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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
The captioned appeal is preferred by the assessee and is directed against the impugned order dated 28/08/2014 of CIT(A)-8, Mumbai, pertaining to the assessment year 2010-11, which in turn has arisen from an order passed by the Assessing Officer dated 01/03/2013 under section 143(3) of the Income Tax Act, 1961( in short “the Act”).
In this appeal, although assessee has raised multiple grounds of appeal, but the solitary dispute is with regard to an addition of (Assessment Year : 2010-11) Rs.17,45,347/- made by the Assessing Officer by invoking the provisions of section 14A of the Act.
3. Briefly put, the relevant facts are that the appellant is a Private Limited Company incorporated under the provisions of Companies Act, 1956, and is a broker and member of Bombay Stock Exchange and National Stock Exchange and is, inter-alia, deriving income from brokerage and trading in shares and securities. For the assessment year under consideration, it filed a return of income declaring a loss of Rs.2,83,240/-, which was subject to scrutiny assessment, whereby the total income has been assessed at Rs.14,72,950/-. The Assessing Officer had noticed that during the year under consideration, assessee has earned tax free dividend income of Rs.1,11,16,796/-. Section 14A of the Act prescribes that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. On the strength of the aforesaid, the assessee was show-caused to explain as to why disallowance under section 14A should not be made in respect of expenditure incurred for earning the exempt dividend income. In response, the assessee explained that in the return of income it had suo-moto disallowed an amount of Rs.60,000/- keeping in view the provisions of section 14A of the Act. However, it transpires that during the assessment proceedings, assessee also furnished a working of disallowance under section 14A of the Act in terms of the provisions of Rule- 8D of Rules 1962, which amounted to Rs.2,80,797/-. The Assessing Officer was not satisfied with the stand of the assessee in as much as according to him determination of disallowance by application
(Assessment Year : 2010-11) of Rule-8D of the Rules was wrongly done by the assessee in as much as assessee did not consider the investment in stock-in-trade of shares and securities. In forming such an opinion, the Assessing Officer relied upon the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd., 117 ITD 169. Consequently, the Assessing Officer reworked the disallowance as per Rule 8D of the Rules at Rs.17,45,347/- and the said amount was added to the returned income under section 14A of the Act. The said action of the Assessing Officer has been affirmed by the CIT(A) also. In this background, the assessee is in further appeal before the Tribunal.
Before me, apart from other grounds, a pertinent plea that has been raised is that the Assessing Officer erred in holding that the disallowance under section 14A of the Act has also to be made in relation to income received from shares held as stock-in-trade. In this context, Ld. Representative for the assessee contended that said issue has been considered by the Mumbai Bench of the Tribunal in the case of DCIT vs. M/s. India Advantage Securities Ltd.,ITA No.6711/Mum/2011 dated 14/09/2011 for assessment year 2008-09 and after relying on the judgment of the Hon’ble Karnataka High Court in the case of CCI Ltd. vs. JCIT, 250 CTR 291(Kar) held that disallowance made under section 14A of the Act could not made in relation to exempt dividend income received on shares held as stock-in-trade. Ld. Representative for the assessee also pointed out that the Tribunal has considered the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd.(supra), which was to the contrary, but following the decision of the Hon’ble Karnaka High Court in the case of CCI
(Assessment Year : 2010-11) Ltd.(supra), the issue was decided in favour of the assessee. It is also pointed out that the said decision of the Tribunal dated 14/9/2012 (supra) has since been affirmed by the Hon’ble Bombay High Court vide its order in Income Tax Appeal No. 1131 of 2013 dated 13/4/2015, a copy of which was placed on record.
As the aforesaid discussion shows, the short point in this appeal relates to the quantification of disallowance under section 14A of the Act on account of expenditure incurred by the assessee in relation to income in the form of dividends, which is exempt from tax. The limited plea of the assessee is that for the purposes of working out the disallowance in terms of Rule 8D of the Rules, the stock-in- trade of shares and securities is not liable to be considered. This controversy has been considered by the Mumbai Bench of the Tribunal in the case of M/s. India Advantage Securities Ltd. (supra) in the following words:-
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding the disallowance of expenses u/s.14A in relation to the exempt dividend income received from shares held on trading account. The A.O. disallowed the expenses holding that the provisions of section 14A were applicable even in relation to the dividend received from the trading shares. The Ld.CIT(A) has however held that the provisions of section 14A will not apply to the shares held on trading account. The Revenue has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. American Express Bank Limited (supra) in which the Tribunal has held that the expenditure u/s.14A has to be disallowed even in respect of dividend income received from trading shares. The Tribunal followed the decision of the Special Bench of the Tribunal in the case of ITO vs. Daga Capital Management Pvt. Ltd. (supra). The assessee in that case had relied on the judgment of Hon’ble High Court of Kerala in the case of CIT vs. Smt. Leena Ramachandran (339 ITR 296) to argue that the disallowance could not be made in relation to the dividend received from trading shares. The Tribunal had however, distinguished the said judgment of Hon’ble High Court of Kerala on the ground that in that case the acquisition of shares with (Assessment Year : 2010-11) the borrowed funds was for the purpose of controlling the company. Therefore, even though the purpose for acquiring the shares was business, the High Court had upheld the disallowance u/s.14A of the I.T. Act. The Tribunal also noted that the High Court in that case had only observed that the interest paid on borrowed funds utilised for acquiring shares could be allowed as deduction u/s.36(1)(iii) only if shares were held as stock-in-trade. These observations were only obiter dicta and not the ratio decidendi of the judgment. The ratio decidendi of the judgment was disallowance of interest u/s.14A which had been upheld by the Tribunal. The Tribunal, therefore, did not accept the arguments based on the judgment of Hon’ble High Court of Kerala in the case of Smt. Leena Ramachandran (supra) which was not directly on the issue of disallowance of expenses in relation to the dividend income received from trading in shares.
6. However, the Hon’ble High Court of Karnataka have recently considered the disallowance of expenses incurred on borrowings made for purchase of trading shares u/s.14A of the I.T. Act in case of CCL Ltd. vs. JCIT (supra). The assessee in that case was distributor of state lotteries and a dealer in shares and securities. The assessee had taken loans for the purchase of certain shares and it had incurred expenditure for broking the loans which had been disallowed under Rule 8D by the A.O. and confirmed by the Ld.CIT(A). The Tribunal agreed with the authorities below that the expenditure relatable to earning of dividend income though incidental to the trading in shares was also to be disallowed u/s.14A of the I.T. Act. The Tribunal however, had observed that the entire broking commission was not relatable to earning of dividend income as the loan had been utilised for the purchase of shares and the profit shown from the sale of shares had been offered as business income. The Tribunal, therefore, directed the A.O. to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the Tribunal. The High Court noted that 63% of shares which were purchased were sold and income derived was offered to tax as business income. The remaining 30% of shares which remained unsold had reverted to dividend income for which the assessee had not incurred any expenditure at all. The High Court also observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus there being a direct judgment of a Hon’ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capital Management P. Ltd. (supra). Infact, we note that the (Assessment Year : 2010-11) Tribunal in the case of Ganjam Treading Co. Ltd. (supra) has already considered this situation and held that in view of the judgment of Hon’ble High Court of Karnataka in the case of CCL Ltd. Vs. JCIT (supra) the disallowance of interest in relation to the dividend received from trading shares cannot be made. We, therefore, see no infirmity in the order of the Ld. CIT(A) in deleting the disallowance u/s.14A computed by the A.O. in relation to the stock-in-trade. The order of the Ld. CIT(A) is accordingly upheld” 5.1 Following the aforesaid decision of the Tribunal, which has since been affirmed by the Hon’ble High Court vide its order dated 13/4/2015(supra), the shares and securities treated as stock-in-trade cannot be considered for the purposes of working of disallowance under section 14A of the Act r.w. Rule 8D of the Rules. Accordingly, the disallowance under section 14A of the Act quantified by the income tax authorities at Rs.17,45,347/- is untenable and the working of the disallowance furnished by the assessee during the assessment proceedings at Rs.2,80,797/- is hereby affirmed. As a consequence, I set-aside the order of the CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to Rs.2,80,797/- and delete the balance.
In the result, the appeal of the assessee is partly allowed.