M/s. K.Ratanchand and Co., Ahmedabad V. The Income tax Officer,Ward-11(4), Ahmedabad

ITA 2660/AHD/2011

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1273 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 10-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R P MAURYA
• Assessee Lawyers: ANIL R SHAH
• Keywords: Capital asset; Business income; Business expenditure; Earning of tax free income
• Section: 143(3); 14A; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD BEFORE S/SHRI KUL BHARAT, JM, & MANISH BORAD, A M. ITA NO.2660/AHD/2011 ASST. YEAR:2008-09 M/S K. RATANCHAND & CO., 32, NEW CLOTH MARKET, OUTSIDE RAIPUR GATE, RAIPUR, AHMEDABAD. VS INCOME-TAX OFFICER, WARD 11(4), AHMEDABAD. (APPELLANT) (RESPONDENT) PA NO.AAGFM 6390M APPELLANT BY SHRI ANIL R. SHAH, AR RESPONDENT BY SHRI R. P. MAURYA, SR. DR DATE OF HEARING: 10.9.2015 DATE OF PRONOUNCEMENT: 24/09/2015 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER. THIS APPEAL OF ASSESSEE IS DIRECTED AGAINST THE OR DER OF CIT(A)- XVI, AHMEDABAD DATED 24 TH AUGUST, 2011 FOR AY 2008-09. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E I.T. ACT (HEREIN AFTER REFERRED TO AS THE ACT) ON 15.12.2010 BY ITO WARD- 11(4), AHMEDABAD. ASSESSEE HAS RAISED FOLLOWING GRO UNDS OF APPEAL :- THE CIT(A)-XVI, AHMEDABAD (HEREIN AFTER REFERRED TO AS THE CIT(A) HAS ERRED BOTH IN LAW AND ON FACT IN PASSING ORDER ON THE FOLLOWING AMONGST THE OTHER GROUNDS- ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 2 I.(A) THE CIT(A) HAS ERRED BOTH IN LAW AND IN FACT IN CONFIRMING THE APPLICABILITY OF SEC.14A AND THE DISALLOWANCE OF RS .4,04,204/- STATING THAT THE SAME IS INCURRED FOR EARNING NON-T AXABLE DIVIDEND OF RS.58,963/-. APPELLANT IS A DEALER IN SHARES AND SHARES ARE HEL D AS STOCK IN TRADE AND THE APPELLANT HAS ALSO EARNED SHARE TRADI NG PROFIT OF RS.6,69,715/- AS ITS BUSINESS INCOME. ALL EXPENSES INCLUDING INTEREST PAID ARE WHOLLY AND EXCLUSIVELY INCURRED F OR THE PURPOSE OF THE BUSINESS AND HENCE, PROVISIONS OF SECTION 14 A/RULE 8D ARE NOT APPLICABLE. (B) ALTERNATIVELY IT IS FURTHER SUBMITTED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE QUANTIFICATION OF DISALLOWANCE UNDER RULE 8D AT RS.4,04,204/-. IT IS SUBMITTED THAT IF AT ALL THERE IS A DISALLOWANCE TO BE MADE, IT SHOULD BE DONE IN ACCORDANCE WITH TH E PROVISIONS OF RULE -8D. (C) ALTERNATIVELY AND WITHOUT PREJUDICE THE CIT(A) OUGHT TO HELD THAT RS.6,09,715/- BEING SURPLUS IN SALE OF SHARES SHOUL D HAVE BEEN TAKEN AS CAPITAL GAIN SINCE THE AO HAS TREATED PURC HASE & SALE OF SHARES AS INVESTMENT OF YOUR APPELLANT WHILE ARR IVING DISALLOWANCE U/S 14A OF THE ACT. II. THE CIT(A) HAS ERRED IN CONFIRMING 50% OUT OF T HE DISALLOWANCE RS.60,068/- BEING 20% EXPENSES OUT OF SHOP, TRAVELI NG CONVERGENCE ETC. ON AD HOC BASIS STATING THAT SOME OF THE VOUCHERS ARE SELF MADE/OFFICE VOUCHERS. IT IS SUBMITTED THAT SINCE THE ENTIRE EXPENSES UND ER VARIOUS HEADS AMOUNTING TO RS.3,00,358/- ARE DULY SUPPORTED BY EVIDENCE AND HAVE BEEN INCURRED DURING THE COURSE O F BUSINESS AND FOR PURPOSES OF BUSINESS AND NOT BEING OF CAPIT AL OR PERSONAL NATURE, CIT(A) OUGHT TO HAVE DELETED THE E NTIRE DISALLOWANCE MADE THE AO. IT IS THEREFORE SUBMITTED THAT RELIEFS CLAIMED ABOV E BE ALLOWED AND THE ORDER OF THE AO BE MODIFIED ACCORDINGLY. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 3 YOUR APPELLANT RESERVES THE RIGHT TO ADD, ALTER, AM END OR TO WITHDRAW ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL. 2. BRIEFLY STATED THE FACTS OF THE CASE GATHERED FR OM THE RECORDS ARE THAT THE ASSESSEE IS IN THE BUSINESS OF TRADING OF SHARES, CLOTH, COMMISSION AND REAL ESTATE RENT. THE ASSESSEE FILED ITS RETURN OF INCOME ON 22.9.2008 AND FURTHER REVISED ON 23.9.200 8 AT A TOTAL INCOME OF RS.39,421/-. SCRUTINY ASSESSMENT AS PER C ASS WAS FRAMED BY AO UNDER SECTION 143(3) OF THE ACT MAKING ADDITION OF RS.4,04,204/- BY INVOKING SECTION 14A OF THE ACT AN D DISALLOWANCE OF EXPENSES OF RS.60,068/- BEING 20% OF 3,00,338/- FOR VARIOUS EXPENSES INCURRED. AGGRIEVED, ASSESSEE WENT IN APPE AL BEFORE CIT(A) WHO UPHELD THE ADDITION MADE BY AO. AGGRIEVE D, THE ASSESSEE IS NOW IN FURTHER APPEAL BEFORE THE TRIBUN AL. 3. GROUND NO.1 RELATES TO CONFIRMATION OF APPLICABI LITY OF SECTION 14A AND DISALLOWANCE OF RS.4,04,204/- STATING THAT THE SAME IS INCURRED FOR EARNING NON-TAXABLE DIVIDEND OF RS.58, 960/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THA T ASSESSEE EARNED DIVIDEND INCOME OF RS.58,963/- WHICH IS CLAI MED EXEMPT BY THE ASSESSEE AND LONG TERM INVESTMENT OF RS.51,000/ - WAS APPEARING IN THE BALANCE SHEET. THE AO FURTHER NOTICED THAT I NTEREST EXPENSES OF RS.14,78,043/- AND BANK INTEREST OF RS.1,79,000/- W AS DEBITED TO PROFIT AND LOSS ACCOUNT AND THERE WERE NO BIFURCATI ON OF THE INTEREST EXPENSES IN RELATION TO TRADING ACTIVITY AND INVEST MENT ACTIVITY, THUS HE MADE DISALLOWANCE UNDER SECTION 14A WORKED OUT A S PER RULES 8D OF THE I.T. RULES, 1962 AND MADE ADDITION OF RS.4,0 4,204/-. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 4 4. AT THE OUTSET THE LD. AR OF THE ASSESSEE SUBMITT ED THAT ASSESSEE BEING IN BUSINESS OF TRADING IN EQUITY SHA RES, CLOTH AND REAL ESTATE AND HAS FILED THE RETURN OF INCOME SHOWING I NCOME FROM TRADING OF SHARES UNDER THE HEAD BUSINESS AND PROF ESSION. INVESTMENT IN EQUITY SHARES AS ON 31.3.2008 AS SHOW N IN THE AUDITED BALANCE SHEET WAS RS.41,67,992/- OUT OF WHICH CLOSI NG STOCK OF SHARES SHOWN IN THE TRADING ACCOUNT WAS RS.41,16,99 2/- AND ONLY RS.51,000/- WAS SHOWN UNDER THE HEAD INVESTMENT IN THE BALANCE SHEET. THE DIVIDEND INCOME EARNED BY THE ASSESSEE D URING THE FY 2007-08 WAS RS.58,963/- WHICH WAS EARNED FROM THE E QUITY SHARES HELD IN STOCK IN TRADE. LD. AR FURTHER SUBMITTED TH AT TOTAL TURNOVER OF CLOTH AND SHARES FOR THE FY 2007-08 WAS RS.1,05,49, 908/- OUT OF WHICH SALES OF CLOTH WAS AT RS.88,63,407/- AND SALE OF SHARES AT RS.16,86,501/- AND THE INTEREST EXPENSES OF RS.16,5 7,043/- (1478,043 + 1,79,000) HAS BEEN INCURRED FOR THE TOT AL BUSINESS OF THE ASSESSEE AND NOT SPECIFICALLY FOR TRADING IN SHARES . THE LD. AR IN SUPPORT OF HIS GROUND FURTHER SUBMITTED AS UNDER :- 2. FOR MAKING THIS DISALLOWANCE, THE AO HAS OBSERV ED THAT WE HAVE DIVIDEND INCOME OF RS.58,963/-, THERE IS A LONG TERM INVESTM ENT OF RS.51,000/- YIELDING NON-TAXABLE INCOME BY WAY OF DIVIDEND, WE HAVE INCU RRED INTEREST EXPENSES OF RS.14,78,043/- AND INTEREST PAID TO BANK IS RS.1,79 ,000/- WHICH IS NOT BIFURCATED INTO EXPENSES IN RELATION TO TRADING ACTIVITY OR IN VESTMENT ACTIVITY AND THEREFORE DISALLOWANCE U/S 14A IS WORKED OUT AS PER RULE 8D W HICH IS QUANTIFIED AT RS.4,04,204/-. 3. WE FIRSTLY STATE THAT THE AO HAS PROCEEDED ON WR ONG FACTUAL FOOTINGS IN MAKING THESE OBSERVATIONS. INVESTMENTS OF RS.51,000 /- REFERRED TO BY THE AO IS BY WAY OF HOLDING OF SHARES OF TEXTILE TRADERS CO-O P. BANK LTD. RS.50,000 AND MASKATI CLOTH DEALER CO-OP. SHOP AND WAREHOUSE RS.1 ,000. DIVIDEND RECEIVED ON THESE SHARES IS NOT EXEMPT U/S 10(36) AND U/S 10 (36) AS OBSERVED BY THE AO. WE, THEREFORE, STRONGLY SUBMIT THAT PROVISIONS OF S EC.14A/RULE 8D ARE WRONGLY APPLIED ON THE FACTS OUR CASE WHICH ARE WRONGLY APP LIED BY THE AO. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 5 4. ALTERNATIVELY, WE STATE THAT IF INTENTION OF THE AO IS TO CORRELATE PROVISIONS OF SEC.14A/RULE 8D VIS--VIS DIVIDEND INCOME OF RS. 58,963/- WE MAY STATE THAT THE AO HAS ONCE AGAIN MADE A FACTUALLY INCORRECT OB SERVATION AS, SAME IS NOT BY WAY OF DIVIDENDS RECEIVED ON SHARES HELD AS INVESTM ENTS. WE ARE ENGAGED IN THE BUSINESS OF TRADING OF CLOTH, SHARES, SECURITIES, R EAL ESTATE AND FINANCING AS SUPPORTED BY THE RELEVANT BUSINESS CLOSE IN OUR PAR TNERSHIP DEED AND ALSO, IN FORM 3CD FORMING PART OF TAX AUDIT REPORT U/S 44AB. 5. WE THEREFORE HOLD SHARES AS STOCK IN TRADE AND N OT AS INVESTMENTS AS MAY BE VERIFIED FROM OUR BALANCE SHEET AND PROFIT & LOS S ACCOUNT WHERE, CLOSING STOCK OF SHARES AS ON 31.3.2008 IS VERIFIABLE AT RS.41,16 ,992/-. 6. WE FURTHER INVITE YOUR HONOURS KIND ATTENTION O UR SHARE TRADING ACCOUNT WHEREIN, WE HAVE OPENING STOCK OF SHARES AT RS.40,0 2,123/- PURCHASE OF SHARES AT RS.11,31,654 AND SALE OF SHARES AT RS.16,86,500 YIELDING PROFIT FROM SHARE TRADING ACTIVITY AT RS.6,69,715. SINCE WE ARE ENGAG ED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES, SHARES ARE PURCHASED WITH AN INTENTION OF TREATING THE SAME AS STOCK IN TRADE AND NOT TO HOLD THEM AS INVE STMENT. THE INCOME DERIVED FROM TRADING OF SHARES IS A BUSINESS INCOME AND NOT LONG TERM/SHORT TERM CAPITAL GAINS AND HOLDING OF SHARES AS ON 31.3.2008 IS BY W AY OF STOCK IN TRADE AND NOT BY WAY OF INVESTMENT. 7. WE ALSO REFER TO CIRCULAR NO.4/2007 DATED 15-6-07 ISSUED BY HON. CBD T WHEREIN CIRCUMSTANCES WHICH DISTINCTION BETWEEN SHARES HELD AS STOCK IN T RADE AND SHARES HELD AS INVESTMENTS ARE ENUMERATED. ON A NALYSIS OF THE CASES REFERRED TO IN THE ABOVE CIRCULAR AS WELL AS ON APPLYING THE TESTS MENTIONED THEREIN WE CAN ONCE AGAIN BE ESTABLISHED AS TRADERS OF SHARES AND NOT INVESTORS IN SHARES. 8. SINCE THIS IS AN ESTABLISH FACT THAT WE ARE TRADERS OF SH ARES AND NOT INVESTORS, WARNS OF SEC.14A/RULE 80 ARE OF APPLICABLE TO THE FACTS OF OUR CASE AS HELD BY HON. COURTS IN THE FOLLOWING JUDGEMENTS WHI CH ARE STRONGLY RELIED UPON BY US. (A) 'THE ASSESSEE HAD NOT MADE ANY INVESTMENT IN SH ARES FOR THE PURPOSE OF EARNING DIVIDEND. NO DOUBT, THE ASSESSEE HAD REC EIVED DIVIDENDS BUT THESE WERE INCIDENTAL RECEIPTS, AS THE ASSESSEE PUR CHASED SHARES FOR THE PURPOSE OF SELLING THE SAME AND DURING THAT PROCESS THE ASSESSEE RECEIVED SOME DIVIDEND. THEREFORE, IT COULD NOT BE SAID THAT THE ASSESSEE WAS DEALING IN THE TRANSACTIONS WHICH WERE EXEMPT F ROM TAX. THEREFORE, ON THE FACTS OF THE INSTANT CASE, THE PROVISIONS OF SE CTION 14A WERE NOT APPLICABLE, IF THE ASSESSING OFFICER WAS OF THE VIE W THAT THE ASSESSEE HAD MADE INVESTMENT FOR THE PURPOSE OF EARNING DIVIDEND , THEN ONUS WAS ON HIM TO PROVE THE SAME, WHICH THE ASSESSING OFFICER HAD FAILED TO DISCHARGE. THEREFORE, THE ADDITION MADE WAS TO BE D ELETED.' ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 6 LEO INDUSTRIES LTD. VS. ITO 143 TAXMAN PAGE 92 & 93 (DELHI) (B) 'THE DIVIDEND EARNED BY THE ASSESSEE WAS MERELY INCIDENTAL TO THE HOLDING OF SHARES FOR A PARTICULAR PERIOD WHEN THE DIVIDEND WAS DECLARED. AS PER THE ACCOUNTS, THE STOCK OF SHARES HELD AS ST OCK-IN-TRADE WAS MERELY RS.21.27 LAKHS. THE SHARES WERE PURCHASED MERELY FO R TRADING IN THE SAME AND NOT EARNING DIVIDNED THEREON. THUS, IT COU LD NOT BE SAID THAT THE EXPENSES ON INTEREST WERE INCURRED OR THE DEPOSITOR Y/CUSTODIAL CHARGES WERE INCURRED MERELY TO EARN DIVIDEND INCOME. THE I NTENTION WAS TO EARN THE PROFIT ON SHARE TRADING AND NOT TO EARN DIVIDEN D INCOME. THUS, THE PROVISIONS OF SECTION 14A COULD NOT-BE INVOKED TO H OLD THAT THE EXPENSES BY WAY OF INTEREST AND DEPOSITORY/CUSTODIAL CHARGES WERE INCURRED IN RELATION TO DIVIDEND INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME. THEREFORE, NO PART OF THE INTEREST EXPENSES AND DEP OSITORY/CUSTODIAL CHARGES COULD BE DISALLOWED BY HOLDING THE SAME AS INCURRED IN RELATION TO EARNING AN EXEMPT INCOME [PARA 2.8]' VIDYUT INVESTMENT LTD. VS. ITO [2006] 10 SOT 284 (D ELHI) 9. IN THE LIGHT OF THE ABOVE CIRCUMSTANCES, THE ADD ITIONS OF RS.4,04,204 MADE U/S. 14A/RULE 8D BE DELETED. 10. WITHOUT PREJUDICE TO ABOVE, WE SUBMIT THAT AS L AID DOWN BY HON. COURTS IN THE FOLLOWING JUDGEMENTS, THE AO IS REQUIRED TO CORELATE INCURRING OF THE EXPENSES WITH EARNING OF NON-TAXABLE INCOME. (I) DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S ECTION 14A CANNOT STAND - CIT V. HERO CYCLES LTD. [2010] 323ITR 518 ( PUNJ. & HAR.) (II) WORDS 'EXPENDITURE INCURRED' IN SECTION 14A RE FER TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT O F WHICH ALLOWANCES ARE PROVIDED FOR UNDER SECTIONS 30 TO 37 ; A RETURN OF INVESTMENT OR A PAY - BACK IS NOT 'EXPENDITURE INCURRED' IN TERMS OF SECT ION 14A' FOR ATTRACTING SECTION 14A, THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH TAX EXEMPT INCOME AND SINCE P AY-BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE, SECTION 14A IS NOT APPLICABLE IN SUCH CASES - CIT V. WALFORT SHARE & STOCK BROKERS ( P) LTD. [2010] 326 ITR 1 (SC). (III) ASSESSING OFFICER WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAD BEEN INCURRED IN RELATION TO INCOME WHICH DID NOT F ORM PART OF TOTAL INCOME UNDER ACT BY ADOPTING REASONABLE BASIS OR METHOD CO NSISTENT WITH ALL ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 7 RELEVANT FACTS AND CIRCUMSTANCES - GODREJ & BOYEE MFG. CO.LTD. V. DY.CIT[2010] 328 ITR 81 (BOM.) IN OUR CASE, THE AO HAS NOT ESTABLISHED ANY SUCH NE XUS OR A CORRELATION BETWEEN EXPENSES INCURRED FOR EARNING NON TAXABLE I NCOME AND HENCE, PROVISIONS OF SEC.14A/RSD ARE WRONGLY APPLIED. AS A MATTER OF FACT, WE HAVE NOT INCURRED ANY EXPENDITURE TO EARN INCOME FR OM DIVIDENDS. WE GET DIVIDEND UNDER ECS AND THE DIVIDEND IS DIRECTLY CRE DITED TO OUR BANK ACCOUNT. WE THEREFORE DO NOT HAVE EVEN THE ADMINIST RATIVE EXPENSES BY WAY OF SALARY, CONVEYANCE, TELEPHONE, TRAVELLING, P OSTAGE, INTEREST OR ANY EXPENSES CLOSE TO THE ABOVE LIST THAT CAN BE CORREL ATED AS HAVING BEEN INCURRED FOR EARNING DIVIDEND INCOME OF RS.58,963. 11. WITHOUT PREJUDICE TO ABOVE AND ASSUMING AND WIT HOUT ADMITTING THAT EVEN IF DISALLOWANCE IS REQUIRED TO BE WORKED OUT A S PER THE FORMULA LAID DOWN IN RULE-8D, WE SUBMIT THAT THE AO HAS WRONGLY QUANTIFIED THE DISALLOWANCE AT RS.4,04,204 TREATING INTEREST PAID RS. 16,57,043 (14,78,043 + 1,79,000) AS IF IT IS FOR INVESTMENT OF SHARES OF RS. 51.000/-. IT IS SUBMITTED THAT INTEREST IS PAID ON FUNDS WHICH A RE UTILIZED IN OUR COMPOSITE BUSINESS ACTIVITIES OF TRADING IN BOTH, S HARES AND SECURITIES, REAL-ESTATE AND FINANCING, AND THE SAME IS NOT ON I NVESTMENT IN SHARES OF RS.51,000/-. THEREFORE, THE INTEREST IS ALLOWABLE A S A DEDUCTION U/S.36(1)(III). UNDER THE CIRCUMSTANCES, THE CORREC T WORKING UNDER RULE 8D IF MADE IN OUR CASE WILL WORK OUT TO RS.NIL AND THE REFORE ALSO, NO DISALLOWANCE CAN BE QUANTIFIED U/S. 14A/RULE 8D. IT WILL CREATE AN UNREALISTIC, ARTIFICIAL AND IF WE MAY VENTURE TO SA Y SO, AN ABSURD SITUATION EVEN TO IMAGE THAT A PRUDENT BUSINESS MAN WOULD INC URE EXPENDITURE OF RS.4,04,204 FOR EARNING NON TAXABLE INCOME OF RS. 5 8,963 ! 12. LOOKING AT THE DISALLOWANCE FROM ALL OR ANY OF THE ABOVE ASPECTS, IT WOULD ESTABLISH WITHOUT DOUBT THAT THE DISALLOWANCE OF RS.4,04,204 IS WRONGLY MADE U/S.14A/RULE 8D AND HENCE, THE SAME IS REQUIRED TO BE DELETED. 13. ALTERNATIVELY AND WITHOUT PREJUDICE TO ABOVE SU BMISSIONS AND ASSUMING WITHOUT ADMITTING THAT THE STAND OF THE AO IS CORRECT TO THE EFFECT THAT THE SHARES ARE HELD BY US AS INVESTMENT AND NO T AS STOCK IN TRADE SO AS TO ATTRACT PROVISIONS OF SEC. 14A/RULE 80, WE STATE THAT AS A MATTER OF PURE CONSEQUENCE OF THE AO'S, STAND AS ABOVE, THE I NCOME EARNED ON TRANSFER OF CAPITAL ASSETS VIZ: SHARES HELD AS INVE STMENTS AMOUNTING TO RS. 6,69,77 5 RESULTS INTO 'CAPITAL GAIN' EITHER SHORT TERM OR LO NG TERM AS THE CASE MAY BE. THE AO THEREFORE BE DIRECTED TO REWORK TAXABLE INCOME AND TAX PAYABLE BY TREATING RS.6,69,715 AS SHORT TERM/LONG TERM CAPITAL GAINS AND ISSUE REFUND OF ADDITIONAL TAX PAID ON THE ABOV E AMOUNT AT FLAT RATE OF 30% APPLICABLE TO BUSINESS INCOME. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 8 THE LD. AR HAS RELIED ON VARIOUS JUDICIAL PRONOUNCE MENTS WHICH HE HAS BIFURCATED UNDER THREE HEADS :- I. FINDING OF ASSESSING OFFICER NECESSARY TO THE EF FECT THAT THE ASSESSEE HAS INCURRED EXPENSES RELATED TO EXEMPT INCOME AND WHEN NO SUCH EXPENDITURE INCURRED THEY CANNOT BE DISALLOWED U/S 14A. 1. KAMAL MADANMOHAN MANGALDAS VS. ITO, WARD 1(1), A HMEDABAD ITA NO.2839/AHD/2011 OF AY 2008-09 IN ITAT C BENCH, A HMEDABAD. 2. DISMN PHARMACEUTICALS AND CHEMICALS LTD. VS. DCI T, 45 SOT PAGE 37(AHD) 3. PATCO INVESTMENT & CONSULTANCY SERVICES PVT. LTD . VS. ACIT/(MADRAS H.C.) 4. CIT VS. RELIANCE INDUSTRIES LTD.339 ITR PAGE 632 (BOM) 5. BALRAMPUR CHINI MILLS LTD. VS. DCIT 140 TTJ (CAL CUTTA) 6. CIT VS. GALILEO INDIA (P) LTD. 220 TAXMAN,PAGE 1 15 (DELHI) 7. CIT VS. WALFORT SHARE & STOCK BROKERS PVT. LTD. 326 ITR P.1 (SC) II. WHERE ASSESSEE IS DEALER IN SHARES AND PROFIT I N SHARE BUSINESS IS TAXED AS BUSINESS INCOME SEC.14A DOES NOT APPLY AS PER FO LLOWING JUDGMENTS: 1. CHART SHOWING SHARE BUSINESS DIVIDEND INCOME 2. ZAVERI VIRJIBHAI MANDALIA VS. ACIT 152 TTJ P.20 (AHD.ITAT) 3. VIDYUT INVESTMENT LTD. VS. ITO WARD 17(3), NEW D ELHI, 10 SOT PAGE 284 (DELHI ITAT) 4. CCI LTD. VS. JCIT 250 CTR P.291 (KAR H.C.) III. DISALLOWANCE U/S 14A CANNOT BE MORE THAN EXEMP T INCOME 1. CHUDGAR RANCHODLAL JETHALAL VS. DCIT (OSD) RANGE -1, AHMEDABAD ITA NO.245/AHD/2013 AY 2008-09 ITAT B BENCH, AHD. 2. JIVRAJ TEA LTD., SURAT VS. DCIT, CIRCLE-1, SURAT . ITA NO.866/AHD/2012 AY 2008-09, AHMEDABAD. 3. M/S DAGA GLOBAL CHEMICALS MUMBAI VS. ACIT-9(1), MUMBI ITA NO.5592/MUM/2012 AY 2009-10 ITAT D BENCH MUMB AI. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 9 5. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS O F LOWER AUTHORITIES AND DID NOT PRODUCE ANY NEW MATERIAL ON RECORD. 6. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS AVAILABLE RECORDS INCLUDING PAPER BOOK AND CASE LAWS RELIED BY THE LD. AR. ADDI TION OF RS.4,04,204/- HAS BEEN MADE BY THE AO AGAINST DIVID END INCOME OF RS.58,963/-. NOTHING CONTRARY HAS BEEN BROUGHT TO T HE FACT THAT ASSESSEE IS A DEALER IN SHARES AND PROFIT IN SHARE BUSINESS HAS BEEN SHOWN BY THE ASSESSEE UNDER THE HEAD INCOME FROM B USINESS. A.O. HAS NOT MADE ANY SPECIFIC FINDING TO SUPPORT THE DI SALLOWANCE MADE BY HIM. FURTHER IN CASE OF ZAVERI VIRJIBHAI MANDALI A VS. ACIT IN ITA NO.469/AHD/2007 FOR AY 2004-05, THE CO-ORDINATE BEN CH HELD WHERE THE ASSESSEE IS A DEALER IN SHARE AND PROFIT IN SHA RE BUSINESS IS TAXED AS BUSINESS INCOME SECTION 14A OF THE ACT DOES NOT APPLY. THE RELEVANT PORTION OF THE DECISION IS REPRODUCED BELO W - 12. IN THE PRESENT CASE BEFORE US IT IS SEEN THAT THE ASSESSEE IS IN THE BUSINESS OF PURCHASE AND SALE OF SHARES, THE INCOME FROM WHICH IS ALSO ASSESSED UNDER THE HEAD INCOME F ROM BUSINESS AND PROFESSION. THE ASSESSEE HAD BORROWED FUNDS FROM KOTAK MAHINDRA INVESTMENT LTD. FOR THE PURPOSE OF PURCHASE OF UNITS AND SHARES WHICH IN FACT HAVE BEE N UTILIZED FOR PURCHASE OF UNITS AND SHARES. THE ASSESSEE HAS PAID INTEREST ON THE AMOUNT BORROWED FROM KOTAK MAHINDRA INVESTMENT LTD. THESE FACTS HAVE NOT BEEN CONTROVER TED BY REVENUE. THE ASSESSEE HAS INCURRED INTEREST EXPENSE S FOR ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 10 PURCHASE OF SHARES AND UNITS OF MUTUAL FUND AND THE BORROWED FUNDS HAVE BEEN USED FOR ACQUISITION OF UNITS ARE I N DISPUTE. THE AO ALSO HELD THAT ASSESSEE IS IN THE BUSINESS O F PURCHASE/SALE OF SHARES AND WHILE FRAMING ASSESSMEN T UNDER SECTION 143(3) THE LOSS OF RS.1,51,21196 INCURRED O N THE SALE/PURCHASE OF UNITS HAS BEEN TREATED AS BUSINESS LOSS. IN VIEW OF THE AFORESAID FACTS, IT CAN BE STATED THAT ASSESSEE IS IN THE BUSINESS OF PURCHASE AND SALE OF SHARES. ONCE T HE PURCHASE AND SALE OF SHARES IS HELD TO BE A BUSINES S ACTIVITY, THE INTEREST PAID THEREON HAS TO BE TREATED AS BUSI NESS EXPENSES IN VIEW OF THE HONBLE HIGH COURT DECISION IN THE CASE OF ADDL. CIT VS. LAXMI AGENTS (SUPRA). THUS FOLLOWI NG THE DECISION OF THE CO-ORDINATE BENCH AND THE HONBLE H IGH COURT, WE ARE OF THE VIEW THAT IN THE PRESENT FACTS OF THE CASE, THE INTEREST EXPENSES INCURRED BY THE ASSESSEE HAVE TO BE TREATED AS BUSINESS EXPENSES AND NO DISALLOWANCE CAN BE MAD E UNDER SEC.14A. WE ACCORDINGLY DIRECT THE DELETION OF THE DISALLOWANCE MADE BY AO. THUS THIS GROUND OF ASSESSEE IS ALLOWED . 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. 7. FURTHER IN THE CASE OF JIVRAJ TEA LTD. VS. DCIT, CIRCLE-1, SURAT IN ITA NO.866/AHD/2012 AND OTHERS, THE CO-ORDINATE BEN CH HELD THAT DISALLOWANCE UNDER SECTION 14A CANNOT BE MORE THAN THE EXEMPT INCOME. THE RELEVANT PORTION OF THE DECISION IS REP RODUCED BELOW- ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 11 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE, THE ASSESSEE RECEIVED EXEMPT DIVIDEND INCOME OF RS.900/-. THE ASSESSING OFFICER WAS OF THE OPINION THAT EXPENDITU RE INCURRED FOR EARNING THE EXEMPT DIVIDEND INCOME WAS NOT ALLOWABL E TO THE ASSESSEE AND THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE TOWARDS THE EARNING OF THE EXEMPTED DIVIDEND INCOME, HE BY INVO KING THE PROVISIONS OF SECTION 14A COMPUTED EXPENDITURE ATTR IBUTABLE TO THE EARNING OF EXEMPT DIVIDEND INCOME UNDER RULE 8D OF THE INCOME-TAX RULES AND MADE DISALLOWANCE FOR INTEREST EXPENDITUR E OF RS.1,49,710/- AND ADMINISTRATIVE EXPENSES OF RS.12,750/-. THE ASS ESSEE UNSUCCESSFULLY APPEALED BEFORE THE CIT(A). THE CONT ENTION OF THE ASSESSEE IS THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHARE CAPITAL AND FREE RESERVES AS ON T HE DATE OF BALANCE- SHEET WAS RS.17,86,69,501/- AND THE INVESTMENTS AT THE END OF THE YEAR WAS AT RS.1,26,00,538/- ONLY. THEREFORE, IN VI EW OF THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF HI TACHI HOME AND LIFE SOLUTIONS (I) LTD. (SUPRA) AND TORRENT POWER LTD. ( SUPRA), NO DISALLOWANCE TOWARDS INTEREST EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME CAN BE MADE. REGARDING THE DISALLOWANCE OF A DMINISTRATIVE EXPENSES OF RS.12,750/-, WE FIND THAT THE CHANDIGAR H BENCH OF THE TRIBUNAL IN THE CASE OF A.C.I.T. VS. PUNJAB STATE C OOP & MARKETING FED. LTD. IN ITA NO. ITA NO.548/CHD/2011 FOR AY 2007- 08 HAS HELD THAT DISALLOWANCE U/S. 14A READ WITH RULE 8D CANNOT EXCE ED THE EXEMPT DIVIDEND INCOME. THEREFORE, WE RESTRICT THE DISALLO WANCE OF ADMINISTRATIVE EXPENSES TO RS.900/- ONLY, BEING THE EXEMPT DIVIDEND INCOME EARNED BY THE ASSESSEE. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 12 8. THE FACTS OF THE CASE OF ASSESSEE ARE WELL COVER ED BY THE ABOVE REFERRED JUDICIAL PRONOUNCEMENTS OF THE CO-OR DINATE BENCHES. SO MUCH SO THAT IT IS UNDOUBTED THAT ASSESSEE IS A DEALER IN SHARES, TRADING OF SHARES HAS BEEN SHOWN AS INCOME FROM BUS INESS, STOCK IN TRADE IN SHARES IS AT RS.41,16,992 INVESTMENT IN SH ARES NOT HELD FOR BUSINESS ARE ONLY RS.51,000, AND DIVIDEND INCOME EA RNED DURING THE YEAR IS RS.58,963. HOWEVER, ASSESSEE HAS MAINTAINED SAME BOOKS OF ACCOUNTS FOR HIS BUSINESS OF TRADING IN CLOTH, T RADING IN SHARES, COMMISSION INCOME, INCOME FROM REAL ESTATE AND EXEM PT INCOME. THERE IS NO BIFURCATION AVAILABLE ON RECORD TO SEGR EGATE THE ENTIRE EXPENSES INCURRED ON THE TYPE OF BUSINESS ACTIVITIE S CARRIED ON AND SOME ELEMENT OF COST FOR EARNING EXEMPT INCOME CANN OT BE IGNORED IN THESE CIRCUMSTANCES. THE ASSESSEE HAS DEMONSTRAT ED THAT IT HAS CARRIED OUT THE BUSINESS ACTIVITY OF SALE AND PURCH ASE OF SHARES. THE REVENUE ON THE OTHER HAND COULD NOT PLACE ANY CONTR ARY MATERIAL ON RECORD. THEREFORE, IN THE LIGHT OF DECISION OF THE CO-ORDINATE BENCHES WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS NOT J USTIFIED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. THE DIVIDEND SO EARNED IS INCIDENTAL TO NORMAL BUSINESS ACTIVITIES OF THE ASSESSEE. MOREOVER, THE AO HAS MADE DISALLOWANCE OF RS.4,04,2 04/- WHEREAS THE ASSESSEE HAS EARNED EXEMPT INCOME IN THE FORM O F DIVIDEND OF RS.58,963/-. EVEN ASSUMING THAT SOME EXPENDITURE IS REQUIRED TO BE DISALLOWED BUT SUCH DISALLOWANCE SHOULD NOT EXCEED THE QUANTUM OF EXEMPT INCOME. THEREFORE, IN VIEW OF THE DECISION O F THE CO-ORDINATE BENCHES WE HEREBY HOLD THAT THE ADDITION UNDER SECT ION 14A CANNOT BE MORE THAN THE EXEMPT INCOME AND SHOULD THEREFORE BE RESTRICTED TO RS.58,963/-. THIS GROUND OF THE ASSESSEE IS PART LY ALLOWED. ITA NO. 2660/AHD/2011 ASST. YEAR 2008-09 13 9. GROUND NO.2 HAS NOT BEEN PRESSED. HENCE THE SAME IS DISMISSED AS NOT PRESSED. 10. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24/09/2015 SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 24/09/2015 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 DY. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 14/9/2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 15/9/2015 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: 24/09/2015 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: