SHRI. MAHESH PUROHIT, MUMBAI V. ADDL.C.I.T. RANGE-2(1), MUMBAI

ITA 1410/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1366 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 02-03-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S S RANA; M JAGDISH
• Assessee Lawyers: S C TIWARI; MEGHNA
• Keywords: Salary income; Earning of tax free income; Source of fund; Proportionate interest; Cost of acquisition
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI. BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 1410/MUM/2009 ASSESSMENT YEAR : 2005-06. SHRI MAHESH PUROHIT, ADDL. COMMISSIONER OF 24-26, CAMA BUILDING, VS. INCOME TAX, GROUND FLOOR, DALAL STREET, RANGE-2(1), FORT, MUMBAI -400 023. MUMBAI. PAN AAMPP9805A APPELLANT RESPONDENT APPELLANT BY : SHRI S.C. TIWARI, AND MS. MEGHNA. RESPONDENT BY : SHR I M. JAGDISH AND SHRI S.S. RANA. O R D E R PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF THE CIT(APPEALS)-II, MUMBAI DATED 15-12-20 08 FOR ASSESSMENT YEAR 2005-06. 2. FACTS IN BRIEF : THE ASSESSEE IS AN INDIVIDUAL DEALING IN SHARES AND HAVING BROKERAGE INCOME. HE DERIVES INCOME FROM SALARY AND DURING THE YEAR HAS EARNED CERTAIN CAPITAL GAINS FROM INVESTMENT IN SH ARES. 3. THERE ARE TWO ISSUES BEFORE US AND THESE ARE ; 2 A) PART DISALLOWANCE OF CLAIM MADE U/S 54ED OF THE ACT , TO THE EXTENT OF RS.1,50,368/-, BEING INTEREST ON BORROWED FUNDS, UTILIZED FOR ACQUISITION OF SHARES. B) DISALLOWANCE OF RS.2,50,519/- MADE BY THE AO U/S 14 A OF THE ACT. 4. THE ASSESSEE ALSO RAISED TWO OTHER GROUNDS, THE FIRST BEING AGAINST ALLOCATION MADE BY THE AO OF EXPENDITURE IN CURRED ON SPECULATION INCOME AND THE SECOND BEING ALLOCATION OF EXPENDITU RE MADE BY THE AO FOR EARNING OF BROKERAGE INCOME. 5. SHRI S.C. TIWARI, LEARNED COUNSEL FOR THE ASSES SEE ADVANCED ARGUMENTS ON THE FIRST TWO GROUNDS ONLY. ON THE ISS UE OF CLAIM U/S 54ED, MR. TIWARI READ SECTION 54ED AND SUBMITTED THAT THE ASSESSEE IS ENTITLED TO A DEDUCTION WHEN HE MAKES AN INVESTMENT IN AN EL IGIBLE ISSUE . HE POINTED OUT THAT IN EVERY INITIAL PUBLIC OFFER (IPO), THE COMPANIES USUALLY ALLOT A SMALL PROPORTION OF A TOTAL SHARE THAT ARE APPLIED FOR. THE ASSESSEE IN THIS CASE HAS BORROWED MONEY AND APPLIE D FOR A LARGE NUMBER OF SHARES IN NTPC. ON THESE BORROWED MONEY HE INCU RRED CERTAIN INTEREST EXPENDITURE. MR. TIWARI SUBMITS THAT THIS INTEREST EXPENDITURE HAS BEEN INCURRED FOR THE ACQUISITION OF THE SHARES AND HENCE IT IS COST OF ACQUISITION OF SHARES. HE SUBMITTED THAT THE TERM COST IS TO BE VIEWED FROM THE ANGLE OF THE ASSESSEE AND WHAT HAS GONE OU T OF THE ASSESSEES POCKET FOR THE ACQUISITION OF THE SHARES SHOULD BE THE VALUE OF ACQUISITION AND THE ASSESSEE SHOULD BE ENTITLED FOR A DEDUCTION . THUS HE SUBMITTED THAT THE ASSESSEE SHOULD BE GRANTED DEDUCTION U/S 5 4ED, ON THE INTEREST PAID ALSO. 6. ON THE ISSUE OF DISALLOWANCE MADE U/S 14A, HE S UBMITTED THAT THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED A CIRCULAR NO. 14 OF 2006 DATED 28-11-2007 AND IN PARA 11.3 OF THAT CIRC ULAR IT IS STATED THAT 3 THE METHOD OF ALLOCATION OF EXPENDITURE IN RELATION TO EXEMPT INCOME IS APPLICABLE FROM THE ASSESSMENT YEAR 2007-08 ONWARDS . HE ARGUED THAT THE CBDT CIRCULAR IS BINDING ON THE OFFICERS OF THE DEP ARTMENT. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF UCO BANK VS. CIT REPORTED IN 237 ITR 889 (SC). HE FURTHER REFERRED TO RULE 8D AND SUBMITTED THAT IT IS NOT A RULE OF EXCEPTION NOR A RULE OF UNIVERSAL APPLICATION. HE CONTENDED THAT TH E AO HAS TO ARRIVE AT A SATISFACTION BEFORE INVOKING THE PARTICULAR RULE. T HE ASSESSEE HAS NOT BEEN PROVIDED WITH AN OPPORTUNITY BEFORE INVOKING THE R ULE.. HE SUBMITTED THAT THE RULE SHOULD NOT HAVE BEEN APPLIED. 7. THE LEARNED DR, MR. M. JAGDISH, ON THE OTHER HA ND, SUBMITTED THAT THE COST OF ACQUISITION MEANS THE CO ST OF THE SPECIFIED SHARES AND NOT THE FINANCING COST. MR. JAGDISH RELI ED ON THE DECISIONS OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. VINIT E STATE PVT. LTD. 165 TAXMAN 260 (DEL.), HE ALSO RELIED ON THE DECISION OF ITAT, C-BENCH, MUMBAI IN ITA NO. 4918/MUM/2004 IN THE CASE OF ITO- 14(2)-3, VS. VIKRAM SADANAND HOSKOTE 18 SOT 130 (MUM). ON DISALL OWANCE U/S 14A, THE LEARNED DR RELIED ON THE DECISION OF THE S PECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. 119 TTJ 289. 8. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED, WE HOLD AS FOLLOWS. 9. AS FAR AS THE FIRST ISSUE IS CONCERNED, THE FAC TS HAVE BEEN BROUGHT OUT BY THE CIT(APPEALS) AT PARA 4 AND 5 OF HIS ORDER WHICH ARE EXTRACTED FOR READY REFERENCE: 4 4. THE FACTS PERTAINING TO THE AFORESAID GROUND OF APPEAL AS PER THE ASSESSMENT ORDER AND AS ADMITTED BY THE A.R. OF THE APPELLANT ARE AS UNDER : A) THE APPELLANT IS ENGAGED IN THE BUSINESS AS DEALER OF SHARES AND BROKING. B) THE APPELLANT HAD PURCHASED 15,145 SHARES OF E-SER VE INTERNATIONAL LTD. ON 5.12.2000, FOR AN AGGREGATE CONSIDERATION OF RS.26,14,784/-. C) THE APPELLANT SOLD 15,145 SHARES OF E-SERVE INTERNA TIONAL LTD. ON 30.8.2004 FOR AN AGGREGATE CONSIDERATION OF RS.1,47,66,375/-. D) THUS THE APPELLANT CLAIMED THAT IT HAD EARNED LONG TERM CAPITAL GAINS ON SALE OF SHARES OF E-SERVE INTERNA TIONAL LTD. OF RS.1,21,51,591/-. THIS COMPUTATION OF INCOME UND ER THE HEAD LONG TERM CAPITAL GAINS WAS ACCEPTED BY THE AO. E) THE APPELLANT, VIDE CHEQUE NO. 641772 DEPOSITED RS.33,38,750/- WITH BIRLA GLOBAL ASSET FINANCE COMP ANY LTD. (BGFL) FOR THE PURPOSE OF MAKING INVESTMENT IN THE SHARES OF NATIONAL THERMAL CORPORATION LTD. IPO ( NTPC), AS APPELLANTS SHARE OF MARGIN MONEY. F) BGFL, MADE AN APPLICATION IN THE PUBLIC ISSUE OF SH ARES OF RS.3,22,40,000/-. THE APPELLANT WAS ALLOTTED 43,573 IN THE PUBLIC ISSUE OF SHARES OF NTPC AND THE EXCESS APPLI CATION MONEY OF RS.2,95,38,474/- WAS REFUNDED TO BGFL ON B EHALF OF THE APPELLANT. G) AFTER ADJUSTING RS.2,62,080/- TOWARDS INTEREST AND RS.350/- FOR OTHER CHARGES, BGFL, REFUNDED RS.3,74,794/- TO THE APPELLANT. H) THE APPELLANT, IN THE RETURN OF INCOME, CLAIMED DED UCTION U/S 54ED OF RS.15,50,000/- (ON ACCOUNT OF INVESTMENT IN THE PUBLIC ISSUE OF SHARES OF NTPC). THE CLAIM OF DEDUC TION WAS ON ACCOUNT OF THE INVESTMENT IN 43,573/- SHARES OF NTPC OF RS.27,01,526/- AND PROPORTIONATE INTEREST PAID TO B GFL, ON THE SHARES ALLOTTED, TO THE EXTENT OF RS.1,50,368/- . I) THE AO HELD THAT THE APPELLANT WAS NOT ENTITLED TO CLAIM OF DEDUCTION U/S 54ED IN ITS ENTIRELY AND FOR THE REAS ONS STATED IN PARA 5.3 TO 5.7 THE CLAIM OF DEDUCTION U/S 54ED WAS RESTRICTED TO RS.1,50,040/-. J) THE APPELLANT HAD EARNED INCOME FROM DIVIDENDS (RS.8,51,987/-) AND LTCG (RS.60,13,835/-) WHICH WAS EXEMPT INCOME UNDER THE ACT. THE APPELLANT CLAIMED THAT THERE WAS NO EXPENDITURE INCURRED IN RELATION TO TH E EXEMPT 5 INCOME. THE AO IN THE CIRCUMSTANCES DID NOT BELIEVE THAT THERE WAS NO EXPENDITURE IN RELATION TO EXEMPT INCO ME. THE AO IN THE CIRCUMSTANCES DID NOT BELIEVE THAT THERE WAS NO EXPENDITURE IN RELATION TO EXEMPT INCOME. THE AO CO MPUTED THE DISALLOWANCE U/S 14A OF RS.2,50,519/- AS EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME. K) THE AO ALSO MADE PROPORTIONATE ALLOCATION OF EXPENS ES OVER OTHER INCOMES FROM BROKERAGE AND SPECULATION. AFTER APPORTIONING THE EXPENSES, THE AO DETERMINED THE LO SS FROM BROKERAGE BUSINESS OF RS.3,32,626/- AND LOSS FROM SPECULATION BUSINESS OF RS.2,30,328/-. 5. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE AR SUBMITTED THAT IT WAS ENTITLED TO THE ENTIRE AMOUNT OF CLAIM OF DEDUCTION U/S 54ED IN SO FAR AS THE APPELLANT HAD I NVESTED IN THE ELIGIBLE PUBLIC ISSUE OF SHARES OF NTPC. THE AR CON TENDED THAT THE VALUE OF THE SHARES ALLOTTED WERE TO BE CONSIDERED S THE INVESTMENT MADE FOR THE PURPOSES OF DEDUCTION U/S 54ED. THE AR SUBMITTED THAT THERE IS NO REQUIREMENT UNDER THE ACT THAT TH E CAPITAL GAIN FUNDS ITSELF SHOULD BE INVESTED IN THE PUBLIC ISSUE OF SHARES AND THAT THE APPELLANT COULD MAKE THE INVESTMENT FROM ANY SO URCE OF FUNDS AVAILABLE TO HIM. THE AR SUBMITTED THAT THE PROPORT IONATE INTEREST OF RS.1,50,040/- PAID TO BGFL SHOULD ALSO BE CONSTR UED AS INVESTMENT IN THE SHARE OF NTPC. ON THE ISSUE OF DI SALLOWANCE COMPUTED U/S 14A, THE AR SUBMITTED THAT THERE WAS N O EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME AND THAT THE PROVISIONS OF RULE 8D WERE NOT TO BE APPLIED RETROSPECTIVELY. ON THE ISSUE OF APPORTIONMENT OF EXPENSES OVER THE VARIOUS SOURCES OF INCOME (BROKERAGE AND SPECULATION), THE AR SUBMITTED THAT COMPUTATION MADE WAS WRONG AND IN THE CASE THE EXPENSES WERE RE QUIRED TO BE APPORTIONED THE SAME OUGHT TO HAVE BEEN APPORTIONED IN RELATION TO THE ENTIRE INCOME OF THE APPELLANT. 10. THE CLAIM BEFORE HIM HAS BEEN REJECTED BY THE CIT(APPEALS) IN PARA 8 OF HIS ORDER WHICH IS EXTRACTED BELOW FOR READY REFERENCE : 8. IT MIGHT BE STATED THAT THE APPELLANT HAS ALSO CLAIMED PROPORTIONATE DEDUCTION U/S 54ED ON ACCOUNT OF THE INTEREST PAID TO BGFL FOR MAKING APPLICATION IN THE PUBLIC ISSUE OF SHARES OF NTPC. THIS CLAIM OF THE APPELLANT IS MISCONCEIVED I N SO FAR AS THE DEDUCTION U/S 54ED IS WITH REFERENCE TO THE COST OF THE SPECIFIED SHARES (I.E. THE AMOUNT PAID TO NTPC FOR THE SHARES ALLOTTED TO THE 6 APPELLANT) AND NOT THE FINANCING COST PAID TO BGFL. THE APPELLANTS PLEA ON THIS ISSUE IS REJECTED. 11. A PERUSAL OF SECTION 54ED, REFERS TO INVESTME NT OF THE WHOLE OR PART OF THE CAPITAL GAIN IN ACQUIRING EQUI TY SHARES. THEREAFTER IT REFERS TO COST OF THE SPECIFIED EQUITY SHARES. IN OUR HUMBLE OPINION, THE LANGUAGE IS CLEAR AND WHAT THE ASSESSEE WOULD BE EL IGIBLE IS ONLY THE COST OF THE EQUITY SHARES WHICH IN THIS CASE IS OF 25,0 00 SHARES. THE ASSESSEE WILL NOT BE ELIGIBLE FOR DEDUCTION OF INTEREST OF R S.1,50,368/-, ON THE GROUND THAT IT IS COST OF THE SPECIFIED EQUITY SHAR ES. THE WORDING IS COST OF THE SPECIFIED EQUITY SHARES AND NOT THE COST O F ACQUIRING SPECIFIED EQUITY SHARES. FROM THE ABOVE WORDING, WHAT THE AS SESSEE WOULD BE ELIGIBLE IS THE COST PAID TO NTPC FOR ACQUIRING THE SHARES AND NOT ANY INCIDENTAL OR ANCILLARY EXPENDITURE. 12. COMING TO THE DECISIONS RELIED UPON BY THE LEA RNED DR, THEY ARE NOT ON THE ISSUE AND HENCE ARE NOT DEALT WITH. 13. IN THE RESULT, WE UPHOLD THE FINDINGS OF THE F IRST APPELLATE AUTHORITY AND DISMISS GROUND NO. 1. 14. COMING TO DISALLOWANCE U/S 14A, AFTER CONSIDE RING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON R ECORD, WE FIND THAT THE QUESTION OF DISALLOWANCE U/S.14A HAS BEEN DECIDED B Y THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S.DAGA CAPITAL MANAGEMENT PVT. LTD. [(2008) 119 TTJ (SB) (MUM.) 289] IN WHICH IT HAS BEEN HELD, BY MAJORITY VIEW, THAT SECTION 14A APPLIES TO ALL HEAD S OF INCOME AND AIMS AT DISALLOWING EXPENDITURE NOT FORMING PART OF THE TOT AL INCOME EVEN THOUGH SUCH EXPENDITURE MAY BE ALLOWABLE UNDER ANY OTHER P ROVISIONS SUCH AS SECTION 36(1)(III). IT HAS FURTHER BEEN HELD THAT S ECTION 14A IS APPLICABLE IRRESPECTIVE OF THE FACT WHETHER THE SHARES AND SEC URITIES ARE HELD AS STOCK- 7 IN-TRADE OR INVESTMENT AND IF THE DIVIDEND INCOME I S EXEMPT, THE PROVISIONS OF SECTION 14A FOLLOW. IN THAT CASE THE SPECIAL BENCH, AFTER MAKING DETAILED DISCUSSION, HAS FINALLY SENT BACK THE MATTER TO THE ASSESSING OFFICER FOR COMPUTING THE DISALLOWANCE IN TERMS OF SECTION 14A R.W. RULE 8D. RESPECTFULLY FOLLOWING THIS DECISION, THE LEARNED CIT(APPEALS) SET ASIDE THE DISALLOWANCE TO THE FIL E OF A.O. FOR RECOMPUTING THE DISALLOWANCE U/S.14A AS PER THE MAN DATE OF THE SPECIAL BENCH ORDER IN THE CASE OF M/S.DAGA CAPITAL MANAGE MENT PVT. LTD. (SUPRA). WE FIND NO INFIRMITY IN THE ORDER OF THE L ERNED CIT(APPEALS). HENCE WE UPHOLD THE SAME AND DISMISS THIS GROUND OF THE ASSESSEE. 15. IN THE RESULT, GROUND NO. 2 IS DISMISSED. 16. AS ALREADY STATED, GROUND NOS. 3 AND 4 HAVE NO T BEEN ARGUED BEFORE US AND HENCE THESE ARE ALSO DISMISSED AS NOT PROSECUTED. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF JUNE, 2010. SD/- SD/- (D. MANMOHAN) (J. SUDHAKAR REDDY) VICE PRESIDENT ACCOUNTANT MEMBER. MUMBAI, DATED : 30 TH JUNE, 2010. WAKODE 8 COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, B-BENCH (TRUE C OPY) BY ORDER AS STT.REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI.