SMK SHARES AND STOCK BROKING, MUMBAI V. DCIT - 4(2)(1), MUMBAI

ITA 4928/MUM/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 3404 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2013-2014
• Appeal Filed On: 23-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V VINOD KUMAR
• Keywords: Earning of tax free income; Speculation loss; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL G BENCH MUMB AI BEFORE SHRI PRAMOD KUMAR, VICE- PRESIDENT AND SHRI PAWAN SINGH JUDICIAL MEMBER ITA NO. 4928/MUM/2018 (ASSESSMENT YEAR 2013-14 ) SMK SHARES AND STOCK BROKING PVT. LTD., 617, PALM SPRING CENTER, LINK ROAD, MALAD (W), MUMBAI 400 064 PAN AABCS4531Q VS. DCIT-4(2)(1) AAYAKAR BHAVAN, M.K. ROAD, MUMBAI- 400020 APPELLANT RESPONDE NT APPELLANT BY : SHRI SATISH MODY (AR) RESPONDENT BY : SHRI V. VINOD KUMAR (SR.DR) DATE OF HEARING : 11.09.2019 DATE OF PRONOUNCEMEN T : 20.11.2019 ORDERUNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. THE APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDE R OF LD. COMMISSIONER OF INCOME-TAX (APPEALS)-9, MUMBAI [THE LD. CIT(A)] DAT ED 13.07.2018 FOR ASSESSMENT YEAR 2013-14. THE ASSESSEE HAS RAISED T HE FOLLOWING GROUNDS OF APPEAL:. 1 . THE LEARNED CIT(A) ERRED IN APPRECIATING THAT THE V ALUE OF STOCK IN TRADE IN SHARES AND SECURITIES IS NOT TO BE CONSIDERED IN WORKING OF DISALLOWANCE U/S 14A READ WITH RULE 8D. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE BUSIN ESS LOSS OF RS. 82,42,978/- AS SPECULATION LOSS BY INCORRECTLY APPL YING THE PROVISIONS CONTAINED IN EXPLANATION TO SEC 73 OF THE INCOME TA X ACT 3. WITHOUT PREJUDICE TO GROUND NO. 2 ABOVE, THE LEA RNED CIT(A) ERRED IN CONFIRMING THE ATTRIBUTION OF THE EXPENSES OF RS.63 ,59,506/-, BEING 39.44% OF THE TOTAL EXPENSES OF RS.1,61,24,509/-, TOWARDS THE SHARE TRADING ACTIVITY OF THE COMPANY. ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 2 2. BRIEF FACTS ARE, THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF A SHARE AND STOCK BROKING AND TRADING IN SHARES AND S ECURITIES, FILED ITS RETURN OF INCOME ON 26.08.2013 DECLARING TOTAL LOSS OF RS. 1,09,53,113/-. THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSING O FFICER DURING THE ASSESSMENT PROCEEDING NOTED THAT ASSESSEE SHOWN DIV IDEND INCOME OF 5,23,328/- IN ITS COMPUTATION OF INCOME. THE ASSESS EE MADE SUO MOTO DISALLOWANCE OF 2,95,300/- UNDER SECTION 14A. THE ASSESSEE WAS ASK ED TO SUBSTANTIATE THE WORKING OF SUO MOTO DISALLOWANCE UNDER SECTION14A. THE ASSESSEE FILED ITS REPLY; VIDE ITS REPLY DATED 28 TH DECEMBER 2015. THE ASSESSING OFFICER HAS NOT RECORDED THE CONTENTS OF REPLY FILED BY THE ASSESSEE. THE ASSESSING OFFICER RECORDED THAT HE IS NOT SATISFIED WITH THE WORKING OF DISALLOWANCE UNDER SECTION14A, FURNISHED BY ASSESSEE. THE ASSESSING OFFICER INVOKED THE PROVISION OF RULE 8D AND MADE INTEREST DISALLOWANCE UNDER RULE 8D2(II) OF RS. 4,44,988/- A ND INDIRECT EXPENSES UNDER RULE8D2(III) OF 3,60,833/-. THE ASSESSING OFFICER AFTER GRANTING T HE SET OFF OF SUO MOTO DISALLOWANCE OF 2,95,300/- MADE FURTHER DISALLOWANCE OF 5,10,521/-. THE ASSESSING OFFICER FURTHER NOTED TH AT IN THE PROFIT AND LOSS ACCOUNT, THE MAJOR ACTIVITIES OF THE ASSESSEE IS FROM SALE OF EQUITY SHARE AND ASSESSEE HAS SHOWN LOSS ON SHARE TRADING OF 18,83,472/-IN ITS SHARE TRADING ACTIVITIES. THE ASSESSING OFFICER NOTED TRE ATED THE SAID LOSS AS SPECULATION LOSS IN VIEW OF THE EXPLANATION TO SECT ION 73 OF THE ACT. THE ASSESSING OFFICER FURTHER NOTED THAT THE DERIVATIVE TRADING LOSS CANNOT BE ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 3 POSSIBLE WITHOUT ALLOCATION OF EXPENSES WHICH IS IN VARIABLY INCURRED FOR DERIVATIVE TRADING. THE ASSESSING OFFICER ON HIS VI EW THAT TOTAL TURNOVER OF THE ASSESSEE IS RS. 1033.05 CRORE, OUT OF WHICH THE NON-SPECULATIVE TURNOVER IS 625.57 CRORE AND SPECULATION TURNOVER IS 407.48 CRORE. THE ASSESSING OFFICER TOOK THE VIEW THAT THE TURNOVER OF SPECULAT IVE TURNOVER IS 39.44%, THEREFORE, PROPORTIONATE EXPENSES ATTRIBUTABLE TO T HE SPECULATIVE ACTIVITIES SHOULD BE DISALLOWED. ACCORDINGLY, OUT OF TOTAL EXP ENSES CLAIMED BY ASSESSEE OF 1.61 CRORE, THE ASSESSING OFFICER DISALLOWED 39.44 % OF THE EXPENSES, WHICH WAS WORKED OUT TO 63,59,506/-. ON APPEAL BEFORE COMMISSIONER (APPEAL) THE DISALLOWANCE UNDER SECTIO N 14A WAS RESTRICTED TO THE EXEMPT INCOME. AND DISALLOWANCE OF EXPENSES WAS UPHELD. THUS, FURTHER AGGRIEVED BY THE ORDER OF LEARNED COMMISSIO NER (APPEALS) THE ASSESSEE HAS FILED PRESENT APPEAL BEFORE THIS TRIBU NAL. 3. WE HAVE HEARD THE SUBMISSION OF LEARNED AUTHORISED REPRESENTATIVE (LD. AR) FOR THE ASSESSEE AND LEARNED DEPARTMENTAL REPRESENT ATIVE (LD. DR) FOR THE REVENUE AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. GROUND NO. 1 RELATES TO DISALLOWANCE UNDER SECTION 14A. THE LD. AR OF TH E ASSESSEE SUBMITS THAT THE ASSESSEE UTILISED THE INTEREST BEARING FUNDS AS WELL AS ASSESSEES OWN FUNDS FOR MAKING INVESTMENT FOR EARNING EXEMPT INCO ME AND ACCORDINGLY, WHILE MAKING THE INTEREST DISALLOWANCE, THE NETTING OF THE INTEREST UNDER RULE 8D2(II) SHOULD BE ALLOWED. ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 4 4. ON THE OTHER HAND THE LD. DR FOR THE REVENUE SUPPOR TED THE ORDER OF THE LD. COMMISSIONER (APPEALS). THE LD. DR FOR THE REVENUE FURTHER SUBMITS THAT THE LD. COMMISSIONER (APPEALS) HAS ALREADY GRANTED SUFFICIENT RELIEF TO THE ASSESSEE. THEREFORE, THE ASSESSEE IS NOT ENTITLED F OR FURTHER RELIEF. ON THE CONTENTION THAT THE ASSESSEE BE ALLOWED RELIEF OF N ETTING OF INTEREST FREE FUNDS, THE DR FOR THE REVENUE SUBMITS THAT THE ASSE SSEE HAS NOT FURNISHED ITS FINANCIAL STATEMENT, AND IN CASE THE CONTENTIONS OF THE ASSESSEE IS ACCEPTED THE ISSUE QUA THE DISALLOWANCE MAY BE RESTORED TO T HE FILE OF ASSESSING OFFICER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PAR TIES AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. DURING THE ASSESSMENT THE ASSESSING OFFICER DISCARDED THE SUO MOTO DISALLOWAN CE UNDER SECTION 14A, OFFERED BY THE ASSESSEE. THE ASSESSING OFFICER INVO KED THE PROVISIONS OF RULE 8D AND MADE DISALLOWANCE OF INTEREST EXPENSES AS WELL AS INDIRECT EXPENSES AND DISALLOWED RS. 8,05,821/- AND AFTER G RANTING SET OFF OF SUO MOTO DISALLOWANCE MADE ADDITION OF RS. 5,10,521/-. HOWEVER, ON APPEAL BEFORE LD. COMMISSIONER (APPEALS) THE DISALLOWANCE WAS RESTRICTED TO THE EXEMPT INCOME. BEFORE, US THE LD. AR FOR THE ASSES SEE MADE LIMITED SUBMISSIONS THAT THE ASSESSEE MAY BE ALLOWED THE NE TTING OF INTEREST EXPENSES QUA THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. WE HAVE NOTED THAT BEFORE MAKING INTEREST DISALLOWANCE UNDE R SECTION 8D(2)(II), THE ASSESSING OFFICER HAS NOT EXAMINED THE RATIO OF INT EREST BEARING FUND AND ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 5 INTEREST FREE FUND INVESTED FOR EARNING EXEMPT INCO ME. BEFORE US THE LD AR FOR THE ASSESSEE MADE LIMITED PRAYER THAT SO FAR AS DISALLOWANCE UNDER RULE 8D(2)(II) IS CONCERNED, THE ASSESSEE MAY BE ALLOWED NETTING OF INTEREST FREE FUNDS AVAILABLE THEM. BEFORE, US THE ASSESSEE HAS N OT FILED THE FINANCIAL STATEMENT SHOWING THE DETAILS OF INTEREST BEARING S AND INTEREST FREE FUNDS AVAILABLE WITH THEM. THEREFORE, CONSIDERING THE SUB MISSIONS OF THE LD AR FOR THE ASSESSEE WE RESTORE THE ISSUE OF INTEREST D ISALLOWANCE UNDER RULE 8D(2)(II) TO THE FILE OF ASSESSING OFFICER TO EXAMI NE THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND GRANT THE BENEFIT O F NETTING OF INTEREST WITH REGARDS TO INTEREST FREE FUNDS AVAILABLE WITH THE A SSESSEE AT THE TIME OF MAKING INVESTMENT FOR EARNING EXEMPT INCOME. NEEDLE SS TO ORDER THAT BEFORE PASSING THE ORDER THE ASSESSING OFFICER SHAL L GRANT OPPORTUNITY TO THE ASSESSEE. SO FAR AS DISALLOWANCE UNDER RULE 8D(2)(I II) IS CONCERNED, THE LD AR FOR THE ASSESSEE HAS NOT CONTESTED THE DISALLOWA NCE, WHICH WE AFFIRM. IN THE RESULT, THIS GROUND OF APPEAL IS PARTLY ALLOWED . 6. GROUND NO.2 RELATES TO CONFIRMING THE BUSINESS LOSS OF RS. 82,42,978/- AS SPECULATION LOSS. THE LD. AR OF THE ASSESSEE SUBMIT S THAT EXPLANATION TO SECTION 73 IS NOT APPLICABLE TO THE ASSESSEE. THE E XPLANATION TO SECTION 73 IS CLARIFICATORY IN NATURE AND HAS RETROSPECTIVE EFFEC T. IN SUPPORT OF HIS SUBMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN CIT VS. DARSHAN SECURITIES (P. ) LTD. [2012] 18 TAXMANN.COM 142 (BOM.) ON THE RATIO THAT THE DEEMIN G FICTION STIPULATES ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 6 THAT WHERE ANY PART OF THE BUSINESS OF A COMPANY CO NSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THE SECTION BE DEEMED TO BE CARRYING ON A SPECUL ATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHA SE AND SALES OF SUCH SHARES. THE DEEMING FICTION APPLIES ONLY TO A COMPA NY AND THE PROVISION MAKES IT CLEAR THAT THE DEEMING FIXATION EXTENDS ON LY FOR THE PURPOSES OF THE SECTION. 7. IN ALTERNATIVE, THE LD. AR OF THE ASSESSEE SUBMITS THAT ALLOCATION OF EXPENSES FOR SPECULATIVE BUSINESS TRANSACTION, THE ONLY INCR EMENTAL COST SHOULD BE TAKEN INTO ACCOUNT. 8. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF AUTHORITIES BELOW. THE LD. DR FURTHER SUBMITS THAT SHARE SOLD AND BOUGHT BY ASSESSEE ARE NOT OWNED BY THE ASSESSEE-COMPANY, THE ASSESSEE-COMPANY MERELY EXECUTES THE TRANSACTION ON BEHALF OF ITS CL IENT IN THE CAPACITY OF INTERMEDIARY AS SHARE BROKER AND EARNED COMMISSION. THE ASSESSEE- COMPANY IS NOT RESPONSIBLE FOR ANY PROFIT EARNED OR LOSS INCURRED OUT OF TRANSACTION ON BEHALF OF ITS CLIENT. THE ROLE OF AS SESSEE IS DIFFERENT FROM ITS ROLE AS A SHARE BROKER. THE LOSS OF BROKER FROM ITS OWN SPECULATION BUSINESS CANNOT BE SET OFF AGAINST THE COMMISSION INCOME EAR NED. ON ALLOCATION/ DISALLOWANCES OF EXPENSES THE LD DR FOR THE REVENUE RELIED ON THE ORDER OF LOWER AUTHORITIES. ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 7 9. WE HAVE CONSIDERED THE SUBMISSION OF THE PARTIES AN D PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE NOTED THAT THE ASSESSI NG OFFICER WHILE PASSING THE ASSESSMENT ORDER TREATED THE LOSS ON SH ARE TRADING IN ITS OWN TRADING AS SPECULATION LOSS. THE ASSESSING OFFICER FURTHER TOOK HIS VIEW THAT ASSESSEE IS ENGAGED IS ENGAGED IN THE BUSINESS OF S HARE TRADING AND SHARE BROKING. THE ASSESSEE IN SHARE BROKING IS EARNING C OMMISSION INCOME FROM ITS CLIENT AND THE LOSS SUFFERED BY ASSESSEE CANNOT BE SET OFF AGAINST THE SAID COMMISSION INCOME AND ACCORDINGLY TREATED THE SAID LOSS AS SPECULATION LOSS. BESIDES THAT THE ASSESSING OFFICER TOOK HIS V IEW THAT AS PER EXPLANATION-2 TO SECTION 28 THAT WHERE THE SPECULAT ION TRANSACTION CARRIED OUT BY ASSESSEE IN SUCH A NATURE AS TO CONSTITUTE T HE BUSINESS, THE BUSINESS SHALL BE DEEMED TO BE DISTINCT AND SEPARATE FROM AN Y OTHER BUSINESS. HENCE, PROPORTIONATE EXPENDITURE INCURRED TOWARD SPECULATI ON TRANSACTIONS ARE LIABLE TO BE SEPARATELY DISALLOWED. ACCORDINGLY, TH E ASSESSING OFFICER WORKED OUT THE TURNOVER OF SPECULATION BUSINESS AS OF 39.44% OF THE TOTAL TURNOVER AND PROPORTIONATELY DISALLOWED 39.44% BEIN G RS. 63,59,506/- OUT OF THE TOTAL EXPENSES OF RS. 1,61,24,509/-, CLAIMED BY THE ASSESSEE. THE LD. CIT(A) CONFIRMED THE ACTION OF ASSESSING OFFICER B Y TAKING VIEW THAT THE ASSESSEE HAS NOT SUGGESTED RELIABLE ALTERNATIVE MET HOD. THEREFORE, THE METHOD ADOPTED BY ASSESSING OFFICER CANNOT BE FAULT ED. BEFORE US, THE LD. AR OF THE ASSESSEE VEHEMENTLY SUBMITTED THAT ONLY I NCREMENTAL COST SHOULD BE TAKEN INTO ACCOUNT WHILE MAKING DISALLOWANCE ON ACCOUNT OF SPECULATIVE ITA NO. 4928 MUM 2018-SMK SHARES AN D STOCK BROKING PVT. LTD. 8 ACTIVITIES. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE THAT ASSESSEE HAS SHOWN A LOSS OF RS. 18,83,472/- IN SHARE TRADIN G ACTIVITIES, AND THE ASSESSING OFFICER HAS DISALLOWED EXPENSES OF RS. 63 ,59,506/- WHICH IS SEEMS TO BE UNREASONABLE AND EXCESSIVE. THEREFORE, WE RESTORE THIS GROUND OF GROUND OF APPEAL TO THE FILE OF THE ASSESSING OF FICER TO CONSIDER ONLY INCREMENTAL COST SHOULD BE TAKEN INTO ACCOUNT WHILE DISALLOWING THE EXPENSES AND PASS THE ORDER ON THIS ISSUE AFRESH. N EEDLESS TO ORDER THAT BEFORE PASSING THE ORDER THE ASSESSING OFFICER SHAL L GRANT OPPORTUNITY TO THE ASSESSEE. IN THE RESULT, THIS GROUND OF APPEAL IS A LLOWED FOR STATISTICAL PURPOSE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COU RT ON 20/11/2019. SD/- SD/- PRAMOD KUMAR PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER MUMBAI, DATE: 20.11.2019 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR G BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI