DCIT, Circle -6 Kolkata, Kolkata V. M/s Kredent Brokerage Services Ltd., Kolkata

ITA 806/KOL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83078 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2014
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 18-05-2012
• Court: TRIBUNAL
• Department Lawyers: RAVI JAIN
• Assessee Lawyers: K K CHHABARIA
• Keywords: Business income; Earning of tax free income
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B , KOLKATA [BEFORE HONBLE SRI MAHAVIR SINGH, JM & HONBLE S RI SHAMIM YAHYA, AM ] ITA NO.806/KOL/2012 ASSESSMENT YEAR : 2008-09 ( APPELLANT ) (RESPONDENT) D.C.I.T., CIRCLE-6, -VS- M/S.KREDENT BROKERAGE S ERVICES LTD. KOLKATA KOLKATA (PAN: AAA 8269 C) FOR THE APPELLANT SHRI RAVI JAIN, CIT (DR) FOR THE RESPONDENT SHRI K.K.CHHABARIA, FCA DATE OF HEARING : 04.09.2014 DATE OF PRONOUNCEMENT : ORDER PER SHRI SHAMIM YAHYA, AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T ORDER OF LD. C.I.T.(A)- VI, KOLKATA DATED 27.02.2011 AND PERTAINS TO ASSESSME NT YEAR 2008-09. 2. THE GROUNDS OF APPEAL RAISED IN THIS APPEAL REA D AS UNDER :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD.CIT(A) ERRED IN LAW IN DELETING THE DISALLOWANCE OF RS.31,90,231/- MADE U/S 14A OF THE INCOME TAX ACT AND THE ORDER OF THE CIT(A) SHOULD BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER SHOULD BE RESTORED ON THIS ISSUE. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD.CIT(A) ERRED IN LAW IN DELETING THE DISALLOWANCE OF RS.4,24,650/- UNDER THE HEAD PE NALTY. THE ORDER OFT EH CIT(A) SHOULD BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER SHOULD BE RESTORED ON THIS ISSUE. 3. THAT THE APPELLANT CRAVES FOR LEAVE TO ADD, DELE TE OR MODIFY ANY OF THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 3. APROPOS : DISALLOWANCE U/S 14A OF THE ACT : ON THIS ISSUE THE AO OBSERVED THAT THE ASSESSEE COMPANY DERIVED DIVIDEND INCOME O F RS.12,37,120/-. AO COMPUTED THE DISALLOWANCE U/S 14A READ WITH RULE 8D AMOUNTIN G TO RS.41,69,459/-. 4. UPON ASSESSEES APPEAL THE LD. CIT(A) OBSERVED T HAT THE AO HAS CONSIDERED THE ENTIRE INVESTMENT AND INVENTORIES TO CONSIDER DISAL LOWANCE U/S 14A OF THE ACT. THE LD. ITA NO.806/K/2012 M/S.KREDENT BROKERAG E SERVICES LTD. A.YR.2008-09 2 CIT(A) OBSERVED THAT THE INVENTORIES OF SHARES ARE NOT TO BE CONSIDERED FOR THE PURPOSE OF SECTION 14A OF THE ACT SINCE THE ASSESSEE IS A D EALER IN SHARES AND TRADING IN SECURITIES WAS ONE OF THE PRINCIPAL BUSINESS. THE L D. CIT(A) OBSERVED THAT THE TURN OVER IN SECURITIES WAS RS.420.54 CRORES, WHILE DIVI DEND RECEIVED ON SUCH TRADING OF SECURITIES WAS RS.11,50,420/- ONLY, BEING A MEAGER 0.10% OF TURNOVER. FURTHER THE LD. CIT(A) NOTED THAT THE ASSESSEE HAS VOLUNTARILY DISA LLOWED RS.8,08,829/- U/S 94(7) OF THE ACT IMPLYING THAT EXEMPTED INCOME WAS RS.3,41,5 91/- ONLY AND NOT RS.11,50,420/-. 4.1. THE LD. CIT(A) HELD THAT THE INVENTORY SHOULD NOT HAVE BEEN CONSIDERED FOR DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D. THE LD. CIT(A) FURTHER NOTED THAT THE ASSESSEE HAS NOT RECEIVED ANY EXEMPTED INCOME F ROM MUTUAL FUNDS. REGARDING UNQUOTED INVESTMENTS LD. CIT(A) NOTED THAT THOUGH T HE ASSESSEE HAS NOT RECEIVED ANY EXEMPTED INCOME FROM THE SAME BUT DIVIDEND IF DECLA RED SHALL BE EXEMPT U/S 10(38) OF THE ACT. HENCE THE LD. CIT(A) HELD THAT INVESTME NTS IN SHARES SHOULD ALSO HAVE BEEN CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT. 4.2. REGARDING DIRECT EXPENDITURE INCURRED FOR EARN ING EXEMPT INCOME, THE LD. CIT(A) HELD THAT THE AO HAS TREATED THE ENTIRE DEPO SITORY CHARGES AS RELATABLE TO EXEMPT INCOME. THE LD. CIT(A) ACCEPTED THE ASSESSEE S CONTENTION IN THIS REGARD THAT THE ASSESSEE WAS MAINTAINING SEPARATE DEMAT ACCOUNT FOR MINOR TRANSACTIONS OF INVESTMENT IN SECURITIES. THE LD. CIT(A) ACCORDINGL Y HELD AS UNDER :- THUS, THE DISALLOWANCE U/S 14A IS CALCULATED AS BE LOW :- AMOUNT (RS.) 1. AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME (DEMAT CHARGES) 2,530/- 2. INTEREST PAID DURING THE YEAR A 42,88,500/- OPENING BALANCE IN INVESTMENTS OF SHARES (AS ON 1.04.2007) 3,17,74,155/- CLOSING BALANCE IN INVESTMENTS OF SHARES (AS ON 31.03.2008) 10,61,28,290/- AVERAGE OF INVESTMENTS OF SHARES B 6,89,51,223/- AVERAGE OF TOTAL ASSSETS (AS PER ASSESSMENT ORDER) C` 46,79,18,452/- INTEREST TO BE DISALLOWED A X B/C 6,31,942/- ITA NO.806/K/2012 M/S.KREDENT BROKERAG E SERVICES LTD. A.YR.2008-09 3 3. AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE INVESTMENT 3,44,756/- TOTAL DISALLOWANCE 9,79,228/- HENCE, BASED ON ABOVE, I DIRECT THE AO TO RESTRICT THE DISALLOWANCE U/S 14A TO RS.9,79,228/- AS AGAINST RS.41,69,459/- CALCULATED BY HIM EARLIER . THIS GROUND OF APPEAL IS PARTLY ALLOWED. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BE FORE US. 5. WE HAVE HEARD BOTH THE COUNSEL AND CAREFULLY PER USED THE RECORDS. WE FIND THAT THE MAIN GRIEVANCE OF THE REVENUE IS THAT THE LD. C IT(A) HAS HELD THAT WHEN SHARES ARE KEPT AS INVENTORIES DISALLOWANCE U/S 14A OF THE ACT IS NOT CALLED FOR. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE DECIS ION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS JCIT IN IT APPEAL NO.359 OF 2011 DATED FEBRUARY, 28, 2012. IT WAS HELD IN THIS CASE THAT WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED FROM THE SAI D INCOME. IT IS NOT THE CASE OF THE ASSESSEE RETAINING ANY SHARES SO AS TO HAVE THE BEN EFIT OF DIVIDEND. 63 PER CENT OF THE SHARES, WHICH WERE PURCHASED, ARE SOLD AND THE INCO ME DERIVED THEREFROM IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 37 PER CENT O F THE SHARES ARE RETAINED. IT HAS REMAINED UNSOLD WITH THE ASSESSEE. IT IS THOSE UNSO LD SHARES WHICH HAVE YIELDED DIVIDEND, FOR WHICH THE ASSESSEE HAS NOT INCURRED A NY 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 INTENTION OF EARNING DIVIDEND INCOME AND THE DIVIDEND INCOME IS INCIDENTAL TO ITS BUSINE SS 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 DIVID END INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MAT TER, THE APPROACH OF THE AUTHORITIES IS NOT IN CONFORMITY WITH THE STATUTORY PROVISIONS CON TAINED UNDER THE ACT. THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE. 5.1. FROM THE ABOVE IT CLEARLY TRANSPIRES THAT THE HONBLE HIGH COURT HAS HELD THAT WHEN THE SHARES ARE NOT RETAINED FOR EARNING THE DI VIDEND INCOME AND THE DIVIDEND INCOME IS INCIDENTAL TO ITS BUSINESS OF SALE OF SHA RES DISALLOWANCE U/S 14A OF THE ACT IS NOT CALLED FOR. IN THIS CASE ALSO WE FIND THE LD. C IT(A) HAS HELD THAT WHEN THE SHARES WERE KEPT ON TRADING ACCOUNT NO DISALLOWANCE US 14A OF THE ACT IS CALLED FOR. WE FIND THAT IN SUCH CIRCUMSTANCES THERE IS NO INFIRMITY IN THE ORDER OF LD. CIT(A) IN VIEW OF THE PRECEDENCE AS ABOVE. FURTHERMORE THE LD. CIT(A) HAS GIVEN A CLEAR BASIS FOR THE COMPUTATION OF DISALLOWANCE CONFIRMED BY HIM. THE R EVENUE HAS NOT BEEN ABLE TO ITA NO.806/K/2012 M/S.KREDENT BROKERAG E SERVICES LTD. A.YR.2008-09 4 POINT OUT ANY INFIRMITY IN THE SAME. HENCE REVENUE S CLAIM THAT THE LD. CIT(A) SHOULD NOT HAVE HELD THAT SHARES HELD AS STOCK IN TRADE DO NOT ATTRACT DISALLOWANCE U/S 14A OF THE ACT IS NOT SUSTAINABLE. ACCORDINGLY IN THE BACK GROUND OF THE AFORESAID DISCUSSION AND PRECEDENT WE UPHOLD THE ORDER OF LD.CIT(A) ON T HIS ACCOUNT. 6. APROPOS GROUND NO.2 : DELETION OF DISALLOWANCE U NDER THE HEAD PENALTY : ON THIS ISSUE THE AO NOTED THAT AS PER TRADING NORMS I SSUED BY THE STOCK EXCHANGES THE ASSESSEE HAD TO DEPOSIT PENALTY CHARGES FOR VARIOUS TYPES OF DEFAULTS. AO FURTHER OBSERVED THAT AS PER DECISION OF BOMBAY HIGH COURT IN THE CASE OF HEMENDRA V.SHAH VS STOCK EXCHANGE BOMBAY, REPORTED IN PAGE 770 OF M AHARASHTRA LAW JOURNAL 1995 (VOL.2), THE RULES AND REGULATION OF STOCK EXCHANGE S ARE STATUTORY IN CHARACTER. THE SAID RULES HAVE THE FORCE OF STATUTE AND ARE DEEMED TO BE INCORPORATED AS PART OF STATUTE. THEREFORE, AO HELD THAT PENALTY CHARGES PA ID TO NSE IS TO BE CONSIDERED AS INFRINGEMENT OF LAW AND THUS, ARE IN ADMISSIBLE EXP ENSES IN TERMS OF EXPLANATION BELOW SECTION 37. CONSIDERING THE ABOVE, THE TOTAL SUM OF RS.5,73,839/- WAS DISALLOWED. 7. UPON ASSESSEES APPEAL THE LD. CIT(A) OBSERVED T HAT THE ASSESSEE HAS SUBMITTED THAT THE PENALTIES ARE IN THE NATURE OF COMPENSATOR Y EXPENSES WHICH IS NOT FOR INFRINGEMENT OF LAW BUT THESE MAY BE FOR EXCEEDING THE LIMITS FOR WHICH SOME AMOUNT WAS TO BE PAID TO STOCK EXCHANGE AS A COMPENSATION FOR EXCEEDING THE LIMIT. IT WAS FURTHER NOTED THAT THE ASSESSING OFFICER HAS NOT BR OUGHT ON RECORD ANY SINGLE SUM WHICH IS PAID FOR THE INFRINGEMENT OF LAW BY WAY OF PENALTY TO THE STOCK EXCHANGE BOARD OF INDIA (SEBI) OR OTHER STATUTORY BODIES. LD . CIT(A) FURTHER NOTED THAT THE HONBLE INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENC H, IN THE CASE OF ITO V. GDB SHARES AND STOCK BROKING SERVICES LTD.(2004) 88 TTJ KOL.352 HAS HELD AS FOLLOWS : SO FAR AS THE DISALLOWANCE OF RS.13,967/- FROM MI SCELLANEOUS EXPENSES BEING PENALTY CHARGES ARE CONCERNED, WE HAVE NOTICED FROM THE DET AILS THAT THE SAME HAVE BEEN PAID TO NATIONAL STOCK EXCHANGE FOR DELAY IN PAYMENT OF THE DUES AND FOR VARIOUS OTHER OBLIGATIONS ARISING OUT OF CARRYING ON BUSINESS ACT IVITIES. WE, THEREFORE, AGREE WITH THE LEARNED COMMISSIONER (APPEALS) THAT THE PENALTY CHA RGES CANNOT BE SAID TO BE FOR INFRINGEMENT OF ANY LAW BUT HAS BEEN PAID BY THE AS SESSEE TO COMPENSATE FOR DELAY IN PAYMENT OF THE DUES TO THE NATIONAL STOCK EXCHANGE AND FOR VARIOUS OTHER OBLIGATIONS. WE, THEREFORE, AGREE WITH THE LEARNED COMMISSIONER (APPEALS) THAT THE DISALLOWANCE IS, ITA NO.806/K/2012 M/S.KREDENT BROKERAG E SERVICES LTD. A.YR.2008-09 5 THEREFORE, NOT JUSTIFIED AND HE HAS RIGHTLY DIRECTE D THE ASSESSING OFFICER TO DELETE RS.13,967/- FROM THE TOTAL INCOME. 7.1.. LD. CIT(A) NOTED THAT THE DETAILS OF PENALTY AND FINES PAID TO THE STOCK EXCHANGE WHICH AS FOLLOWS :- S.NO . PARTICULARS AMOUNT 1. VIOLATION OF MARKET WIDE POSITION LIMIT 3,81,95 5.36 2. NON SUBMISISON OF UCC 5,100.00 3. SHORT DELIVERY 25,995.42 4. NON UNLOADING OF CTCL 9,500.00 5. NON SUBMISIKSON OF CLIENT FUNDING 2,100.0 0 6. OTHERS 1,49,188.88 TOTAL 5,73,839.63 7.2. THEREFORE, LD. CIT(A) HELD THAT FOLLOWING THE JUDGMENT OF THE HONBLE INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCH AND SUBMISSIO NS OF THE ASSESSEE, THE PENALTY CHARGES PAID BY THE ASSESSEE ARE ALLOWED AS EXPENDI TURE EXCEPT RS.1,48,189/- FOR WHICH THE ASSESSEE HAS NOT GIVEN ANY DETAILS. THUS THE PENALTY CHARGE AND FINE AMOUNTING TO RS.4,25,650/- WAS ALLOWED AS EXPENDITU RE U/S 37(1) OF THE INCOME-TAX ACT, 1961. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BE FORE US. 8. WE HAVE HEARD BOTH THE COUNSEL AND CAREFULLY PER USED THE RECORDS. WE FIND THAT THE LD. CIT(A) HAS PASSED AN ORDER FOLLOWING THE DE CISION OF ITAT, KOLKATA BENCH. THE TRIBUNAL HAS CLEARLY FOUND THAT WHEN SUM HAVE B EEN PAID TO STOCK EXCHANGE FOR DELAY IN PAYMENT OF THE DUES AND FOR VARIOUS OTHER OBLIGATIONS ARISING OUT OF CARRYING ON BUSINESS ACTIVITIES, THE PENALTY CHARGES CANNOT BE SAID TO BE FOR INFRINGEMENT OF ANY LAW WERE PAID TO COMPENSATE FOR DELAY IN PAYMENT OF THE DUES TO THE STOCK EXCHANGE AND FOR VARIOUS OTHER OBLIGATIONS. IN THESE CIRCUMS TANCES WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A). ACCORDINGLY WE UPHO LD THE SAME. ITA NO.806/K/2012 M/S.KREDENT BROKERAG E SERVICES LTD. A.YR.2008-09 6 9. IN THE RESULT THE APPEAL FILED BY THE REVENUE ST ANDS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 11.09.2014. SD/- SD/- [ MAHAVIR SINGH ] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 11.09.2014. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO: 1. M/S.KREDENT BROKERAGE SERVICES LTD., 4, BRABOURNE R OAD, KOLKATA-700001. 2 D.C.I.T., CIRCLE-6, KOLKATA. 3 . CIT(A)-VI, KOLKATA. 4. CIT - KOLKATA. 5. CIT-DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES