ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD, MUMBAI V. ADDL CIT RG 4(1), MUMBAI

ITA 4662/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6126 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 22-11-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 07-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Keywords: Salary income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH, MUMBAI BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 4662/MUM/2009 (ASSESSMENT YEAR: 2006-07) ASIT C. MEHTA INVESTMENT DCIT, RANGE - 4(1) INTERMEDIATES LTD. AAYAKAR BHAVAN, M.K. ROAD 'NUCLEUS HOUSE', 5TH FLOOR VS. MUMBAI 400020 SAKI VIHAR ROAD, ANDHERI (E) MUMBAI 400072 PAN - AAACA 5009 N APPELLANT RESPONDENT APPELLANT BY: SHRI SATISH MODY RESPONDENT BY: SHRI A.K. NAYAK O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- IV, MUMBAI DATED 01.06.2009. 2. GROUND NO1 RAISED BY THE ASSESSEE IS WITH REFERENCE TO DISALLOWANCE OF AN AMOUNT OF ` 4,67,314/- UNDER SECTION 14A 3. THE BRIEF FACTS ARE THAT THE ASSESSEE HAS SHOWN DIV IDEND INCOME OF ` 17,78,811/- WHICH IS CLAIMED AS EXEMPT UNDER SECTIO N 10(34). IT WAS ARGUED BY THE ASSESSEE THAT THERE WAS NO EXPENDITUR E INCURRED BY IT TOWARDS EARNING OF THE TAX EXEMPT DIVIDEND INCOME AS REQUIR ED BY SECTION 14A. THEREFORE, THERE WAS NO EXPENDITURE TO BE DISALLOWE D UNDER SECTION 14A. THIS DID NOT FIND FAVOUR WITH THE A.O. THE A.O. REL IED ON THE DECISION IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT P. LTD. IN ITA NO. 8057/MUM/2003. THE A.O. APPLIED RULE 8D AND DETERMINED AN AMOUNT O F ` 4,67,314/- AS EXPENDITURE RELATABLE TO EXEMPT INCOME, WHICH WAS D ISALLOWED. 4. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT THE C OMPANY HAD NOT INCURRED ANY EXPENDITURE DIRECTLY RELATING TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT WAS FURTHER SUBMITTED THAT THE INVESTMENTS IN ITA NO. 4662/MUM/2009 ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD. 2 SHARES AND MUTUAL FUND UNITS ARE MADE FROM AND OUT OF THE ACCUMULATED PROFIT/RESERVES/SURPLUS OF THE PREVIOUS YEAR AND CU RRENT YEAR AND NOT FROM BORROWED FUNDS. IN VIEW OF THIS IT IS SUBMITTED THA T NO SUCH EXPENSE HAVE BEEN INCURRED TO WHICH SECTION 14A COULD BE APPLIED . AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE THE CIT(A) CONFIRMED TH E DISALLOWANCE MADE BY THE A.O. 5. AT THE OUTSET THE ASSESSEE SUBMITTED THAT THE ISSUE IS TO BE RESTORED TO THE FILE OF THE A.O. CONSEQUENT TO THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V S. DCIT 328 ITR 81. THE LEARNED D.R. HAS NO OBJECTION IF THE MATTER IS REST ORED TO THE FILE OF THE A.O. 6. WE HAVE CONSIDERED THE ISSUE. SINCE THE HON'BLE BOM BAY HIGH COURT HAS CONSIDERED THE DISALLOWANCE UNDER SECTION 14A A ND PRINCIPLES WERE LAID DOWN, THE ISSUE IS TO BE RE-EXAMINED AND A REASONAB LE AMOUNT HAS TO BE ARRIVED AT BY THE A.O. WITHOUT INVOKING RULE 8D FOR THIS ASSESSMENT YEAR. IT IS ALSO TO BE KEPT IN MIND THE NATURE OF BUSINESS A CTIVITY OF THE ASSESSEE AND THE EXPENDITURE CLAIMED IN VARIOUS ACTIVITIES. IN T HE INTEREST OF JUSTICE, WE RESTORE THE MATER BACK TO THE FILE OF THE A.O. TO E XAMINE THE FACTS AFRESH AND ARRIVE AT THE REASONABLE DISALLOWANCE UNDER SECTION 14A KEEPING IN MIND THE PRINCIPLES ESTABLISHED BY THE HON'BLE BOMBAY HIGH C OURT IN THE ABOVE REFERRED CASE. THE ISSUE IS RESTORED TO THE FILE OF THE A.O. 7. GROUND NO. 2 PERTAINS TO REDUCING THE REBATE UNDER SECTION 88E. THE ASSESSEE CLAIMED REBATE ON ` 1,28,66,940/-, WHICH WAS ACTUALLY PAID DURING THE YEAR ON GROSS INCOME OF ` 4,43,73,633/- ON SECURITY TRANSACTIONS. THE A.O., HOWEVER, CONSIDERED THAT THE ASSESSEE HAS NOT APPORTIONED THE EXPENDITURE PERTAINING TO THE INCOME OF SECURITIES TRANSACTIONS CORRECTLY AND ADJUSTED CERTAIN ITEMS TOWARDS SHARE TRADING TRANSA CTIONS AND RESTRICTED THE INCOME FROM SHARE TRADING SUBJECT TO STT AT ` 4,06,16,157/- AND ACCORDINGLY THE DEDUCTION UNDER SECTION 88E WAS REDUCED TO ` 1,21,84,847/-. THE ASSESSEE IS AGGRIEVED AS THE CIT(A) ALSO HAS CONFIR MED THE SAME. WHILE REFERRING TO PARA 4.5 OF THE ASSESSMENT ORDER THE L EARNED COUNSEL SUBMITTED THAT THE ASSESSEE HAS NO OBJECTION IN ALLOCATING TH E TRANSACTION CHARGES PAID ON TURNOVER AT ` 19,03,024/-, WHICH WAS ALLOCATED BY THE A.O. HOWEVE R, HIS ITA NO. 4662/MUM/2009 ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD. 3 MAIN OBJECTION IS WITH REFERENCE TO DEMAT CHARGES O F ` 50,000/- AND OTHER ALLOCATED TOWARDS SHARE TRADING. IT WAS HIS SUBMISS ION THAT THE AMOUNT OF ` 50,000/- ALLOCATED TOWARDS DEMAT CHARGES ON SHARE T RADING IS NOT CORRECT AS THE ENTIRE DEMAT CHARGES IS FOR THE WHOLE OF THE BUSINESS OF BROKING AND ` 50,000/- CANNOT BE ALLOCATED TOWARDS SHARE TRADING INCOME ON ESTIMATION BASIS. WITH REFERENCE TO ALLOCATION OF REMUNERATION OF THE DIRECTORS IT WAS HAS SUBMISSION THAT THE COMMISSION PAID AT ` 29,53,991/- AT BEST CAN BE CONSIDERED AS ATTRIBUTABLE TO SHARE TRADING TRANSAC TION BECAUSE COMMISSION WAS PAID ON THE TOTAL PROFIT OF THE ASSESSEE COMPAN Y BUT THE REMUNERATION WAS ALSO ALLOCATED BY THE A.O., WHICH WAS OBJECTED TO. IT WAS HIS SUBMISSION THAT THE DIRECTORS SALARY HAS NO DIRECT RELATIONSH IP WITH ASSESSEES SHARE TRANSACTION PROFIT, HENCE THIS AMOUNT NEED NOT TO B E APPORTIONED. SIMILAR ARGUMENT IS ALSO EXTENDED TOWARDS TOTAL REPAIR AND MAINTENANCE CHARGES OUT OF WHICH ` 1,00,000/- WAS ALLOCATED TOWARDS SHARE TRADING INCO ME. 8. THE LEARNED D.R., HOWEVER, SUBMITTED THAT THE ALLOC ATION MADE BY THE A.O. FOR WORKING OUT THE DEDUCTION IS REASONABLE AS ASSESSEE HAS NOT ARRIVED AT THE PROFIT CORRECTLY FOR THE PURPOSE OF REBATE U NDER SECTION 88E. 9. WE HAVE CONSIDERED THE ISSUE. THE ASSESSEE IS A MEM BER OF THE BOMBAY STOCK EXCHANGE AND NATIONAL STOCK EXCHANGE A ND ENGAGED IN THE BUSINESS OF SHARE BROKING, TRADING AND DEALING IN S HARES AND SECURITIES. THE A.O. NOTICED THAT THE ASSESSEE HAS NOT CORRECTLY AP PORTIONED THE EXPENDITURE AND ACCORDINGLY ASKED THE ASSESSEE TO SHOW CAUSE WH Y CERTAIN OTHER DIRECT EXPENSES LIKE INDEXATION CHARGES, STAMP DUTY AND IN DIRECT EXPENSES LIKE DIRECTORS REMUNERATION, ELECTRICITY CHARGES, DEPRE CIATION, ETC. CANNOT BE ALLOCATED. HOWEVER, AFTER CONSIDERING THE EXPLANATI ON OF THE ASSESSEE THE A.O. HAS CONSIDERED AND AMOUNT OF ` 19,99,923/- TOWARDS TRANSACTION CHARGES DIRECTLY ATTRIBUTABLE TO THE SHARE TRANSACT ION INCOME WHICH THE ASSESSEE HAS NO OBJECTION. ACCORDINGLY TO THAT EXTE NT THE AMOUNT STANDS CONFIRMED. THE NEXT IS WITH REFERENCE TO ALLOCATION OF ` 50,000/- OUT OF TOTAL DEMAT CHARGES OF ` 97,88,678/- CLAIMED IN THE P & L ACCOUNT. EVEN THOU GH THE DEMAT CHARGES ARE NOT PERTAINING TO ARBITRAGE I NCOME WHICH DOES NOT USE DEMAT FACILITIES, IT CANNOT BE STATED THAT NO E XPENDITURE IS ALLOCABLE ITA NO. 4662/MUM/2009 ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD. 4 TOWARDS SHARE TRADING AS ASSESSEE IS ALSO IN THE BU SINESS OF SHARE TRADING APART FROM BROKERAGE INCOME. THERE IS PROFIT ON SHA RE TRADING ALSO OFFERED AS INCOME. WE DO NOT HAVE THE QUANTUM OF SHARE TRADING TRANSACTION TO ARRIVE AT THE REASONABLENESS OR OTHERWISE OF THE AMOUNT BU T CONSIDERING THAT ONLY AN AMOUNT OF ` 50,000/- OUT OF ` 97,88,678/- WAS CONSIDERED BY THE A.O. WE ARE OF THE OPINION THAT THIS AMOUNT IS A REASONABLE EXPENDITURE TOWARDS DEMAT CHARGES ALLOCATED TOWARDS SHARE TRADING INCOM E. ACCORDINGLY THIS AMOUNT IS ALSO CONFIRMED. 10. WITH REFERENCE TO THE THIRD ITEM OF INDIRECT EXPENS ES OF DIRECTORS REMUNERATION, IT COMPRISES TWO ITEMS OF SALARY AND COMMISSION PAID. THE ASSESSEE HAS NO OBJECTION FOR ALLOCATION OF COMMISS ION AT THE RATIO OF 18.92% AS THE COMMISSION WAS PAID ON ARBITRAGE INCOME ALSO . IT WAS THE CONTENTION THAT THE SALARY INCOME CANNOT BE APPORTIONED TOWARD S SHARE TRADING INCOME. WE ARE NOT CONVINCED WITH THE ARGUMENT THAT THE IND IRECT EXPENSES CANNOT BE ALLOCATED TO SHARE TRADING. THE A.O. HAS TAKEN T HE TOTAL REMUNERATION PAID TO THE DIRECTORS AND ALLOCATED 18.92% TOWARDS SHARE TRADING AND ARBITRAGE INCOME SO AS TO ARRIVE AT THE INCOME FOR THE PURPOSE OF ALLOWANCE OF REBATE. AS SEEN FROM THE TOTAL PROFITS OF THE AS SESSEE THE ASSESSEES TOTAL INCOME COMPUTED WAS ABOUT ` 6.39 CRORES OUT OF WHICH SHARE TRADING/ARBITRAGE INCOME WAS ALMOST ` 4.06 CRORES BUT THE A.O. HAS TAKEN THE BASIS OF PERCENTAGE OF TRANSACTION ON THE BASIS OF THE STT PAID, WHICH IS AT 18.92%, EVENTHOUGH ON INCOME BASIS MORE THAN 60% OF THE INCOME IS FROM ARBITRAGE INCOME. THE A.O. HAS ALLOCATED ONLY 18.92% OF THE INDIRECT EXPENSES OF REMUNERATION OF DIRECTORS TOWARDS THIS INCOME, WHICH IN OUR VIEW IS REASONABLE. IT CANNOT BE STATED THAT THE DI RECTORS REMUNERATION OTHER THAN COMMISSION PAID CANNOT BE ALLOCATED TO S HARE TRADING ACTIVITY AS ASSESSEES DIRECTORS WERE ALSO ACTIVELY INVOLVED IN MONITORING THE ARBITRAGE ACTIVITY EVENTHOUGH THERE ARE THREE PERSONS APPOINT ED FOR THE ARBITRAGE ACTIVITY AND SUBSTANTIAL AMOUNT WAS PAID TO THEM. I N OUR VIEW THE EXPENDITURE ALLOCATED TOWARDS REMUNERATION AT 18.92 % OF THE TOTAL AMOUNT IS REASONABLE AND DOES NOT REQUIRE ANY MODIFICATION . AN AMOUNT OF ` 58,764/- (SEEMS TO BE SOME ERROR IN CALCULATION) WA S ALLOCATED OUT OF TOTAL EXPENDITURE OF ` 31,05,943/- VIDE PARA 9.5(D). IT IS THE SUBMISSION OF THE ITA NO. 4662/MUM/2009 ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD. 5 ASSESSEE THAT NONE OF THESE EXPENDITURE PERTAINS TO SHARE TRADING ACTIVITY, ACCORDINGLY THE SAME CANNOT BE ALLOCATED TOWARDS IN COME OF SHARING TRADING TRANSACTION UNDERTAKEN BY THE ASSESSEE. AS SEEN FRO M THE EXPENDITURE, ONLY MEMBERSHIP FEES TO STOCK EXCHANGES, STOCK EXCHANGE CHARGES, REGISTRATION FEES TO SEBI, STAMP DUTY EXPENDITURE AND INSURANCE WERE PERTAINING TO SHARE BROKING ACTIVITY. HENCE THESE CHARGES NEED NO T BE ALLOCATED TO ASSESSEES SHARE TRADING ACTIVITY. SINCE THE A.O. H AS CONSIDERED THESE AS INDIRECT EXPENDITURE, WE ARE OF THE OPINION THAT NO THING CAN BE ALLOCATED TOWARDS SHARE TRADING INCOME AS THESE CHARGES PERTA IN TO SHARE BROKING ACTIVITY. ACCORDINGLY THE A.O. IS DIRECTED TO EXCLU DE THE AMOUNT OF ` 58,764/- ALLOCATED VIDE PARA 9.5(D). LIKEWISE THE VSAT AND L EASE LINE CHARGES APPORTIONED AT ` 1,00,000/- ALSO CANNOT BE ALLOCATED TOWARDS SHARE T RADING ACTIVITY AS THESE REPAIRS AND VSAT LEASE LINE CHARG ES PERTAIN MAINLY TO SHARE BROKING ACTIVITY. AN AMOUNT OF ` 1,00,000/- WAS DISALLOWED TOWARDS REPAIRS AND MAINTENANCE CHARGES AND ` 1,00,000/- OUT OF VSAT LEASE LINE CHARGES. THESE AMOUNTS ARE ALLOCATED ARBITRARILY WI THOUT ANY JUSTIFICATION WHETHER ANY OF THESE EXPENDITURES PERTAIN TO ASSESS EES SHARE TRADING ACTIVITY. SINCE THE INDIRECT EXPENDITURE WAS ALREAD Y CONSIDERED THERE IS NO NEED FOR ALLOCATING ANY FURTHER EXPENDITURE AGAIN. THERE IS NO JUSTIFICATION FOR EITHER ARRIVING AT THE AMOUNT OR ALLOCATING AN ADHOC AMOUNT TOWARDS SHARE TRADING INCOME BY THE A.O OUT OF THESE EXPEND ITURES. WE ARE NOT CONVINCED WITH THE SAID APPORTIONMENT DONE ON ADHOC BASIS. IN VIEW OF THIS WE DIRECT THE A.O. TO EXCLUDE THE AMOUNT OF ` 2,00,000/- ALLOCATED TOWARDS REPAIRS AND MAINTENANCE CHARGES AND VSAT LEASE LINE CHARGES. THE ASSESSEE GETS PARTIAL RELIEF ON THIS. THE A.O. IS T O REWORK OUT THE DEDUCTION UNDER SECTION 88E ACCORDINGLY. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD DECEMBER 2010. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 3 RD DECEMBER 2010 ITA NO. 4662/MUM/2009 ASIT C. MEHTA INVESTMENT INTERMEDIATES LTD. 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IV, MUMBAI 4. THE CIT IV, MUMBAI CITY 5. THE DR, G BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.