HALLMRK CORPORATION, MUMBAI V. ASST CIT 22(1), NAVI MUMBAI

ITA 1716/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5118 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 18-11-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 12-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PITAMBER DAS
• Assessee Lawyers: S VENKATRAMA N
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H B ENCH, MUMBAI , , !' #$% , !& ! ' BEFORE SHRI VIJAY PAL RAO, JM AND SHRI N.K. BILLAIYA, AM ./ I.T.A. NO. 1716/MUM/2012 ( ( ( ( ( / ASSESSMENT YEAR : 2008-09 M/S. HALLMARK CORPORATION, 5/59, 3 RD FLOOR, BHAVESH APARTMENT, 90 FEET ROAD, GHATKOPAR EAST, MUMBAI-400 077 THE ACIT 22(1), 4 TH FLOOOR, TOWER NO. 6, VASHI RLY STATION COMPLEX, NAVI MUMBAI ) !& ./ * ./PAN/GIR NO. : AACFH 4419G ( )+ /APPELLANT ) .. ( ,-)+ / RESPONDENT ) )+ . ! / APPELLANT BY : ` SHRI S. VENKATRAMAN ,-)+ / . ! /RESPONDENT BY : SHRI PITAMBER DAS / 01& / DATE OF HEARING :18.11.2013 23( / 01& / DATE OF PRONOUNCEMENT :20.11.2013 !4 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. CIT(A)-33, MUMBAI DT.19.12.2011 PERTAINING TO A.Y. 2008-09. 2. THE ASSESSEE HAS RAISED TWO SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 RELATES TO THE DISALLOWANCE MADE BY THE ACIT AND CONFIRMED BY THE LD. CIT(A) U/S. 14A OF THE ACT BY APPLYING RULE 8D OF I.T. RULES, 1962. ITA NO.1716/M/2012 2 3. THE ASSESSEE IS A TRADER IN SHARES AND SECURITIES. FOR THE YEAR UNDER CONSIDERATION, THE RETURN WAS FILED ON 30.9.2008 DE CLARING TOTAL INCOME AT RS. 22,31,850/-. THE CASE WAS SELECTED FOR SCRUTIN Y ASSESSMENT AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND SERVE D UPON THE ASSESSEE. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCE EDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS EARNED DIVIDE ND INCOME WHICH IT HAS CLAIMED AS EXEMPT. THE AO WAS OF THE FIRM BELIEF T HAT PROVISIONS OF SEC. 14A R.W. RULE 8D ARE VERY MUCH APPLICABLE IN RESPEC T OF ITS EXEMPT INCOME. THE AO RELIED UPON THE DECISION OF THE JUR ISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD 32 8 ITR 81. THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE AS TO WHY NO EXPENSES HAVE BEEN ALLOCATED FOR EARNING THE EXEMPT INCOME. THE ASSES SEE REPLIED THAT NO EXPENSES HAVE BEEN CLAIMED THEREFORE, THERE IS NO Q UESTION OF DISALLOWANCE U/S. 14A OF THE ACT. THE AO FURTHER R ELIED UPON THE DECISION OF THE TRIBUNAL, MUMBAI REPORTED IN 8 TAXM AN.COM 23 AND ALSO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL M UMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (MUM) A ND WENT ON TO COMPUTE THE DISALLOWANCE U/S. 14A R.W. RULE 8D AT R S. 34,68,589/-. 4. THE ASSESSEE STRONGLY AGITATED THIS ISSUE BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. BEFORE THE LD. CIT(A), THE ASS ESSEE CLAIMED THAT IT IS A TRADER IN SHARES AND SECURITIES AND NOT AN INV ESTOR AND RECEIVED DIVIDEND WHILE DEALING IN SHARES. IT WAS CLAIMED T HAT THE DIVIDEND WAS NOT RECEIVED ON INVESTMENTS. THE LD. CIT(A) WAS NO T CONVINCED WITH THE SUBMISSION OF THE ASSESSEE. ON THE CONTRARY, THE L D. CIT(A) HELD THAT THE ASSESSEE COULD NOT DISCHARGE ITS ONUS TO SHOW THAT THERE ARE NO EXPENDITURE DIRECTLY LINKED TO SHARES PURCHASED AN D YIELDED DIVIDEND DURING THE YEAR UNDER CONSIDERATION. THE LD. CIT(A ) WAS CONVINCED THAT ITA NO.1716/M/2012 3 THERE IS NO ALTERNATIVE LEFT BUT TO FOLLOW PROVISI ONS OF SEC 14A(3) WITH RULE 8D AND CONFIRMED THE ADDITIONS MADE BY THE AO. 5. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. A T THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE IS SUES INVOLVED ARE DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE TRIBUNAL, MUMBAI BENCH VIDE ITA NO. 6711/M/2011. IT IS THE S AY OF THE COUNSEL THAT IN THIS CASE, THE TRIBUNAL HAS RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCL LTD VS JCI T 250 CTR 291. THE LD. COUNSEL PLEADED THAT THE SAME SHOULD BE FOL LOWED IN THE CASE OF THE ASSESSEE. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE DECISION OF THE TRIBUNAL IN ITA NO. 6711/M/11 V IS--VIS FACTS OF THE CASE UNDER CONSIDERATION. WE FIND FORCE IN THE CON TENTION OF THE LD. COUNSEL THAT ON IDENTICAL FACTS, THE TRIBUNAL HAS D ECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF TH E HONBLE KARNATAKA HIGH COURT (SUPRA). IT WOULD NOT BE OUT OF PLACE T O MENTION HERE THAT ONE OF US I.E. JM WAS A PARTY TO THE DECISION OF THE TR IBUNAL IN ITA NO. 6711/M/11. THE TRIBUNAL HAS GIVEN ITS FINDING FROM PARA-5 ON PAGE-4 ONWARDS WHICH READ AS UNDER: WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIV AL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TH E DISALLOWANCE OF EXPENSES U/S.14A IN RELATION TO THE EXEMPT DIVID END INCOME RECEIVED FROM SHARES HELD ON TRADING ACCOUNT. THE A.O. DISALLOWED THE EXPENSES HOLDING THAT THE PROVISIONS OF SECTION 14A WERE APPLICABLE EVEN IN RELATION TO THE DIVIDEN D RECEIVED FROM THE TRADING SHARES. THE LD.CIT(A) HAS HOWEVER HELD THAT THE PROVISIONS OF SECTION 14A WILL NOT APPLY TO THE SHA RES HELD ON ITA NO.1716/M/2012 4 TRADING ACCOUNT. THE REVENUE HAS PLACED RELIANCE O N THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S . AMERICAN EXPRESS BANK LIMITED (SUPRA) IN WHICH THE TRIBUNAL HAS HELD THAT THE EXPENDITURE U/S.14A HAS TO BE DISALLOWED E VEN IN RESPECT OF DIVIDEND INCOME RECEIVED FROM TRADING SH ARES. THE TRIBUNAL FOLLOWED THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGE MENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD RELIED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CAS E OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE THAT THE DISALLOWANCE COULD NOT BE MADE IN RELATION TO THE D IVIDEND RECEIVED FROM TRADING SHARES. THE TRIBUNAL HAD HOW EVER, DISTINGUISHED THE SAID JUDGMENT OF HONBLE HIGH COU RT OF KERALA ON THE GROUND THAT IN THAT CASE THE ACQUISITION OF SHARES WITH THE BORROWED FUNDS WAS FOR THE PURPOSE OF CONTROLLING T HE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING TH E SHARES WAS BUSINESS, THE HIGH COURT HAD UPHELD THE DISALLOWANC E U/S.14A OF THE I.T. ACT. THE TRIBUNAL ALSO NOTED THAT THE HIG H COURT IN THAT CASE HAD ONLY OBSERVED THAT THE INTEREST PAID ON BO RROWED FUNDS UTILISED FOR ACQUIRING SHARES COULD BE ALLOWED AS D EDUCTION U/S.36(1)(III) ONLY IF SHARES WERE HELD AS STOCK-IN -TRADE. THESE OBSERVATIONS WERE ONLY OBITER DICTA AND NOT THE RAT IO DECIDENDI OF THE JUDGMENT. THE RATIO DECIDENDI OF THE JUDGMENT WAS DISALLOWANCE OF INTEREST U/S.14A WHICH HAD BEEN UPH ELD BY THE TRIBUNAL. THE TRIBUNAL, THEREFORE, DID NOT ACCEPT THE ARGUMENTS BASED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERA LA IN THE CASE OF SMT. LEENA RAMACHANDRAN (SUPRA) WHICH WAS N OT DIRECTLY ON THE ISSUE OF DISALLOWANCE OF EXPENSES IN RELATIO N TO THE DIVIDEND INCOME RECEIVED FROM TRADING IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAV E RECENTLY CONSIDERED THE DISALLOWANCE OF EXPENSES IN CURRED ON BORROWINGS MADE FOR PURCHASE OF TRADING SHARES U/S. 14A OF THE I.T. ACT IN CASE OF CCL LTD. VS. JCIT (SUPRA). THE ASSESSEE IN THAT CASE WAS DISTRIBUTOR OF STATE LOTTERIES AND A DEALE R IN SHARES AND SECURITIES. THE ASSESSEE HAD TAKEN LOANS FOR THE P URCHASE OF CERTAIN SHARES AND IT HAD INCURRED EXPENDITURE FOR BROKING THE LOA NS WHICH HAD BEEN DISALLOWED UNDER RULE 8D BY THE A.O. AND CONFIRMED BY THE LD.CIT(A). THE TRIBUNAL AGREED WITH THE AUTHORITIE S BELOW THAT THE EXPENDITURE RELATABLE TO EARNING OF DIVIDEND IN COME THOUGH INCIDENTAL TO THE TRADING IN SHARES WAS ALSO TO BE DISALLOWED U/S.14A OF THE I.T. ACT. THE TRIBUNAL HOWEVER, HAD OBSERVED THAT THE ENTIRE BROKING COMMISSION WAS NOT RELATABLE TO EARNING OF DIVIDEND INCOME AS THE LOAN HAD BEEN UTILISED FOR T HE PURCHASE OF SHARES AND THE PROFIT SHOWN FROM THE SALE OF SHARES HAD BEEN OFFERED AS BUSINESS INCOME. THE TRIBUNAL, THEREFOR E, DIRECTED THE A.O. TO BIFURCATE THE EXPENDITURE PROPORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY THE TRIBUNAL. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE PURCHASED WERE SOLD ITA NO.1716/M/2012 5 AND INCOME DERIVED WAS OFFERED TO TAX AS BUSINESS I NCOME. THE REMAINING 30% OF SHARES WHICH REMAINED UNSOLD HAD R EVERTED TO DIVIDEND INCOME FOR WHICH THE ASSESSEE HAD NOT INCU RRED ANY EXPENDITURE AT ALL. THE HIGH COURT ALSO OBSERVED TH AT THE ASSESSEE HAD NOT RETAINED THE SHARES WITH THE INTEN TION OF EARNING DIVIDEND INCOME WHICH WAS INCIDENTAL DUE TO HIS SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSEE. THE HIGH COURT, THEREFORE, DID NOT UPHOLD THE ORDER OF THE TRIBUNAL DISALLOWING THE EXPENDITURE IN RELATION TO THE DIVIDEND FROM SHARES . THUS THERE BEING A DIRECT JUDGMENT OF A HONBLE HIGH COURT ON THIS ISSUE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISI ON OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. D AGA CAPITAL MANAGEMENT P. LTD. (SUPRA). INFACT, WE NOTE THAT THE TRIBUNAL IN THE CASE OF GANJAM TREADING CO. LTD. (SUPRA) HAS AL READY CONSIDERED THIS SITUATION AND HELD THAT IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (SUPRA) THE DISALLOWANCE OF INTEREST IN RELATION TO THE DIVIDEND RECEIVED FROM TRADING SHARES CANNOT BE MADE. WE, T HEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DELE TING THE DISALLOWANCE U/S.14A COMPUTED BY THE A.O. IN RELATI ON TO THE STOCK-IN-TRADE. THE ORDER OF THE LD.CIT(A) IS ACCO RDINGLY UPHELD. RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNA L, THE FINDING OF THE LD. CIT(A) ARE REVERSED. THE AO IS DIRECTED TO DELETE THE ADDITIONS MADE U/S. 14A OF THE ACT. 8. GROUND NO. 2 WITH ITS SUB GROUNDS IS AN ALTERNAT IVE PLEA AND WITHOUT PREJUDICE TO GROUND NO. 1. AS WE HAVE DECI DED GROUND NO. 1 IN FAVOUR OF THE ASSESSEE, THE GRIEVANCE RAISED IN GRO UND NO. 2 BECOME OTIOSE. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH NOVEMBER, 2013 !4 / 3( &! 5 6 720.11.20133 / = SD/- SD/- ( VIJAY PAL RAO ) ( N.K. BILLAIYA ) /JUDICIAL MEMBER !& / ACCOUNTANT MEMBER MUMBAI; 6 DATED / /2013 . . ./ RJ , SR. PS ITA NO.1716/M/2012 6 !4 / ,0 >!(0 !4 / ,0 >!(0 !4 / ,0 >!(0 !4 / ,0 >!(0 / COPY OF THE ORDER FORWARDED TO : 1. )+ / THE APPELLANT 2. ,-)+ / THE RESPONDENT. 3. ? ( ) / THE CIT(A)- 4. ? / CIT 5. @= ,0 , , / DR, ITAT, MUMBAI 6. =A B / GUARD FILE. !4 !4 !4 !4 / BY ORDER, -0 ,0 //TRUE COPY// C CC C / D D D D (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI DATE INITIALS 1. DRAFT DICTATED ON: 18.11.2013 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 18.11.2013 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: