ADDL CIT 9(2), MUMBAI V. INDIA ADVANTAGE SECURITIES LTD, MUMBAI

ITA 6711/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9020 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2008-2009
• Appeal Filed On: 05-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C KUTTY
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. : 6711/MUM/2011 ASSESSMENT YEAR : 2008-09 DCIT, RANGE 9(2), AAYAKAR BHAVAN, R. NO.218, 2 ND FLOOR, M.K. ROAD, MUMBAI-400 020 VS. M/S. INDIA ADVANTAGE SECURITIES LTD. 4 TH FLOOR, OM PLAZA, VASANJI LALJI ROAD, KANDIVALI (W), MUMBAI-400 067 PAN NO: AADCP 5317 M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K. C. KUTTY RESPONDENT BY : SHRI DHARME SH SHAH DATE OF HEARING : 05.09.2012 DATE OF PRONOUNCEMENT : 14.09.2012 ORDER PER RAJENDRA SINGH, A.M. : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 25.07.2011 OF CIT(A), MUMBAI FOR THE A.Y. 2008-09. THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARDING T HE DISALLOWANCE OF EXPENSES IN RELATION TO THE EXEMPT INCOME U/S.14A O F THE I.T. ACT. 2. THE FACTS IN BRIEF ARE THAT THE A.O. DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD RECEIVED DI VIDEND INCOME OF ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 2 RS.1,40,859/- WHICH WAS EXEMPT FROM TAX. THE ASSES SEE HAD HOWEVER, NOT MADE ANY DISALLOWANCE OF EXPENSES RELATING TO E XEMPT INCOME. THE A.O., THEREFORE, COMPUTED THE DISALLOWANCE U/S.14A AS PER RULE 8D WHICH COME TO RS.48,73,483/- CONSISTING OF INTEREST EXPENDITURE OF RS.39,00,174/- AND OTHER EXPENSES OF RS.9,73,309/-. THE A.O. THUS DISALLOWED A SUM OF RS.48,73,483/- AND ADDED TO THE TOTAL INCOME. 3. THE ASSESSEE DISPUTED THE DECISION OF THE A.O. A ND SUBMITTED BEFORE THE LD. CIT(A) THAT THE DISALLOWANCE U/S.14A COULD BE MADE ONLY IF THE A.O. WAS SATISFIED THAT THE ASSESSEE HAD INCURR ED ANY EXPENDITURE IN RELATION TO THE EXEMPT INCOME. IT WAS POINTED OUT THAT THE INTEREST EXPENDITURE HAD BEEN CLAIMED BY THE ASSESSEE AS DED UCTION U/S.36(1)(III). IT WAS ALSO SUBMITTED THAT THE SHARES HAD BEEN SHOW N AS STOCK-IN-TRADE IN THE BOOKS OF ACCOUNTS AND, THEREFORE, SUCH STOCK -IN-TRADE COULD NOT BE TAKEN INTO ACCOUNT WHILE COMPUTING THE DISALLOWANCE UNDER RULE 8D. THE CIT(A) WAS SATISFIED BY THE EXPLANATION GIVEN A ND AGREED THAT THE DISALLOWANCE UNDER RULE 8D COULD BE MADE ONLY WITH RESPECT TO INVESTMENT AND NOT IN STOCK-IN-TRADE. IT WAS NOTED BY HIM THAT THE INVESTMENTS MADE BY THE ASSESSEE WERE ONLY TO THE T UNE OF RS.50,000/-. THE A.O. HAD HOWEVER, ADOPTED THE FIGURE OF STOCK I NVENTORY APPEARING AT SCHEDULE-6 AMOUNTING TO RS.25,81,52,042/- WHICH WAS TRADING STOCK AND WHICH HAD TO BE EXCLUDED. THE LD.CIT(A) ACCORD INGLY EXCLUDED THE STOCK-IN-TRADE FROM THE PURVIEW OF COMPUTATION OF D ISALLOWANCE OF ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 3 EXPENSES UNDER RULE 8D. HE ACCORDINGLY COMPUTED TH E DISALLOWANCE BOTH DIRECT EXPENSES AND INDIRECT EXPENSES AT RS.47 ,247/- AND DISALLOWANCE WAS UPHELD ONLY TO THAT EXTENT AND THE BALANCE ADDITION MADE BY THE A.O. WAS DELETED. AGGRIEVED BY THE SAI D DECISION, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US, THE LD. DR APPEARING FOR THE REVENUE ASSAILED THE ORDER OF THE LD.CIT(A). IT WAS SUBMITTED THAT THE PROVIS IONS OF SECTION 14A WERE APPLICABLE EVEN IN RELATION TO THE DIVIDEND IN COME RECEIVED FROM THE TRADING IN SHARES AS HELD BY THE SPECIAL BENCH OF T HE TRIBUNAL IN THE CASE OF ITO VS. M/S. DAGA CAPITAL MANAGEMENT P. LTD . (117 ITD 169). HE ALSO REFERRED TO THE LATEST DECISION OF THE TRIBUNA L DATED 08.08.2012 IN ITA NO.5904 & 6022/MUM/2000 IN THE CASE OF M/S. AME RICAN EXPRESS BANK LIMITED. THE LD. AR FOR THE ASSESSEE, ON THE OTHER HAND, SUBMITTED THAT ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE LATEST JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (250 CTR 291) IN WHICH IT HAS BEEN HELD THAT NO DIS ALLOWANCE COULD BE MADE U/S.14A IN RESPECT OF DIVIDEND INCOME RECEIVED FROM THE SHARES HELD AS TRADING STOCK. IT WAS POINTED OUT THAT FOL LOWING THE SAID JUDGMENT, THE MUMBAI BENCH OF THE TRIBUNAL IN THE C ASE OF GANJAM TREADING CO. P. LTD. IN THE ORDER DATED 20.07.2012 IN ITA NO.3724/MUM/2005 HAVE HELD THAT THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DAGA CAPITAL MANAG EMENT P. LTD. ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 4 (SUPRA) WAS NOT APPLICABLE IN THE CASE OF DIVIDEND RECEIVED FROM TRADING SHARES. THE LD. AR FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF YATISH TRADING CO. (P) LTD. VS. ACIT (129 ITD 237) AND THE DECISION IN THE CASE OF PRAKASH K. SHAH & S ECURITIES P. LTD. VS. ACIT IN ITA NO.3339/MUM/2010. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE DISALLOWAN CE 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 R ELATION TO THE DIVIDEND RECEIVED FROM THE TRADING SHARES. THE LD.CIT(A) HA S 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 DE CISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. AMERICAN EXPRESS BANK LIMITED (SUPRA) IN WHICH THE TRIBUNAL HAS HELD THA T THE EXPENDITURE U/S.14A HAS TO BE DISALLOWED EVEN IN RESPECT OF DIV IDEND INCOME RECEIVED FROM TRADING SHARES. THE TRIBUNAL FOLLOWED THE DEC ISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA C APITAL MANAGEMENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD R ELIED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE THAT THE DISALL OWANCE COULD NOT BE MADE IN RELATION TO THE DIVIDEND RECEIVED FROM TRAD ING SHARES. THE ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 5 TRIBUNAL HAD HOWEVER, DISTINGUISHED THE SAID JUDGME NT 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 CONT ROLLING THE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING TH E SHARES WAS BUSINESS, THE HIGH COURT HAD UPHELD THE DISALLOWANC E U/S.14A OF THE I.T. ACT. THE TRIBUNAL ALSO NOTED THAT THE HIGH COURT I N THAT CASE HAD ONLY OBSERVED THAT THE INTEREST PAID ON BORROWED FUNDS U TILISED 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 ON LY OBITER DICTA AND NOT THE RATIO DECIDENDI OF THE JUDGMENT. THE RATIO DEC IDENDI OF THE JUDGMENT 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 O N THE ISSUE OF DISALLOWANCE OF EXPENSES IN RELATION TO THE DIVIDEN D INCOME RECEIVED FROM TRADING IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAV E 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 DIS TRIBUTOR OF STATE LOTTERIES AND A DEALER IN SHARES AND SECURITIES. THE ASSESSE E HAD TAKEN LOANS FOR THE PURCHASE OF CERTAIN SHARES AND IT HAD INCURRED EXPENDITURE FOR BROKING THE LOANS WHICH HAD ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 6 BEEN DISALLOWED UNDER RULE 8D BY THE A.O. AND CONFI RMED BY THE LD.CIT(A). THE TRIBUNAL AGREED WITH THE AUTHORITIE S 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 PROFIT SHOWN FROM THE SALE OF SHARES HAD BEEN OFFERED AS BUSINESS INCOME. THE TR IBUNAL, THEREFORE, DIRECTED THE A.O. TO BIFURCATE THE EXPENDITURE PROP ORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY THE TRIB UNAL. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE PURCHASED WERE SOLD AND INCOME DERIVED WAS OFFERED TO TAX AS BUSINESS INCOM E. THE REMAINING 30% OF SHARES WHICH REMAINED UNSOLD HAD REVERTED TO DIVIDEND INCOME FOR WHICH THE ASSESSEE HAD NOT INCURRED ANY EXPENDI TURE AT ALL. THE HIGH COURT ALSO OBSERVED THAT THE ASSESSEE HAD NOT RETAI NED THE SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME WHICH WAS INCIDENTAL DUE TO HIS SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSE E. 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 ISS UE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISION OF THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DAGA CAPITAL MANAGEMEN T P. LTD. (SUPRA). ITA NO : 6711/MUM/2011 M/S. INDIA ADVANTAGE SECURITIES LTD. 7 INFACT, WE NOTE THAT THE TRIBUNAL IN THE CASE OF GA NJAM TREADING CO. LTD. (SUPRA) HAS ALREADY CONSIDERED THIS SITUATION AND H ELD 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 RELATI ON TO THE DIVIDEND RECEIVED FROM TRADING SHARES CANNOT BE MADE. WE, T HEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DELETIN G THE DISALLOWANCE U/S.14A COMPUTED BY THE A.O. IN RELATION TO THE STO CK-IN-TRADE. THE ORDER OF THE LD.CIT(A) IS ACCORDINGLY UPHELD. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 14 TH DAY OF SEPTEMBER, 2012. SD/- SD/- - ( VIJAY PAL RAO ) ( RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 14.09.2012 COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI