KSM SECURITIES & FINANCE P.LTD, MUMBAI V. DCIT 1(2), MUMBAI

ITA 3632/MUM/2013

• Counselvise Citation: 363219914 RSA 2013
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 08-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAGHUVEER MADNAPPA
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

, ' INCOME TAX APPELLATE TRIBUNAL,MUMBAI - A,BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & SANJAY GARG,JUDICIAL MEMBER /. ITA NO.36 32 /MUM/201 3 , / ASSESSMENT YEAR - 20 0 8 - 0 9 M/S. KSM SECURITIES & FINANCE PVT. LTD. NATIONAL INSURANCE BLDG., 2 ND FLOOR 204, D.N. ROAD, FORT MUMBAI - 400 001. PAN:AAACK 4080 F VS DY. CIT, ROOM NO.535, 5 TH FLOOR AAYAKAR BHAVAN, M.K. ROAD \ MUMBAI - 400 020. /ASSESSEE BY :SH RI K. GOPAL / REVENUE BY : SH RI RAGHUVEER MADNAPPA / DATE OF HEARING : 0 9 - 0 9 - 2015 / DATE OF PRONOUNCEMENT : 11 - 09 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLEN GING THE ORDER,DATED 1 8 .12.201 2 ,OF THE CIT(A ) - 7,MUMBAI THE ASSESS EE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER U/S 14A OF RS.11,04,298/ - . YOUR APPELLANTS SUBMIT THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR AND THE SAID ADDITION BE DELETED. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANTS SUBMIT THAT THE DISALLOWANCE U/S.14A IS EXCESSIVE AND OUGHT TO BE REDUCED SUBSTANTIALLY. 2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER IN RESPECT OF SALARY PAID TO MRS . BINA K. MEHTA, SENIOR FINANCE EXECUTIVE OF RS.1,01,800/ - . YOUR APPELLANTS SUBMIT THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ADDITION IS NOT WARRANTED AND OUGHT TO BE DELETED. 3) YOUR APPELLANTS FURTHER RESERVE THE RIGHTS TO ADD, AMEND OR ALTER THE AFORESAID GROUNDS OF APPEAL AS THEY MAY THINK FIT BY THEMSELVES OR BY THEIR REPRESENTATIVES. ASSESSEE - COMPANY,ENGAGED IN THE BUSINESS OF FINANCING,INVESTMENT,CONSULTANCY AND SHARES RELATED ACTIVITIES,FILED ITS RETURN OF INCOME ON 30.092008,DECLARING LOSS OF RS.27.24 LAKHS.COMPLETING THE ASSESSMENT ON 27.12.2010,U/S.143(3)OF THE ACT,THE AO DETERMINED THE INCOME OF THE ASSESSEE AT RS.( - )15,63,232/ - . 2. FIRST GROUND OF APPEAL DEALS WITH DISALLOWANCE MADE U/S.14A OF THE ACT,AMOUNTIN G TO RS. 11.04 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.1.67 LAKHS,THAT IT HAD SUO MOTTO DISALLOWED A SUM OF RS.2.18 LAKHS AS EXPENDITURE INCURRED TO EARN EXEMPT INCOME.REFERRING TO THE PROVISI ONS OF SECTION 14A R.W. RULE 8D(2)OF THE INCOME TAX,RULES,1962(RULES)THE AO HELD THAT IN THE CASE UNDER CONSIDERATION THE ASSESSEE HAD NOT ALLOCATED THE EXPENSES IN RELATION TO EXEMPT IN SCIENTIFIC WAY,THAT NO SEPARATE ACCOUNTS WERE KEPT FOR EARNING TAXABL E AND EXEMPT INCOME,THAT THE FUNDS WERE UTILISED FROM COMMON KITTY WHICH INCLUDED OWN FUND AND INTEREST BEARING FUND,THAT EXPENSES WERE INCURRED FOR TAXABLE AND EXEMPT INCOMES FROM COMMON POOL.HE MADE A DISALLOWANCE OF RS.13.22 LAKHS AS PER SECTION 14A R.W .RULE 8D OF THE RULES.AS THE ASSESSEE ITSELF HAD DISALLOWED RS.2.18 LAKHS,SO,IT RESULTED IN DISALLOWANCE OF RS.11,04,298/ - . 2.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM, IT WAS A RGUED THAT THE ASSESSEE ITSELF HAD DISALLOWED K SM SECURITIES - 36 32/13 - AY.08 - 09 2 CERTAIN PORTION OF EXPENDITURE,THAT EXPENSES BEARING NEXUS WITH THE EARNING OF EXEMPT INCOME HAD ALREADY BEEN DISALLOWED,THAT ALL OTHER EXPENSES WERE IN NATURE OF ROUTINE BUSINESS EXPENSES WHICH WERE NECESSARY TO KEEP THE BUSINESS AFLOAT,THAT DIVIDEND INCOME WAS DERIVED FROM THE SHARES THAT WERE PART OF STOCK IN TRADE,THAT THE WHOLE OF THE LOAN WAS UTILISED FOR PURCHASE OF STOCK OF SHARES DURING THE YEAR,THAT IT HAD PURCHASED SHARES OF RS.4.33 CRORES,THAT DIVIDE ND INCOME WAS INCIDENTAL TO THE BUSINESS INCOME,THAT NO AMOUNT WAS NEEDED TO BE DISALLOWED OUT OF THE INTEREST PAYMENTS.THE ASSESSEE RELIED UPON THE CASES OF ADVANTAGE SECURITIES,ETHIA PLASTIC PVT. LTD, YATISH TRADING CO.PVT.LTD.THE ASSESSEE ALTERNATIVELY S UBMITTED THAT THE DISALLOWANCE MADE BY THE AO WAS ON HIGHER SIDE.IT GAVE TWO DIFFERENT CALCULATIONS AND STATED THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO RS.7.55 LAKHS OR TO RS.6.89 LAKHS. 2.2. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)CONTENDED THAT TH E AO HAD MADE DISALLOWANCE U/S.14A WITH REGARD TO THE SHARES THAT WERE PART OF STOCK IN TRADE,THAT THE ASSESSEE WAS NOT INVESTOR IN SHARES,THAT THE INTEREST PAID ON ACCOUNT OF IPO,CAR PURCHASE WERE WRONGLY INCLUDED IN THE INTEREST DISALLOWANCE,THAT THE ASS ESSEE ITSELF HAD MADE DISALLOWANCE OF RS.2.18 LAKHS, THAT FAA HAD NOT DEALT THE ISSUES RAISED BY IT.HE RELIED UPON THE DECISION OF THE TRIBUNAL DELIVERED IN THE CASE OF INDIA ADVANTAGE SECURITIES LTD.( ITA/6711/MUM/2011, AY.2008 - 09,DATED 14.09.2012 ) AND STAT ED THAT THE ORDER OF THE TRIBUNAL WAS UPHELD BY THE HONBLE BOMBAY HIGH COURT.ALTERNATIVELY,IT WAS ARGUED THAT THE DISALLOWANCE WAS ON HIGHER SIDE.HE MADE A REFERENCE TO TWO CALCULATIONS OF PROBABLE DISALLOWANCES.DEPARTMENTAL REPRESENTATIVE(DR)SUPPORTED TH E ORDER OF THE FAA. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL.WE FIND THAT THE AO HAD REJECTED ENHANCED THE DISALLOWANCE MADE BY THE ASSESSEE AS PER THE PROVISIONS OF SECTION 14A R.W.RULE 8D OF THE RULES,THAT THE ASSESSEE HAD FAA HAD NOT DEALT WITH THE ARGUMENTS TAKEN BY THE ASSESSEE DURING APPELLATE PROCEEDING NAMELY HOLDING OF SHARES AS STOCK IN TRADE AND INTEREST EXPENDITURE INCURRED FOR PERSONAL OR BUSINESS PURPOSES, THAT WHILE CALCULATING THE TOTAL ASSETS APPEARING IN THE BALANCE SHEET THE AO TAKEN ASSETS AFTER DEDUCTING THE CURRENT LIABILITIES AND PROVISIONS.IN OUR OPINION,SUCH ASSETS SHOULD BE TOTAL OF FIXED ASSETS,INVESTMENTS AND CURRENT ASSETS,LOANS AND ADVANCES. WE ARE ALSO OF THE VIEW THAT THE INTEREST EXPENDITURE INCURRED UND ER THE HEADS INTEREST ON SHARE MARGIN,INTEREST ON IPO FUNDING,AND INTEREST ON CAR LOANS SHOULD NOT BE CONSIDERED FOR DISALLOWANCE TO BE MADE U/S.14A OF THE ACT. WE FIND THAT IN THE MATTER OF INDIA ADVANTAGE SECURITIES LTD.(SUPRA)THE ISSUE OF PROPORTIONATE D ISALLOWANCE U/S.14A R.W.RULE 8D WAS DISCUSSED BY THE TRIBUNAL IN LENGTH AND IT WAS HELD THAT STOCK IN TRADE(SHARES)CANNOT BE CONSIDERED FOR DISALLOWANCE AND THAT SHARES HELD AS INVESTMENT COULD BE TAKEN INTO CONSIDERATION FOR CALCULATION OF RULE 8D. THE SA ID JUDGMENT WAS CONFIRMED BY THE HONBLE BOMBAY HIGH COURT ON 13.04.2015(ITA 1131 OF 2013).CONSIDERING THE ABOVE WE ARE OF THE OPINION THAT THE DISALLOWANCE MADE BY THE AO UNDER RULE 8D WAS ON HIGHER SIDE. FOLLOWING THE ABOVE JUDGMENT OF THE HONBLE JURISDI CTIONAL HIGH COURT,WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE AT RS.6.89 LAKHS.IN SHORT,WE ENDORSE THE ALTERNATE CALCULATION SUBMITTED BY THE ASSESSEE .FIRST GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE ,IN PART. 3. NEXT GROUND PERTAINS TO ADDI TION IN RESPECT OF SALARY PAID,AMOUNTING TO RS.1.01 LAKHS,TO BINA K MEHTA(BKM). DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD MADE PAYMENT OF RS. 2. 4 7 CRORES,TO BKM A PERSON COVERED U/S.40A(2)(B)OF THE ACT.HE DIRECTED THE ASSESSEE TO J USTIFY THE REASONABLENESS OF THE PAYMENT MADE.AFTER CONSIDERING THE SUBMISSIONS FILED BY IT,HE HELD THAT BKM WAS STATED TO BE DIRECTOR OF THE COMPANY,THAT IN THE RETURN OF INCOME HER NAME DID NOT FIGURE AS DIRECTOR,THAT THE ASSESSEE HAD MISLED THE DEPARTME NT AND HAD GAVE COLOUR OF SALARY PAID TO HER AS SALARY PAYMENT TO FINANCE DIRECTOR,THAT LAST YEAR SHE WAS PAID RS.1.46 LAKHS ONLY,THAT IN THE AY.2006 - 07 SHE WAS PAID K SM SECURITIES - 36 32/13 - AY.08 - 09 3 RS.1.08 LAKHS,THAT IT HAS INCREASED SALARY OF BKM BUT HER JOB PROFILE HAD REMAINED SAME,TH AT ONUS WAS ON THE ASSESSEE TO PROVE THAT EXPENSES WERE REASONABLE AND NOT EXCESSIVE,THAT THE ASSESSEE HAD ADDUCED ANY EVIDENCE IN SUPPORT OF ITS CLAIM.FINALLY,HE MADE A DISALLOWANCE OF RS.1.01 LAKHS(EXCESS OVER THE SALARY OF LAST AY.). 3.1. DURING THE APP ELLATE PROCEEDINGS, BEFORE THE FIRST APPELLATE AUTHORITY(FAA),THE ASSESSEE CONTENDED THAT BKM WAS PROMOTED AS SENIOR FINANCE EXECUTIVE FROM ASSISTANT FINANCE EXECUTIVE,THAT HER SALARY WAS INCREASED,THAT SHE WAS LOOKING AFTER JOB OF BILL DISCOUNTING, LETTER OF CREDIT,ARRANGING INTER CORPORATE DEPOSITS ETC,THAT DEPARTMENT HAD CONSISTENTLY ACCEPTED THE SALARY PAID TO HER OVER THE YEARS,THAT THE SALARY PAID TO HER WAS REASONABLE . AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER,THE FAA HE LD THAT THE ASSESSEE HAD FAILED TO ADDUCE ANY SUPPORTIVE DOCUMENTS OR PROOF IN SUPPORT OF ITS CONTENTION, THAT IN ABSENCE OF SPECIFIC INFORMATION FROM IT THE ORDER OF THE AO HAD TO BE UPHELD. 3.2. BE FORE US,THE AR MADE THE SAME ARGUMENTS THAT WERE MADE BEFO RE THE FAA.HE STATED THAT IN THE EARLIER AND SUBSEQUENT YEARS THE AO HAD ACCEPTED THE SALARY PAYMENT MADE TO BKM WHILE PASSING THE ORDERS U/S.143(3)OF THE ACT.DR SUPPORTED THE ORDER OF THE FAA. 3.3 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERI AL BEFORE US. WE FIND THAT THE AO HAS CLAIMED THAT THE ASSESSEE WAS A DIRECTOR OF THE COMPANY WHEREAS THE ASSESSEE HAS STATED THAT BKM WAS PROMOTED AS SENIOR FINANCE EXECUTIVE.WE DO NOT KNOW FROM WHERE THE AO ARRIVED AT THE CONCLUSION THAT SHE WAS A DIRECTO R.THE FAA HAS NOT CONSIDERED THE ARGUMENTS ADVANCED BEFORE HIM ABOUT THE EDUCATIONAL QUALIFICATION OF BKM AND DUTIES PERFORMED BY HER.WE FIND THAT IN SUBSEQUENT YEARS SHE HAS BEEN GIVEN HIGHER SALARY AND THE AO HAS NOT MADE ANY DISALLOWANCE IN THAT REGARD WHILE PASSING ORDER U/S.143(3)OF THE ACT. THEREFORE, REVERSING THE ORDER OF THE FAA,WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH ,SEPTEMBER,2015. 11 , 2015 SD/ - SD/ - ( / SANJAY GARG) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, / DATE: 11 .09.2015 . . . JV. SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.