COMMUNE EQUIPMENTS & TRADING P.LTD, MUMBAI V. DCIT CIR 2(1), MUMBAI

ITA 8129/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9558 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 05-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PARAS S SAVLA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 8129/M/2011 ASSESSMENT YEAR : 2008-09 M/S. COMMUNE EQUIPMENTS & TRADING PVT. LTD. 4/87, NITNAND NAGAR, SOCIETY NO.4, SWANI NITANAND ROAD OPP. ANDHERI RLY. STATION ANDHERI MUMBAI-400 069. PAN NO. AAACC 1442 M VS. DY. COMMISSIONER OF INCOME TAX CIRCLE-2(1) 5 TH FLOOR, AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PARAS S. SAVLA RESPONDENT BY : SHRI SANDEEP GOYAL DATE OF HEARING : 22.11.2012 DATE OF PRONOUNCEMENT : 22.11.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 21.10.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2008-09. T HE DISPUTE RAISED IN THIS APPEAL RELATES TO DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT AND DISALLOWANCE OF SHARE TRADING EXPENSE S. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF EXPEN SES RELATING TO EXEMPT INCOME UNDER SECTION 14A OF THE ACT. THE AO DURING THE ITA NO.8129/M/11 A.Y. 08-09 2 ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD EARNED DI VIDEND INCOME OF RS.57,384/- WHICH WAS EXEMPT FROM TAX. BUT TH E ASSESSEE HAD NOT DISALLOWED ANY EXPENSES RELATING TO EXEMPT IN COME UNDER SECTION 14A OF THE ACT. THE ASSESSEE SUBMITTED THAT THE PR OVISIONS OF SECTION 14A WERE NOT APPLICABLE AS NO EXPENSES WERE INCURR ED IN RELATION TO EXEMPT INCOME. THE AO DID NOT ACCEPT THE CONTENTIONS RAISED AND COMPUTED THE DISALLOWANCE OF EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES WHICH WAS APPLICABLE FOR ASSESSMENT YE AR 2008- 09. THE AO COMPUTED DISALLOWANCE OF INTEREST AT RS.3,01, 722/- AND DISALLOWANCE OF EXPENSES UNDER RULE 8D(III) AT RS.23,047 /-. THE TOTAL DISALLOWANCE OF RS.3,24,770/- WAS THUS MADE UNDER SECTION 14A. 2.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT NO DIRECT EXPENSES HAD BEEN INCURRED FOR E ARNING OF DIVIDEND. IT WAS POINTED OUT THAT THE ASSESSEE HAD EXPL AINED TO THE AO THAT INTEREST EXPENSES HAD BEEN INCURRED WHOLLY AND EXC LUSIVELY FOR THE COMPANYS TRADING BUSINESS WHICH WAS PURCHASE AND SALE O F COMPUTER HARDWARE AND SOFTWARE. IT WAS POINTED OUT THA T RULE 8D(2)(I) EXPRESSLY EXCLUDES INTEREST EXPENSES WHICH WERE DI RECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE ASSESSEE ALSO SUBMITTED THAT AS ON 31.3.2007 AND 31.3.2008 THE ASSESSE E HAD OWN FUNDS RS.3.65 CRORES AND RS.7.27 CRORES WHEREAS INVESTMENT I N SHARES ON THOSE DATES WAS RS.21.89 LACS AND RS.70.30 LACS RESPECTIVE LY. THE ITA NO.8129/M/11 A.Y. 08-09 3 ASSESSEE ALSO SUBMITTED THAT IT HAD POINTED OUT TO THE AO THAT INVESTMENT IN SHARES HAD GONE UP DURING THE YEAR PART LY BECAUSE OF INVESTMENTS RECEIVED ON MERGER OF MAGNIFIC TECHNOLOGIES ( P) LTD., ACCOST COMMUNICATION & SPECIALITY EQUIPMENT PVT. LTD. I NTO THE COMPANY. IT WAS ACCORDINGLY REQUESTED THAT ADDITION MAD E BE DELETED. CIT(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THERE WAS NO NEXUS BETWEEN SURPLUS FUNDS AND INVESTMENT IN FUNDS GENERATING EXEMPT INCOME. THEREFORE, INTERE ST ALLOCABLE TO EXEMPT INCOME IS REQUIRED TO BE COMPUTED AS PER RULE 8 D WHICH IS APPLICABLE FROM ASSESSMENT YEAR 2008-09 AS PER THE JUDGM ENT OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & B OYCE MFG. CO. LTD. VS. CIT (328 ITR 81). CIT(A) THEREFORE, CONFIRME D THE DISALLOWANCE MADE BY AO AGGRIEVED BY WHICH, THE ASSESSEE I S IN APPEAL BEFORE THE TRIBUNAL. 2.2 BEFORE US THE LD. AR SUBMITTED THAT THE ASSESSEE HAD NOT TAKEN ANY LOANS WHICH WAS CLEAR FROM COPY OF THE BALANCE SHEET P LACED AT PAGE 15 OF THE PAPER BOOK. THE ASSESSEE HAD RECEIVED INT EREST INCOME WHICH WAS CLEAR FROM THE DETAILS OF OTHER INCOME PLACED AT PAGE-21 OF THE PAPER BOOK WHICH SHOWS INTEREST RECEIVED OF RS.2.93 C RORES. IT WAS POINTED OUT THAT INTEREST OF RS.3.23 CRORES PAID BY THE ASSESSEE WAS INTEREST ON ADVANCES RECEIVED IN CONNECTION WITH TRADING BUSINESS. THE ASSESSEE HAD TAKEN ADVANCE OF RS.7.19 CRORES AS PER DETAILS G IVEN AT ITA NO.8129/M/11 A.Y. 08-09 4 PAGE 20 OF THE PAPER BOOK. IT WAS ARGUED THAT ONCE THE INTEREST PAYMENT WAS LINKED TO TRADING ACTIVITIES THE SAME COUL D NOT BE DISALLOWED UNDER SECTION 14A ATTRIBUTING THE SAME TO DI VIDEND INCOME. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE TRIBUNA L IN THE CASE OF ACIT VS. MOHAN EXPORTS (P.) LTD. (138 ITD 108). THE LD. AR ALSO POINTED OUT THAT THE AO HAD NOT RECORDED SATISFACTI ON REGARDING INCURRING OF EXPENSES RELATING TO DIVIDEND INCOME WHIC H WAS REQUIRED UNDER SECTION 14A OF THE ACT. THE LD. DEPARTMENTAL REP RESENTATIVE ON THE OTHER HAND SUBMITTED THAT SINCE FUNDS WERE MIXED IN TEREST WAS REQUIRED TO BE DISALLOWED UNDER RULE 8D. IT WAS POIN TED OUT THAT ADVANCE RECEIVED FROM CUSTOMERS COULD ALSO HAVE BEEN USED F OR PURCHASE OF INVESTMENT IN SHARES. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWA NCE OF EXPENSES IN RELATION TO EXEMPT DIVIDEND INCOME OF RS.57 ,384/-. AGAINST THE SAID DIVIDEND INCOME, AO HAS MADE DISALLOWA NCE OF RS.3,24,770/- CONSISTING OF INTEREST DISALLOWANCE OF RS. 3,01,722/- AND DISALLOWANCE OF OTHER EXPENSES OF RS.23,047/-. UNDER TH E PROVISIONS OF SECTION 14A, DISALLOWANCE OF EXPENSES RELATING TO EXEM PT INCOME IS REQUIRED TO BE COMPUTED UNDER RULE 8D IF THE AO IS NO T SATISFIED BY THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. RULE 8D IS APPLICABL E FROM ASSESSMENT YEAR 2008-09 AS HELD BY HON'BLE HIGH COURT OF BOMBAY IN ITA NO.8129/M/11 A.Y. 08-09 5 CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA). THERE IS NO DISPUTE REGARDING APPLICABILITY OF RULE 8D AS ASSESSMENT YEAR INV OLVED IS 2008-09. WE FIND FROM THE PERUSAL OF ASSESSMENT ORDER TH AT AO HAS NOT GIVEN ANY REASONS AS TO WHY HE HAD NOT ACCEPTED THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATI ON TO EXEMPT INCOME. AO HAS FAILED TO RECORD ANY SATISFACTION. FURTH ER WE NOTE FROM DETAILS FILED BEFORE US IN THE PAPER BOOK THAT INTERE ST HAD BEEN PAID ON ADVANCES TAKEN FROM CUSTOMERS IN CONNECTION WITH TRADING B USINESS AND NOT ON ANY LOAN TAKEN. THE LD. DEPARTMENTAL REP RESENTATIVE HAS POINTED OUT THAT ADVANCE TAKEN COULD ALSO HAVE BEEN USE D FOR MAKING THE INVESTMENT IN SHARES AS FUNDS WERE MIXED UP. HOWEVE R, WE FIND THAT THIS ASPECT HAS NOT BEEN EXAMINED BY THE LOWER AU THORITIES NOR ANY SUCH SPECIFIC CLAIM HAD BEEN MADE BY THE ASSESSEE. THE ASSESSEE HAS ALSO CLAIMED THAT INVESTMENTS DURING THE YEAR HAD INCREASED PARTLY BECAUSE OF INVESTMENTS RECEIVED FROM TWO OTHER COMPANIES W HICH HAD MERGED WITH THE ASSESSEE DURING THE YEAR. BUT THIS ASPE CT HAS ALSO NOT BEEN EXAMINED. IT IS REQUIRED TO BE EXAMINED WHETHER ALONG WITH INVESTMENTS RECEIVED, ASSESSEE HAD RECEIVED ANY LIABILITIES OF THE MERGED COMPANIES RELATING TO SAID INVESTMENT. THEREFORE , IN OUR VIEW THE ISSUE REGARDING DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A REQUIRES FRESH EXAMINATION. WE, THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE ISSUE TO THE FILE OF AO FOR PASSING A F RESH ORDER AFTER ITA NO.8129/M/11 A.Y. 08-09 6 NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY O F HEARING TO THE ASSESSEE. 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF SHARE T RADING EXPENSES OF RS.4,72,260/-. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.4,72,260/- AS SHARE TRADING EX PENSES AGAINST INCOME FROM CAPITAL GAIN. THE AO OBSERVED THAT THE ASSESS EE FAILED TO GIVE ANY BREAK-UP OF NATURE OF EXPENSES. HE, THEREFORE , DISALLOWED SUCH EXPENSES. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE HAD SUBMITTED BROKERS NOTE IN SUPPORT OF SHARE TRANSACTIONS FROM WHICH IT WAS CL EAR THAT SHARE TRANSACTIONS EXPENSES INCURRED COMPRISED OF BROKERAGE, STT AND SERVICE TAX CHARGED BY BROKER. THE AO HAD NEVER ASKED T HE ASSESSEE TO FURNISH DETAILS OF SHARE TRANSACTION EXPENSES. IT WAS POINTED OUT THAT WHILE COMPUTING CAPITAL GAIN, EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER OF SHARES WAS ALLOW ABLE AS DEDUCTION. EXPENDITURE CLAIMED WAS DIRECTLY IN RELATIO N TO SHARE TRANSACTIONS AND THEREFORE ALLOWABLE AS DEDUCTION. CIT(A ) HOWEVER, OBSERVED THAT THE EXPENSES WERE NOT IDENTIFIABLE SEPARA TELY AND INDIVIDUALLY WITH ANY SHARE TRANSACTION AND THE ASSESSEE CO ULD ALSO NOT FURNISH SUCH BREAK-UP. HE, THEREFORE CONFIRMED THE DISA LLOWANCE MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. ITA NO.8129/M/11 A.Y. 08-09 7 3.1 BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD CLAIMED SHARE TRANSACTION EXPENSES (NOT SHARE TRA DING EXPENSES) COMPRISING OF BROKERAGE, STT AND SERVICE TAX WH ILE COMPUTING CAPITAL GAIN WHICH WAS ALLOWABLE. THE AO HAD NEVER ASKED FOR DETAILS OF SHARE TRANSACTION EXPENSES. THE AO HAD CALL ED FOR BROKERS NOTE WHICH CLEARLY SHOWED THAT THESE EXPENSES WE RE IN CONNECTION WITH SALE OF SHARES. HE REFERRED TO DETAILS OF SUCH EXPENSES PLACED AT PAGE-39 OF THE PAPER BOOK WHICH, IT WAS POI NTED OUT HAD BEEN FILED BEFORE CIT(A) WHO HAD ALSO NOT CALLED FOR ANY SPECIFIC DETAILS. IT WAS ALSO SUBMITTED THAT IF REQUIRED THE ASSE SSEE WILL BE ABLE TO GIVE DETAILS OF SUCH EXPENSES SPECIFICALLY RELATING TO SH ARE TRANSACTION RESULTING INTO CAPITAL GAIN. THE LD. DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWABI LITY OF EXPENSES SUCH AS BROKERAGE, STT, SERVICE TAX CHARGED BY BROKERS WHI LE COMPUTING CAPITAL GAIN. SUCH EXPENSES ARE OBVIOUSLY ALLO WABLE AS DEDUCTION UNDER SECTION 48 OF THE ACT. THE ASSESSEE HAD FIL ED COPIES OF BROKERS NOTE BEFORE AO WHICH GAVE DETAILS OF SUCH EXPENSE S. HOWEVER, THE SPECIFIC DETAILS OF SUCH EXPENSES RELATING TO SHARE TRA NSACTIONS RESULTING IN CAPITAL GAIN HAD NOT BEEN FILED BY THE A SSESSEE NOR HAD ITA NO.8129/M/11 A.Y. 08-09 8 BEEN SPECIFICALLY CALLED FOR BY AUTHORITIES BELOW. THERE FORE, IN OUR VIEW MATTER REQUIRES FRESH EXAMINATION. WE, THEREFORE SET A SIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO AO FOR PASSING A F RESH ORDER AFTER NECESSARY EXAMINATION AND AFTER PROVIDING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22.11.2012. SD/- SD/- (VIVEK VARMA ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 22.11.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.