RAMKUMAR VENUGOPAL INVESTMENT P.LTD, MUMBAI V. ACIT (OSD) 2(3), MUMBAI

ITA 6324/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83610 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 16-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 16-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DR K SHIVARAM; RAHUL R SARDA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUM BAI .. , , BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ./ I.T.A. NO. 6324/MUM/2012 ( / ASSESSMENT YEAR: 2009-10) RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. MASJID MANOR, 2 ND FLOOR, 16, HOMI MODI STREET, FORT, MUMBAI-400 023 / VS. ASST. CIT (OSD), RANGE 2(3), AAYKAR BHAVAN, MUMBAI ! ./' ./PAN/GIR NO. AACCR 0534 P ( !# /APPELLANT ) : ( $%!# / RESPONDENT ) !# & ' / APPELLANT BY : DR. K. SHIVARAM & SHRI RAHUL R. SARDA $%!# & ' / RESPONDENT BY : SHRI SANJEEV JAIN ( )* & +, / DATE OF HEARING : 16.07.2014 -./0 & +, / DATE OF PRONOUNCEMENT : 27.08.2014 1 / O R D E R PER SANJAY GARG, JUDICIAL MEMBER : THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-6, MUMBAI (CI T(A) FOR SHORT) DATED 30.07.2012. THE ASSESSEE HAS TAKEN THE FOLLOWING GR OUNDS OF APPEAL: 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW THE LD. CIT(A) HAS ERRED UPHOLDING THE DISALLOWANCE OF RS.3 163709/- BEING DISALLOWANCE U/S. 14A OF THE I.T. ACT. HE HAS FAILE D TO APPRECIATE THAT THERE WAS NO DIRECT NEXUS BETWEEN DIVIDEND INCOME AND EXP ENSES INCURRED AND AS 2 ITA NO. 6324/MUM/2012 (A.Y. 2009-10) RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ASST. CIT (OSD) SUCH THE EARNING DIVIDEND IS COLLATERAL TO THE MAIN BUSINESS OF SHARE TRADING AND THE INTEREST EXPENSES WERE NOT INCURRED TO EARN SUCH DIVIDEND BUT FOR SHARES TRADING PURPOSE AND CONSEQUENTLY NO DISALLOW ANCE OUGHT TO HAVE BEEN MADE. 2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS W ELL AS IN LAW THE LD. CIT(A) HAS ERRED IN REJECTING THE CONTENTION OF THE APPELLANT AND CONCLUDING THAT THE DISALLOWANCE MADE BY THE AO IS JUSTIFIABLE , REASONABLE AND NOT EXCESSIVE. 3) APPELLANT CRAVES TO LEAVE TO ADD, ALTER OR/AND MODIFY ALL OR ANY OF THE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. 2. A PERUSAL OF THE ABOVE GROUNDS OF APPEAL REVEALS THAT THE SOLE ISSUE RAISED BY THE ASSESSEE THROUGH ITS GROUNDS OF APPEAL IS RELATING TO DISALLOWANCE U/S.14A IN RELATION TO DIVIDEND INCOME ON SHARES HELD AS STOCK-IN-TRADE. I T HAS BEEN CONTENDED BY THE LD. AUTHORIZED REPRESENTATIVE (AR) THAT SINCE THE SHARE S WERE HELD AS STOCK-IN-TRADE HENCE, THERE WAS NO INTENTION OF THE ASSESSEE TO MAKE THE INVESTMENTS FOR THE PURPOSE OF EARNING OF DIVIDEND INCOME. THE DIVIDEND INCOME WAS INCIDEN TAL TO THE BUSINESS OF THE ASSESSEE. HENCE, THE PROVISIONS OF SECTION 14A WERE NOT ATTRA CTED. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF THE HONBLE KARNATA KA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT (2012) 250 CTR (KAR) 291 WHEREIN THE HONBLE KARNATAKA HIGH COURT HAS HELD THAT IN A CASE WHERE THE ASSESSEE HAS NOT RETA INED SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME BUT FOR THE PURPOSE OF BUSINESS/TRA DING IN SHARES AND THE DIVIDEND INCOME WAS INCIDENTAL NO DISALLOWANCE IS ATTRACTED UNDER SECTION 14A OF THE INCOME TAX ACT. 3. WE MAY OBSERVE THAT THE ISSUE RELATING TO THE DI SALLOWANCE UNDER SECTION 14A IN RELATION TO SHARES HELD IN STOCK IN TRADE WAS DISCU SSED BY THE CO-ORDINATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF D.H. SECURITIES (P) LTD. VS. DCIT (2014) 41 TAXMANN.COM 352 AND THE MATTER WAS REFERRED TO THE THIRD MEMBER. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LT D. VS. JCIT (2012) 250 CTR (KAR) 291 WAS REFERRED TO AND DISCUSSED BEFORE THE TRIBUN AL AND IT HAS BEEN HELD THAT IN VIEW OF 3 ITA NO. 6324/MUM/2012 (A.Y. 2009-10) RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ASST. CIT (OSD) THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BO M) AND THE HONBLE KOLKATA HIGH COURT IN THE CASE OF DHANUKA & SONS VS. CIT [2011 ] 339 ITR 319, SECTION 14A IS ATTRACTED EVEN IN THE CASE OF DIVIDEND INCOME FROM SHARES HELD AS STOCK IN TRADE. WHILE HOLDING SO,IT HAS BEEN OBSERVED BY THE TRIBUNAL TH AT THE INVESTMENT COMPONENT OR ELEMENT IS IN BUILT IN THE EXPENDITURE INCURRED FOR PURCHASE AND SALE OF SHARES EVEN HELD AS STOCK IN TRADE FOR BUSINESS PURPOSES. THE EXPENDITU RE ATTRIBUTABLE TOWARDS EARNING OF EXEMPT INCOME, IMMATERIAL OF THE FACT WHETHER SUCH EXEMPT INCOME WAS ACTUALLY EARNED OR NOT, IS EMBEDDED IN THE EXPENDITURE INCURRED FOR SHARE TRADING ACTIVITY AND IS LIABLE TO BE APPORTIONED IN THE LIGHT OF THE PROVISIONS OF SE CTION 14A OF THE ACT. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT RELIED UPON BY THE ASSESSEE HAS BEEN DULY DISCUSSED AND DISTINGUISHED IN THE THIRD MEMBER CASE OF D.H. SECURITIES (P) LTD. VS. DCIT(SUPRA). HOWEVER, IT HAS BEEN FURTHER OBSERVED IN THE SAID T HIRD MEMBER DECISION OF THE TRIBUNAL THAT THE SHARES WHICH YIELD TAX EXEMPT DI VIDEND INCOME, INTEREST QUA WHICH IS TO BE DISALLOWED, WHEN HELD AS STOCK IN TRADE, YIELD T AXABLE INCOME ALSO. IN FACT, THE SHARES ARE BOUGHT AND HELD PRIMARILY FOR THE PURPOSE OF EA RNING INCOME FROM TRADING IN SHARES. HENCE, WHILE CALCULATING THE INTEREST DISALLOWANCE UNDER RULE 8D(2)(II), THE DISALLOWANCE OF THE ENTIRE AMOUNT IS NOT JUSTIFIED. THE TRIBUNAL THEREFORE HELD THAT THE AMOUNT CALCULATED AS PER RULE 8D(2)(II) WOULD NEED TO BE S CALED DOWN AS THE INCOME EARNED FROM SHARE TRADING IS OFFERED FOR TAXATION. THE TRIBUNAL OBSERVED THAT WHILE SCALING DOWN THE SAID AMOUNT NO HARD AND FAST RULE CAN BE APPLIED AN D THE SAME CAN BE DETERMINED ONLY ON ADHOC BASIS. THE TRIBUNAL ALSO OBSERVED THAT WHERE THE SHARE TRADING IS THE DOMINANT OBJECT OF PURCHASE AND SALE OF SHARES, THE TURNOVER OF THE YEAR WOULD BE VERY HIGH IN COMPARISON TO THE AVAILABLE SHARE HOLDING BECAUSE O F THE CONTINUOUS ACTIVITY OF SALE AND PURCHASE OF SHARES. HENCE, MECHANICAL APPLICATION O F RULE 8D(2)(II) WOULD BE WRONG. THE TRIBUNAL, ACCORDINGLY, PURPOSED TO RESTRICT THE DISALLOWANCE TO 20% OF THE AMOUNT IN RELATION TO INTEREST DISALLOWANCE UNDER RULE 8D(2)( II), I.E., IN RELATION TO INDIRECT EXPENSES. THE TRIBUNAL FURTHER HELD THAT SO FAR THE DIRECT EXPENSES ARE CONCERNED, NO SUCH 4 ITA NO. 6324/MUM/2012 (A.Y. 2009-10) RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ASST. CIT (OSD) DISALLOWANCE U/S.14A WAS ATTRACTED BECAUSE OF THE F ACT THAT NO DIRECT EXPENDITURE IS INCURRED BY THE ASSESSEE FOR EARNING OF DIVIDEND IN COME WHEN THE PURPOSE OF SALE AND PURCHASE OF SHARES IS TRADING. THE ALMOST SIMILAR V IEW HAD BEEN MADE BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DAMANI ESTATES & FINANCE PVT. LTD. (IN ITA NO. 3029/MUM/2012 DATED 17.07.2013). 4. IN OUR VIEW, TAKING INTO CONSIDERATION THE FACT THAT THE PRIMARY OBJECT OF HOLDING THE SHARES IS TRADING AND THE DIVIDEND INCOME IS IN CIDENTAL AND FURTHER THAT DUE TO CONTINUOUS ACTIVITY OF SALE AND PURCHASE OF THE SHA RES, THE ANNUAL TURNOVER WOULD BE MUCH HIGHER IN CASE OF SHARE TRADING AS COMPARED TO THE INVESTMENTS MADE FOR THE PURPOSE OF EARNING OF EXEMPT INCOME, EVEN THE DISAL LOWANCE @ 20% OF THE AMOUNT CALCULATED UNDER RULE 8D(2)(II) WILL BE ON HIGHER S IDE. WE FEEL THAT IT WILL BE APPROPRIATE IF THE SAID DISALLOWANCE IS RESTRICTED TO 5% OF THE AMOUNT SO ARRIVED. 5. SO FAR THE DISALLOWANCE UNDER RULE 8D(2)(III) I S CONCERNED, SINCE IN THE SHARE TRADING ACTIVITY, INVESTMENT IS NOT MADE FOR THE PU RPOSE OF EARNING EXEMPT INCOME, HENCE, THE MANAGERIAL/ADMINISTRATIVE EXPENSES IN RELATION TO DIVIDEND INCOME CALCULATED UNDER RULE 8D(2)(III) ARE ALSO REQUIRED TO BE SCALED DOWN WHICH WE THINK THAT SHOULD BE RESTRICTED TO 10% OF THE AMOUNT SO CALCULATED UNDER RULE 8D(2)(III). IN VIEW OF OUR ABOVE OBSERVATIONS, THE DISALLOWANCE U/S.14A READ WITH RU LE 8D IS, ACCORDINGLY, RESTRICTED TO 5% OF THE AMOUNT ARRIVED AT UNDER RULE 8D(2)(II) AN D 10% OF THE AMOUNT CALCULATED BY THE A.O. UNDER RULE 8D(2)(III). 6. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. 20+3 42+ & 51 ) 6 + & + 78 ORDER PRONOUNCED IN THE OPEN COURT ON AUGUST 27, 20 14 SD/- SD/- (B. R. BASKARAN) (SANJAY GARG) / ACCOUNTANT MEMBER / JUDICIAL MEMBER ( * MUMBAI; 9 DATED : 27.08.2014 5 ITA NO. 6324/MUM/2012 (A.Y. 2009-10) RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ASST. CIT (OSD) ). ../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. !# / THE APPELLANT 2. $%!# / THE RESPONDENT 3. ( :+ ( ) / THE CIT(A) 4. ( :+ / CIT - CONCERNED 5. =) $+ >4 , , >4 0 , ( * / DR, ITAT, MUMBAI 6. ?* / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ( * / ITAT, MUMBAI