INDSEC SECURITIES & FINANCE LTD, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 4236/MUM/2012

• Counselvise Citation: 423619914 RSA 2012
• Duration Of Justice: 1 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 19-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Keywords: Earning of tax free income
• Section: 80HHC; 14A; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I , MUMBAI BEFORE SHRI P.M. JAGTAP , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO. 4236/MUM/12 ASSESSMENT YEAR: 2009 - 10 M/S. INDSEC SECURITIES & FINANCE LTD. 301/302 215 ATRIUM, A WING, ANDHERI KURLA ROAD, CHAKALA ANDHERI (E), MUMBAI - 400 093 PAN: AA AC I1958G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4 (1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 (APPELLANT) (RESP ONDENT) ASSESSEE BY : SHRI VIJAY MEHTA/SHRI ANUJ KISNADWALA REVENUE BY : SHRI O.P. SINGH (D.R.) DATE OF HEARING : 18.07.13 DATE OF PRONOUNCEMENT : 06.09.13 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFER RED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A) DATED 31.07.11 RELEVANT TO ASSESSMENT YEAR 2009 - 10. IN THE FIRST GROUND OF APPEAL , THE APPELLANT HAS AGITATED THE CONFIRMATION OF ENHANCEMENT OF DISALLOWANCE OF RS.18,09,124/ - MADE BY THE AO AGAINST THE DISALLOWANCE OF RS. 2,84,274/ - ALREADY OFFERED BY THE A PPELLANT . 2. THE BRIEF FACTS ARE THAT DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.3,09,413/ - BEING DIVIDEND INCOME . T HE AO DETERMINED THE AMOUNT OF EXPENDITUR E AS PER THE PROVISIONS OF RULE 8D AT RS. 20,93,398/ - . A S AN AMOUNT OF RS.2,84,274/ - HAD ALREADY BEEN DISALLOWED BY THE APPELLANT , HENCE THE AO MADE THE ADDITION OF RS.18,09,124/ - INTO THE INCOME OF THE APPELLANT. ITA NO. 4236/MUM/12 M/ S. INDSEC SECURITIES & FINANCE LTD. 2 BEFORE THE LD. CIT(A) THE CONTENTION OF T HE APPELLANT WAS THAT IT HAD NOT MADE ANY INVESTMENT IN SHARES FOR THE PURPOSE OF EARNING DIVIDEND . THE DIVIDEND RECEIVED, THEREFORE, WERE INCIDENT AL RECEIPTS AS THE APPELLANT HAD PURCHASED SHARES FOR THE PURPOSE OF SELLING THE SAME . IT WAS FURTHER CONTE NDED THAT IT COULD NOT BE SAID THAT APPELLANT WAS DEALING IN TRANSACTIONS WHICH WERE EXEMPT FROM TAXES AND THAT THE AO HAD INVOKED THE PROVISION OF RULE 8D WITHOUT GIVING ANY REASON AND WITHOUT IDENTIFYING ANY EXPENSES WHICH COULD HAVE BEEN INCURRED TO E ARN TAX FREE DIVIDEND INCOME. T HE PROVISIONS OF SECTION 14A/RULE 8D WERE NOT APPLICABLE IN THE CASE OF THE APPELLANT AS NO EXPENDITURE HAD BEEN INCURRED TO EARN TAX FREE DIVIDEND INCOME. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD NOT UTILIZED ANY BOR ROWED FUND FOR ACQUISITION OF INVESTMENT AND VARIOUS ADMINISTRATIVE EXPENSES AND INTEREST HAD BEEN INCURRED NOT TO EARN THE DIVIDEND INCOME BUT TO RUN DAY TO DAY BUSINESS ACTIVITY. IT WAS POINTED OUT THAT EVEN IF DIVIDEND HAD NOT BEEN RECEIVED, THE APPELL ANT HAD TO INCUR THESE EXPENSES. IT WAS FURTHER CONTENDED THAT SECTION 14A DOES NOT PROVIDE FOR APPORTIONMENT OF EXPENSES UNLIKE SECTION 80HHC WHEREIN THE METHOD OF COMPUTING THE DEDUCTION IS ON THE BASIS OF APPORTIONMENT . 3. HOWEVER, THE LD. CIT(A) OB SERVED THAT THE ASSESSEE HAD NOT MAINTAINED SEPARATE ACCOUNTS OF EXPENSES INCURRED FOR EARNING OF EXEMPT INCOME. FURTHER, AS THE ASSESSEE HAD NOT MAINTAINED ANY SEPARATE RECORDS ON ACCOUNT OF EXPENDITURE HAVING BEEN INCURRED FOR EARNING OF DIVIDEND INCOME , THE AO BLINDLY COULD NOT BE FASTENED WITH ANY BURDEN TO DISCOVER SUCH EXPENDITURE OF ESTABLISH NEXUS OF SUCH EXPENDITURE WITH EXEMPT INCOME. W HEN IT IS NOT POSSIBLE TO DIRECTLY DETERMINE THE AMOUNT OF EXPENDITURE HAVING BEEN INCURRED FOR EARNING OF EXEM PT INCOME, THE PROVISIONS OF RULE 8D COME INTO PLAY. THE LD. CIT(A) FURTHER OBSERVED THAT T HE APPELLANTS CONTENTION THAT THE PROVISIONS OF SECTION 14A DOES NOT PROVIDE FOR APPORTIONMENT OF EXPENSES WAS NOT SUSTAINABLE IN VIEW OF INSERTION OF SUB - SECTION (2) OF SECTION 14A WITH EFFECT FROM 01.04.07 REQUIRING THE AO TO DETERMINE SUCH AMOUNT IN ACCORDANCE WITH SUCH METHOD AS HAS BEEN PRESCRIBED. SUCH METHOD AS MENTIONED IN SUB - SECTION (2) OF SECTION 14A HAS BEEN PRESCRIBED AS PER RULE 8D. HE FURTHER OBSER VED THAT IN THE ABSENCE OF CASH FLOW STATEMENT AND M ERELY, ON THE BASIS OF BALANCE OF OWN FUND AND BORROWED FUND AS ON THE DATE OF THE BALANCE ITA NO. 4236/MUM/12 M/ S. INDSEC SECURITIES & FINANCE LTD. 3 SHEET, IT CANNOT BE PRESUMED THAT BORROWED FUND HAD NOT BEEN UTILIZED FOR EARNING OF EXEMPT INCOME. 4. WE HAVE HEARD THE LD. REPRESENTATIVE OF THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORDS. IT MAY BE OBSERVED THAT UNDER SECTION 14A OF THE INCOME TAX ACT RESORT CAN BE MADE TO RULE 8D (2) OF THE INCOME TAX RULES FOR DETERMINING THE AMOUNT OF EXPENDITURE IN REL ATION TO EXEMPT INCOME , IF , THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. HOWEVER, A PERUSAL OF THE ASSESSMENT YEAR REVEALS THAT THE AO WITHOUT RECORDING ANY DISSATISFACTION WITH REGARD TO T HE CALCULATIONS AND COMPUTATION MADE BY THE ASSESSEE , STRAIGHTWAY APPLIED RULE 8D AGAINST THE MANDATE OF THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. 5. THE LD. CIT(A) WHILE REJECTING THE CONTENTION OF THE ASSESSEE HAS OBSERVED THAT THE ASSESSEE HAD NOT MAINTAINED SEPARATE ACCOUNTS OF EXPENSES INCURRED FOR EARNING OF EXEMPT INCOME AND FURTHER THAT THE ASSESSEE HAD NOT PRODUCED ANY CASH FLOW STATEMENT OR ANY OTHER MATERIAL WHICH COULD HAVE ESTABLISHED THAT BORROWED FUNDS HAD NOT BEEN UTILIZED BY TH E ASSESSEE FOR EARNING OF EXEMPT INCOME. 6. HOWEVER, WE MAY OBSERVE THAT NO SUCH DETAILS WERE CALLED FOR BY THE AO FROM THE ASSESSEE WHILE MAKING THE DISALLOWANCE UNDER CONSIDERATION. AS OBSERVED ABOVE, HE STRAIGHTWAY APPLIED RULE 8D. 7 . SO KEEPING I N VIEW OF THE OVER ALL FACTS AND CIRCUMSTANCES OF THE CASE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION THAT THE AO WILL EXAMINE THE COMPUTATION/CALCULATION MADE IN THIS REGARD BY THE ASSESSEE. THE AO WILL BE AT LIBERTY TO CALL FOR ANY REC ORD/EVIDENCES OR STATEMENT ETC. FROM THE ASSESSEE AS MAY BE REQUIRED BY HIM FOR DECIDING THE ISSUE UNDER CONSIDERATION. AFTER GOING THROUGH THE DETAILS PROVIDED BY THE ASSESSEE, IF THE AO WILL BE SATISFIED WITH THE OBJECTION/CALCULATION MADE BY THE ASSESS EE THEN HE WILL ASSESS THE INCOME ACCORDINGLY . HOWEVER, IF THE AO DOES NOT AGREE WITH THE COMPUTATION MADE BY THE ASSESSEE, AND IN THAT EVENT HE WILL HAVE TO RECORD HIS DISSATISFACTION WITH REASONING FOR THE SAME BY WAY OF A SPEAKING ORDER. THEN HE WILL BE AT LIBERTY TO RESORT TO THE ITA NO. 4236/MUM/12 M/ S. INDSEC SECURITIES & FINANCE LTD. 4 PROVISIONS OF RULE 8D. NEEDLESS TO SAY THAT THE ASSESSEE WILL CO - OPERATE AND PROMPTLY SUPPLY THE NECESSARY DETAILS ETC. TO THE AO FOR DECIDING THE ISSUE UNDER CONSIDERATION. 8 . GROUND NO.2 OF THE APPEAL RELATES TO THE CONFIR MATION OF DISALLOWANCE OF MARK - TO - MARKET LOSS OF RS.83,655/ - TREATING IT AS CONTINGENT IN NATURE. 9 . THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DATED 03.05.13 PASSED IN ITA NO.1502/M /12 (ASSESSMENT YEAR 2008 - 09) IN THE CASE OF KOTAK MAHINDRA INVESTMENT LTD. WHEREIN THE CO - ORDINATE BENCH OF THIS TRIBUNAL WHILE RELYING UPON THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA ( P.) LTD. (2009) 1 79 TAXMAN 326, HAS OBSERVED THAT T HE STOCK FUTURE IS ONE OF THE TYPES OF FORWARD CONTRACT, WHICH IS TRADED ON EXCHANGES. THIS CAN BE TRADED IN BSE AS WELL AS IN NSE. IN SUCH TYPE OF CONTRACTS THE STOCK IS NOT ACTUALLY PURCHASED RATHER THE PROFIT OR LOSS IS CALCULATED ON THE BOOK VALUE IN COMPARISON TO THE ACTUAL MARKET RATE OF THE STOCKS ON THE DATE WHICH HAS BEEN AGREED BY THE PARTIES FOR THE PERFORMANCE OF THE CONTRACT. CERTAIN STOCKS ARE BOOKED TO BE PURCHASED AT PREDETERMINED PARTICULAR RATE ON FUTURE D ATE AND WHEN SUCH FUTURE DATE OF PERFORMANCE OF CONTRACT BECOMES DUE, THEN THE PREDETERMINED PRICE IS COMPARED WITH THE ACTUAL MARKET RATE OF THE BOOKED STOCK AND THE DIFFERENCE, IF ANY, IS PAID BY THE PARTIES WITHOUT ACTUALLY PURCHASING OR SELLING THE STO CKS IN QUESTION. THE DAILY MARKET RATE OF THE SAID STOCK IN QUESTION IS TAKEN AND THE DIFFERENCE BETWEEN THE MARKET RATE AND THE PREDETERMINED RATE IS DAILY CALCULATED AND THE DIFFERENCE MARGIN, IF ANY, IS RECEIVED/PAID TO THE BROKER AND FINALLY ON THE STI PULATED DATE THE CONTRACTS ARE SQUARED OFF RESULTING INTO ACTUAL LOSS OR PROFIT. THE CONTRACTS IN SUCH TYPE OF CASES CAN BE SQUARED OFF BEFORE THE ARRIVAL OF ACTUAL PERFORMANCE DATE OF CONTRACT, AS THE PROFIT AND LOSS ARE CALCULATED ON DAILY BASIS AND THE MARGINS ARE SETTLED ACCORDINGLY. SUCH TYPE OF CONTRACTS ARE NOT PURELY CONTINGENT IN NATURE RATHER LOSS OR PROFIT IS SOMEWHAT ASCERTAINABLE IN VIEW OF CONSTANT WATCH ON DAILY MARKET VALUE AND EVEN THE QUANTUM OF PROFIT OR LOSS THOUGH NOT ACTUALLY ASCERTAIN ABLE, CAN BE ANTICIPATED IN VIEW OF THE TRENDS OF THE MARKET. THE DIFFERENCE BETWEEN THE PREDETERMINED PRICE AND MARKET PRICE IS SETTLED DAILY ON ITA NO. 4236/MUM/12 M/ S. INDSEC SECURITIES & FINANCE LTD. 5 MARK - TO - MARKET BASIS. IN SUCH TYPE OF CONTRACTS, IT IS NOT THE STOCK VALUE WHICH IS SUBJECT MATTER OF THE CONT RACT RATHER THE CONTRACT ITSELF IS THE STOCK IN TRADE WHICH IS PURCHASED BY PAYING/DEPOSITING THE INITIAL MARGINS ON PERCENTAGE BASIS TO THE BROKER TAKING INTO CONSIDERATION MAXIMUM ANTICIPATED RISE OR FALL IN THE PRICE OF THE STOCK IN FUTURE. T HE DIFFEREN CE OF MARGIN IS CALCULATED AND SETTLED ON DAILY BASIS IN VIEW OF THE MARKET RATES AND TRENDS. THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD (2009) 179 TAXMAN 326, WHILE DEALING WITH THE QUESTION AS TO WHETHER THE ADDITI ONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE CAN BE ALLOWED TO BE ADJUSTED PENDING ACTUAL PAYMENT OF THE VARIED, HAS OBSERVED THAT EXPENDITURE AS USED IN SECTION 37 IN INCOME TAX ACT MAY IN THE CIRCUMSTANCES OF A PARTICULAR CA SE COVER AN AMOUNT WHICH IS A LOSS EVEN THOUGH SAID AMOUNT HAS NOT BEEN GIVEN FROM THE POCKET OF THE ASSESSEE. IT HAS BEEN FURTHER OBSERVED THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE PROFIT & LOSS ACCOUNT THE VALUE OF STOCK IN TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE PROFITS BEFORE ACTUAL REALIZATION. PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTED IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS, SUCH PRINCIPLES STAND SUPERSEDED OR MO DIFIED BY LEGISLATIVE ENACTMENTS. UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR S ACCOUNT IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY. ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRON G AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. . THE CO - ORDINATE BENCH OF THIS TRIBUNAL FURTHER RELYING UPON THE JUDGMENT OF ANOTHER CO - ORDINATE BENCH OF THE TRIBUNAL DATED 10.11.10 PASSED IN ITA NO.5324/MUM/2007 FOR A.Y. 2004 - 05 IN THE CAS E OF EDELWEISS CAPITAL LTD. FURTHER HELD THAT IT IS NOT ONLY THE ACTUAL STOCK BUT DERIVATIVES CAN ALSO BE HELD ITA NO. 4236/MUM/12 M/ S. INDSEC SECURITIES & FINANCE LTD. 6 AS STOCK IN TRADE AND THE PRINCIPLE COST OR MARKET PRICE WHICHEVER IS LOWER HAS BEEN RIGHTLY FOLLOWED BY THE ASSESSEE IN VALUING THE DERIVATIV ES AND FURTHER WHEN THE DERIVATES ARE HELD AS STOCK IN TRADE THEN WHATEVER RULES APPLY TO THE STOCK IN TRADE WILL HAVE TO APPLY TO THEIR VALUATION ALSO. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT WHILE VALUATION OF CLOSING STOCK, ANTICIPATED PROFIT IN TH E SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NOT PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFITS BEFORE ACTUAL REALIZATION. 10 . RESPECTFULLY FOLLOWING THE LAW LAID DOWN BY THE AUTHORITIES AS MENTIONED ABOVE , THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ADDITION MADE BY THE AO ON THIS GROUND IS HEREBY ORDERED TO BE DELETED. 11 . SUBJECT TO OUR OBSERVATIONS MADE ABOVE, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT O N 06 TH SEPTEMBER 2013. SD/ - SD/ - ( P.M. JAGTAP ) ( SANJAY GARG ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 06.09. 2013. * KISHORE COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.