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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by Revenue is against the order of Commissioner of Income Tax (Appeals)-XX, Kolkata dated 15.07.2013. Assessment was framed by DCIT, Circle-36, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 20.12.2010 for assessment year 2008-09.
ITO, Wd-36(3), Kol. v. Smt. Samta Jain. Page 2 Shri Subash Agarwal, Ld. Authorized Representative appearing on behalf of assessee and Shri Debasish Banerjee, Ld. Departmental Representative appearing on behalf of Revenue.
Common grounds raised by Revenue in this appeal is that Ld. CIT(A) erred in restricting the disallowance made by Assessing Officer from ₹41,67,630/- to ₹7.51 lakhs u/s 14A r.w.s. Rule 8D of the IT Rules, 1962.
Facts of the present case are that assessee is an individual and engaged in the business of dealing in shares and securities. During the year under consideration assessee has earned dividend income of ₹57,163/-. During the course of assessment proceedings, AO observed that assessee failed to make any disallowance in accordance with provision of Sec. 14A r.w.s. Rule 8D of the IT Rules. Accordingly, he sought the clarification from assessee for the applicability of Rule 8D of the IT Rules. In compliance notice thereto assessee submitted that some disallowance can be made in terms of provision of Rule 8D of the IT Rules but AO disallowed the same in terms of the rule 8D as the following expenses:- i) Direct charges of Rs.29,14,124/- ii) Interest Rs.12,19,509/- iii) .5% of average investment Rs. 33,997/- Total Rs.41,67,630/-
Aggrieved assessee preferred an appeal before Ld. CIT(A) where it was submitted that assessee maintains two portfolio for making the investment in the shares & securities as stock-in-trade and investment. During the year, the dividend income out of share & securities held as stock-in-trade was incidental to the share trading activity. Therefore, no specific expenditure is incurred in relation to earning of dividend income out of shares & securities held as stock-in-trade. Before Ld. CIT(A) assessee pleaded that disallowance u/s 14A r.w.s. Rule 8D of the IT Rules out to be restricted to the shares held by way of investment and assessee submitted the working of the disallowance under Rule 8D of the IT Rules as under:-
ITO, Wd-36(3), Kol. v. Smt. Samta Jain. Page 3 Rule Particulars Amount 8D(2)(i) Expenditure incurred directly in relation to earning dividend income 31,405/-
8D(2)(ii) interest in relation to dividend income 6,99,850/- interest X average of “investments” average value of total assets = 2,15,69,464 x (38,45,935 + 40,52,148)/2 12,17,09,924
8D(2)(iii) administrative expenditure 19,745/- 0.5% of the average of dividend yielding “investments” = 0.5% of 39,49,042/-
Total disallowance under section 14A 7,51,000/- After considering the same, Ld. CIT(A) has partly deleted the addition made by AO by observing as under:- “4.2 I have perused the assessment order and considered the submission of the appellant. The case laws relied upon by the appellant were also perused. The fact of the case is that the AO found that the appellant earned exempt income, therefore, he invoked Rule 8D of the IT Act and accordingly, calculated disallowance at Rs.41,67,630/-. However, the appellant argued that the disallowance under Section 14A read with Rule 8D ought to be restricted to the shares held by way of “investments”. Rule 8D(2)(i) disallows the expenditure which is incurred in direct relation to the tax free income earned. In the fats & circumstances of the case, it is evidently clear that no expenditure has been incurred in relation to earning of exempt income and therefore no disallowance should be made under clause (i) of Rule 8D(2). As regards disallowance should b made under clause (i) of Rule 8D(2). As regards disallowance with reference to Rule 8D(2)(ii) & (iii), the computation with reference to “investments” capable of earning tax free income is as follows: Rule Particulars Amount 8D(2)(i) Expenditure incurred directly in relation to earning dividend income 31,405/-
8D(2)(ii) interest in relation to dividend income 6,99,850/- interest X average of “investments” average value of total assets = 2,15,69,464 x (38,45,935 + 40,52,148)/2 ITO, Wd-36(3), Kol. v. Smt. Samta Jain. Page 4 12,17,09,924
8D(2)(iii) administrative expenditure 19,745/- 0.5% of the average of dividend yielding “investments” = 0.5% of 39,49,042/-
Total disallowance under section 14A 7,51,000/-
In view of the facts and circumstances of the case as discussed (supra), I find merit in the argument of the appellant and therefore, the calculation for disallowance given (supra) is found to be sustainable. Hence, the AO is directed to take the figures of disallowance under Rule 8D at Rs.7,51,000/- and the balance disallowance be reduced from the total assessed income.”
Being aggrieved by this order of Ld. CIT(A) Revenue came in appeal before us for against the partly relief allowed to assessee.
Before us Ld. DR submitted that Ld. CIT(A) erred in taking the only investment made in shares and securities for the purpose of disallowance of the expenses in terms of the provisions of section 14A of the Act read with rule 8D of the IT Rules but Ld. CIT(A) erred in not considering the shares relying as stock-in-trade as they are also yielding dividend income. Therefore, disallowance should be made for all the shares and securities whether held as investment or stock-in-trade and he vehemently relied on the order of AO.
On the other hand, Ld AR submitted that assessee is maintaining two portfolio (i) for investment in shares & securities and (ii) for stock-in-trade in shares & securities. The dividend income earned during the year under consideration from shares held as stock-in-trade is incidental and he vehemently relied on the order of Ld. CIT(A).
We have heard the rival contentions and perused the materials available on record. From the aforesaid discussion, we find that AO has invoked the provision of Sec. 14A r.w.s. Rule 8D of the IT Rules without ITO, Wd-36(3), Kol. v. Smt. Samta Jain. Page 5 recording any satisfaction as required under the Act. AO has disallowed the expense as per provision of Rule 8D of the IT Rules by taking the shares & securities held as stock-in-trade and investment. However, Ld. CIT(A) has worked out the disallowance only on the basis of shares & securities held as investment. Before us Revenue is in appeal for giving partly relief by Ld. CIT(A). Now, the issue before us is as to whether for making the disallowance under section 14A of the Act and Rule 8D of the IT Rules shares held as investment is only to be considered. We find that several courts have held that for making the disallowance as per Rule 8D of the IT Rules with reference to exempt income should consider only asset held by way of investment and not stock-in-trade. In this connection we are relying on the order of DCIT v. Gulshan Investment Co Ltd. (11 taxmann.com 113) wherein the Tribunal held that disallowance as per Rule 8D can be made only with reference to exempt income yielding assets held by way of “investments” and not “stock-in-trade”. Reliance in this regard is placed on the decision of Chandigarh Bench of Hon’ble ITAT in the case of ACIT v. Punjab State Cooperative & Marketing Fed ltd. in wherein it has been held that the disallowance under Section 14A cannot exceed the tax free income earned i.e. Rs.57,133/-. Attention is further invited to the decision of the this Bench in the case of REI Agro Ltd. v. DCIT in ITA No.1331/Kol/2011 dated 19.06.2013, wherein the Tribunal held that the words used in Rule 8D(2(ii) & (iii) are “the average value of the investment, income from which do not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year” . the Bench observed that the Assessing Officer erred in considering those investments which has not earned any dividend or exempt income. The Tribunal held only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Following the ratio laid down in the aforesaid decision, the disallowance u/s 14A read with Rule 8D should be computed only with reference to “investments”.
ITO, Wd-36(3), Kol. v. Smt. Samta Jain. Page 6 6.1 The facts as decided in the aforesaid case are identical in the present case. Therefore, in our considered view, the shares and securities held as stock-in-trade will not be taken into consideration for making the disallowance u/s. 14A r.w.s. Rule 8D of the IT Rules. Taking a consistent view of the aforesaid orders we have no hesitation in upholding the order of Ld. CIT(A). Hence, this ground of Revenue’s appeal is dismissed.