“1. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance made by the Assessing Officer u/s.14A.
2. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering Para.23.9 of the Hon’ble ITAT's order in the case of Daga Capital Management P Ltd (ITA No.8057/Mum/2003) wherein it is held that a person may make investment in shares and the shares so purchased may be held as 'stock in trade or 'investment'. The word 'investment' in this rule refers to the making of purchase of shares not holding it as investment.
3. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in not considering the decision of Bombay High Court in the case of M/s. Godrej & Boyce Mfg Co. Ltd, Mumbai vs. DCIT (ITA 626/10 & WP 758/10) vide order dated 12.8.2010 whereby the Hon'ble Court has upheld the validity of section 14A of the Income tax Act, 1961 and that the Hon'ble High Court has also held that the provisions of Rule 8D are applicable from Assessment Year 2008-09." The appellant prays that the order of the CIT(A) on the grounds be set aside and matter may be decided according to law. The appellant craves leave to amend or alter any ground or add new ground which may be necessary.”
The brief facts of the case are that the assessee is an individual engaged in the business of share trading and has received commission, rental and consultancy income . The assessee is also partner in M/s Rashi Investments, a partnership firm and has received income from such firm (share of profit) which is claimed exempt. The assessee is also proprietor of M/s Khattri Aromas, situated at Pant Nagar, business of which is not yet commenced. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the Act, the A.O. asked the assessee to show cause as to why disallowance u/s 14A of the Act should not be made for exempted income. The assessee submitted that the assessee has suo-motu disallowed an amount of Rs ITA 915/Mum/2013 3 19,80,509/- in the return of income filed with the Revenue and since the assessee has suo-motu disallowed an expense, provisions of Rule 8D of Income Tax Rules,1962 shall not be applicable unless the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee and comes to a conclusion that the disallowance offered by the assesse is incorrect in accordance with section 14A of the Act. The assessee submitted that he maintains two separate books of account, one in respect of its business assets and the other in respect of his personal assets. The business set was submitted before the AO. The assessee submitted that the business transactions are separate from the personal set. However, as both the books of accounts relate to the same person, a consolidated Balance Sheet had to be prepared so as to fill in the return of income with the Revenue filed for the relevant year reflecting both business activities and personal transactions as the return form (ITR-4) does not have separate demarcation for such circumstances. The assessee submitted that most of the investments which are non-taxable are made through the personal set and thus most of the tax-free income is in the personal set. As regards disallowance of expenses u/s. 14A of the Act, in relation to the exempt income shown in personal set it is submitted that none of the expenditure has been claimed in the return of income filed with the Revenue as business expenditure except that the expenditure on Rates and Taxes has been claimed as a deduction from Income from House property. Thus in nutshell, no expense has been claimed in respect of personal set. The assessee further submitted that investments have been made out of self accumulated surplus and capital account of the assessee, no funds have been borrowed for making such investments and, therefore, no interest has been paid in making any investments in personal account. Thus, there is a direct nexus between the own funds and personal investments. Thus, as regards personal set, no question of disallowance of interest or expenses arises as neither any interest nor any expenditure has been claimed in the personal set. The assessee ITA 915/Mum/2013 4 relied upon the decision of Mumbai-Tribunal in the case of Sh Pawan Kumar Parmeshwarlal in ITA No. 530/Mum/2009. With respect to the specific issue of disallowance of interest expenditure , it was submitted by the assessee that during the year interest expenditure has been incurred for business purposes and investments have been made out of profits earned by the assessee in past, therefore, no question of disallowance of interest arises. The interest claimed as expenditure in books of accounts of share business during the year has been paid to share brokers for amount funded for purchase of shares the income in respect of which is chargeable to tax and the shares have been held as stock in trade , thus provisions of section 14A of the Act do not apply as the same apply to expenses incurred for earning exempted incomes. The assessee submitted that he is engaged in the business of purchase and sale of shares. The expenses inter-alia include direct expenses i.e. expenses which are directly attributable to share trading activity such as de-mat charges, stamp charges, auction charges, service tax, transaction charges etc. which are directly attributable to the trading of the assessee and have nothing to do with the general expenses. With respect to the interest expense so incurred again has a direct nexus with the purchase and sale of shares as the interest has been paid on temporary funding received for the purchase of trading shares. The temporary funding has been received on a particular day and immediately utilized for the business purposes on the same day from the same bank account. There is a direct nexus of interest bearing funds to the purchase for trading and thus this also forms part of direct expenses. Further, interest claimed as expenditure in books of accounts of share business during the year has been paid to share brokers for amount funded for purchase of shares, the income in respect of which is chargeable to tax and that no loans from any banks has been availed by the assessee. The assessee relied on the following judgments:-
ITA 915/Mum/2013 5 i) Mumbai-Tribunal order in the case of Godrej Industries Ltd v. DCIT (ITA No. 1090/Mum/09). ii) Hon'ble Punjab & Haryana High Court judgment in the case of CIT v. Hero Cycles 323 ITR 158 (PH). iii) Reliance Utilities & Power Ltd (ITA No 1398 of 2008) order dated 09.01.2009. iv) Hon'ble Kerela High Court in the case of CIT v. Smt.Leena Ramachandran 2010 TIOL 541 HC Kerala IT (ITANo.1784 of 2009). v) Yatish Trading Co. P Ltd, Vs ACIT 1(3), ITAT (Mumbai) order dated 10.11.2010. vi) Vidyut Investments Ltd 10-S0T -0284.
The A.O. after considering the submission of the assessee, rejected the claim of assessee by following the decision of his predecessor for the assessment year 2008-09 whereby disallowance of Rs. 1,19,68,218/- u/s. 14A of the Act was made for the assessment year 2008-09 and on further appeal before the CIT(A) by the assessee, the CIT(A) restricted the disallowance made by the AO u/s. 14A to Rs. 24,64,871/-. The decision of the CIT(A) was not accepted by the Revenue and appeal to the Mumbai-Tribunal was filed, decision of which was pending till the finalization of the assessment order for the impugned assessment year by the AO. Therefore, following the decision of his predecessor for the assessment year 2008-09, the A.O. made disallowance u/s 14A of the Act amounting to Rs. 57,53,785/- by applying Rule 8D(2)(ii) and (iii) of the Income Tax Rules, 1962 , vide assessment orders dated 28.12.2011 passed by the AO u/s 143(3) of the Act.
Aggrieved by the assessment order dated 28.12.2011 passed by the A.O. u/s 143(3) of the Act, the assessee preferred first appeal before the CIT (A).
ITA 915/Mum/2013 6
6. Before the CIT(A), the assessee submitted that the A.O. has just followed the decision of his predecessor for the assessment year 2008-09 without considering the facts of the case and submissions made by the assessee. The assessee submitted that the assessee has suo-motu disallowed an amount of Rs. 19,80,509/- u/s 14A of the Act at the time of filing return of income with Revenue and once the assessee has suo-motu disallowed an expense, provisions of Rule 8D of Income Tax Rules, 1962 shall not be applicable unless the A.O. is not satisfied with the correctness of the claim made by the assessee having regard to the accounts of the assessee and comes to a conclusion that the disallowance is incorrect. The assessee submitted that the A.O. without recording the reasons of his non-satisfaction with the correctness of the claim of the assessee in respect of such expenditure, proceeded to apply Rule 8D of Income Tax Rules, 1962 to compute the disallowance u/s 14A of the Act, which is not correct as per law. To support his contention, he relied upon the decision of Mumbai-Tribunal in the case of Auchtel Products Ltd. in 2649 & 3185/Mum/2011 and also decision of Tribunal-Delhi in the case of DCIT v. Jindal Photo Ltd. in ITA No. 814(Del) 2011. The assessee submitted that he maintains two separate books of account, one in respect of its business assets and the other in respect of his personal assets. The business transactions are separate from the personal set, the details of which are as under:-
Particulars Personal set Business set Separate Bank accounts Yes Yes Separate balance sheets Yes Yes Nature of transactions Personal investments Share/securities trading Shares held as Investments Stock-in-trade Funding of assets Own sources Profits + Loan Expenditure claimed No Yes Whether dividend main source of Yes No, incidental in income respect of shares held as stock-in- trade.
ITA 915/Mum/2013 7 The assessee submitted that since both the books of account relate to the same person, a consolidated balance sheet had to be prepared so as to fill in the return of income with the Revenue for the relevant year reflecting both business activities and personal transactions as the return form does not have separate demarcation for such circumstances. The assessee submitted that he has offered the following exempt income in the return of income filed with the Revenue:-
Exempt income Total Personal set Business set Dividend 65,80,590/- 50,85,430/- 14,95,160/- Interest on RBI Bonds 2,05,59,563/- 2,05,59,563/- Thus, it is clear from the above that investments which are non-taxable made through the personal set and thus most of the tax free income is in the personal set. The assessee submitted that it has debited expenditure of Rs.4,45,510/- in personal set , which the assessee submitted was added back with respect to personal set while preparing the computation of income and these investments have been made out of self accumulated surplus and capital account of the assessee and no funds have been borrowed for making such investments and therefore no interest has been paid in making any investments in personal account and there is a direct nexus between the own funds and personal investments, thus as regards personal set no question of disallowance of interest or expenses arise as neither any interest nor any expenditure has been claimed in the personal set. The assessee submitted that the A.O. without verifying the fact that the investment transactions are being made through separate bank account maintained for business and personal purposes disallowed the expenses u/s.14A of the Act by applying Rule 8D of Income Tax Rules, 1962. Thus, the disallowance has been made by the A.O. merely on the basis of conjectures and surmises and not on the basis of any evidence. The assessee relied upon the decision of the Mumbai- ITA 915/Mum/2013 8 Tribunal in the case of Shri Pawan Kumar Parmeshwarlal in decision of Mumbai-Tribunal in the case of Godrej Industries Ltd. v. DCIT in ITA No. 1090/Mum/09, decision of Hon’ble Punjab and Haryana High Court in the case of CIT v. Hero Cycles 323 ITR 158(P&H) and decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited in ITA no. 1398 of 2008, order dated 09-01-2009. It was submitted that AO without considering the facts of the case has applied the provisions of Rule 8D of Income Tax Rules, 1962 to compute disallowance u/s 14A of the Act. The assessee reiterated the submission which were made before the A.O. which are not repeated for sake of brevity and submitted that in the business set of the assessee, the total dividend earned is only Rs. 14,95,160/-, therefore, by no stretch of imagination, it can be contended that the assessee incurred an interest of Rs. 1,78,05,981/- to earn an exempt income of only Rs. 14,95,160/-. The assessee submitted that the assessee is in the business of share trading and the intention of taking loan is to do share trading and not to earn dividend and this dividend income earned is only incidental to the trading activity of shares carried on by the assessee. The assessee has earned dividend in this set only on account of shares which were purchased and sold and were held as stock-in-trade at the beginning and close of the previous year, income from which has already been shown as part of total taxable income. The assessee relied on the decision of Hon’ble Karnataka High Court in the case of CCI Ltd. v. JCIT [206 Taxman 563], decision in the case of Vidyut Investments Limited 10-SOT-0284 , decision of Hon’ble Kerala High Court in the case of CIT v. Smt. Leena Ramachandran, 2010 TIOL 541 HC Kerala (ITA No. 1784 of 2009) and also decision of Mumbai-Tribunal in the case of Yatish Trading Co. Pvt. Limited v. ACIT vide orders dated 10.11.2010. The assessee submitted that the CIT(A) in his order dated 22nd July, 2011 for assessment year 2008-09 has not accepted the contention of the assessee that disallowance of interest in relation to dividend received from trading shares cannot be made , in view of the decision of ITA 915/Mum/2013 9 Special bench of the Tribunal in the case of Daga Capital management (P) Ltd. In this connection, the assessee relied on the recent decision of Tribunal in the case of Ganjam Trading Co. v. DIT, dated 20-07-2012 wherein the judgment of Hon’ble Karnataka High Court in the case of CCI Ltd. (supra) was relied upon which directly cover’s the issue. Thus, it was contended that no disallowance can be made u/s Rule 8D(2)(ii) of the Income Tax Rules, 1962. As regards the issue of disallowance of expenditure by applying Rule 8D(2)(iii) of Income Tax Rules, 1962 @ 0.5% of expenses is concerned, it was submitted that the A.O. has treated the shares as stock-in-trade and has computed the disallowance of 0.5%. The assessee submitted that there is no investments under the business set which generate an income which does not form part of total income. The assessee submitted that the assessee is carrying on trading in shares and If there were no investments, Rule 8D of Income Tax Rules, 1962 automatically becomes inoperative as the same is based on calculation of investments and Rule 8D of Income Tax Rules, 1962 specifically talks of calculation based on investments. The assessee relied upon the decision of Delhi Bench of ITAT in the case of M/s Gillettee Group India v. ACIT.
The CIT(A) after considering the arguments of the assessee held that it is a pre-requisite that before invoking Rule 8D of Income Tax Rules, 1962, the A.O. must record his satisfaction to show that expenditure has been incurred by the assessee for earning tax-free income or how the assessee’s claim of apportionment is incorrect. The. CIT (A) held that the A.O. cannot apply Rule 8D of Income Tax Rules, 1962 without pointing out any inaccuracy in the method of apportionment or allocation of expenses adopted by the assessee. The CIT(A) observed that the assessee in the instant case maintains separate books of account, separate bank accounts for his share trading activity and the personal investments. In business balance sheet the shares are held as stock-in-trade. In business activity, the dividend income has been earned on the shares held as stock-in-trade and there were no other investments in ITA 915/Mum/2013 10 business balance sheet which yield exempt income. The interest has been paid by the assessee to brokers through whom the assessee has purchased/sold the shares for trading and interest has been paid to brokers on the outstanding balances from time to time on account of shares held as stock-in-trade only. In the personal balance sheet, the assessee is having taxable income earning investments as well as tax free earning investments. In the personal books, the expenditure claimed by the assessee is only some de-mat charges and bank commission, rates and taxes etc. and there were no borrowed funds appearing in the personal balance sheet which was disallowed by the assessee in computation of income while filing return of income with the Revenue. The CIT(A) held that the Hon’ble Karnatka High Court in the case of CCI Ltd. (supra) and Hon’ble Kerala High Court in the case of Leena Ramchandran (supra) held that disallowance u/s 14A in respect of dividend received on shares held as stock-in-trade cannot be made and these decisions have over-ruled the Special Bench of the Mumbai- Tribunal decision in the case of Daga Capital Management (P) Ltd(supra). The CIT(A) held that recently the Mumbai Tribunal in the case of India Advantage Securities Ltd. (ITA No. 6711/Mum/2011), Ganjam Trading Co. P. Ltd. (ITA No. 3724/Mum/2005) and in the case of Esquare Pvt. Ltd. (ITA No. 5688/Mum/2011) has held that section 14A of the Act is not applicable in respect of dividend received from shares held as stock-in-trade. Thus, no disallowance of interest u/s 14A read Rule 8D(2)(ii) can be made in the assessment year 2009-10 due to the reasons elaborated by the CIT(A) hereinabove. The assessee submitted that he maintains separate books for personal investments and trading stock of shares and no administrative expenses were required to be incurred for such personal investments and once it is held that section 14A of the Act cannot be invoked for earning the dividend on shares held as stock-in-trade as the dividend was only incidental to the trading activity , it follows that no disallowance out of administrative expenses can be made out of business set of . The tax free investments in ITA 915/Mum/2013 11 personal balance sheet such as RBI relied bonds are one time investment made in earlier years only and hence do not require any administrative expenses. The assessee has himself made a disallowance of Rs. 19,80,509/- u/s 14A of the Act. The A.O. has not recorded his satisfaction as to the incorrect claim made by the assessee having regard to the accounts of the assessee which is sine qua-non for invoking the applicability of Rule 8D of Income Tax Rules, 1962. The A.O. has not at all stated as to how the said disallowance made by the assessee was incorrect, hence, Rule 8D(2)(iii) of Income Tax Rules, 1962 cannot be invoked ignoring the disallowance u/s 14A of the Act made by the assessee. Accordingly, the CIT(A) restricted the disallowance u/s 14A of the Act to Rs. 19,80,509/- , vide orders dated 05-11- 2011.
8.Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal.
The ld. D.R. fairly conceded that similar issue arose in the assessment year 2008-09 in in assessee’s own case whereby the Tribunal has allowed the appeal of the assessee by observing as under:-
“5.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 has to be accepted. With regard to personal investment for which separate account has been maintained CIT(A) has given a clear ITA 915/Mum/2013 12 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 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 can not 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.”
The ld. D.R. submitted that although the Mumbai-Tribunal decided the issue in favour of the assessee for assessment year 2008-09 in , but the Revenue has not accepted the decision of the ITA 915/Mum/2013 13 Mumbai-tribunal and the Revenue is in appeal before the Hon’ble jurisdictional High Court of Bombay.
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-in- trade 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.
ITA 915/Mum/2013 14
In the result, the appeal filed by the Revenue in ITA N0. 915/Mum/2013 for the assessment year 2009-10 is dismissed.
Order pronounced in the open court on 16th March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 16-03-2016 को क� गई ।