M/s Dalmia Securities Pvt. Ltd., Kolkata V. DCIT, CIR-12, KOLKATA, Kolkata

CO 22/KOL/2014

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 2821 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 10 month(s) 18 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 08-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 31-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 20-03-2014
• Court: TRIBUNAL
• Department Lawyers: RAJAT KUMAR KUREEL
• Assessee Lawyers: ASHIM CHOWDHURY
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENC H KOLKATA BEFORE SHRI A.T.VARKEY, JM & DR. A.L.SAINI, AM ./ ITA NO.325/KOL/2014 ( / ASSESSMENT YEAR:2009-2010) DCIT, CIRCLE-12 P-7, CHOWRINGHEE SQUARE, AAYAKAR BHAWAN, 7 TH FLOOR, KOLKATA-700069 VS. M/S DALMIA SECURITIES PVT. LTD. IDEAL PLAZA, 11/1, SARAT BOSE RD., KOLKATA-700020 ./ ./PAN/GIR NO. : AABCD 1813 G ( /APPELLANT ) .. ( / RESPONDENT ) AND CROSS OBJECTION NO.22/KOL/2014 ( / ASSESSMENT YEAR:2009-2010) M/S DALMIA SECURITIES PVT. LTD. IDEAL PLAZA, 11/1, SARAT BOSE RD.,KOLKATA-700020 VS. DCIT, CIRCLE-12 P-7, CHOWRINGHEE SQUARE, AAYAKAR BHAWAN, 7 TH FLOOR, KOLKATA-700069 ./ ./PAN/GIR NO. : AABCD 1813 G ( /APPELLANT ) .. ( / RESPONDENT ) REVENUE BY : SHRI RAJAT KUMAR KUREEL, JCIT ASSESSEE BY : SHRI ASHIM CHOWDHURY, AR / DATE OF HEARING : 21/12/2016 /DATE OF PRONOUNCEMENT 08/02/2017 / O R D E R PER DR. ARJUN LAL SAINI, AM: THE CAPTIONED APPEAL FILED BY THE REVENUE, AND CROS S OBJECTION FILED BY THE ASSESSEE, PERTAINING TO THE ASSESSMENT YEAR 2009-2010, ARE DIRECTED AGAINST THE ORDER PASSED BY LD. COMMISSION ER OF INCOME TAX (APPEALS)-XII, KOLKATA, IN APPEAL NO.347/XII/12/201 1-12, DATED 08.11.2013, WHICH IN TURN ARISES OUT OF AN ORDER PA SSED BY THE ASSESSING OFFICER (AO) UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961, (IN SHORT THE ACT), DATED 29.12.2011. ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 2 2. BRIEF FACTS OF THE CASE QUA THE ASSESSEE ARE THA T THE ASSESSEE FILED ITS RETURN OF INCOME ON 23.9.2009 DECLARING TOTAL I NCOME AT NIL. LATER ON, THE CASE WAS SELECTED FOR SCRUTINY U/S.143(3) OF TH E ACT, AND THE AO HAS COMPLETED THE ASSESSMENT BY MAKING THE ADDITION U/S . 14A R.W.R.8D OF THE RULES AT RS. 64,95,384/-. THE AO ALSO DISALLOWED TH E FOREIGN TRAVELLING EXPENSES PARTLY AND ALSO DISALLOWED COMPUTER AND SO FTWARE EXPENSES. 3. AGGRIEVED FROM THE ORDER OF THE AO, ASSESSEE FIL ED AN APPEAL BEFORE THE CIT(A), WHO HAS DELETED THE ADDITION MAD E BY THE AO BY OBSERVING THE FOLLOWINGS :- 5.1.3 DECISION: I HAVE CAREFULLY CONSIDERED THE SUBMISSION PUT FOR TH ON BEHALF OF THE APPELLANT ALONG WITH THE SUPPORTING DETAILS/DOCUMEN TS, PERUSED THE FACTS OF THE CASE INCLUDING THE AOS OBSERVATION AN D FINDINGS AND OTHER MATERIALS BROUGHT ON RECORD. IT IS SUBMITTED THAT THE COMPANY HAD EXEMPTED DIVIDEND INCOME OF RS.58,40,974 FROM S TOCK IN TRADE AND RS.33,85,428 FROM INVESTMENTS AGGREGATING TO RS . 92,26,402 AS PER SCHEDULE 15 TO THE AUDITED ACCOUNTS OUT OF WHIC H RS.47, 13,776/- HAS BEEN DISALLOWED U/S 94(7) OF THE ACT R ESULTING IN RS.45, 12,626/- WHICH IS EXEMPT AND DOES NOT FORM PART OF TOTAL INCOME. NO SPECIFIC EXPENSES WERE INCURRED TO EARN DIVIDEND IN COME WHICH AROSE DUE TO HOLDING OF SHARES. THE COMPANY DEALS I N SHARES IN HEDGING ACTIVITY AND THE OPENING STOCK-IN-TRADE WAS RS.91.67 CRORE AND CLOSING STOCK-IN-TRADE WAS RS.84.88 CRORE (SCHE DULE-7). IN TRADING ACTIVITY THE COMPANY EARNED DIVIDEND INCOME BY VIRTUE OF HOLDING OF SHARES AND NO EXTRA EFFORTS ARE REQUIRED FOR EARNING DIVIDEND WHICH TOO IS VARIABLE AND THE QUANTUM IS N OT CERTAIN. IN MOST OF THE CASES, THE DIVIDEND IS DIRECTLY CREDITE D IN THE BANK ACCOUNT THROUGH ECS. TO SUM UP NO SPECIFIC EXPENSES WERE REQUIRED TO EARN DIVIDEND INCOME. AS REGARDS THE DISALLOWANCE OF PROPORTIONATE INTERE ST INCOME UNDER RULE 8D(2)(II), IT IS SUBMITTED THAT DURING THE YEA R UNDER APPEAL, THE APPELLANT COMPANY PAID INTEREST OF RS.1,96,65,291/- AS PER SCHEDULE 19 TO THE AUDITED ACCOUNTS AND RECEIVED INTEREST IN COME OF RS.3,16,07,453/- (INCLUDING RS.3,12,11,447 FROM FIX ED DEPOSIT WITH BANKS) AS PER SCHEDULE 14 TO THE AUDITED ACCOUNTS R ESULTING IN NET INTEREST INCOME OF RS.1,19,42,162/-. THE BORROWED F UNDS WERE WHOLLY AND EXCLUSIVELY UTILIZED FOR THE TRADING ACTIVITY O F THE COMPANY IN SHARES AND MUTUAL FUNDS AND KEEPING MONEY WITH BANK S IN FIXED ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 3 DEPOSIT ACCOUNTS IN THE NAME OF BSE & NSE TO AVAIL MARGIN LIMIT FOR TRADING ACTIVITY AND NOTHING OUT OF IT CAN BE ATTRI BUTED TO ACQUIRING ANY ASSETS INCOME FROM WHICH DO NOT FORM PART OF TO TAL INCOME. MOREOVER, THE VALUE OF INVESTMENT (SCHEDULE-6) AS O N 01/04/2008 WAS 41,47,02,711/- WHICH REDUCED TO RS.30,96,14,444 /- AS ON 31/03/2009 RESULTING IN REDUCTION OF RS 10,50,88,26 7 DURING THE YEAR. THUS NO PORTION OF THE BORROWED FUNDS WERE UTILIZED TO ACQUIRE INVESTMENTS INCOME FROM WHICH WAS EXEMPT. THE OPENI NG AND CLOSING CAPITAL AND RESERVES & SURPLUS OF THE COMPA NY WERE RS.113,13,71,857 AND RS.96,59,73,576 RESPECTIVELY W HICH WERE OWN INTEREST FREE FUNDS. IT IS STATED THAT THE OPENING OF INVESTMENTS OF RS.30,96,14,445 WERE ACQUIRED OUT OF NON INTEREST B EARING FUND AS HAS BEEN HELD IN ASSESSMENT YEAR 2008-09 (SUPRA) AN D DURING THE YEAR UNDER APPEAL THE INVESTMENTS REDUCED BY RS.10, 50,88,267 WHICH WERE ALSO AVAILABLE TO THE COMPANY AND ACCORD INGLY DURING THE YEAR THERE WAS SURPLUS OF RS.1,19,42,162 AS AGAINST NET OUT GO OF RS.1,40,690/- IN INTEREST ACCOUNT IN ASSESSMENT YEA R 2008-09 WHICH STANDS ACCEPTED BY DEPARTMENT. SINCE THERE IS NO CH ANGE IN FACTS OF THE CASE IN ASSESSMENT YEAR 2008-09 AND 2009-10 NO DISALLOWANCE OF INTEREST IS TENABLE. RELIANCE IS ALSO PLACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN CASE OF RADHASOAMI SATSANG [193 ITR 321 (SC). THAT DURING THE YEAR THE COMPANY ACQUIRED FOLLOWING THREE SHARES FOR RS.1,26,91,320 OUT OF OWN FUNDS AND SALE OF MUTUAL FUND UNITS AS WILL BE EVIDENT FROM ENCLOSED STATEMENT SH OWING DETAILS OF PURCHASES AND BANK STATEMENTS:- QUANTITY COMPANY AMOUNT 1,34,064 GKW LTD RS.78,08,570 18,325 INDIA HOTEL LTD. RS.12,82,750 3,60,000 DALMIA INSURANCE BROKERS (P) LTD. RS.36,00,000 THUS, IT IS CONTENDED THAT NO INTEREST BEARING FUND S WERE UTILIZED TO ACQUIRE SHARES DURING THE YEAR INCOME FROM WHICH IS EXEMPT AND DOES NOT FORM PART OF TOTAL INCOME. HENCE NO INTERE ST CAN BE DISALLOWED AND THE DISALLOWANCE OF RS.46,84,591/- I S UNTENABLE WHICH SHOULD BE DELETED. HENCE, AS PER THE APPELLANT THE DISALLOWANCE UNDER RULE 8D(2)(II) IS NIL. HOWEVER, THE AO HAS NOT ACCEPTED THE EXPLANATI ON OFFERED BY THE APPELLANT AND WITHOUT GIVING ANY FINDING REGARDING THE INCURRENCE OF EXPENSES FOR THE SAME HAS DISALLOWED RS.46,84,591/- AS PROPORTIONATE INTEREST EXPENSES INCURRED BY THE APP ELLANT FOR EARNING THE EXEMPT INCOME. AFTER CONSIDERING THE APPELLANT'S SUBMISSION AND PE RUSING THE ENTIRE FACTS, I AM INCLINED TO AGREE WITH THE CONTENTION O F THE APPELLANT THAT NO INTEREST BEARING FUNDS WERE UTILIZED TO ACQUIRE SHARES DURING THE YEAR, INCOME FROM WHICH IS EXEMPT AND DOES NOT FORM PART OF TOTAL ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 4 INCOME AND THEREFORE NO INTEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II). MOREOVER, I FIND THAT THE JURISDICTIONAL LTAT IN THE CASE OF DCLT VS. TRADE APARTMENT (ITA NO. 1277 /KOL/2011) H AS HELD THAT IN CASE OF PROPORTIONATE DISALLOWANCE OF INTEREST EXPE NSE, THE NETTING OF SUCH INTEREST INCOME TO BE CONSIDERED AND WHEN THE INTEREST INCOME CREDITED TO P&L ACCOUNT EXCEEDED THE INTEREST EXPEN DITURE INCURRED BY THE APPELLANT, NO INTEREST EXPENDITURE WAS LEFT WHICH COULD BE DISALLOWED U/S 14A OF THE ACT. IT IS ALSO SEEN THAT THE ORDER PASSED IN THE CASE OF DCIT VS. TRADE APARTMENT HAS ALSO BEEN FOLLOWED BY THE HON'BLE ITAT, KOLKATA IN THE CASE OF BISHWANATH PAS ARI VS. ACIT IN ITA NO. 1682/KOL/2011. THEREFORE, IN VIEW OF THE DE CISIONS OF THE HON'BLE ITAT, KOLKATA, AS IN THE APPELLANT'S CASE N ET INTEREST HAS BEEN CREDITED, I AM OF THE VIEW THAT NO DISALLOWANC E OF THE INTEREST CAN BE MADE UNDER RULE 8D(2)(II). NOW COMING TO THE DISALLOWANCE OF INDIRECT ADMINIST RATIVE EXPENSES INCURRED FOR EARNING THE EXEMPT DIVIDEND INCOME UND ER RULE 80(2)(III), I AM OF THE VIEW THAT THE DECISION OF T HE HON'BLE JURISDICTIONAL ITAT, KOLKATA DATED 19/06/2013 IN TH E CASE OF REI AGRO LTD VS.DCIT IS APPLICABLE. IN THAT CASE, THE HONB'L E ITAT,KOKATA HAS HELD THAT FOR MAKING DISALLOWANCE U/S 14A READ WITH RULE 8D IN RESPECT OF THE INCOME WHICH IS EXEMPTED & DOES NOT FORM PORT OF THE TOTAL INCOME, THE ONLY INVESTMENT WHICH HAS GIVEN R ISE TO THE EXEMPTED INCOME SHOULD BE TAKEN INTO CONSIDERATION AND NOT THE ENTIRE INVESTMENT MADE BY THE ASSESSEE. THUS, IT IS OBSERVED THAT FROM THE STATEMENT FURNISHED BY THE APPELLANT SHOWI NG AVERAGE VALUE OF INVESTMENTS (OUT OF TOTAL INVESTMENTS) FROM WHIC H DIVIDEND OF RS.33,85,428/- WAS RECEIVED, WORKED OUT TO RS.33,09 ,30,653/- (AS AGAINST RS.362158578/- AS PER AO) AND 0.5 % OF WHIC H IS WORKED OUT AT RS.16,54,653/-, AS AGAINST RS.1810793/- AS PER A O. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE ITAT, KOLKATA(SUPRA), ON PERUSAL OF THE DETAILS OF WORKIN G MADE AND FURNISHED ON THE ABOVE BASIS, IT IS FOUND THAT IN T HE INSTANT CASE OF THE APPELLANT, IN MY OPINION, THE AVERAGE VALUE OF INVE STMENT WORKED OUT AT RS.33,09,30,653/- ( INSTEAD OF RS. 36,21,58,578/ - AS PER THE AO) REQUIRES TO BE TAKEN INTO ACCOUNT FOR THE PURPOSE O F COMPUTING DISALLOWANCE UNDER RULE 8D(2) (III) AND THUS, 0.5% OF THE AVERAGE VALUE OF SUCH INVESTMENT OF RS.33,09,30,653/- COMES TO RS.16,54,653/-. THUS, THE .AO IS DIRECTED TO RESTRI CT THE DISALLOWANCE U/S 14A OF THE ACT UNDER RULE 8D(2)(III) TO RS.16,5 4,653/- AS WORKED OUT BY THE APPELLANT. HOWEVER, AS THE DETAILS OF TH E WORKING FURNISHED TO ARRIVE AT THIS FIGURE BY THE APPELLANT IN THIS R ESPECT REQUIRES VERIFICATION FROM THE RECORDS, THE AO IS DIRECTED T O VERIFY THE SAME AND DECIDE ACCORDINGLY. THUS, THIS GROUND OF APPEAL IS PARTLY ALLOWED. ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 5 4. NOT BEING SATISFIED WITH THE ORDER OF LD. CIT(A) , THE REVENUE IS IN APPEAL BEFORE US AND ASSESSEE HAS ALSO RAISED CROSS OBJECTIONS: GROUNDS OF APPEALS TAKEN BY THE REVENUE ARE AS FOLL OWS: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION A MOUNTING TO RS.46,84,591/- ON ACCOUNT OF PROPORTIONATE INTEREST EXPENSES OF RULE 8D(II) R.W.SEC.14A 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND AS PER LAW LD. CIT(A) ERRED IN DELETING THE ADDITION A MOUNTING TO RS.18,10,793/- U/S.14A READ WITH RULE 8D(III). 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND AS PER LAW LD. CIT(A) ERRED IN NOT FOLLOWING THE CALCU LATION AS PRESCRIBED BY RULE 8D OF I.T.ACT, APPRECIATING THE CALCULATION MADE BY THE A.O. WHICH IS IN ACCORDANCE WITH RULE 8 D OF THE I.T.ACT. CROSS OBJECTIONS RAISED BY THE ASSESSEE ARE AS FOLL OWS: 1) FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING DISALLOWANCE OF RS.16,54,653/- UNDER RUL E 8D (2) (III) OF THE INCOME TAX RULES READ WITH SECTION 14A OF THE ACT. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPR ECIATE THE FACT THAT THE SAID DISALLOWANCE WAS MADE ON A PERCENTAGE BASIS WITH REFERENCE TO THE VALUE OF INVESTMENT HELD BY THE AP PELLANT AND WAS NOT WITH RELATION TO ANY EXPENDITURE INCURRED DIREC TLY OR INDIRECTLY IN RELATION TO EARNING OF ANY INCOME. 2) FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS ) FAILED TO APPRECIATE THE FACT THAT THE DISALLOWANCE UNDER SEC TION 14A OF THE ACT CAN ONLY BE MADE OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 6 UNDER THE ACT AND THE DISALLOWANCE AS MADE IN ACCOR DANCE WITH RULE 8D (2) (III) OF THE INCOME TAX RULES IS BEYOND AND IN EXCESS OF THE PROVISIONS OF SECTION 14A OF THE ACT AND AS SUC H IS LIABLE TO BE DELETED. 5.ALTHOUGH, IN THIS APPEAL THE REVENUE HAS RAISED T HREE GROUNDS OF APPEAL BUT AT THE TIME OF HEARING THE MAIN GRIEVANC E OF THE REVENUE HAS BEEN CONFINED TO THE ISSUE OF ADDITIONS DELETED BY THE LD.CIT(A), WHICH WERE MADE BY THE ASSESSING OFFICER UNDER SECT ION 14A READ WITH RULE 8D (2) (II) AND RULE 8D (2) (III) OF THE I.T. RULES. THE SOLITARY GRIEVANCE OF THE ASSESSEE IN CROSS OBJ ECTION IS THAT THE DISALLOWANCE UNDER RULE 8D (2) (III) WAS MADE BY LD CIT(A) ON A PERCENTAGE BASIS WITH REFERENCE TO THE VALUE OF INV ESTMENT HELD BY THE ASSESSEE AND IT WAS NOT WITH RELATION TO ANY EX PENDITURE INCURRED DIRECTLY OR INDIRECTLY IN RELATION TO EARNING OF AN Y INCOME. 5.1 THE LD AR SUBMITTED THAT D URING THE YEAR UNDER APPEAL, THE ASSESSEE COMPANY PAID INTEREST OF RS.1,96,65,291 AS PER SCHE DULE 19 TO THE AUDITED ACCOUNTS AND RECEIVED INTEREST INCOME OF RS.3,16,07 ,453/- (INCLUDING RS.3,12,11,447 FROM FIXED DEPOSIT WITH BANKS) AS PE R SCHEDULE 14 TO THE AUDITED ACCOUNTS RESULTING IN NET INTEREST INCOME O F RS.1,19,42,162/-. THE BORROWED FUNDS WERE WHOLLY AND EXCLUSIVELY UTILIZED FOR THE TRADING ACTIVITY OF THE COMPANY IN SHARES AND MUTUAL FUNDS AND KEEPING MONEY WITH BANKS IN FIXED DEPOSIT ACCOUNTS IN THE NAME OF BSE & NSE TO AVAIL MARGIN LIMIT FOR TRADING ACTIVITY AND NOTHING OUT OF IT CAN BE ATTRI BUTED TO ACQUIRING ANY ASSETS INCOME FROM WHICH DO NOT FORM PART OF TOTAL INCOME. ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 7 LD. AR FURTHER SUBMITTED THAT WITHOUT CONSIDERING T HE AFORESAID SUBMISSIONS THE ASSESSING OFFICER DISALLOWED RS. 46 ,84,591 AS PER RULE 8D(2)(II) WHICH IS WRONG AND UNTENABLE ON THE FOLLO WING GROUNDS:- A) THAT DURING THE YEAR THE COMPANY PAID INTEREST O F RS.1,96,65,291 AS PER SCHEDULE 19 TO THE AUDITED ACCOUNTS AND RECEIVE D INTEREST INCOME OF RS.3,16,07,453/- (INCLUDING RS.3,12,11,447 FROM FIX ED DEPOSIT WITH BANKS) AS PER SCHEDULE 14 TO THE AUDITED ACCOUNTS R ESULTING IN NET INTEREST INCOME OF RS.1,19,42,162/-. B) THAT OPENING OF INVESTMENTS OF RS.30,96,14,445 W ERE ACQUIRED OUT OF NON INTEREST BEARING FUND AS HAS BEEN HELD IN ASSES SMENT YEAR 2008-09 AND DURING THE YEAR UNDER APPEAL THE INVESTMENTS RE DUCED BY RS.10,50,88,267 WHICH WERE ALSO AVAILABLE TO THE CO MPANY AND ACCORDINGLY DURING THE YEAR THERE WAS SURPLUS OF RS .1,19,42,162 AS AGAINST NET OUT GO OF RS.1,40,690 IN INTEREST ACCOU NT IN ASSESSMENT YEAR 2008-09, WHICH STANDS ACCEPTED BY DEPARTMENT. SINCE THERE IS NO CHANGE IN FACTS OF THE CASE IN ASSESSMENT YEAR 2008-09 AND 2009-10 NO DISALLOWANCE OF INTEREST IS TENABLE. RELIANCE IS PL ACED ON THE DECISION OF THE HON'BLE SUPREME COURT IN CASE OF RADHASOAMI SAT SAOG [193 ITR 321 (SC). C) THAT DURING THE YEAR THE COMPANY ACQUIRED FOLLOW ING THREE SHARES FOR RS.1,26,91,320 OUT OF OWN FUNDS AND SALE OF MUTUAL FUND UNITS AS WILL BE EVIDENT FROM ENCLOSED STATEMENT SHOWING DETAILS OF PURCHASES AND BANK STATEMENTS:- QUANTITY COMPANY AMOUNT 1,34,064 GKW LTD RS.78,08,570 18,325 INDIA HOTEL LTD. RS.12,82,750 3,60,000 DALMIA INSURANCE BROKERS (P) LTD. RS.36,00,000 THUS NO INTEREST BEARING FUNDS WERE UTILIZED TO ACQ UIRE SHARES DURING THE YEAR INCOME FROM WHICH IS EXEMPT AND DOES NOT FORM PART OF TOTAL INCOME. HENCE NO INTEREST CAN BE DISALLOWED AND THE DISALLO WANCE OF RS.46,84,591 IS UNTENABLE WHICH SHOULD BE DELETED. REGARDING GROUND NO.2 TAKEN BY REVENUE FOR DISALLOW ANCE UNDER RULE 8D (2) (III) ( THE ASSESSEE IS IN CROSS OBJECTIONS ALS O),WHICH RELATES TO DISALLOWANCE OF RS18,10,793 BEING 0.5% OF AVERAGE V ALUE OF INVESTMENT AS PER RULE 8D(2)(III) ON THE GROUND THAT THE FACIL ITIES AND THE SET UP OF THE COMPANY HAS ALSO BEEN USED TO MANAGE THE INVESTMENT S. THE DIVIDEND HAS BEEN EARNED FROM THESE INVESTMENTS. HENCE A PAR T OF THE TOTAL EXPENSES HAS BEEN INCURRED AND UTILIZED FOR THE PUR POSE OF THE DIVIDEND INCOME. ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 8 THE LD AR FOR THE ASSESSEE SUBMITTED THAT RULE 8D (2)(III) IS TO DISALLOW NOTIONAL EXPENSES WHICH WERE NOT INCURRED AND CLAIM ED. AS SUCH NO EXPENSES SHOULD BE DISALLOWED UNDER RULE 8 D/(2)(II I) WHICH OVER RIDES THE MAIN SECTION 14A OF THE I. T. ACT FOR DISALLOWANCE OF EXPENSES INCURRED TO EARN EXEMPT INCOME AND AS SUCH RULE 8D(2)(III) IS I LLEGAL AND UNCONSTITUTIONAL. THE LD AR POINTED OUT THAT THE A SSESSING OFFICER HAS NOT SPECIFICALLY POINTED OUT ANY DIRECT EXPENSE AND HAS NOT GIVEN ANY FINDING REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSES SEE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. THE LD AR SUBMITTED THAT, THERE MAY BE CERTAIN IND IRECT EXPENSES INCURRED THAT MAY BE ATTRIBUTED INDIRECTLY. CONSEQU ENTIALLY THE COMPANY HAS ESTIMATED A SUM OF RS. 92,264/- AS DISALLOWANCE IN TERMS OF SECTION 14A OF THE I. T. ACT, 1961 BEING 1 % RS.92,26,402 B EING DIVIDEND RECEIVED.IN VIEW OF THE ABOVE ONLY DISALLOWANCE U/S .14A IS 92,264/- AS OFFERED BY THE COMPANY. IN ADDITION TO THIS THE AR FOR THE ASSESSEE HAS REL IED ON THE FOLLOWING JUDGMENTS: (1).M.S. TRADE APARTMENT LTD. ITA NO.1277/KOL/2011 , A.Y. 2008-09, DATED 30.03.2012: AS LD.CIT(A) HAS RIGHTLY OBSERVED, ONCE THERE IS N O NET INTEREST EXPENDITURE, AS IS THE CASE BEFORE US-UPON SETTING OFF INTEREST CREDITED TO PROFIT AND LOSS ACCOUNT, NO PART OF INT EREST DEBITED CAN BE DISALLOWED AS ATTRIBUTABLE TO EARNING TAX FREE DIVI DEND (2).M/S JIWRAJKA ASSOCIATES PVT LTD, ITA NO. 2362/M /2013, A.Y.2009-10, DATED 26.06.2014: UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, IN OUR VIEW, THE LD CIT(A) RIGHTLY HELD THAT THE ASSESSEE WAS RIGHT IN HIS ACTION IN NETTING THE INTEREST RECEIVED AGAINST THE INTEREST PAID. (3). DAGA CAPITAL MANAGEMENT (P) LTD.-ITAT MUMBAI,1 17 ITD 169 (2009): DOMINANT AND IMMEDIATE CONNECTION REFERS TO FIRST DEGREE OF RELATION BETWEEN THE TWO THINGS. HOWEVER, IT WOULD CEASE TO BE DOMINANT CONN ECTION IF THE DEGREE OF RELATIONSHIP SLIPS FROM FIRST TO SECOND. THERE IS A DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE SHAPE O F INTEREST ON BORROWINGS FOR PURCHASE OF SHARES AND THE DIVIDEND INCOME. IT IS O NLY DUE TO THE INVESTMENT IN THE SHARES THAT THE DIVIDEND INCOME HAS RESULTED IN. SU CH INVESTMENT RESULTS INTO TWO INCOMES, VIZ., THE PROFIT ON ITS SALE AND THE DIVIDEND. BOTH THESE INCOMES FALL ON THE SAME PLATFORM AND ARE THE DIRECT RESULT OF INVESTME NT. IF A PERSON INVESTS IN THE SHARES FROM WHICH DIVIDEND INCOME IS EARNED AND THEREAFTER SUCH DIVIDEND IS DEPOSITED IN THE BANK FROM WHERE THE INTEREST INCOME RESULTS, IN SUC H A SITUATION THE RELATION BETWEEN THE INTEREST PAID BY THE ASSESSEE ON THE BORROWED F UNDS FOR THE PURCHASE OF SHARES WITH THE DIVIDEND INCOME IS DOMINANT AND IMMEDIATE, BEING THAT OF THE FIRST DEG REE BUT THE RELATION OF SUCH INTEREST PAID WITH THE INTEREST IN COME EARNED ON THE AMOUNT INVESTED IN THE BANK, WOULD BE OF SECOND DEGREE, BEING INDIRECT AND NON-IMMEDIATE. THEREFORE, THE ASSESSEE'S SUBMISSION, THAT THE EXPENDITURE OF INTE REST ON INVESTMENT IN SHARES HAD DIRECT AND PROXIMATE LINK WITH THE PROFIT OR LOSS F ROM TRADING OF SHARES AND INDIRECT LINK ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 9 WITH THE DIVIDEND INCOME WHICH WAS EARNED INCIDENTA LLY AND, HENCE, NO DISALLOWANCE WAS WARRANTED, HAD NO FORCE. [PARA 23.8] THE ASSESSEE'S SUBMISSION THAT SECTION 14A WOULD BE APPLICABLE ONLY WHEN THE SHARES ARE HELD AS AN INVESTMENT AND NOT AS STOCK-IN-TRADE , WAS DEVOID OF MERIT FOR THE REASON THAT THE REFERENCE IN RULE 8D(2) (II ) IS TO 'THE VALUE OF INVESTMENT' AND NOT THE ASSET S 'HELD AS INVESTMENT'. A PERSON MAY MAKE INVESTMENT IN SHARES AND THE SHARES SO PURCHASED MAY BE HELD EITHER AS 'STOCK-IN-TRADE' OR 'INVESTMENT'. THE WORD 'INVESTMENT' IN THIS RULE REFERS TO THE MAKING OF PURCHASE OF SH ARES AND NOT HOLDING IT AS AN INVESTMENT. [PARA 23.9] 5.2. ON THE OTHER HAND, LD. DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE AO, WHICH WE HAVE ALREADY NO TED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREV ITY. 5.3. HAVING HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL ON RECORD, WE ARE OF THE VIEW THAT THERE IS MERIT IN THE SUBMI SSIONS OF THE ASSESSEE, AS THE PROPOSITION CANVASSED BY LD. AR FOR THE ASSE SSEE ARE SUPPORTED BY VARIOUS JUDGMENTS CITED ABOVE AND THE FACTS NARRATE D BY HIM ABOVE. AS THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ASSE SSEE COMPANY PAID INTEREST OF RS.1,96,65,291/- AND RECEIVED INTEREST OF RS.3,16,07,453/- AND AFTER OFFSETTING THE INTEREST PAID WITH INTEREST IN COME RECEIVED THE RESULTING NET INTEREST INCOME COMES TO RS.1,19,42,162/-. THE RE IS NO INTEREST EXPENDITURE AFTER OFFSETTING HENCE THERE SHOULD NOT BE ANY DISALLOWANCE. THE LD. AR FOR THE ASSESSEE ALSO SUBMITTED THAT THE BORROWED FUNDS WERE WHOLLY AND EXCLUSIVELY UTILIZED FOR THE TRADING ACT IVITY OF THE COMPANY IN SHARES AND MUTUAL FUNDS AND KEEPING MONEY WITH BANK S IN FIXED DEPOSIT ACCOUNTS IN THE NAME OF BSE & NSE TO AVAIL MARGIN L IMIT FOR TRADING ACTIVITY AND NOTHING OUT OF IT CAN BE ATTRIBUTED TO ACQUIRING ANY ASSETS ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 10 INCOME FROM WHICH DO NOT FORM PART OF TOTAL INCOME. THUS, NO PORTION OF BORROWED FUNDS WERE UTILIZED TO ACQUIRE SHARES DURI NG THE YEAR. LD. AR ALSO POINTED OUT THAT THE OPENING OF INVESTMENTS OF RS.30,96,14,445 WERE ACQUIRED OUT OF NON INTEREST BEARING FUND AS HAS BE EN HELD IN ASSESSMENT YEAR 2008-09 AND DURING THE YEAR UNDER APPEAL THE I NVESTMENTS REDUCED BY RS.10,50,88,267 WHICH WERE ALSO AVAILABLE TO THE COMPANY AND ACCORDINGLY DURING THE YEAR THERE WAS SURPLUS OF RS .1,19,42,162 AS AGAINST NET OUT GO OF RS.1,40,690 IN INTEREST ACCOU NT IN ASSESSMENT YEAR 2008-09, WHICH STANDS ACCEPTED BY DEPARTMENT. THIS WAY, THE LD. AR FOR THE ASSESSEE HAS STATED THAT NO INTEREST BEARING FU NDS WERE UTILIZED TO ACQUIRE SHARES DURING THE YEAR, INCOME FROM WHICH I S EXEMPT AND DOES NOT FORM PART OF TOTAL INCOME AND, THEREFORE, NO IN TEREST CAN BE DISALLOWED UNDER RULE 8D(2)(II). HENCE, LD CIT(A) HAS RIGHTLY DELETED THE ADDITION OF RS.46,84,591/-. ACCORDINGLY, WE CONFIRM THE ORDER P ASSED BY THE LD CIT(A). REGARDING DISALLOWANCE UNDER RULE 8D(2)(III), ( FOR THIS THE ASSESSEE IS ALSO IN CROSS OBJECTIONS), LD. AR SUBMITTED THAT DE CISION OF ITAT KOLKATA IN THE CASE OF REI AGRO LTD VS. DCIT, ORDER DATED 19/0 6/2013 (SUPRA) IS APPLICABLE. IN THAT CASE THE ITAT HAS HELD THAT FOR MAKING DISALLOWANCE UNDER R.W.RULE 8D IN RESPECT OF INCOME WHICH IS EXE MPT AND DOES NOT FORM PART OF TOTAL INCOME, THE ONLY INVESTMENT WHICH HAS GIVEN RISE TO THE EXEMPT INCOME SHOULD BE TAKEN INTO CONSIDERATION AN D NOT THE ENTIRE INVESTMENT MADE BY THE ASSESSEE. THEREFORE, THE AVE RAGE VALUE OF THE ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 11 INVESTMENTS FROM WHICH DIVIDEND OF RS.33,85,428/- W AS RECEIVED WORKED OUT TO RS.33,09,30,653/- AND 0.5% OF WHICH IS WORKE D OUT AT RS.16,54,653/-.HOWEVER, AS THE DETAILS OF THE WORKI NG FURNISHED TO ARRIVE AT THIS FIGURE BY THE ASSESSEE IN THIS RESPECT REQU IRES VERIFICATION FROM THE RECORDS,( AS THE LD CIT(A) ALSO HELD IN HIS ORDER), THE AO IS DIRECTED TO VERIFY THE SAME AND DECIDE ACCORDINGLY. THUS, THIS GROUND OF APPEAL [RULE 8D (2) (III)] IS ALLOWED FOR STATISTICAL PURPOSES. CONSIDERING THE FACTUAL POSITION AND THE CASE LAW C ITED ABOVE, WE ARE OF THE VIEW THAT THE ORDER PASSED BY LD. CIT(A) IS IN ACCORDANCE WITH THE PROVISIONS OF LAW AND PRECEDENTS APPLICABLE, THEREF ORE DOES NOT REQUIRE ANY INTERFERENCE. THEREFORE, WE CONFIRM THE ORDER P ASSED BY LD. CIT(A) IN RESPECT OF DISALLOWANCE DELETED BY HIM UNDER RULE 8 D(2)(II) AT RS.46,84,591/-. THE DISALLOWANCE RESTRICTED BY THE CIT (A) UNDER SECTION 14A R.W.R. 8D(2) (III) AT RS.16,54,563/- IS ALLOWED FOR STATISTICAL PURPOSES 5.4. IN THE RESULT, APPEAL FILED BY THE REVENUE ON ALL THE GROUNDS ARE DISMISSED. 6. THE CROSS OBJECTIONS FILED BY THE ASSESSEE PERTA IN TO ADDITION MADE BY ASSESSING OFFICER U/S 14A, R.W.R 8D(2)(III). THE LD .CIT(A) HAS ALREADY CONSIDERED THE JUDGMENT OF ITAT KOLKATA IN REI AGR O VS. DCIT (SUPRA) AND REDUCED THE ADDITION FROM RS. 18,10,793/- TO RS .16,54,653/- AND ALLOWED THE APPEAL FOR STATISTICAL PURPOSES. THE SOLITARY GRIEVANCE OF THE ASSESSEE IN CROSS OBJ ECTION IS THAT THE DISALLOWANCE UNDER RULE 8D (2) (III) WAS MADE BY LD CIT(A) ON A ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 12 PERCENTAGE BASIS WITH REFERENCE TO THE VALUE OF INV ESTMENT HELD BY THE ASSESSEE AND IT WAS NOT WITH RELATION TO ANY EXPEND ITURE INCURRED DIRECTLY OR INDIRECTLY IN RELATION TO EARNING OF ANY INCOME. SINCE, WE HAVE DISMISSED THE APPEAL OF THE REVENUE, THEREFORE THE CROSS OBJECTIONS FILED BY THE ASSESSEE BECOME INFRUCTUOUS AND ACCORDINGLY DISMISSED. 6.1.IN THE RESULT, THE CROSS OBJECTIONS FILED BY TH E ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8/02/ 2017. SD/ - (A.T.VARKEY) SD/ - (DR. A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA ; ! DATED 08/02/2017 ' $%& /PRAKASH MISHRA , 0 . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) % & , / ITAT, 1. / THE APPELLANT- DCIT, CIRCLE-12, KOLKATA 2. / THE RESPONDENT.-M/S DALMIA SECURITIES PVT. LTD. 3. 1 ( ) / THE CIT(A), KOLKATA. 4. 1 / CIT 5. 23 4 0056 , 56 , / DR, ITAT, KOLKATA 6. 4 78 / GUARD FILE. 2 0 //TRUE COPY// ITA NO.325/14 & CO NO.22/14 DALMIA SECURITIES PVT. LTD 13 DATE INITIAL 1. DRAFT DICTATED ON 02.01.2017 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 03.01.2017 (DICTATION PAD HAS BEEN ENCLOSED ALONG WITH THIS ORIGINAL FILE) SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/P S 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. FILE SENT TO THE BENCH CLERK SR.PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.