NIRJAY SECURITIES P. LTD, MUMBAI V. DCIT (OSD) CIR 2(2), MUMBAI

ITA 6081/MUM/2010

• Counselvise Citation: 608119914 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 06-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R S RAWAL
• Assessee Lawyers: D BHASKARA RAO
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M) ITA NO.6081/MUM/2010(A.Y. 2007-08) NIRJAY SECURITIES P. LTD. 201, STOCK EXCHANGE TOWER, DALAL STREET, MUMBAI 23. PAN:AAACN 1785G (APPELLANT) VS. THE DCIT (OSD) CIR.2(2), AAYKAR BHAVAN, MK ROAD, MUMBAI -20 (APPELLANT) APPELLANT BY : SHRI D. BHASKARA RAO RESPONDENT BY : SMT. R.S. RAWAL DATE OF HEARING : 29/12/2011 DATE OF PRONOUNCEMENT : 29/1 2/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 25/1/10 OF CIT(A)-5, MUMBAI RELATING TO ASSESSMENT YEAR 2007-0 8. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS FOLLOWS: 1. THE C.I.T(A) WAS NOT JUSTIFIED IN SUSTAINING DI SALLOWANCE OF RS 13,97,798/ = MADE U/S 14A OF THE LT ACT BY THE A.O. 2.A THE FIRST APPELLATE AUTHORITY SHOULD HAVE HELD THAT RULE 8D OF THE I.T. RULES IS APPLICABLE FOR THE A.Y. 2008-09 AND L ATER YEARS. (B) THE C.I.T (A) FAILED TO NOTICE THAT RULE 8D WAS NOTIFIED ON 24-3- 2008 BY THE C.B.D.T AND THE SAME IS THEREFORE EFFEC TIVE FROM THE A.Y. 2008-09 AND LATER ASSESSMENT YEARS. (C) THE FIRST APPELLATE AUTHORITY OUGHT TO HAVE FOL LOWED THE DECISION OF THE BOMBAY HIGH COURT IN C.I.T VS MIRZA ATAULLAHA B AIG REPORTED AT 202 ITR 291 (BOM). ITA NO.6081/MUM/2010(A.Y. 2007-08) 2 THE APPELLANT CRAVES LEAVE TO ADD TO, VARY, MODIFY OR DELETE ANY OF THE ABOVE GROUNDS BEFORE OR AT THE TIME OF HEARING OF T HE APPEAL. 2. THE ASSESEE IS A COMPANY ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES. IN THE COURSE OF ASSESSMENT PROCEE DINGS THE AO NOTICED ON PERUSAL OF THE BALANCE SHEET THAT THE ASSESSEE HAD MADE INVESTMENT OF RS. 1,48,19,318/-. THESE INVESTMENTS ACCORDING TO THE AO WOULD YIELD INCOME WHICH WOULD NOT BE CHARGEABLE TO TAX UNDER CHAPTER- III OF THE INCOME TAX ACT,1961(THE ACT)[SEC. 10(34) OF THE ACT]. THE AO THEREFORE, PROPOSED TO MAKE DISALLOWANCE OF EXPENSES U/S. 14A OF THE ACT R.W.R. 8D OF THE INCOME TAX RULES. IN RESPONSE THE ASSESSEE SUBMITTED THAT DURING THE PREVIOUS YEAR THERE WAS NO EXEMPT INCOME AND NO DISALLOWANCE SHOU LD BE MADE. THE ASSESSEE ALSO SUBMITTED THAT IT HAD OFFERED THE DIV IDEND INCOME TO TAX. THE AO HOWEVER, OBSERVED AS FOLLOWS: FROM THE SUBMISSION, OF THE ASSESSEE IT IS VISIBLE THAT THE ASSESSEE HAS OFFERED THE EXEMPT INCOME FOR TAXATION, WHICH IS NOT ACCEPTABLE WITHIN THE MEANING AND SCOPE OF THE INCOME TAX ACT 1961. THE ASSESSEE DOES NOT HAVE THE PREROGATIVE OF CHOOSING HEADS OF INCOME. THE DIVIDEND INCOME IS AN EXEMPT INCOME U/S 10(34) OF THE INCOME TAX ACT, 1961, AND HENCE IT NEEDS TO BE PLACED UNDE R THAT HEAD ONLY. FURTHERMORE, SINCE THE ASSESSEE HAS EARNED EXEMPT I NCOME, THE PROVISIONS OF SECTION 14A R.W.R. 8D GETS TRIGGERED OFF. IN VIEW OF THE DECISION OF THE ITAT SPECIAL BENCH, MUMBAI, IN THE CASE OF DAGA - CAPITAL MANAGEMENT PVT. LTD. VIDE ORDER N O. ITA 8057/MUM12003 DT.. 20/10/2008 WHEREIN IT IS HELD TH AT RULE 8D IS RETROSPECTIVE IN NATURE, THE DISALLOWANCE UNDER RUL E 8D OF THE IT RULES IS WORKED OUT. ACCORDINGLY HE MADE A DISALLOWANCE OF RS. 13,97,798 /- UNDER SECTION 14A OF THE ACT BY APPLYING RULE 8D OF THE IT RULES, 1962. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO GIVING RISE TO THIS APPEAL BY THE ASSESEE BEFORE TH E TRIBUNAL. ITA NO.6081/MUM/2010(A.Y. 2007-08) 3 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RECORDS CAREFULLY. IT IS NOT IN DISPUTE BEFORE US THAT THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX,RANGE 10(2), MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIONER OF INCOME TAX RANGE 10(2), MUMB AI & ORS. BY JUDGMENT DATED 12-8-2010 HAS DEALT WITH THE DISALLO WANCE THAT CAN BE MADE U/S.14-A OF THE ACT. THE HONBLE COURT ALSO D EALT WITH THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA C APITAL MANAGEMENT PVT. LTD. 117 ITD 169 (MUM) (SB) AND HAS LAID DOWN THE F OLLOWING PROPOSITION: I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961, AS WAS A PPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE O F THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPAN Y IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDE ND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; ITA NO.6081/MUM/2010(A.Y. 2007-08) 4 V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI)EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICE R IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHA LL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. THE ASSESSMENT YEAR IN THE CASE OF THE ASSES SEE IS AY 07-08 AND THEREFORE RULE 8D OF THE IT RULES, 1962 WOULD NOT A PPLY. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COUR T THE ISSUE WITH REGARD TO DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE HONBLE BOMBAY HIGH COUR T. RULE 8D SHOULD NOT BE APPLIED AND THE AO HAS TO ADOPT A REASONABLE BAS IS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CIRCUMSTANCES AND AFTER AFFORDING REASONABLE ITA NO.6081/MUM/2010(A.Y. 2007-08) 5 OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MA TERIAL ON THE RECORD. WE, THEREFORE, SET ASIDE THE ORDER OF THE AO AND REMAND THE ISSUE TO THE A.O FOR FRESH CONSIDERATION AS STATED ABOVE. 6. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 29 TH DAY OF DEC. 2011. SD/- SD/- (PRAMOD KUMAR ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 29 TH DEC.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.6081/MUM/2010(A.Y. 2007-08) 6 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 29/12/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 29/12/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER