ADDL CIT RG 3(1), MUMBAI V. DERIVE TRADING P.LTD, MUMBAI

ITA 3101/MUM/2012

• Counselvise Citation: 310119914 RSA 2012
• Duration Of Justice: 2 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 07-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Assessee Lawyers: BEHARILAL
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

, , , ,, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D MUMBAI , , ! ' BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER . / ITA NO.3101/MUM/2012 #$ #$ #$ #$ %$ %$ %$ %$ / ASSESSMENT YEAR: 2008-09 DCIT CIRCLE 3(1), ROOM NO.607, 6 TH FLOOR, AAYKAR BHAVAN, M.K. MARG, MUMBAI-400020 VS. M/S DERIVE TRADING PVT. LTD. 903, DALAMAL HOUSE, NARIMAN POINT, MUMBAI- 400021 ( ! / REVENUE) ( &'() /RESPONDENT) P.A. NUMBER : AACCD5211D ! * ** * + + + + /REVENUE BY : SHRI AKHILENDRA YADAV &'() * ** * + + + + /RESPONDENT BY SHRI BEHARI LAL # * , / DATE OF HEARING : 29/12/2014 -.% * , / DATE OF PRONOUNCEMENT : 01/01/2015 O R D E R PER JOGINDER SINGH, JM: THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 29/02/2012 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 2 M/S DERIVE TRADING PVT. LTD . . I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AS APPRECIATE THAT THE DISALLOWANCE U/S. 14A, RULE 8D( 2)(II) IN RESPECT OF SPECULATION BUSINESS HAS BEEN SEPARATELY IDENTIFIED AND EXCLUDED, AND THE REMAINING INTEREST EXPENSES HAVE TO BE ALLOCATED IN PROPORTIONAL BASIS . THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO APPRECIATE THAT THE INTEREST COSTS FOR EARNING DIVI DENDS, BE IT INCIDENTAL OR NOT, HAVE TO BE DISALLOWED, AND THE SAME HAS BEEN COMPUTED AT RS.8,82,64,345/- AS AGAINST RS. NIL COMPUTED BY THE ASSESSEE. II. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AS FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S 14A, RULE 8D(2)(III) EQUIVALENT TO % OF THE AVERAGE INVESTM ENTS HAS BEEN RIGHTLY MADE BY THE ASSESSING OFFICER AT RS.42,78,828/- AS AGAINST THE ADHOC DISALLOWANCE OF RS.5,00,000/- OFFERED BY THE ASSESSEE WHICH HAS NOT BASIS. III. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AS FAILED TO APPRECIATE THAT THE ADHOC DISALLOWANCE OF RS.5 LAKHS MADE BY THE ASSESSEE IS WITHOUT ANY BASIS, AN D THAT THE APPLICATION OF RULE 8D IS JUSTIFIED GIVEN THE F ACTS AND CIRCUMSTANCES OF THE CASE. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO APPRECIATE THAT THE APPL ICATION OF RULE 8D IS MANDATORY WHEN THE A.O. IS NOT SATISFIED WITH THE CORRECTNESS OF DISALLOWANCE MADE BY THE ASSESSEE . 3 M/S DERIVE TRADING PVT. LTD . . IV. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) O N THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING O FFICER BE RESTORED. 2. AT THE TIME OF HEARING, SHRI AKHILENDRA YADAV, L D. COUNSEL FOR THE REVENUE DEFENDED THE CONCLUSION ARRIVED AT IN T HE ASSESSMENT ORDER BY SUBMITTING THAT THE LD. COMMISSIONER OF IN COME TAX (APPEALS) GRANTED RELIEF IGNORING THE FACTS AND ALS O WITHOUT ASSIGNING ANY VALID REASON. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE, SHRI BIHARI LAL, DEFENDED THE CONCLUS ION ARRIVED AT IN THE IMPUGNED ORDER BY FURTHER EXPLAINING THAT ISSUE IN HAND IS COVERED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE F OR ASSESSMENT YEAR 2009-10 BY THE ORDER OF THE TRIBUNAL DATED 10/ 12/2014 (ITA NO.878/MUM/2013). THIS FACTUAL MATRIX COULD NOT BE CONTROVERTED BY THE REVENUE WITH THE HELP OF ANY PO SITIVE MATERIAL/JUDICIAL PRONOUNCEMENTS. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE COMING TO ANY CONCLUSION, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE IMPUGNED ORDER FOR READY REFERENCE:- 5) GROUND NO.2(A) - DISALLOWANCE U/S 14A ;- (I) THE QUANTUM OF DISALLOWANCE U/S 14A R. W. RULE 8 0 IS TOTALLY ILLEGAL, UNJUSTIFIED AND UNWARRANTED ON THE FA CTS OF THE CASE. THERE IS NO NEXUS BETWEEN INVESTMENT AND EXPENDITURE INCURRED. THERE CANNOT BE A PRESUMPTION THAT CERTAIN EXPENDITURE IS BOUND TO BE INCURRED FOR EARNI NG EXEMPT INCOME, THE DISALLOWANCE U/S 14A REQUIRES FI NDING OF INCURRENCE OF EXPENDITURE FOR EARNING EXEMPT INC OME. THE 4 M/S DERIVE TRADING PVT. LTD . . CONTENTION OF THE AO THAT DIRECTLY OR INDIRECTLY SO ME EXPENDITURE ALWAYS INCURRED WHICH MUST BE DISALLOWED U/S 14A IS NOT ACCEPTABLE, RELIANCE IN SUPPORT ON THE S AME IS PLACED ON THE FOLLOWING DECISIONS: I) CIT VS. HERO CYCLE 3231TR 518 (P & H) II) CIT VS METAL MAN AUTO P. LTD. 336 ITR 434 (P & H) (II) IT IS FURTHER SUBMITTED THAT APPELLANT COMPANY IS ENGAGED IN THE BUSINESS OF DEALING IN FUTURE AND OPTIO N AND TRADING SHARES AND, COMMODITIES. THE SHARES WERE HELD AS 'STOCK IN TRADE' NOT AS AN 'INVESTMENT'. THE DETA ILS OF SHARE TRADING ACCOUNT ARE GIVEN IN SCHEDULE G OF PRO FIT & LOSS ACCOUNT, ON PERUSAL OF THE SAME YOUR HONOUR WO ULD APPRECIATE THAT APPELLANT'S ONLY BUSINESS IN TRADIN G LARGE SCALE AND ALL EXPENSE INCURRED DURING THE COURSE OF BUSINESS AND THEREFORE NO EXPENDITURE WAS INCURRED IN RELATIO N TO EARNING THE EXEMPTED INCOME. THE DIVIDEND INCOME IS ON LY INCIDENTAL TO THE TRADING ACTIVITY. A DEALER IN SHAR ES DOES NOT ACQUIRE A SHARE TO EARN DIVIDEND INCOME, THE DOMINAN T AND IMMEDIATE OBJECT BEING ACQUISITION OF SHARES IS TO EARN PROFIT ON SALE OF SHARES AT THE EARLIEST POINT WHICH IS CH ARGEABLE TO TAX AND HENCE THERE WAS NO QUESTION OF MAKING ANY DISALLOWANCE U/S.14A OF THE I. T. ACT. THE LEARNED AO HOWEVER REJECTED THE CONTENTION OF THE APPELLANT ON THE GROUND THAT THE PROVISIONS OF RULE 8D(2) & (III) DOES NOT MAKE ANY DISTINCTION AS TO WHETHER T HE INVESTMENT MADE IN SHARES/SECURITIES IS OF THE NATU RE OF 'STOCK IN TRADE' OR 'INVESTMENT'. HE ALSO RELIED UPO N THE DECISION OF HON'BLE ITAT SPECIAL BENCH (MUMBAI) IN THE CASE OF CAPITAL MANAGEMENT PVT. LTD. IN THIS CONTEXT WE SEEK TO RELY ON THE FOLLOWING TW O LATEST DECISION WHICH SUPPORTS THE VIEW THAT WHEN THE SHARE S WERE HELD AS SLACK IN TRADE DISALLOWANCE U/S 14A CAN NOT BE MADE: . 5 M/S DERIVE TRADING PVT. LTD . . I) YATISH TRADING CO. (P) LTD. VS. ACIT 50 DTR (MUMBA I) (TRIB)158 : (2011) 129 1TD 237 II) KERLA HIGH COURT IN CASE OF CIT VS. LEELA RAMCHANDRAN, ITA NO.1784 OF 2009 5.1) DISALLOWANCE OF INTEREST U/S 14A. AT RS. 8,82,64,3451- UNDER RULE 8D 2(II):- IN THIS CONTEXT IT IS SUBMITTED THAT APPELLANT MADE THE BORROWINGS DURING THE COURSE OF SHARE TRADING BUSINE SS CONSISTING OF FUTURE AND OPTION AND TRADING IN SHARE S AND COMMODITIES. THE INTEREST DEBITED TO THE PROFIT AND L OSS ACCOUNT IS RS. 11,34,67,539/-. THE INTEREST ON BORR OWED FUNDS USED FOR TRADING ACTIVITY IS AN ALLOWABLE EXPE NDITURE UNDER S. 36(1)(III) AND THE SAME CANNOT BE TREATED AS THE EXPENDITURE FOR EARNING THE DIVIDEND INCOME WHICH IS INCIDENTAL TO THE TRADING ACTIVITY. WHEN THE REAL P URPOSE AND INTENT TO USE THE BORROWED FUNDS WAS FOR TRADING ACTI VITY AND IF INCIDENTALLY RESULTED SOME DIVIDEND INCOME ON T HE SHARES PURCHASED FOR TRADING THEN THE SAME WOULD NO T CHANGE THE PURPOSE, NATURE OR CHARACTER OF THE EXPE NDITURE. THUS, WHEN THE SAID EXPENDITURE (INTEREST) INCURRED FOR TRADING ACTIVITY THEN THE SAME CANNOT BE SAID TO HA VE BEEN INCURRED FOR EARNING THE DIVIDEND INCOME. AS PER THE B ASIC PRINCIPLE OF TAXATION ONLY THE NET INCOME I.E., GRO SS INCOME MINUS EXPENDITURE INCURRED IS TAXED. ACCORDINGLY, TH E EXPENDITURE WHICH WAS INCURRED FOR EARNING THE TAXAB LE BUSINESS INCOME HAS TO BE ALLOWED AGAINST THE TAXABL E INCOME AND THE QUESTION OF APPORTIONMENT OF THE SAID EXPENDITURE DOES NOT ARISE. THE EXPRESSION 'IN RE/AT ICN TO' USED IN S. 14A MEANS DOMINANT AND IMMEDIATE CONNECTIO N OR NEXUS. THUS, IN ORDER TO DISALLOW THE EXPENDITURE U/S. 14A THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDIT URE INCURRED AND THE INCOME NOT FORMING THE PART OF THE TOTAL INCOME. DISALLOWANCE CANNOT BE MADE ON THE BASIS OF PRESUMPTION AND ESTIMATION. IF THE EXPENDITURE IS IN CURRED 6 M/S DERIVE TRADING PVT. LTD . . WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APPA RENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND TAXABLE INCOME THEN AS SUCH NO DISALLOWANCE CAN BE MADE U/S. 14A MERELY BECAUSE SO ME TAX EXEMPT INCOME IS RECEIVED INCIDENTALLY. IN CASE OF DEALER IN SHARES AND, SECURITIES THE PRIMARY OBJECT AND INT ENTION FOR ACQUISITION OF THE SHARES IS TO EARN PROFIT ON TRAD ING OF SHARES. THE INCOME ON SALE AND PURCHASE OF THE SHARE S OF A DEALER IS CHARGEABLE TO TAX. THEREFORE, IF THE SAID ACTIVITY OF PURCHASE AND SALE ALSO INCIDENTALLY YIELDS SOME DIVIDE ND INCOME ON THE SHARES HELD BY HIM AS STOCK-IN-TRADE S UCH DIVIDEND INCOME IS NOT INTENDED AT THE TIME OF PURCHA SE OF SUCH SHARES AND ACCORDINGLY THERE IS NO LIVE CONNECT ION BETWEEN THE EXPENDITURE INCURRED AND DIVIDEND INCOM E. RELINACE IN SUPPORT OF THE SAME IS PLACED ON THE FOL LOWING DECISION: A) KERLA HIGH COURT IN CASE OF CIT VS. LEELA RAMCHANDRAN, ITA NO.1784 OF 2009. B) YATISH TRADING CO. (P) LTD. VS. ACIT 50 DTR (MUMBAI)(TRIB)158: (2011) 1291TD 237. THE LEARNED AO A/SO ACCEPTED THE ABOVE FACT. IN THIS CONTEXT HIS FOLLOWING FINDING GIVEN IN PARA 5.4 OF THE ASSESSMENT ORDER IS VERY RELEVANT: 'THIS SHOWS THAT THE BORROWED FUNDS WERE UTILIZED IN THE FORM OF STOCK IN TRADE FOR THE PURPOSE OF SPECULATIO N BUSINESS OF THE ASSESSEE. HENCE THE BORROWED FUNDS HA S DIRECT NEXUS WITH SPECULATION BUSINESS, THEREFORE, THE INTEREST PAID ON BORROWED FUNDS DIRECTLY RELATES TO TH E SPECULATION BUSINESS. IN VIEW OF THE ABOVE THE LEARNED AO IS NOT JUSTIFIED IN MAKING DISALLOWANCE OF INTEREST OF RS.8,82,64,345/- U/S 14A R.W. RULE 8D (2)(II). 7 M/S DERIVE TRADING PVT. LTD . . 2.2. WE ARE ALSO REPRODUCING HEREUNDER THE RELEVANT PORTION FROM THE AFORESAID ORDER OF THE TRIBUNAL DATED 10/12/201 4 FOR READY REFERENCE:- 4. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. DR HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CA SE OF D.H. SECURITIES LTD. VS. DCIT (41 TAXMANN.COM 352)AND SU BMITTED THAT IT HAS BEEN HELD THAT SECTION 14A IS APPLICABL E EVEN IN THE CASE OF TRADING IN SHARES SO FAR AS THE DIVIDEND IN COME FROM THE SHARES HELD AS STOCK IN TRADE IS CONCERNED. 5. ON THE OTHER HAND, THE LD. AUTHORIZED REPRESENTA TIVE HAS SUBMITTED THAT IN THE LATEST DECISION DATED 27.08.2 014 OF THIS TRIBUNAL IN THE CASE OF RAMKUMAR VENUGOPAL INVESTME NTS PVT. LTD. VS. ACIT IN ITA NO. 6324//MUM2012, THE TRIBUNA L AFTER CONSIDERING THE THIRD MEMBER DECISION IN THE CASE O F D.H. SECURITIES LTD. VS. DCIT, HAS HELD THAT THE DISALLO WANCE SHOULD BE RESTRICTED TO 5% OF THE AMOUNT ARRIVED UN DER RULE 8D(2)(II)(III) AND 10% OF THE AMOUNT CALCULATED BY THE ASSESSING OFFICER UNDER RULE 8D(2 )(III). 6. HAVING HEARD THE RIVAL SUBMISSIONS AS WELL AS CA REFUL PERUSAL OF RELEVANT MATERIAL ON RECORD, WE ARE OF T HE VIEW THAT WHEN THE ASSESSEE IS IN THE BUSINESS OF SHARE TRADI NG AS WELL AS FUTURE & OPTION THEN THE EXPENDITURE INCURRED BY THE 8 M/S DERIVE TRADING PVT. LTD . . ASSESSEE IN THE COURSE OF BUSINESS ACTIVITY OF TRAD ING IN SHARES WOULD BE CONSIDERED EXCLUSIVELY FOR BUSINESS ACTIVI TY AND THE SAME CANNOT BE APPORTIONED BEING AN EXPENDITURE INC URRED FOR EARNING THE DIVIDEND INCOME. THE TRIBUNAL IN THE CA SE OF RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ACIT ( SUPRA) AFTER CONSIDERING THE THIRD MEMBER DECISION IN THE CASE OF D.H. SECURITIES VS. DCIT (SUPRA) AS WELL AS THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCL LTD. VS. JC IT HELD IN PARA 3 TO 5 AS UNDER:- 3. WE MAY OBSERVE THAT THE ISSUE RELATING TO THE DISALLOWANCE UNDER SECTION 14A IN RELATION TO SHARES HELD IN STOCK IN TRADE WAS DISCUSSED BY THE COORDINATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF D.H. SECURITIES (P) LTD. VS. DCIT (2014) 41 TAXMANN.COM 352 AND THE MATTER WAS REFERRED TO THE THIRD MEMBER. THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. J CIT (2012) 250 CTR (KAR) 291 WAS REFERRED TO AND DISCUSSE D BEFORE THE TRIBUNAL AND IT HAS BEEN HELD THAT IN VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM) AND THE HONBLE KOLKATA HIGH COURT IN THE CASE OF DHANUKA & SONS VS. CIT [2011] 339 ITR 319, SECTION 14A IS ATTRACTED EVEN IN THE CASE OF DIVIDEND I NCOME FROM SHARES HELD AS STOCK IN TRADE. WHILE HOLDING SO , IT HAS BEEN OBSERVED BY THE TRIBUNAL THAT THE INVESTMENT COMPONENT OR ELEMENT IS IN BUILT IN THE EXPENDITURE INCURRED FOR PURCHASE AND SALE OF SHARES EVEN HELD AS STOCK IN TRADE FOR BUSINESS PURPOSES. THE EXPENDITURE ATTRIBUTABLE TOWARDS EARNING OF EXEMPT INCOME, IMMATERIAL OF THE FACT WH ETHER SUCH EXEMPT INCOME WAS ACTUALLY EARNED OR NOT, IS EMBEDDED IN THE EXPENDITURE INCURRED FOR SHARE TRADING ACTIVITY AND IS LIABLE TO BE APPORTIONED IN THE LIGHT OF THE PROVISIONS OF SECTION 14A OF THE ACT. THE DECISION O F THE HONBLE KARNATAKA HIGH COURT RELIED UPON BY THE ASSE SSEE HAS BEEN DULY DISCUSSED AND DISTINGUISHED IN THE THIRD MEMBER CASE OF D.H. SECURITIES (P) LTD. VS. DCIT(S UPRA). 9 M/S DERIVE TRADING PVT. LTD . . HOWEVER, IT HAS BEEN FURTHER OBSERVED IN THE SAID THI RD MEMBER DECISION OF THE TRIBUNAL THAT THE SHARES WHIC H YIELD TAX EXEMPT DIVIDEND INCOME, INTEREST QUA WHICH IS TO BE DISALLOWED, WHEN HELD AS STOCK IN TRADE, YIELD TAXABL E INCOME ALSO. IN FACT, THE SHARES ARE BOUGHT AND HELD PRIMARILY FOR THE PURPOSE OF EARNING INCOME FROM TR ADING IN SHARES. HENCE, WHILE CALCULATING THE INTEREST DISAL LOWANCE UNDER RULE 8D(2)(II), THE DISALLOWANCE OF THE ENTIRE AMOUNT IS NOT JUSTIFIED. THE TRIBUNAL THEREFORE HELD THAT THE AMOUNT CALCULATED AS PER RULE 8D(2)(II) WOULD NEED TO BE SCAL ED DOWN AS THE INCOME EARNED FROM SHARE TRADING IS OFFER ED FOR TAXATION. THE TRIBUNAL OBSERVED THAT WHILE SCALING DO WN THE SAID AMOUNT NO HARD AND FAST RULE CAN BE APPLIED AND TH E SAME CAN BE DETERMINED ONLY ON ADHOC BASIS. THE TRIBU NAL ALSO OBSERVED THAT WHERE THE SHARE TRADING IS THE DO MINANT OBJECT OF PURCHASE AND SALE OF SHARES, THE TURNOVER OF THE YEAR WOULD BE VERY HIGH IN COMPARISON TO THE AVAILAB LE SHARE HOLDING BECAUSE OF THE CONTINUOUS ACTIVITY OF SALE AND PURCHASE OF SHARES. HENCE, MECHANICAL APPLICATION O F RULE 8D(2)(II) WOULD BE WRONG. THE TRIBUNAL, ACCORDINGLY, PURPOSED TO RESTRICT THE DISALLOWANCE TO 20% OF THE AMOUNT IN RELATION TO INTEREST DISALLOWANCE UNDER RULE 8D(2 )(II), I.E., IN RELATION TO INDIRECT EXPENSES. THE TRIBUNAL FURT HER HELD THAT SO FAR THE DIRECT EXPENSES ARE CONCERNED, NO S UCH DISALLOWANCE U/S.14A WAS ATTRACTED BECAUSE OF THE FA CT THAT NO DIRECT EXPENDITURE IS INCURRED BY THE ASSESS EE FOR EARNING OF DIVIDEND INCOME WHEN THE PURPOSE OF SALE AN D 10 M/S DERIVE TRADING PVT. LTD . . PURCHASE OF SHARES IS TRADING. THE ALMOST SIMILAR V IEW HAD BEEN MADE BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DAMANI ESTATES & FINANCE PVT. LTD. (IN ITA NO. 3029/MUM/2012 DATED 17.07.2013). 4. IN OUR VIEW, TAKING INTO CONSIDERATION THE FACT THAT THE PRIMARY OBJECT OF HOLDING THE SHARES IS TRADING AND THE DIVIDEND INCOME IS INCIDENTAL AND FURTHER THAT DUE TO CONTINUOUS ACTIVITY OF SALE AND PURCHASE OF THE SHAR ES, THE ANNUAL TURNOVER WOULD BE MUCH HIGHER IN CASE OF SHAR E TRADING AS COMPARED TO THE INVESTMENTS MADE FOR THE PURPOSE OF EARNING OF EXEMPT INCOME, EVEN THE DISAL LOWANCE @ 20% OF THE AMOUNT CALCULATED UNDER RULE 8D(2)(II) W ILL BE ON HIGHER SIDE. WE FEEL THAT IT WILL BE APPROPRIATE IF THE SAID DISALLOWANCE IS RESTRICTED TO 5% OF THE AMOUNT SO A RRIVED. 5. SO FAR THE DISALLOWANCE UNDER RULE 8D(2)(III) IS CONCERNED, SINCE IN THE SHARE TRADING ACTIVITY, INVESTMENT IS NOT MADE FOR THE PURPOSE OF EARNING EXEMPT INCOME, HENCE, TH E MANAGERIAL/ADMINISTRATIVE EXPENSES IN RELATION TO D IVIDEND INCOME CALCULATED UNDER RULE 8D(2)(III) ARE ALSO REQU IRED TO BE SCALED DOWN WHICH WE THINK THAT SHOULD BE RESTRICT ED TO 10% OF THE AMOUNT SO CALCULATED UNDER RULE 8D(2)(III) . IN VIEW OF OUR ABOVE OBSERVATIONS, THE DISALLOWANCE U/ S.14A READ WITH RULE 8D IS, ACCORDINGLY, RESTRICTED TO 5% O F THE AMOUNT ARRIVED AT UNDER RULE 8D(2)(II) AND 10% OF THE AMOUNT CALCULATED BY THE A.O. UNDER RULE 8D(2)(III). 11 M/S DERIVE TRADING PVT. LTD . . 7. AS REGARDS THE VIEW OF THE TRIBUNAL THAT THE EXP ENDITURE ATTRIBUTABLE TOWARDS THE EARNING OF THE EXEMPT INCO ME DIRECTLY RELATED TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AS THE SAME CANNOT BE CLAIMED AGAINST THE TAXABLE INCOME OF THE ASSESSEE. WE DO AGREE AND CONCUR WITH THE SAID VIEW. THEREFORE, THE DISALLOWANCE COMPUTED UNDER RULE 8D OF THE INCOME T AX RULES CANNOT BE MORE THAN THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR THE DIVIDEND INCOME EXCLUDING THE ACTI VITY OF SHARE TRADING WHICH IS THE BUSINESS ACTIVITY OF THE ASSES SEE. EVEN THE COMPUTATION OF DISALLOWANCE ARRIVED AS PER THE RULE 8D SHOULD BE RESTRICTED ONLY TO THE EXTENT OF ACTUAL EXPENDITURE OR TO THE EXTENT OF THE EXPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE AC TIVITY OF THE DIVIDEND INCOME EXCLUDING THE BUSINESS ACTIVITY OF SHARE TRADING. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE- COMPUTE THE DISALLOWANCE U/S 14A WITH THE RIDER TO THE ACTUAL E XPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE RECEIPT OR EARNING OF THE DIVIDEND INCOME EXCLUDING THE EXPENDITURE RELATED TO BUSINES S ACTIVITY OF SHARE TRADING. 2.3. IN VIEW OF THE ABOVE, IF THE CONCLUSION ARRIVE D AT BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE ITSELF FOR ASS ESSMENT YEAR 2009-10 IS ANALYZED WITH THE FACTS OF THE PRESENT A SSESSMENT YEAR, UNCOTROVERTEDLY THE DISALLOWANCE COMPUTED UND ER RULE 8D OF THE INCOME TAX RULES CANNOT BE MORE THAN THE ACT UAL EXPENDITURE INCURRED BY THE ASSESSEE FOR THE DIVIDE ND INCOME EXCLUDING THE ACTIVITY OF SHARE TRADING WHICH IS TH E BUSINESS 12 M/S DERIVE TRADING PVT. LTD . . ACTIVITY OF THE ASSESSEE. THE COMPUTATION OF DISA LLOWANCE ARRIVED AT AS PER RULE 8D OF THE RULES SHOULD BE RE STRICTED ONLY TO THE EXTENT OF ACTUAL EXPENDITURE OR TO THE EXTEN T OF THE EXPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE ACTIVI TY OF THE DIVIDEND INCOME EXCLUDING THE BUSINESS ACTIVITY OF SHARE TRADING. THUS, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE DISALLOWANCE U/S 14A WITH THE RIDER TO THE ACTUAL E XPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE RECEIPT OR EARNING OF DIVIDEND INCOME EXCLUDING THE EXPENDITURE RELATED TO BUSINES S ACTIVITY OF SHARE TRADING. THE APPEAL OF THE REVENUE IS DISPOSED OF IN TERMS I NDICATED HEREINABOVE. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 29/12/2014. SD/- SD/- (RAJENDRA) (JOGINDER SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED - 01/01/2015 F{X~{T? P.S/. # . . / / / / * ** * &,0 &,0 &,0 &,0 10%, 10%, 10%, 10%, / COPY OF THE ORDER FORWARDED TO : 1. () / THE APPELLANT 2. &'() / THE RESPONDENT. 3. 2 ( ) / THE CIT(A)- 4. 2 / CIT 13 M/S DERIVE TRADING PVT. LTD . . 5. 034 &,# , , / DR, ITAT, MUMBAI 6. 4$ 5 / GUARD FILE. /# /# /# /# / BY ORDER, '0, &, //TRUE COPY// 6 66 6 / 7 7 7 7 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI