OASIS SECURITIES LTD, MUMBAI V. ASST CIT 4(2), MUMBAI

ITA 2105/MUM/2012

• Counselvise Citation: 210519914 RSA 2012
• Duration Of Justice: 1 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 29-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHIJIT PATANKAR
• Assessee Lawyers: PRAKASH K JOTWANI
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO. 2105/M/12 ASSESSMENT YEAR : 2008 - 09 M/S. OASIS SECURITIES LTD. 2 ND FLOOR, BLDG. NO.5, RAJABAHADUR COMPOUND, 43, TAMARIND LANE, FORT, MUMBAI - 400 023 PAN: AA A CO 0091J VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, 4(2) MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PRAKASH K. JOTWANI REV ENUE BY : SHRI ABHIJIT PATANKAR, D.R. DATE OF HEARING : 25.07. 20 13 DATE OF PRONOUNCEMENT : 28.08.2013 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) DATED 02 .02.12, RELEVANT TO ASSESSMENT YEAR 2008 - 09 . THE GROUND NO.1 OF THE APPEAL IS REPRODUCED AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW: 1.A) THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE U/S. 14A OF RS.8,72,001/ - . T HE LEARNED CIT(A) FURTHER FAILED TO CONSIDER THAT THE AO AND CIT(A) DID NOT PROVE NEXUS OF EARNING TAX FREE INCOME VIS - - VIS EXPENDITURE FOR EARNING THE SAME. B) THE LEARNED CIT(A) FURTHER ERRED IN NOT CONSIDERING THAT INTEREST EXPENDITURE WAS INCURRED F OR INVESTING IN IPO AND NOT IN EARNING TAX FREE INCOME. THE LEARNED CIT(A) FURTHER FAILED TO CONSIDER THE BOMBAY HIGH COURT DECISION IN THE CASE OF RELIANCE UTILITIES. 2. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE ASSESSMENT YEAR UNDER CONSIDERAT ION , ASSESSEE EARNED TAX FREE DIVIDEND INCOME OF RS.2,28,221/ - AND THE 2 ITA NO .2105/M/12 OASIS SECURITIES LTD. SAME WAS CLAIMED AS EXEMPT. THE AO OBSERVED THAT THE ASSESSEE DID NOT ALLOCATE ANY EXPENSE S INCURRED FOR EARNING OF SUCH TAX FREE INCOME. ASSESSE E STATED THAT NO EXPENDITURE HAD BEEN INCURRED TO EARN THE EXEMPTED INCOME. HOWEVER, AO DID NOT AGREE WITH ABOVE CONTENTION OF ASSESSEE AND BY APPLYING RULE 8D OF I.T. RULES CALCULATED THE EXPENDITURE AT RS.8,72,001/ - AND DISALLOWED THE SAME AS PER SECTION 14A OF THE ACT. BEING AGGRIEVED, A SSESSEE FILED APPEAL BEFORE LEARNED CIT(A) . 3. LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT T HE ASSESSEE HAD NOT MAINTAINED SEPARATE ACCOUNTS OF EXPENSES INCURRED FOR EARNING OF EXEMPT INCOME. FURTHER, AS THE ASSESSEE HAD NOT MAINTAINED ANY SEPARATE RECORDS ON ACCOUNT OF EXPENDITURE HAVING BEEN INCURRED FOR EARNING OF DIVIDEND INCOME . T HE AO CANNOT BE FASTENED WITH ANY BURDEN TO DISCOVER SUCH EXPENDITURE OF ESTABLISH NEXUS OF SUCH EXPENDITURE WITH EXEMPT INCOME. I N ABS ENCE OF RELEVANT DETAILS OF SUCH EXPENDITURE , THE PROVISIONS OF RULE 8D COME INTO PLAY. HE FURTHER OBSERVED THAT MERELY BECAUSE THE BALANCE SHEET AS ON 31.03.2008 SHOWS CERTAIN BALANCE OF OWN AND OUTSTANDING BORROWED FUND WOULD NOT MEAN THAT THE APPELLA NT HAD NOT UTILIZED ANY BORROWED FUND FOR INVESTMENT IN SECURITIES THAT EARNED DIVIDEND INCOME . THE APPELLANT F AILED TO PRODUCE ANY SUCH FLOW STATEMENT OR ANY OTHER MATERIAL WHICH CAN ESTABLISH THAT BORROWED FUND HAD NOT BEEN UTILIZED FOR EARNING OF EXEMPT INCOME IN AS MUCH AS NO SUCH FUND HAD BEEN UTILIZED FOR MAKING INVESTMENT FROM WHICH DIVIDEND HAD BEEN RECEIVED. HE FURTHER OBSERVED THAT THE ASSESSEE BEING A SHARE TRADER UNDERTAKES TRANSACTIONS OF SHARE WHICH INCLUDES THOSE TRANSACTIONS WHICH SUBSEQUEN TLY YIELDED DIVIDEND OF CAPITAL GAIN WHICH WAS EXEMPT . THE EXPENSES DEBITED TO P & L ACCOUNT HAD BEEN INCURRED FOR UNDERTAKING TRANSACTIONS OF SHARES WHICH ALSO INCLUDED SUCH TRANSACTIONS WHICH YIELDED EXEMPT DIVIDEND. THEREFORE, THE EXPENSES INCLUDING I NTEREST AND ADMINISTRATIVE EXPENSES DEBITED TO P & L ACCOUNT INCLUDE EXPENDITURE INCURRED FOR UNDERTAKING TRANSACTIONS OF SHARES WHICH YIELDED EXEMPT INCOME. A NY EXPENDITURE INCURRED FOR UNDERTAKING TRANSACTIONS FOR SHARES WHICH SUBSEQUENTLY YIELDED EXEMP T INCOME WAS REQUIRED TO BE TREATED AS EXPENDITURE INCURRED FOR EARNING OF EXEMPT DIVIDEND INCOME. THE 3 ITA NO .2105/M/12 OASIS SECURITIES LTD. ASSESSEE HOWEVER, DID NOT MAINTAIN ANY DETAILS OF EXPENSES INCURRED FOR UNDERTAKING TRANSACTIONS OF SHARES WHICH HA D YIELDED EXEMPT INCOME. THE AMOUNT OF SUCH EXPENDITURE WAS , THEREFORE, REQUIRED TO BE DETERMINED AS PER PROVISIONS OF RULE 8D. THE CIT (A) THUS CONFIRMED THE ADDITION . 4. THE LEARNED A.R. BEFORE US HAS SUBMITTED THAT THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE FINDINGS OF T HE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE OWN CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2007 - 08 VIDE ORDER DATED 20.02.13 PASSED IN ITA NO. 8009/MUM/2011. THE RELEVANT FINDINGS OF THE TRIBUNAL , IN RESPECT OF THE MATTER , IN THE SAID CASE ARE REPRODUCED AS UNDER: 10. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE IS ENGAGED IN THE ACTIVITY OF STOCK BROKING AND PROVIDING FINANCIAL SERVICES. ASSESSEE HAS GIVEN DETAILS OF THE PAYMENT OF INTEREST MADE TO BIRLA GLOBAL FINANCE CO. LTD., AND KOTAK MAHINDRA INVEST MENT LTD, WHICH ARE MENTIONED IN PARA 6 HEREINABOVE. IT IS NOT DISPUTED THAT BORROWED MONEY WAS INVESTED IN IPO. AT THE TIME OF HEARING, LD A.R. SUBMITTED THAT PROFIT/LOSS ON THE SAID ALLOTMENT OF SHARES TO THE ASSESSEE HAS RIGHTLY BEEN ASSESSED UNDER T HE HEAD BUSINESS INCOME OF THE ASSESSEE. THEREFORE, THE BORROWED MONEY, WHICH WAS UTILIZED IN INVESTMENT IN IPO, WAS CONSIDERED AS STOCK - IN - TRADE. WE OBSERVE THAT SIMILAR ISSUE HAS BEEN CONSIDERED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCL LTD VS JCIT, 250 CTR (KAR) 291, WHEREIN, IT WAS HELD THAT EVEN THOUGH THE DIVIDEND INCOME IS EXEMPT FROM PAYMENT OF TAX , IF ANY EXPENDITURE IS INCURRED IN EARNING THE SAID INCOME, THE SAID EXPENDITURE ALSO CANNOT BE DEDUCTED. BUT WHEN THE ASSESSEE HAS N OT RETAINED THE SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME AND THE DIVIDEND INCOME IS INCIDENTAL TO THE SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPO RTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTION., IN THE SAID CASE, THE HONBLE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE PURCHASED WERE SOLD AND INCOME DERIVED WAS OFFERED TO TAX AS BUSINESS INCOME. THE REMAI NING 37% OF SHARES WHICH REMAINED UNSOLD HAD RETAINED AND REMAINED UNSOLD WITH THE ASSESSEE. ON THOSE UNSOLD SHARES, ASSESSEE RECEIVED DIVIDEND INCOME FOR WHICH THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT ALL. THE HIGH COURT OBSERVED THAT THE ASSE SSEE HAD NOT RETAINED THE SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME AND IT WAS INCIDENTAL TO HIS BUSINESS OF SALE OF SHARES WHICH REMAINED UNSOLD WITH THE ASSESSEE. THE HIGH COURT, THEREFORE, DID NOT UPHOLD THE ORDER OF THE TRIBUNAL DISALLO WING THE EXPENDITURE IN RELATION TO THE DIVIDEND FROM SHARES. THUS, THE HONBLE HIGH COURT HELD THAT THE DISALLOWANCE OF INTEREST IN RELATION TO DIVIDEND RECEIVED FROM TRADING OF SHARES CANNOT BE MADE. CONSIDERING ABOVE DECISION OF HONBLE HIGH COURT (SU PRA) AND THE FACT THAT SHARES IN WHICH THE BORROWED MONEY WAS INVESTED ARE TRADING SHARES, THE DISALLOWANCE OF INTEREST U/S.14A AS MADE BY LD CIT(A) CANNOT BE MADE IN RELATION TO STOCK - IN - TRADE. FURTHER, LD A.R. CONCEDED THAT IN RESPECT OF INVESTMENT IN SH ARES, SOME ADMINISTRATIVE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR WHICH DISALLOWANCE HAS TO BE MADE. LD A.R. REFERRED THE DECISION DATED 10.10.2012 OF ITAT MUMBAI (SUPRA). CONSIDERING THE SAID DECISION OF CO - ORDINATE BENCH (SUPRA), WE RESTRICT T HE DISALLOWANCE TO 25% OF THE DIVIDEND INCOME OF RS. 1,73,580, WHICH WORKS OUT TO RS.43,395/ - . ACCORDINGLY, WE ALLOW GROUND NO.1 OF APPEAL IN PART BY RESTRICTING THE DISALLOWANCE TO RS.43,395/ - . 4 ITA NO .2105/M/12 OASIS SECURITIES LTD. 5. IT MAY BE OBSERVED THAT RULE 8D WAS NOT APPLICABLE F OR THE ASSESSMENT YEAR 200 7 - 0 8 . HOWEVER THE SAID RULE IS APPLICABLE FOR ASSESSMENT YEAR 2008 - 09 ONWARDS. HENCE THE SAME CAN BE APPLIED IN THE CASE OF ASSESSEE. HOWEVER AS PER THE OBSERVATIONS OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE OWN CASE OF T HE ASSESSEE FOR ASSESSMENT YEAR 2007 - 08 , THE DISALLOWANCE OF INTEREST UNDER SECTION 14A CANNOT BE MADE IN RELATION TO STOCK - IN - TRADE. THE ASSESSEE AT PAGE 2 OF THE PAPER BOOK IN THE APPEAL FILE BEFORE US HAS FILED THE WORKING OF DISALLOWANCE AS PER RULE 8D A FTER EXCLUDING THE DISALLOWANCE OF INTEREST UNDER SECTION 14A , WHICH IS REPRODUCED AS UNDER: CALCULATION OF DISALLOWANCE U/S. 14A CALCULATION OF AVERAGE VALUE OF INVESTMENTS AND DISALLOWANCE THEREOF A.Y. 2008 - 2009 PARTICULARS AMOUNT I. AMOUNT OF EXPENDITURE [AS PER RULE 8D(2)(I)]..(I) - II. AMOUNT AS PER THE FORMUL A GIVEN IN RULE 8D(2)(II) ( A ) AMOUNT OF INTEREST - ( B ) AVERAGE VALUE OF INVESTMENTS 4,725,000 (AS CALCULATE IN THE TABLE ABOVE) ( C ) AVERA GE VALUE OF THE TOTAL ASSET 136,056,428 THEREFORE, A * B/C - III. AMOUNT EQUAL TO ONE - HALF PERCENTAGE OF (B) . (III) 23,625 [AS PER RULE 8D(2)(III)] [AS PER CALCULATION SHOWN IN THE TABLE ABOVE] ___________ TOTAL DISALLOWANCE [I + II + III] 23,625 ___________ 6. SO RESPECTFULLY FO LLOWING THE FINDINGS OF THE CO - ORDINATE BENCH OF THE TRIBUNAL RELATING TO THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2007 - 08 AND TAKING INTO CONSIDERATION THE WORKING OF THE DISALLOWANCE UNDER RULE 8D SUBMITTED BY THE ASSESSEE, THE DISALLOWANCE UNDER THIS HEAD IS RESTRICTED TO RS.23,635/ - . THIS ISSUE IS DECIDED ACCORDINGLY. 5 ITA NO .2105/M/12 OASIS SECURITIES LTD. 7. GROUND NO.2 OF THE APPEAL IS REPRODUCED AS UNDER: 2. THE LEARNED CIT(A) ERRED IN NOT ALLOWING REBATE U/S. 88E OF RS.13,68,927/ - AND FURTHER ERRED IN CONSIDERING FINDINGS RECORDE D BY AO AND NOT CONSIDERING THE APPELLANTS SUBMISSIONS. 8. IT MAY BE OBSERVED THAT THE ASSESSEE BEFORE THE AO HAD CLAIMED REBATE UNDER SECTION 88E AT RS.55,06,087/ - WHEREAS THE AO ALLOWED THE SAME AT RS.13,68,927/ - , WHILE OBSERVING AS UNDER: THUS, F ROM THE PLAIN READING OF SECTION 88E, IT TRANSPIRES THAT THE AMOUNT WHICH IS ELIGIBLE FOR REBATE IS THE INCOME THAT IS RELATABLE TO THE STT PAID TRANSACTIONS AFTER REDUCING THE EXPENDITURE. THE COMPUTATION OF EXPENDITURE IS DONE ON THE BASIS OF PREVIOUS Y EAR WHICH THE ASSESSEE HAS NOT DISPUTED. THE RELEVANT ALLOCATION OF EXPENDITURE IS REPRODUCED BELOW: RS. (A) TOTAL INCOME FROM ALL OPERATIONS 7,30,15,848 (B) JOBBING INCOME (STT PAID) 1,43,03,572 ADD: INCOME FROM SHARE TRADING 2,10,76,109 GROSS INCOME ELIGIBLE FOR 88E [WHICH IS 48% OF (A)] 3,53,79,681 LESS : ALLOWABLE EXPENSES 2,32,11,564 NET INCOME ELIGIBLE FOR REBATE U/S. 88E 1,21,68,117 REBATE U/S. 88E @ 34% 41,37,160 9. HOWEVER, THE LEARNED CIT(A) FURTHER REDUCED THE SAID REBATE BY DIRECTING THE AO TO CALCULATE THE AVERAGE RATE OF TAX ON INCOME ELIGIBLE FOR REBATE UNDER SECTION 88E @ 30% INSTEAD OF 34% TAKEN AS THE AVERAGE RATE OF TAX. THE RELEVANT PORTION OF THE O RDER OF THE CIT(A) IS REPRODUCED AS UNDER: 3.2 I HAVE CONSIDERED THE CONTENTION OF THE AO AS WELL AS OF THE LD. A.R. I FIND THAT THE METHOD ADOPTED BY THE AO IN ARRIVING AT THE EXPENDITURE AT 48% IN RELATION TO THE INCOME ON WHICH THE STT IS ALLOWABLE, IS CORRECT AS THE INCOME ON WHICH STT IS ALLOWABLE IS EQUAL TO 48% OF THE TOTAL INCOME. THEREFORE, ON THE FACTS OF THIS CASE, THE METHOD ADOPTED BY THE AO IS REASONABLE. THE AO IS FURTHER DIRECTED TO CALCULATE AVERAGE RATE OF TAX ON INCOME ELIGIBLE FOR R EBATE U/S. 88E I.E. RS.1,21,68,117 (GROSS INCOME RS.3,53,79,681 MINUS PROPORTIONATE EXPENSES RS.2,32,11,564) @ 30% INSTEAD OF 34% TAKEN AS THE AVERAGE RATE OF TAX AND RECALCULATE THE REBATE U/S. 88E ACCORDINGLY. THIS GROUND OF APPEAL IS, THUS, DISMISSED. 10. IT MAY OBSERVED THAT THE LEARNED CIT (A) HAS NOT GIVEN ANY REASON TO POINT OUT ANY DEFECT IN THE WORKING OF THE DISALLOWANCE DONE BY THE AO UNDER SECTION 88E. HE HAS EVEN GIVEN NO REASON TO CALCULATE AVERAGE RATE OF TAX OF ELIGIBLE INCOME @ 30% INSTEAD OF 34% WHICH WAS DONE BY T HE AO ON THE BASIS OF THE TAX PAYABLE ON THE TOTAL INCOME OF THIS YEAR . WE DO NOT FIND ANY JUSTIFICATION BY THE LEARNED CI T(A) TO REDUCE THE REBATE UNDER 6 ITA NO .2105/M/12 OASIS SECURITIES LTD. SECTIO N 88E WITHOUT ASSIGNING ANY REASON. HENCE THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE IS HEREBY SET ASIDE AND THAT OF AO IS HEREBY ORDERED TO BE RESTORED. 11. GROUND NO.3 OF THE APPEAL IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY FINDING. 12. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.08. 2013. SD/ - SD/ - ( RAJENDRA SINGH ) ( SANJAY GARG ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 28.08. 2013. * KISHORE COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.