Edelvalue Partners., Mumbai V. Dy. Commissioner of Income Tax, Circle-14(1)., Hyderabad

ITA 1318/Hyd/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 7987 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 18-02-2021
• Assessment Year: 2010-2011
• Appeal Filed On: 28-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Assessee Lawyers: T CHAITANYA KUMAR
• Keywords: Earning of tax free income; Proportionate interest; Reasonable cause; Rule 8D; Set aside
• Section: 14A; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT A NO. 1251 /H/20 1 7 ASSESSMENT YEAR: 2 0 1 0 - 11 ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 14(1), HYDERABAD. VS. EDELVALUE PARTNERS, HYDERABAD. PAN AACFE 8006A (APPELLANT) (RESPONDENT) AND ITA NO. 1318/HYD/2017 ASSESSMENT YEAR: 2010 - 11 EDELVALUE PARTNERS, HYDERABAD. PAN AACFE 8006A VS. ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 14(1), HYDERABAD. REVENUE BY: SHRI Y.V.S.T. SAI ASSESSEE BY: SHRI T. CHAITANYA KUMAR DATE OF HEARING: 18/02/2021 DATE OF PRONOUNCEMENT: 19 /0 3 /2021 O R D E R PER L.P. SAHU. A.M. : THESE ARE CROSS APPEALS BY THE REVENUE AS WELL AS ASSESSEE DIRECTED AGAINST THE ORDER OF CIT(A) 6, HYDERABAD DATED 20/04/2017 FOR THE AY 2010 - 11. I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 2 - : 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(APPEALS) ERRED IN REDUCING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 FROM RS.20,14,13,586/ - TO RS.1,45,OO,OOO/ - . 2. THE LEARNED CIT(APPEALS) HAS FAILED TO APPRECIATE THE FACT THAT THE DISALLOWANCE UNDER SECTIO N 14A OF THE INCOME TAX ACT HAS TO BE NECESSARILY QUANTIFIED AS PER THE PROCEDURE LAID DOWN IN RULE 8D OF INCOME TAX RULE, 1962. 3. ANY OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING. 2.1 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, EDELVALUE PARTNERS (HEREINAFTER REFERRED TO AS 'THE APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE COMMISSIONER OF INCOME TAX (APPEALS) - 6 (HEREINAFTER REFERRED TO AS 'CIT(A)'), HY DERABAD'S ORDER ON FOLLOWING GROUNDS: DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 80 OF THE INCOME TAX RULES. 1962 1. LEARNED CIT (A) ERRED IN CONFIRMING THE ACTION OF DEPUTY COMMISSIONER OF INCOME TAX - CIRCLE 14(1), HYDE RABAD (HEREINAFTER REFERRED TO AS 'AO') FOR INVOKING RULE 8D OF THE INCOME TAX RULES, 1962 (HEREINAFTER REFERRED TO AS ' I T. RULES'). I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 3 - : 2. THE CIT(A) ERRED CONFIRMING THE DISALLOWANCE OF RS.1,45,30,297 (RS.1.45 CR . AS PER THE CLT(A) ORDER) BASED ON THE METH OD PRESCRIBED IN RULE 8D(2)(II) AND (III ) OF THE LT. RULES. OUT OF THE ABOVE AMOUNT RS.89,33,110 IS TOWARDS PROPORTIONATE INTEREST COST INCURRED UNDER RULE 8D(2)(II) AND RS.55,97,187 IS TOWARDS 0.5% OF AVERAGE VALUE OF STOCK IN TRADE UNDER RULE 8D(2)(III) O F THE I T. RULES. 3. THE CIT (A) ERRED IN CONFIRMING THE ACTION OF AO CONSIDERING SHARES AND SECURITIES HELD AS STOCK IN TRADE FOR MAKING DISALLOWANCE UNDER RULE 8D(2)(II} AND 8D(2)(III} OF THE I. T. RULES. THE APPELLANT SUBMITS THAT ON THE FACTS AND CI RCUMSTANCES OF THE CASE AND IN LAW, RULE 8D OF THE LT. RULES SHALL NOT BE INVOKED IN THE CASE OF THE APPELLANT. THE APPELLANT SUBMITS THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO RS.38,37,427 BEING SUO - MOTO DI SALLOWANCE COMPUTED BY IT UNDER SECTION 14A OF THE INCOME TAX ACT, 1961, AS EXPENDITURE INCURRED TOR EARNING THE EXEMPT INCOME WHICH IS BASED ON A SCIENTIFIC METHOD AND CORRESPONDS TO THE EXPENSES INCURRED IN PROPORTION TO THE NET OF DIVIDEND INCOME AND LOSS FROM EQUITY SHARES VIS - A - VIS TOTAL INCOME OF THE APPELLANT. WITH OUT PREJUDICE TO ABOVE, EVEN IF THE AO PROPOSES TO APPLY RULE 8D IN APPELLANT'S CASE, THE AMOUNT OF DISALL OWANCE WORKS OUT TO RS.55,97,187 BEING 0.5% OF THE AVERAGE VALUE OF STOCK IN TRADE ON THE FIRST ANA L AST DAY OF THE PREVIOUS YEAR AS PER RULE 8D(2)(III) OF THE I.T. RULES. THE APPELLANT CRAVES LEAVE TO ADD, AMEND AND ALTER THE ABOVE GROU NDS OF APPEAL. 3. ON PERUSAL OF RECORD, WE FIND THAT THERE IS A DELAY OF 2 DAYS IN FILING APPEAL BY THE REVENUE BEFORE THE ITAT AND THE I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 4 - : SAME WAS DULY EXPLAINED BY THE CIT - DR. SINCE THE DELAY WAS PREVENTED BY A REASONABLE CAUSE, THE SAME IS CONDONED AND THE APPEAL IS ADMITTED FOR ADJUDICATION, TO WHICH, THE LD. AR OF THE ASSESSEE HAD NO OBJECTION. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FIRM ENGAGED IN THE BUSINESS OF TRADING IN SECURITIES/DERIVATIVES AND COMMODITIES, FILED ITS RETURN OF INCOM E FOR AY 2010 - 11 ADMITTING A TOTAL LOSS OF RS. 26,68,81,346/ - . SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND THE STATUTORY NOTICES WERE ISSUED TO THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT ASSESSEE HAD RECEIVED D IVIDEND INCOME TO THE TUNE OF RS. 1,33,89,153 ON SOME STOCKS, WHICH WAS CLAIMED AS EXEMPT INCOME AND DEBITED INTEREST EXPENSES OF RS. 30,01,04,347/ - . AO OBSERVED THAT THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE WAS INCURRED TOWARDS EARNING EXEMPT INCOME , BUT, ACCORDING TO AO, SOME PORTION OF OTHER EXPENSES ATTRIBUTABLE AND RELATED TO EARNING OF DIVIDEND INCOME REQUIRES TO BE DISALLOWED U/S 14A RWS RULE 8D OF THE ACT. I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 5 - : ACCORDINGLY, AO COMPUTED THE DISALLOWANCE UNDER RULE 8D(2)(II) & (III) OF RS. 19,88,16,399/ - AND RS. 55,97,187/ - , TOTALING TO RS. 20,44,13,586/ - AND COMPLETED THE ASSESSMENT ACCORDINGLY. 5. AGGRIEVED BY THE ORDER OF AO, TH E ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AND THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS CONSIDERING THE NATURE OF THE BUSINESS ACTIVITY OF THE ASSESSEE, RESTRICTED THE DISALLOWANCE TO RS. 1,45,00,000/ - AS AGAINST RS. 20 ,44,13,586/ - MADE BY THE AO , BY HOLDING THAT THE ENTIRE INTEREST EXPENDITURE IS ELIGIBLE TO BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE ACT AND DISALLOWANCE CANNOT BE MADE U/S 14A OF THE ACT. 6. AGGRIEVED BY THE ORDER OF CIT(A), BOTH THE REVENUE AS WELL AS ASSESSEE ARE IN APPEALS BEFORE THE ITAT. 7. BEFORE US, THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN PARTLY ALLOWING THE APPEAL OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE WAS IN BUSINESS OF TRADING IN DERIVATIVES/PURCHASE AND SALE OF SCRIPS AND HE I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 6 - : OUGHT TO HAVE RESTRICTED THE DISALLOWANCE TO RS. 38,37,427/ - BEING SUO - MOTO DISALLOWANCE COMPUTED BY IT U/S 14A OF THE ACT AS EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. IN THIS CONNECTION, HE INVITED OUR ATTENTION TO PAP ER BOOK AT PAGE 1. HE ALSO INVITED OUR ATTENTION TO PAGE 20 OF THE PAPER BOOK WHERE THE BREAK - UP OF THE EXPENSES OF DISALLOWANCE OF RS. 38,37,247/ - ARE NARRATED. HE ALSO RELIED ON CASE LAW WHICH ARE AS UNDER: 1. PHENIL SUGARS (P) LTD. VS. CIT, 2016 TAX PU B(DT) 4619 (DELHI - TRIB.) 2. M/S EDELWEISS SECURITIES PVT. LTD., ITA NO. 6943/MUM/2013, ORDER DATED 15/07/2015. 8. THE LD. DR, ON THE OTHER HAND, BESIDES RELYING ON THE ORDER OF AO, SUBMITTED THAT THE CIT(A) HAS WRONGLY ALLOWED THE APPEAL OF THE ASSESSEE, WHEREAS, THE AO HAS RIGHTLY CALCULATED THE DISALLOWANCE U/S 14A RWS 8D(2)(III) OF THE ACT. 8. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD AS WELL AS GOING THROUGH THE ORDERS OF THE REVENUE AUTHORITIES, WE OBSERVE THAT NO DOUBT THE ASSESSEE IS ENGAGED IN THE BUSINESS DERIVATIVES AND PURCHASE & SALE OF SCRIPS OF SHARES THROUGH STOCK EXCHANG E AND ALSO SUO - MOTO COMPUTED THE DISALLOWANCE U/S 14A AT RS. 38,37,427/ - . HOWEVER, ON PERUSAL OF BALANCE SHEET, I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 7 - : WHICH IS PLACED AT PAGE 3 OF THE P APER BOOK, WE FIND THAT ASSESSEES OWN FUNDS ARE RS. 3,37,28,540/ - AS ON 31/03/2010 WHEREAS THE LOAN FUNDS ARE RS. 333,50,10,951/ - , ON WHICH IT HAS PAID INTEREST AND THERE WAS A STOCK - IN - TRADE, WHICH IS AT SCHEDULE V OF THE PAPER BOOK AND THE DETAILS OF WH ICH ARE AT PAGES 8 TO 10 OF THE PAPER BOOK. THE TOTAL VALUE OF THE QUOTED SECURITIES IS RS. 223,88,74,285/ - . DURING THE IMPUGNED AY, THE ASSESSEE RECEIVED DIVIDEND INCOME TO THE TUNE OF RS. 1,33,89,153/ - , WHICH HAS BEEN CLAIMED AS EXEMPT INCOME. IN THIS C ONNECTION, WE REFER TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD., VS. CIT [2018] 91 TAXMANN .COM 154 ( SC ) WHEREIN THE HONBLE APEX COURT HELD AS UNDER: 39) IN THOSE CASES, WHERE SHARES ARE HELD AS STOCK - IN - TRADE, THE MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EARN PROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERNED WITH THOSE PROFITS WHICH WOULD NATURALLY BE TREATED AS INCOME UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION. WHAT HAPPENS IS THAT, IN THE PROCESS, WHEN THE SHARES ARE HELD AS STOCK - IN - TRADE, CERTAIN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALLY, WHICH IS ALSO AN INCOME. HOWEVER, BY VIRTUE OF SECTION 10 (34) OF THE ACT, THIS D IVIDEND INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME AND IS EXEMPT FROM TAX. THIS TRIGGERS THE APPLICABILITY OF SECTION 14A OF THE ACT WHICH IS BASED ON THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON - TAXABLE INCOME AS HELD IN WALFOR T SHARE AND STOCK BROKERS P LTD. CASE. THEREFORE, TO THAT EXTENT, DEPENDING UPON THE FACTS OF EACH CASE, THE EXPENDITURE INCURRED IN ACQUIRING THOSE SHARES WILL HAVE TO BE APPORTIONED. 40) WE NOTE FROM THE FACTS IN THE STATE BANK OF PATIALA CASES THAT THE AO, I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 8 - : WHILE PASSING THE ASSESSMENT ORDER, HAD ALREADY RESTRICTED THE DISALLOWANCE TO THE AMOUNT WHICH WAS CLAIMED AS EXEMPT INCOME BY APPLYING THE FORMULA CONTAINED IN RULE 8D OF THE RULES AND HOLDING THAT SECTION 14A OF THE ACT WOULD BE APPLICABLE. IN SPITE OF THIS EXERCISE OF APPORTIONMENT OF EXPENDITURE CARRIED OUT BY THE AO, CIT(A) DISALLOWED THE ENTIRE DEDUCTION OF EXPENDITURE. THAT VIEW OF THE CIT(A) WAS CLEARLY UNTENABLE AND RIGHTLY SET ASIDE BY THE ITAT. THEREFORE, ON FACTS, THE PUNJAB AND HARYANA HIG H COURT HAS ARRIVED AT A CORRECT CONCLUSION BY HTTP://WWW.ITATONLINE.ORG 39 AFFIRMING THE VIEW OF THE ITAT, THOUGH WE ARE NOT SUBSCRIBING TO THE THEORY OF DOMINANT INTENTION APPLIED BY THE HIGH COURT. IT IS TO BE KEPT IN MIND THAT IN THOSE CASES WHERE SHAR ES ARE HELD AS STOCK - IN - TRADE, IT BECOMES A BUSINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARNED OR NOT BECOMES IMMATERIAL. IN FACT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INVESTEE COMPANY DEC LARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, THOUGH THE ASSESSEE HAS TO ULTIMATELY TRADE THOSE SHARES BY SELLING THEM TO EARN PROFITS. THE SITUATION HERE IS, THEREFORE, DIFFERENT FROM THE CASE LIKE MAXOPP INVESTMENT LTD. WHERE THE ASSESSEE WOULD CONTINUE TO HOLD THOSE SHARES AS IT WANTS TO RETAIN CONTROL OVER THE INVESTEE COMPANY. IN THAT CASE, WHENEVER DIVIDEND IS DECLARED BY THE INVESTEE COMPANY THAT WOULD NECESSARILY BE EARNED BY THE ASSESSEE AND THE ASSESSEE ALONE. THEREFORE, EVEN AT THE TIME OF INVESTING INTO THOSE SHARES, THE ASSESSEE KNOWS THAT IT MAY GENERATE DIVIDEND INCOME AS WELL AND AS AND WHEN SUCH DIVIDEND INCOME IS GENERATED THAT WOULD BE EARNED BY THE ASSESSEE. IN CONTRAST, WHERE THE SHARES ARE HELD AS STOCK - IN - TRADE, THIS MAY NOT B E NECESSARILY A SITUATION. THE MAIN PURPOSE IS TO LIQUIDATE THOSE SHARES WHENEVER THE SHARE PRICE GOES UP IN ORDER TO EARN PROFITS. IN THE RESULT, THE APPEALS FILED BY THE REVENUE CHALLENGING THE JUDGMENT OF THE PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA ALSO FAIL, THOUGH LAW IN THIS RESPECT HAS BEEN HEREINABOVE. I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 9 - : RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE HONBLE APEX COURT AS ABOVE, WE SET ASIDE THE ORDER OF THE CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF AO WITH A DIRECTION TO DECIDE THE ISSUE FOLLOWING THE SAID CASE. WE FURTHER DIRECT THE AO THAT THE DISALLOWANCE SHOULD BE MADE UNDER RULE 8D(2)(III) @ 0.5% ON THE AVERAGE VALUE OF THE INVESTMENT IN WHICH EXEMPT INCOME HAS BEEN RECEIVED. THEREFORE, THE GROUNDS RAISED IN BOTH THE APPEALS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RES ULT BOTH THE APPEALS UNDER CONSIDERATION ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 19 TH MARCH , 2021 . SD/ - SD/ - ( S.S. GODARA ) (LAXMI PRASAD SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDE RABAD, DATED : 19 TH MARCH , 20 2 1 K V I TA NO S . 1251 & 1318 /HYD / 1 7 EDELVALUE PARTNERS, HYD. : - 10 - : C OPY TO : 1 ACIT, CIRCLE 14(1), 6 TH FLOOR, C BLOCK, IT TOWERS, MASAB TANK, HYDERABAD. 2 M/S EDELVALUE PARTNERS, 2 ND FLOOR, MB TOWERS, PLOT NO. 5, ROAD NO. 2, HYDERABAD. 3 C I T( A ) - 6 , HYDERABAD. 4 PR. CIT - 6 , HYDERABAD 5 ITAT, DR, HYDERABAD. 6 GUARD FILE.