NIRMAL N KOTECHA, MUMBAI V. CIT(28), MUMBAI

ITA 3700/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0329 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 21-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 16-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAGDISH P JANGIDDR
• Assessee Lawyers: PRADEEP KAPASIAR
• Keywords: Business income; Principle of natural justice; Earning of tax free income; Additional evidence; Reasonable cause; Validity of assessment
• Section: 14A

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -FBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./3567/MUM/2015, /ASSESSMENT YEAR: 2009-10 ACIT-17(2) ROOM NO.134, AAYAKAR BHAVAN M.K. ROAD, MUMBAI-400 020. VS. MR. NIRMAL N. KOTECHA 601, SUKH CASTLE, BHADARKAR ROAD MATUNGA,MUMBAI-400 019. PAN:AEZPK 2016 H ( /APPELLANT ) ( / RESPONDENT ) ./I.T.A./3700/MUM/2015, /ASSESSMENT YEAR: 2009-10 MR. NIRMAL N. KOTECHA MUMBAI-400 019. VS. ACIT-17(2) MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI JAGDISH P. JANGID-DR ASSESSEE BY: SHRI PRADEEP KAPASI-AR / DATE OF HEARING: 19.05.2017 / DATE OF PRONOUNCEMENT: 07.06.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDERS,DATED 27/03/2015,OF THE CIT( A)-28,MUMBAI,THE ASSESSING OFFICER (AO)AND THE ASSESSEE HAVE FILED CROSS-APPEALS FOR T HE ABOVE-MENTIONED ASSESSMENT YEAR. ASSESSEE,AN INDIVIDUAL,FILED HIS RETURN OF INCOME O N 30/09/2009, DECLARING TOTAL LOSS OF RS. 4. 70CRORES.THE AO COMPLETED THE ASSESSMENT,U/S.143(3) OF THE ACT,ON 29/12/2011,DETERMINING HIS INCOME AT RS. 49.29 CRORES. ITA/3567/MUMBAI/2015: 2. EFFECTIVE GROUND OF APPEAL, RAISED BY THE AO AND SI XTH GROUND OF APPEAL RAISED BY THE ASSESSEE,IS ABOUT DISALLOWANCE MADE U/S.14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES,1962 (RULES). 2.1. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.16.41 LAKHS,THAT HE HAD PAID INTEREST OF RS.3.07CRORES TO BROKERS ON THE OUT- STANDING AMOUNT DUE TO THEM, THAT HE HAD MADE DISAL LOWANCE OF RS.5 LAKHS ONLY U/S.14A OF THE ACT.THE AO OBSERVED THAT THE SHARES FROM WHICH DIVIDEND INCOME AROSE WERE PURCHASED USING THE BORROWED FUNDS ON WHICH INTEREST WAS PAID , THAT SOME EXPENSES MUST HAVE BEEN INCURRED FOR EARNING THE INCOME. HE CONSIDERED ALL THE SHARES AS STOCK IN TRADE AND ALSO HELD THAT SAME WERE TO BE TAKEN INTO CONSIDERATION FOR C OMPUTING THE DISALLOWANCE IN VIEW OF THE 3700&3567/M/15 NIRMAL N. KOTECHA 2 DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CA SE OF DAGA CAPITAL MANAGEMENT PRIVATE LTD (117 ITD 169).HE COMPUTED THE DISALLOWANCE UNDE R RULE 8D(2) (I) AT RS.5 LAKHS, UNDER RULE 8D(2)(II) AT RS.2.08 CRORES AND UNDER RULE 8D( 2)(III) AT RS. 23.91 LAKHS.THUS,TOTAL DISALLOWANCE U/S.14 A READ WITH RULE 8D OF THE RULE S,WAS COMPUTED AT RS.2.32 CRORES. 2.2. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA) AND MADE ELABORATE SUBMISS IONS BEFORE HIM. AFTER CONSIDERING THE AVAILABLE MATERIAL,THE FAA HELD THAT THE ASSESSEE W AS A TRADER IN SHARES, THAT CERTAIN DIVIDEND INCOME HAD BEEN EARNED BY HIM ON THE SHARES DURING THE YEAR UNDER CONSIDERATION, THAT THE AO HAD HELD THAT THE SHARES CONSTITUTED THE STOCK I N TRADE OF THE BUSINESS OF THE ASSESSEE, THAT THE AO HAD RECORDED SUFFICIENT REASON AS TO WHY HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE REGARDING THE AMOUNT OF E XPENDITURE TO BE DISALLOWED IN RELATION TO THE INCOME WHICH DID NOT FORM PART OF THE TOTAL INC OME. REFERRING TO THE ORDER OF THE TRIBUNAL IN THE CASE OF DH SECURITIES PRIVATE LIMITED (ITA/5 724/MUMBAI/2001 DATED 27/11/2013, AY.2008-09), THE FAA HELD THAT DISALLOWANCE AS PER THE METHOD IN RULE 8D (2) (II) SHOULD BE RESTRICTED TO 20% OF RS. 2.08 CRORES (RS. 41.79 LAK HS), THAT THE DISALLOWANCE UNDER RULE 8D (2) (I) AND RULE 8D (2)(III) SHOULD BE RESTRICTED T O RS.5 LAKHS AND RS.23.91 LAKHS RESPECTIVELY. IN SHORT,HE RESTRICTED THE DISALLOWANCE TO THE EXTE NT OF RS.70.71 LAKHS. 2.3. DURING THE COURSE OF HEARING BEFORE US,THE DEPARTME NTAL REPRESENTATIVE(DR) SUPPORTED THE ORDER OF THE AO.THE AUTHORISED REPRESENTATIVE(A R) ARGUED THAT THE ASSESSEE HAD,ON ITS OWN, MADE A DISALLOWANCE OF RS. 5 LAKHS WHILE COMPU TING THE TOTAL INCOME,THAT THE AO HAD FURTHER MADE A DISALLOWANCE OF RS.5.47 LAKHS UNDER THE HEAD UNLISTED EXPENSES, THAT THE AO HAD WRONGLY ASSUMED THAT INVESTMENT IN SHARES WAS O UT OF THE BORROWED FUNDS, THAT HE ASSUMED AVERAGE INVESTMENT IN SHARES AT RS.47.83 CR ORES, THAT AVERGE VALUE OF INVESTMENT OF RS. 19.19 CRORES DID NOT EARN ANY DIVIDEND INCOME,T HAT SAME WERE REQUIRED TO BE EXCLUDED FROM THE AVERAGE VALUE OF INVESTMENT A BASE FOR DIS ALLOWANCE AS PER RULE 8D (2) OF THE RULES, THAT NO DISALLOWANCE COULD BE MADE U/S.14 A IN CASE OF THE SHARES HELD IN STOCK-IN-TRADE (RS. 23.16 CRORES),THAT THE VALUE OF AVERAGE INVESTMENT IN SHARES SHOULD BE REDUCED BY THE AVERAGE VALUE OF SHARES HELD AS STOCK, THAT THE ASSESSEE HA D OWN CAPITAL OF RS.85.43 CRORES,THAT THE INTEREST-FREE CAPITAL EXCEEDED THE AVERAGE INVESTME NT IN SHARES,THAT NO INTEREST DISALLOWANCE WOULD BE MADE UNDER RULE 8D OF THE RULES, THAT THE AO HAD MADE THE DISALLOWANCE OF RS. 5.47 LAKHS, THAT THE DISALLOWANCE U/S.14A READ WITH RULE 8D OF THE RULES COULD NOT HAVE EXCEEDED THE AMOUNT OF RS. 16.41 LAKHS, BEING EXEMP T DIVIDEND INCOME.HE REFERRED TO THE 3700&3567/M/15 NIRMAL N. KOTECHA 3 CASES OF INDIA ADVANTAGE SECURITIES LTD. (380 ITR 4 71),HDFC BANK LTD. (366 ITR 505), MAXOPP INVESTMENTS LTD.(374 ITR 272) AND EVEREST CA NTO CYLINDERS LTD. (378 ITR 57). 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS.16,48,785/ -,THAT HE HIMSELF HAD MADE A DISALLOWANCE OF RS.10.97 LAKHS IN THE RETURN OF INC OME FILED BY HIM, THAT THE AO MADE A DISALLOWANCE OF RS. 2.37 CRORES, THAT THE FAA REDUC ED THE DISALLOWANCE TO RS.70.71 LAKHS, THAT THE ASSESSEE HAD STOCK-IN-TRADE OF THE SHARES WORTH RS.23.16 CRORES, THAT HE HAD OWN CAPITAL OF RS.85,43,06,528/-, THAT THE CAPITAL FAR EXCEEDED THE AVERAGE INVESTMENT IN SHARES.IN OUR OPINION, PROPORTIONATE DISALLOWANCE U/S.14 A RE AD WITH RULE 8D CANNOT EXCEED THE EXEMPT INCOME I.E. RS.16.41 LAKHS. NO DISALLOWANCE UNDER THE HEAD INTEREST EXPENDITURE CAN BE MADE,CONSIDERING THE AVAILABILITY OF INTEREST FR EE FUNDS.BESIDES STOCK-IN-TRADE CANNOT BE CONSIDERED FOR COMPUTING THE 14A DISALLOWANCE. 2.5. THE QUESTION OF QUANTUM OF DISALLOWANCE IS SUBJECT MATTER OF GROUND OF APPEAL NUMBER SIX, FILED BY THE ASSESSEE,AS STATED EARLIER.AS THE ISSUE RAISED BY THE AO AND THE ASSESSEE ARE INTERCONNECTED,SO, WE WOULD LIKE TO DECIDE THE ISSU E IN THE SUBSEQUENT PARAGRAPH. WE FIND THAT THE ASSESSEE HAD ON ITS OWN MADE DISAL LOWANCE OF RS. 5 LAKHS.IN OUR OPINION, THERE WAS NO JUSTIFICATION FOR ENHANCING THE DISALL OWANCE BY THE AO/FAA.CONSIDERING THE PRINCIPLES LAID DOWN BY THE CASES REFERRED TO BY TH E ASSESSEE I.E. INDIA ADVANTAGE SECURITIES LTD. (SUPRA), HDFC BANK LTD.(SUPRA)AND MAXOPP INVES TMENTS LTD,(SUPRA) AND THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE UNDER APPEAL,WE DECIDE THE EFFECTIVE GROUND OF APPEAL FILED BY THE AO AGAINST HIM.GROUND OF APPEAL NO.6,R AISED BY THE ASSESSEE IS ALLOWED. ITA/3700/MUM/2015: 3 .FIRST EFFECTIVE GROUND OF APPEAL(GOA-1,2,7& 9),FIL ED BY THE ASSESSEE,DEALS WITH NOT ADMITTING ADDITIONAL EVIDENCES/ADDITIONAL GROUND OF APPEAL AND VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. 3 RD GROUND DEALS WITH SERVICE OF NOTICE U/S.143 (2) OF THE ACT.NEXT 2 GROUNDS ARE ABOUT TREATMENT TO BE GIVEN TO THE SHARE TRANSA CTIONS ENTERED INTO BY THE ASSESSEE. THE ASSESSEE HAD CLAIMED LONG-TERM CAPITAL GAINS (LTCG) AND SHORT-TERM CAPITAL GAINS (STCG) WITH REGARD TO THE SHARES SOLD DURING THE YE AR UNDER APPEAL.THE AO/FAA TREATED THE SHARE TRANSACTIONS UNDER THE HEAD BUSINESS INCOME.G ROUND NUMBER 5 IS ALSO INDIRECTLY RELATED WITH THE HEADS OF INCOME UNDER WHICH INCOME WAS ASS ESSED I.E. CAPITAL GAINS OR BUSINESS 3700&3567/M/15 NIRMAL N. KOTECHA 4 INCOME.NEXT GROUND DEALS WITH DISALLOWANCE MADE U/S .14 A OF THE ACT,THAT WE HAVE ALREADY ADJUDICATED IN THE EARLIER PARAGRAPHS OF OUR ORDER. 3. BEFORE DECIDING THE ISSUE OF TREATING THE ASSESSEE A TRADER OR AN INVESTOR ON MERITS,WE WOULD LIKE TO DEAL WITH FIRST EFFECTIVE GROUND OF APPEAL. BEFORE US,THE AR ARGUED THAT THE FAA HAD NOT CONSIDERED THE ADDITIONAL GROUND OF APPEAL FILE D BY THE ASSESSEE FOR CONTESTING THE INVALIDITY OF ASSESSMENT,THAT THE NOTICE U/S.143 (2 ), DATED 29/09/2010, WAS NOT SERVED ON THE ASSESSEE WITHIN THE STATUTORY TIME AS PRESCRIBED BY THE ACT, THAT THE AO HAD NOT ISSUED THE NOTICE U/S.143(2)THAT WAS SERVED UPON HIM, THAT THE FAA DID NOT CONSIDER THAT VITAL ASPECT. WITH REGARD TO ADDITIONAL EVIDENCES IT WAS STATED T HAT THE FAA HAD NOT ADMITTED THE APPLICATION FILED FOR SUBMITTING ADDITIONAL EVIDENC ES, THAT THE AO HAD REFERRED TO THE EX PARTE ORDER OF THE SEBI, DATED 23/04/2009 TO DECIDE THE I SSUE AGAINST THE ASSESSEE, THAT ON 11/ 03/ 2015 HE HAD FILED AN APPLICATION UNDER RULE 46A OF THE RULES,THAT THE FAA DID NOT ACKNOWLEDGE THE APPLICATION, THAT ON 17/03/2015 HE SENT THE APPLICATION BY SPEED POST, THAT THE CONTENTION OF THE FAA THAT APPLICATION FOR FILI NG ADDITIONAL EVIDENCES WAS FURNISHED AFTER THE CONCLUSION OF HEARING ON 17/03/2015 WAS BASELES S,THAT THE ADDITIONAL EVIDENCES WERE NECESSARY FOR DISPOSAL OF THE APPEAL ON MERITS, THA T THE ASSESSEE SHOULD BE ALLOWED TO RELY ON SUCH EVIDENCES, THAT THERE WAS SERIOUS VIOLATION OF PRINCIPLES OF NATURAL JUSTICE.THE DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 4.2. IN OUR OPINION,DURING THE APPEAL PROCEEDINGS,AN ASS ESSEE SHOULD BE GIVEN REASONABLE OPPORTUNITY OF HEARING,AS SO MANY ISSUE MAY CROP UP AFTER HE RECEIVES THE ASSESSMENT ORDER. FAA IS THE FIRST STAGE WHERE HE CAN EXPLAIN HIS CAS E AS TO HOW THE TAX DEMAND RAISED IN HIS CASE IS NOT LEGALLY SUSTAINABLE.SOMETIMES,HE MAY RA ISE ADDITIONAL GROUNDS OR SUBMIT ADDI - TIONAL EVIDENCES TO DEMONSTRATE THAT STAND TAKEN BY THE AO CANNOT BE CONFIRMED ON FACTS OR AS PER THE PROVISIONS OF LAW.SUCH GROUND/EVIDENCES MA Y GO TO THE ROOT OF THE MATTER.DUE IMPORTANCE SHOULD BE GIVEN TO ADDITIONAL GROUND OR FRESH EVIDENCES.IN RULE 46A OF THE RULES THE FAA HAS BEEN AUTHORISED TO ADMIT NEW EVIDENCES. IT IS A DISCRETIONARY POWER.BUT, DISCRETION HAS TO BE USED JUDICIOUSLY. IN THE PRESE NT CASE,THE FAA REJECTED THE ADDITIONAL EVIDENCES AND GROUNDS WITHOUT A REASONABLE CAUSE.TH E DEMAND HAS ARISEN AS THE AO HAD HELD,THAT THE ASSESSEE WAS A TRADER NOT AN INVESTOR ,WITH REGARD TO HIS SHARE TRANSACTIONS.THERE WAS NO JUSTIFICATION FOR NOT ADMITTING ADDITIONAL G ROUND ABOUT SERVICE OF NOTICE U/S.143 (2) OF THE ACT.SIMILARLY,THE ADDITIONAL EVIDENCES SHOULD H AVE BEEN TAKEN ON RECORD BEFORE DECIDING THE ISSUE.IN OUR OPINION,IT WOULD BE VIOLATION OF P RINCIPLES OF NATURAL JUSTICE IF A MATTER IS DECIDED AGAINST AN ASSESSEE WITHOUT TAKING INTO CON SIDERATION THE MATERIAL THAT MAY SUPPORT 3700&3567/M/15 NIRMAL N. KOTECHA 5 HIS STANDS.SO,DECIDING THE EFFECTIVE GROUND OF APPE AL IN FAVOUR OF THE ASSESSEE,IN THE INTEREST OF JUSTICE,WE RESTORE BACK THE ISSUE TO THE FILE OF THE FAA FOR FRESH ADJUDICATION. HE IS DIRECTED TO ADMIT ADDITIONAL GROUND AS WELL AS ADDI TIONAL EVIDENCES THAT WERE RAISED/SUBMITTED BEFORE HIM DURING THE APPELLATE PROCEEDINGS.HE WOUL D DECIDE THE MATTER AFTER HEARING THE ASSESSEE.EFFECTIVE GROUND OF APPEAL IS DECIDED IN F AVOUR OF THE ASSESSEE,IN PART. 5. WE ARE NOT ADJUDICATING GROUND OF APPEAL 4 AND 5,TH AT DEAL WITH THE MERIT OF THE CASE,AS WE HAVE RESTORED BACK THE ISSUE TO THE FILE OF THE FAA . 6. GROUND NO. 8 AND 9 ARE CONSEQUENTIAL IN NATURE,HENC E ARE NOT BEING ADJUDICATED. AS A RESULT,APPEAL FILED BY THE AO IS DISMISSED AND THE APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH JUNE, 2017. , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 07.06 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.