ANAHAITA NALIN SHAH, MUMBAI V. ACIT- RANGE 4 (2), MUMBAI

ITA 7115/MUM/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3636 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 05-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJUKTA CHOW DHURY
• Keywords: Business income; Principle of natural justice; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUM BAI BEFORE SHRI SHAILENDRA KUMAR YADAV, JM AND SHRI RAJESH KUMAR, AM ./ I.T.A. NO. 7115/MUM/2013 ( / ASSESSMENT YEAR: 2010-11) MRS. ANAHAITA NALIN SHAH 1/1A, BIRLA MANSION, 134, N.M. ROAD, FORT, MUMBAI-400 023. / VS. ASST. COMMISSIONER OF INCOME TAX, RANGE 4(2), 6 TH FLOOR, INCOME TAX OFFICE, MAHARSHI KARVE ROAD, MUMBAI-400 020. ./ ./PAN/GIR NO. AANPS 9303H ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI SANJUKTA CHOWDHURY / RESPONDENT BY : SHRI SATYA PAL KUMAR / DATE OF HEARING : 05/11/2015 !'# / DATE OF PRONOUNCEMENT : 15/01/2016 $% / O R D E R PER RAJESH KUMAR, A. M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 17.10.2013 OF COMMISSIONER OF INCOME TAX (APPEALS)-8, MUMBAI (HER EINAFTER CALLED AS THE CIT(A) ) FOR ASSESSMENT YEAR 2010-11.THE ASSESSEE HAS RAIS ED FOLLOWING GROUNDS OF APPEAL: 2 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT 1. THE LEARNED ASSESSING OFFICER HAS ERRED IN ADDING AN AMOUNT OF RS.11,18,976/- U/S 14A OF THE INCOME TAX ACT, 1961. 2. THE LEARNED CIT(A)-8 HAS ERRED IN CONFIRMING THE AB OVE ADDITION IN THE HANDS OF YOUR PETITIONER. 3. THE ORDER APPEALED AGAINST IS BAD IN LAW AND IS AGA INST THE PRINCIPLE OF NATURAL JUSTICE. 4. THE ORDER APPEALED AGAINST IS BASED ON SURMISES AND CONJECTURES. 2. THE COMMON ISSUE RAISED IN ALL THE GROUNDS OF APPEA L IS AGAINST THE CONFIRMATION OF DISALLOWANCE U/S 14A R.W.R 8D OF T HE ACT OF RS.11,18,976/- . 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE FILED HER RETURN OF INCOME ON 31.08.2010 DECLARING AS INCOME OF RS.67,08,440/-. T HE ASSESSEE WAS A DIRECTOR OF M/S. NVS BROKERAGE PVT. LTD. DURING YEAR THE ASSESS EE HAD EARNED THE TAX FREE DIVIDEND OF RS.14,80,716/- AND DID NOT ALLOCATE AN D APPORTION ANY EXPENSES INCURRED FOR EARNING SUCH TAX FREE INCOME. THE ASSE SSEE ALSO CARRIED ON BUSINESS OF SALES AND PURCHASES OF SHARES UNDER PORTFOLIO MANAG EMENT SERVICES THROUGH J.M. FINANCIAL SERVICES LTD. AND THE INCOME FROM THE SA ID TRADING WAS ALSO OFFERED RS. 98,577/- AS INCOME FROM BUSINESS. THE LD. AO DURING THE COURSE OF SCRUTINY FOUND THE ASSESSEE HAD EARNED A DIVIDEND INCOME OF RS.14,80,716/- HOWEVER NO EXPENSES WERE ALLOCATED TO THE EXEMPT INCOME AND TH EREFORE CONCLUDED THAT 3 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT PROVISIONS OF SECTION 14A R.W.R. 8D OF THE ACT WERE APPLICABLE AND ACCORDINGLY MADE THE DISALLOWANCE OF RS.11,18,976/- AS COMPUTED IN PARA 4.3 OF THE ASSESSMENT ORDER. THE LD. CIT(A) DISMISSED THE APPEAL OF THE A SSESSEE BY HOLDING AS UNDER:- I HAVE CONSIDERED THE FACTS OF THE CASE AND THE AR GUMENTS OF THE APPELLANT. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APP ELLANT AND THE ARGUMENT OF THE ASSESSING OFFICER. I FIND THAT WITH THE INSERTION O F RULE RULE 8D R.W. THE PROVISIONS OF SUB-SECTION 2 &3 OF SECTION U/S 14A(2 ) LAY DOWN A PROCEDURE FOR DETERMINING EXPENDITURE TO BE DISALLOWED U/S. 14A. THIS BEING PROCEDURAL IN NATURE, IT IS TO BE APPLIED TO ALL THE PENDING PROC EEDINGS AS ON THE DATE OF ITS INSERTION. THIS HAS ALSO BEEN UPHELD BY THE SPECIAL BENCH OF ITAT MUMBAI IN ITS DECISION DATED 20/10/2008 IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT (P) LTD. IN ITA NO. 8057/MUM/2003. IN THIS DECISION, SPECIAL BENCH OF ITAT HAS ALSO HELD THAT FOR THE INVESTMENT IN SHARES HELD AS INVESTMEN T AS WELL AS STOCK IN TRADE, BOTH, WILL FORM PART OF INVESTMENT MADE FOR THE PURPOSES OF TAX FREE EXEMPTED INCOME. IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (ITANO .636/2010), THE HONBLE BOMBAY HIGH COURT HAD HELD THAT RULE RULE 8D WAS AP PLICABLE ONLY FROM AY 2008-09. THUS, ADDITION OF THE AMOUNT DETERMINED AS PER RULE RULE 8D HAS TO BE MADE FROM AY 2008-09 ONWARDS AS AMOUNT OF EXPENDITU RE INCURRED FOR EARNING OF EXEMPT INCOME. THE RECENT SPECIAL BENCH JUDGEMENT I N THE CASE OF M/S. DAGA 4 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT CAPITAL MANAGEMENT PVT. LTD.(2008) REPORTED IN 26 S OT603 SUPPORTS THE VIEW THAT THE ASSESSING OFFICER HAS RIGHTLY MADE THE DISALLOW ANCE U/S.14A. THE APPELLANTS CONTENTION THAT NO EXPENDITURE HAD BEEN INCURRED TO EARN EXEMPT INCOME IS NOT ACCEPTABLE FOR THE REASON THAT THE ASSESSEE BEING A SHARE BROKER UNDERTAKES TRANSACTIONS OF SHARE WHICH INCLU DES THOSE TRANSACTIONS WHICH SUBSEQUENTLY YIELDED DIVIDEND WHICH WAS EXEMPT. THE EXPENSES DEBITED TO P&L ACCOUNT HAD BEEN INCURRED FOR UNDERTAKING TRANSACTI ONS OF SHARES WHICH ALSO INCLUDED SUCH TRANSACTIONS WHICH YIELDED EXEMPT DIV IDEND. THEREFORE, THE EXPENSES INCLUDING INTEREST AND ADMINISTRATIVE EXPENSES DEBI TED TO P& L ACCOUNT INCLUDE EXPENDITURE INCURRED FOR UNDERTAKING TRANSACTIONS O F SHARES WHICH YIELDED EXEMPT INCOME. APPARENTLY, ANY EXPENDITURE INCURRED FOR UN DERTAKING TRANSACTIONS FOR SHARES WHICH SUBSEQUENTLY YIELDED EXEMPT INCOME IS REQUIRED TO BE TREATED AS EXPENDITURE INCURRED FOR EARNING OF EXEMPT DIVIDEND INCOME. THEREFORE, THE ASSESSEES CONTENTION THAT NO EXPENDITURE HAD BEEN INCURRED FOR EARNING OF EXEMPT INCOME IS NOT ACCEPTABLE. THE AMOUNT OF SUCH EXPEND ITURE IS, THEREFORE, REQUIRED TO BE DETERMINED AS PER PROVISIONS OF RULE RULE 8D. IN VIEW OF ABOVE DISCUSSION, THE ASSESSING OFFICER HAS CORRECTLY CALCULATED THE DISA LLOWANCE U/S.14A R.W. RULE RULE 8D AND THUS, THE ADDITION IS CONFIRMED. THUS, THE GROUND OF APPEAL IS DISMISSED. 5 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT 3. THE LD. AR SUBMITTED BEFORE US THAT THE LD. AO W ORKED OUT THE DISALLOWANCE U/S. 14A AS PER RULE 8D OF RS.11,18,976/- WHICH COM PRISED OF RS.5,49,368/- ON ACCOUNT OF INTEREST UNDER RULE8D(2)(II) AND RS.6,9 7,002/- BEING 0.5% OF THE AVERAGE INVESTMENTS UNDER RULE 8D(2)(III) . THE LD. COUNSEL ARGUED THAT DURING THE YEAR ENDED 31.3.2008, THE ASSESSEE BORROWED 2.00 C RORES FROM J.M. FINANCIAL SERVICES LTD AND UTILIZED THE SAME FOR SHARE TRA DING BUSINESS THROUGH THE SAME BROKERAGE COMPANY AND NET PROFIT FROM THE SHARE TR ADING WAS SHOWN AS INCOME FROM BUSINESS. DURING THE YEAR THE AMOUNT OF RS.5, 49,368/- WAS PAID AS INTEREST FOR THE SAID LOAN AND SINCE THE LOAN WAS EXCLUSIVE LY BORROWED FOR SHARE TRADING THROUGH J.M. FINANCIAL PRODUCTS PVT LTD AND THE IN COME FROM THE SAID TRADING BUSINESS WAS DULY RETURNED AS BUSINESS INCOME AND T HEREFORE THE INTEREST PAID TO THE SAID COMPANY WAS WRONGLY DISALLOWED BY THE AO U/S14 A R.W.R. RULE 8 D. THE LD. COUNSEL RELIED ON THE DECISION OF THE CIT VS. GUJAR AT POWER CORPORATION LTD. 352 ITR 583 (GUJ) AND CIT VS. HDFC BANK LTD. 366 ITR 50 5 (BOM) IN SUPPORT OF THE ASSESSEES CASE. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE DID NOT BORROW ANY LOAN DURING THE FINANCIAL YEAR 31.03.2007 TO 3 1.03.2009 AND SUBMITTED THAT ALL THE INVESTMENT MADE BY THE ASSESSEE WERE OUT OF HER OWN FUNDS DURING THE ABOVE YEARS. THE LD. COUNSEL SUBSTANTIATED HIS ARGUMENTS BY FILING THE COMPARATIVE STATEMENT OF 4 YEARS FROM 2007-08 TO 2010-2011 SHOW ING DETAILS OF THE CAPITAL 6 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT ACCOUNT, INTEREST PAID, TOTAL INVESTMENT, DIVIDEND RECEIVED ON SHARES, DIVIDEND RECEIVED ON MUTUAL FUNDS AND LOAN/ CREDITORS AND PR OVISIONS FILED AT PAGE NO. 13 OF THE PAPER BOOK . THE TOTAL INVESTMENT VALUE OF S HARES WAS 13,93,91,986/- AND THE BALANCE IN THE CAPITAL ACCOUNT AS ON THAT DATE WAS RS.18,40,73,180/- WHICH UNEQUIVOCALLY PROVED THAT ALL THESE INVESTMENT WER E MADE OUT OF ASSESSES OWN FUNDS AND NOT OUT OF BORROWED FUNDS. THE BORROWED F UNDS WERE UTILIZED FOR THE PURPOSE OF SHARE TRADING THE INCOME FROM WHICH WAS RETURNED AS INCOME FROM BUSINESS DURING THE YEAR. AS REGARDS THE ADDITIONS UNDER RULE 8D(2)(III) OF RS. 4,21,973/- BEING 0.5% OF AVERAGE INVESTMENTS , IT W AS ARGUED THAT THE 0.5% SHOULD BE CALCULATED BY TAKING INTO ACCOUNT ONLY THOSE I NVESTMENTS WHICH YIELDED DIVIDEND INCOME DURING THE YEAR AND NOT BY TAKING ALL THE INVESTMENTS. THE LD COUNSEL FINALLY PRAYED THAT THE ADDITION MADE U/S .14A WAS WRONG AND BE DELETED. THE LD. DR ON THE OTHER HAND RELIED ON THE AUTHORIT IES BELOW. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE WAS ENGAGED IN TH E BUSINESS OF SHARE TRADING FOR THE PURPOSE OF WHICH THE ASSESSEE BORROWED THE MONE Y FROM J.M. FINANCIAL PRODUCTS PVT. LTD., WHICH WAS USED FOR THE PURPOSE OF SHARE TRADING. MOREOVER THE DETAILS AS FILED BY THE ASSESSEE ON PAPER BOOK AT P G. NO.13 SHOWS THAT ASSESSEE HAD 7 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT CAPITAL RS. 18,40,73,180/- ON 31.03.2010 WHEREAS THE TOTAL VALUE OF INVESTMENT ON THAT DATE WAS RS. 13,93,91,986/- WHICH MEANS THA T THESE INVESTMENTS WERE MADE BY THE ASSESSEE OUT OF HER OWN FUNDS AND NOT OUT OF THE BORROWINGS WHICH WERE USED FOR THE PURPOSE OF SHARE TRADING. WE ALSO FIND THAT AS ON 31.03.2010 , THE CLOSING STOCK OF SHARES WAS RS.1,07,26,256/-WHICH A LSO PROVES THAT THE MONEY BORROWED WAS UTILIZED FOR THE PURPOSE OF SHARE TRAD ING BUSINESS CLOSING STOCK OF SHARES WAS DULY SHOWN BY THE ASSESSEE. IN THE CASE OF CIT VS. HDFC BANK LTD. (SUPRA) THE HONBLE BOMAY HIGH COURT HAS HELD TH AT ASSESSEES CAPITAL , PROFITS RESERES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN HIGHER THAN THE INVESTMENTS IN THE TAX FREE SECURITIES AND IN VIEW OF THIS FACTUAL POSITION IT WOULD HAVE TO BE PRESUMED THAT INVESTMENTS MADE BY THE AS SESSEE WOULD BE OUT OF THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. I N THE CASE OF CIT VS GUJRAT POWER CORPORATION LTD (SUPRA) THE HONBLE GUJRAT HIGH COU RT HAS HELD THAT THE ASSESSEE HAD DEMONSTRATED THAT IT HAD OTHER SOURCES OF INVES TMENTS AND NO PART OF THE BORROWED COULD BE STATED TO BE USED FOR THE PURPOS E OF EARNING TAX FREE INCOME, THE INVOCATION OF THE PROVISIONS OF SECTION 14A FO R TAXING SUCH INTEREST WAS NOT JUSTIFIED. THE FACTS OF THE CASE OF THE ASSESSEE AR E SQUARELY COVERED BY THE ABOVE DECISIONS AND WE RESPECTFULLY FOLLOWING THE RATIO L AID DOWN , DELETE THE ADDITION OF RS.5,49,368/- UNDER RULE 8D(2)(II). AS REGARDS THE BALANCE ADDITION OF RS. 8 ITA NO.7115/MUM/2013 MRS. ANAHAITA NALIN SHAH VS. ACIT 4,21,973/- WE FIND MERIT IN THE ARGUMENTS OF THE LD AR THAT 0.5% OF DIVIDEND YIELDING INVESTMENTS SHOULD BE DISALLOWED AND NOT O N THE ENTIRE INVESTMENTS . WE , THEREFORE DIRECT THE AO TO CALCULATE THE DISALLOW ANCE OF 0.5% UNDER RULE 8D(2)(III) BY TAKING THOSE INVESTMENTS WHICH YIEL DED DIVIDEND DURING THE YEAR. THUS, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THE AO IS DIRECTED ACCORDINGLY. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15TH JANUARY, 2016 SD/- SD/- (SHAILENDRA KUMAR YADAV) (RAJESH KUMAR) &' $ / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER ( ) MUMBAI; *$ DATED : 15.1.2016 PS. ASHWINI GAJAKOSH / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. + ( ) / THE CIT(A) 4. + / CIT CONCERNED 5. ./0 ''12 , 12# , ( ) / DR, ITAT, MUMBAI 6. 045 6 / GUARD FILE / BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI