QUEST PORTFOLIO SERVICES P. LTD, MUMBAI V. DCIT 10(3), MUMBAI

ITA 1668/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2732 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 11-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S C TIWARI
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & N.K. PR ADHAN, ACCOUNTANT MEMBER & SHRI I.T.A. NO.1668/MUM/2014 (ASSESSMENT YEAR : 2011-12) QUEST PORTFOLIO SERVICES PVT. LTD. 1202, NEELKANTH HEIGHTS, NEAR BANK OF INDIA, B.P.S. CROSS ROAD, MULUND (W), MUMBAI-400080. PAN: AAACQ1454B VS. DCIT - 10(3), MUMBAI. (APPELLANT) .. ( RESPONDENT) I.T.A. NO.2420/MUM/2014 (ASSESSMENT YEAR : 2011-12) DCIT - 10(3), ROOM NO. 451, 4 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020. VS. QUEST PORTFOLIO SERVICES PVT. LTD. 11, 2 ND FLOOR, KRISHNA KUNJ, NEAR DEEP MANDIR CINEMA, LBS MARG, MULUND (W), MUMBAI-400080. PAN: AAACQ1454B (APPELLANT) .. ( RESPONDENT) ASSESSEE BY SHRI S.C.TIWARI (AR) REVENUE BY SHRI SATYAPAL KUMAR (DR) DATE OF HEARING : 25.08.2016 DATE OF PRONOUNCEMENT : 23.09.2016 O R D E R SAKTIJIT DEY, JM: 2 ITA NOS.1668 & 2420/M/2014 1. THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE AGAINST THE COMMON ORDER OF LD. CIT(A)-22, MUMBAI DATED 15.01.2 014 FOR THE ASSESSMENT YEAR (AY) 2011-12. ITA NO. 1668/MUM/2014 2. THE ONLY ISSUE IN DISPUTE IN ASSESSEES APPEAL IS I N RELATION TO DISALLOWANCE OF RS. 39,61,235/- U/S 14A R.W. RULE 8 D. 3. BRIEFLY, THE FACTS ARE THE ASSESSEE-COMPANY IS ENGA GED IN TRADING & DEALING IN SHARES, SECURITIES, CURRENCY & COMMODITY DERIVATIVES. FOR THE YEAR UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF I NCOME ON 27.08.2010 DECLARING INCOME OF RS. 1,04,66,701/-. DURING THE A SSESSMENT PROCEEDING, THE AO NOTICED THAT IN THE RELEVANT PREVIOUS YEAR ASSES SEE HAD EARNED EXEMPT INCOME BY WAY OF DIVIDEND AMOUNTING TO RS. 6,30,349 /- AND THE ASSESSEE SUO- MOTO HAS DISALLOWED EXPENDITURE OF RS. 31,517/- BEI NG 5% OF THE DIVIDEND INCOME U/S 14A OF THE ACT. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT IT HAD NOT INCURRED ANY SPECIFIC EXPENDITURE FOR EARNING T HE DIVIDEND INCOME. THE AO HOWEVER, DID NOT FIND MERIT IN THE SUBMISSIONS OF T HE ASSESSEE. HE WAS OF THE VIEW THAT DISALLOWANCE U/S 14A HAS TO BE MADE IN TE RMS OF THE PROCEDURE LAID DOWN UNDER RULE 8D. THUS, THE AO APPLYING RULE 8D O F THE RULES, WORKED OUT DISALLOWANCE U/S 14A AT RS. 39,61,235/-. BEING AGGR IEVED OF SUCH DISALLOWANCE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEF ORE THE FIRST APPELLATE AUTHORITY (FAA), IT WAS ARGUED BY THE ASSESSEE THAT SINCE THE SHARES, SECURITIES, MUTUAL FUNDS WERE HELD AS STOCK-IN-TRAD E BY THE ASSESSEE NO 3 ITA NOS.1668 & 2420/M/2014 DISALLOWANCE U/S 14A CAN BE MADE. LD. CIT(A) HOWEVE R, WAS NOT CONVINCED WITH THE SUBMISSIONS OF THE ASSESSEE. RELYING UPON A DECISION OF THE ITAT, MUMBAI (3 RD MEMBER) IN CASE OF M/S B.H. SECURITIES PVT. LTD., THE LD. CIT(A) SUSTAINED THE DISALLOWANCE BY HOLDING THAT EVEN WHE RE SHARES ARE HELD AS STOCK-IN-TRADE, DISALLOWANCE U/S 14A CAN BE MADE. 4. THE LD. AR SUBMITTED BEFORE US THAT THE ISSUE IS NO W SETTLED IN FAVOUR OF THE ASSESSEE BY VIRTUE OF THE DECISION OF THE HONB LE BOMBAY HIGH COURT IN CASE OF CIT VS. INDIA ADVANTAGE SECURITIES LTD. (38 0 ITR 471). THE LD. AR SUBMITTED, AT BEST, KEEPING IN VIEW THE PROVISIONS OF RULE 8D(III) DISALLOWANCE CAN BE MADE @ 10% OF THE DIVIDEND INCOME EARNED. TH E LD. DR, THOUGH, AGREED THAT THE ISSUE IS COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, HOWEVER, HE RELIED UPON THE OBSERVATION S OF AO AND CIT(A). 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND PERUSED THE MATERIALS ON RECORD. THERE IS NO DISPUTE THAT THE T RANSACTION IN SHARE, SECURITIES, MUTUAL FUNDS HAS BEEN UNDERTAKEN AS A T RADING ACTIVITY BY THE ASSESSEE AND THE INCOME DERIVED THEREFROM HAS BEEN SHOWN UNDER THE HEAD BUSINESS INCOME. AS CAN BE SEEN, IT IS THE CONTEN TION OF THE ASSESSEE FROM THE STAGE OF ASSESSMENT PROCEEDING ITSELF THAT NO D ISALLOWANCE U/S 14A CAN BE MADE IN RESPECT OF THE SHARE, SECURITIES, MUTUAL FU NDS ETC. HELD AS STOCK-IN- TRADE. WE FIND, AFORESAID ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JURISDICTIONAL HIGH COURT WHILE UPHOLDI NG THE ORDER OF THE ITAT IN CASE OF CIT VS. INDIA ADVANTAGE SECURITIES LTD.(SUP RA) LAYING DOWN THE 4 ITA NOS.1668 & 2420/M/2014 PROPOSITION THAT NO DISALLOWANCE U/S 14A CAN BE MAD E IN RESPECT OF INCOME EARNED FROM SHARES, SECURITIES, MUTUAL FUNDS, HELD AS STOCK-IN-TRADE. HOWEVER, APPLYING THE PRINCIPLE LAID DOWN IN THE CASE OF CIT VS. INDIA ADVANTAGE SECURITIES LTD.(SUPRA), WE DIRECT THE AO TO DISALLO W AN AMOUNT OF 10% OF THE DIVIDEND INCOME TO COMPLY WITH THE PROVISIONS OF SE CTION 14A. GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 2420/MUM/2014 6. IN THIS APPEAL, THE ONLY ISSUE RAISED BY THE DEPART MENT IS AGAINST THE DECISION OF THE CIT(A) IN DELETING THE ADDITION MAD E BY THE AO U/S. 40A(2)(B) OF THE ACT ON ACCOUNT OF PERFORMANCE BONUS PAID TO THE DIRECTOR OF THE COMPANY. 7. BRIEFLY, THE FACTS ARE IN COURSE OF ASSESSMENT PROC EEDING, THE AO NOTICED THAT ASSESSEE HAD PAID RS. 10 CRORES AS PERFORMANCE BONUS TO ONE OF ITS DIRECTOR IN ADDITION TO REMUNERATION PAID TO HIM. H E ALSO OBSERVED, SHARE HOLDING OF THE DIRECTOR IN THE COMPANY IS 91%. THER EFORE, HE CALLED UPON THE ASSESSEE TO JUSTIFY PAYMENT OF SUCH HUGE PERFORMANC E BONUS TO THE DIRECTOR. THOUGH, ASSESSEE SUBMITTED ITS EXPLANATION JUSTIFY ING THE PAYMENT OF PERFORMANCE BONUS. HOWEVER, THE AO REJECTING THE EX PLANATION OF THE ASSESSEE HOLD THAT QUANTUM OF PERFORMANCE BONUS PAID TO THE DIRECTOR IS NOT REASONABLE IN TERMS OF SECTION 40A(2)(B) OF THE ACT. ACCORDING LY, HE DISALLOWED THE EXPENDITURE. BEING AGGRIEVED OF SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 5 ITA NOS.1668 & 2420/M/2014 8. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE FOUND THAT IN ASSESSEES OWN CASE FOR AY 2008-09, THE TRIBUNAL WHILE DECIDING IDENTICAL NATURE OF DISPUTE RELATING TO DISALLOWANCE OF PERFO RMANCE BONUS PAID TO THE DIRECTOR HAS ALLOWED THE ASSESSEES CLAIM, THEREFOR E, FOLLOWING THE DECISION OF THE ITAT, LD. CIT(A) DELETED THE ADDITION. LD. COUN SELS APPEARING FOR BOTH THE PARTIES HAVE AGREED BEFORE US THAT ISSUE IN DISPUTE IS COVERED BY THE DECISION OF THE ITAT IN ASSESSEES ON CASE FOR AY 2008-09. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES A ND PERUSED THE MATERIAL ON RECORD. AS COULD BE SEEN, THE DISPUTE I NVOLVED IN THE PRESENT APPEAL IS DISALLOWANCE OF PAYMENT OF PERFORMANCE BO NUS OF RS. 10 CRORES TO A DIRECTOR OF THE COMPANY VIZ; SHRI RAVINDRA R. DHARA MSHI BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT BY AO. I T IS FURTHER OBSERVED, SIMILAR DISALLOWANCE WAS ALSO MADE BY THE AO IN AY 2008-09. WHEN THE ISSUE CAME UP FOR CONSIDERATION BEFORE THE ITAT IN AY 2008-09 IN ITA NO. 1630/MUM/2011 DATED 10.06.2011, THE ITAT AFTER CONSIDERING THE SU BMISSIONS OF THE PARTIES IN THE CONTEXT OF FACTS AND MATERIALS ON RECORD DELETE D THE ADDITION HOLDING AS UNDER: 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A LSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE PERFORM ANCE BONUS OF RS.B.5 CRORES PAID BY THE ASSESSEE COMPANY TO ITS DIRECTOR SHRI R AVINDRA RAICHAND DHARAMSHI HAS BEEN DISALLOWED BY THE AUTHORITIES BE LOW TO THE EXTENT OF RS. 4.25 CRORES ON THE GROUND THAT THE SAME TO THAT EXT ENT WAS EXCESSIVE AND UNREASONABLE AND THAT THIS EXCESS PAYMENT WAS MADE BY THE ASSESSEE COMPANY IN ORDER TO AVOID DIVIDEND DISTRIBUTION TAX . IT IS, THEREFORE, IMPORTANT TO ASCERTAIN WHETHER THE AMOUNT OF RS.8.5 CRORES PA ID BY THE ASSESSEE COMPANY TO ITS DIRECTOR ON ACCOUNT OF PERFORMANCE B ONUS IS EXCESSIVE AND UNREASONABLE OR NOT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE FIRST OBJECTION RAISED BY THE AUTHORITIES BELOW IN THIS, REGARD IS THAT (;1E DECISION TO 6 ITA NOS.1668 & 2420/M/2014 PAY PERFORMANCE BONUS OF RS.8.5 CRORES WAS TAKEN IN THE BOARD MEETING HELD IN FEBRUARY, 200B ON THE BASIS OF UNAUDITED FINANCI AL RESULTS FOR THE THREE QUARTERS ENDING 31.12.2007 'WHICH DISCLOSED A NET P ROFIT OF RS.6.61 CRORES ONLY WHICH DID NOT JUSTIFY THE PAYMENT OF PERFORMANCE BO NUS OF RS. 8 3 CRORES. IT HAS ALSO BEEN ALLEGED BY THE. ASSESSING OFFICER THA T THE DECISION TO PAY PERFORMANCE BONUS WAS AN AFTER THOUGHT AND IT WAS D ONE TO AVOID THE DIVIDEND DISTRIBUTION TAX. HOWEVER, AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE ENTIRE PERFORMANCE BONUS WAS PAID BY THE ASSESSEE COMPANY TO THE CONCERNED DIRECTOR ON 31 ST MARCH, 200B ITSELF AND KEEPING IN VIEW THIS UNDISPUTED POSITION; IT CANNOT BE SAID THAT THE DEC ISION TO PAY PERFORMANCE BONUS WAS AN AFTER THOUGHT. WE ALSO FIND MERIT IN T HE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT EVEN THOUGH THE UNAUD ITED FINANCIAL RESULTS FOR THE 3 QUARTERS ENDING 31 ST DEC.2007 WERE AVAILABLE FOR CONSIDERATION IN THE BOARD MEETING HELD IN THE MONTH OF FEBRUARY 2008, T HE DIRECTORS MUST HAVE BEEN AWARE OF THE FINANCIAL PERFORMANCE OF THE ASSE SSEE COMPANY IN THE MONTH OF JANUARY 2008 AS WELL AS THE PROJECTIONS FO R THE REMAINING 2 MONTHS WHILE DECIDING THE QUANTUM OF PERFORMANCE BONUS TO BE PAID TO THE CONCERNED DIRECTOR. IN THIS REGARD, THE LEARNED COUNSEL FOR T HE ASSESSEE HAS PREPARED AND FURNISHED A STATEMENT GIVING MONTH-WISE PROFITABILI TY POSITION FOR THE MONTH OF JANUARY, FEBRUARY AND MARCH 2008 WHICH CLEARLY SHOW S THAT A PROFIT OF RS. 537 CRORES WAS EARNED BY THE ASSESSEE COMPANY IN THE MO NTH OF JANUARY 2008 ITSELF MAKING THE TOTAL PROFIT EARNED FOR THE PERIO D OF 10 MONTHS ENDING JANUARY 2008 TO RS. 12.52 CRORES. THIS MAKES IT CLE AR THAT THE PAYMENT OF PERFORMANCE BONUS OF RS.8.5 CRORES WAS FULLY JUSTIF IED ON THE BASIS OF PROFIT EARNED BY THE ASSESSEE COMPANY UPTO JANUARY 2008 OF WHICH THE DIRECTORS WERE EXPECTED TO AWARE OF WHILE TAKING THE DECISION TO PAY PERFORMANCE BONUS OF RS. 8.5 CRORES TO THE CONCERNED DIRECTOR. 12. IN ANY CASE, THE PERFORMANCE .BONUS OF RS.8.5 C RORES WAS PAID TO THE CONCERNED DIRECTOR FOR THE FINANCIAL YEAR 2007-08 A ND THE REASONABILITY OF THE SAME, THEREFORE, HAS TO BE ASCERTAINED KEEPING IN V IEW THE FINANCIAL PERFORMANCE OF THE ASSESSEE COMPANY FOR THE ENTIRE YEAR AS A WHOLE. IN THIS REGARD, IT IS NOTED FROM THE AUDITED PROFIT AND LOS S ACCOUNT OF THE ASSESSEE COMPANY PLACED AT PAGE NO.2 OF THE PAPER BOOK THAT A TOTAL PROFIT OF RS. 15.69 CRORES WAS EAMED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION BEFORE PAYMENT OF PERFORMANCE BONUS TO THE DIRECTOR AND EV EN AFTER THE SAID PAYMENT, A NET PROFIT BEFORE TAX OF THE ASSESSEE CO MPANY WAS RS. 7.19 CRORES. AFTER MAKING PROVISION OF TAX OF RS. 2.52 CRORES, T HE NET PROFIT OF THE ASSESSEE COMPANY AFTER TAX WAS RS 4.667 CRORES WHICH AS COMP ARED TO THE PAID UP CAPITAL OF RS. 1 CRORES GAVE A FABULOUS RATE OF RET URN. IT MAY BE PERTINENT TO NOTE HERE THAT THERE WAS NO MAJOR EXPENDITURE INCUR RED BY THE ASSESSEE COMPANY UNDER ANY HEAD INCLUDING SALARY AND REMUNER ATION PAID TO OTHERS EXCEPT THE EXECUTIVE DIRECTOR TO WHOM PERFORMANCE B ONUS OF RS. 8.5 CRORES WAS PAID IN ADDITION TO SALARY OF RS.30 LAKHS. AO T HESE FACTS AND FIGURES OF THE PRESENT CASE CLEARLY SHOW THAT THE HUGE PROFIT WAS EARNED BY THE ASSESSEE COMPANY MAINLY AS A RESULT OF EFFORTS OF THE SAID E XECUTIVE DIRECTOR UTILIZING HIS SKILLS, EXPERTISE AND EXPERIENCE IN THE FIELD AND I T, THEREFORE, CANNOT BE SAID 7 ITA NOS.1668 & 2420/M/2014 THAT THE PERFORMANCE BONUS OF RS.8.5 CRORES PAID TO THE SAID DIRECTOR WAS EXCESSIVE OR UNREASONABLE. 13. MOREOVER, AS SUBMITTED BY THE LEARNED COUNSEL F OR THE ASSESSEE, THE MAJOR AMOUNT OF PROFIT EARNED BY THE ASSESSEE COMPANY TO THE EXTENT OF RS. 8.38 CRORES WAS EARNED FROM F & 0 TRANSACTIONS AND THE F ACT THAT JOBBERS FOR SUCH TRANSACTION ARE PAID CHARGES TO THE EXTENT OF 50% O F THE PROFIT AS PER THE PREVAILING MARKET PRACTICE FURTHER SHOWS THAT THE P ERFORMANCE BONUS PAID BY THE ASSESSEE COMPANY TO THE DIRECTOR WHICH IS ABOUT 55% OF THE PROFIT IS FAIR AND REASONABLE. AS NOTED BY THE ASSESSING OFFICER A T PAGE NO.5 OF THE ASSESSMENT ORDERS SIMILAR PERFORMANCE BONUS OF RS. 5 CRORES WAS PAID TO THE DIRECTOR IN THE IMMEDIATELY SUCCEEDING YEAR AGAINST THE PROFIT OF RS. 9.40 CRORES AND THE SAME BEING 53% OF THE PROFITS FURTHE R SHOWS THAT PAYMENT OF PERFORMANCE BONUS AT 55% OF THE PROFITS IN THE YEAR UNDER CONSIDERATION WAS FAIR AND REASONABLE AND IT WAS CERTAINLY NOT THE DE CISION TAKEN AS AN AFTER THOUGHT TO AVOID PAYMENT OF DISTRIBUTION TAX. WHILE MAKING THE DISALLOWANCE OUT OF PERFORMANCE BONUS, THE A.O. HAS INVOKED THE PROVISIONS OF SECTION 4OA(2)(A). IT IS SETTLED POSITION OF LAW THAT FOR M AKING A DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 40A(2)(A), THE O NUS IS ON THE DEPARTMENT TO SHOW THAT THE PAYMENT OF EXPENDITURE MADE BY THE AS SESSEE WHICH IS SOUGHT TO BE DISALLOWED IS EXCESSIVE AND UNREASONABLE. IN THE PRESENT CASE, NOTING HAS BEEN BROUGHT ON RECORD BY THE A.O. TO SHOW THAT THE PERFORMANCE BONUS OF RS.8.5 CRORES PAID BY THE ASSESSEE COMPANY TO IT S DIRECTOR WAS EXCESSIVE AND UNREASONABLE AND THEREFORE, THE ONUS THAT LAY O N THE DEPARTMENT TO JUSTIFY THE DISALLOWANCE MADE BY INVOKING THE PROVISIONS OF SECTION 40A(2)(A) WAS NOT DISCHARGED. AS SUCH CONSIDERING ALL THE FACTS, AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY TH E ASSESSING OFFICER OUT OF PERFORMANCE BONUS PAID TO THE DIRECTOR TO THE EXTEN T OF RS. 4.25 CRORES AND CONFIRMED BY THE LEARNED CIT(A) IS NOT SUSTAINABLE. IN THAT VIEW OF THE MATTER, WE DELETE THE SAID DISALLOWANCE AND ALLOW GROUND NO S. 3 AND 4 OF THE ASSESSEE'S APPEAL. 10. WE HAVE NOTED, LD. CIT(A) HAS GIVEN A FACTUAL FINDI NG THAT IN THE IMPUGNED AY, THE AO HAS NOT ESTABLISHED THAT THE PA YMENT OF PERFORMANCE BONUS TO THE DIRECTOR IS UNREASONABLE TO ENABLE THE APPELLATE AUTHORITIES TO TAKE A DIFFERENT VIEW. 11. BEFORE US, ALSO THE DEPARTMENT HAS NOT BROUGHT ANY MATERIAL TO DEMONSTRATE THAT THE FACTS RELATING TO THE DISALLOW ANCE OF PERFORMANCE BONUS IN THE YEAR UNDER CONSIDERATION IS IN ANY WAY DIFFE RENT FROM THE AY 2008-09. THAT BEING THE FACTUAL POSITION, RESPECTFULLY FOLLO WING THE DECISION OF THE CO- 8 ITA NOS.1668 & 2420/M/2014 ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE AY 20 08-09 AS REFERRED TO ABOVE, WE UPHOLD THE ORDER OF CIT(A) BY DISMISSING THE GROUND RAISED. 12. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED AND THE DEPARTMENTS APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF SEPTEMBER, 2016. SD/- SD/- (N.K. PRADHAN) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 23.09.2016 SHARWAN P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR D BENCH BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.