M/s. Spade Financial Services Ltd., New Delhi V. JCIT, New Delhi

ITA 3765/DEL/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7413 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 20-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 23-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R K KAPOOR
• Keywords: Depreciation; Earning of tax free income; Onus to prove
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI H.S. SIDHU : JUDICIAL MEMBER ITA NO. 4454/DEL/2012 ASSTT. YR: 2009-10 ACIT, CIRCLE 9(1), VS. M/S SPADE FINANCIAL SERV ICES LTD., NEW DELHI. K-26, JANGPURA EXTN. NEW DELHI. PAN: AAACS 4632 H ITA NO. 3765/DEL/2012 ASSTT. YR: 2009-10 M/S SPADE FINANCIAL SERVICES LTD., VS. ACIT, CIRCLE 9(1), K-26, JANGPURA EXTN. NEW DELHI. NEW DELHI. ( APPELLANT ) ( RESPONDENT ) DEPARTMENT BY : SHRI RAKESH KUMAR SR. DR ASSESSEE BY : SHRI R.K. KAPOOR FCA DATE OF HEARING : 25-08-2014 DATE OF ORDER : 28-08-2014. O R D E R PER S.V. MEHROTRA, A.M:- THESE CROSS APPEALS, PREFERRED BY REVENUE AS WELL A S THE ASSESSEE, ARE DIRECTED AGAINST THE ORDER DATED 24-5-2012 PASSED B Y THE LD. CIT(A)-XII, NEW DELHI, IN APPEAL NO. 341/11-12, RELATING TO A.Y . 2009-10. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, DURI NG THE RELEVANT ASSESSMENT YEAR, DERIVED INCOME FROM THE BUSINESS O F SALE & PURCHASE OF ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 2 LONG TERM INVESTMENTS IN THE FORM OF SHARES, STOCK, MUTUAL FUND AND BONDS. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING I NCOME OF RS. 32,83,850/-. THE ASSESSING OFFICER NOTICED THAT DURING THE YEAR ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 2,64,79,639/-. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FILE DETAILS OF EXPENDITURE, INCURRED F OR EARNING THE DIVIDEND INCOME AND ALSO TO EXPLAIN AS TO WHY NO DISALLOWANC E BE MADE U/S 14A AS PER RULE 8D. THE ASSESSEE SUBMITTED THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR EARNING DIVIDEND INCOME SINCE IT WAS A PASSIVE ACTIVITY. ASSESSEE ALSO OBJECTED TO THE PROPOSED INVOCATION OF SECTION 14A AND APPLICABILITY OF RULE 8D OF THE IT RULES. THE ASSESSEE OBJECTED AS UNDER: (I) TO WHAT EXTEND EXPENDITURE SHOULD BE APPORTIONED; (II) WHY APPORTIONMENT OF EXPENDITURE SHOULD BE MADE? (III) WHAT SHOULD BE BASIS OF APPORTIONMENT OF EXPENDITUR E. 2.1. THE ASSESSING OFFICER, AFTER CONSIDERING THE A SSESSEES REPLY, OBSERVED AS UNDER: (I) THE EARNING OF EXEMPT INCOME WAS NOT IN THE NATURE OF PASSIVE ACTIVITY HAVING NO INPUT. HE POINTED OUT THAT IN PR ESENT SITUATION, MAKING OF INVESTMENT, MAINTAINING OR CONTINUING INV EST AND TIME OF EXIT FROM INVESTMENT ARE WELL INFORMED AND WELL COORDINATED MANAGEMENT DECISIONS INVOKING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO ACUMEN OF SENIOR MANAGEMENT FUNCTI ONARIES. THEREFORE, COST IS INBUILT INTO EVEN SO CALLED PAS SIVE INVESTMENT. HE FURTHER OBSERVED THAT THERE ARE INCIDENTAL EXPEN DITURES OF COLLECTION, TELEPHONE, FOLLOW UP EVEN DIRECTORS TIM E AND ENERGY ETC. THEREFORE, INDIRECT EXPENSES ARE ALSO EMBEDDED IN E ARNING OF INCOME. ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 3 (II) THE INVESTMENT MADE, BEING A CONSCIOUS DECISION AND HAVING DEPLOYMENT OF FUNDS CLEARLY BEINGS INTO PICTURE EXP ENDITURE BY WAY OF COST OF FUNDS INVESTED. COMPOSITE FUNDS HA VING COST NEEDS TO BE SPREAD SO AS TO APPORTION APPROPRIATE C OST OF FUNDS INVESTED IN THE ACTIVITY LENDING TO CARRYING OF EXE MPT INCOME. 2.2. HE FURTHER OBSERVED THAT THE ONUS TO PROVE THA T EXPENDITURE WAS INCURRED IN THE TAXABLE BUSINESS OPERATIONS AND NOT THE EXEMPT INCOME, IS UPON THE ASSESSEE. HE FURTHER POINTED OUT THAT THE APPORTIONMENT OF THE EXPENSE IS PERMISSIBLE FOR MAKING DISALLOWANCE U/S 14A. HE FURTHER POINTED OUT THAT DISCUSSION ABOUT THE APPORTIONMENT OF DIRE CT OR INDIRECT EXPENDITURE TOWARDS TAXABLE AND EXEMPT INCOME HAS BECOME ACADEM IC IN VIEW OF RULE 8D WHICH PRESCRIBES MECHANISM FOR WORKING OUT THE D ISALLOWANCE U/S 14A. HE, ACCORDINGLY, COMPUTED THE DISALLOWANCE U/S 14A AT RS. 55,35,655/-. 2.3. BEFORE LD. CIT(A) IT WAS SUBMITTED THAT ASSESS EE HAD FILED RETURN DECLARING INCOME AT RS. 32,83,850/- AFTER MAKING DI SALLOWANCE OF RS. 2,36,911/- U/S 14A ON ACCOUNT OF EXEMPT INCOME AT R S. 2,71,67,888/-. THE ASSESSEE SUBMITTED THAT ASSESSING OFFICER DID NOT C ONSIDER THE DISALLOWANCE MADE BY THE ASSESSEE AND SOLELY RELIED ON THE DECIS ION OF SPECIAL BENCH IN THE CASE OF DURGA CAPITAL MANAGEMENT PVT. LTD. AND MAX OPP. INVESTMENT LTD. FOR JUSTIFYING THE DISALLOWANCE BY APPLICATION OF RULE 8D. THE ASSESSEE SUBMITTED THAT DISALLOWANCE U/S 14A CANNOT EXCEED T HE EXPENDITURE INCURRED BY THE ASSESSEE IN COMPUTING THE TOTAL INCOME BECAU SE SECTION 14A IS NOT A STAND ALONE PROVISION, IT HAS TO BE READ IN THE CON TEXT AND SUBJECT TO OTHER PROVISIONS OF THE INCOME TAX ACT FOR COMPUTATION O F TOTAL INCOME OF THE ASSESSEE. THE ASSESSEES CLAIM THAT TOTAL EXPENDITU RE INCURRED FOR EARNING EXEMPT AND TAXABLE INCOME WAS AS UNDER: (1) EXPENSES DEBITED TO PROFIT & LOSS A/C ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 4 A. PAYMENT TO EMPLOYEES-SCHEDULE J RS. 48,000/- B. ADMINISTRATIVE & OTHER EXPENSES-SCHEDULE K RS. 5,27,112/- C. FINANCIAL CHARGES RS. 56/- D. DEPRECIATION RS. 1,38,084/- RS. 7,13,252/- (2) ADD: DIFFERENCE ON ACCOUNT OF DEPRECIATION CLAIMED IN THE RETURN [283569 138084] RS. 1,45,4 85/- TOTAL EXPENSES INCURRED RS. 8,58,737/- EXPENSES DISALLOWED BY THE ASSESSEE IN THE COMPUTAT ION OF INCOME/ RETURN ON ACCOUNT OF DISALLOWANCE U/S 14A AS PER TAX AUDIT REPORT, ITEM 17(1): (I) AMOUNT DISALLOWED U/S 14A AS PER AUDIT REPORT: (A) DEMAT AND STAMP FEE RS. 15,875/- (B) SECURITY TRANSACTION TAX RS. 1,61,036/- (C) LEGAL AND PROFESSIONAL CHARGES RS. 60,000/- RS . 2,36,911/- RS. 2,36,911/- 2.4. WITH REFERENCE TO ABOVE COMPUTATION, IT WAS SU BMITTED THAT ASSESSEE HAD ONLY CLAIMED AN EXPENDITURE OF RS. 6,21,822/-. THE ASSESSEE RELIED ON THE DECISION OF ITAT DELHI BENCH G IN ASSESSEES OWN CASE IN ITA NO. 3271/DEL/2011 FOR A.Y. 2008-09. LD. CIT(A) WHILE PA RTLY ALLOWING THE ASSESSEES APPEAL, RESTRICTED THE DISALLOWANCE TO R S. 6,21,826/-, WHICH WAS OVER AND ABOVE RS. 2,36,911/-, ALREADY DISALLOWED B Y THE ASSESSEE IN ITS COMPUTATION OF INCOME. 2.5. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), BOTH THE ASSESSEE AND THE DEPARTMENT ARE IN APPEAL BEFORE US. ASSESSEES APPEAL (ITA NO. 3765/DEL/12): 3. ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) HAS ERRED IN DISALLOWING RS. 6,21,82 6/- IN ADDITION TO THE DISALLOWANCE OF RS. 2,36,911/- MADE BY THE ASSESSEE U/S 14A OF THE INCOME TAX ACT, ON WHOLLY E RRONEOUS, ILLEGAL AND UNTENABLE GROUNDS. ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 5 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT THE EN TIRE EXPENDITURE CLAIMED BY THE ASSESSEE OF RS. 8,58,737 /- INCLUSIVE OF DEPRECIATION OF RS. 2,83,669/- CANNOT BY ANY IMA GINATION BE SAID TO HAVE BEEN INCURRED IN CONNECTION WITH INCOM E, WHICH IS NOT TAXABLE, WHEN ADMITTEDLY THE ASSESSEE HAS BOTH TAXABLE AND NON-TAXABLE INCOME. 3. IN ANY CASE AND WITHOUT PREJUDICE TO THE ABOVE, THE DEPRECIATION OF RS. 2,83,669/- IS AN ALLOWANCE AND CANNOT BE SAID TO BE AN EXPENDITURE INCURRED IN CONNECTION WI TH INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 4. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LD. CIT(A) HAS TREATED THE ENTIRE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF ADMINISTRATIVE AND OTHER EXPENSES, SALARY ETC. TOWARDS THE EARNING OF EXEMPT INCOME, WITHOUT ALLOCATING ANY EXPENDITURE TOWARDS THE EARN ING OF TAXABLE INCOME. LD. COUNSEL SUBMITTED THAT LD. CIT(A) DID NOT TAKE INTO CONSIDERATION THAT DEPRECIATION COULD NOT BE ALLOCATED TOWARDS THE EAR NING OF EXEMPT INCOME. 5. LD. DR RELIED ON THE ASSESSMENT ORDER. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. THERE IS NO DISPUTE THAT THE TO TAL EXPENDITURE INCURRED BY THE ASSESSEE WAS RS. 8,58,737/-, OUT OF WHICH ONLY APPROPRIATION COULD BE MADE TOWARDS THE EARNING OF EXEMPT INCOME. THEREFO RE, IN ANY VIEW OF THE MATTER, THE DISALLOWANCE U/S 14A COULD NOT EXCEED B EYOND RS. 8,58,737/-. OUT OF THIS, ASSESSEE HIMSELF HAD MADE A DISALLOWAN CE OF RS. 2,36,911/- AS DETAILED EARLIER AND, THEREFORE, THE SHORT ISSUE, B EFORE US, IS THAT THOUGH APPLICABILITY OF RULE 8D IS NOT DISPUTED, BUT, WHET HER THE QUANTUM OF DISALLOWANCE COULD EXCEED EVEN WHEN THE EXPENDITURE WAS NOT CLAIMED BY THE ASSESSEE, OR NOT. WE FIND THAT IN A.Y. 2008-09 THE ITAT HAS OBSERVED AS UNDER: ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 6 4. LD. A.R. RELYING UPON THE ORDERS OF THE AUTHORI TIES BELOW CONTENDED THAT THE RECORD WOULD SHOW THAT THE ASSES SEE HAD RETURNED A TAXABLE INCOME OF RS.1,69,93,970/- AND E XEMPT INCOME OF RS. 4,05,57,728/-. THE ASSESSEE HAD SHOWN IN REGARD TO THE TAXABLE INCOME ;AND EXPENDITURE OF RS.10,91, 629/- AND IN REGARD TO THE EXEMPT INCOME RS.5,67,578/-. IN THE A FORESAID PECULIAR SITUATION RELYING UPON THE IMPUGNED ORDER IT WAS HIS SUBMISSION THAT THE CIT(A) HAS ESTIMATED THE DISALL OWANCE AT RS.8 LAKHS AS SUCH ENTIRE EXPENDITURE CLAIMED CANNO T BE SAID TO HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME. AS SU CH THE IMPUGNED ORDER DESERVES TO BE UPHELD. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CAREFUL CONSIDER ATION OF THE SAME WE ARE OF THE VIEW THAT IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE NO INFIRMITY HAS BEEN POI NTED OUT BY THE LD. D.R. IN THE IMPUGNED ORDER. A PERUSAL OF TH E SAME SHOWS THAT IT IS NOT DISPUTED THAT RULE 8D IS APPLICABLE, HOWEVER, ONLY ON CONSIDERING THE PECULIAR FACTS OF THE CASE THE C IT(A) HAS CONSIDERED IT APPROPRIATE TO ESTIMATE THE DISALLOWA NCE AT RS.8 LAKHS. BEING SATISFIED BY THE REASONING AND FINDING OF THE 6.1. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMST ANCES OF THE CASE, WE FIND FORCE IN THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT THE ENTIRE EXPENDITURE COULD NOT BE APPROPRIATED TOWARDS THE E ARNING OF EXEMPT INCOME AND, THEREFORE, WE ESTIMATE THE EXPENDITURE INCURRE D TOWARDS EARNING OF EXEMPT INCOME AT RS. 4 LACS OUT OF THE TOTAL EXPENS ES OF RS. 8,58,737/-. WE DIRECT ACCORDINGLY. 7. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED. REVENUES APPEAL ( ITA NO. 4454/DEL/2012): 8. THE REVENUE IN ITS APPEAL HAS RAISED FOLLOWING G ROUND OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN RESTRICTING THE DISALLO WANCE OF RS. 55,35,655/- MADE BY THE AO U/S 14A R.W. RULE 8D TO RS. 6,21,826/-. ITA 4454 & 3765/DEL/12 SPADE FINANCIAL SERVICES LTD. 7 9. WHILE DEALING WITH ASSESSEES APPEAL, WE HAVE RE STRICTED THE DISALLOWANCE TO RS. 4 LACS U/S 14A OF THE ACT. IN V IEW OF ABOVE, THE GROUND TAKEN BY THE REVENUE IS LIABLE TO BE DISMISSED. WE ORDER ACCORDINGLY. 10. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 28-08-2014. SD/- SD/- ( H.S. SIDHU ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28-08-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR