DCIT, New Delhi V. M/s Jalco Financial Services Pvt. Ltd., New Delhi

ITA 2695/DEL/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2719 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 25-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MADHUKAR KUMAR BHAG
• Keywords: Earning of tax free income
• Section: 14A; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA NO. 2695/DEL/2011 A.YR. 2008-09 DCIT CIRCLE 4(1), VS. M/S JALCO FINANCIAL SERVIC ES PVT. LTD. NEW DELHI. G-28, GROUND FLOOR, KALKAJI, NEW DELHI. PAN: AAACJ 2791 E C.O. NO. 410/DEL/2012 ( IN ITA NO. 2695/DEL/2011) A.YR. 2008-09 M/S JALCO FINANCIAL SERVICES PVT. LTD. VS DCIT CI RCLE 4(1), G-28, GROUND FLOOR, KALKAJI, NEW DELHI. NEW DELHI. ( APPELLANT ) ( RESPONDENT ) DEPARTMENT BY : SHRI MADHUKAR KUMAR BHAG SR. DR ASSESSEE BY : SHRI RAJESH DUREJA ADV. O R D E R PER R.P. TOLANI, J.M: : 1. THIS IS REVENUES APPEAL AND ASSESSEES CROSS-O BJECTIONS AGAINST CIT(A)S ORDER DATED 1-3-2011 RELATING TO A.Y. 2008 -09. THE ISSUE IN BOTH THE APPEALS CONCERNS SECTION 14A READ WITH RULE 8D. RESPECTIVE EFFECTIVE GROUNDS ARE AS UNDER: REVENUES APPEAL (ITA NO. 2695/DEL/11): 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(APPEALS) HAS ERRED IN DELETING THE RESTRICTING THE ADDITION U/S 14A OF THE I.T. ACT TO RS. 74,57,3 47/- AS AGAINST RS. 1,48,07,132/- MADE BY AO. 2 2.1. THE LD. CIT(A) IGNORED THE FINDING RECORDED BY THE AO AND THE FACT THAT THE ADDITION WAS CORRECTLY MADE B Y THE AO IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF THE I. T. RULES, 1962. ASSESSEES CROSS OBJECTIONS: THAT HAVING REGARDS TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 74,57,347/- OUT OF ADDITION OF RS. 148,07,132/- MAD E BY LD. AO U/S 14A READ WITH RULE 8D. 2. ASSESSEE FILED ITS RETURN OF INCOME WHICH WAS TA KEN UP FOR SCRUTINY U/S 143(3). THE ASSESSEE IS CLAIMED TO BE ENGAGED IN TH E BUSINESS OF SHARE TRADING AND THE DIVIDEND INCOME IS CLAIMED TO BE IN CIDENTAL TO BUSINESS OF SHARE TRADING. THUS, THE ENTIRE EXPENDITURE DEBITED TO THE P&L A/C WAS CLAIMED TO BE FOR THE PURPOSE OF SHARE TRADING AND NO PART OF IT WAS ATTRIBUTABLE TO EARNING THE TAX FREE DIVIDEND INCOM E. ASSESSING OFFICER WAS NOT SATISFIED AND MADE A DISALLOWANCE OF RS. 148,07 ,132/- U/S 14A READ WITH RULE 8D OF THE INCOME-TAX ACT. 2.1. AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL WHE RE THE CIT(A) GAVE PART RELIEF BY WORKING OUT THE DISALLOWANCE U/S 14 A WOULD BE RS. 74,57,347/-, THUS GIVING RELIEF OF RS. 73,49,785/- (RS. 1,48,07,132/- MINUS RS. 74,57,347/-). THE REVENUE IS IN APPEAL BEFORE US AGAINST THE RELIEF GIVEN 3 BY THE LD. CIT(A) AND THE ASSESSEE HAS FILED CROSS OBJECTIONS AGAINST PART SUSTENANCE OF DISALLOWANCE. 3. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT: (I) BEFORE INVOKING RULE 8D THE ASSESSING OFFICER FAILE D TO RECORD ANY COGENT REASONS FOR INVOKING RULE 8D. IT HAS BEEN M ERELY STATED THAT SEPARATE BOOKS OF A/C ARE NOT MAINTAINED IN RE SPECT OF INVESTMENT IN SHARES AND OTHER ACTIVITIES. IT IS CL AIMED THAT ASSESSEE DEALS ONLY IN TRADING OF SHARES AND NO OTHER ACTIVI TY. (II) IT HAS BEEN ASSUMED BY ASSESSING OFFICER THAT ASSE SSEE COMPANY MUST HAVE INCURRED CERTAIN EXPENSES FOR EARNING THE TAX FREE DIVIDEND INCOME. HOWEVER, NOT A SINGLE EXPENDITURE HAS BEEN LINKED AS INCURRED FOR EARNING OF DIVIDEND INCOME. SECTION 14A CANNOT BE APPLIED UNLESS THERE IS CO RELATION BETWE EN THE EXPENDITURE AND DIVIDEND INCOME. (III) UNLESS THE ASSESSEES ACTIVITIES ARE PROPERLY VERIF IED AND EXAMINED AS TO THE NATURE OF EXPENDITURE AND THE NATURE OF A CTIVITIES, RULE 8D CANNOT BE APPLIED AUTOMATICALLY. RELIANCE IS PLACED ON FOLLOWING JUDGMENTS: (I) CIT VS HERO CYCLES 323 ITR 158 (P & H) - THE HON'BLE HC HAS HELD THAT DISALLOWANCE UNDER SECTION 14A COU LD NOT STAND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED. 4 (II) CIT VS WALFORT STOCK & SHARE BROKERS [2,010] 326 ITR 1 (SC) - THE HON'BLE APEX COURT IN THIS CASE HAS HE LD THAT FOR ATTRACTING S. 14A, THERE HAS TO BE A PROXIMATE CAUS E FOR DISALLOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TA X EXEMPT INCOME. (III) DCIT VS JINDAL PHOTO LTD. (ITA NO. 4539IDE1.L 2010) - IN THIS CASE IT HAS BEEN HELD BY THE HON'BLE DELHI ITAT THAT FOR SECTION 14A DISALLOWANCE, EVEN UNDER RULE 8D, ONUS IS ON AO TO SHOW NEXUS BETWEEN THE EXPENDITURE AND TAX-FREE INCOME. (IV) ACIT VS SIL INVESTMENTS LTD. [2012] 148 TTJ 21 3 (DEL.) - IN THIS CASE IT HAS BEEN HELD BY THE HON'BLE DELH I ITA T THAT WITHOUT ESTABLISHING NEXUS BETWEEN EXPENDITURE AND EXEMPT INCOME, DISALLOWANCE OF EXPENSES UNDER SECTION 14A COULD NOT BE DONE BY MERELY APPLYING RULE 8D(2)(III). (V) JUSTICE SAM P BHARUCHA VS ADDL. CIT [2012] 53 S OT 192 (MUM.) - IN THIS CASE IT HAS BEEN HELD BY THE H ON'BLE ITA T THAT PRINCIPLE OF APPORTIONMENT EMBEDDED IN SECTION 14A HAD NO APPLICATION WHERE NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME AND ENTIRE EXPENDITURE WAS INCURRED T O EARN ONLY PROFESSIONAL INCOME. 3.1. RELIANCE IS ALSO PLACED ON VARIOUS CASE LAWS W HICH ARE MENTIONED IN THE WRITTEN SUBMISSIONS. MAIN EMPHASIS IS PLACED BY THE ASSESSEE ON THE JUDGMENT OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CCI LTD. VS. JCIT (2012) 206 TAXMAN 263 (KAR.) CANNOT BE CONSIDERED A S THE ASSESSEE COULD NOT DEMONSTRATE AS TO WHICH ASSESSMENT YEAR THE JUD GMENT PERTAINS. 3.2. RELIANCE IS PLACED ON ITAT MUMBAI BENCH ORDER DATED 29-8-2012 IN THE CASE OF ESQUIRE PVT. LTD. VS. DCIT (MUM. ) (ITA NO. 5688/MUM/2011) FOR A.Y. 2008-09, HOLDING AS UNDER: 16. FURTHER OUT OF THE TOTAL AMOUNT OF 'INTEREST CLAIMED WHICH WERE SHOWN INTEREST AT ~2,91,38,496/- , THERE SEEMS TO BE NO EXAMINATION OF INTEREST CLAIMS 5 AND TO WHOM IT IS PAID. IT IS PERTINENT TO NOTE THA T THE INTEREST ON BORROWED FUNDS USED FOR TRADING ACTIVIT Y IS AN ALLOWABLE EXPENDITURE UNDER SECTION 36(1)(III) A ND THE SAME CANNOT BE TREATED AS EXPENDITURE FOR EARNING THE DIVIDEND INCOME. FURTHER THERE IS NOTHI NG ON RECORD TO INDICATE WHETHER THE DIVIDEND INCOME I S INCIDENTAL TO THE TRADING ACTIVITY OR INVESTMENT ACTIVITY. IF THE DIVIDEND INCOME IS INCIDENTAL TO TRADING ACTIVITY, FOLLOWING THE PRINCIPLES LAID DOW N BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD VS. JCIT 206 TAXMAN 563, THE EXPENDITURE INCURRED IN ACQUIRING SHARES CANNOT BE APPORTIONED TO' THE DIVIDEND FOR MAKING DISALLOWANCE UNDER SECTION 14A. AS HELD BY THE HON'BLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. SMT. LEENA CHANDRAN 339 ITR 296 (KER.) INTEREST PAID ON FUNDS BORROWED FOR ACQUISITION OF SHARES IN THE FORM OF INVESTMENT WOULD ONLY ATTRACT DISALLOWANCE UNDER SECTION 14A. SINCE THE VERY BASIS FOR AO'S WORKING OF DISALLOWAN CE IS NOT CORRECT AND SINCE HE HAS NOT EXAMINED THE ACCOUNTS OF ASSESSEE AS REQUIRED UNDER SECTION 14A(2), WE IN THE INTEREST OF JUSTICE, RESTORE THE MATTER TO THE FILE OF AO TO EXAMINE THE NATURE OF INTEREST EXPENDITURE, THE AMOUNT OF DIVIDEND EARNED AND THE NATURE ON WHICH IT IS EARNED I.E. WHETHER O N INVESTMENT SHOWN IN THE BOOKS OR ON TRADING SHARES INCIDENTAL TO THE BUSINESS ACTIVITY AND ALSO TO EXA MINE WHETHER ANY EXPENDITURE CAN BE ATTRIBUTED TO THE EARNING OF EXEMPT INCOME. AO IS ALSO DIRECTED TO KEEP IN MIND THE JUDICIAL PRINCIPLES AVAILABLE ON T HE ISSUE WHILE ARRIVING AT THE DISALLOWANCE UNDER SECTION 14A CONSISTENT WITH FACTS AND LAW, NEEDLESS TO STATE THAT ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO EXPLAIN. SINCE ASSESSEE ALSO GAVE SOME WORKING BEFORE US WHICH WAS EXTRACTED ABOVE IN ORDE R, AO IS ALSO DIRECTED TO KEEP IN MIND THE ABOVE WORKI NG AND DETERMINE THE DISALLOWANCES UNDER SECTION 14A ACCORDINGLY. IN CASE ANY AMOUNT IS DISALLOWED UNDER SECTION 14A, WE MAKE IT CLEAR THAT THE AMOUNT ALSO HAS TO BE DISALLOWED UNDER THE PROVISIONS OF SECTION 6 11SJB. WITH THESE DIRECTIONS, THE ISSUE IN GROUND N OS. 3 & 4 IS RESTORED TO THE FILE OF AO FOR FRESH ADJUDICATION. ACCORDINGLY GROUNDS CONSIDERED ALLOWE D FOR STATISTICAL PURPOSES. 3.3. FURTHER RELIANCE IS PLACED ON KOLKATA BENCH OF THE ITAT IN THE CASE OF DCIT VS. GULSHAN INVESTMENT CO. LTD. (2013) 142 ITR 89 (KOL.), WHEREIN THE ITAT AFTER CONSIDERING THE FACTS AND CI RCUMSTANCES OF THE CASE UPHELD THE SIMILAR VIEW BY FOLLOWING OBSERVATIONS : 9. SO FAR AS THE CASE BEFORE US IS CONCERNED, AS W ILL BE CLEARLY DISCERNIBLE FROM THE OBSERVATIONS OF THE LE ARNED CIT(A) EXTRACTED EARLIER IN THIS ORDER, LEARNED CIT(A) HAS UPHELD DISALLOWANCE UNDER SECTION 14A IN RESPECT OF EVEN I NDIRECT EXPENDITURE, BUT HE HAS MERELY HELD THAT THE PROVIS IONS OF RULE 8D DO NOT COME INTO PLAY IN THIS CASE AS THE SHARES ARE NOT HELD AS INVESTMENT. AS LEARNED COUNSEL RIGHTLY CONTEND S THE PROVISIONS OF RULE 8D CAN NEVER BE APPLIED IN A CAS E WHERE EXEMPT INCOME YIELD ASSETS ARE NOT HELD AS INVESTME NTS, AND THAT THE RELATED ASSETS I.E. SHARES, HAVING BEEN HE LD AS STOCK IN TRADE ALL ALONG, THERE IS NO OCCASION TO INVOKE RUL E 8D. THERE IS NO INFIRMITY IN THIS APPROACH, NOR DO REVENUE AUTHO RITIES STAND TO LOSE ANYTHING BY THIS APPROACH CANVASSED BY THE ASSESSEE. QUITE TO THE CONTRARY OF WHAT LEARNED DEPARTMENTAL REPRESENTATIVE PERCEIVES TO BE ADVANTAGEOUS TO THE ASSESSING OFFICER, IN CASE THE APPLICATION OF RULE 8D WAS TO BE UPHELD, THERE WOULD HAVE BEEN NO DISALLOWANCE AT ALL SINCE NOT ONLY THAT NO INVESTMENTS WERE HELD BY THE ASSESSEE, ADMI TTEDLY THERE ARE NO DIRECT EXPENSES ARE INCURRED ON EARNING OF T HE DIVIDEND AND AS SUCH IN ALL THE THREE SEGMENTS OF DISALLOWAN CE UNDER RULE 8D(2) I.E. 8D(2)(I),(II) AND (III) THERE WILL BE ZERO DISALLOWANCE. AS AGAINST THIS ZERO DISALLOWANCE UND ER RULE 8D, THE CIT(A) HAS UPHELD DISALLOWANCE TO THE EXTENT OF RS. 1,57,527/- IN RESPECT OF INDIRECT EXPENSES ATTRIBUT ED TO THE EARNING OF DIVIDEND, AND IT HAS EVEN THE CASE OF RE VENUE THAT THIS DISALLOWANCE FOR INDIRECT EXPENSES IS UNFAIR O R UNREASONABLE. 7 10. IN VIEW OF THE ABOVE DISCUSSIONS, WHILE UPHOLD THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A), WE AL SO MAKE IT CLEAR THAT IN OUR HUMBLE UNDERSTANDING, THE PROVISI ONS OF SECTION 14A ARE INDEED ATTRACTED WHETHER OR NOT THE SHARES ARE HELD AS STOCK IN TRADE OR AS INVESTMENTS, EVEN THOU GH THE PROVISIONS OF RULE 8D(2)(II) AND (III) CANNOT BE IN VOKED IN SUCH A CASE AND EVEN THOUGH THE PROVISIONS OF RULE 8D(I) ARE MUCH NARROWER IN SCOPE THAN THE SCOPE OF SECTION 14A SIM PLICITOR, WITH THESE OBSERVATIONS, WE CONFIRM THE CONCLUSION S OF THE LEARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATT ER. 3.4. LD. COUNSEL FOR THE ASSESSEE CONCEDES THAT THE ITAT JUDGMENT IN THE CASE OF AMERICAN EXPRESS BANK IS AGAINST ASSESSEE B UT THE SAME HAS BEEN DISTINGUISHED SUBSEQUENTLY. IN OTHER WORDS, JUDGMEN T IS FAVOURABLE TO ASSESSEE FURTHER, THERE IS NO VOLUNTARY DISALLOWANC E U/S 14A OFFERED BY THE ASSESSEE IN THE RETURN OF INCOME AS IT BELIEVED THA T BEING IN SHARE TRADING BUSINESS EXCLUSIVELY, THE ENTIRE EXPENDITURE IS REL ATABLE TO SHARE TRADING BUSINESS I.E. EARNING PROFIT OR LOSS THERE FROM. DI VIDEND IS ONLY AN INCIDENTAL ACTIVITY, BY WHICH IT MAY BE RECEIVED OR NOT AND ON THIS PROPOSITION NO PART OF THE EXPENDITURE DEBITED BY ASSESSEE IN P&L A/C I S LIABLE FOR DISALLOWANCE U/S 14A READ WITH RULE 8D. 5. LD. DR, ON THE OTHER HAND, STRONGLY RELIED ON TH E ORDER OF ASSESSING OFFICER. 6. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON MUMBAI BENCH OF THE ITAT ORDER IN THE CASE OF ESQUI RE PVT. LTD. SUPRA) IN WHICH THOUGH CERTAIN DETAILS WERE FILED STILL THE B ENCH RESTORED THE MATER BACK TO THE FILE OF ASSESSING OFFICER AS THE WORKIN G COULD NOT BE VERIFIED BY THE BENCH AND DIRECTED THE ASSESSING OFFICER TO DEC IDE THE ISSUE AFRESH. 8 6.1. IN THIS CASE WE FIND THAT ASSESSEE HAS NOT FIL ED ANY PAPER BOOK OR THE STATEMENTS OF ACCOUNTS. IN THESE CIRCUMSTANCES, IT IS NOT POSSIBLE FOR US TO FACTUALLY VERIFY THE VERACITY OF THE CLAIM AND ASCE RTAINMENT OF ASSESSEES BUSINESS, THE AMOUNT OF STOCK IN TRADE, INVESTMENT ETC. AND THE SATISFACTION ABOUT APPLICABILITY OF RULE 8D. IN VIEW OF THESE FA CTS AND CIRCUMSTANCES, FOLLOWING THE ITAT MUMBAI BENCH ORDER IN THE CASE O F ESQUIRE PVT. LTD. (SUPRA), WE SET ASIDE THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION IN ACCORDANCE WITH LAW, PROVISIONS A ND THE AVAILABLE CASE LAWS, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF B EING HEARD. 7. IN THE RESULT, REVENUES APPEAL AND ASSESSEES C ROSS OBJECTION ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 31-07-2013. SD/- SD/- ( SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 31-07-2013. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR