Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM] I.T.A No.639/Kol/2012 Assessment Year: 2008-09 Deputy Commissioner of Income-tax Vs. M/s. Crosses Capital Services Pvt. Ltd. Circle-6, Kolkata. (PAN:AACCC5470H) (Appellant) (Respondent) & CO No. 57/Kol/2012 In I.T.A No.639/Kol/2012 Assessment Year: 2008-09 M/s. Crosses Capital Services Pvt. Ltd. Vs. Deputy Commissioner of Income-tax Circle-6, Kolkata. (Cross Objector) (Respondent)
Date of hearing: 17.09.2015 Date of pronouncement: 07.10.2015 For the Appellant: Shri Sanjit Kr. Das, JCIT, Sr. DR For the Respondent: Shri S. M. Surana, Advocate ORDER Per Shri Mahavir Singh, JM: This appeals by revenue and cross objection by assessee are arising out order of CIT(A)-VI, Kolkata in appeal No. 130/CIT(A)-VE/R-6/10-11/Kol dated 23.12.2011. Assessment was framed by Addl. CIT, Range-6, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2008-09 vide its order dated 27.12.2010. 2. At the outset, it is noticed that this appeal by revenue is time barred by 21 days and for Condonation of delay a petition dated 20.04.2012 is placed in file. When the petition was confronted to Ld. Counsel for the assessee, he fairly conceded that the cause shown by revenue is reasonable and hence, delay may be condoned. In term of the above, we condone the delay and admit the appeal. 3. The first common issue in this appeal of revenue and CO of the assessee is as regards to the order of CIT(A) in restricting the disallowance at Rs.27,235/- as against the disallowance made by AO at Rs.11,47,078/- qua exempted income by invoking the provisions of section 14A of the Act read with Rule 8D of I. T. Rules, 1962 (hereinafter referred to as the “Rules”). For this, revenue has raised the following ground no.1 and assessee has raised following ground no.2:
2 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 Revenue’s ground: “1. That on the facts and in the circumstances of the case, Ld. CIT(A) erred in law in deleting the disallowance of Rs.11,47,078/- made u/s. 14A of the I. T. Act and the order of the CIT(A) should be set aside and the order of the Assessing Officer should be restored. Assessee’s ground: “2. For that the Ld. CIT(A) erred in confirming the addition of Rs.27,235/- as expenses related to the earning of exempted income when the Ld. AO did not record any satisfaction about the correctness of the claim of the assessee and in any case the disallowance retained by the Ld. CIT(A) is excessive.”
Briefly stated facts are that the AO during the course of assessment proceedings noticed from the accounts of the assessee that it has earned exempt income i.e. dividend income of Rs.2,73,349/- but has not disallowed any expenditure in regard to this income u/s. 14A of the Act read with Rule 8D of the Rules. The AO made disallowance of inadmissible expenses of depository charges of Rs.3,76,973/-, disallowance of interest relatable to exempt income at Rs.6,02,009/- and ½% of average value of investment at Rs.1,68,096/-. Accordingly, he made disallowance at Rs.11,47,078/-. Aggrieved, assessee preferred appeal before CIT(A), who restricted the disallowance at Rs.27,235/- qua the earning of dividend income of Rs.2,72,349/- by observing in paras 4 and 5 as under: “4. I have carefully considered the observations of the Assessing Officer and submissions of the assessee. The assessee does not have any investments and all the shares are taken in his one account i.e., share trading. The assessee has submitted that dividend income is incidental to his business activities and there is no direct or indirect expenditure incurred in relation to earning of dividend income. The appellant has shown taxable income at an amount of Rs.10,55,98,040/- while the net receipt from share trading and broking income etc. is Rs.15,39,12,042/-. The Assessing Officer has nowhere said that he was not satisfied with the correctness of the claim of the expenditure although the assessee has also not shown any such expenditure incurred on dividend. 5. Looking into the trading activities of the appellant and the income earned on dividend, it is clear that the appellant has not made investments for the purpose of earning of dividend. The details of the dividend receipt shows, it has been received in all the twelve months ranging from Rs. 5/- to Rs. 42,350/-. The trading pattern of the assessee shows that it has not invested the money with the prime motive of earning of dividend. The assessee has submitted that there is no loss u/s 94(7) of the I. T. Act, 1961. The intention of the assessee and the business of the assessee clearly show that the earning of dividend is incidental to business. There are no direct expenses incurred for it. The funds have not been borrowed at any point of time for making investments to earn dividend from exempted income as submitted by assessee. The assessee has relied upon a number of judgments. The said judgments are not directly applicable since all of them were pronounced by the Hon'ble Appellate Authorities before the commencement of Rule 8D of the I. T. Act, 1961 which is applicable from the Asstt. Year 2008-09. In the facts and circumstances of the case, it is held that the assessee has not made any investments or direct expenditure for earning dividend and the earning of dividend is incidental to the
3 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 main business of the assessee. However, there are expenses which cannot be quantified exactly but by estimation 10% of the exempted income is disallowed as expenses pertaining to earning of dividend (exempted) income. Therefore, the disallowance of Rs.27,235/- for earning dividend of Rs.2,72,349/- is upheld. The appeal of the assessee is partly allowed on this ground.”
Aggrieved, now assessee and revenue both are in appeal before Tribunal. 5. At the outset, Ld. Counsel for the assessee argued that there is no satisfaction recorded by the AO for application of provisions of section 14A of the Act read with Rule 8D of the Rules. Ld. Counsel for the assessee stated that the AO has disallowed the sum of Rs.11,47,078/- by mechanically calculating the figures solely on the basis of formula prescribed under Rule 8D of the Rules and CIT(A) reduced the same to Rs.27,235/- of exempt income @ 10% of the exempt income holding that the provisions of section 14A of the Act read with Rule 8D of the Rules are not applicable but estimated disallowance is to be made. Ld. Counsel for the assessee stated that this position is stated in the order of Coordinate Bench of this Tribunal in the case of REI Agro Ltd. Vs. DCIT (2013) 144 ITD 141(Kol). Ld. Counsel also argued that the assessee is a dealer in shares and all the shares are stock in trade, which can be verified from the Balance Sheet of the assessee and hence, the provisions of section 14A of the Act read with Rule 8D of the Rules does not apply to the closing stock of shares. According to Ld. Counsel for the assessee, the dividend earned by the assessee is on shares kept in closing stock. Ld. Counsel for the assessee for this proposition relied on the decision of Hon’ble Karnataka High Court in the case of CII Ltd. Vs. JCIT (2012) 206 Taxmann 563 (Kar), wherein it is held that disallowance of expenses incurred on borrowings made for purchase and trading of shares cannot be made u/s. 14A of the Act read with Rule 8D of the Rules. On the other hand, Ld. Sr. DR supported the order of the AO.
We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee is in the business of share broking and share trading activity. Earning of dividend income is incidental to such business activity and whatever expenditure is incurred i.e. for the business. The assessee has earned total dividend income during the year under consideration at Rs.2,72,349/- out of the total income declared at Rs.15,39,12,042/-, which is a meagre 0.18% of the total income. Further, we have noticed from the assessment order that the AO has not recorded any
4 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 satisfaction for application of the provisions of section 14A of the Act read with Rule 8D of the Rules. In fact, there is no whisper of any satisfaction in the assessment order that the provisions of section 14A of the Act are applicable. We find that the AO made disallowance mechanically calculating the figures solely on the basis of Rule 8D of the Rules. Here, the coordinate Bench of ITAT in the case of REI Agro Ltd., Supra has held that for applicability of Rule 8D of the Rules, satisfaction of the AO about the correctness of the accounts of the assessee is necessary. The Tribunal in REI Agro Ltd., supra has held as under:
“7.1 In any case, the working of the disallowance under sub-part (ii) of subclause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does 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. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is 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. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term “average of the value of investment” is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed.”
In view of the above facts that the AO has not recorded any satisfaction as regards to correctness of the accounts of the assessee, hence, respectfully following the coordinate bench decision in the case of REI Agro Ltd., supra, we allow this issue of assessee’s CO and dismiss the ground of appeal of revenue. 7. Further, another aspect was examined by Hon'ble Karnataka High Court in the case of CCI Ltd., supra wherein it is held that no disallowance can be made in respect to those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all, though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its
5 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 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 should 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. Accordingly, Hon’ble High in this case has held as under: “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 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its 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 should 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.”
Similar are the facts of the present case before us that the assessee undisputedly dealing in the shares and securities as admitted by AO itself while mentioning the nature of business as “dealing in shares and securities”. This earning of dividend on such shares is merely incidental to such business activities. Accordingly, on this aspect also the assessee succeeds. Hence, this issue of assessee’s CO is allowed and revenue’s ground is dismissed.
The next common issue in this appeal of revenue and that of the Cross Objection of the assessee is as regards to the order of CIT(A) in restricting the rebate u/s. 88E of the Act to the extent of Rs.2,69,69,781/- as against the claim of the assessee at Rs.3,16,79,411/- on STT payments pertaining to the business of the assessee. For this, revenue has raised following ground no. 2 and assessee has raised following ground no.3: Revenue’s ground “2. That on the facts and circumstances of the case, ld. CIT(A) erred in law in directing that the rebate u/s. 88E of the I. T. Act should be allowed after allocating expenses and after deducting the full amount of the STT paid. The order of the CIT(A) should be cancelled and order of the AO should be restored. Assessee’s ground:
“3. For that the Ld. CIT(A) erred in restricting the tax rebate u/s. 88E to Rs.2,69,69,781/- only ignoring the claim of the assessee which was Rs.3,16,79,411/- as
6 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 per the return and on the facts and circumstances of the case and taking into account the income earned from share business as well as share brokerage business which was part of share business the entire claim should have been allowed.”
Briefly stated facts are that the AO while computing relief u/s. 88E of the Act on STT transactions, the AO allowed relief only to the income relating to STT transactions of the assessee and he computed the rebate as under: “Income relating to STT Transactions Least of the following two items: (1) STT Paid Rs. 3,32,34,833/- (2) 30% of Income from STT related transactions i.e. Rs. 1,78,55,901/- Therefore, Rebate u/s. 88E is allowed for Rs.1,78,55,901/-” Aggrieved against the order of AO, assessee preferred appeal before CIT(A). The assessee before the CIT(A) contended that the AO has not allowed expenditure relating to business of share broking. The CIT(A) requested the assessee to submit calculation of apportionment of expenses on the basis of turnover of share trading and brokerage business separately. Accordingly, assessee submitted the calculation. The CIT(A) directed the AO to take the proportionate expenses pertaining to share trading including F&O income and brokerage income on the basis of turnover and income basis as per the computation submitted by the assessee. For this, CIT(A) held in para 11, 12, 13 and 14 as under: “11. I have duly considered the observations of the Assessing Officer in the assessment order and written submissions of the assessee. The Assessing Officer has calculated rebate u/s. 88E of the Income-tax Act, 1961, by taking the net income from STT transactions at an amount of Rs.10,70,66,490/- and reduced the gross income shown under the head 'brokerage, dividend and interest' amounting to Rs.75,46,819/-. In this manner, the Assessing Officer has calculated that the income relating to STT transactions amounts to Rs.5,95,19,671/- only. The assessee, on the other hand, submitted that the entire expenditure of the P/L A/c thereby has been deducted from the income relating to STT transactions. He has submitted that the expenses are to be apportioned from the gross income originating to the assessee from brokerage and share transactions business of the assessee including F&O. It is right that the expenses in the P/L A/c are incurred for earning of the al1 the three types of income i.e., brokerage, share trading and interest. Since dividend is of a very small amount and the expenses for earning interest income are minimal, therefore, the expenses are to be apportioned among the income earned from the business of brokerage, share trading of the appellant and interest income. The appellant has apportioned the expenditure relating to salary, telephone, interest, SEBI turnover, free cash market and SEBI turnover fees F&O on the basis of turnover of the brokerage business and share trading business since these are incurred due to the volume of transactions of the business. The said apportionment is upheld as correct method of determining the expenses relating to both the businesses. Similarly, the rest of the expenses have been apportioned on the basis of net receipt from the business of brokerage and share trading. The share trading business accounts for 68.83% of the total income as per the assessee. Therefore, the expenses on the basis of this apportionment
7 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 basis amounts to Rs. 1,62,25,924/- as pertaining to share trading business and balance amount pertains to business of brokerage as per the calculation submitted by assessee. The Assessing Officer will allocate expenses pertaining to Share trading including F & 0 income and brokerage income on the basis of turnover and income basis as determined by the assessee in the calculation submitted during appellate proceedings. 12. The A.R of the assessee has relied upon the case of DCIT, Circle-1, Kolkata Vs M/s Ashika Stock Broking Ltd (2011) 44 SOT 556 (Kol) wherein it has been held by the Hon'ble Jurisdictional Tribunal that if there is a net surplus from share dealing of capital market segment and future option segment taken together and there is a net profit therefrom, the assessee is entitled for a rebate of STT paid thereon as per section 88E of the Income-tax Act, 1961 (Pare-15) 13. Therefore, the entire amount of STT paid (amount on which STT has been paid and income is taxable i.e. share trading and F&O), is to be taken for the purposes of calculation of rebate u/s 88E to be allowed to the assessee. However, the SIT paid on brokerage income is not to be taken in to account since it does not pertain to assessee as it is paid on behalf of clients. The calculation of the rebate u/s. 88E to be allowed has been submitted by assessee, which is as under: - “Gross income from share trading business Rs. 10,61,25,194/- Less: Expenses Rs. 1,62,25,924/- Rs. 8,98,99,270/- STT Paid Rs. 3,32,34,833/- 30% of income from STT relating transaction Rs. 2,69,69,781/-”
Aggrieved, revenue as well as assessee both came in appeal before Tribunal. 10. We have heard rival submissions and gone through facts and circumstances of the case. Admittedly, assessee is a dealer in shares having large turnover in business of brokerage. The assessee is a registered broker with NSE. The AO while computing the income from different business segments apportioned the business expenses on the basis of proportionate income under different business segments and accordingly, computed the income from operations for the purpose of determining income from share business segments for the purpose of computation of rebate u/s. 88E of the Act. Further, CIT(A) restricted rebate u/s. 88E of the Act after apportioning the expenses as noted above (the findings of CIT(A) are reproduced as it is). We find that the CIT(A) required the assessee to give calculation of the turnover in different business segments and found that the turnover of share business segment to the gross turnover was 5.87% under the head own business turnover in term of % of total turnover. Therefore CIT(A) apportioned the expenses on share segments and some of the expenses were apportioned @ 5.87% and some of the expenses i.e. balance other expenses on income basis as per calculation ‘c’ @68.83%. We find that revenue has not disputed the proportionate determination on turnover basis but has contested the AO’s method to bifurcate the expenses on proportionate of income basis. According to assessee, all the expenses should bifurcated
8 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09 in proportion to turnover of share business segment to the gross turnover. We find that qua the expenses, the plea of the assessee that all the expenses should be bifurcated in proportion to turnover of share business segment to that of the gross turnover is quite reasonable. Therefore, the part of the expenses, which were bifurcated by the CIT(A) on income basis is directed to be determined on the basis of percentage of turnover of own business @ 5.87%. We find that similar issue was dealt with by the Mumbai Bench of ITAT in the case of Ruia Stud & Agricultural Farms Vs. ITO (1985) 14 ITD 429 (Mum) wherein the apportionment of common expenses are explained to be dealt with as under: “13. On the last question of apportionment of common expenses between agricultural and non-agricultural business, we have no hesitation in accepting the assessee’s claim. If, as a matter of fact, the actual expenditure out of the common expenditure pertaining to each of the business could be worked out, adopting that figure would be the most correct method of allocation. In the absence of these details a rough and ready method of apportionment would be on the basis of the turnover in the different businesses. We find that apportioning the expenditure on the basis of the gross profit is positively incorrect since there are several variables the applicability of which is to be considered in working out this computation. The assessee’s claim is accepted on this point also.”
Similarly, Hon'ble Delhi High Court in the case of Control & Switchgear Co. Ltd. Vs. DCIT (2012) 66 DTR 161 (Del.) has considered the issue of common issue how to be dealt with as under:
“10. The Tribunal has recorded the following findings :
"5.5 Coming to adjustment on account of common expenses, we may gainfully refer to the provision contained in sub- section(5), which mandates that the same have to be computed as if eligible business was the only source of income of the assessee during the previous year. Seen in this context, if certain expenses incurred by head office lead to benefit to the eligible business also, the expenses will have to be apportioned to it. This has not been done. Therefore, such an apportionment was necessary to work out eligible profits for deduction. The assessee has not furnished unit-wise details with narration to find out which expenses could be allocated to eligible business from the head office. In absence thereof, the ld. CIT(Appeals) correctly came to the conclusion that common expenses have to be allocated to the eligible business in the ratio of turnover of the eligible business to the total turnover. He has also adequately justified the reasons for calculating financial expense for the purpose of allocation. The assessee had furnished details of some expenses, which could not be considered for allocation for the reason that those contained proposed dividend, proposed dividend tax, court fee for old cases and expenses recovered from the respective units, being Rs.4,53,401/- from other units and Rs.12,26,065/ from eligible unit. We do not find the necessity of making any interference with these findings as these are based on sound logic. He has also granted relief to the assessee to calculate the disallowance for the period 23.10.2005 to 31.3.2006 as the
9 ITA No.639/Kol/2012 & CO 57/K/2012 M/s. Crosses Capital Services Pvt. Ltd. AY 2008-09
eligible unit was set up on 23.10.2005 and not on 1.10.2005. There seems to be no scope for any further relief in this matter also. Accordingly, it is held the ld. CIT(appeals) was right in disallowing Rs.69,67,762/- from the deduction subject to some adjustment to be made by AO on verification. Thus, this ground is dismissed."
In view of the above factual discussion and precedence relied upon, we dismiss the issue of revenue’s appeal allow that of the assessee’s Cross Objection. 13. In the result, the appeal of revenue is dismissed and assessee’s CO is allowed. 14. Order is pronounced in the open court on 07.10.2015 Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member
Dated : 07th October, 2015
Jd. Sr. P.S Copy of the order forwarded to:
APPELLANT – DCIT, Circle-6, Kolkata. 1. Respondent – M/s. Crosses Capital Services Pvt. Ltd., 1, R. N. Mukherjee 2 Road, 5th floor, Suit-37, Kolkata-700 001. The CIT(A), Kolkata 3. 4. CIT Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,
Asstt. Registrar.