ACIRA CONSULTANCY PVT. LTD, Mumbai V. ITO 5 (1)(4), Mumbai

ITA 1274/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 8203 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 05-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Benefit of exemption; Rule 8D
• Section: 14A

Judgement Text

आयकर अपीलीय अिधकरण मुंबई पीठ “ए”, मुंबई ŵी जी. एस. पɄू,अȯƗ एवं ŵी िवकास अव̾थी,Ɋाियक सद˟ के समƗ IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “A”, MUMBAI BEFORE SHRI G. S. PANNU, PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER आअसं. 1274/मुं/2019 (िन.व. 2014-15) ITA NO.1274/MUM/2019 (A.Y.2014-15) आअसं. 1275/मुं/2019 (िन.व. 2015-16) ITA NO.1275/MUM/2019 (A.Y.2015-16) Acira Consultancy Pvt. Ltd. 511/C, 6 th Floor, Sunshine CHS Ltd. Off. Chandivli Farm, Raheja Vihar, Andheri (E), Mumbai-400072. PAN: AAICA9489N ...... अपीलाथŎ /Appellant बनाम Vs. ITO-5(1)(4), Room No. 569, 5 th Floor, Aayakar Bhavan, M.K. Road, Mumbai-400020 ..... Ůितवादी/Respondent अपीलाथŎ Ȫारा/ Appellant by : Sh. V.G. Ginde, Advocate with Sh. Kumar Kale, Advocate Ůितवादी Ȫारा/Respondent by : Sh. Mehul Jain, Sr-DR सुनवाई की ितिथ/ Date of hearing : 17/06/2022 घोषणा की ितिथ/ Date of pronouncement : 12/08/2022 आदेश/ ORDER These two appeals by the assessee are directed against the order of Commissioner of Income Tax (Appeals)-10, Mumbai [hereinafter referred to as 2 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) ‘the CIT(A)’] dated 28.12.2018, common for the Assessment Years (AY) 2014-15 & 2015-16. Since, the similar issues have been raised in both these appeals, these appeals are taken up together for adjudication and are disposed of by this common order. 2. Facts are narrated from the appeals of the assessee in AY 2014-15 for the sake of convenience. ITA No. 1274/Mum/2019 for AY 2014-15. 3. The assessee in appeal has assailed the order of CIT(A) on two counts: (1) Disallowance of interest under section 14A r.w.r. 8D(2)(ii). (2) Denial of exemption on dividend under section 10(34) of the Income Tax Act, 1961 (in short ‘the Act’). 3. Sh. V.G. Ginde appearing on behalf of the assessee submitted that the assessee is engaged in the business of trading in shares and security. During the period relevant to AY under appeal, the assessee received dividend income of Rs. 68,88,070/-. The Assessing Officer (AO) computed disallowance under section 14A r.w.r. 8D to the tune of Rs. 36,03,819/-. The ld. Authorized Representative (AR) submitted that the prayer of the assessee in respect of ground no.1 is limited to the extent of disallowance made under Rule 8D(2)(iii) i.e. disallowance of ½ % of the average value of investments. The ld. AR submitted that the issue is squarely covered by the order of Tribunal in assessee’s own case in ITA No. 1273/Mum/2019 decided on 07.09.2021 and the decision of Special Bench in the case of Vireet Investments P. Ltd., 165 ITD 27 (Del. Trib.). The ld. AR prayed that only those shares on which the assessee has earned dividend income should be included for computing average value of investments under Rule 8D(iii). 3 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) 4. In respect of ground no.2, the ld. AR submitted that the assessee has earned dividend income of Rs. 44,37,063/- on shares that were borrowed from its associates and were pledged as collateral security to the lender for borrowing unsecured loan. The ld. AR narrating the facts submitted that the assessee had borrowed shares of some of the companies on which the assessee had received dividend during the period when those shares were transferred in the name of the assessee. The assessee had taken unsecured loan from Rubfila International Ltd., the borrowed shares were pledged to the said company as collateral security. The details of the shares borrowed, dividend received and the actual owners of the shares are tabulated herein under: S. No. Name of the Company Date of dividend declared Amount of dividend Lenders Quantity borrowed 1 Visaka Industries Ltd. 21.06.2013 4,37,500 Ruchit B. Patel 1,25,000 2 Mafatlal Industries Ltd. 18.07.2013 7,50,000 Hardik B. Patel 1,50,000 3 Technocraft Inds. Ltd. 23.09.2013 2,80,000 Ruchit B. Patel 1,40,000 4 KPR Mills Ltd. 21.08.2013 12,60,000 Hardik B. Patel 1,00,000 5 KPR Mills Ltd. 31.10.2013 16,80,000 Ruchit B. Patel 3,20,000 6 IDBI Ltd. 29.08.2013 29,563 44,37,063 4.1. The ld. AR pointed that the assessee had furnished all relevant details regarding the lender’s Demat statements, quantity of shares borrowed, etc. before the AO and the CIT(A). The Demat statements clearly reflect that the shares borrowed were immediately pledged to Rubfila International Ltd. The assessee had also furnished confirmations from the lenders of the shares before the AO. The ld. AR asserted that the dividend earned by the assessee on the 4 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) shares borrowed is purely incidental to the transaction arising out of pledging of shares to borrow loans. 4.2 The borrowed shares were reflected in the Demat Account of the assessee on the date of declaration of dividend, hence, dividend was received by the assessee on borrowed shares. The assessee claimed exemption under section 10(34) in respect of the dividend received on borrowed shares, the assessee reflected the dividend income in its return of income and claimed exemption under section 10(34) of the Act. The AO failed to appreciate the fact that the exemption under section 10(34) is allowed qua the dividend income and not qua the owner of the shares. Therefore, if the dividend income is assessed in the hands of the assessee, consequential benefit of exemption under section 10(34) on dividend income should be allowed to the assessee. The ld. AR further submitted that the dividend is already subject to dividend distribution tax under section 115O of the Act in the hands of the company declaring such dividend, hence, taxing the same dividend in the hands of the assessee would result in double taxation. The ld. AR asserted that whether the recipient of the dividend is actual owner of shares or de facto owner is not relevant, as the dividend declared by the company before distribution to the shareholders is already subject to tax, therefore, the same should not be taxed again in the hands of recipient. In support of his contention, the ld. AR placed reliance on the decision in the case of SSKI Investors Services Pvt. Ltd. Vs. DCIT, 34 SOT 412 (Mumbai). The ld. AR submitted that the authorities below have erred in holding dividend income received on borrowed shares as unexplained source of income without appreciating the documents on record and the facts of the case. 4.3. The ld. AR further referred to the confirmations from the lenders of the shares and the Demat account statements of the lenders at page no. 21 to 29 of 5 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) the Paper Book (PB) and the Demat Account statement of the assessee at page no. 15 & 16 of the PB. 5. On the other hand, Sh. Mehul Jain representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. 6. We have heard the submissions made by rival sides and have examined the orders of authorities below. Ground No.1 of appeal is with respect to disallowance made under section 14A r.w.r. 8D of the Act. The limited prayer of the assessee is that for computing disallowance under Rule 8D only dividend yielding shares should be considered for computing average value of investments. The Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra) has held that only those investments are to be considered for computing average value of investments which yielded exempt income during the year. We find that in AY 2012-13, the Co-ordinate Bench of Tribunal in assessee’s own case in ITA No. 1273/Mum/2019 (supra) has restored this issue back to the file of AO for re-computing disallowance under section 14A in accordance with the aforesaid decision of Special Bench. Accordingly, this issue is restored to the file of AO to re-compute disallowance under section 14A r.w.r. 8D in line with the decision of Special Bench. Hence, ground no.1 of the appeal is allowed for statistical purpose in the aforesaid terms. 7. The next issue in appeal is denial of exemption under section 10(34) of the Act on dividend. The assessee received dividend income on shares borrowed by the assessee from its associates to further pledge the same as collateral security against unsecured loan taken from Rubfila International Ltd. The assessee claimed dividend received on said shares as exempt under section 10(34) of the 6 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) Act. The AO denied exemption and held dividend income taxable under the head “Income from other Sources”. The assessee in order to substantiate genuineness of transaction i.e. borrowing of shares from its associates and pledging the same to Rubfila International Ltd. furnished copies of the Demat Account statement of the lenders of the shares and confirmations from the said lenders. A perusal of the transaction statements of the lenders of the shares and Demat transaction statement of the assessee would show live nexus of the transfer of shares from Demat Account of the lenders of the shares to the Demat Account of the assessee and further pledged of those shares shortly thereafter. It was during the period when these borrowed shares were reflected in the Demat Account of the assessee that the dividend was declared by the companies. Since, the assessee happened to be the owner of shares in the register of shareholders of the respective companies, dividend was received by the assessee in respect of the shares held by the assessee. It is pertinent to mention here that for the companies declaring dividend, it is immaterial whether the shares are held in the capacity of owner or a borrower. As long as the name of the holder of shares is registered in the register of shareholders on the record date, the dividend by the companies would be disbursed to the registered holder of those shares. At the time of distribution of dividend, the companies are under obligation to deduct tax under section 115O of the Act. Once, dividend income is subject to tax at the time of distribution, the same cannot be brought to tax in the hands of recipient. 8. In the instant case, we find that the authorities below have failed to appreciate the transaction of borrowing of shares by the assessee and subsequent pledged of the same as security twoards unsecured loan taken by the assessee. The Demat Account of the assessee clearly depicts the transaction of transfer of shares in the name of assessee and their subsequent pledge. Though, 7 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) from the transaction in the Demat Account, it is not emanating whether the shares have been purchased by the assessee or they have been borrowed by the assessee, however, the confirmations filed by the lenders of the shares support assessee’s theory of borrowing of shares. 9. The argument put forth by the assessee that exemption under section 10(34) is available qua the dividend income and not qua owner of the shares has force. We are in agreement with the aforesaid proposition. Irrespective of the fact whether the shares are held in the capacity of real owner or the beneficial owner, the recipient of dividend would be eligible for claiming exemption under section 10(34) of the Act. We find support to our above view from the decision in the case of SSKI Investors Services Pvt. Ltd. Vs. DCIT (supra). Thus, we hold assessee eligible for claiming exemption under section 10(34) of the Act on dividend income in respect of the shares reflected in its Demat Account on the date of declaration of dividend, de-hors, the fact whether those shares are borrowed or purchased by the assessee. Consequently, the assessee succeeds on ground no.2. 10. In the result, the appeal of assessee is partly allowed in the terms aforesaid. ITA No. 1275/Mum/2019 for AY 2015-16. 11. The ld. AR of the assessee submitted that the solitary issue raised in the appeal for AY 2015-16 is in respect of disallowance of interest under section 14A r.w.r. 8D(2)(ii) of the Act. The ld. AR submitted that the short prayer with respect to disallowance under Rule 8D(2) is for considering only dividend yielding investments in line with the decision of Special Bench in the case of Vireet Investments Pvt. Ltd. (supra). The ld. AR further submitted that the AO while 8 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) computing disallowance under section 14A r.w.r. 8D has disallowed excess direct expenses. The other expenditure claimed by the assessee is Rs. 23,021/- excluding Demat charges. Demat charges have already been excluded under Rule 8D(2)(i), hence, disallowance of other expenses as per Rule 8D(2)(ii) were restricted to Rs. 23,021/- only. 12. On the other hand, Sh. Mehul Jain representing the Department vehemently supported the assessment order and the order of CIT(A) on this issue. 13. Both sides heard, orders of the authorities below examined. The assessee in appeal has assailed computation of disallowance under section 14A r.w.r. 8D(2) on two counts: (i) While computing disallowance, only dividend yielding shares during the relevant period should be considered. We find merit in the above prayer of the assessee. The Special Bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra) has held that for computing average value of investment only dividend yielding investments during the year be considered. The AO is directed to compute disallowance in respect of average value of investments in line with the decision of Special Bench (supra). (ii) The second prayer of the assessee as emanating from ground no.2 is restricting of disallowance under Rule 8D(2)(iii) to Rs. 23,021/- i.e. to the extent the “other expenditure” claimed by the assessee. We do not find favour with the second prayer made by the assessee. Rule 8D prescribes standard method for computing disallowance to be made under section 14A of the Act. While computing disallowance under Rule 8D(2)(i), the 9 आअसं. 1274 & 1275/मुं/2019 (िन.व. 2014-15 & 2015-16) ITA Nos. 1274 & 1275/M/2019 (AYs 2014-15 & 2015-16) direct expenditure relating to earning of exempt income are disallowed. As per sub-clause-(ii) interest expenditure incurred for earning exempt income is disallowed and as per sub-clause-(iii) 0.5% of the average value of investments has to be disallowed. There is no provision of restricting direct expenditure in sub-clause-(iii) of Rule 8D(2), thus, in view of the explicit provisions for computing disallowance relevant to the AY under appeal, ground no.2 raised in the appeal is dismissed. 14. In the result, appeal of assessee is partly allowed in the terms aforesaid. 15. To sum up, appeal of the assessee for AY 2014-15 & 2015-16 are partly allowed. Order pronounced in the open court on Friday, the 12 th day of August, 2022. Sd/- Sd/- (G.S. PANNU) (VIKAS AWASTHY) अȯƗ / PRESIDENT Ɋाियक सद˟/JUDICIAL MEMBER मुंबई/Mumbai, िदनांक/Dated: 12/08/2022 SK, Sr. PS Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ/The Appellant , 2. Ůितवादी/ The Respondent. 3. आयकर आयुƅ(अ)/ The CIT(A)- 4. आयकर आयुƅ CIT 5. िवभागीय Ůितिनिध, आय.अपी.अिध., मुबंई/DR, ITAT, Mumbai 6. गाडŊ फाइल/Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai