M/s. Chona Financial Services Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1/CHNY/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7185 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-09-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 02-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GURU BHASHYAM
• Assessee Lawyers: D ANAND
• Keywords: Business income; Earning of tax free income
• Section: 14A; 6

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! # $ , % & BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 1/MDS/2014 ( / ASSESSMENT YEAR: 2010-11) M/S. CHONA FINANCIAL SERVICES LTD. NO.19, PRAKASAM STREET, T.NAGAR, CHENNAI-600 017. VS ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI. PAN: AAACC3031C ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. D.ANAND, ADVOCATE /RESPONDENT BY : MR. GURU BHASHYAM, JCIT / DATE OF HEARING : 25 TH SEPTEMBER, 2014 /DATE OF PRONOUNCEMENT : 31 ST OCTOBER, 2014 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) CENTRAL -II, CHENNAI DATED 25.10.2013 FOR THE ASSESSMENT YEAR 2 010-11. 2. THE ONLY ISSUE IN THE APPEAL OF THE ASSESSEE I S THAT COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFI ED IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER IN DI SALLOWING EXPENSES ATTRIBUTABLE FOR EARNING DIVIDEND INCOME U NDER SECTION 14A AT ` 6,81,900/- APPLYING RULE 8D(III). IT WAS THE 2 ITA NO.1/MDS/2014 SUBMISSION OF THE ASSESSEE THAT ASSESSEE COMPANY HA S NOT INCURRED ANY EXPENSES TO EARN DIVIDEND INCOME WHIC H IS EXEMPT FROM TAX. IT WAS THE SUBMISSION OF THE ASSES SEE THAT ALL THE DIVIDENDS WERE CREDITED TO BANK ACCOUNT VIA ECS AND NO EXPENSES WERE INCURRED FOR EARNING DIVIDEND INCO ME. THE ASSESSING OFFICER REJECTED THE CONTENTIONS OF THE A SSESSEE THAT NO EXPENSES WERE INCURRED AND HE DISALLOWED AP PLYING RULE 8D(III) BY TAKING 0.5% OF AVERAGE INVESTMENTS AND ARRIVED AT DISALLOWANCE OF ` 6,81,900/- ON THE GROUND THAT ASSESSEE MADE INVESTMENTS IN MUTUAL FUNDS AND STOCK -IN- TRADE, SUBSTANTIAL PERSONNEL, ADMINISTRATIVE AND OTHER EXPENSES ARE DEBITED TO PROFIT AND LOSS ACCOUNT AND THEREFORE CANNOT BE DENIED THAT SOME OF THE PERSONNEL COULD B E INVOLVED IN CARRYING OUT THE TRANSACTIONS. IT WAS A LSO THE CONTENTION OF THE ASSESSING OFFICER THAT A PORTION OF EXPENSES TOWARDS COMMISSION, BANK CHARGES, PRINTING & STATIO NERY , LEGAL AND PROFESSIONAL CHARGES, ELECTRICITY ETC. CO ULD BE RELATABLE TO THE EARNING OF EXEMPTED INCOME, THEREF ORE, HE COMPUTED DISALLOWANCE APPLYING RULE 8D(III). ON APP EAL, THE 3 ITA NO.1/MDS/2014 COMMISSIONER OF INCOME TAX (APPEALS) SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 3. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSI ONS MADE BEFORE THE LOWER AUTHORITIES. COUNSEL FURTHER SUBMITS THAT ASSESSING OFFICER CONSIDERED EVEN STOCK-IN-TRA DE AS PART OF INVESTMENTS IN COMPUTING DISALLOWANCE UNDER RULE 8D(III). COUNSEL SUBMITS THAT NO DISALLOWANCE CAN BE MADE UN DER SECTION 14A ON THE INVESTMENTS HELD AS STOCK-IN-TRA DE SINCE SUCH INVESTMENTS WHICH WERE ALSO HELD AS STOCK-IN- TRADE COULD BE TAXED AS BUSINESS INCOME. 4. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES. THE ASSESSEE IS A MEMBER OF NATIONAL STOCK EXCHANGE ENGAGED IN STOCK BROKING. THE ASSESSEE IS ALSO INT O BUSINESS OF SHARES AS IS EVIDENT FROM THE BALANCE S HEET WHEREIN THE SHARES WERE HELD AS STOCK-IN-TRADE. THE 4 ITA NO.1/MDS/2014 ASSESSEE ALSO EARNS INCOME FROM SALE OF THESE SHARE S. SINCE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE BR OKING AND PURCHASE AND SALE OF SHARES ALSO, IT CANNOT BE HELD THAT ASSESSEE HAS NOT INCURRED ANY EXPENSES IN MAINTAINI NG THE PORTFOLIO AND IN EARNING DIVIDEND INCOME. THEREFOR E, IN PRINCIPLE, WE AGREE WITH THE LOWER AUTHORITIES IN A PPLYING RULE 8D(III) . HOWEVER, IN ASSESSEES CASE, THE ASSESSIN G OFFICER CONSIDERED STOCK-IN-TRADE ALSO FOR THE PURPOSE OF C OMPUTING 0.5% OF AVERAGE VALUE OF INVESTMENTS FOR DISALLOWAN CE. THIS TRIBUNAL IS CONSISTENTLY HOLDING THAT WHEN THE STOC KS ARE HELD AS STOCK-IN-TRADE DISALLOWANCE UNDER SECTION 14A CA NNOT BE MADE. THIS TRIBUNAL IN THE CASE OF INDIAN OVERSEAS BANK VS. DCIT IN ITA NOS. 2124 TO 2126, 1951, 2030 & 2031/MDS/2013 DATED 26.09.2014 HELD AS UNDER:- 62. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE THAT COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT SINCE ALL THE INVESTMENTS HELD BY T HE APPELLANT CONSTITUTES ITS STOCK-IN-TRADE THE PROVI SIONS OF SECTION 14A ARE NOT APPLICABLE AND HENCE NO DISALLOWANCE IS CALLED FOR. 63. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE BANK IS HOLDING SECURITIES AS STOCK-IN-TRADE, WHEN ONCE SECURITIES ARE HELD AS STOCK-IN-TRADE, NO DISALLOWA NCE UNDER SECTION 14A IS WARRANTED. THE COUNSEL SUBMIT S THAT CO-ORDINATE BENCH OF THIS TRIBUNAL DECIDED SIMILAR ISSUE FOR 5 ITA NO.1/MDS/2014 THE ASSESSMENT YEAR 2009-10 IN ITA NO.1949/MDS/2012 DATED 18.6.2014. REFERRING TO THE SAID ORDER, COUNS EL SUBMITS THAT IN PRINCIPLE, THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE HOLDING THAT PROVISIONS OF S ECTION 14A HAVE NO APPLICATION WHEN THE SECURITIES ARE HEL D AS STOCK-IN-TRADE. HOWEVER, THE TRIBUNAL REMITTED THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO ASCERTAIN W HETHER SECURITIES ARE HELD AS STOCK-IN-TRADE. 64. DEPARTMENTAL REPRESENTATIVE PLACES RELIANCE ON THE ORDERS OF LOWER AUTHORITIES IN INVOKING PROVIS IONS OF SECTION 14A READ WITH RULE 8D FOR THE PURPOSE OF DISALLOWING EXPENDITURE ATTRIBUTABLE FOR EARNING DI VIDEND INCOME. 65. WE HAVE PERUSED THE ORDER OF CO-ORDINATE BENCH OF THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2009-10, W HEREIN THE TRIBUNAL HELD THAT AUTHORITIES BELOW HAVE WRONG LY INVOKED SECTION 14A IN CASE OF INVESTMENTS HELD AS STOCK- IN-TRADE. WHILE HOLDING SO THE TRIBUNAL OBSERVED AS UNDER:- 15. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, PERUS ED THE RELEVANT FINDINGS AND THE JUDICIAL PRECEDENTS. UNDISPUTEDLY, THE ASSESSEE HAD EARNED EXEMPT INCOME OF ` 21 CRORES FROM INVESTMENTS MADE IN MUTUAL FUNDS AND EQUITIES. ITS STAND ADOPTED THROUGHOUT HAS BEEN TO HAVE HELD THE INVESTMENTS AS STOCK-IN-TRADE. THERE IS NO FINDING ON THIS ISSUE FORTHCOMING EITHER FROM THE ASSESSING OFFICER OR TH E CIT(A). WE HAVE ALSO PERUSED THE GUARD FILE PERTAINING TO I.T.A.NO. 1815/MDS/2011 DECIDED ON 2.4.2013(SUPRA). IT IS EVIDENT THEREFROM THAT THE V ERY DISALLOWANCE STANDS UPHELD BY A CO-ORDINATE BENCH. ITS PLEA CHALLENGING APPLICABILITY OF SECTION 14A IN CA SE OF INVESTMENT HELD AS STOCK-IN-TRADE APPEARS TO HAVE NEITHER BEEN RAISED NOR ADJUDICATED. SO, WE TREAT I T AS A FRESH PLEA NOT COVERED BY THE EARLIER ORDER. THUS , THE NEW ISSUE THAT ARISES FOR OUR CONSIDERATION IS AS T O WHETHER A DISALLOWANCE U/S 14A CAN BE MADE EVEN IN A CASE WHEN THE INVESTMENTS GIVING RISE TO AN EXEMPT INC OME ARE HELD AS STOCK-IN-TRADE OR NOT. PROCEEDING ON THE SAME, WE FIND THAT THE CASE LAW QUOTED BY THE ASSESSEE (SUPRA) SQUARELY SUPPORTS ITS PLEA. THE REVENUE HAS BROUGHT TO OUR NOTICE A RECENT THIRD MEMBER DECISION IN CASE OF D.H. SECURITIES P. LTD V S 6 ITA NO.1/MDS/2014 DCIT [2014] 31 (TRIB) 381. THIS DECISION FOLLOWS TH E JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT (WHICH IS ALSO THE CONCERNED JURISDICTIONAL HIGH COURT) IN CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD VS ACIT, 32 8 ITR 81 AND THAT OF HON'BLE CALCUTTA HIGH COURT IN DHANUKA & SONS VS CIT, 339 ITR 319. NOT ONLY THIS, THE HON'BLE THIRD MEMBER ALSO REFERS TO THE CASE LA W CCI LTD.(SUPRA) AND EXPRESSES A VIEW THAT THE AFORESAID DECISIONS OF OTHER HON'BLE HIGH COURTS WE RE NOT BROUGHT TO THE NOTICE OF THE KARNATAKA HIGH COU RT. IN THESE CIRCUMSTANCES, THE PICTURE THAT EMERGES IS TH AT VARIOUS HIGH COURTS HAVE EXPRESSED DIVERGENT OPINIO NS ON THIS LEGAL ISSUE. THAT BEING THE CASE, WE APPLY THE DECISION OF CIT VS VEGETABLE PRODUCTS LTD 88 ITR 19 2 AND IN THE VIEW FAVOURABLE TO THE ASSESSEE IS FOLLO WED. SO, IN PRINCIPLE, WE HOLD THAT THE AUTHORITIES BELO W HAVE WRONGLY INVOKED SECTION 14A IN CASE OF INVESTMENTS HELD AS STOCK-IN-TRADE WHEREIN THE EXEMPT INCOM E BY WAY OF DIVIDENDS IS ONLY INCIDENTAL. IT IS ALSO MAD E CLEAR THAT SINCE THERE IS NO VERIFICATION OF THE FACTUAL POSITION OF INVESTMENTS HELD AS STOCK-IN-TRADE, WE ACCEPT THE ASSESSEES CONTENTIONS IN PRINCIPLE ONLY AND REMIT THE ISSUE BACK TO THE ASSESSING OFFICER TO DETERMINE TH E TRUE FACTUAL POSITION. THE ASSESSEES ALTERNATIVE P LEA CARRIES ONLY AN ACADEMIC SIGNIFICANCE. THE RELEVANT GROUND IS ACCEPTED FOR STATISTICAL PURPOSES. 66. SINCE THE FACTS AND CIRCUMSTANCES ARE IDENTICAL , FOLLOWING THE SAID DECISION OF THIS TRIBUNAL, WE AL LOW THE GROUND RAISED BY THE ASSESSEE. 6. IN THE SAID DECISION, THE TRIBUNAL HELD THAT ONC E THE INVESTMENTS ARE HELD AS STOCK-IN-TRADE DISALLOWANCE UNDER SECTION 14A CANNOT BE MADE. THEREFORE, IN VIEW OF T HE SAID DECISION, WE DIRECT THE ASSESSING OFFICER TO EXCLUD E STOCK-IN- TRADE FOR THE PURPOSE OF COMPUTING 0.5% AVERAGE VAL UE OF INVESTMENTS UNDER RULE 8D(III) AND COMPUTE DISALLOW ANCE ACCORDINGLY. 7 ITA NO.1/MDS/2014 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 31 ST DAY OF OCTOBER, 2014 AT CHENNAI. SD/- SD/- ( . ) ( ( *+ ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDR A PRASAD ) - / ACCOUNTANT MEMBER * - / JUDICIAL MEMBER * /CHENNAI, / /DATED 31 ST OCTOBER, 2014 SOMU 12 32 /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .