PARAMOUNT ENTERPRISES, MUMBAI V. JCIT 15(1), MUMBAI

ITA 6205/MUM/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9192 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 23-10-2013
• Court: TRIBUNAL
• Department Lawyers: IN CIRCUMSTANCES OF; RULE D ON FACTS
• Assessee Lawyers: IN CIRCUMSTANCES OF CA SE; CASE WAS COVERED
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI VK;DJ VIHYH; VF/KDJ.K] ** LH ** U;K;IHB EQACBZ BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER JH FOT; IKY JKO] U;KF;D LNL; ,OA JH JKTSUNZ] YS[KK LNL; DS LE{K ITA NO. 6205 /MUM/ 2013 ASSESSMENT YEAR: - 2009 - 10. PARAMOUNT ENTERPRISES 701, BALAJI GARDEN, A WING, 42 - 47, SCHEME ROAD, NO. 6 OPP. INDIAN GYMKHANA, MATUNGA MUMBAI 400 019. VS.` JOINT CIT 15(1), MUMBAI . APPELLANT RESPONDENT ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 7.08.2013 OF CIT(A) FOR A.Y. 2009 - 10. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN THIS APPEAL: - 1. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE, AND IN LAW, LEARNED COMMISSIONER OF INCOME - TAX (APPEAL) ERRED IN UPHOLDING ACTION OF THE ASSESSING OFFICER IN TRAVELING THROUGH SUB - RULE 80 (2) WITHOUT APPRECIATING THAT, HE HAD NO JURISDICTION TO DO SO W HEN THE APPELLANT HAD VOLUNTARILY DISALLOWED RS. 53,518, BEING 5% OF EXEMPT INCOME; AND THE CASE WAS COVERED BY RULE 8D (1). 2. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE, AND IN LAW, LEARNED COMMISSIONER OF INCOME - TAX (APPEAL) ERRED IN UPHOLDING ACT ION OF THE ASSESSING OFFICER IN DISALLOWING RS. 971,849 INVOKING PROVISIONS OF RULE 80 READ WITH SECTION14A AGAINST DIVIDEND INCOME OF RS. 1,070,360 IGNORING THE FACT THAT, THE ASSESSEE BY SHRI MEHUL SHAH REVENUE BY SHRI PREMANAND J. DATE OF HEARING 11.03. 2015 DATE OF PRONOUNCEMENT 20 .03.2015 ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 2 | P A G E APPELLANT IS A TRADER IN SHARES AND SECURITIES, AND DIVIDENDS WERE INCIDENTAL T O ITS HOLDING SHARES AND SECURITIES. 3. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE, AND IN LAW, LEARNED COMMISSIONER OF INCOME - TAX (APPEAL) ERRED IN UPHOLDING ACTION OF THE ASSESSING OFFICER IN TREATING INTEREST RECEIPT AS INCOME FROM OTHER SOURCES A ND IGNORING INTEREST OUT GO THAT HAD DIRECT NEXUS WITH INTEREST RECEIPT; AND THEREBY EXPOSING ENTIRE INTEREST OUT GO OF RS.1 ,489,851 TO THE RIGOR OF SECTION 14A READ WITH RULE 80. 4. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE, AND IN LAW, LEARNED C OMMISSIONER OF INCOME - TAX (APPEAL) ERRED IN UPHOLDING ACTION OF THE ASSESSING OFFICER IN CONSIDERING SHARES AND SECURITIES HELD AS STOCK IN TRADE FOR THE PURPOSE OF 1/2 % OF AVERAGE INVESTMENTS AND NUMERATOR FOR INTEREST DISALLOWANCE FOR COMPUTATION OF DIS ALLOWANCE UNDER RULE 80 BY NOT ADJUDICATING THIS GROUND. 2. THE ONLY ISSUE ARISES FROM THE GROUNDS RAISED BY THE ASSESSEE IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) IS ERRED IN UPHOLDING THE DISALLOWANCE MADE BY ASSESSING OFFICER U/S 14A R.W.R 8D. THE ASSESSEE IN THIS CASE IS ENGAGED IN THE BUSINESS OF TRADING AND DEALING IN SHARES AND SECURITIES. THE SHARES AND SECURITIES ARE HELD AS STOCK IN TRADE. THE ASSESSEE HAS EARNED THE DIVIDEND INCOME OF RS. 10,70,360/ - DURING THE YEAR W HICH WAS CLAIMED AS EXEMPT U/S 10(34) AND 10(35) OF INCOME TAX ACT. THE ASSESSEE ITSELF HAS DISALLOWED A SUM OF RS. 53,518/ - BEING 5% OF THE DIVIDEND INCOME IN THE COMPUTATION OF TOTAL INCOME. THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE U/S 14A R.W.R 8D AMOUNTING TO RS. 9,71,849/ - COMPRISING OF THE DISALLOWANCE OF INTEREST OF RS. 8,03,696/ - AND DISALLOWANCE ON ACCOUNT OF OTHER EXPENSES OF RS. 1,68,153/ - . THE ASSESSEE CHALLENGED THE ACTION OF ASSESSING OFFICER BEFORE THE CIT(A) BUT COULD NOT SUCCEED AS THE CIT(A) HAS CONFIRMED THE DISALLOWANCE MADE BY ASSESSING OFFICER U/S 14A. ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 3 | P A G E 3. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME. HE HAS POINTED O UT THAT THE ASSESSEE IS A STOCK TRADER AND DID NOT HOLD ANY INVESTMENT IN SHARES AND SECURITIES, THEREFORE, THE ENTIRE EXPENDITURE ON ACCOUNT OF INTEREST AS WELL AS OTHER EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF TRADING ACTIVITY. WHAT EVER DIRECT EXPENSES INCURRED FOR EARNING THE DIVIDEND INCOME HAS ALREADY BEEN DISALLOWED BY THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE HAS RECEIVED THE INTEREST OF ABOUT RS. 20,00,000 AS AGAINST THE INTEREST PAYMENT OF RS. 14,89,850/ - , THERE FORE, THE NET INTEREST IS AN INCOME AND NOT AN EXPENDITURE. SINCE THE ASSESSEES OWN FUND IS MORE THAN THE BORROWED FUND AND INTEREST INCOME IS MORE THAN THE INTEREST PAYMENT, THEREFORE, NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE U/S 14A IS CALLED FOR . THE SECOND ARGUMENT ADVANCED BY THE ASSESSEE IS THE JURISDICTION OF THE ASSESSING OFFICER TO INVOKE RULE 8D(2) WITHOUT RECORDING THE SATISFACTION OF NOT ACCEPTING THE DISALLOWANCE MADE BY THE ASSESSEE ON ITS OWN. IN SUPPORT OF HIS CONTENTION HE HAS RE LIED UPON THE FOLLOWING DECISIONS: - (I) CIT VS. UTI BANK LTD. [2013] 32 TAXMANN.COM 370 (II) DIRECTOR OF INCOME TAX VS. BNP PARIBAS SA [2013] 32 TAXMANN.COM 276 (III) PINNACLE BROCOM PRIVATE LTD. VS. ACIT [IN ITA NO. 6247/MUM/2012 (IV) ACIT VS. DHAMPUR SUGAR MILLS PVT. LTD . (ALL.)(HC) ( ITA NO. 220 OF 2014 DATED 5.11.2014. (V) CIT VS. CONSOLIDATED PHOTO & FINVEST LTD. [IT APPEAL NO. 1290 OF 2011] (VI) SHAREKHAN FINANCIAL SERVICES (P) LTD. VS. ACIT [ITA NO. 5861/MUM/2011 DATED 20.08.2014. (VII) ESQUIRE PVT. LTD. VS. DCIT [ ITA NO. 5688/MUM/2011 (VIII) DCIT VS. INDIA ADVANTAGE SECURITIES LTD [ITA NO. 6711/MUM/2011 (IX) YATISH TRADING CO. (P) LTD. VS. ASSISTANT COMMISSIOER OF INCOME TAX [ 9 TAXMANN.COM 164. ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 4 | P A G E (X) DCIT VS. BALJIT SECURITIES PVT. LTD. (KOL.) (TRIB.) ITAT 1183/KOL/2012 4. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW AS WELL AS THE DECISION OF THIS TRIBUNAL IN THE CASE OF DAMANI ESTATES & FINANCE PVT. LTD. IN ITA NO. 3029/MUM2012 DATED 17.07.2013 AS RELIED UPON BY THE CIT(A) 5. WE HAVE CONSIDERED THE RIV AL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THOUGH THE ASSESSEE HAS RAISED VARIOUS CONTENTIONS ON THIS ISSUE, HOWEVER, WE FIND THAT THE ASSESSEE IS A STOCK TRADER AND NOT HOLDING ANY INVESTMENT IN SHARES AND SECURITIES THEN SO FAR AS INTEREST EX PENDITURE IS CONCERNED, THE SAME CANNOT BE ATTRIBUTABLE OR ALLOCABLE FOR EARNING THE DIVIDEND INCOME WHICH IS ONLY AN INCIDENTAL INCOME AND NOT INTENDED INCOME OF THE ACTIVITY OF THE ASSESSEE BEING TRADING IN SHARES AND SECURITIES. WE FIND THAT IN A SERIES OF DECISIONS, THIS TRIBUNAL HAS DECIDED THIS ISSUE BY HOLDING THAT NO DISALLOWANCE U/S 14A CAN BE MADE ON ACCOUNT OF THE EXPENDITURE INCURRED FOR TRADING IN SHARES & SECURITIES MERELY BECAUSE THE ASSESSEE EARNED THE INCIDENTAL DIVIDEND INCOME. THE TRIBUNA L IN THE CASE OF DCIT VS. M/S INDIA ADVANTAGE SECURITIES LTD VIDE ORDER DATED 14.09.2012 IN ITA NO. 6711/MUM/2011 HELD IN PARA 5 AND 6 AS UNDER: - 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE DISALLOWANCE OF EXPENSES U/S.14A IN RELATION TO THE EXEMPT DIVIDEND INCOME RECEIVED FROM SHARES HELD ON TRADING ACCOUNT. THE A.O. DISALLOWED THE EXPENSES HOLDING THAT THE PROVISIONS OF SECTION 14A WERE APPLICABLE EVEN IN RELATION TO THE DIVIDEND RECEIVED F ROM 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 EXP RESS 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 RECEIVED FROM TRADING SHARES. THE TRIBUNAL FOLLOWED THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD RELIED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERALA ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 5 | P A G E IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE THAT THE DISALLOWANCE COULD NOT BE MADE IN RELA TION TO THE DIVIDEND RECEIVED FROM TRADING SHARES. THE TRIBUNAL HAD HOWEVER, DISTINGUISHED THE SAID JUDGMENT OF HONBLE HIGH COURT OF KERALA ON THE GROUND THAT IN THAT CASE THE ACQUISITION OF SHARES WITH THE BORROWED FUNDS WAS FOR THE PURPOSE OF CONTROLLIN G THE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING THE SHARES WAS BUSINESS, THE HIGH COURT HAD UPHELD THE DISALLOWANCE U/S.14A OF THE I.T. ACT. THE TRIBUNAL ALSO NOTED THAT THE HIGH COURT IN THAT CASE HAD ONLY OBSERVED THAT THE INTEREST PAID O N BORROWED FUNDS UTILISED 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 NOT THE RATIO DECIDENDI OF THE JUDGMENT. THE RATIO DECIDENDI OF THE JUDGME NT WAS DISALLOWANCE OF INTEREST U/S.14A WHICH HAD BEEN UPHELD 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 ON THE ISSUE OF DISALLOWANCE OF EXPENSES IN RELATION TO THE DIVIDEND INCOME RECEIVED FROM TRADING IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAVE RECENTLY CONSIDERED THE DISALLOWANCE OF EXPENSES INCURRED ON BORROWINGS MADE FOR PURCHASE OF TRADING SHARES U/S.14A OF THE I.T. ACT IN CASE OF CCL LTD. VS. JCIT (SUPRA). THE ASSESSEE IN THAT CASE WAS DISTRIBUTOR OF STATE LOTTERIES AND A DEALER IN SHARES AND SECURITIES. THE ASSESSEE HAD TAKEN LOANS FOR THE PURCHASE OF CERTAIN SHARES AND IT HAD INC URRED EXPENDITURE FOR BROKING THE LOANS WHICH HAD BEEN DISALLOWED UNDER RULE 8D BY THE A.O. AND CONFIRMED BY THE LD.CIT(A). THE TRIBUNAL AGREED WITH THE AUTHORITIES BELOW THAT THE EXPENDITURE RELATABLE TO EARNING OF DIVIDEND INCOME THOUGH INCIDENTAL TO THE TRADING IN SHARES WAS ALSO TO BE DISALLOWED U/S.14A OF THE I.T. ACT. THE TRIBUNAL HOWEVER, HAD OBSERVED THAT THE ENTIRE BROKING COMMISSION WAS NOT RELATABLE TO EARNING OF DIVIDEND INCOME AS THE LOAN HAD BEEN UTILISED FOR THE PURCHASE OF SHARES AND THE PRO FIT SHOWN FROM THE SALE OF SHARES HAD BEEN OFFERED AS BUSINESS INCOME. THE TRIBUNAL, THEREFORE, DIRECTED THE A.O. TO BIFURCATE THE EXPENDITURE PROPORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY THE TRIBUNAL. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE 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 THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT ALL. THE HIGH C OURT ALSO OBSERVED THAT THE ASSESSEE HAD NOT RETAINED THE SHARES WITH THE INTENTION 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 SHARES. THUS THERE BEING A DIRECT JUDGMENT OF A HONBLE HIGH COURT ON THIS ISSUE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CA SE OF M/S. DAGA CAPITAL MANAGEMENT P. LTD. (SUPRA). INFACT, WE NOTE THAT THE TRIBUNAL IN THE CASE OF GANJAM TREADING CO. LTD. (SUPRA) HAS ALREADY CONSIDERED THIS SITUATION AND HELD THAT IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (SUPRA) THE DISALLOWANCE OF INTEREST IN ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 6 | P A G E RELATION TO THE DIVIDEND RECEIVED FROM TRADING SHARES CANNOT BE MADE. WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE U/S.14A COMPUTED BY THE A.O. IN RELATION TO THE STOCK - IN - TRADE. THE ORDER OF THE LD.CIT(A) IS ACCORDINGLY UPHELD. 6. FOLLOWING THE JUDGMENT OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCL LTD 250 CTR 291 AS WELL AS THE DECISION OF THIS TRIBUNAL IN THE CASE OF DCIT VS. INDIA ADVANTAGE SECURITIES LTD (SUPRA) AS WELL AS YATISH TRADING CO. (P) LTD. VS. ASSISTANT COMMISSIOER OF INCOME TAX (SUPRA), WE HOLD THAT THE INTEREST EXPENDITURE IS EXCLUSIVELY INCURRED FOR TRADING ACTIVITY AND, THEREFORE, CANNOT BE SAID TO BE AN EXPENDITURE INCURRED FOR COMPOSITE ACTIVITY YIELDING TAXABLE AND NON TAXABLE INCOME AND ACCORDINGLY, THE SAME CANNOT BE ATTRIBUTED /ALLOCATED IN RESPECT OF DIVIDEND INCOME IN THE HANDS OF THE ASSESSEE. AS REGARDS THE OTHER EXPENSES, WE FIND THAT THE ASSESSING OFFICER HAS NOT POINTED OUT ANY EXPENDITURE DEBITED TO THE P&L ACCOUNT WHICH HAS ANY PROXIMATE NEXUS WITH THE DIVIDEND INCOME. THE ENTIRE EXPENDITURE DEBITED TO THE P&L ACCOUNT HAS A DIRECT NEXUS WITH THE TRADING ACTIVITY OF THE ASSESSEE, THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSEE ON ITS OWN IS PROPER AND JUST AND NO FURTHER DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES IS JUSTIFIED . IN VIEW OF THE ABOVE DISCUSSION, WE DELETE THE ADDITION MADE BY ASSESSING OFFICER U/S 14A. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED . ORDER PRONOUCNED IN THE OPEN COURT ON THIS 20 TH DAY OF MARCH 2015 VKNS'K DH ?KK S'K.KK [KQYS U;K;KY; ES FNUKAD 2 0 EKPZ 2015 DKS DH XBZA SD/ - SD/ - ( RAJENDRA ) (VIJAY PAL RAO) ( ACCOUNTANT MEMBER ) (JUDICIAL MEMBER ) MUMBAI DATED 20 .03.2015 SKS SR. P.S, ITA NO.6205/MUM/2013 ASSESSMENT YEAR: - 2009 - 10. 7 | P A G E COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI