Santosh Mohanlal Rathi, Pune V. Deputy Commissioner of Income-tax,

ITA 2464/PUN/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1777 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-11-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 21-10-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Business income; Rule of consistency; Earning of tax free income; Question of law; Rule 8D; Set aside; Capital Gains; CHAPTER IV
• Section: 143(3); 14A; 208; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.2464/PUN/2016 / ASSESSMENT YEAR : 2010-11 SANTOSH MOHANLAL RATHI, FLAT NO. 8 & 9, TULSI APARTMENT, RASTA PETH, PUNE 411011 PAN : ADBPR7665N ....... / APPELLANT / V/S. DY. CIT, CIRCLE-2, PUNE / RESPONDENT ASSESSEE BY : SHRI PRATEEK JHA REVENUE BY : SHRI S.P. WALIMBE / DATE OF HEARING : 05-11-2020 / DATE OF PRONOUNCEMENT : 09-12-2020 / ORDER PER S.S. VISWANETHRA RAVI, JM : THIS APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 2 9-07-2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, PUN E [CIT(A)] FOR ASSESSMENT YEAR 2010-11. 2 ITA NO. 2464/PUN/2016, A.Y. 2010-11 2. GROUND NO. 1 RAISED BY THE ASSESSEE CHALLENGING THE A CTION OF CIT(A) IN UPHOLDING THE PROFIT ON SALE OF SHARES IS BUSINESS INCOME AS AGAINST THE CLAIM OF INCOME FROM CAPITAL GAINS. 3. THE BRIEF FACTS RELATING TO THE ISSUE ON HAND ARE THA T THE ASSESSEE IS AN INDIVIDUAL AND ENGAGED IN SHARE TRADING AND A SUB-BROK ER OF M/S. EMKAY SHARES & STOCK BROKERS LTD., MUMBAI. THE ASSESSE E DECLARED A CAPITAL GAIN OF RS.90,47,345/-. THE QUANTUM OF SALE AND PURC HASE ALONG WITH THE TRANSACTION VALUE OF THE VARIOUS SCRIPS IS REPRODUCED BELOW : S. NO. NAME OF THE SCRIP PERIOD QUANTITY BOUGHT AMOUNT RS. QUANTITY SOLD AMOUNT RS. PROFIT 1 KERALA CHEM 1.4.09 TO 31.3.10 1,95,586 2,66,71,998 1,77,582 2,89,13,458 83,24,062 2 EDUCOM -DO- 530 18,25,801 800 24,68,562 6,42,761 3 HERCULES -DO- 36,930 63,91,595 43,428 73,57,070 3,66,303 4 OTHERS -DO- 57,612 1,20,51,392 61,247 1,02,17,386 27,619 4. ACCORDING TO AO FROM THE ABOVE CHART, THE ASSESSEE REGULARLY ENGAGED IN PURCHASE AND SALE OF SHARES WITH A MOTIVE OF E ARNING A PROFIT. THE PROFIT MADE IS HIGH INVOLVING AN ELEMENT OF UNCERTAINTY. FURTHER, THE ASSESSEE UTILIZED BORROWED FUNDS FOR TRADING OF SHARES AND HE SHOW CAUSED THE ASSESSEE WHY ABOVE SAID AMOUNT ON ACCOUNT OF PROFIT SHOULD NOT BE TREATED AS BUSINESS INCOME. THE ASSESSEE MADE HIS CONT ENTIONS VIDE LETTER DATED 01-03-2013 WHICH IS ON RECORD BY THE AO IN HIS OR DER FROM PAGES 2 TO 4. THE AO CONSIDERED THE WRITTEN SUBMISSIONS OF ASSES SEE AND DISCUSSED THE SAME IN PARAS 3.4 TO 3.8 AND HELD THAT TH E INTENTION OF ASSESSEE IN BUYING THE SHARES IS NOT TO DERIVE INCOME BY WAY OF DIVIDEND BUT TO EARN PROFITS ON SALE OF SHARES AND ADDED ABOVE S AID AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE HOLDING THAT IT IS INCOME FROM BUSINESS. 3 ITA NO. 2464/PUN/2016, A.Y. 2010-11 5. BEFORE CIT(A) IN FIRST APPELLATE PROCEEDINGS, THE ASSESS EE CONTENDED THAT THE AO ERRED IN TREATING THE GAINS ON SALE OF SHARES HELD AS INVESTMENT AS BUSINESS PROFIT WITHOUT APPRECIATING THE INTENTION OF AS SESSEE IN MAKING INVESTMENT. FURTHER, IT WAS ARGUED THAT THE AO FAILED TO APPRECIATE THE PRIMARY OBJECTIVE OF ASSESSEE TO HOLD CERTAIN SHARES. TH E INCOME FROM DIVIDEND IS NORMALLY LOW ON INVESTMENT AND THE ASSESSEE S HOWN THE INCOME AS CAPITAL GAIN ON THE SHARES HELD UNDER THE HEA D INVESTMENT. THE CIT(A) DID NOT AGREE WITH THE ARGUMENTS ADVANCED IN THE FIRST APPELLATE PROCEEDINGS. HE PLACED RELIANCE IN THE CASE OF JAIJURIA BROS LTD. VS. CIT REPORTED IN 180 ITR 208 OF HONBLE CALCUTTA HIGH COURT A ND HELD THE SHARES WHICH HAVE BEEN HELD FOR SHORT DURATION AND HAVE BEEN FREQUENTLY TRANSACTED IS ASSESSABLE UNDER THE HEAD INCOME FROM BUS INESS. FURTHER, HE PLACED RELIANCE IN THE CASE OF MAJOJ KUMAR SAMDARIA VS. CIT REPOR TED IN 223 TAXMAN 245 OF HONBLE HIGH COURT OF DELHI AND HELD I NCOME ARISING FROM SALES OF SHARES OF VERY HIGH FREQUENCY AND VOLUME AND IS ASSESSABLE AS BUSINESS INCOME. THEREBY, HE UPHELD THE ORDER OF AO IN TREATING AN AMOUNT OF RS.90,47,345/- AS INCOME FROM BUSINESS. 6. BEFORE US, SHRI PRATEEK JHA, THE LD. AR SUBMITS THAT TH E SHARES SOLD DURING THE PREVIOUS YEAR RELEVANT TO YEAR UNDER CONSID ERATION WERE PURCHASED DURING THE EARLIER YEARS AS WELL AS IN CURRENT YEAR. THE ASSESSEE MAINTAINED SEPARATE PORTFOLIOS FOR INVESTMENT AND TRADING AND REFERRED TO COMPUTATION OF TOTAL INCOME AT PAGE 11 OF PAPER BOOK (VOL. -I). THE SHORT TERM CAPITAL GAINS ON SALE OF SHARES ARE FROM THE INVESTME NT PORTFOLIOS AND INCOME EARNED FROM UNDER INVESTMENT PORTFOLIOS IS TO BE AS SESSED AS INCOME FROM CAPITAL GAIN AND REFERRED TO PAGE 14 OF THE PA PER BOOK. THE INTENTION OF ASSESSEE IS CLEAR TO HOLD THE SHARES AS INVES TMENT AND HELD THE SAME AS IN INVESTMENT PORTFOLIO. THE SHARES PURCHASED IN THE INVESTMENT 4 ITA NO. 2464/PUN/2016, A.Y. 2010-11 PORTFOLIO ARE ONLY THOSE SHARES ARE ON DELIVERY BASED TR ANSACTION. THE INVESTMENT AND CAPITAL LOSS ON DELIVERY BASED TRANSACTION WERE HELD AS ON ACCOUNT OF SHORT TERM CAPITAL GAIN INCOME OR SHORT TERM CAPITAL LOSS AND REFERRED TO PAGE 18 OF THE PAPER BOOK. THE MAJOR POR TION OF GAIN PERTAINS TO TRANSACTIONS RELATED TO SALE OF SHARES OF NITTA GELATINE AND REFERRED TO PAGE 52 OF THE PAPER BOOK. THE SALE AND PURCHASE OF NIT TA GELATINE WERE HELD ON AN AVERAGE FOR MORE THAN SIX MONTHS AND THE PERIOD OF HOLDING OF SUCH SHARES ARE SIGNIFICANT WHICH INDICATES THE INTENTION OF ASSESSEE FOR INVESTMENT AND REFERRED TO PAGES 68 AND 69 OF THE PAP ER BOOK. THE ASSESSEE RECEIVED DIVIDEND INCOME FOR THE YEAR UNDER CO NSIDERATION AND FOR A.Y. 2009-10 SHOWN THE SAID SHARES IN INVESTMENT PORTFOLIO . THE ASSESSEE ALSO VALUED THE STOCK OF SHARES ON THE BASIS OF AVERAGE COST OF THE RESPECTIVE SHARES IN INVESTMENT PORTFOLIO. THE ASSESSEE FO LLOWING THE SAME DECLARED THE PROFIT EARNED ON SHARES IN INVESTMENT PORT FOLIO FOR A.YS. 2008- 09 AND 2009-10 AS CAPITAL GAIN AND THE RESPONDENT-REVE NUE ACCEPTED THE SAME UNDER SCRUTINY PROCEEDINGS U/S. 143(3) OF THE ACT. THE LD. AR PLACED RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF BOMBAY IN TH E CASE OF CIT VS. GOPAL PUROHIT REPORTED IN 336 ITR 287 AND PRAYED TO ALLOW GROUND NO. 1 RAISED BY THE ASSESSEE. 7. THE LD. DR, SHRI S.P. WALIMBE SUBMITS THAT THE TREATMENT IN THE BOOKS OF ASSESSEE IS NOT CONCLUSIVE, IF THE VOLUME, FREQUENCY AND REGULARITY WITH WHICH THE TRANSACTIONS ARE CARRIED OUT INDICATE SYST EMATIC AND ORGANIZED ACTIVITY WITH A PROFIT MOTIVE, THEN, IT BECOMES BU SINESS PROFIT AND NOT CAPITAL GAIN. THE ASSESSEE DOES NOT HAVE A SEPARAT E PORTFOLIO OF SHARES HELD AS INVESTMENT AND AS STOCK-IN-TRADE. THE TOTAL VOLU ME OF THE TRANSACTIONS ON ACCOUNT OF PURCHASE OF SHARES WAS RS.4.6 9 CRORES AND THE TOTAL VOLUME OF TRANSACTIONS ON ACCOUNT OF SALE OF SHARES WAS RS.4.89 5 ITA NO. 2464/PUN/2016, A.Y. 2010-11 CRORES. HE ARGUED THAT THE PERCENTAGE OF PURCHASE AND SALE IS 95 % AND THE TRANSACTION OF PURCHASE AND SALE OF SHARES IS EVENLY SPR EAD OVER THE ENTIRE YEAR. HE ARGUED THAT IT IS CLEAR THE ACTIVITY OF THE ASS ESSEE IS ORGANIZED AND SYSTEMATIC WITH A PROFIT MOTIVE AND SUCH ACTIVITIES OF THE A SSESSEE PARTAKE THE CHARACTERISTICS OF BUSINESS, AND IT CANNOT BE HELD THE ASSESSEE HAS MERELY MADE INVESTMENTS IN SHARES. THE ASSESSEE HAS S UBSTANTIAL UNSECURED LOANS AND ALSO PAID INTEREST ON SUCH LOANS. TH E ASSESSEE UTILIZED SAID LOANS FOR THE PURPOSE OF TRADING OF SHARES. HE ARGUED THAT THE INTENTION OF ASSESSEE IS CLEAR IN BUYING THE SHARES IS TO E ARN PROFITS. HE SUBMITTED THAT THE CIT(A) HAS RIGHTLY PLACED RELIANCE IN T HE CASE OF MANOJ KUMAR SAMDARIA (SUPRA) WHEREIN THE SLP FILED AGAINST THE SA ID DECISION, THE HONBLE SUPREME COURT DISMISSED THE SAID SLP WHICH IS REPORTED IN 228 TAXMAN 63 (SC). HE ARGUED THAT THE PROFIT ON TRANS ACTION IN SHARES IS TO BE TREATED AS BUSINESS INCOME IN TERMS OF DECISION OF H ONBLE SUPREME COURT IN THE CASE OF MAJOJ KUMAR SAMDARIA (SUPRA) AND P RAYED TO DISMISS THE GROUND NO. 1 RAISED BY THE ASSESSEE. 8. HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. THE AO HELD THE ASSESSEE DID NOT MAINTAIN TWO PORTFOLIOS F OR INVESTMENT AND TRADING. BUT, HOWEVER, AT PAGE NO.14 OF THE PAPER B OOK WHICH CLEARLY SHOWS THE ASSESSEE HAS MAINTAINED TWO PORTFOLIOS, ONE FOR INVESTMENT AND THE OTHER IS FOR TRADING. FURTHER, WE NOTE THAT AT PAG E NO.11 OF THE PAPER BOOK, THE ASSESSEE COMPUTED THE SALE OF SHARES AS BUSIN ESS INCOME FROM TRADING PORTFOLIO AND CAPITAL GAIN FROM INVESTMENT PORTFOLIO. T HEREFORE, IN OUR OPINION, THE OBSERVATIONS OF BOTH THE AUTHORITIES I.E., AO AND LD.CIT(A) ARE INCORRECT TO THE EXTENT THAT ASSESSEE DOES NOT H AVE TWO PORTFOLIOS. THERE IS NO DISPUTE THAT ALL THE SHARES WHICH WERE SOLD A RE DELIVERY BASED TRANSACTIONS. WE FIND FROM PAGE NO.18 OF THE PAPER BOO K THAT THE 6 ITA NO. 2464/PUN/2016, A.Y. 2010-11 ASSESSEE HAS SHOWN THE GAINS FROM SELLING OF SHARES AS CAP ITAL GAIN AND THE LOSS HAS BEEN SHOWN AS CAPITAL LOSS. THE SUBJECTED SHAR ES WHICH WERE IN DISPUTE BEFORE US ARE RELATED TO THE SALE OF SHARES OF NIT TA GELATINE WHICH IS CLEAR FROM PAGE NO.52 OF THE PAPER BOOK. ALL THOSE SHARE S, WE FIND WERE HELD FOR MORE THAN SIX MONTHS WHICH WERE PURCHASED DUR ING EARLIER YEAR I.E., A.Y. 2009-10 AND CURRENT YEAR REFLECTED IN PAGE NOS.69 AND 78 OF THE PAPER BOOK. WE NOTE THAT THE RESPONDENT REVENUE ACC EPTED THE TREATMENT OF GAINS ARISING FROM SALE OF SHARES AS CAPITAL GAINS IN EARLIE R ASSESSMENT YEARS 2008-09 AND 2009-10 AND THERE IS NO DISPUTE B Y THE LD. D.R. BEFORE US REGARDING THE SAME. FOLLOWING THE SAME TREATMENT, THE ASSESSEE ASSESSED THE GAINS FROM THE INVESTMENT PORTFOLIO AS INCOME FROM CAPITAL GAINS IN THE YEAR UNDER CONSIDERATION. 9. COMING TO THE HON'BLE JURISDICTIONAL HIGH COURT OF BOM BAY IN THE CASE OF GOPAL ROHIT REPORTED IN 336 ITR 287 WAS PLEASED TO UPHOLD THE ORDER OF TRIBUNAL IN HOLDING THE DELIVERY BASED TRANSACTIONS ARE IN THE NATURE OF INVESTMENTS AND PROFIT RECEIVED THEREON SHOULD BE ASSESSED AS CAPITAL GAINS. WE NOTE THAT THE RESPONDENT REVENUE RAIS ED THREE SUBSTANTIAL QUESTIONS OF LAW BEFORE THE HON'BLE HIGH COURT OF BOMBAY : (I) THE TRIBUNAL ERRED IN TREATING THE PROFITS ARISING FROM SALE OF SHARES FROM INVESTMENT PORTFOLIO AS CAPITAL GAINS, (II) NOT JUSTIFIED IN HOLDING THE PRINCIPLE OF CONSISTENCY AND (III) NOT JUSTIFIED IN TREATING THE E NTRIES IN BOOKS OF ACCOUNTS AS CRUCIAL. THE HON'BLE HIGH COURT OF B OMBAY WAS PLEASED TO UPHOLD THE ORDER OF TRIBUNAL AND DISMISSED THE ABOVE SAID THREE SUBSTANTIAL QUESTIONS OF LAW RAISED BY THE RESPONDENT REV ENUE. IN THE PRESENT CASE, THERE IS NO DISPUTE THAT ALL THE SHARES ARE DELIVERY BASED AND SAME HAS BEEN SHOWN IN THE SEPARATE INVESTMENT PORTFOLIO . FURTHER, ASSESSEE HAS TREATED ALL THE DELIVERY BASED SHARES IN IN VESTMENT PORTFOLIO 7 ITA NO. 2464/PUN/2016, A.Y. 2010-11 AND MADE ENTRIES TO THAT EFFECT IN HIS BOOKS OF ACCOUNTS. FURTHER, THE RESPONDENT REVENUE CONSISTENTLY ACCEPTED THE TREATME NT OF SHARES AND THE PROFITS ARISING THEREON AS CAPITAL GAIN FOR A.YS. 2008-09 AND 2009-10. THE INTENTION OF THE ASSESSEE IS CLEARLY ESTABLISHED IN TREATING THE SAME AS SHARES IN INVESTMENT PORTFOLIO FOR THE EARLIER TWO YEARS A ND RESPONDENT REVENUE CONSISTENTLY ACCEPTED THE SAID TREATMENT SHOW N BY THE ASSESSEE. THEREFORE, IN OUR OPINION, THE ORDER OF LD.CIT(A) IS LIABLE TO BE SET ASIDE IN TERMS OF PRINCIPLE LAID DOWN BY THE HONBLE JURISDICTIONAL HIG H COURT WHICH WAS UPHELD BY THE HONBLE SUPREME COURT. FOR B ETTER UNDERSTANDING, THE RELEVANT PORTION OF THE DECISION OF HON' BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. GOPAL PUROHIT CITED SUPRA IS REPRODUCED HEREUNDER : THE FOLLOWING QUESTIONS OF LAW HAVE BEEN FORMULATE D IN THE APPEAL FILED BY THE REVENUE AGAINST THE JUDGMENT OF THE TRIBUNAL, DT. 10TH FEB., 2009 : '(A) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL WAS JUSTIFIED IN TREATING THE INCOME FROM SALE OF 7,59,003 SHARES FOR RS. 5,00,12,879 AS AN INCOME FROM SHORT-TERM CAPITAL GAIN AND SALE OF 3,88,797 S HARES FOR RS. 6,65,02,340 AS LONG-TERM CAPITAL GAIN AS AGAINS T THE 'INCOME FROM BUSINESS' ASSESSED BY THE AO ? (B) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT PRINCIPLE OF CONSISTENCY MUST BE APPLIED HERE AS AU THORITIES DID NOT TREAT THE ASSESSEE AS A SHARE TRADER IN PRECEDI NG YEAR, IN SPITE OF EXISTENCE OF SIMILAR TRANSACTION, WHICH CA NNOT IN ANY WAY OPERATE AS RES JUDICATA TO PRECLUDE THE AUTHORI TIES FROM HOLDING SUCH TRANSACTIONS AS BUSINESS ACTIVITIES IN CURRENT YEAR ? (C) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT PRESENTATION IN THE BOOKS OF ACCOUNT IS THE MOST CR UCIAL SOURCE OF GATHERING INTENTION OF THE ASSESSEE AS REGARDS T O THE NATURE OF TRANSACTION WITHOUT APPRECIATING THAT THE ENTRIE S IN THE BOOKS OF ACCOUNTS ALONE ARE NOT CONCLUSIVE PROOF TO DECIDE THE INCOME ?' 2. THE TRIBUNAL HAS ENTERED A PURE FINDING OF FACT TH AT THE ASSESSEE WAS ENGAGED IN TWO DIFFERENT TYPES OF TRAN SACTIONS. THE FIRST SET OF TRANSACTIONS INVOLVED INVESTMENT IN SHARES. THE SECOND SET OF TRANSACTIONS INVOLVED DEALING IN SHAR ES FOR THE PURPOSES OF BUSINESS (DESCRIBED IN PARA 8.3 OF THE JUDGMENT OF 8 ITA NO. 2464/PUN/2016, A.Y. 2010-11 THE TRIBUNAL AS TRANSACTIONS PURELY OF JOBBING WITH OUT DELIVERY). THE TRIBUNAL HAS CORRECTLY APPLIED THE P RINCIPLE OF LAW IN ACCEPTING THE POSITION THAT IT IS OPEN TO AN ASSESSEE TO MAINTAIN TWO SEPARATE PORTFOLIOS, ONE RELATING TO I NVESTMENT IN SHARES AND ANOTHER RELATING TO BUSINESS ACTIVITIES INVOLVING DEALING IN SHARES. THE TRIBUNAL HELD THAT THE DELIV ERY BASED TRANSACTIONS IN THE PRESENT CASE, SHOULD BE TREATED AS THOSE IN THE NATURE OF INVESTMENT TRANSACTIONS AND THE PROFI T RECEIVED THEREFROM SHOULD BE TREATED EITHER AS SHORT-TERM OR , AS THE CASE MAY BE, LONG-TERM CAPITAL GAIN, DEPENDING UPON THE PERIOD OF THE HOLDING. A FINDING OF FACT HAS BEEN A RRIVED AT BY THE TRIBUNAL AS REGARDS THE EXISTENCE OF TWO DISTIN CT TYPES OF TRANSACTIONS NAMELY, THOSE BY WAY OF INVESTMENT ON ONE HAND AND THOSE FOR THE PURPOSES OF BUSINESS ON THE OTHER HAND. QUESTION (A) ABOVE, DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. 3. INSOFAR AS QUESTION (B) IS CONCERNED, THE TRIBUNAL HAS OBSERVED IN PARA 8.1 OF ITS JUDGMENT THAT THE ASSES SEE HAS FOLLOWED A CONSISTENT PRACTICE IN REGARD TO THE NAT URE OF THE ACTIVITIES, THE MANNER OF KEEPING RECORDS AND THE P RESENTATION OF SHARES AS INVESTMENT AT THE END OF THE YEAR, IN ALL THE YEARS. THE REVENUE SUBMITTED THAT A DIFFERENT VIEW SHOULD BE TAKEN FOR THE YEAR UNDER CONSIDERATION, SINCE THE PRINCIP LE OF RES JUDICATA IS NOT APPLICABLE TO ASSESSMENT PROCEEDING S. THE TRIBUNAL CORRECTLY ACCEPTED THE POSITION THAT THE P RINCIPLE OF RES JUDICATA IS NOT ATTRACTED SINCE EACH ASSESSMENT YEA R IS SEPARATE IN ITSELF. THE TRIBUNAL HELD THAT THERE OU GHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FA CTS AND CIRCUMSTANCES ARE IDENTICAL, PARTICULARLY IN THE CA SE OF THE ASSESSEE. THIS APPROACH OF THE TRIBUNAL CANNOT BE F AULTED. THE REVENUE DID NOT FURNISH ANY JUSTIFICATION FOR ADOPT ING A DIVERGENT APPROACH FOR THE ASSESSMENT YEAR IN QUEST ION. QUESTION (B), THEREFORE, DOES NOT ALSO RAISE ANY SU BSTANTIAL QUESTION. 4. INSOFAR AS QUESTION (C) IS CONCERNED, AGAIN THERE CANNOT BE ANY DISPUTE ABOUT THE BASIC PROPOSITION THAT ENTRIE S IN THE BOOKS OF ACCOUNT ALONE ARE NOT CONCLUSIVE IN DETERM INING THE NATURE OF INCOME. THE TRIBUNAL HAS APPLIED THE CORR ECT PRINCIPLE IN ARRIVING AT THE DECISION IN THE FACTS OF THE PRE SENT CASE. THE FINDING OF FACT DOES NOT CALL FOR INTERFERENCE IN A N APPEAL UNDER S. 260A. NO SUBSTANTIAL QUESTION OF LAW IS RAISED. THE APPEAL IS ACCORDINGLY DISMISSED. 10. WE FIND IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF T HE ABOVE CASE BEFORE THE HON'BLE HIGH COURT OF BOMBAY ARE IDENTICAL TO T HE FACTS OF THE PRESENT CASE AND THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF BOMBAY (SUPRA) IS APPLICABLE TO THE PRESENT CASE. THEREFORE, THE O RDER OF LD.CIT(A) IS NOT JUSTIFIED AND IT IS SET ASIDE. THE GROUND NO.1 OF THE ASSES SEE IS ALLOWED. 9 ITA NO. 2464/PUN/2016, A.Y. 2010-11 11. GROUND NO.2 RAISED BY THE ASSESSEE CHALLENGING THE A CTION OF LD.CIT(A) IN CONFIRMING THE DISALLOWANCE UNDER SEC.14A R.W.R 8D IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 12. HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE O N RECORD. THE ASSESSEE EARNED DIVIDEND OF RS.2,03,834/- AND CLAIMED EXEMP TION UNDER THE ACT. THE AO SHOW CAUSED WHY THE PROVISIONS UNDER SEC.14A R.W.R. 8D(2)(II) SHALL NOT BE APPLIED. IT WAS CONTENDED THAT NO EXP ENDITURE INCURRED IN EARNING THE EXEMPT INCOME AND THE SAID SHARE S WHICH YIELD EXEMPT INCOME WERE PURCHASED IN EARLIER YEAR AND THE S AME WERE HELD UNDER THE HEAD INVESTMENT PORTFOLIO. WE NOTE THAT TH E SAME HAS BEEN IN THE BALANCE-SHEET AS ON 31.03.2009 DURING THE YEAR UNDE R CONSIDERATION. BEFORE LD.CIT(A) ALSO THE SAME CONTENTIONS HAVE BEEN RAISED BY THE ASSESSEE, HOWEVER THE LD.CIT(A) WENT ON TO UPHOLD THE DISA LLOWANCE MADE BY THE AO BY APPLYING RULE 8D OF I.T. RULES. 13. THE CONTENTION OF SHRI PRATEEK JHA, LD.A.R. IS THAT THE DISALLOWANCE MADE FOR THE PURPOSE OF SEC.14A OF THE ACT BY APPLYING R ULE 8D(2) OF INCOME TAX RULES IS NOT MAINTAINABLE IN VIEW OF THE FACT THA T THERE WAS NO EXPENDITURE INCURRED ON THE REMAINING EXEMPT INCOME. HE FURTHER CONTENDED THAT THE SHARES HAVE BEEN PURCHASED DURING THE YEAR UNDER CONSIDERATION AND ALSO IN EARLIER YEARS AND THERE CANNOT BE DISALLOWANCE MORE THAN THE EXEMPT INCOME. HE PRAYED TO DELETE THE ADDITION AS CONFIRMED BY THE LD.CIT(A). WE NOTE THAT ASSESSEE EARNED EXEMPT INCOME OF RS.2,03,834/- AND THE DISALLOWANCE MADE BY THE AO AND C ONFIRMED BY THE LD.CIT(A) IS RS.7,66,911/-. IN THIS REGARD, WE FIND FORCE IN THE ARGUMENT OF THE LD.A.R. THAT THERE CANNOT BE DISALLOWANCE MORE THAN THE EXEMPT INCOME. 10 ITA NO. 2464/PUN/2016, A.Y. 2010-11 14. WE ALSO FIND IN THE DECISION OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF M/S. NIRVED TRADERS PVT. LTD., VS. DCIT (ITA NO.149 /2017 DATED 23.04.2019) WHEREIN THE JURISDICTIONAL HIGH COURT HELD THAT T HE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8 D(2) OF THE RULES CANNOT EXCEED THE ASSESSEE'S EXEMPT INCOME AND THE RELEVANT PORTION OF THE SAME IS EXTRACTED HEREIN BELOW : 5. HAVING HEARD THE LEARNED COUNSEL FOR THE PARTIE S AND HAVING PERUSED THE DOCUMENTS ON RECORD, CONSISTENTLY DIFFE RENT HIGH COURTS IN THE COUNTRY HAVE TAKEN A VIEW THAT THE DISALLOWA NCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES CANNOT EXCEED THE ASSESSEE'S EXEMPT INCOME. THE DELHI HIGH COURT, IN THE CASE OF CHEMINVEST LTD. VS. COMMISSIONER OF INCOME TAX 1, HAS HELD THAT WHEN THE ASSESSEE HAS NOT EARNED ANY INCOME WH ICH WAS EXEMPT FROM TAX, DISALLOWANCE OF THE EXPENDITURE UN DER SECTION 14A READ WITH 8D OF THE RULES WOULD NOT BE PERMISSIBLE . 6. KARNATAKA HIGH COURT, IN THE CASE OF PRAGATI KRI SHNA GRAMIN BANK VS. JOINT COMMISSIONER OF INCOME-TAX2, HAS HELD THAT EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN THE TOTAL INCOME CANNOT EXCEED SUCH INCOME. IT WAS OBSERVED AS UNDER . '14. WE MAKE IT CLEAR THAT THE EXPENDITURE FOR EARN ING EXEMPTED INCOME HAS TO HAVE A REASONABLE PROPORTION TO THE I NCOME, SO EARNED, GOING BY THE COMMON FINANCIAL PRUDENCE. THEREFORE, EVEN IF THE ASSESSING AUTHORITY HAS TO M AKE AN ESTIMATE OF SUCH AN EXPENDITURE INCURRED TO EARN EXEMPTED IN COME, IT HAS TO HAVE A RATIONAL NEXUS WITH THE AMOUNT OF INCOME EAR NED ITSELF. DISALLOWANCE UNDER SECTION 14A OF RS.2,48,85,000/- AS EXPENSES TO EARN EXEMPTED DIVIDEND INCOME OF RS.1,80,30,965/- I S PER SE ABSURD AND 1 378 ITR 33 2 [2018] 256 TAXMAN 349 (KA RNATAMA) URS 3 OF 7 4 3-ITXA 149-17.ODT HYPOTHETICAL. THE DI SALLOWANCE UNDER SECTION 8D CANNOT EXCEED THE EXPENSES CLAIMED BY ASSESSEE UNDER THE PROVISO TO RULE 8D. THEREFORE, WHERE THE ASSESSEE CLAIMED THAT ASSESSEE DID NOT INCUR ANY SUCH EXPENDITURE DU RING THE YEAR IN QUESTION TO EARN DIVIDENDS OF RS.1,80,30,965/-, THE BURDEN WAS UPON THE ASSESSING AUTHORITY TO COMPUTE THE INTERES T ON SUCH BORROWED FUNDS WHICH WERE DEDICATEDLY USED FOR INVE STMENT IN SECURITIES TO EARN SUCH EXEMPTED DIVIDEND INCOME. T HE DISALLOWANCE UNDER SECTION 14A CANNOT BE WILD GUESSWORK BEREFT OF GROUND REALITIES. IT HAS TO HAVE A REASONABLE AND CLOSE NE XUS WITH THE FACTUALLY INCURRED EXPENSES. IT IS NOT DEEMED DISAL LOWANCE UNDER SECTION 14A OF THE ACT BUT AN ENABLING PROVISION FOR ASSESSING AUTHORITY TO COMPUTE THE SAME ON THE GIVE N FACTS AND FIGURES IN THE REGULARLY MAINTAINED BOOKS OF ACCOUN TS. THE ASSESSING AUTHORITY ALSO COULD NOT HAVE CALLED UPON THE ASSES SEE HIMSELF TO UNDERTAKE THE EXERCISE OF COMPUTING THE DISALLOWANC E UNDER SECTION 8D OF THE RULES. SUCH ABDICATION OF DUTY IS NOT PERMI SSIBLE IN LAW. SINCE NO SUCH EXERCISE HAS BEEN UNDERTAKEN BY THE A SSESSING AUTHORITY, THE CASE CALLS FOR A REMAND.' 11 ITA NO. 2464/PUN/2016, A.Y. 2010-11 7. GUJARAT HIGH COURT, IN THE CASE OF COMMISSIONER OF INCOME-TAX-I VS. CORRTECH ENERGY (P.) LTD.3, HAS HELD AND OBSERV ED AS UNDER : '4. COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSE SSING OFFICER AS WELL AS CIT (APPEALS) HAD APPLIED FORMULA OF RUL E 8D OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE A SSESSMENT YEAR 2009-2010. SINCE IN THE PRESENT CASE, WE ARE C ONCERNED WITH THE ASSESSMENT YEAR 2009-2010, SUCH FORMULA WA S CORRECTLY APPLIED BY THE REVENUE. WE HOWEVER, NOTIC E THAT SUB- SECTION (1) OF SECTION 14A PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF 3 [2015] 372 ITR 97 URS 4 OF 7 5 3-ITXA 149-17.ODT THE ACT, NO DEDUCTIO N SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, THE TRIBUNAL HA S RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDE R SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS TRIBU NAL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HAR YANA HIGH COURT IN CASE OF CIT V WINSOME TEXTILE INDUSTRIES L TD. [2009] 319 ITR 204 IN WHICH ALSO THE COURT HAD OBSERVED AS UND ER : '7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. TH E JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD. (2006) 286 I TR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIV EN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCT ION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PU RPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HA VING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTEDLY THE ASSESS EE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION SECTION 14A COULD HAVE NO APPLICATION.' 5. WE DO NOT FIND ANY QUESTION OF LAW ARISING. APPE AL IS THEREFORE DISMISSED.' 8. RECENTLY, THIS COURT, IN A DECISION DATED 4TH FE BRUARY, 2019, IN THE CASE OF THE PR. COMMISSIONER OF INCOME TAX-10 VS . HSBC INVEST DIRECT (INDIA) LTD. HAD OBSERVED AS UNDER. '4. HAVING HEARD LEARNED COUNSEL FOR THE PARTIES AN D PERUSED DOCUMENTS ON RECORD, WE NOTICE THAT IN CHEMINVEST L TD. (SUPRA) DELHI HIGH COURT HAD REFERRED TO AND RELIED UPON ITS EARL IER DECISION IN THE CASE OF CIT VS. HOLCIM INDIA (P) LTD. (I.T.A. NO.48 6 OF 2014, DECIDED ON 5 TH SEPTEMBER 2014). WE FURTHER NOTICE THAT THI S COURT IN INCOME TAX APPEAL NO.693 OF 2015 BY AN ORDER DATED 21 ST N OVEMBER, 2017 WHILE DISMISSING THE REVENUE'S APPEAL ON SIMILAR IS SUE HAD NOTED THAT THE DECISION OF DELHI HIGH COURT IN CASE OF HO LCIM INDIA )P) LTD. (SUPRA) HAD ADOPTED THE SAME PRINCIPLES. IN THE PRE SENT CASE, COUNSEL FOR THE REVENUE HOWEVER, POINTS OUT THAT TH IS IS NOT A CASE WHERE THE ASSESSEE HAD EARNED NO INCOME WHICH WAS E XEMPT FROM TAX. HOWEVER, IN OUR OPINION, THE RATIO OF THE ABOV E NOTED DECISIONS IN THE CASES OF CHEMINVEST LTD. AND HOLCIM INDIA (P) L TD. (SUPRA) WOULD INCLUDE A FACET WHERE THE ASSESSEE'S INCOME EXEMPT FROM TAX IS NOT NIL BUT HAS EARNED EXEMPT INCOME WHICH IS LARGER TH AN THE 12 ITA NO. 2464/PUN/2016, A.Y. 2010-11 EXPENDITURE INCURRED BY THE ASSESSEE IN ORDER TO EA RN SUCH INCOME. IN SUCH A SITUATION THAT DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME SO EARNED BY THE ASSESSEE DURING THE YEAR UN DER CONSIDERATION. WE DO NOT FIND ANY ERROR IN THE VIEW OF THE TRIBUNAL. WE RECORD THAT THE ASSESSEE HAD OFFERED VOLUNTARY D ISALLOWANCE OF EXPENDITURE OF RS.1.30 CRORES, WHICH IS NOT BEEN DI STURBED BY THE TRIBUNAL. 5. THE TAX APPEAL IS DISMISSED.' 9. IN VIEW OF SUCH CONSISTENT TREND OF THE HIGH COU RTS, WE ANSWER THE QUESTION IN FAVOUR OF THE ASSESSEE. WE REVERSE THE DECISION OF THE TRIBUNAL TO THE EXTENT OF LIMITING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT TO A SUM OF RS.1,13,72,545/-. 15. IN THE LIGHT OF THE DECISION OF THE HONBLE JURISDICTION AL HIGH COURT CITED SUPRA, THE DISALLOWANCE MADE BY THE AO IS NOT MAI NTAINABLE BUT HOWEVER, WE RESTRICT THE ADDITION TO AN EXTENT OF EXEMPT INCOME I.E., RS.2,03,834/-. THE ORDER OF LD.CIT(A) IS MODIFIED ACCORDINGLY. THUS, GROUND NO.2 IS PARTLY ALLOWED. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 9 TH DAY OF DECEMBER, 2020. SD/- SD/- (INTURI RAMA RAO) (S.S. VISWANETHRA RAVI) ACCOUNTANT MEMBER JUDICIAL MEMBER / PUNE; / DATED : 9 TH DECEMBER, 2020. YAMINI 13 ITA NO. 2464/PUN/2016, A.Y. 2010-11 $%&'()( & / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A)-2, PUNE 4. THE PR. CIT-2, PUNE 5. !' ##$% , & $% , ()* , / DR, ITAT, A BENCH, PUNE. 6. '+,-. / GUARD FILE. // # // TRUE COPY// & / BY ORDER, // TRUE COPY // #0 $*/ PRIVATE SECRETARY, & $% , / ITAT, PUNE