The ACIT, Circle-11, Ahmedabad V. Shri Parshwanath Finance, Ahmedabad

ITA 2460/AHD/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1010 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 17-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S N DIVETIA
• Keywords: Opportunity of being heard
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI S. S. GODARA, JM, & SHRI MANISH BORA D, AM. ITA NO.2460/AHD/2013 ASST. YEAR: 2009-10 ACIT, CIRCLE-11, AHMEDABAD. VS. SHRI PARSHWANATH FINANCE, BHAILAL CHATURNI CHAWL, NR. ROZY CINEMA, SARANGPUR, AHMEDABAD. APPELLANT RESPONDENT PAN AAGFS 5771A APPELLANT BY SHRI PRASOON KABRA, SR.DR RESPONDENT BY SHRI S. N. DIVETIA, AR DATE OF HEARING: 14/7/2016 DATE OF PRONOUNCEMENT: 22/7/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL OF REVENUE IS DIRECTED AGAINST THE ORD ER OF LD. CIT(A)-XVI, AHMEDABAD, DATED 5 TH AUGUST, 2013 IN APPEAL NO.CIT(A)-XVI/JCIT/R-11/429/11-12, FOR ASST. YEAR 2 009-10, PASSED AGAINST ORDER U/S 143(3) OF THE IT ACT, 1961 (IN SH ORT THE ACT), FRAMED ON 14.12.2011 BY JT. CIT, RANGE-11, AHMEDABAD. GROU NDS OF APPEAL RAISED IN THIS APPEAL ARE AS UNDER :- (1) THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 32,75,430/- ON ACCOUNT OF DISALLOWANCE U/S 14A R.W. S. 8D WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE FINDINGS BROUGHT OUT BY THE AO.. ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 2 (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF FINANCE AND SHARE TRADING, E-FILED ITS RETURN OF INCOME FOR ASST. YEA R 2009-10 ON 9.9.2009 DECLARING LOSS OF RS.97,91,666/-. CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, LD. ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HA S EARNED DIVIDEND INCOME OF RS.10,62,439/-, INCOME FROM SHOR T-TERM AND LONG- TERM CAPITAL GAIN AND INTEREST INCOME ALONG WITH CA RRYING ON SHARE TRADING BUSINESS. IT WAS ALSO OBSERVED THAT ASSESSE E INCURRED A PORTFOLIO MANAGEMENT SERVICES (PMS) OF RS.2,78,477/ - FOR EARNING SHORT TERM CAPITAL GAIN OF RS.23,68,330/- BUT DID N OT DISALLOW PMS FEES. ACCORDINGLY, ASSESSMENT WAS COMPLETED ON 14/1 2/2011 AT AN ASSESSED LOSS OF RS.62,37,759/- AFTER MAKING FOLLOW ING TWO ADDITIONS- I) DISALLOWANCE U/S 14A RS.32,75,430/- II) DISALLOWANCE ON A/C OF PMS FEES RS. 2,78,477 /- RS.35,53,907/- 3. AGGRIEVED, ASSESSEE WENT IN APPEAL AGAINST THE D ISALLOWANCE OF RS.32,75,430/- MADE U/S 14A OF THE ACT AND THE S AME WAS DELETED BY LD. CIT(A) BY OBSERVING AS UNDER :- 3.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE IN THE LIGHT OF SUBMISSIONS MADE BY THE APPELLANT. IT IS AN UNDISPUTED FACT OF THE C ASE AS ADMITTED BY ID A O HIMSELF IN PARA-2 OF HIS ORDER THAT THE APPELLANT IS ENGAGED I N THE BUSINESS OF SHARE TRADING ACTIVITY. THE ID A O HAS ALSO RECORDED IN THE ORDER THAT INTE REST BEARING FUNDS WERE UTILISED FOR PURCHASE OF SHARES, SOME OF WHICH YIELDED DIVIDEND INCOME. PERUSAL OF THE ASSESSMENT ORDER INDICATES THAT THE BASIS OF DISALLOWANCE OF I NTEREST BY THE A O RESTS UPON HIS PRESUMPTION THAT SOME EXPENDITURE WAS INCURRED TOWA RDS SHARES FROM WHICH DIVIDEND ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 3 WAS EARNED. IT IS PERTINENT TO NOTE THAT HON'BLE JU RISDICTIONAL TRIBUNAL IN THE CASE OF BHARATKUMAR P MANDALIA (ITA NO 472/AHD/2007 DT 30-1 1-2012), RELYING UPON THE DECISION OF HON'BLE GUJARAT HIGH COURT AS WELL AS D ECISION OF HON'BLE ITAT, MUMBAI IN THE CASE OF YATISH TRADING CO 129 ITD 237 HAVE HELD AS UNDER :- ' '.,..9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE APART FROM OTHER BUSINESS IS ALSO ENGAGED IN THE BUSINESS OF PURCHASE AND SAL E OF SHARES AND UNITS OF MUTUAL FUNDS. THE EARNINGS FROM THE SALE AND PURCHA SE OF SHARES IS CONSIDERED AS INCOME FROM BUSINESS. IT IS SEEN THAT THE A.O. HAS COMPUTED THE LOSS ON THE MUTUAL FUND/SHARE TRANSACTIONS CARR IED OUT OF BORROWED FUNDS AND TREATED AS LOSS FROM BUSINESS. IN VIEW OF THE AFORESAID FACTS THE ACTIVITY OF THE ASSESSEE AS BUSINESS AND THE LOSS ARISING OUT OF TRANSACTIONS OF REDEMPTION OF UNITS AS BUSINESS LOS S IS NOT UNDER DISPUTE. DURING THE YEAR THE ASSESSEE HAD BORROWED MONEY FRO M KOTAK MAHINDRA INVESTMENTS LTD. AND USED IT FOR PURCHASE OF UNITS. THE ASSESSEE HAS ALSO EARNED DIVIDENDS WHICH ARE EXEMPT US/ 10(33). 10. IN THE CASE OF ADDL. C!T VS. LAXMI AGENTS PVT LTD, (1980) 125 ITR 227 (GUJ.) THE HON'BLE GUJARAT HIGH COURT HAS HELD THAT IF ONCE IT IS ESTABLISHED THAT CAPITAL WAS BORROWED FOR THE PURPOSE OF BUSINESS, I T IS IMMATERIAL HOW THAT BORROWED CAPITAL WAS APPLIED BECAUSE ALL THAT CL (H I) OF SEC. 36(1) REQUIRES IS THAT BORROWINGS ON WHICH INTEREST IS PAID SHOULD BE FOR THE PURPOSE OF BUSINESS 11. IN THE CASE OF CIT VS. COTTON FABRICS LTD' (1981) 131 ITR 99 (GUJ 1 )' THE HON,BLE GUJARAT HIGH COURT THAT IT HAS BEEN HELD TH AT IF THE BORROWING IS FOR THE PURPOSE OF THE BUSINESS THEN INTEREST NEED NOT BE APPORTIONED BETWEEN THE BUSINESS REQUIREMENTS AND THE MONEYS BORROWED FOR THE PURPOSE OF INVESTMENT IN SHARES. U/S. 36' INTEREST PAID BY AN ASSESSEE FOR THE PURPOSE OF CARRYING ON ITS BUSINESS IS DEDUCTED IN ITS ENTI RETY WHILE COMPUTING PROFITS AND GAINS OF BUSINESS AND THEREFORE IT IS N OT POSSIBLE TO ALLOCATE A PORTION OF THAT INTEREST AS AGAINST INCOME FROM DIV IDENDS BY STATING THAT INTEREST HAD TO BE PAID FOR THE PURPOSE OF INVESTIN G IN SHARES' 12. IN THE CASE OF YATISH TRADING CO' PVT LTD' VS. ACIT (2011) 129 ITD 237 IT HAS BEEN HELD THAT WHEN THE REAL PURPOSE AND INTENT TO USE THE BORROWED FUNDS WAS FOR TRADING ACTIVITY AND IF INCIDENTALLY RESULTED SOME DIVIDEND INCOME ON THE SHARES PURCHASED FOR TRADING THEN THE SAME WOULD NOT CHANGE THE PURPOSE, NATURE OR CHARACTER OF THE EXPE NDITURE. THUS' WHEN INTEREST IS INCURRED FOR TRADING ACTIVITY THEN THE SAME CANNOT BE SAID B HAVE BEEN INCURRED FOR EARNING THE DIVIDEND INCOME IN T HE CASE OF DEALER IN SHARES AND SECURITIES THE PRIMARY OBJECT AND INTENT ION FOR ACQUISITION OF THE SHARES IS TO EARN PROFIT ON TRACING OF SHARES. THE INCOME ON SALE AND PURCHASE OF THE SHARES OF A DEALER IS CHARGEABLE TO TAX. THEREFORE, IF THE SAID ACTIVITY OF PURCHASE AND SALE A/SO INCIDENTALLY YIELDS SOME DIVIDEND INCOME ON THE SHARES HELD BY HIM AS STOCK IN TRADE SUCH DIVIDEND INCOME IS NOT INTENDED AT THE TIME OF PURCHASE OF SUCH SHA RES AND ACCORDINGLY THERE IS NO LIVE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND DIVIDEND INCOME. ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 4 13. CONSIDERING THE FACTUAL POSITIONING IN THE PRES ENT CASE IN LIGHT OF THE DECISIONS OF HIGH COURT AND TRIBUNAL, WE- ARE OF TH E VIEW THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR IN THE PRESE NT CASE. WE THEREFORE DIRECT THE DELETION OF THE DISALLOWANCE MADE BY THE A.O. THUS THE GROUND OF THE ASSESSEE IS ALLOWED....' ON PERUSAL OF FACTS OF PRESENT CASE, IT IS SEEN THA T THE SAME ARE NEARLY IDENTICAL TO THOSE ADJUDICATED BY HON'BLE JURISDICTIONAL TRIBUNAL SUPR A. IT IS NOT DISPUTED THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF SHARE TRADING ACTIVITY A ND THAT SOME DIVIDEND WAS RECEIVED FROM SUCH SHARES. IN RESPECTFUL COMPLIANCE TO THE O RDER OF HON'BLE TRIBUNAL SUPRA, IT IS HELD THAT IN VIEW OF PECULIAR FACTS OF THIS CASE, N O DISALLOWANCE U/S. 14A RWS RULE 8D WAS REQUIRED TO BE MADE IN THIS CASE. CONSEQUENTLY, THE ADDITION MADE BY THE A O IS DELETED AND THE GROUND OF APPEAL NO. 2.1,2.2,3.1,3.2 3.3 RAISED ARE THEREFORE ALLOWED. 4. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE T RIBUNAL. 5. LD. DR SUPPORTED THE ORDER OF LD. ASSESSING OFFI CER. 6. LD. AR SUBMITTED THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE TRADING AND FINANCE AND THE BORROWED FUNDS HA VE BEEN USED IN THE COURSE OF BUSINESS. LD. AR SUPPORTED THE ORDER OF LD. CIT(A) CONTENDING THAT NO DISALLOWANCE OF INTEREST EXPENSE S IS CALLED FOR IN THE CASE OF ASSESSEE WHO IS A DEALER IN SHARES AND SECURITIES. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. SOLITARY GRIEVANCE OF THE REVENUE IS AGA INST THE ORDER OF LD. CIT(A) DELETING THE DISALLOWANCE OF RS.32,75,43 0/- MADE U/S 14A OF THE ACT R.W. RULE 8D OF THE IT RULES. FROM GOING THROUGH THE ASSESSMENT ORDER, WE FIND THAT ASSESSEE BEING A PAR TNERSHIP FIRM IS HAVING MAIN SOURCE OF INCOME FROM FINANCING, SHARE TRADING AND PORTOLIO MANAGEMENT SERVICES AND HAS DECLARED LOSS OF RS.97,91,666/-. APART FROM EARNING DIVIDEND INCOME OF RS.10,62,439/- , ASSESSEE FIRM HAS ALSO EARNED INTEREST INCOME FRO M BANKS, SHORT ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 5 TERM CAPITAL, RENTAL INCOME, INTEREST AND FINANCING AND HAS ALSO INCURRED LONG TERM CAPITAL LOSS PAID INTEREST ON BO RROWINGS AND TO PARTNERS. WE FURTHER OBSERVE THAT ASSESSEE HAS INCU RRED A PORTFOLIO MANAGEMENT FEES OF RS.2,78,477/- FOR EARNING SHORT TERM CAPITAL GAIN OF RS. 23,68,330/-. FURTHER AT THE CLOSE OF THE YEA R INVESTMENT IN SHARES STOOD AT RS.4,32,44,624/- AS AGAINST PARTNER S CAPITAL OF RS.2,63,07,331/-. 8. THE REASON FOR DETAILING THE ABOVE INCOME, EXPEN DITURE, CAPITAL AND INVESTMENTS IS TO UNDERSTAND THAT EVEN IF LD. A R IS PRESSING THE ASPECT THAT ASSESSEE IS ENGAGED IN BUSINESS OF SHAR E TRADING AND FINANCING WHICH DO NOT CALL FOR A DISALLOWANCE U/S 14A OF THE ACT, WE SEE ANOTHER PICTURE ON THE BASIS OF ABOVE FACTS. AP ART FROM BEING ENGAGED IN THE BUSINESS OF SHARE TRADING ASSESSEE I S EARNING INCOME FROM SHORT TERM CAPITAL GAIN, DIVIDEND INCOME, INCU RRED LONG TERM CAPITAL LOSS, INVESTMENTS IN SHARES IS ALMOST DOUBL E THE AMOUNT OF PARTNERS CAPITAL. TAKING ALL THESE TOGETHER IT CLE ARLY SHOWS THAT ASSESSEES ONLY SOURCE OF INCOME IS NOT FROM BUSINE SS OF SHARE TRADING BUT HAS OTHER SOURCE OF INCOME ALSO INCLUDI NG EXEMPTED INCOME AND SHORT TERM CAPITAL GAIN SUBJECT TO SPECI AL TAX RATE. FURTHER WE OBSERVE THAT LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY FOLLOWING THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE CASES REFERRED ABOVE BUT IT SEEMS THAT LD. CIT(A) HAS FAI LED TO APPRECIATE THE COMPLETE FACTS. JUDGEMENTS OF HON. JURISDICTION AL HIGH COURT REFERRED IN THE ORDER OF LD. CIT(A) ARE RELATING TO THOSE CASES WHERE THE INTEREST BEARING FUNDS HAVE BEEN USED FOR BUSIN ESS PURPOSES AND DIVIDEND INCOME HAS BEEN EARNED INCIDENTALLY. AS TH E FACTS OF THE ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 6 CASE OF ASSESSEE DO NOT MATCH WITH THE FACTS DEALT IN BY HON. JURISDICTIONAL HIGH COURT, LD. CIT(A) WAS NOT CORRE CT TO STRAIGHT AWAY APPLYING THE SAME TO THE CASE OF ASSESSEE. 9. IN THE GIVEN CASE, WHERE THE ASSESSEE HAS EARNED EXEMPTED INCOME AND ALSO HAS A SUBSTANTIAL INVESTMENTS IN SH ARES THE PROVISIONS OF SECTION 14A OF THE ACT FOR DISALLOWAN CE OF EXPENDITURE INCURRED IN RELATION TO INCOME EARNING DIVIDEND INC OME IS CLEARLY ATTRACTED. WE FIND THAT LD. ASSESSING OFFICER HAS A PPLIED THE GROSS AMOUNT OF INTEREST EXPENDITURE OF RS.75,53,433/- IN THE FORMULA FOR WORKING OUT PROPORTIONATE DISALLOWANCE OF INTEREST. IN THE PRESENT CASE, WE FIND THAT ASSESSEE HAS ALSO EARNED INTERES T INCOME DURING THE YEAR. IN VARIOUS DECISIONS OF CO-ORDINATE BENCH ES IT HAS BEEN REPEATEDLY HELD THAT AT THE TIME OF CALCULATION OF DISALLOWANCE OF SEC.14A OF THE ACT NET INTEREST EXPENDITURE (I.E. G ROSS INTEREST PAID MINUS INTEREST RECEIVED) SHOULD BE USED IN THE FORM ULA FOR CALCULATING PROPORTIONATE DISALLOWANCE U/S 14A OF THE ACT. 10. FURTHER WE ALSO OBSERVE THAT LD. AR HAS NOT BRO UGHT ON RECORD AUDITED FINANCIAL STATEMENTS, DETAILS OF INVESTMENT , PARTNERS CAPITAL ACCOUNT, INDIRECT INCOME EARNED, WHICH COULD HELP T O CALCULATE THE ACTUAL DISALLOWANCE U/S 14A OF THE ACT. WE, THEREFO RE, SET ASIDE THIS ISSUE TO THE FILE OF LD. ASSESSING OFFICER TO RECAL CULATE THE DISALLOWANCE U/S 14A OF THE ACT BY USING NET INTERE ST PAID FIGURE AT THE PLACE OF GROSS INTEREST PAID DURING THE YEAR IN THE FORMULA. NEEDLESS TO MENTION THAT LD. ASSESSING OFFICER WILL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE TO PRODU CE ALL THE ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 7 NECESSARY DOCUMENTS/EVIDENCES ETC. IN SUPPORT OF HI S CLAIM. THIS GROUND OF REVENUE IS ALLOWED FOR STATISTICAL PURPOS ES. 11. OTHER GROUND OF THE APPEAL IS OF GENERAL NATURE , WHICH DOES NOT REQUIRE ANY ADJUDICATION. 12. IN THE RESULT, APPEAL FILED BY THE REVENUE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JULY, 2016 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 22 /7/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD ITA NO. 2460/AHD/2013 ASST. YEAR 2009-10 8 1. DATE OF DICTATION: 21/07/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER:22/07/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 22/7/16 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: