ACIT CIR 4(2), MUMBAI V. N.D. NISSAR, MUMBAI

ITA 6391/MUM/2013

• Counselvise Citation: 639119914 RSA 2013
• Duration Of Justice: 1 year(s) 9 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 30-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY KUMAR SONIDR
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Business expenditure; Proportionate interest; Revenue expenditure
• Section: 14A; 10(10D); 37; 28; 10

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.5762 //MUM/2013 ASSESSMENT YEAR: 2010-11 M/S N.D. NISSAR, 610, STOCK EXCHANGE TOWER, DALAL STREET, FORT, MUMBAI-400023 / VS. ACIT-4(2), ROOM NO.642, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( '#$ /ASSESSEE) ( / REVENUE) P.A. NO. AAAFN4104C ITA NO.6391/MUM/2013 ASSESSMENT YEAR: 2010-11 ACIT-4(2), ROOM NO.642, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. M/S N.D. NISSAR, 610, STOCK EXCHANGE TOWER, DALAL STREET, FORT, MUMBAI- 400023 ( / REVENUE) ( '#$ /ASSESSEE) P.A. NO. AAAFN4104C '#$ / ASSESSEE BY SHRI VIJAY KOTHARI / REVENUE BY SHRI VIJAY KUMAR SONI-DR % & ' ( / DATE OF HEARING : 11/08/2015 ' ( / DATE OF ORDER: 28/08/2015 N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 2 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE AS WELL AS REVENUE ARE IN CROSS APPEA L AGAINST THE IMPUGNED ORDER DATED 12/08/2013 OF THE LD. FIRST APPELLATE AUTHORITY, MUMBAI, FOR ASSESSMENT Y EAR 2010-11. 2. FIRST, WE SHALL TAKE UP APPEAL OF THE REVENUE ( ITA NO.6391/MUM/2013), WHEREIN, THE FIRST GROUND RAISED PERTAINS TO ALLOWING PREMIUM, PAID BY THE ASSESSEE, AS KEYMAN INSURANCE PREMIUM INSTEAD OF PERSONNEL INSUR ANCE PREMIUM, TREATED BY THE ASSESSING OFFICER. THE CRU X OF ARGUMENT ADVANCED BY SHRI VIJAY KUMAR SONI, LD. DR, IS IDENTICAL TO THE GROUND RAISED BY ASSERTING THAT KE YMAN INSURANCE PREMIUM IS ONLY PAYABLE TO THE EMPLOYEE A ND NOT TO THE PARTNER. ON THE OTHER HAND, SHRI VIJAY KOTH ARI, LD. COUNSEL FOR THE ASSESSEE, CONTENDED THAT IMPUGNED I SSUED IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE MUMBAI BENCH OF THE TRIBUNAL, IN THE CASE OF ITO VS M/S N.D. NISSAR (ITA NO.4826/MUM/2007) AND ALSO IN THE CASE OF B.N.EXPORTS 323 ITR 178 (BOM.) THIS FACTUAL MATRIX WAS NOT CONTROVERTED BY LD. DR. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT IN THE CASE OF ASSESSEE, ON IDENTICAL ISSUE/FACTS FOR A.Y. 2004-05 HELD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION ON ACCOUNT OF KEYMAN INSURANCE POLICY TAKEN ON THE LIFE OF TWO PA RTNERS N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 3 AND DISMISS THE APPEAL OF THE REVENUE VIDE ORDER DA TED 26/05/2009. THE RELEVANT PORTION OF THE SAME IS RE PRODUCED HEREUNDER FOR READY REFERENCE:- 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER:- '1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING ADDIT ION OF RS.1,68,00,000/- MADE BY [HE ASSESSING OFFICER ON A CCOUNT OF PAYMENT MADE FOR KEYMAN INSURANCE POLICIES TAKEN ON THE LIFE OF PARTNERS. ' 2 WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, [HE LEARNED CIT(A) HAS ERRED IN RELYING ON THE DECI SION OF THE ITAT, MUMBAI IN THE CASE OF ITO VS TAKUR VAIDYANATN AIYER, 1984 7 ITD 9 AND HOLDING THAT THE ASSESSEE'S CLAIM FOR DEDUCTION OF PREMIUM PAID ON THE KEYMAN INSURANCE POLICIES IN THE NAME OF PARTNERS QUALIFIED FOR DEDUCTION U/S.37(1) OF TH E I.T. ACT,. 3. THE ONLY ISSUE RAISED BY THE REVENUE IN THE PRES ENT APPEAL IS AGAINST THE DELETION OF ADDITION MADE ON ACCOUNT OF PAYMENT MADE FOR KEYMAN INSURANCE POLICIES TAKEN ON THE LIF E OF THE PARTNERS. 4. MR. P.N.DEVADASAN, LEARNED DEPARTMENTAL REPRESEN TATIVE APPEARED FOR THE REVENUE AND MR. VIJAY C.KOTHARI, L EARNED COUNSEL APPEARED FOR THE ASSESSEE AND PUT FORWARD T HEIR CONTENTIONS. 5. THE LEARNED AR FOR THE ASSESSEE PLACED RELIANCE ON SERIES OF DECISIONS FOR THE ALLOWANCE OF THE DEDUCTION ON ACC OUNT OF PAYMENT OF KEYMAN INSURANCE POLICIES ON THE LIFE OF THE N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 4 PARTNERS. THE LIST OF DECISION RELIED UPON BY THE A SSESSEE ARE AS UNDER: A) P. G. ELECTRONICS VS. ITO [2005} 98 TTJ (DEL) 89 6 B) ACIT VS. ART GLASS INDUSTRIES (ITA NO.4863/MUM/2 006 & 2495/MUM/2007) C) CHEMICAL CORPORATION VS. DCIT (ITA. NO.2224/MUM/2 003) D) A. RAJABALI VS. ADDL CIT (ITA NO.6031/MUM/2006) & E) ACIT VS. MRS. JASMINE INDUSTRIAL CORP. (ITA .VO. 3611/MUM/2006) THE LEARNED OR PLACED RELIANCE ON THE ORDER OF ASSE SSING OFFICER. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS. THE ONLY ISSUE ARISING IN THE PRESENT APPE AL IS IN RESPECT OF INSURANCE PREMIA PAID UNDER KEYMAN INSUR ANCE POLICIES ON THE LIFE OF PARTNERS. THE ASSESSEE HAD TAKEN INSURANCE POLICIES ON THE LIFE OF TWO PARTNERS AS D ETAILED IN PARA 2 OF THE ORDER OF THE CIT (A). THE SAID AMOUNT WAS CLAIMED AS AN ALLOWABLE DEDUCTION FROM THE PROFITS OF THE BUSINESS ON THE BASIS THAT THE FIRM WAS A SEPARATE ASSESSABLE ENTITY AND THE PREMIA PAID COULD NOT BE TREATED AS A PERSONAL EXPENDITURE OF PARTNERS AS ON THE MATURITY OF THE P OLICY THE TOTAL SUM WAS GOES TO THE FIRM AND NOT [0 THE PARTN ERS. SIMILAR ISSUE OF ALLOWABILITY OF INSURANCE PREMIA PAID BY T HE REGISTERED FIRMS ON KEYMAN INSURANCE POLICY TAKEN O N THE LIFE OF THE PARTNERS WAS CONSIDERED BY DIFFERENT BENCHES OF THE TRIBUNAL AND IN-TURN RELYING ON THE DECISION IN THE CASE OF P. G. ELECTRONICS VS. ITO (SUPRA) RELATING TO ASSESSMENT YEAR 1998- 99 ALLOWED THE CLAIM OF DEDUCTION. THE FINDINGS OF THE TRIBUNAL IN P. G. ELECTRONICS VS. ITO (SUPRA) ARE AS UNDER: '4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT, AN EXACTLY IDENT ICAL ISSUE HAS BEEN DECIDED BY THE DELHI BENCH OF THE TRIBUNAL IN THE C ASE OF P.G. ELECTRONICS VS ITO ITA NO. 1463/DEL/2002 FOR ASSESS MENT YEAR 1998- N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 5 99. THE BENCH VIDE ITS ORDER DATED 07-10-2005 HAS D ELIBERATED UPON THE ISSUE IN DETAIL AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. WE DEEM IT NECESSARY TO EXTRACT THE FINDINGS OF THE TR IBUNAL BELOW TO GIVE MORE CLARITY: '4. I HAVE CAREFULLY CONSIDERED THE MATTER. VARIOUS AMENDMENTS WERE MADE TO THE IT ACT, 1961, SIMULTANEOUSLY BY THE FIN ANCE (NO.2) ACT, 1996, W.E.F. 1ST OCT., 1996 RELATING TO THE SUBJECT OF KEYMAN INSURANCE POLICY. CLAUSE (XI) WAS INSERTED TO SECTI ON 2(24), WHICH DEFINED 'INCOME', TO INCLUDE ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY. SUB-SECTION (100) TO SECTION 10 WAS INSERTE D TO EXEMPT ANY SUM RECEIVED UNDER A LIFE INSURANCE POLICY, INCLUDI NG THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY OTHER THAN SUMS RECEIVED UNDER A KEYMAN INSURANCE POLICY. THE EXPLANATION IN SERTED BELOW THE SUB-SECTION DEFINED A 'KEYMAN INSURANCE POLICY' TO MEAN A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF A NOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRST-MENTIONED PERSO N. CLAUSE (II) OF SUB-SECTION (3) OF SECTION 17 WAS AMENDED TO INCLUD E ANY SUM RECEIVED UNDER THE KEYMAN INSURANCE POLICY, INCLUDI NG THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY, AS 'PROFI TS IN LIEU OF SALARY' OF THE EMPLOYEE, TAXABLE UNDER THE HEAD 'SALARIES'. CLAUSE (VI) WAS INSERTED TO SECTION 28 TO PROVIDE THAT ANY SUM RECE IVED UNDER A KEYMAN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY WILL BE CHARGED TO TAX UNDER T HE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' HOWEVER, CLAUS E (IV) TO SUB- SECTION (2) TO SECTION 56, ALSO INSERTED BY THE SAM E AMENDING ACT, PROVIDED THAT IF THE SUM RECEIVED UNDER THE KEYMAN POLICY IS NOT TAXED UNDER THE HEAD 'SALARIES OR 'PROFITS AND GAINS OF B USINESS OR PROFESSION', THEN IT WILL BE TAXED UNDER THE HEAD ' INCOME FROM OTHER SOURCES' 5. THE ABOVE AMENDMENTS, ALL W.E.F. 1ST OCT, 1996, WERE EXPLAINED BY CIRCULAR NO. 762, DT 18 TH FEB., 1998, ISSUED BY THE CBDT AS FOLLOWS: 'TAXATION OF A SUM RECEIVED UNDER THE KEYMAN INSURA NCE POLICY 14.1 A KEYMAN INSURANCE POLICY OF THE LIFE INSURAN CE CORPORATION OF INDIA, ETC., PROVIDES FOR AN INSURAN CE POLICY TAKEN BY A BUSINESS ORGANIZATION OR A PROFESSIONAL ORGANIZATIO N ON THE LIFE OF AN EMPLOYEE, IN ORDER TO PROTECT THE BUSINESS AGAINST THE FINANCIAL LOSS, WHICH MAY OCCUR FROM THE EMPLOYEE'S PREMATURE DEATH . THE 'KEYMAN' IS AN EMPLOYEE OR A DIRECTOR, WHOSE SERVICES ARE PE RCEIVED TO HAVE A SIGNIFICANT EFFECT ON THE PROFITABILITY OF THE BUSI NESS THE PREMIUM IS PAID BY THE EMPLOYER. 14.2 THERE WERE SOME DOUBTS ON THE TAXABILITY OF TH E INCOME INCLUDING BONUS, ETC., FROM SUCH POLICY AND ALSO REGARDING TH E TREATMENT OF THE PREMIUM PAID -WHETHER ITSHOULD BE ALLOWED AS A CAPI TAL EXPENDITURE N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 6 OR AS A REVENUE EXPENDITURE. THE FINANCE (NO.2) ACT , 1996, THEREFORE, LAYS DOWN THE TAX TREATMENT OF THE KEYMAN INSURANCE POLICY. 14.3 CLAUSE (100) OF SECTION 10 OF THE IT ACT EXEMP TS CERTAIN INCOME FROM TAX. THE FINANCE (NO.2) ACT, 1996, AMENDS CLAU SE (100) OF SECTION 10 TO EXCLUDE ANY SUM RECEIVED UNDER A KEYM AN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY FOR THIS PURPOSE. 14.4 THE FINANCE (NO 2) ACT, 1996, ALSO LAYS DOWN T HAT THE SUMS RECEIVED BY THE SAID ORGANIZATION ON SUCH POLICIES, BE TAXED AS BUSINESS PROFITS; THE SURRENDER VALUE OF THE POLICY , ENDORSE IN FAVOUR OF THE EMPLOYEE (KEYMAN), OR THE SUM RECEIVED BY HI M AT THE TIME OF RETIREMENT BE TAKEN AS 'PROFITS IN LIEU OF SALARY' FOR TAX PURPOSES; AND IN CASE OF OTHER PERSONS HAVING NO EMPLOYER-EMPLOYE E RELATIONSHIP, THE SURRENDER VALUE OF THE POLICY OR THE SUM RECEIV ED UNDER THE POLICY BE TAKEN AS INCOME FROM OTHER SOURCES AND TAXED ACC ORDINGLY. THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS ALLO WED AS BUSINESS EXPENDITURE. 14.5 THE AMENDMENTS TAKE EFFECT FROM THE 1SI DAY OF OCTOBER, 1996.' IT MAY BE SEEN FROM PARA 14.2 OF THE CIRCULAR THAT THE BOARD WAS AWARE OF THE DOUBTS RELATING TO THE TREATMENT OF TH E PREMIUM PAID IN RESPECT OF A KEYMAN INSURANCE POLICY ISSUED BY THE LIC OF INDIA AND HAS ACCORDINGLY CLARIFIED, TO PUT THE DOUBTS AT RES T, IN THE LAST SENTENCE OF PARA 14.4 THAT 'THE PREMIUM PAID ON THE KEYMAN I NSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE'. 6. IN THE LIGHT OF THE ABOVE AMENDMENTS AND THE CIR CULAR CLARIFYING THE POSITION RELATING TO THE ALLOWABILITY OF THE PREMIU M PAID ON KEYMAN INSURANCE POLICY, THE CIT, IN MY VIEW, WAS NOT JUST IFIED IN DIRECTING THE AO TO DISALLOW THE PREMIUM PAID BY THE ASSESSEE -FIRM IN RESPECT OF THE LIFE OF PARTNER ANURAG GUPTA, ASSURED UNDER THE KEYMAN INSURANCE POLICY. THERE IS NO DOUBT REGARDING THE F ACT THAT THE POLICY IS A KEYMAN INSURANCE POLICY, AS CAN BE SEEN FROM P ARA 2 OF THE ORDER OF THE CIT THEREFORE, THE ORDER OF THE CIT CANNOT B E SUSTAINED AS IT RUNS COUNTER TO THE AMENDMENTS MADE TO THE ACT AS C LARIFIED BY THE CIRCULAR ISSUED BY THE CBOT IT IS WELL-SETTLED THAT CIRCULARS ISSUED BY THE CBOT REGARDING THE EXECUTION OF THE ACT ARE BIN DING ON THE IT AUTHORITIES. THE AMENDED LAW IS APPLICABLE TO THE Y EAR UNDER CONSIDERATION. THE CIT WAS, THEREFORE, NOT JUSTIFIE D IN ASSUMING JURISDICTION TO REVISE THE ASSESSMENT UNDER SECTION 263, CONTRARY TO THE LAW AN CIRCULAR ISSUED BY THE BOARD. HE COULD N OT HAVE CONSIDERED THE ASSESSMENT ERRONEOUS SINCE THE ALLOWANCE OF THE PREMIUM AS A DEDUCTION AS BUSINESS EXPENDITURE WAS IN CONFORMITY WHICH THE CIRCULAR OF THE BOARD WHICH WAS BINDING ON THE AO. EVEN ON MERITS, HIS VIEW THAT THE PREMIUM PAID ON KEYMAN INSURANCE POLICY SHOULD BE DISALLOWED IS NOT TENABLE, ALSO BECAUSE OF THE CIRC ULAR CITED ABOVE.' N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 7 5. IN VIEW OF THE ABOVE DECISION OF THE DELHI BENCH OF THE TRIBUNAL WE HOLD THAT THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY ON THE LIFE OF THE SENIOR PARTNER IS A BUSINESS EXPENDITUR E. WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE THIS GROUND OF TH E REVENUE FAILS' 7. IN VIEW OF THE DECISION OF THE CO-ORDINATE BENCH ES OF THE TRIBUNAL ON THE ISSUE, WE FIND NO INFIRMITY IN THE ORDER OF CIT CA) AND WE CONFIRM THE ORDER OF CIT (A) IN HOLDING THAT THE ASSESSEE IS ENTITLED TO THE DEDUCTION IN THE HANDS OF THE ASSESSEE'S PARTNERSHIP FIRM ON ACCOUNT OF INSURANCE PREMIA PAID ON ACCOUNT OF KEYMAN INSURANCE POLICY TAKEN ON THE LIFE OF TWO PARTNERS. THUS, THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE REJECTED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 2.2. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL AND T HE AFORESAID ORDER OF THE TRIBUNAL, IF KEPT IN JUXTAPO SITION AND ANALYZED, WE FIND THAT THE ASSESSEE PAID INSURANCE PREMIUM OF RS.1.68 CRORES IN RESPECT OF KEYMAN INSURANCE PO LICY TAKEN IN MARCH 2004 ON THE LIFE OF TWO PARTNERS NAMELY, S HRI KETNA N. NISSAR (40%) AND JAYESH N. NISSAR (40%), OF THE ASSESSEE FIRM. THE LD. ASSESSING OFFICER DENIED THE CLAIMED RELIEF ON THE GROUND THAT THE KEYMAN INSURANCE PREMIUM IS ALLOWAB LE ONLY IN THE CASE OF EMPLOYEES AND NOT FOR THE PARTNERS/D IRECTORS. ON APPEAL, THE LD. COMMISSIONER OF INCOME TAX (APPE ALS) FOLLOWING THE DECISION FOR A.Y. 2004-05 OF THE TRIB UNAL, DECIDED IN FAVOUR OF THE ASSESSEE. NOW, THE REVENU E IS N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 8 AGGRIEVED AND IS IN APPEAL BEFORE THIS TRIBUNAL. IT IS NOTED THAT THE TRIBUNAL, WHILE COMING TO A PARTICULAR CONCLUSI ON, FOLLOWED THE DECISION FROM DELHI BENCH OF THE TRIBUNAL IN TH E CASE OF P.G. ELECTRONICS VS ITO (ITA NO.1463/DEL./2002), WH ICH HAS BEEN REPRODUCED AT PAGE-3 (INTERNAL PAGE OF THE ORD ER) AND PAGE-10 OF THE PAPER BOOK. EVEN, THE SAME HAS BEEN EXPLAINED BY CIRCULAR NO. 762 DATED 18/02/1998, ISSUED BY CBD T. IN THE PRESENT APPEAL, PAYMENT OF PREMIUM IS NOT IN DO UBT, HOWEVER, THE ONLY QUESTION TO BE ADJUDICATED BY US IS WHETHER SUCH PREMIUM IS ALLOWABLE FOR PARTNERS OR DIRECTORS ? THIS ISSUE HAS BEEN SETTLED BY THE HONBLE JURISDICTIONA L HIGH COURT IN CIT VS B.N. EXPORTS (2010) 323 ITR 178 (BOM.) BY HOLDING THAT, FOR CLAIMING BUSINESS EXPENDITURE U/S 10(10D) READ WITH SECTION 37 OF THE ACT, INSURANCE PREMIUM ON KEYMAN INSURANCE POLICY TO ENSURE LIFE OF A PARTNER AND EF FECT OF CIRCULAR NO.762 (SUPRA), IS AN ALLOWABLE DEDUCTION. THE OBJECT AND PURPOSE OF KEYMAN INSURANCE POLICY IS TO PROTEC T THE BUSINESS AGAINST A FINANCIAL SETBACK WHICH MAY OCCU R AS A RESULT OF PREMATURE DEATH, TO THE BUSINESS OR PROFE SSIONAL ORGANIZATION AND FURTHER A KEYMAN INSURANCE POLICY IS OBTAINED ON THE LIFE OF A KEYMAN INCLUDING PARTNER TO SAFEGUARD THE FIRM AGAINST DISRUPTION OF BUSINESS. WHILE COMING TO THIS CONCLUSION, THE HONBLE COURT DULY C ONSIDERED THE DECISION FROM HONBLE APEX COURT IN BIST & SONS VS CIT (1979) 116 ITR 131 (SC)(PARA-9), CIT VS AW FIGGIES & COMPANY 24 ITR 405 (SC)(PARA-9), CIT VS CHITAMBARAM PILLAI 106 ITR 292 (SC) (PARA-9). THUS, RESPECTFULLY FOLLO WING THE DECISIONS FROM HONBLE JURISDICTIONAL HIGH COURT, W E AFFIRM THE N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 9 STAND OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S), ON THE ISSUE IN HAND. 3. THE NEXT GROUND RAISED BY THE REVENUE PERTAINS TO HOLDING THAT DISALLOWANCE OF INTEREST SHOULD BE MAD E U/S 14A WITH REFERENCE TO NET INTEREST ONLY. THE ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT, WHILE MAKING THE DISALLOWANCE , THE LD. ASSESSING OFFICER NEITHER DISCUSSED THE FACTS NOR R ECORDED ANY SATISFACTION WITH RESPECT TO CORRECTNESS OF CLAIM O F EXPENSES MADE BY THE ASSESSEE AND FURTHER, THE ASSUMPTION OF JURISDICTION BY THE ASSESSING OFFICER TO RE-DETERMI NE THE DISALLOWANCE, AS PER THE PROVISIONS OF RULE-8D(2) O F THE RULES, IS WRONG, BY CONTENDING THAT THE ASSESSING OFFICER NOWHERE DOUBTED THE CORRECTNESS OF CLAIM OF THE ASSESSEE HA VING REGARD TO THE ACCOUNTS SO MAINTAINED. IT WAS PLEADED THAT DIVIDEND INCOME WAS EARNED ONLY ON SHARES & SECURITIES, WHIC H WERE HELD AS STOCK IN TRADE, THUS, SECTION 14A OF THE AC T IS NOT ATTRACTED. THE LD. COUNSEL PLACE RELIANCE ON FOLLO WING JUDICIAL PRONOUNCEMENTS:- A) CCI LTD V JCIT (250 CTR 291(KAR), B) GANJAM TRADING COMPANY PVT. LTD. V DCIT (ITA 3724/M/2005 JDATED 20.07.2012(MUMBAI) C) DCIT V M/S INDIA ADVANTAGE SECURITIES LTD. (ITA 6711/MUM/2011 DATED 14.09.2012 MUMBAI) D) YATISH TRADING COMPANY PVT. LTD. V ACIT (129 ITR 237)(MUMBAI) N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 10 E) PRAKASH K. SHAH & SECURITIES PVT. LTD. V ACIT (ITA 3339/M/2010)(MUM) F) CIT V COCANADA RADHASWAMI BANK LTD. 57 ITR 306(SC) G) CIT VS SMT. LEELA RAMCHANDRAN ITA NO.1784 OF 2009- ORDER DATED 14-06-2010( KERALA HIGH COURT) 3.1. ON THE OTHER HAND, THE LD. DR, DEFENDED THE CONCLUSION ARRIVED AT IN THE ASSESSMENT ORDER BY CO NTENDING THAT THE DISALLOWANCE WAS RIGHTLY MADE BY THE ASSES SING OFFICER. 3.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE LD. ASSESSING OFFICER, WHILE FRAMING T HE ASSESSMENT, OBSERVED THAT THE ASSESSEE EARNED TAX F REE DIVIDEND INCOME OF RS.11,51,845/- WHICH WAS CLAIMED AS EXEMPT AND THE ASSESSEE SUO-MOTO DISALLOWED EXPENDITURE OF RS.1,15,185/-. THE ASSESSING OFFICER WAS OF THE VIE W, THAT NO DEDUCTION IS ALLOWED IN RESPECT OF EXPENDITURE INCU RRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND HE PLACE RELIANCE UPON THE DECISIO N IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS DCIT (ITA NO. 626 OF 2010), THUS, HE RE-CALCULATED THE DISALLOWANCE U/S 14A, AS PER FORMULA PROVIDED IN RULE-8D. THE NET DISALLOWANCE M ADE TO THE TUNE OF RS.23,26,332/-. ON APPEAL, THE LD. COM MISSIONER OF INCOME TAX (APPEALS) FOLLOWED THE DECISION OF TH E TRIBUNAL IN THE CASE OF MORGAN STANLEY INDIA SECURITIES LTD. VS ACIT (ITA NO.5072/MUM/2005 AND 6774/MUM/2004) AND HELD THAT THE DISALLOWANCE OF INTEREST SHOULD BE MADE WI TH N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 11 REFERENCE TO NET INTEREST ONLY. THE LD. FIRST APPE LLATE AUTHORITY, DIRECTED THE ASSESSING OFFICER TO CALCUL ATE THE DISALLOWANCE UNDER RULE-8D ON THE BASIS OF NET INTE REST AND NOT THE GROSS INTEREST. THE REVENUE IS AGGRIEVED AN D IS IN APPEAL BEFORE THIS TRIBUNAL. 3.3. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT ADMITTEDLY, THE ASSESSING OFFICER NOWHERE DOUBTED THE CORRECTNESS O F THE CLAIM, MADE BY THE ASSESSEE, HAVING REGARD TO THE A CCOUNTS MAINTAINED BY THE ASSESSEE. IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEE EARNED DIVIDEND INCOME ON SHARES AND S ECURITIES, WHICH WERE HELD AS STOCK IN TRADE. DURING HEARING OF THIS APPEAL, ON THE IMPUGNED ISSUE, THE BENCH DIRECTED T HE LD. COUNSEL FOR THE ASSESSEE, TO ESTABLISH WHETHER THE SHARES AND STOCKS WERE HELD AS STOCK-IN-TRADE, THE ASSESSEE PR ODUCED THE DOCUMENTS/PAPER-BOOK, (RUNNING INTO 19 PAGES) SUCH AS COMPUTATION OF INCOME AND ANNUAL INCOME FOR THE YEA R ENDING 31 ST MARCH, 2010, (PAGES 1 TO 11) AND ENDING 31 ST MARCH, 2009 (PAGES 12 TO 19). MORE SPECIFICALLY, PAGE-3 CONTAI NING BALANCE SHEET AS ON 31/03/2010 AND SCHEDULE F (PAGE-8) CONT AINING CURRENT ASSETS. MEANING THEREBY, THE ASSESSEE DULY EXPLAINED ITS VERSION WITH THE HELP OF THE DOCUMENTARY EVIDEN CE. IT IS NOTED THAT WHILE COMPUTING THE DISALLOWANCE U/S 14A READ WITH RULE-8D OF THE RULES, THE ASSESSING OFFICER CO NSIDERED N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 12 THE PAYMENTS TO PARTNERS. THE TERM INTEREST HAS B EEN DEFINED U/S 2(28A) OF THE ACT, WHICH MEANS, INTEREST PAYABL E IN RESPECT OF ANY MONEY BORROWED OR DEBT INCURRED (INC LUDING A DEPOSIT, CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION ) AND INCLUDES ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF MONEY S BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILI TY WHICH HAS NOT BEEN UTILIZED. THE CAPITAL CONTRIBUTED BY THE PARTNER IS NEITHER MONEY BORROWED NOR DEBT INCURRED BY THE ASS ESSEE, THUS, WE FIND NO INFIRMITY IN THE CONCLUSION DRAWN BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS), RESULTANTLY, THE APPEAL OF THE REVENUE IS HAVING NO MERIT, THEREFORE, DISMI SSED. 4. NOW, WE SHALL TAKE UP APPEAL OF THE ASSESSEE (I TA NO.5762/MUM/2013), WHEREIN, THE ONLY GROUND PERTAIN S TO PARTLY CONFIRMING THE DISALLOWANCE OF RS.14,25,250/ - U/S 14A, R.W.R 8D(2) OF THE RULES. THE CRUX OF ARGUMENT ADVA NCED BY LD. COUNSEL, IS THAT WHILE GRANTING PART RELIEF TO THE ASSESSEE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DID NOT AP PRECIATE THAT THE ASSESSEE WAS NOT HOLDING SHARES AND SECURI TIES, BY WAY OF INVESTMENT RATHER THE SHARES AND SECURITIES WERE HELD IN STOCK IN TRADE AND FURTHER CONFIRMING COMPUTATIO N OF DISALLOWANCE U/S 14A R.W.R.8D, CONSIDERING THE INTE REST PAID TO PARTNERS ON THEIR CAPITAL, WHILE COMPUTING THE D ISALLOWANCE UNDER RULE-8D(2)(II) OF THE RULES. ON THE OTHER HA ND, THE LD. DR, SHRI VIJAY KUMAR SONI, DEFENDED THE CONCLUSION ARRIVED AT IN THE IMPUGNED ORDER. 4.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACT S, IN BRIEF, N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 13 ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS AS STOCK BROKER OF BSE AND ALSO TRADING IN SHARES AND SECURI TIES, DECLARED TOTAL INCOME OF RS.3,89,81,380/-. THE ASSE SSING OFFICER MADE DISALLOWANCE OF RS.24,41,517/- AGAINST THE DISALLOWANCE OF RS.1,15,185/-, COMPUTED BY THE ASSE SSEE. THE LD. ASSESSING OFFICER DISALLOWED THE INTEREST PAID TO THE PARTNERS ON THEIR CAPITAL ATTRIBUTING TO EARNING OF DIVIDEND INCOME BY TREATING THE PARTNERS CAPITAL AS BORROWED FUNDS. ON APPEAL, THE LD. COMMISSIONER OF INCOME TAX (APPE ALS) DIRECTED TO CALCULATE THE DISALLOWANCE UNDER RULE 8 D ON THE BASIS OF NET INTEREST AND NOT THE GROSS INTEREST, T HUS, PART RELIEF WAS GIVEN TO THE ASSESSEE. 4.2. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT THE ASSES SING OFFICER NOTIONALLY DISALLOWED RS.14,25,250/- BY APPLYING RU LE 8D. MORE SPECIFICALLY, WHEN THE ASSESSEE FIRM HAS VOLUN TARILY DISALLOWED 10% OF THE DIVIDEND INCOME I.E. RS.1,15, 185/- AS EXPENSE INCURRED FOR EARNING TAX FREE INCOME. THUS, THE DISALLOWANCE OF PROPORTIONATE INTEREST IN CONNECTIO N WITH EARNING DIVIDEND INCOME IS NOT JUSTIFIED. THE INTE REST HAS BEEN PAID ON THE CAPITAL OF PARTNERS INTRODUCED FOR THE PURPOSES OF BUSINESS EXCLUSIVELY. SO IT IS ALSO TH AT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AS ON THE DATE OF PURCHASE OF SHARES AND IT IS NOT THE CASE T HAT BORROWED N.D. NISSAR ITA NO.5762 & 6391/MUM/2013 14 FUNDS WERE UTILIZED FOR THE SAID PURPOSE. WE ALSO N OTE THAT NO NEXUS HAS BEEN ESTABLISHED BETWEEN THE CAPITAL/BORR OWED FUNDS AND PURCHASE CONSIDERATION PAID BY THE ASSESS EE. TOTALITY OF FACTS CLEARLY INDICATES THAT SHARES WER E ACQUIRED OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE, THEREFORE, DISALLOWANCE CANNOT BE EXCEED BY THE INCOME EARNED BY THE ASSESSEE FIRM, THUS, WE FIND MERIT IN THE GROUND OF THE ASSESSEE. IT IS ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS ALLOWED AND THAT OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 11/08/2015. SD/ - (ASHWANI TANEJA) SD/ - (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER % & MUMBAI; ) DATED : 28/08/2015 F{X~{T? P.S/. . . %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. +,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. 0 0 % 1 ( + ) / THE CIT, MUMBAI. 4. 0 0 % 1 / CIT(A)- , MUMBAI 5. 34 .' , 0 +( ' 5 , % & / DR, ITAT, MUMBAI 6. 6# 7& / GUARD FILE. / BY ORDER, /3+ . //TRUE COPY// / (DY./ASSTT. REGISTRAR) , % & / ITAT, MUMBAI