M/S. NINE INTERNATIONAL SECURITIES P. LTD, MUMBAI V. THE ITO 3(2)(3), MUMBAI

ITA 5902/MUM/2005

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3733 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 02-11-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 03-10-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Speculation loss; Capital expenditure; Speculative transactions; Capital Gains
• Section: 14A; 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER I.T.A.NO. 5902/MUM/2005 ASSESSMENT YEAR : 2001-02 NINE INTERNATIONAL SECURITIES PVT. LTD., 401/402, DALAMAL TOWERS, NARIMAN POINT, MUMBAI 400 021. PAN:AAACA 9446 R VS. THE INCOME-TAX-3(2)(3), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SATISH MODY RESPONDENT BY : AJIT KUMAR SINHA O R D E R PER N.V. VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 12.08.2005 OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, MUMBAI, R ELATING TO THE ASSESSMENT YEAR 2001-02. 2. THE GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL I N NATURE. 3. GROUND NOS. 2 & 3 RAISED BY THE ASSESSEE READS AS F OLLOWS: 2. LEARNED CIT(A) HAS ERRED IN HOLDING THAT ASSESS ING OFFICER HAS RIGHTLY INVOKED PROVISIONS OF EXPLANATION TO SECTION 73 & 4 3(5). 3. LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT ENT IRE BUSINESS WAS COMPOSITE BUSINESS & CANNOT BE SEGREGATED AS TRADIN G AND SPECULATION AS PER PROVISION OF LAW. 4. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS O F TRADING IN SHARES AND SECURITIES. THE ASSESSEE HAD PURCHASED AND SOLD SHARES DURING THE PREVIOUS YEAR. THE ASSESSEE HAD TAKEN AND GIVEN DELIVERY IN RESPECT OF PURCHASE AND SALE OF SOME OF THE SHARES. IN RESPECT OF SOME OF THE SHARE S THERE WAS NO DELIVERY EITHER AT THE TIME OF PURCHASE OR AT THE TIME OF SALE. THE DETAILS OF THE TRANSACTION IN ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 2 RESPECT OF WHICH THERE WAS NO DELIVERY (SPECULATION ) AND IN THE TRANSACTIONS WHERE THERE WAS DELIVERY ARE AS FOLLOWS: OPENING STOCK RS. 50,64,040 ADD: PURCHASES (AS PER STATEMENT) I) TRADING RS.19,02,40,519 II) SPECULATION RS. 1,49,41,295 -------------------- RS.20,51,81,814 LESS: CLOSING STOCK (AS PER STT) RS. 1,10,43 ,487 ------- ------------- RS. 19,41,38,327 SALES (AS PER STATEMENT) I) TRADING RS. 18,91,74,491 II) SPECULATION RS. 1,42,43,557 ------------------- -- RS. 20,34,18,048 ------------------- -- IT CAN BE SEEN FROM THE ABOVE THAT THE PURCHASES OF SHARES WHERE THERE WAS NO DELIVERY WAS RS.1,49,41,295/- AND IN RESPECT OF SAL ES OF SHARES WHERE THERE WAS NO DELIVERY WAS RS.1,42,43,557/-. THUS, THERE WAS A LO SS OF RS.6,97,738/- ON ACCOUNT OF TRADING IN SHARES IN WHICH THE ASSESSEE HAD NEIT HER TAKEN DELIVERY AT THE TIME OF PURCHASE NOR GIVEN DELIVERY AT THE TIME OF SALE. AC CORDING TO THE A.O. THE ABOVE TRANSACTIONS WERE SPECULATIVE TRANSACTION AND HE, T HEREFORE, DID NOT ALLOW SET OFF OF THE AFORESAID LOSS AGAINST THE PROFIT WHICH THE ASS ESSEE HAD EARNED IN PURCHASE AND SALE OF SHARES WHERE THERE WAS ACTUAL DELIVERY. THE ASSESSEE SUBMITTED THAT IN VIEW OF EXPLANATION TO SECTION 73 OF THE ACT, TH E ENTIRE BUSINESS OF PURCHASE AND SALE OF SHARES HAS TO BE CONSIDERED AS A COMPOSITE BUSINESS AND FURTHER SEGREGATION AS TRADING IN SHARES AND SPECULATION IN SHARES COULD NOT BE MADE. THIS SUBMISSION WAS NOT ACCEPTED BY THE A.O. THE A.O. THEREFORE, DID NOT ALLOW THE SET OFF AS CLAIMED BY THE ASSESSEE AND THE SPEC ULATION LOSS WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 5. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE A.O. OBSERVING AS FOLLOWS: ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE REASONING GIVEN BY THE ASSESSING OFFICER. I DO NOT AGREE WITH THE ARGUMENTS OF THE APPELLANT THAT THE ASSESSING OFFIC ER INVOKED THE PROVISIONS OF SECTION 73. IN FACT THE ASSESSING OFF ICER HAS TREATED THE TRANSACTIONS AS SPECULATED BY APPLYING THE PROVISIO NS OF SEC.43 WHICH READS AS UNDER: SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHI CH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDIN G STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHER WISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCR IPS. SINCE THE APPELLANT HAS SETTLED THE TRANSACTIONS OT HERWISE THAN TAKING PHYSICAL DELIVERY THE TRANSACTIONS ARE CLEARLY SPEC ULATIVE TRANSACTIONS AND ANY LOSS SUFFERED ON SUCH TRANSACTIONS WOULD BE SPE CULATIVE LOSS. ACCORDINGLY, I AGREE WITH THE FINDINGS OF THE ASSES SING OFFICER THAT THE NATURE OF THE LOSS OF RS.6,97,738/- IS SPECULATIVE LOSS AND THE GROUNDS OF APPEAL RAISED BY THE APPELLANT ON THIS ACCOUNT ARE DISMISSED. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WHO SUBMITTED THAT SINCE THE ASSESSEE WAS A COMPANY AND THE BUSINESS OF THE ASSESSEE WAS PURCHASE AND SALE OF SHARES OF OTHER C OMPANIES, SUCH COMPANY SHOULD BE DEEMED TO BE CARRYING ON A SPECULATIVE BU SINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF PURCHASE AND SALE OF SHARE S, IN VIEW OF EXPLANATION TO SEC.73 OF THE ACT. HE, THEREFORE, SUBMITTED THAT TH E SEGREGATION OF INCOME AS DONE BY THE A.O. CANNOT BE SUSTAINED. IN THIS REGARD, TH E LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE CALC UTTA HIGH COURT IN THE CASE OF CIT V. ARVIND INVESTMENTS LTD.(192 ITR 365)(CAL.). 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, RELIED ON THE ORDER OF THE CIT(A) AND SUBMITTED THAT TO THE E XTENT THERE WAS ACTUAL DELIVERY OF SHARES AT THE TIME OF PURCHASE AND SALE AND WHER E IN THOSE TRANSACTIONS THERE WAS NO LOSS THEN THE PROFIT ARISING OUT OF SUCH TRA NSACTION HAVE TO BE CONSIDERED AS NORMAL BUSINESS PROFITS. IT WAS ONLY WHERE THERE WA S A LOSS, ARISING OUT OF THE PURCHASE AND SALE OF SHARES IRRESPECTIVE OF THE FAC T THAT THERE WAS DELIVERY OR NOT, THE LOSS HAS TO BE CONSIDERED AS SPECULATIVE LOSS. IN THIS REGARD, THE LEARNED ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 4 DEPARTMENTAL REPRESENTATIVE ALSO SUBMITTED THAT THE HEADING OF SECTION 73 SHOWS THAT IT APPLIES ONLY TO LOSSES IN SPECULATIVE BUSIN ESS AND THE ENTIRE SCOPE OF SECTION 73 IS ONLY WHEN THERE IS A LOSS. IN THIS REGARD HE ALSO REFERRED TO THE LEGISLATIVE HISTORY BEHIND ENACTMENT OF EXPLANATION TO SECTION 73. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF SEC.73 READS AS FOLLOWS: 73. LOSSES IN SPECULATION BUSINESS.--(1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SH ALL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHER SPECU LATION BUSINESS. (2) WHERE FOR ANY ASSESSMENT YEAR ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSINESS HAS NOT BEEN WHOLLY SET OFF UN DER SUB-SECTION (1), SO MUCH OF THE LOSS AS IS NOT SO SET OFF OR THE WHOLE LOSS WHERE THE ASSESSEE HAD NO INCOME FROM ANY OTHER SPECULATION BUSINESS, SHALL, SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER, BE CARRIED FORWAR D TO THE FOLLOWING ASSESSMENT YEAR, AND (I) IT SHALL BE SET OFF AGAINST THE PROFITS AND GAI NS, IF ANY, OF ANY SPECULATION BUSINESS CARRIED ON BY HIM ASSESSABLE FOR THAT ASSE SSMENT YEAR; AND (II) IF THE LOSS CANNOT BE WHOLLY SO SET OFF, THE A MOUNT OF LOSS NOT SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING ASSESSMEN T YEAR AND SO ON. (3) IN RESPECT OF ALLOWANCE ON ACCOUNT OF DEPRECIAT ION OR CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH, THE PROVISIONS OF SUB-SECTION (2) OF SECTION 72 SHALL APPLY IN RELATION TO SPECULATION B USINESS AS THEY APPLY IN RELATION TO ANY OTHER BUSINESS. (4) NO LOSS SHALL BE CARRIED FORWARD UNDER THIS SEC TION FOR MORE THAN *FOUR ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSM ENT YEAR FOR WHICH THE LOSS WAS FIRST COMPUTED. EXPLANATION.--WHERE ANY PART OF THE BUSINESS OF A C OMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS 'INTEREST ON SECURITIES' , 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' AND 'INCOME FROM OTHER S OURCES' OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES CONSISTS IN THE PURCHASE AND SAL E OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. 10. ACCORDING TO THE LEARNED D.R., THE EXPLANATION IS APPLICABLE ONLY IN A CASE WHERE THERE IS A LOSS INCURRED BY AN ASSESSEE WHICH IS A COMPANY AND ANY OF PART OF THE BUSINESS OF SUCH COMPANY IS PURCHASE AND SAL E OF SHARES OF OTHER COMPANIES AND WHERE SUCH LOSS IS INCURRED IN THE BU SINESS OF PURCHASE AND SALE OF SUCH SHARES. IN OTHER WORDS, ACCORDING TO HIM, WHE RE THE BUSINESS OF SUCH COMPANY IS PURCHASE AND SALE OF SHARES OF OTHER COM PANIES AND IN THE COURSE OF ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 5 SUCH BUSINESS THE ASSESSEE EARNS PROFIT AND THERE I S ACTUAL DELIVERY AT THE TIME OF PURCHASE AND SALE, THEN SUCH PROFIT IS NORMAL BUSIN ESS PROFIT. BUT IF THERE IS A LOSS IN SUCH TRANSACTIONS, EVEN THOUGH THERE IS ACTUAL D ELIVERY, THE SAME WILL BE TREATED AS A SPECULATIVE LOSS. 11. WHEN S. 73 WAS INTRODUCED, IT DID NOT HAVE THE EXPLANATION. THE EXPLANATION WAS INSERTED ONLY W.E.F. 1ST APRIL, 197 7, BY THE TAXATION LAWS (AMENDMENT) ACT, 1975. THE OBJECT OF THIS PROVISION WAS TO CURB THE DEVISE SOMETIME RESORTED TO BY BUSINESS HOUSES CONTROLLING GROUPS OF COMPANIES TO MANIPULATE AND REDUCE THE TAXABLE INCOME OF COMPANI ES UNDER THEIR CONTROL. THE EXPLANATION APPLIES ONLY TO A COMPANY. IT DOES NOT APPLY TO ASSESSABLE ENTITIES OTHER THAN COMPANIES. EVEN AMONGST COMPANIES, IT IS NOT APPLICABLE TO A CASE OF A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, HOUSE PROPERTY, CA PITAL GAINS AND OTHER SOURCES. IT IS NOT ALSO APPLICABLE TO A COMPANY WHOSE MAIN BUSI NESS IS THAT OF BANKING OR THE GRANTING OF LOANS AND ADVANCES. IT IS ONLY IN THE C ASE OF OTHER COMPANIES THAT THE EXPLANATION APPLIES. THE EXPLANATION CONSISTS OF A DEEMING PROVISION. IT DEEMS TO ACTUAL PURPOSE AND SALE OF SHARES, THE PROFITS OR L OSSES ARISING OUT OF WHICH WOULD BE OTHERWISE DEALT WITH AS BUSINESS PROFITS OR LOSS ES IN THE NORMAL WAY UNDER THE NORMAL PROVISION OF THE IT ACT, TO BE THE RESULT OF SPECULATION. THE RESULT WOULD BE THAT SUB-S. (1) OF S. 73 WOULD APPLY AND ANY LOSS A RISING OUT OF THE SPECULATION BUSINESS WOULD BE SET OFF ONLY AGAINST PROFITS FROM ANOTHER SPECULATION BUSINESS. THERE IS NO DEFINITION OF THE WORDS 'SPECULATION BU SINESS' APPEARING IN THE EXPLANATION. THE DEFINITION OF 'SPECULATION TRANSAC TION' IN S. 43(5) IS ONLY FOR THE PURPOSES OF SS. 28 TO 41 OF THE ACT. THE LEGISLATU RE APPARENTLY THOUGHT THAT THE ACTUAL PURCHASE AND SALE OF SHARES BY CERTAIN COMPA NIES SHOULD BE DEEMED TO BE SPECULATIVE TRANSACTIONS AS THERE WAS EVIDENCE TO S HOW THAT SOME COMPANIES WERE ADOPTING A DEVICE TO MANIPULATE THE PRICES OF THE S HARES, WHICH ARE DEALT WITH ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 6 AMONGST CONTROLLING GROUPS, TO REDUCE THEIR TAXABLE INCOME. THAT WAS THE REASON WHY THE EXPLANATION WAS INSERTED. 12. THE PROVISIONS OF EXPLANATION TO SEC.73 AS WE HAVE ALREADY SEEN PROVIDES THAT WHERE ANY PART OF THE BUSINESS OF A COMPANY CO NSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHA LL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF S UCH SHARES. ACCORDING TO THE LEARNED D.R. THE USE OF THE EXPRESSION FOR THE PUR POSES OF THIS SECTION SHOWS THAT THE EXPLANATION IS RELEVANT ONLY FOR THE PURPO SE OF APPLICABILITY OF SEC.73. ACCORDING TO THE LEARNED D.R., SEC.73 IS APPLICABLE ONLY WHEN LOSSES FROM SPECULATIVE BUSINESS ARE SOUGHT TO BE SET OFF. THU S ACCORDING TO THE D.R. THE INTERPRETATION SUGGESTED BY HIM LOOKING INTO THE OB JECT OF THE INTRODUCTION OF THE EXPLANATION AS EXPLAINED ABOVE SHOULD BE ACCEPTED. 13. WE FIND THAT AN IDENTICAL ISSUE AS ARISING FO R CONSIDERATION IN THIS APPEAL CAME UP FOR CONSIDERATION BEFORE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. LOKMAT NEWSPAPERS PVT. LTD. 322 ITR 43. TH E FACTS OF THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT WAS THE ASSESSEE WAS A CO MPANY. FOR AY 03-04, THE ASSESSEE SHOWED A PROFIT OF RS.28,37,382 ON SALE OF SHARES AND SECURITIES HELD AS STOCK-IN-TRADE. THE SAME WAS OFFERED TO TAX AS SPE CULATIVE INCOME AFTER SETTING OFF SPECULATION LOSS OF RS.27,61,505 BROUGHT FORWARD FR OM AY 96-97 TO 98-99. THE AO TREATED THE INCOME FROM SALE OF SHARES AS NORMAL BU SINESS INCOME AND DID NOT ALLOW SET OFF AS CLAIMED BY THE ASSESSEE. THE HON BLE COURT HELD THAT SET OFF CLAIMED HAD TO BE ALLOWED. THE HONBLE COURT HELD THAT EXPLANATION TO SEC.73 APPLIES TO A BUSINESS CARRIED ON BY AN ASSESSEE WHI CH IS A COMPANY OF PURCHASE AND SALE OF SHARES AND THEREFORE BOTH PROFIT AS WEL L AS LOSS IN SUCH BUSINESS HAVE TO BE TREATED AS SPECULATIVE INCOME OR LOSS. THE H ONBLE COURT HELD THAT FULL EFFECT ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 7 MUST BE GIVEN TO THE DEEMING FICTION CREATED BY THE EXPLANATION AND WHEN THERE IS PROFIT ONE CANNOT REFUSE TO APPLY THE DEEMING FICTI ON. 14. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT T HE CLAIM OF THE ASSESSEE HAS TO BE ACCEPTED AND THE ADDITION MADE BY THE A.O . HAS TO BE DELETED. WE ORDER ACCORDINGLY. GROUND NOS. 2 & 3 OF THE ASSESSEE ARE ALLOWED. 15. GROUND NOS. 4 AND 5 RAISED BY THE ASSESSEE READ AS UNDER: 4. THE LEARNED CIT(A) HAS ERRED IN DISALLOWING PRO FESSIONAL FEES OF RS. 3,50,000/-. 5. LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT ASS ESSEE IS PERMITTED BY ITS CONSTITUTION TO DEAL IN REAL ESTATE BUSINESS. LEAR NED CIT(A) HAS ERRED IN IGNORING EVIDENCE IN THIS REGARD. 16. THE ASSESSING OFFICER NOTICED IN THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD PAID A SUM OF RS. 1,75,000/- TO MOHAN SADARANGANI AND ANOTHER SUM OF RS. 1,75,000/- TO SURIYA DILIP KANAL . THE AFORESAID FEES WERE PAID FOR THE PURPOSE OF TAKING PROFESSIONAL ADVISE AS TO WHETHER THE ASSESSEE CAN ENTER INTO THE BUSINESS OF REAL ESTATE. IN THIS REGARD T HE A.O. WAS OF THE VIEW THAT THE ASSESSEE WAS IN THE BUSINESS OF TRADING IN SHARES A ND NOT DEALING IN PROPERTY. THEREFORE, THE AFORESAID EXPENDITURE CANNOT BE SAID TO BE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E. THE ASSESSEE, HOWEVER, SUBMITTED THAT DOING REAL ESTATE BUSINESS WAS ALSO PERMITTED UNDER THE MEMORANDUM OF ASSOCIATION OF THE COMPANY. THE A.O. HOWEVER, HELD THAT THE AFORESAID EXPENSES WAS NOT IN RELATION TO THE BUSIN ESS OF THE ASSESSEE AND DISALLOWED THE CLAIM FOR DEDUCTION MADE BY THE ASSE SSEE. 17. ON APPEAL BY THE ASSESSEE THE CIT(A) ALSO CONCU RRED WITH THE VIEW OF THE A.O. AD HE HELD THAT ASSESSEE DID NOT BRING ANY MAT ERIAL ON RECORD TO SHOW THAT IT HAD INTENTION TO ENTER INTO THE REAL ESTATE BUSINES S. 18. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE STAND OF THE ASSESSEE AS WAS PUT FORTH BEFORE THE REVENUE AUTHOR ITIES. BEFORE US IT IS ALSO NOT IN DISPUTE THAT EXCEPT THIS ISOLATED INSTANCE THERE WA S NO OTHER ATTEMPT MADE BY THE ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 8 ASSESSEE TILL DATE TO ENTER INTO REAL ESTATE BUSINE SS. WE ARE OF THE VIEW THAT THE ASSESSEE FAILED TO BRING ANY MATERIAL ON RECORD TO SHOW THAT IT HAD AN INTENTION TO DO REAL ESTATE BUSINESS. IN THE CIRCUMSTANCES WE A RE OF THE VIEW THAT THE ORDER OF CIT(A) IS CORRECT AND DOES NOT CALL FOR ANY INTERFE RENCE. WE, THEREFORE UPHOLD THE FINDINGS OF THE CIT(A) AND DISMISS GROUND NOS. 4 & 5. 19. GROUND NO. 6 & 7 RAISED BY THE ASSESSEE READ AS UNDER: 6. LEARNED CIT(A) HAS ERRED IN UPHOLDING ADDITION OF RS.1,50,000/- MADE U/S.14A. 7. LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT THE RE WAS HARDLY 10 ENTRIES FOR DIVIDEND RECEIVED DURING THE YEAR. 20. DURING THE YEAR THE ASSESSEE COMPANY HAS RECEIV ED DIVIDENDS FROM FOLLOWING MUTUAL FUNDS AND COMPANIES: I) CHOLAMANDALAM MUTUAL FUND RS. 6, 41,510 II) KOTHARI PIONEER MUTUAL FUND RS. 8,37,925 III) DIVIDEND FROM COMPANIES RS. 29,739 ---------------- TOTAL RS. 4,31,814 ---------------- 21. THE DIVIDEND INCOME FROM MUTUAL FUNDS AND DIVID END INCOME ON SHARES, DID FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THE A.O. WAS OF THE VIEW THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOUL D BE MADE ON ACCOUNT OF THE EXPENDITURE INCURRED IN EARNING THE INCOME WHICH DI D NOT FORM PART OF THE ASSESSEES TOTAL INCOME. 22. ON PERUSAL OF THE RECORDS, THE A.O. NOTICED THA T THE ASSESSEE HAD PAID PROFESSIONAL FEES OF RS.33,2,675/-. THESE PAYMENTS WERE MADE IN CONNECTION WITH THE PROFESSIONAL ADVISES FOR MAKING INVESTMENTS AND TRADING IN SHARES AND SECURITIES. THE A.O. THEREAFTER NOTICED THAT THE IN VESTMENTS OF THE ASSESSEE IN MUTUAL FUNDS AND SHARES WERE SUBSTANTIAL. THE A.O. WAS, THEREFORE, OF THE VIEW THAT THE EXPENSES INCURRED BY THE ASSESSEE ON ACCOU NT OF PROFESSIONAL FEES FOR ADVISE OF CAPITAL MARKET RELATED MATTER, PORTFOLIO RELATED MATTERS AND RESEARCH ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 9 CONNECTED WITH INVESTMENT IN SHARES, MUTUAL FUNDS A ND SECURITIES HAD TO BE ALLOCATED IN THE RATIO OF TURNOVER. THE TOTAL EXPE NDITURE ON ACCOUNT OF PROFESSIONAL FEES FOR THE ADVICE ON CAPITAL MARKET RESEARCH ON V ARIOUS SHARES AND SECURITIES AND PORTFOLIO RELATED ADVICE WAS RS. 21,62,500/- (OUT O F THE TOTAL EXPENDITURE UNDER THE HEAD PROFESSION FEES OF RS. 33,2,675/-). THE ASSESS EE ARGUED THAT THERE WAS NO EFFORTS MADE IN THE INVESTMENT IN UNITS OF MUTUAL F UNDS BUT PROFESSIONAL ADVICE WAS SOUGHT FOR INVESTING IN THE SHARES. THE AO WAS OF THE VIEW THAT THERE SHOULD BE EXPENDITURE IN THE MANAGEMENT OF PORTFOLIO OF UN ITS OF MUTUAL FUNDS ALSO. THEREFORE ON ESTIMATE BASIS , THE AO DISALLOWED A S UM OF RS.2,00,000/- UNDER SECTION 14A OF THE INCOME-TAX ACT AS RELATED TO EAR NING DIVIDEND INCOME. 23. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD AS F OLLOWS: I HAVE CAREFULLY CONSIDERED THE REASONING GIVEN BY THE ASSESSING OFFICER AND THE SUBMISSIONS OF THE APPELLANT. AS PER THE AP PELLANT THE DIVIDEND INCOME EARNED IS ONLY RS. 9.30 LACS APPROX. WHILE T HE INTEREST INCOME IS 17.16 LACS WHICH IS INCLUDED IN THE OTHER INCOME. T HAT THE DISALLOWANCE OF RS. 2 LACS OUT OF TOTAL EXPENSES OF RS. 9.3 LACS IS HIGHLY EXCESSIVE BECAUSE THE DIVIDEND INCOME IS HARDLY 10% OF THE OTHER INCO ME. THE A.O. HAS MADE THE DISALLOWANCE BY CONSIDERING THE QUANTUM OF INVE STMENTS MADE IN THE MUTUAL FUNDS AS COMPARED TO THE TOTAL TURN OVER OF SALE AND PURCHASES OF SHARES. FURTHER, THE CLAIM OF THE APPELLANT IS THT THERE ARE ONLY 10 ENTRIES OF DIVIDENDS AND MUCH EXPENDITURE CANNOT BE SAID TO BE RELATING TO EARNING OF SUCH DIVIDEND. IN THE ABSENCE OF CLEAR BIFURCATION OF EXPENSES FOR EARNING DIVIDEND INCOME THE ASSESSING OFFICER HAS MADE DISA LLOWANCE ON AD HOC BASIS WHICH APPEARS TO BE HIGHLY EXCESSIVE IN VIEW OF THE FACT THAT THE INVESTMENTS ARE NOT MADE OUT OF THE BORROWED FUNDS AND ONLY THE ADMINISTRATIVE EXPENSES ARE TO BE ALLOCATED AND THE EFFORTS PUT IN TO ACHIEVE THE TURN OVER OF 20.34 CRORES IN SHARE TRAD ING ARE MORE THAN MAKING AN INVESTMENT IN THE MUTUAL FUNDS WHICH HAVE GENERATED THE DIVIDEND INCOME. IN THE CIRCUMSTANCES, IT WILL BE F AIR AND JUSTIFIED TO RESTRICT THE DISALLOWANCE TO RS. 1.50 LACS AND THE APPELLANT GETS A RELIEF OF RS. 50,000/-. 24. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE. WE ARE OF THE VIEW THAT THE DISALLOWANCE OF THE EXP ENSES INCURRED TO EARN THE INCOME WHICH DID NOT FORMED PART OF THE TOTAL INCOM E SUSTAINED BY THE CIT(A) IS REASONABLE AND WE THEREFORE CONFIRM HIS ORDER AND D ISMISS GROUND NOS. 6 & 7 RAISED BY THE ASSESSEE. ITA NO.5902/M/2005 NINE INTERNATIONAL SECURITIES PVT. LTD. 10 25. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF NOVEMBER, 2010. SD. SD. (RAJENDRA SINGH) (N.V. VASUDEAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED THE 10 TH NOVEMBER, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT-3, MUMBAI 4. THE CIT(A)-III, MUMBAI 5. THE DR C BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI