HATWAY INVESTMENT P.LTD, MUMBAI V. DCIT 9(2), MUMBAI

ITA 262/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8119 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 23-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 11-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM ./ I.T.A. NO. 8662/MUM/2011 ( / ASSESSMENT YEAR: 2008-09) DY. CIT-9(2), ROOM NO. 218, 2 ND FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 / VS. HATHWAY INVESTMENT PVT. LTD. RAHEJAS, 4 TH FLOOR, CORNER OF MAIN AVENUE & V & P ROAD, SANTACRUZ (W), MUMBAI-400 054 ' ./# ./PAN/GIR NO. AAACH 1675 B ( $ / REVENUE ) : ( %& '( /ASSESSEE ) & ./ I.T.A. NO. 262/MUM/2012 ( / ASSESSMENT YEAR: 2008-09) HATHWAY INVESTMENT PVT. LTD. RAHEJAS, 4 TH FLOOR, CORNER OF MAIN AVENUE & V & P ROAD, SANTACRUZ (W), MUMBAI-400 054 / VS. DY. CIT-9(2), ROOM NO. 218, 2 ND FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 ' ./# ./PAN/GIR NO. AAACH 1675 B ( %& '( /ASSESSEE ) : ( $ / REVENUE ) $ ) * / REVENUE BY : SHRI PITAMBAR DAS %& '( ) * / ASSESSEE BY : SHRI NITESH JOSHI %$ + ) , / DATE OF HEARING : 24.07.2014 -./ ) , / DATE OF PRONOUNCEMENT : 17.10.2014 / O R D E R PER SANJAY ARORA, A. M.: THESE ARE CROSS APPEALS, I.E., BY THE ASSESSEE AND THE REVENUE, DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEAL S)-20, MUMBAI (CIT(A) FOR 2 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. SHORT) DATED 18.10.2011, PARTLY ALLOWING THE ASSESS EES APPEAL CONTESTING ITS ASSESSMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT H EREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2008-09 VIDE ORDER DATED 30.11.2010. 2. THE SUBJECT MATTER OF THE INSTANT APPEALS IS THE DISALLOWANCE U/S.14A(1) OF THE ACT. THE ASSESSEE, A NON-BANKING FINANCE COMPANY, IN THE BUSINESS OF INVESTMENT AND FINANCING, CLAIMED DURING THE COURSE OF ASSESSMENT PROCEEDINGS TO HAVE NOT INCURRED ANY EXPENDITURE IN RELATION TO INCOME NOT FORMING PART OF THE ITS TOTAL INCOME, EVEN AS IT HAD MADE A SUO MOTU DISALLOWANCE U/S.14A AT RS.35,47,021/- , BEING 2% OF THE DIVIDEND INCOME OF RS.1684.70 LACS, CLAIMED TAX EXEMPT U/S.1 0(34) OF THE ACT, I.E., AS HAD BEEN ESTIMATED BY THE REVENUE ITSELF IN ITS CASE FOR A.Y . 2004-05 (PB PGS. 36-39). WITHOUT PREJUDICE, IT WAS FURTHER CLAIMED THAT THE SAID DIS ALLOWANCE BE RESTRICTED TO THE AMOUNT OF EXPENDITURE ACTUALLY CLAIMED PER ITS RETURN OF INCO ME (PB PGS. 30-35). IN VIEW OF THE ASSESSING OFFICER (A.O.), THE WORKING OF THE DISALL OWANCE FOR THE CURRENT YEAR HAD TO BE NECESSARILY MADE FOLLOWING RULE 8D. THE ASSESSEE HA VING NOT INCURRED ANY INTEREST EXPENDITURE FOR THE YEAR, THE INDIRECT ADMINISTRATI VE EXPENDITURE WAS ESTIMATED BY HIM APPLYING RULE 8D(2)(III), I.E., AT 0.5% OF THE AVER AGE INVESTMENT FOR THE YEAR, WHICH WORKED TO RS.130.51 LACS. THE ASSESSEE HAVING ALREA DY DISALLOWED RS.35.47 LACS, A FURTHER DISALLOWANCE OF RS.93,17,949/- WAS MADE, I.E., BY TAKING INTO ACCOUNT THE EXPENDITURE INCURRED BY THE ASSESSEE AT RS.128.65 L ACS. IN APPEAL, THE LD. CIT(A), CITING GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM), VALIDATED THE INVOCATION OF R. 8D , MANDATORY W.E.F. THE CURRENT YEAR, IN ASSESSMENT. THE A.O., HOWEVER, HAD ALSO INCLUDED THE VALUE OF SHARES HELD AS STOCK-IN- TRADE. IT WAS, HE INFERRED, BECAUSE OF THIS THAT AN ANOMALOUS SITUATION HAD ARISEN WHEREBY THE DISALLOWANCE UNDER R. 8D(2)(III) (RS.130.51 LAC S) EXCEEDED THE EXPENDITURE ACTUALLY INCURRED BY THE ASSESSEE (RS.128.65 LACS). THE VALU E OF SHARES HELD AS STOCK-IN-TRADE WAS ACCORDINGLY DIRECTED FOR DELETION IN ARRIVING AT TH E INDIRECT EXPENDITURE RELATABLE TO THE DIVIDED INCOME, ALLOWING PARTIAL RELIEF TO THE ASSE SSEE. AGGRIEVED, BOTH THE PARTIES ARE IN APPEAL. 3 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. 3. BEFORE US, THE ASSESSEES CASE WAS CONFINED TO T HE REASONABILITY OF THE DISALLOWANCE, MADE SUO MOTU . HOW COULD AN ESTIMATION, VALID FOR A.Y. 2004-05, BE NOT SO FOR A SUBSEQUENT YEAR, EVEN IF R.8D STANDS SINCE PRESCRIBED, I.E., WITHOUT BRINGING ANY DISTINGUISHING FEATURE ON RECORD? IN FACT, THE TRIB UNAL HAD FOR A.Y. 2007-08 REMANDED THE MATTER BACK TO THE FILE OF THE A.O. TO DETERMINE TH E DISALLOWANCE ON A REASONABLE BASIS (PB PGS.40-41). THE A.O. WORKED OUT THE SAME WITH R EFERENCE TO CERTAIN EXPENDITURE, AGGREGATING TO RS.10.57 LACS, WHICH HE CONSIDERED A S HAVING A PROXIMATE NEXUS WITH THE EXEMPT DIVIDEND INCOME. THE SAME WAS DISALLOWED IN THE RATIO OF THE SAID INCOME TO THE TOTAL INCOME (38.29%), AT RS.4,04,808/- (PB PGS.42- 44). ADDUCING A WORKING, IT WAS SUBMITTED BY THE LD. AUTHORIZED REPRESENTATIVE (AR) , THE ASSESSEES COUNSEL, THAT APPLYING THE SAME FORMULA FOR THE CURRENT YEAR YIEL DS A DISALLOWANCE OF RS.5.59 LACS, EVEN AS THE ASSESSEE HAD ITSELF MADE A DISALLOWANCE OF RS.35.47 LACS FOR THE CURRENT YEAR, WHICH THEREFORE OUGHT TO BE CONFIRMED. THE LD. DEPARTMENTAL REPRESENTATIVE (DR) WOULD, ON THE OTHER HAND, RELY ON THE ASSESSMENT ORDER. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 4.1 WHILE THE REVENUE CONTESTS THE EXCLUSION OF THE SHARES HELD AS STOCK-IN-TRADE, I.E., IN THE COMPUTATION OF THE DISALLOWANCE WORKABLE WIT H REFERENCE TO RULE 8D, THE ASSESSEE INSISTS ON THE DISALLOWANCE BEING RESTRICTED TO THA T MADE SUO MOTU BY IT, BEING REASONABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. HOWEVER , AS PER THE REVENUE, IRRESPECTIVE OF THE MANNER IN WHICH THE DISALLOWANCE HAD BEEN WORKE D FOR THE PRECEDING YEARS, THE SAME WOULD HAVE TO BE NECESSARILY DETERMINED ADOPTING TH E METHOD PRESCRIBED UNDER R. 8D FOR THE CURRENT YEAR. THE REVENUES CASE QUA ITS APPEAL IS THAT THERE IS NO BASIS FOR THE EXCLUSION OF THE STOCK-IN-TRADE IN COMPUTING THE DI SALLOWANCE UNDER R.8D, FOR WHICH THE A.O. HAS SPECIFICALLY RELIED ON ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. [2009] 312 ITR (AT) 1 (MUM) (SB). THERE WAS NOTHING ON RECORD TO SHOW THAT THE DIVIDEND RECEIVED BY THE ASSESSEE WAS ONLY ON SHARES HELD AS INVESTME NT. ACCORDINGLY, THE DIRECTION BY THE LD. CIT(A) FOR EXCLUDING THE SHARES HELD AS STOCK-I N-TRADE IS WITHOUT BASIS, BOTH IN LAW 4 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. AND ON FACTS. THE ISSUE ARISING THUS FOR OUR CONSIDERATION IS THE CORRECT QUANTUM OF DISALLOWANCE U/S. 14A(1) IN THE FACTS AND CIRCUMSTA NCES OF THE CASE . 4.2 BEFORE, HOWEVER, WE MAY PROCEED TO DISCUSS THE ISSUE AT HAND, IT WOULD BE IN ORDER TO CONSIDER THE ASSESSEES ANOTHER CONTENTION, MADE WITH REFERENCE TO ITS GROUND OF APPEAL 2, I.E., THAT THE A.O. HAVING NOT RECORDED ANY DISS ATISFACTION WITH THE ASSESSEES WORKING, NO DISALLOWANCE COULD AT ALL BE MADE BY HIM, EVEN A S THE ASSESSEE BEFORE US DID NOT RAISE ANY ARGUMENT QUA THE SAID GROUND. IN FACT, TO THE EXTENT THE ASSESSE E DOES NOT DISCLOSE ANY BASIS FOR ITS SUO MOTU DISALLOWANCE AND, FURTHER, WITH REFERENCE TO ITS AC COUNTS, THERE IS NO MERIT IN ITS CLAIM. HOW, IN FACT, WE WONDER COULD T HE A.O. EXPRESS HIS SATISFACTION OR OTHERWISE THEREWITH WITHOUT BEING COMMUNICATED THE BASIS OF THE ASSESSEES WORKING? IT IS ONLY AFTER AND UPON THE ASSESSEE DISCHARGING THE PRIMARY ONUS ON IT, BY MAKING A CLAIM WITH REFERENCE TO ITS ACCOUNTS, THAT THE SAME (ONU S) WOULD STAND SHIFTED TO THE A.O. WHY, FOR INSTANCE, SHOULD THE CLAIM BE RESTRICTED TO 2% OF THE DIVIDEND INCOME, AND NOT (SAY) 5% OR 10% OR 50%, ET. AL. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISION IN THE CASE OF AFL (P.) LTD. VS. ASST. CIT [2013] 28 ITR (TRIB) 263 (MUM), RENDERED CONSIDERING AND FOLLOWING THE DECISION IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), AS ALSO OTHERS CITED BY THE ASSESSEE IN THAT CASE, VIZ. MAXOPP INVESTMENT LTD. VS. CIT [2012] 347 ITR 272 (DEL). RATHER, CONTINUING FURTHER, WHY SHOULD THE SAME (DI SALLOWANCE) BE AT ALL BASED ON INCOME ? THE DISALLOWANCE IS OF EXPENDITURE, AND WHICH IS NOT INCURRED AS A PERCENTAGE, OR AS A LINEAR FUNCTION, OF INCOME, WHI CH IS ITSELF UNCERTAIN, BOTH AS TO ITS TIMING AND QUANTUM OF ACCRUAL. IF EXPENDITURE WERE TO BE AT A DEFINED RATIO OF GROSS INCOME, THE INCOME DETERMINATION WOULD BE A SIMPLE EXERCISE OF APPLYING THE SAID RATIO TO THE GROSS INCOME ARISING IN A PARTICULAR PERIOD. WE ARE OF-COURSE NOT SPEAKING OF AN EXPENDITURE WHICH IS INCURRED UNDER CONTRACT, WHICH ALSO CONTAINS PROVISION WITH REGARD TO THE CORRESPONDING INCOME. THE EXPENDITURE IS INC URRED FOR THE PURPOSES OF AND IN PURSUANCE TO AN ACTIVITY WHICH MAY RESULT IN OR MAY GENERATE REVENUE. HOW MUCH AND WHEN LIES IN THE WOMB OF FUTURE? THAT, NEVERTHELESS , AN EXPENDITURE IS INCURRED IS ITSELF SUFFICIENT FOR IT BEING ALLOWED AS AN ADMINISTRATIV E EXPENDITURE, IRRESPECTIVE OF THE 5 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. INCOME MATERIALIZING, IF ANY, OR ITS QUANTUM. WHERE , THEREFORE, IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME, THE SAME WOULD RE QUIRE BEING ASCERTAINED, SO THAT IT COULD BE SEGREGATED AND EXCLUDED FROM THE PROCESS O F DETERMINATION OF TOTAL INCOME. THIS IS THE VERY BASIS OF SECTION 14A; THE CONCEPT OF IN COME BEING ONLY THE NET INCOME, I.E., NET OF EXPENDITURE INCURRED IN RELATION THERETO, LY ING AT ITS HEART/CORE, AS EXPLAINED AT LENGTH BY THE HONBLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) (REFER PAGES 95-100, 108-117). THE ASSESSEES ARGUM ENT IS THUS FUNDAMENTALLY FLAWED. REFERENCE IN THIS CONTEXT MAY ALSO BE MADE TO THE D ECISION IN THE CASE OF D. H. SECURITIES (P.) LTD. VS. DY. CIT [2014] 146 ITD 1 (MUM) (TM) (PARA 6.4, PGS. 8-9) A ND DY. CIT VS. DAMANI ESTATES & FINANCE (P.) LTD. [2013] 25 ITR 683 (MUM)(TRIB) (PARAS 10-11, 15- 16), RENDERED, AGAIN, FOLLOWING THE DECISION IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), BESIDES ALSO BY ITS SPECIAL BENCH IN CHEMINVEST LTD. VS. ITO [2009] 121 ITD 318 (DEL)(SB), RELYING ON CIT VS. MALAYALAM PLANTATIONS LTD. [1964] 53 ITR 140 (SC), EACH OF WHICH DISCUSS THIS AND RELEVANT ASPECTS AT LENGT H. THE APEX COURT IN CIT VS. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC), AS ALSO NOTED BY THE TRIBU NAL IN THESE DECISIONS, CLARIFIED THAT EXPENDITURE HAVING BEEN INCURRED WOU LD BE ALLOWABLE EVEN IF THERE WAS NO INCOME. ACCORDINGLY, A DISALLOWANCE WOULD ARISE WHE RE THE SAID INCOME DOES NOT FORM PART OF THE TOTAL INCOME. CONTINUING FURTHER, WE OBSERVE THE LD. CIT(A) HAS, AND VERY APPROPRIATELY, CONSIDERED AND DEALT WITH THE ASSESSEES SAID OBJEC TION, RAISED PER ITS GROUND NO. 3 BEFORE HIM BY THE ASSESSEE (REFER PARA 4.3 OF THE IMPUGNED ORDER). THE ASSESSEES REVENUE STREAMS ARE FROM TRADING OPERATIONS; SALE OF INVEST MENTS; DIVIDEND; AND INTEREST. IT MAINTAINING COMPOSITE ACCOUNTS FOR ITS INDIVISIBLE BUSINESS, OR QUA ITS BUSINESS SEGMENTS (IF THESE ARE RECKONED AS SEPARATE, THOUGH RELATED, BUSINESSES), DETERMINATION OF ANY EXPENDITURE ATTRIBUTABLE TO EXEMPT INCOME BECOMES R ELEVANT IN VIEW OF SECTION 14A, WHICH, AS EXPLAINED BY THE HONBLE HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WIDENS THE THEORY OF APPORTIONMENT, TOWARD WHICH R. 8D COMES INTO PLAY (W.E.F. A.Y. 2008-09). 6 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. 4.3 WE MAY NEXT CONSIDER THE ISSUE ON MERITS. WE HA VE ALREADY NOTED THE ASSESSEES METHOD, DESPITE ITS ACCEPTANCE BY THE REVENUE FOR T HE PRECEDING YEARS, I.E., A.YS. 2004- 05 AND 2007-08, AS BEING BOTH FACTUALLY AND LEGALLY UNTENABLE (REFER PARA 4.2 OF THIS ORDER). THAT THE TRIBUNAL MAY HAVE IN SOME OTHER CA SES ALSO FOLLOWED THE SAME APPROACH WOULD NOT IN ANY MANNER DETRACT FROM THE VALIDITY O F THE SAID FINDING, WHICH IN FACT IS ONLY AN ENDORSEMENT OF WHAT IT HAD FOUND AND HELD I N A NUMBER OF DECISIONS CITED SUPRA. THE VOLUME OF THE EXPENDITURE INCURRED IN RELATION TO A PARTICULAR ACTIVITY OR INCOME THERE-FROM, IT MAY BE APPRECIATED, IS A MATTER OF F ACT, SO THAT ITS ESTIMATION IN THE GIVEN FACTS AND CIRCUMSTANCES, IS AGAIN A FACTUAL MATTER. IF, THEREFORE, WITH NO PRESCRIBED RULE OR BASIS, AND WITHOUT EVEN DISCUSSING THE MERITS OF TH E METHOD CHOSEN, A METHOD IS ADOPTED TO RESOLVE AN ISSUE, WHICH IS ESSENTIALLY ONE OF QU ANTIFICATION, AND WHICH IS ACCEPTED BY EITHER PARTY OR EVEN BOTH, IF ONLY TO GIVE A QUIETU S TO THE MATTER, THE SAME IS NOT REFLECTIVE OF ITS MERITS, MUCH LESS OF IT BEING HELD OUT AS A PRECEDENT. FURTHER STILL, R. 8D BECOMES EFFECTIVE, AND MANDATORILY SO, W.E.F. THE CURRENT Y EAR. THE SAME, A RULE OF ESTIMATION, STATUTORILY PRESCRIBED, ALTERS THE PARADIGM AS IT W ERE IN-AS-MUCH AS IT IMPELS AND PROVIDES A STANDARDIZATION TO THE (ESTIMATION) PROCESS, CAUS ING TO REMOVE ANY ARBITRARINESS THAT MAY OTHERWISE INFLICT IT, I.E., THE VERY SAME MALAI SE THAT WE HAVE IN FACT FOUND THE CHOSEN METHOD TO BEAR. THE HONBLE JURISDICTIONAL HIGH COU RT HAS ALREADY FOUND R. 8D AS CONSTITUTIONALLY VALID IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WHICH COULD ONLY BE IF IT IS REASONABLE AND FAIR, WHICH ASPECTS HAVE ALSO BEE N CONSIDERED BY THE HONBLE COURT. WE ARE COMPLETELY UNIMPRESSED AND UNMOVED BY THE AS SESSEES RELIANCE ON THE METHOD THAT STOOD ADOPTED FOR ITS CASE FOR A.Y. 200 4-05. THAT FOR A.Y. 2007-08 IS IN FACT DIFFERENT, YIELDING A RESULT THAT VARIES OVER 600% WHEN COMPARED WITH THE EQUIVALENT FIGURE THAT OBTAINS ON APPLYING THE FORMULA ADOPTED FOR A.Y. 2004-05 . WHAT BETTER PROOF THAT BOTH THE SETS OF FIGURES ARE COMPLETELY ARBITR ARY, HAVING NO BASIS IN FACT, I.E., THE EXPENDITURE ACTUALLY INCURRED, WHICH IS THE ONLY RE LEVANT BASIS, IF IT IS TO BE MADE WITH REFERENCE TO THE ACCOUNTS, WHERE THE SAME IS REFLEC TED. TWO PERSONS INCURRING THE SAME EXPENDITURE WOULD STAND SUBJECTED TO LARGELY DIFFER ENT DISALLOWANCES DEPENDING NOT ONLY THE VOLUME OF THE TAX EXEMPT INCOME EARNED DURING T HE RESPECTIVE PERIOD, TO WHICH NO 7 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. RATIO CAN BE PREDICATED, BUT ALSO TAXABLE INCOME/S ARISING DURING THE SAME PERIOD, WHICH MAY BE IN DIFFERENT FIELDS, FURTHER SUBJECT TO OR D EPENDENT ON A VARIETY OF OTHER FACTORS. THIS IN FACT IS PRECISELY WHAT WE SOUGHT TO EXPLAIN EARLIER (PARA 4.2), CLARIFYING THAT EXPENDITURE, PARTICULARLY INDIRECT EXPENDITURE, AND INCOME IN RELATION TO WHICH IT IS INCURRED, ARE LARGELY INDEPENDENT OF EACH OTHER. TH OUGH THEY MAY HAVE SOME COMMON GROUND, THERE ARE LARGE AREAS, OR IMPULSES TO WHICH THEY MAY RESPOND, WHICH HAVE NO OVERLAP, SO THAT THERE IS NO ESTABLISHED OR DISCERN ABLE CORRELATION BETWEEN THE TWO, SO AS TO ENABLE ESTIMATION OF ONE WITH REFERENCE TO THE O THER. THE WORKING FURNISHED BY THE ASSESSEE, THUS, RATHER THAN PROVING OR SUPPORTING I TS CASE ACTUALLY DISPROVES IT. THE ONLY CAVEAT OR ALTERNATIVE TO THE ADOPTION OF R. 8D IS T HE RELEVANT EXPENDITURE, I.E., THAT INCURRED IN RELATION TO TAX-EXEMPT INCOME, WHICH CONNOTES A BROAD, THOUGH DISCERNABLE, RELATIONSHIP, WHERE ASCERTAINABLE FROM THE ASSESSEE S ACCOUNTS. IT IS ONLY IN SUCH A CASE THAT THE EXPENDITURE TO BE DISALLOWED IS DETERMINED DE HORS AND IN DISREGARD OF R.8D. TOWARD THIS, THE VERY FACT THAT THE METHOD CANVASSE D BY THE ASSESSEE IS BASED ON INCOME RATHER THAN EXPENDITURE, IS ITSELF AN ADMISSION OF ITS ACCOUNTS BEING NOT GEARED TO FURNISH THE RELEVANT DATA OR INFORMATION. IN FACT, TO BE FA IR, THE ASSESSEE NOWHERE CONTENDS SO, OR CLAIMS ITS ACCOUNTS TO BE MAINTAINED OR RECORDING E XPENDITURE ACTIVITY-WISE. IN FACT, IN THE CASE OF SHARES HELD AS STOCK-IN-TRADE, IT IS THE SA ME ACTIVITY, I.E., THE PURCHASE AND SALE OF SHARES, THAT RESULTS IN TWO STREAMS OF INCOME, BEIN G THE SHARE TRADING INCOME (WHICH IS TAXABLE) AND DIVIDEND INCOME (WHICH IS NOT TAXABLE) , SO THAT THERE IS NO FEASIBILITY OF RECORDING EXPENDITURE SEPARATELY, AND THE ESTIMATIO N OF EXPENDITURE BECOMES INEVITABLE. AGAIN, WHERE THE SAME EMPLOYEE (SAY) IS LOOKING AFT ER INVESTMENTS, WHICH MAY RESULT IN DIVIDEND (TAX-FREE) AS WELL AS PROFIT ON THEIR SALE (TAXABLE), THE RELEVANT COST WOULD REQUIRE BEING ALLOCATED. 4.4 RULE 8D HAVING THUS BEEN RIGHTLY INVOKED IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE NEXT QUESTION WOULD BE THE VALIDITY OR OT HERWISE OF EXCLUSION OF STOCK-IN-TRADE. SECTION 14A, AS EXPLAINED IN DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA), AND THEN IN D. H. SECURITIES (P.) LTD. (SUPRA) AND DAMANI ESTATES & FINANCE (P.) LTD. (SUPRA), APPLYING 8 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. GODREJ & BOYCE MFG. CO. LTD. (SUPRA), DRAWS NO DISTINCTION BETWEEN WHETHER THE S HARES OR ASSETS YIELDING INCOME NOT FORMING PART OF TOTAL INCOME ARE HELD AS STOCK-IN-TRADE OR AS INVESTMENT. THE ONLY RELEVANT CONSIDERATION IS THAT THE EXPENDITURE IS INCURRED IN PURSUANCE TO THE RELEVANT ACTIVITY, SHARE TRADING F OR INSTANCE, WHICH YIELDS BOTH STREAMS OF INCOME, I.E., TAXABLE AND NON-TAXABLE. IN THE FACTS OF THE PRESENT CASE, THE INVESTMENT PORTFOLIO REPRESENTS THE ASSESSEES OPERATING ASSET , ABSORBING 85% AND 49% OF ITS TOTAL RESOURCES (INCLUDING ON FIXED ASSETS, AND NET OF AC CUMULATED LOSSES, IF ANY), AS ON 31.03.2007 AND 31.03.2008 RESPECTIVELY, OR AT A AVE RAGE OF 67% FOR THE YEAR; THE ASSESSEE BEING IN THE BUSINESS OF INVESTMENTS, I.E., BESIDES DEALING IN SHARES. THE INVESTMENT PORTFOLIO AS ON 31.03.2008 (AT RS.210.41 CRS.) ALMO ST MATCHES THE FUNDS CONSUMED IN CURRENT ASSETS (RS.220.42 CRS.) (PB PG.7). NO WONDE R, THE INCOME FROM INVESTMENT, I.E., PROFIT ON SALE OF INVESTMENTS AND DIVIDEND (AT A TO TAL OF RS.340.77 CRS.) STANDS AT 98.84% OF THE TOTAL INCOME FOR THE FINANCIAL YEAR (F.Y.) 2 006-07 (PB PG.8). FURTHER, IT IS ON ACCOUNT OF THIS HEAVY INVESTMENT IN SHARES HELD BY WAY OF TRADING STOCK (RS.132.26 CRS. AS ON 31.03.2008), THAT ITS INCLUSION RESULTS IN, AS R IGHTLY POINTED OUT BY THE LD. CIT(A), THE ESTIMATION PER R. 8D(2)(III) (RS.130.51 LACS) EXCEE DING THE ACTUAL EXPENDITURE, WHICH THOUGH IS TO BE RECKONED AT THE SUM CLAIMED PER THE RETURN OF INCOME, I.E., RS.116.44364 LACS (AND NOT AT RS.128.65 LACS AS CONSIDERED BY TH E REVENUE AUTHORITIES/REFER PB PGS.30- 35). THE QUESTION NEVERTHELESS ARISES, AND IS TO BE ANSW ERED, BOTH IN LEGAL AND FACTUAL TERMS . THE LD. CIT(A) DIRECTS FOR EXCLUSION OF STOCK-IN- TRADE, WHICH HAS TO HAVE A BASIS, BOTH ON FACTS AS WELL AS IN LAW. HIS REASON FOR THE SAME, I.E., A HIGH ESTIMATION OF DISALLOWANCE UNDER R.8D, WHICH IS IN ANY CASE TO BE RESTRICTED TO THE AMOUNT ACTUALLY CLAIMED, SKIRTS, RATHER THAN ADDRESSES THE ISSUE. W HERE AND TO THE EXTENT, THE STOCK-IN- TRADE YIELDS INCOME THAT IS TAX-EXEMPT, THE EXPENDI TURE RELATABLE THERETO, BOTH DIRECT AND INDIRECT, WOULD ATTRACT STATUTORY DISALLOWANCE U/S. 14A. IN FACT, WE HAVE FURTHER FOUND EVEN THE INVESTMENT ALSO TO BE AN OPERATING ASSET, I.E., GIVEN THE ASSESSEES BUSINESS. THE DIRECTION BY THE LD. CIT(A) IS THUS WITHOUT ANY BAS IS EITHER ON FACTS OR IN LAW. IN FACT, IT WOULD BE OBSERVED THAT THE DISALLOWANCE AT A PERCEN TAGE OF INCOME (2% OR HIGHER), AS BEING PRESSED BY THE ASSESSEE, HAS NO RELATIONSHIP WITH THE SHARES HELD AS STOCK-IN-TRADE. 9 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. 4.5 FINALLY, WE MAY ALSO ADDRESS THE ASSESSEES REL IANCE ON THE DECISION IN THE CASE OF CIT VS. GODREJ AGROVET LTD. (IN ITA NO. 934 OF 2011 DATED 08.01.2013), BEING BY THE HONBLE JURISDICTIONAL HIGH COURT. THE RELEVANT QUE STION, AS POSED BEFORE THE HONBLE COURT, AT THE REVENUES INSTANCE, WAS AS UNDER: A) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE ITAT WAS CORRECT IN HOLDING THAT THE CIT(A) WAS NOT JUSTIFIED IN APPLYING THE SAID RULE 8D TO QUANTITY THE DISALLOWA NCE U/S.14A? B) . THE HONBLE COURT ANSWERED THE SAME VIDE PARA 3 OF ITS DECISION, WHICH READS THUS:- 3. SO FAR AS QUESTION (A) IS CONCERNED, THE TRIBUN AL IN ITS ORDER DATED 17.09.2010 HAS FOLLOWED THE DECISION OF THIS COURT IN THE MATTER OF GODREJ & BOYCE MFG. CO. LTD. REPORTED IN 328 ITR PAGE 0081 . IN THE ABOVE CASE, THIS COURT HAS HELD THAT RULE 8D OF THE INCOME TAX RULES, 1962 IS APPLICABLE PROSPECTIVELY W.E.F. ASSESSMENT YEAR 200 8-09, THIS APPEAL RELATES TO ASSESSMENT YEAR 2005-06. CONSEQUENTLY, T HE TRIBUNAL CORRECTLY HELD THAT RULE 8D OF THE INCOME TAX RULES, 1962 IS INAPPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. IN VIEW OF THE ABOVE, WE SEE NO REASON TO ENTERTAIN QUESTION (A) AS FORMULATED BY T HE ASSESSEE. AS THE READING OF THE DECISION WOULD SHOW, THE HON BLE COURT, NOTING THAT THE ASSESSMENT YEAR UNDER REFERENCE WAS A.Y. 2005-06, W HILE R. 8D HAD BEEN HELD BY IT AS APPLICABLE PROSPECTIVELY, I.E., W.E.F. A.Y. 2008-09 , FOUND NO MERIT IN THE REVENUES OBJECTION. A DECISION, IT IS TRITE LAW, IS ONLY AN AUTHORITY ON WHAT IT ACTUALLY DECIDES, AND NOT WHAT MAY REMOTELY OR EVEN LOGICALLY FLOW FROM I T (REFER: GOODYEAR INDIA LTD. V. STATE OF HARYANA [1991] 188 ITR 402 (SC)). IN THIS VIEW OF THE MATT ER, WE FIND THE SAID RELIANCE BY THE ASSESSEE AS COMPLETELY MISPLACED. 4.6 THE PROPOSITION QUA NON-APPLICATION OF R. 8D(2)(III) CAME UP BEFORE, AN D STOOD DISCOUNTENANCED BY THE TRIBUNAL IN D. H. SECURITIES (P.) LTD. (SUPRA) AND DAMANI ESTATES & FINANCE (P.) LTD. (SUPRA), WITH REFERENCE TO THE DECISIONS IN THE CAS E OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AND DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA), SINCE APPROVED BY THE FORMER. THE RELEVANT DISCUSSION IN THE LATTER APPEARS AT PAGES 47-56 OF THE REPORTS, WHEREAT THE TRIBUNAL CONSIDERS THE SCO PE OF THE EXPENDITURE INCURRED IN 10 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. RELATION TO THE EXEMPT INCOME. IN D. H. SECURITIES (P.) LTD. (SUPRA), IT HELD THAT R. 8D(2)(III), PRESCRIBING A RATIO (OF INVESTMENT) IN RESPECT OF INDIRECT EXPENDITURE, COULD NOT BE ALTERED, AS ON ACCOUNT OF HARDSHIP (SEE PARA 6.5 , PGS. 9-10 OF THE REPORTS). THE SAME (RATIO) WAS IN FACT NOMINAL, RECOMMENDING ITSELF TO EASY ACCEPTANCE, AS ALSO OBSERVED BY IT IN DAMANI ESTATES & FINANCE (P.) LTD. (SUPRA). REFERENCE FOR THE SAME MAY BE MADE TO THE DISCUSSION AT PARA 6.5 (PGS. 9-11) AND PARA 20 (PGS. 698-700) OF THE SAID DECISION, WHICH WE REPRODUCE AS UNDER FOR READY REFERENCE: CONTINUING FURTHER, THE PART OF THE RULE PRESCRIBI NG THE RATIO IN RESPECT OF INDIRECT EXPENDITURE (R. 8D(2)(III)) CANNOT BE ALTE RED ON ACCOUNT OF HARDSHIP (REFERENCE IS DRAWN TO THE SECTION OF THE JUDGMENT IN GODREJ & BOYCE (SUPRA) ON THE CONSTITUTIONALITY OF SUB-SECTIONS (2 ) & (3) OF SECTION 14A AND RULE 8D/PGS. 113 123). EVEN SO, THE RULE PRESCRIB ES THE SAME AS THE RATIO OF INDIRECT EXPENDITURE REQUIRED TO SUPPORT AN INVE STMENT. WE SAY SO AS THE EXPENDITURE PRESCRIBED FOR DISALLOWANCE IS BASED ON LY ON ONE VARIABLE, I.E., THE VALUE OF THE INVESTMENT (ON AN AVERAGE). INVEST MENT ACTIVITY, IT MAY BE APPRECIATED, IS MUCH STABLER IN CHARACTER IN COMPAR ISON TO THE TRADING ACTIVITY, WHICH INVOLVES CONTINUOUS CHURNING OF FUN DS AND, THUS, ACTIVITY, REQUIRING A MUCH HIGHER LEVEL OF ORGANIZATIONAL SUP PORT/EXPENDITURE. INVESTMENTS, ON THE OTHER HAND, ARE LONG TERM AND S TRATEGIC, REQUIRING ONLY PERIODIC REVIEW OF PERFORMANCE WITH REFERENCE TO TH E INVESTMENT OBJECTIVE/S, BESIDES ON ACCOUNT OF ENVIRONMENTAL CH ANGES, IF ANY. WHY, THE PRESCRIBED ALLOCATION RATIO OF 0.5% OF THE INVESTME NT VALUE QUA INDIRECT EXPENDITURE IS VERY NOMINAL, RECOMMENDING ITSELF TO EASY ACCEPTANCE, IS ITSELF BASED, EVEN AS OBSERVED BY THE HONBLE COURT (AT 116 OF THE REPORT ), ON THE 2% TO 2.5% (OF THE INVESTMENT) USUALLY CHARGED BY THE PORTFOLIO MANAGEMENT SERVICE (PMS) PROVIDERS, OF WHICH AROUND 1% (OF THE PORTFOLIO VALUE) WOULD BE THEIR PROFIT. THE NOMINAL RATE OF 0.5% ALSO ESCHEWS THE CHARGE OF IT BEING HARSH, WHILE BEING A T THE SAME TIME CLARIFICATORY OF ITS PURPOSE; THE INVESTMENT ACTIVI TY BEING ESSENTIALLY SPORADIC AND EPISODIC. IN FACT, THE ASSESSEE ITSELF EXPLAINS OF NO CHANGE IN ITS INVESTMENT PORTFOLIO DURING THE YEAR EXCEPT FOR ONE SWITCH FROM A COMPANY SHARE TO UNITS OF A MUTUAL FUND (HDFC LIQUI D FUND). OUR DISCUSSION IS, HOWEVER, ONLY TOWARD THE NOMINALITY AND PURPORT OF THE CHARGE, AND DOES NOT IN ANY MANNER IMPLY OF IT BEIN G CONFINED ONLY TO SHARES HELD AS INVESTMENT. THIS IS AS EVEN THOUGH P URCHASED WITH A SHORT TERM PERSPECTIVE, THE SHARES ARE PURCHASED ONLY WIT H PROFIT OBJECTIVE, I.E., AS REPRESENTING A GOOD INVESTMENT OPPORTUNITY, SO THAT IT IS PERCEIVED AS UNDER- PRICED, AND ITS MARKET PRICE WOULD APPRECIATE IN TI ME, YIELDING GOOD RETURN AND, RATHER, IN A SHORTER PERIOD OF TIME. THAT IS, THE INVESTMENT COMPONENT 11 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. OR ELEMENT IS INBUILT IN ANY PURCHASE AND TOWARD WH ICH THE ALLOCATION OF INDIRECT EXPENDITURE IS PRESCRIBED PER R. 8D(2)(III ). THE FACT THAT TRADING SHARES ALSO YIELD DIVIDEND INCOME, WHICH IS NOT TAX ABLE, I.E., BESIDES SHARE TRADING INCOME, IS ITSELF RELEVANT AND SUFFICIENT F OR ATTRACTING THE PROVISION OF S.14A(1). IN FACT, AN ARGUMENT TO THIS EFFECT, I .E., R. 8D(2)(III) AS BEING NOT APPLICABLE TO SHARES HELD AS STOCK-IN-TRADE, WAS SP ECIFICALLY ASSUMED IN THE CASE OF DAGA CAPITAL (SUPRA). THE TRIBUNAL REJECTED THE ARGUMENT, MADE WITH REFERENCE TO THE LANGUAGE OF R.8D, CLARIFYING THAT THE WORDS USED ARE VALUE OF INVESTMENT AND NOT HELD AS INVESTMENT. WE MAY REPRODUCE THE RELEVANT PART OF THE ORDER FOR THE SAKE OF BETTER C LARITY (PAGE 55 OF 312 ITR (AT)): LEARNED COUNSEL FOR THE ASSESSEE . WE ARE NOT IMPRESSED WITH THIS SUBMISSION RAISED ON BEHALF OF THE ASSESSEE FO R THE OUT-AND-OUT REASON THAT THE REFERENCE IN THIS RULE IS TO THE V ALUE OF INVESTMENT AND NOT THE ASSETS HELD AS INVESTMENT. A PERSON M AY MAKE INVESTMENT IN SHARES AND THE SHARES SO PURCHASED MA Y BE HELD EITHER AS STOCK-IN-TRADE OR INVESTMENT. THE WORD INVE STMENT IN THIS RULE REFERS TO THE MAKING OF PURCHASE OF SHARES AND NOT HOLDING IT AS INVESTMENT. WE DECIDE ACCORDINGLY. WE ACCORDINGLY, DO NOT FIND ANY SCOPE FOR EITHER NO N-APPLICATION OF, OR EVEN SCALING DOWN OF THE AMOUNT WORKABLE WITH REFERENCE, TO R. 8 D(2)(III) WHERE THE SHARES, ON WHICH THE EXEMPT INCOME IS RECEIVED, ARE HELD AS STOCK-IN -TRADE, AS ADVOCATED BY THE TRIBUNAL IN THE SAID CASES FOR THE DISALLOWANCE OF INTEREST U/R .8D(2)(II). 4.7 SO, HOWEVER, WE OBSERVE THAT THE REVENUE HAS IN THE ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING YEAR, I.E., A.Y. 2007-08, CON SIDERED ONLY SOME OF THE EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT (AT RS.10.57 LACS/PB PGS.42-44) AS RELEVANT FOR THE PURPOSE OF DISALLOWANCE OF INDIRECT ADMINISTRATIVE EXPENDITURE. WE HAVE ALREADY NOTED THAT THE DISALLOWANCE UNDER R. 8D HAS TO BE IN ANY CASE RESTRICTED TO THE AMOUNT OF THE RELEVANT EXPENDITURE ACTUALLY CLAIMED PER THE RETUR N OF INCOME. UNDER THE CIRCUMSTANCES, WE THEREFORE ONLY CONSIDER IT FIT AND PROPER THAT T HE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. TO ALLOW THE ASSESSEE AN OPPORTUNITY TO PR ESENT ITS CASE BEFORE HIM WITH REFERENCE TO THE EXPENDITURE CLAIMED (AND THUS DISA LLOWED) AS ALSO INCLUDING EXPENDITURE WHICH IS IN FACT NOT RELATABLE TO THE INCOME NOT FO RMING PART OF THE TOTAL INCOME. THIS 12 ITA NOS. 8662/M/11 & 262/M/12 (A.Y. 2008-09) HATHWAY INVESTMENT PVT. LTD. BECOMES ALSO RELEVANT IN VIEW OF THE ASSESSEE BEING ALSO IN THE BUSINESS OF SHARE TRADING, SO THAT THE DIRECT EXPENDITURE IN RESPECT THEREOF W OULD ALSO STAND DEBITED IN ITS ACCOUNTS AND, ACCORDINGLY, CLAIMED. THE ONUS THOUGH, WE MAY CLARIFY, TO ESTABLISH ITS CASE WOULD ONLY BE ON THE ASSESSEE, WHICH THE A.O. SHALL DECID E BY ISSUING DEFINITE FINDING/S OF FACT/S, LIMITING THE DISALLOWANCE UNDER R.8D(2)(III ) TO THE AMOUNT OF EXPENDITURE AS SO DETERMINED BY HIM. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON OCTOBER 17, 2 014 SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 0+ MUMBAI; 1% DATED : 17.10.2014 $.%../ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. '2 / THE APPELLANT 2. 34'2 / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. 7$8 9 3%:& , , :&/ , 0+ / DR, ITAT, MUMBAI 6. 9 ;' < + / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , 0+ / ITAT, MUMBAI