ACIT CIR 4(2), MUMBAI V. VISARIA SECURITIES P.LTD, MUMBAI

ITA 4299/MUM/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9347 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2015
• Appeal Filed By: Department
• Bench Allotted: F
• Next Hearing Date: 27-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 29-05-2013
• Court: TRIBUNAL
• Department Lawyers: SACHCHIIDAND DUBEY
• Assessee Lawyers: LATA PARULEKAR
• Keywords: Business income; Earning of tax free income; Speculation loss
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA, AM & SHRI VIVEK VARMA , JM ITA NO. 4299 / MUM/20 1 3 ( ASSESSMENT YEAR : 200 9 - 10 ) THE ACIT - 4(2), MUMBAI VS. M/S VISARIA SECURITIES PVT. LTD., 301 - A, COMMERCE HOUSE, 140 - N.M.ROAD, FOUNTAIN, MUMBAI - 400 001 PAN/GIR NO. : A A ACV 7721 L ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI SACHCHIIDAND DUBEY /ASSESSEE BY : SHRI VIJAY MEHTA & MS. LATA PARULEKAR DATE OF HEARING : 15 / 0 1 /201 5 DATE OF PRONOUNCEMENT : 13/03 /2015 O R D E R PER R.C.SHARMA ( A .M.) : TH IS APPEAL S IS FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A), DATED 15 - 3 - 2013 FOR ASSESSMENT YEAR 200 9 - 10 IN THE MATTER OF ORDER PASSED U/S. 143 ( 3) OF THE I.T.ACT . . 2. THE ONLY GRIEVANCE OF THE REVENUE RELATES TO DELETING DISALLOWANCE OF EXPENDITURE OF RS. 11,34,655/ - U/S.14A R.W.R.8D. 3. IT IS PERTINENT TO MENTION AT THE OUTSET THAT APPEAL OF ASSESSEE IN ITA NO.4958/M/2013 WAS ALSO FIXED ALONG WIT H THE APPEAL OF REVENUE WHICH COULD NOT BE HEARD DUE TO WANT TO TIME. HOWEVER, GROUND TAKEN IN ITA NO. 4299/13 2 ASSESSEES APPEAL WAS PERTAINING TO TREATMENT OF LOSS ON DIMINUTION OF VALUE OF SHARES, WHETHER BUSINESS LOSS OR SPECULATION LOSS, IS HAVING NO RELATION WITH TH E GROUND TAKEN IN REVENUES APPEAL FOR DISALLOWANCE OF EXPENSES U/S.14A OF I.T. ACT. BOTH LD. AR AND DR AGREED THAT REVENUES APPEAL MAY BE HEARD INDEPENDENTLY. ACCORDINGLY, WE HAVE HEARD ONLY REVENUES APPEAL. 4 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE RECORD. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF SHARE BROKING AND SHARE TRADING. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE AS SESSEE EARNED DIVIDEND INCOME OF RS.28,67,950/ - AND SUO MOTU DISALLOWED AN AMOUNT OF RS.2,83,396/ - IN HIS COMPUTATION OF INCOME WHICH THE AO FOUND TO BE INCORRECT. THE AO ASKED THE ASSESSEE AS TO WHY DISALLOWANCE SHOULD NOT BE MADE AS PER FORMULA GIVEN IN RULE 8D. IN RESPONSE TO IT, THE ASSESSEE SUBMITTED ITS EXPLANATION. HOWEVER, THE AO DID NOT CONVINCE WITH THE SUBMISSION OF ASSESSEE AND DISALLOWED RS.11,34,655/ - ON ACCOUNT EXPENDITURE ALLOCATED FOR EARNING EXEMPT INCOME. 5 . BY THE IMPUGNED ORDER, THE CIT (A) DELETED THE ADDITION MADE BY THE AO AFTER HAVING THE FOLLOWING OBSERVATIONS : - 2.3 . I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE .AND THE CONTENTION OF THE APPELLANT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT IS SEEN THAT THE APPELLANT HAD EARNED A TAX FREE DIVIDEND INCOME OF RS. 27,66,950/ - AND SUO MOTTO DISALLOWED AN AMOUNT OF RS. 2,83,396/ - BEING THE EXPENSES TO EARN THE EXEMPT INCOME IN ITS COMPUTATION OF INCOME. ACCORDING TO THE ASSESSING OFFICER THE DISALLOWANCES SHOULD BE CALCULATED IN ACCORDANCE WITH THE FORMULA GIVEN UNDER RULE 8D OF INCOME TAX RULE, 1962. THE ITA NO. 4299/13 3 ASSESSING OFFICER OBSERVED THAT WHERE THERE IS COMPOSITE USE OF FUNDS, EXPENDITURE CANNOT BE SEPARATELY CALCULATED AND SOME EXPENDITURE NEED TO BE ALLOCATED TO EARN THE EXEMPT INCOME. BY FOLLOWING THE DECISION OF THE HO N'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE, THE ASSESSING OFFICER CALCULATED THE EXPENSES DISALLOWABLE UNDER RULE 80 OF THE INCOME TAX RULE. 2.3(A) I FIND THAT WHILE CALCULATING THE AVERAGE O F INVESTMENT, THE ASSESSING OFFICER ALSO INCLUDED THE STOCK HELD AS STOCK IN TRADE: THE SAID INCLUSION IS NOT PERMISSIBLE AS STOCK IN TRADE ARE NOT SUBJECT MATTER OF DISALLOWANCE U/S 14A AS HELD BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. V S. JCIT - 206 TAXMAN 563. IN THIS CASE, THE HON'BLE HIGH COURT HAS HELD THAT THE DIVIDEND INCOME WAS INCIDENTAL TO THE BUSINESS OF SHARE TRADING AND THE EXPENDITURE WAS NOT INCURRED WITH AN INTENTION TO EARN DIVIDEND. SINCE DIVIDEND WAS EARNED ON UNSOLD PO RTION OF SHARES, NO EXPENDITURE COULD BE DISALLOWED U/S 14.A WHICH IS REPRODUCED BELOW: 'WHEN NO EXPENDITURE. IS INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED FROM THE SAID INCOME. IT IS NOT THE CASE O F THE ASSESSEE RETAINING ANY SHARES SO AS TO HAVE THE BENEFIT OF DIVIDEND. 63% OF THE SHARES, WHICH WERE PURCHASED, ARE SOLD AND THE INCOME DERIVED THERE FROM IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 37% OF THE SHARES ARE RETAINED. IT HAS REMAIN ED UNSOLD WITH THE ASSESSEE. IT IS THOSE UNSOLD SHARES YIELDED DIVIDEND, FOR WHICH THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AL ALL. THOUGH THE DIVIDEND INCOME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE INCURRED IN EARNING DIVIDEND INCOME AND THE' DIVIDEND INCOME IS INCIDENTAL TO HIS BUSINESS OF SALE OF SHARES, WHICH REMAINED UNSOLD BY THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SNEAK BE DI SALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROACH OF THE AUTHORITIES IS NOT IN CONFORMITY WITH THE STATUTORY PROVISIONS CONTAINED UNDER THE ACT. THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE ... ' 2.3(B) FURTHER, I FIND THAT THE ASSESSING OFFICER HAS NOT MADE ANY OBSERVATION REGARDING THE CORRECTNESS OF THE CLAIM OF THE APPELLANT IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM ITS TOTAL INCOME UNDER THE ACT. THE INESCAP ABLE FACT IS THAT THE APPELLANT HAD SUO MOTTO MADE SOME DISALLOWANCES AND THE ASSESSING OFFICER HAS NOT FOUND ANY DEFECT IN THE CLAIM MADE BY THE APPELLANT IN RELATION TO ITS BOOKS OF ACCOUNT. THE HON'BLE DELHI ITAT IN ITS JUDGEMENT IN THE CASE OF M/ S. JIN DAL PHOTO LTD. VS. DCIT HAS OBSERVED AS UNDER: '18. NOW, AS PER SECTION 14A(2) OF THE ACT, IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS ITA NO. 4299/13 4 OF THE C LAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEE'S TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED; I. E . UNDER RULE 8 D OF THE I. T. RUL E S. HOWE VER, IN THE PRESENT CAS E , THE ASSESSMEN T ORDER DOES NOT EVIDENCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8 D OF THE RU L ES WAS NOT APPROPRIATELY APPLIED BY THE AO AS CORRECTLY HELD BY THE CIT (A) . IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN AD HOC DISALLOWANCE WAS M ADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPENDITURE , THIS ONUS HAS NOT BEEN DISCHARGED. I N 'CIT VS. HERO CYCLES' (P&H)323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/ S 14 A OF THE ACT REQUIRES A CLEAR FI NDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN 'ACIT VS. EICHER LTD ', 101 TTJ(D EL.) 369, THAT IT WAS HELD THAT THE BUR D EN IS ON THE AO TO ESTA BLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN 'MERUTI UDYOG VS. DCIT , 92 ITD 119 (DE L), IT HA S BEEN H ELD THAT BEFORE MAKING ANY DISALLOWANCE U/S. 14A O F THE ACT, 'THE ONUS TO ESTAB L ISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME , IS ON THE REVENUE. IN ' W IMCO SEEDLINGS LIMITED V S. DCIT', .107 ITO 267 (DE L .) (TM), IT HAS BEEN HELD THAT .THERE CAN B E NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN. 1. PUNJAB NATIONAI BANK VS, D CIT, 103 TTJ908 (DEL.); 2. VIDYUT LNVESTMEN T LTD. 10 S0T 284 ( D EL.);AND 3. D .J.MEHTAVS.ITO,2901T(J238 (MUM.)(AT) 19. 'IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. 2.3(C) I N THE LIGHT OF THE FOREGOING, I FIND THAT THE ASSESSING OFFICER CANNOT INVOKE THE PROVISIO NS OF SECTION 14A(2) AND RULE 8D UNTIL AND U NLESS HE RECORDS A SATISFACTION THAT THE APPELLANTS CLAIM IS NOT CORRECT IN RELATION TO' ITS BOOKS OF ACCOUNT HAVING NOT DONE SO. THE INVOKING OF PROVISIONS OF RULE 8D ARE NOT IN ORDER, THEREFORE, T HE DISALLOWANCES MADE BY THE ASSESSING OFFICER ARE NOT SUSTAINABLE TO THE FACTS OF THE APPELLANTS CASE. THE SAME ARE ACCORDINGLY DELETED. THIS GROUND OF APPEAL IS ALLOWED. 6 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT THE CIT(A) HAS NOTED THAT THE ASSESSEE HAD EARNED A TAX FREE DIVIDEND INCOME OF ITA NO. 4299/13 5 RS. 27,66,950/ - AND SUO MOT O DISALLOW ED AN AMOUNT OF RS. 2,83,396/ - BEING THE EXPENSES TO EARN THE EXEMPT INCOME IN ITS COMPUTATION OF INCOME. THE CIT(A) OBSERVED THAT THE AO HAS NOT FOUND ANY FAULT WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM ITS TOTAL INCOME UNDER THE ACT. AFTER RELYING ON VARIOUS JUDICIAL PRONOUNCEMENTS AS REFERRED IN HIS APPELLATE ORDER , THE CIT(A) FOUND THAT THERE IS NOTHING WRONG IN THE DISALLOWANCE OF RS.2,83,396/ - MADE BY ASSESSEE HIMSELF. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS RECORDED BY CIT(A) AT PARA 2.3, WHICH RESULTED INTO DELETION OF DISALLOWANCE OF EXCESS DISALLOWANCE MADE BY AO U/S.14A. 7 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 1 3 TH MARCH, . 201 5 . SD/ - SD/ - ( , ) ( VIVEK VARMA ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 1 3 / 0 3 /201 5 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//