DCIT CIR 4(3), MUMBAI V. J.G.A. SHAH SHARE BROKERS P. LTD, MUMBAI

ITA 7874/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8784 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 12-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 15-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income
• Section: 14A; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI I BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI RAJENDRA SINGH, AM & SHRI VIJAY PAL RA O, JM ITA NO. 7874/MUM/2010 (ASST YEAR 2007-08) THE DY COMMR OF INCOME TAX 4(3), MUMBAI VS M/S J G A SHAH SHARE BROKERS P LTD OFFICE NO.7, 3 RD FLOOR, RAJABAHADUR MANSION 24 HAMAM STREET, FORT MUMBAI 23 (APPELLANT) (RESPONDENT) ITA NO. 7966/MUM/2010 (ASST YEAR 2007-08) M/S J G A SHAH SHARE BROKERS P LTD OFFICE NO.7, 3 RD FLOOR, RAJABAHADUR MANSION 24 HAMAM STREET, FORT MUMBAI 23 VS THE DY COMMR OF INCOME TAX 4(3), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AAACJ3477H ASSESSEE BY SHRI SANJAY C SHAH REVENUE BY SH K G KUTTY DT.OF HEARING 12 TH SEPT 2012 DT OF PRONOUNCEMENT 26 TH , SEPT 2012 PER VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 1.9.2010 OF THE CIT(A) FOR THE AY 2009-10. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN ITS APPEAL: 1., LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERRE D IN DIRECTING LEARNED ASSESSING OFFICER TO RE-COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT BY APPLYING A RATIO WHICH IS UNREALISTIC AND ILLOGICAL H AVING REGARDS TO FACTS AND CIRCUMSTANCES OF THE CASE. 2. LEANED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER RESTRICTING A MOUNT OF REBATE ALLOWABLE ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 2 U/S 88E TO RS 1231251/- AS AGAINST ( .S 1782445/- C LAIMED BY APPELLANT, ON THE PLEA THAT APPELLANT HAS NOT SEPARATELY MAINTAINED A CCOUNTS FOR DIFFERENT SEGMENTS INSTEAD ALLOCATED CERTAIN EXPENSES TO DIFFE RENT ACTIVITIES WITHOUT ANY JUSTIFIABLE BASIS. 3. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ORDER OF THE LEARNED ASSESSING OFFICER IN ADOPTING T HE GROSS INCOME FROM SIT TRANSACTION AT RS 9915737/- AS AGAINST RS 7179060/- DECLARED BY APPELLANT ON THE PLEA THAT APPELLANT DID NOT DENY SPECIFICALLY T HAT NO DEDUCTION OF STI PAID RS 2736677/- HAS BEEN MADE AND IT WAS ALLEGED THAT THERE WAS NO ENTRY ON THE ASSET SIDE OF THE BALANCE SHEET SHOWING ONLY AMOUNT ON ACCOUNT OF STT PAID. 4. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION MADE BY LEARNED ASSESSING OFFICER OF SIT PA ID RS 2736677/- TO TOTAL INCOME ON THE PLEA THAT APPELLANT DID NOT DENY SPECIFICALLY THAT NO DEDUCTION OF STT PAID RS 2736677/- HAS BEEN MADE AN D IT WAS ALLEGED THAT THERE WAS NO ENTRY ON THE ASSET SIDE OF THE BALANCE SHEET SHOWING ONLY AMOUNT ON ACCOUNT OF STT PAID. 5. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRE D IN GIVING ERRONEOUS DIRECTION OF ALLOWING DEDUCTION OF RS 1237578/- ONL Y FOR THE PURPOSE OF DETERMINING INCOME FROM DEALING IN SHARES & SECURITI ES INSTEAD OF ALSO GIVING DIRECTION FOR DELETION OF SAID AMOUNT FROM TOTAL IN COME OF APPELLANT 2.1 THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF BROKERAGE AS WELL AS ARBITRAGE BUSINESS IN THE STOCK EXCHANGE OF BOTH BSE AS WELL AS NSE. THE ASSESSEE HAS ADMITTED DIVIDEND INCOME OF ` . 32,19,214/-. THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE TO THE TUNE OF ` 1,32,338/- U/S 14A BY APPLYING RULE 8D OF THE I T ACT. 2.2 ON APPEAL, THE CIT(A) AFTER CONSIDERING THE DEC ISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOY CE MFG LTD HELD THAT RULE 8D IS NOT APPLICABLE FOR THE AY UNDER CONSIDERATION. HOWEVER , IT WAS HELD THAT SECTION 14A IS APPLICABLE AND THE REASONABLE AMOUNT OF EXPENDITURE INCURRED FOR EARNING OF EXEMPT DIVIDEND INCOME SHOULD BE AT THE RATIO OF TH E TOTAL EXPENDITURE IN PROPORTION WITH THE VALUE OF THE TRANSACTION WHICH HAD YIELDED DIVIDEND INCOME TO THE TOTAL TRANSACTION OF SHARES. ACCORDINGLY, THE ASSESSING OFFICER WAS DIRECTED TO DETERMINE THE QUANTUM OF SUCH EXPENDITURE BY APPLYI NG THE RATIO AS MENTIONED IN THE IMPUGNED ORDER FOR DISALLOWANCE OF THE EXPENDIT URE U/S 14A. ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 3 3 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE ASSESSEE IS IN THE BUSINESS OF ARBITRAGE IN THE CASH SEGMENT AS WELL AS DERIVATIVE SEGMENTS AND OPERATING AT BOTH BSE AND NSE. THE INCOME FROM THE ACTIVITY OF DERIVATIVE HAS OFFERED AS BUSINESS INCOME AND ACCEPTED BY THE REVE NUE. THEREFORE, ALL THE EXPENSES ARE INCURRED FOR THE BUSINESS ACTIVITY OF THE ASSESSEE FOR EARNING THE BUSINESS INCOME AND NOT FOR EARNING DIVIDEND INCOME . 3.1 IN THE CASH SEGMENTS, THE SHARES ARE BOUGHT BY PAYING ACTUAL COST AND DELIVERY OF SHARES TAKEN WHEREAS IN THE DERIVATIVE SEGMENTS, IT IS A FUTURE MARKET AND THERE ARE 12 SERIES OF DERIVATIVE SEGMENTS; ONE FO R EACH MONTH. A TRADER CREATES A BOUGHT POSITION OR SALE POSITION FOR A PARTICULAR S CRIPT IN ONE SERIES AND THE SAID POSITION CONTINUES FOR A PARTICULAR SERIES UNTIL IT IS SQUARED OFF WITHIN THE MONTH. IN CASE IT IS NOT SQUARED OFF, THE POSITION AUTOMATICA LLY SQUARED OFF BASED ON CLOSING PRICE PREVAILING THE LAST THURSDAY OF THE MONTH. T HUS, THE TRADER PAYS ONLY MARGIN TO COVER THE FLUCTUATION IN MARKET PRICE. A TRADER IN SHARE ARBITRAGE BUSINESS BUYS SHARES IN READY MARKET AND CREATES A SELL POSITION IN FUTURE MARKET. THE DIFFERENCE IN PRICE BETWEEN CASH MARKET AND FUTURE MARKET AT THE BEGINNING OF THE MONTH AS WELL AS THE DIFFERENCE IN PURCHASE PRICE AND SALE PRICE BETWEEN TWO STOCK EXCHANGES IN CASH MARKET ARE THE COMPONENTS OF ARBITRAGE PROFIT. 3.2 THE LD AR HAS SUBMITTED THAT A TRADER ALSO DEL IVER ALL SHARES IN SHORT PERIOD TILL THE EXPIRY OF THE PERIOD WITHIN THE MONTH AND THE REFORE, THE DIVIDEND INCOME IS ONLY AN INCIDENTAL TO BUSINESS ACTIVITY OF THE ASSE SSEE. HE HAS RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD VS JCITG REPORTED IN 250 CTR(KAR) 191 AND SUBMITTED THAT NO DISALLOWANCE IS CALLED FOR U/S 14A WHEN THE SHARES ARE HELD BY THE ASSESSEE IN HIS BUSINESS OF ARBITRAGE. HE HAS ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 4 ALSO RELIED UPON THE DECISION OF THE TRIBUNAL IN TH E CASE OF YATISH TRADING CO P LTD VS ACIT REPORTED IN 129 ITD 237. 3.3 ON THE OTHER HAND, THE LD DR OF THE ASSESSEE HA S RELIED UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE FORMULA ADOPTED BY TH E CIT(A) IS A CORRECT ONE TO FIND OUT THE REASONABLE BASIS OF DISALLOWANCE U/S 14A. 4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE DIVIDEND I NCOME DERIVED BY THE ASSESSEE ON THE SHARES WHICH WERE HELD BY THE ASSESSEE IN ITS S HARE ARBITRAGE BUSINESS ACTIVITY. THERE IS NO ALLEGATION OR INDICATION IN THE ASSESSM ENT ORDER AS WELL AS IN THE ORDER OF THE CIT(A) THAT THE ASSESSEE HAS SPECIFICALLY INCUR RED ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME. 4.1 SECTION 14A CONTEMPLATES AN IMPLICITLY NOTION O F APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR A COMPOSITE A CTIVITY FOR WHICH TAXABLE AND NON-TAXABLE INCOME IS RECEIVED. BUT, WHEN IT IS PO SSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO THE EXEMPT INCOME OR WHE N NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME, THEN THE PRINCIPLE OF APPORTIONMENT AS EMBEDDED IN SECTION 14A HAS NO APPLICATION. THE OB JECT OF SECTION 14A IS NOT TO ALLOW TO REDUCE THE TAXABLE INCOME BY DEBITING THE EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME. THE LOGIC AND SCHEME OF THE PR OVISIONS OF SECTION 14A IS NOT TO ALLOW THE EXPENDITURE INCURRED TO EARN THE EXEMPT I NCOME AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO E ARN THE TAXABLE INCOME. THERE SHOULD BE PROXIMITY BETWEEN THE EXPENDITURE AND THE INCOME WHICH IS NOT FORM PART OF THE TOTAL INCOME FOR APPLYING THE PROVISIONS OF SECTION 14A. ONCE SUCH PROXIMITY OF RELATION IS ACCEPTED, THE DISALLOWANCE HAS TO B E AFFECTED. THEREFORE, IN ORDER TO ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 5 DISALLOW THE EXPENDITURE U/S 14A, THERE MUST BE A L IVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PAR T OF THE TOTAL INCOME. 4.2 WHEN THE EXPENDITURE, WHICH IS CLAIMED BY THE A SSESSEE IS INCURRED WHOLLY AND EXCLUSIVELY FOR EARNING TAXABLE INCOME ARISING FROM THE BUSINESS ACTIVITY OF THE ASSESSEE IN THE ARBITRAGE TRADING, THEN IN THE ABSE NCE OF ANY ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EARNING OF DIVIDEND INCOME, NO EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMP T INCOME. THE SHARES ARE HELD BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS ACTIV ITY AND NOT AS INVESTMENT; THEREFORE, THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) IS APPLICABLE WHEREIN THE HONBLE HIGH COURT HAS HELD IN PARA 5 AS UNDER: 5. WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE M EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED FRO M THE SAID INCOME. IT IS NOT THE CASE OF THE ASSESSEE RETAINING ANY SHARES SO AS TO HAVE THE BENEFIT OF DIVIDEND. 63% OF THE SHARES, WHICH WERE PURCHASED , ARE SOLD AND THE INCOME DERIVED THERE FROM IS OFFERED TO TAX AS BUSINES S INCOME. THE REMAINING 37% OF THE SHARES ARE RETAINED. IT HAS REMAINED UNSO LD WITH THE ASSESSEE. IT IS THOSE UNSOLD SHARES HAVE YIELDED DIVIDEND, FOR WHIC H, THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AT ALL. THOUGH THE DIVIDEND INCOME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE IS INCURRED IN EARNING THE SAID INCOME, THE SAID EXPENDITURE ALSO CANNOT BE DEDUCTED . BUT IN THIS CASE, WHEN THE ASSESSEE HAS NOT RETAINED SHARES WITH THE I NTENTION OF EARNING DIVIDEND INCOME AND THE DIVIDEND INCOME IS INCIDENT AL TO HIS BUSINESS OF SALE OF SHARES, WHICH REMAINED UNSOLD BY THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DISALL OWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROACH OF THE AUTHORIT IES IS NOT IN CONFORMITY WITH THE STATUTORY PROVISIONS CONTAINED UNDER THE ACT . THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE. ACCORDINGLY, WE PASS THE FOLLOWING. 5 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBL E KARNATAKA HIGH COURT (SUPRA), NO DISALLOWANCE IS CALLED FOR WHEN NO ACTU AL EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING DIVIDEND INCOME. ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 6 6 GROUND NOS 2 TO 4 REGARDING REBATE ALLOWABLE U/S 88E IN RESPECT OF SECURITY TRANSACTIONS TAX AS WELL AS THE ADDITION AS PROPOSE D TO ADOPT THE RATIO OF SHARE TRADING INCOME TO THE TOTAL INCOME FOR THE PURPOSE OF STT REBATE U/S 88E. 6.1 THE ASSESSEE HAS PAID STT AT ` 27,48,784/-. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROFIT FROM DEALING IN SHARES AT 11.6 9% OF THE TOTAL TURNOVER AND ACCORDINGLY ONLY 11.69% OF STT OF ` . 27,48,784/- IS ELIGIBLE FOR REBATE U/S 88E OF TH E I T ACT. BY APPLYING THIS RATIO, THE ASSESSING OFFICER PROPOSED TO ALLOW THE CREDIT U/S 88E ONLY AT ` 3,21,333/-. THE ASSESSEE OBJECTED TO THE SAID PROP OSED ACTION OF THE ASSESSING OFFICER AND CONTENDED THAT THE NET INCOME FROM THE ACTIVITY OF SHARE AND SECURITY IS ` . 59,41,482/- AND THE AVERAGE INCOME TAX LEVYABLE O N THE SAID INCOME IS RS. 17,82,445/-. THE ASSESSING OFFICER DID NOT AGRE E WITH THE EXPLANATION AND CONTENTION OF THE ASSESSEE AND APPLIED THE RATIO OF THE GROSS INCOME FROM SHARE AND SECURITIES TO THE GROSS TOTAL INCOME AS PER THE BAL ANCE SHEET AND ARRIVED AT THE RATE OF 18.09%. BY APPLYING THE SAID RATIO FOR ALLOCATI ON OF THE EXPENDITURE TO THE STT INCOME, THE ASSESSING OFFICER WORKED OUT THE EXPEND ITURE AT ` . 45,73,988/- BEING 18.9% OF ` . 2,52,84,623/-( THE TOTAL EXPENDITURE AS PER THE I NCOME AND EXPENDITURE ACCOUNT). 6.2 IN THIS WAY, THE ASSESSING OFFICER COMPUTED T HE NET STT INCOME ELIGIBLE FOR REBATE AT ` . 41,04,171/- AND ALLOWED THE REBATE @ 30%, WHICH C OMES TO ` . 12,31,251/- . WHILE WORKING OUT THE STT INCOME E LIGIBLE TO REBATE U/S 88E, THE ASSESSING OFFICER HAS FIRSTLY ADDED BACK THE STT O F ` 27,48,784/- PAID BY THE ASSESSEE TO THE GROSS INCOME RELATED TO THE STT INCOME AND T HEN REDUCED THE PROPORTIONATE EXPENDITURE IN THE RATIO OF 18.09% PLUS 12,37,578/- AS THE ASSESSEE HAS SEPARATELY WORKED OUT THE EXPENDITURE IN RELATION TO THE INCOM E IN DEALING IN SHARES AND ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 7 SECURITIES. ACCORDINGLY, THE ASSESSING OFFICER HAS COMPUTED THE TOTAL INCOME OF THE ASSESSEE AT ` . 2,49,48,600/-. 6.3 ON APPEAL, THE CIT(A) HAS HELD THAT THE METHOD OLOGY ADOPTED BY THE ASSESSING OFFICER IS REASONABLE AND THE ALLOCATION OF THE EXPENDITURE ON THE BASIS OF THE SAID METHOD IS JUSTIFIED. ACCORDINGLY, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER IN GROSSING UP OF THE INCOME BY ADDING THE STT AMOUNT AND THEREAFTER ALLOWING THE REBATE U/S 88E AT ` . 12,31,251/-. 7 BEFORE US, THE LD AR HAS SUBMITTED THAT WHEN THE ASSESSEE HAS ALREADY TAKEN INTO CONSIDERATION THE EXPENDITURE OF ` 12,37,578/- SPECIFICALLY INCURRED FOR EARNING THE INCOME FROM THE ACTIVITY OF SHARE AND SECURITIE S, THEN NO APPORTIONMENT OF THE OTHER EXPENDITURE IS JUSTIFIED. IN SUPPORT OF HIS CONTENTION, THE LD AR HAS SUBMITTED THAT THE ASSESSEE WAS RUNNING BROKERAGE BUSINESS SI NCE 1999 AND HENCE SET UP A COMPLETE INFRASTRUCTURE IN THE SAID BUSINESS; THERE FORE, NO NEW INFRASTRUCTURE HAS BEEN SET UP IN THE ARBITRAGE BUSINESS, WHICH WAS S TARTED BY THE ASSESSEE SINCE FEB 2006. THE LD AR HAS CONTENDED THAT THE COST ATTAC HED TO THE BROKERAGE BUSINESS AND ARBITRAGE BUSINESS ARE IDENTIFIABLE TO A LARGE EXTENT AND NO PART OF COMMON EXPENDITURE CAN BE ALLOCATED TO THE ARBITRAGE BUSI NESS AS THE OTHER BUSINESS OF THE ASSESSEE WAS ALREADY IN EXISTENCE AND THE COMMON ES TABLISHMENT EXPENDITURE ARE INCURRED FOR THE EXISTING BUSINESS AND NOT FOR THE NEW BUSINESS UNDERTAKEN BY THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE HAS REL IED UPON THE FOLLOWING DECISIONS: I)COMMISSIONER OF INCOME-TAX V. INDUSTRIAL INVESTME NT TRUST CO. LTD. -67 ITR 436 II)RAJASTHAN STATE WAREHOUSING CORPORATION V. CIT - 242 ITR 450 III)PUNJAB STATE CO-OP. SUPPLY & MARKETING FEDERATI ON LTD. V. CIT 128 ITR 189 IV)ACIT VS P I INDUSTRIES - 67 DTR 153 ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 8 8 ALTERNATIVELY, THE LD AR HAS SUBMITTED THAT EVEN IF THE COMMON EXPENSES ARE TO BE APPORTIONED AGAINST THE INCOME OF ARBITRAGE B USINESS, THEN APPORTIONMENT SHOULD BE ON TURNOVER BASIS AND NOT ON INCOME BASIS AS ADOPTED BY THE ASSESSING OFFICER. THE LD AR HAS SUBMITTED THAT FOR THE AY 2008-09, THE ASSESSING OFFICER HAS ACCEPTED THE APPORTIONMENT OF INDIRECT EXPENSES AND NOT OF THE EXPENSES. 8.1 AS REGARDS THE COMPUTATION OF INCOME FOR THE PU RPOSE OF STT REBATE U/S 80HHC, THE LD AR HAS SUBMITTED THAT THE ASSESSING O FFICER HAS ADDED THE STT PAID BY THE ASSESSEE TO THE INCOME FROM ARBITRAGE TRADING B USINESS, WHICH IS AGAINST THE PROVISIONS OF LAW. HE HAS FURTHER SUBMITTED THAT T HE REBATE U/S 88E IS ONLY REGARDING THE TAX PAID BY THE ASSESSEE, WHICH HAS NOT BEEN CL AIMED BY THE ASSESSEE AS ALLOWABLE EXPENDITURE. THUS, THE LD AR HAS SUBMITT ED THAT WHEN THE ASSESSEE HAS NOT AT ALL TAKEN INTO CONSIDERATION THE STT PAID WH ILE COMPUTING THE INCOME, THEN THE SAME CANNOT BE ADDED TO THE INCOME OF THE ASSES SEE. THUS, THE LD AR HAS SUBMITTED THAT THE ASSESSING OFFICER HAS COMMITTED TOTAL ERROR; FIRSTLY FOR COMPUTING THE REBATE U/S 88E ON ACCOUNT OF STT PAID AND SECO NDLY THE ADDITION MADE IN THE TOTAL INCOME OF THE ASSESSEE BY THE AMOUNT OF ` 27,36,677/- , BEING STT PAID WHICH HAS BEEN ADDED BY THE ASSESSING OFFICER FOR BOTH T HE PURPOSES. 8.2 THE LD DR ON THE OTHER HAND HAS SUBMITTED THAT THE INCOME SHOWN BY THE ASSESSEE FROM DEALING IN SHARES AND SECURITIES IS NET OF STT AND THEREFORE, THE INCOME FROM STT TRANSACTION ADMITTED BY THE ASSESSEE AT RS . 71,79,060/- IS AFTER EXCLUSION OF STT PAID BY THE ASSESSEE. HENCE, THE ASSESSING OFF ICER IS JUSTIFIED IN ADDING BACK THE STT OF ` 27,36,677/- AND ALLOWING THE REBATE AFTER DETERMIN ING THE PROPORTIONATE EXPENDITURE IN THE RATIO OF 18.09% TO THE TOTAL EXP ENDITURE, BEING THE RATIO OF STT INCOME TO THE TOTAL INCOME. THUS, THE LD DR HAS S UBMITTED THAT THE METHOD ADOPTED BY THE ASSESSING OFFICER IS REASONABLE AND APPROPRIATE AND SHOULD BE ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 9 UPHELD. HE AS FURTHER SUBMITTED THAT THE STT PAID I S NOT AN ALLOWABLE DEDUCTION AND THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY ADDED THE SAID AMOUNT TO DETERMINE THE GROSS STT INCOME OF THE ASSESSEE AND CONSEQUENTLY R EVISED THE GROSS TOTAL INCOME. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BE LOW ON THIS ISSUE. 9 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE APPORTIONMENT OF THE EXPENDI TURE IS CONCERNED, THE FIRST CONTENTION OF THE LD AR IS THAT THERE SHOULD NOT BE ANY APPORTIONMENT OF THE COMMON EXPENDITURE WHEN THE ASSESSEE HAS ALREADY TA KEN INTO ACCOUNT, THE EXPENDITURE EXCLUSIVELY INCURRED FOR THE ACTIVITY O F DEALING IN SHARES AND SECURITIES. WE DO NOT AGREE WITH THE CONTENTION OF THE LD AR BE CAUSE THERE IS NO DISPUTE THAT THE ASSESSEE HAS USED THE SAME ESTABLISHMENT FOR TH E EXISTING BUSINESS AS WELL AS FOR ARBITRAGE BUSINESS ACTIVITY AND THEREFORE, THE EXPE NDITURE INCURRED ON THE COMMON ADMINISTRATION AND ESTABLISHMENT WHICH IS USED FOR ALL BUSINESS ACTIVITIES OF THE ASSESSEE SHALL BE APPORTIONED AMONG THE SAME. IT I S NOT THE CASE THAT THE ASSESSEE IS USING THE ADMINISTRATION AND ESTABLISHMENT FOR T HE MAIN BUSINESS ACTIVITY AND EARNED SOME EXEMPT INCOME IN THE FORM OF DIVIDEND A S INCIDENTAL TO THE MAIN BUSINESS AND IN SUCH A SITUATION WHEN THE EXPENDITU RE IS INCURRED FOR THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE CANNOT BE SAID TO BE INCURRED FOR EARNING DIVIDEND INCOME. FURTHER, THIS IS NOT THE CASE OF ADDITIONA L INSIGNIFICANT BUSINESS ACTIVITY APART FROM THE MAIN BUSINESS ACTIVITY; BUT THE ASSESSEE H AS STARTED A NEW LINE OF BUSINESS ACTIVITY, WHICH IS SUSTAINABLE AND SIGNIFICANT BUSI NESS OF THE ASSESSEE. THEREFORE, THE DECISIONS RELIED UPON BY THE ASSESSEE, WHICH ARE ON THE POINT OF APPORTIONMENT OF THE EXPENDITURE ON TAX FREE INCOME, ARE NOT APPLICA BLE IN THE FACTS OF THE CASE OF THE ASSESSEE. ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 10 9.1 HOWEVER, WE DO FIND MERITS IN THE ALTERNATIVE P LEA OF THE ASSESSEE THAT APPORTIONMENT OF THE EXPENDITURE SHOULD BE BASED ON TURNOVER OF THE DIFFERENT BUSINESS ACTIVITY AND ALSO ONLY WITH RESPECT TO THE COMMON EXPENDITURE WHICH ARE NOT IDENTIFIABLE EXPENDITURE TO THE SEPARATE BUSINE SS ACTIVITY. THUS, THE APPORTIONMENT OF COMMON EXPENDITURE SHOULD BE BASED ON THE PROPORTIONATE TURNOVER OF THE SEPARATE BUSINESS ACTIVITY APART FR OM THE EXCLUSIVE EXPENDITURE, WHICH IS IDENTIFIABLE TO HAVE BEEN INCURRED FOR A S PECIFIC BUSINESS ACTIVITY. HENCE, WE SET ASIDE THE ISSUE OF APPORTIONMENT OF EXPENDIT URE FOR THE PURPOSE OF COMPUTING THE STT INCOME TO THE RECORD OF THE ASSES SING OFFICER WITH THE DIRECTION THAT THE SAME SHOULD BE DETERMINED ON THE BASIS OF THE TURNOVER AND NOT ON THE BASIS OF THE INCOME AND ONLY WITH RESPECT TO THE CO MMON EXPENDITURE. 10 THE SECOND ASPECT OF THE METHOD IS GROSSING UP O F THE STT INCOME BY ADDING BACK ` . 27,36,677/- FOR THE PURPOSE OF COMPUTING THE REB ATE ON ACCOUNT OF STT U/S 88E. 10.1 THERE IS NO DISPUTE THAT STT PAID ON THE TRANS ACTION IS NOT AN ALLOWABLE DEDUCTION; BUT IT IS NOT CLEAR FROM THE RECORD WHET HER THE GROSS RECEIPTS IN RELATION TO DEALING IN SHARES AND SECURITIES ARE NET OF STT OR WITHOUT EXCLUSION OF STT PAID BY THE ASSESSEE. THREE IS NO DISPUTE THAT THE ASSESSEE HAS NOT SEPARATELY CLAIMED ANY DEDUCTION ON ACCOUNT OF STT PAID WHILE COMPUTING TH E INCOME FROM THE BUSINESS OF DEALING IN SHARES AND SECURITIES; BUT IT IS NOT ASC ERTAINABLE FROM THE RECORDS BEFORE US WHETHER THE SAID GROSS RECEIPTS/INCOME IS TAKEN AF TER EXCLUSION OF STT PAID BY THE ASSESSEE AT THE POINT OF PURCHASE AS WELL AS SALE O F SHARES AND SECURITIES. IF THE AMOUNT IS WITHOUT DEDUCTION OF STT TAX, THEN THE AD DITION MADE BY THE ASSESSING OFFICER IS NOT PERMITTED. THEREFORE, SUBJECT TO VE RIFICATION OF THE FACTS WHETHER THE GROSS INCOME SHOWN BY THE ASSESSEE FROM THE BUSINES S OF DEALING IN SHARES AND ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 11 SECURITIES IS PRIOR TO DEDUCTION OF STT OR AFTER DE DUCTION OF STT, THE ADDITION ON ACCOUNT OF STT PAID IS REQUIRED TO BE CONSIDERED. THE ASSESSING OFFICER IS DIRECTED TO VERIFY THIS ASPECT AND IF THE GROSS INCOME SHOWN BY THE ASSESSEE IS WITHOUT DEDUCTION OF TAX, THEN NO ADDITION CAN BE MADE FOR COMPUTATION OF REBATE U/S 88E. 11 SIMILARLY, THE AMOUNT OF STT PAID OF ` . 27,36,677/- HAS TO BE CONSIDERED FOR ADDITION IN THE TOTAL INCOME OF THE ASSESSEE. 12 GROUND NO.5 REGARDING DEDUCTION OF ` . 12,37,538/-, WHICH IS COMMON TO THE GROUND RAISED IN REVENUES APPEAL AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A ) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALL OW DEDUCTION IN RESPECT OF DIRECT EXPENSES INCURRED FOR BUSINESS OF DEALING IN SHARES WITHOUT APPRECIATING THE FACTS NARRATED IN THE ASSESSMENT ORDER BY THE AS SESSING OFFICER. 12.1 AT THE TIME OF APPORTIONMENT OF THE EXPENDITUR E TOWARDS STT INCOME, THE ASSESSING OFFICER HAS NOT ADJUSTED THE DIRECT EXPEN DITURE OF ` . 12,37,578/- ALREADY TAKEN INTO ACCOUNT BY THE ASSESSEE AGAINST THE INCO ME FROM BUSINESS OF DEALING IN SHARES AND SECURITIES AND IN THIS WAY, THE ASSESSIN G OFFICER. HAS NOT ALLOWED THE DIRECT EXPENDITURE WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSED. 12.2 ON APPEAL, THE CIT(A), THOUGH PRINCIPALLY AC CEPTED THE CLAIM OF THE ASSESSEE THAT THE ASSESSING OFFICER, HAD NEVER INT ENDED TO DISALLOW THE SUM OF ` 12,37,578/- AND THE SAME IS ALLOWABLE; BUT THE CIT (A) HAS DIRECTED THE ASSESSING OFFICER TO ALLOW THE SAID DEDUCTION WHILE DETERMIN ING THE INCOME RELATED TO STT. BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE AGGRIE VED WITH THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE. ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 12 13 THE ASSESSEE IS AGGRIEVED ONLY TO THE EXTENT THA T THE DIRECTION SHOULD HAVE BEEN GIVEN TO ALLOW SUCH DEDUCTION WHILE DETERMININ G THE INCOME RELATED TO STT AS WELL AS TOTAL INCOME OF THE ASSESSEE; WHEREAS THE R EVENUE IS AGGRIEVED BY THE ORDER WHEREBY THE ASSESSING OFFICER WAS DIRECTED TO ALLOW THE DEDUCTION ON THIS AMOUNT WHILE DETERMINING THE INCOME RELATED TO STT. 14 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS COMPUTED THE I NCOME FROM DEALING IN SHARES AND SECURITIES AS UNDER; K DEALING IN SHARES & SECURITIES: A) CAPITAL MARKET SEGMENT (9 61,929.59 B. FUTURES & OPTIONS SEGMENT 8,140 ,990.35____________ 7,179,060.78 856,025.03 LESS TURNOVER RELATED DIRECT EXPENSES (925,676.97 (223 ,840.61) INDIRECT & OTHER EXPENSES (312,501.00) (97,856.04) 5,941,482.79 534,328.38 14.1 IT IS CLEAR FROM THIS COMPUTATION THAT THE ASS ESSEE HAS TAKEN GROSS INCOME AT ` . 71,79,060/- AND THEREAFTER DEDUCTED THE EXPENDITU RE RELATED TO THE SAID ACTIVITY AMOUNTING TO ` 12,37,578/-( ` . 9,25,676/- + ` . 3,12,601/-) AND ACCORDINGLY ADMITTED THE INCOME AT ` 59,41,482/- FROM THE BUSINESS OF DEALING IN SHARES AND SECURITIES. 14.2 THE ASSESSING OFFICER HAS RECOMPUTED THE INCO ME OF THE ASSESSEE IN PARA 6 OF THE ASSESSMENT ORDER AS UNDER: ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 13 14.3 IT IS CLEAR FROM THE COMPUTATION OF THE ASSESS ING OFFICER THAT THE GROSS INCOME IN RESPECT OF THE BUSINESS IN DEALING IN SHARES AND SECURITIES WAS TAKEN AT ` 71,79,060/- WITHOUT REDUCING THE DIRECT EXPENDITUR E. THE AMOUNT REDUCED FROM THE GROSS IN COME IS ONLY ` 59,41,482/-, WHICH IS SHOWN BY THE ASSESSEE AFTER REDUCING THE ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 14 DIRECT EXPENDITURE IS AT ` 12,37,578/-. IN THIS WAY THE DIRECT EXPENDITURE OF ` 12,37,578/- WAS LEFT OUT WHILE THE ASSESSING OFFIC ER RECOMPUTED THE TOTAL INCOME. 14.4 IT IS PERTINENT TO MENTION THAT THE ASSESSING OFFICER HAS TAKEN THE INCOME AS PER P&L ACCOUNT AND THEREAFTER ADDED THE ITEMS WHIC H WERE DISALLOWED. BUT WHILE ADDING THE GROSS INCOME RELATING TO THE BUSINESS OF DEALING IN SHARES AND SECURITIES, THE ASSESSING OFFICER HAS NOT TAKEN INTO CONSIDERAT ION THE DIRECT EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. ACCORDING LY, WE FIND THAT THE CIT(A) HAS RIGHTLY HELD THAT DEDUCTION OF ` . 12,37,578/ IS ALLOWABLE. HOWEVER, INADVERTENTLY , THE DIRECTION WAS GIVEN TO THE ASSESSING OFFICER ONLY W ITH REGARD TO THE DETERMINATION OF THE INCOME RELATED TO STT IN PARA 4 OF HIS ORDER A S UNDER: 4. THE NEXT GROUND OF APPEAL (GROUND NO.5) IS AGAINS T NOT ALLOWING DEDUCTION IN RESPECT OF DIRECT EXPENSES INCURRED FO R BUSINESS OF DEALING IN SHARES AMOUNT TO ` 12,37,578/-. THE APPELLANT HAS POINTED OUT THAT IT WAS NEVER THE INTENTION OF THE ASSESSING OFFICER TO DIS ALLOW THE DIRECT EXPENSES. FROM THE ASSESSMENT ORDER, I FIND THAT THE APPELLANT S CONTENTION IS RIGHT THAT ASSESSING OFFICER HAD NEVER INTENDED TO DISALLOW TH IS SUM WHICH WAS CLAIMED FOR DETERMINING INCOME FROM DEALING IN SHARES AND SECUR ITIES AT ` 59,41,482/-. IN ABSENCE OF ANY AVERSE FINDING BY THE ASSESSING O FFICE, I FIND THAT DEDUCTION OF ` . 12,37,578/- IS ALLOWABLE. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEDUCTION OF THIS AMOUNT WHILE DE TE4RMING INCOME RELATED TO STT. THE APPEAL ON THIS GROUND IS ALLOWED. 14.5 IN OUR VIEW, THOUGH THERE IS NO INHERENT OR MA TERIAL ERROR IN THE ORDER OF THE CIT(A), WHEN HE HAS ALREADY HELD THAT THE DEDUCTI ON OF ` . 12,37,578 IS ALLOWABLE; BUT ONLY FOR THE MATTER OF REMOVAL OF DOUBT, WE MA KE IT CLEAR THAT THE SAID AMOUNT OF ` 12,37,578/- IS ALLOWABLE BOTH AT THE TIME OF COMPU TING THE STT INCOME FOR THE PURPOSE OF REBATE U/S 88E AS WELL AS WHILE COMPUTIN G THE TOTAL INCOME. 15 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE WHERE AS THE APPEAL OF THE REVENUE IS DISMI SSED. ITA NO 7874 & 7966/M/10. M/S J G A SHAH SHARE BROKERS P LTD 15 ORDER PRONOUNCED IN THE OPEN COURT ON THE 26 TH , DAY OF SEPT 2012. SD/- SD- ( RAJENDRA SINGH ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 26 TH , SEPT 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI