ACIT 10(1), MUMBAI V. PRESCIENT SUCURITIES P.LTD, MUMBAI

ITA 5281/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9421 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 07-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 11-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRI PARTHASARATHI NAIK
• Assessee Lawyers: AJAY R SINGH; DR K SHIVARAM
• Keywords: Business income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTAT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER I.T.A. NO.5281/M/2011 ASSESSMENT YEAR: 2008-2009 THE ACIT-10(1), 455, AAYAKAR BHAVAN, 4 TH FLOOR, M.K. MARG, MUMBAI 400 020. VS. M/S. PRESCIENT SECURITIES PVT. LTD., 102, WINDOR VIDHYA NAGRI MARG, OFF. CST ROAD, KALINA, SANTACRUZ (E), MUMBAI 400 098. PAN:AADCP0490P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHRI PARTHASARATHI NAIK, SR. DR RESPONDENT BY : SHRI DR. K. SHIVARAM & AJAY R SINGH DATE OF HEARING: 7.11.2012 DATE OF ORDER: 21.11.2012 O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE REVENUE ON 11.7.2011 IS AG AINST THE ORDER OF CIT (A)- 21, MUMBAI DATED 21.4.2011 FOR THE ASSESSMENT YEAR 2008-2009. 2. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROU NDS WHICH READ AS UNDER: 1 (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN HOLDING THAT THE FIGUR ES OF OPENING AND CLOSING STOCK CANNOT BE CONSIDERED FOR WORKING THE DISALLOWANCE U/S 14A OF THE ACT. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD CIT (A) FAILED TO APPRECIATE THAT AS PE R THE HONBLE ITATS DECISION IN THE CASE OF DAGA CAPITAL MANAGEM ENTS PVT. LTD. SECTION 14A WOULD BE APPLICABLE WHERE SHARES A RE HELD AS STOCK-IN-TRADE. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A ) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER BE RESTORED. 3. DURING THE PROCEEDINGS BEFORE US, DR. K. SHIVARA M, LD COUNSEL MADE AN APPLICATION UNDER RULE-27 OF THE INCOME TAX APPELLA NT TRIBUNAL RULES, 1963 RAISING 2 M/S. PRESCIENT SECURITIES PVT. LTD AN OBJECTION AND READ OUT THE SAME. FURTHER, LD CO UNSEL MENTIONED THAT THE ISSUE RAISED BY THE REVENUE RELATES TO THE APPLICABILITY OF SECTION 14A OF THE ACT WHEN THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING OF THE DIVIDEND INCOME YIELDED ON SHARES HELD AS STOCK-IN- TRADE . LD COUNSEL MENTIONED THAT THE DIVIDEND YIELDED BY SUCH SHARES IS NOT ONLY EXEMPT U/S 10(34) OF THE ACT BUT ALSO THE SAME DOES NOT ATTRACT SECTION 14A OF THE ACT. FOR THIS PROPOSITION, HE RELIED ON THE HONBLE KARNATAKA HIG H COURT JUDGMENT IN THE CASE OF CCL LTD. VS. JCIT (250 ITR 291) IN SUPPORT OF HIS S TAND ON THE ISSUE. AS PER THE COUNSEL, NO DISALLOWANCES U/S 14A SHOULD BE DONE WH EN ASSESSEE EARNS DIVIDEND OUT OF THE SHARES HELD AS STOCK-IN-TRADE. AS PER THE COUNSEL, ABOVE CITED JUDGMENT CONSIDERED THE SPECIAL BENCH DECISION IN THE CASE O F ITO VS. M/S. DAGA CAPITAL MANAGEMENT P. LTD. (117 ITD 169) AS WELL AS THE ITA T, MUMBAI DECISION IN THE CASE OF M/S. AMERICAN EXPRESS BANK LIMITED IN ITA NO. 59 04 & 6022/MUM/2000 WHICH OTHERWISE, SUPPORTS THE REVENUE. IN THIS REGARD, LD COUNSEL FILED A COPY OF THE DECISION IN THE CASE OF M/S. INDIA ADVANTAGE SECURIT IES LTD. VIDE ITA NO.6711/M/2011 (AY: 2008-2009) DATED 14.9.2012 (PAR A 5) AND ANOTHER DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF ESQUIRE PRIVA TE LIMITED VIDE ITA NO.5688/MUM/2011 (AY: 2008-2009) DATED 29.8.2012 (P ARA 14 TO 16 ARE RELEVANT), ON IDENTICAL FACTS, THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE AND DR SHIVARAM READ OUT THE SAID PARAGRAPHS. 4. ON THE OTHER HAND, LD DR RELIED ON THE ORDER OF THE REVENUE AUTHORITIES. FURTHER, AS PER LD DR, REQUEST FOR NOT INVOKING THE PROVISIONS OF SECTION 14A IN RESPECT OF THE EXEMPT DIVIDEND INCOME IS LIKE ASKIN G FOR SHARE OF THE CAKE AND EAT IT TOO. THE ASSESSEE CLAIMED EXEMPTION FROM TAX IN RE SPECT OF THE DIVIDEND INCOME ARISING OUT OF THE SHARES HELD AS STOCK IN TRADE IN VIEW OF THE PROVISIONS OF SECTION 10 AND NOT ACCEPTING FOR ANY DISALLOWANCE OF EXPENDITU RE U/S 14A OF THE ACT. HE HOWEVER, DISPLAYED HIS RESPECT FOR THE CITED JUDGME NT OF HONBLE KARNATAKA HIGH COURT. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE ORDE RS OF THE REVENUE, THE PAPERS AVAILABLE ON RECORD AND THE DECISIONS CITED BY THE LD COUNSEL TO SUPPORT THE 3 M/S. PRESCIENT SECURITIES PVT. LTD CONTENTIONS OF THE ASSESSEE. IT IS A SETTLED PROPOS ITION AT THE LEVEL OF HONBLE HIGH COURT OF KARNATAKA THAT THE PROVISION OF SECTION 14 A HAS NO APPLICATION TO THE DIVIDEND INCOME ARISING OUT OF THE SHARES HELD AS S TOCK-IN-TRADE WHICH IS AN UNDISPUTED FACT IN THE PRESENT CASE. 6. HONBLE KARNATAKA HIGH COURT HAS EXAMINED THE IS SUE AND HELD THAT THE EARNING OF DIVIDEND INCOME OUT OF THE SHARES HELD O N TRADING ACCOUNT IS MERELY AN INCIDENTAL INCOME AS THE ASSESSEE IS ALWAYS WANT TH OSE SHARES TO BE PARTED OR SOLD AND ONLY THE UNSOLD SHARES IS THE SOURCE OF SUCH IN CIDENTAL DIVIDEND INCOME. IN SUCH CASE, THE PROVISIONS OF SECTION 14A ARE NOT APPLICA BLE. THIS BEING A DIRECT JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA ON THIS ISSUE IN THE PRESENT CASE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISION OF SPE CIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). WE HAVE CONSIDERED THE PRINCIPLE OF JUDICIAL HIERARCHY. WE HAVE ALSO PERUSED PARA 5 AN D 6 OF THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. INDIA ADVANTAGE SECURIT IES LTD (SUPRA) WHICH CONSIDERED THE SAID JUDGMENT OF HONBLE HIGH COURT O F KARNATAKA FOR DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE. CONSIDERING THE SE TTLED NATURE OF THE ISSUE AND THE IMPORTANCE OF THE SAID DECISION OF THE TRIBUNAL, RE LEVANT PARAGRAPHS ARE REPRODUCED AS UNDER: 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVA L CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TH E DISALLOWANCE OF EXPENSES U/S 14A IN RELATION TO THE EXEMPT DIVIDEND INCOME RECEIVED FROM SHARES HELD ON TRADING ACCOUNT . THE AO DISALLOWED THE EXPENSES HOLDING THAT THE PROVISIONS OF SECTION 14A WERE APPLICABLE EVEN IN RELATION TO THE DIVIDEND RECEIVED FROM THE TRADING SHARES. THE LD CIT (A) HAS HOWEVER HELD THAT THE PROVISIONS OF SECTION 14A WILL NOT APPLY TO THE SHARES HELD ON TRADING ACCOUNT. THE REVENUE HAS PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. AMERICAN EXPRESS BANK LIMITED (SUPRA) IN WHICH THE TRIBUNAL HAS HELD THAT THE EXPENDITURE U/S 14A HAS TO BE DISALLOWED EVEN IN RESPECT OF DIVIDEND INCOME RECEI VED FROM TRADING SHARES. THE TRIBUNAL FOLLOWED THE DECISION OF SPEC IAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGE MENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD RELIED ON T HE JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE THAT THE DISALL OWANCE COULD NOT 4 M/S. PRESCIENT SECURITIES PVT. LTD BE MADE IN RELATION TO THE DIVIDEND RECEIVED FROM T RADING SHARES. THE TRIBUNAL HAD HOWEVER, DISTINGUISHED THE SAID JUDGME NT OF HONBLE HIGH COURT OF KERALA ON THE GROUND THAT IN THAT CASE THE ACQUISITION OF SHARES WITH THE BORROWED FUNDS WAS F OR THE PURPOSE OF CONTROLLING THE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING THE SHARES WAS BUSINESS, THE HIGH COURT H AD UPHELD THE DISALLOWANCE U/S 14A OF THE IT ACT. THE TRIBUNAL AL SO NOTED THAT THE HIGH COURT IN THAT CASE HAD ONLY OBSERVED THAT THE INTEREST PAID ON BORROWED FUNDS UTILIZED FOR ACQUIRING SHARES COULD BE ALLOWED AS DEDUCTION U/S 36(1)(III) ONLY IF SHARES WERE HELD AS STOCK-IN- TRADE . THESE OBSERVATIONS WERE ONLY OBITER DICTA AND NO T THE RATIO DECIDENDI OF THE JUDGMENT. THE RATIO DECIDENDI OF THE JUDGMENT WAS DISALLOWANCE OF INTEREST U/S 14A WHICH HAD BEEN UPH ELD BY THE TRIBUNAL. THE TRIBUNAL, THEREFORE, DID NOT ACCEPT THE ARGUMENTS BASED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CASE OF SMT. LEENA RAMACHANDRAN (SUPRA) WHICH WAS NOT DIRECTLY O N THE ISSUE OF DISALLOWANCE OF EXPENSES IN RELATION TO THE DIVIDEN D INCOME RECEIVED FROM TRADING IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAV E RECENTLY CONSIDERED THE DISALLOWANCE OF EXPENSES INCURRED ON BORROWINGS MADE FOR PURCHASE OF TRADING SHARES U/S 14A OF THE IT AC T IN THE CASE OF CCL LTD. VS. JCIT (SUPRA). THE ASSESSEE IN THAT CASE W AS DISTRIBUTOR OF STATE LOTTERIES AND DEALER IN SHARES AND SECURITIES . THE ASSESSEE HAD TAKEN LOANS FOR THE PURCHASE OF CERTAIN SHARES AND IT HAD INCURRED EXPENDITURE FOR BROKING THE LOANS WHICH HAD BEEN DI SALLOWED UNDER RULE 8D BY THE AO AND CONFIRMED BY THE LD CIT (A). THE TRIBUNAL AGREED WITH THE AUTHORITIES BELOW THAT THE EXPENDIT URE RELATION TO EARNING OF DIVIDEND INCOME THOUGH INCID ENTAL TO THE TRADING IN SHARES WAS ALSO TO BE DISALLOWED U/S 14A OF THE IT ACT . THE TRIBUNAL HOWEVER, HAD OBSERVED THAT THE ENTI RE BROKING COMMISSIONS WAS RELATABLE TO EARNING OF DIVIDEND IN COME AS THE LOAN HAD BEEN UTILIZED FOR THE PURCHASE OF SHARES AND TH E PROFIT SHOWN FROM THE SALE OF SHARES HAD BEEN OFFERED AS BUSINESS INC OME. THE TRIBUNAL, THEREFORE DIRECTED THE AO TO BIFURCATE THE EXPENDIT URE PROPORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY TH E HIGH COURT. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WER E PURCHASED WERE SOLD AND INCOME DERIVED WAS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 30% OF SHARES WHICH REMAINED UNSOLD HAD REVERTED TO DIVIDEND INCOME FOR WHICH TH E ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT ALL. THE HIGH COUR T ALSO OBSERVED THAT THE ASSESSEE HAD NOT RETAINED THE SHARES WITH THE INTEN TION OF EARNING DIVIDEND INCOME WHICH WAS INCIDENTAL DUE TO HIS SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSEE. THE HIGH COURT, THEREFORE, DID NOT UPHOLD THE ORDER OF THE TRIBUNAL DISALLOWING THE EXPENDITURE IN RELATION TO THE DIVIDEND FROM SH ARES. THUS, 5 M/S. PRESCIENT SECURITIES PVT. LTD THERE BEING A DIRECT JUDGMENT OF A HONBLE HIGH COU RT ON THIS ISSUE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DE CISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. D AGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). IN FACT, WE NOTE TH AT THE TRIBUNAL IN THE CASE OF GANJAM TREADING CO. LTD. (SURPA) HAS AL READY CONSIDERED THIS SITUATION AND HELD THAT IN VIEW OF THE JUDGMEN T OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (SUPRA) THE DISALLOWANCE OF INTEREST IN RELATION TO THE DIVIDEN D RECEIVED FROM TRADING SHARES CANNOT BE MADE. WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE LD CIT (A) IN DELETIN G THE DISALLOWANCE U/S 14A COMPUTED BY THE AO IN RELATION TO THE STOCK-IN- TRADE. THE ORDER OF THE LD CIT (A) IS ACCORDINGLY UPHELD. 7. FURTHER, IT IS A FACT THAT THE ASSESSEE OFFERED DISALLOWANCE U/S 14A AT RS. 5,64,531/-. IN THIS REGARD, LD DR RAISED AN ARGUMEN T THAT THE ASSESSEE HAVING OFFERED FOR DISALLOWANCE U/S 14A IS BOUND TO OFFER IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D. THIS ARGUMENT WAS CONSIDERED BY THE CIT (A) IN HIS ORDER VIDE PARA 2.3. WE PERUSED THE ORDER OF THE CIT (A) AND THE CONTENT S OF THE SAID PARA 2.3 AND FIND THE REASONING GIVEN BY THE CIT(A) THEREIN IS QUITE REASONABLE. THE CONTENTS OF THE SAID PARA ARE REPRODUCED AS UNDER: THE AO CONSIDERED THE OPENING BALANCE OF INVESTMENT AT RS. 13.36 CRORES AND CLOSING BALANCE OF INVESTMENT AT RS. 41. 42 CRORES THEREBY TAKING AVERAGE INVESTMENT AT RS. 27.39 CRORES. HOW EVER, AS PER BALANCE SHEET THE APPELLANT WAS HAVING OPENING BALA NCE OF INVESTMENT AT RS. NIL WHEREAS THE CLOSING BALANCE OF INVESTMENT WAS AT RS. 70,000/-. THUS, THE AVERAGE VALUE OF INVESTMENT DU RING THE YEAR WAS AT RS. 35,000/- ONLY. AS PER THE PROVISIONS OF RUL E 8D, IT WAS ONLY THE INVESTMENT WHICH HAD TO BE CONSIDERED FOR THE PURPO SE OF DISALLOWANCE. HOWEVER, IN THE CASE UNDER CONSIDERATION, THE AO IN CORRECTLY ADOPTED THE FIGURES OF OPENING AND CLOSING BALANCE OF STOCK IN TRADE. THUS, IN MY CONSIDERED VIEW, THE OPENING AND BALANCE OF STOC K IN TRADE WAS NOT REQUIRED TO BE CONSIDERED FOR WORKING OUT THE DISAL LOWANCE AS PER FORMULA PROVIDED IN RULE 8D. AS PER INTERPRETATION OF THE PROVISIONS OF RULE 8D, IT WAS ONLY THE OPENING AND CLOSING BALANC E OF INVESTMENT WHICH WAS REQUIRED TO BE CONSIDERED FOR WORKING THE DISALLOWANCE. THE APPELLANTS AVERAGE VALUE OF INVESTMENT DURING THE YEAR WAS ONLY AT RS. 35,000/- ONLY, THE INDIRECT EXPENDITURE DISALLOWANC E AS PER CLAUSE (II) OF RULE 8D(2) WAS WORKING OUT AT RS. 3240/- ONLY. CON SEQUENTLY, THE O.5% OF AVERAGE VALUE OF INVESTMENT OF RS. 35,000/- WAS WORKING OUT TO RS. 2000/- ONLY. IN THE FACTS AND CIRCUMSTANCES, THE DISALLOWANCE AS PER FORMULA PROVIDED IN RULE 8D WAS REQUIRED TO BE WORKED OUT AS UNDER:- 6 M/S. PRESCIENT SECURITIES PVT. LTD (I) DIRECT INTEREST EXPENDITURE RS. NIL (II) INDIRECT INTEREST EXPENDITURE RS. 340/- (III) 0.5% OF AVERAGE INVESTMENT RS. 2000/- RS. 2,340 /- THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. 234 CTR 1 HAS HELD THAT PROVISIONS OF RULE 8D ARE APPLICABLE FROM AY 2008-2009 ONWARDS. THE PROVISIONS OF RULE 8D AR E STATUTORILY MANDATORY AND ANY WORKING OF DISALLOWANCE U/S 14A I S REQUIRED TO BE WORKED OUT AS PER FORMULA PROVIDED IN RULE 8D(2) ON LY. AS PER THE PROVISIONS OF RULE 8D(2) THE DISALLOWANCE U/S 14A W ORKED OUT TO RS. 340/- ONLY WHEREAS THE APPELLANT ITSELF HAD OFFERED DISALLOWANCE U/S 14A AT RS. 5,64,531/-. IN THE FACTS AND CIRCUMSTANC ES, THE AO WAS NOT JUSTIFIED IN DISALLOWING FURTHER EXPENDITURE OF RS. 34,68,900/- U/S 14A OF THE ACT. THE DISALLOWANCE MADE BY THE AO IS, THERE FORE, DESERVED TO BE DELETED. 8. THE DECISION OF THE CIT (A) IS WELL REASONED AND IN OUR OPINION, THE SAME IS SUSTAINABLE. THEREFORE, ORDER OF THE CIT (A) DOES N OT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE ARE DISMISSED AND CROSS OBJECTION RAISED BY THE ASSESSEE AS PER RULE 27 OF THE INCOME TAX APPELLATE RULES, 1962 IS ARE ALSO DISMISSED AS ACADEMIC. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF NOVEMBER, 2012. SD/- SD/- (VIVEK VARMA) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 21.11.2012 AT :MUMBAI OKK COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR C, BENCH, ITAT, MUMBAI. 6. GUARD FILE. 7 M/S. PRESCIENT SECURITIES PVT. LTD // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI