Ethio Plastics Pvt.Ltd., Baroda V. The Dy.CIT.,Circle-1(2), Baroda

ITA 848/AHD/2012

• Counselvise Citation: 84820514 RSA 2012
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 17-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: URVASHI SHODHAN ARS; S N SAPORKAR
• Keywords: Business income; Transactions in derivatives; Earning of tax free income
• Section: 14A; 80G

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD A BENCH BEFORE: SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTAN T MEMBER I.T.A. NO.848/AHD/2012 A.Y.2008-09 ETHIO PLASTICS PRIVATE LTD., 61, KUNJ SOCIETY, ALKAPPURI, BARODA-390 007 PAN-AAACE4587D APPELLANT VS. THE DY. C.I.T., CIRCLE-1(2) BARODA RESPONDENT DEPARTMENT BY : SHRI SAMIR TEKRIWAL, SR. D.R. ASSESSEE BY : SHRI S.N. SAPORKAR & MS. URVASHI SHODHAN, A.RS. DATE OF HEARING : 26.10.2012 DATE OF PRONOUNCEMENT : 10.12.2012 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF LD. CIT(A)-1, BARODA DATED 01.02.2012. 2. ASSESSEE IS AGGRIEVED BY THE ACTION OF LD. CIT(A ) IN CONFIRMING THE ADDITION OF RS.36,99,760/- MADE BY THE A.O. BY MAKING DISALL OWANCE U/S 14A READ WITH RULE 8D OF THE ACT. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPOR TING GOODS AND DEALING IN SHARES AND SECURITIES. DURING THE ASSESSMENT PROCE EDING THE A.O. OBSERVED THAT COMPANY HAS SHOWN EXEMPT DIVIDEND INCOME OF RS.59,7 9,502/- IN VIEW OF THE PROVISION OF SECTION 14A OF THE ACT. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY INTEREST AND OTHER EXPENSES INCURRED IN RELATIO N TO EARNING OF INCOME NOT I.T.A. NO.848/AHD/2012 A.Y.2008-09 2 INCLUDABLE IN TOTAL INCOME SHOULD NOT BE DISALLOWED U/S 14A OF THE ACT. THE ASSESSEE RELIED ON THE FOLLOWING SUBMISSIONS:- OUR BUSINESS IS OF EXPORTING GOODS AND DEALING IN SHARES AND SECURITIES. OUR MAIN BUSINESS ACTIVITIES IN P.Y. 2007-08 ARE OF EXPORTING GOODS AND F&O BUSINESS. WE HAVE ALSO DEALT WITH SHARES & SEC URITIES TO SOME EXTENT. THE EXPENSES INCURRED BY US ARE IN RESPECT OF OUR REGULAR BUSINESS ACTIVITIES AND DIVIDEND EARNED BY US IS RE TURN ON OUR INVENTORY. WE HAVE NOT INCURRED ANY DIRECT EXPENSES TO EARN DI VIDEND INCOME. WE REQUIRE SHARES FOR DEALING IN DERIVATIVES WHICH IS OUR MAJOR BUSINESS ACTIVITY. WE ARE ALLOWED TO CARRY ON THIS BUSINESS IN LARGE VOLUME DEPENDING UPON THE MARGIN GIVEN BY US IN THE FORM O F SHARES AND ALSO PAYMENT OF AMOUNT OF DIFFERENCE IN M TO M AS PER SE BI/STOCK EXCHANGE RULES. WE REQUIRE HUGE FUNDS FOR THIS BUSINESS AND HOLDING SHARES FOR OFFERING MARGIN AND PAYMENT OF M TO M DIFFERENCES. IN VIEW OF THESE FACTS, WE STRONGLY CONTEND THAT RULE 8D COULD NOT B E APPLIED TO US AS IT DOES NOT TAKE ALL ASPECT OF OUR BUSINESS AND THEREF ORE, ARBITRARY IN NATURE. IT IS VERY STRANGE THAT THE RULE DOES NOT REFER TO ANY ACTUAL INDIRECT EXPENDITURE BUT THE ALLOWANCE IS BASED ON AVERAGE O F THE VALUE OF INVESTMENT. HENCE ALSO, THE RULE IS UNEQUITABLE AND HARSH. WE ALSO SUBMIT THAT SECTION 14A HAS NO APPLICATION IN OUR L INE OF BUSINESS AND IT COULD BE ATTRACTED WHEN THE ASSESSEE HAS INCURRED E XPENSES TO EARN EXEMPT INCOME. MOREOVER, SIR, THE DIVIDEND INCOME RECEIVED IS NOT AT ALL AN EXEMPT INCOME, BUT INCOME WHICH HAS BEEN ALREADY SUBJECTED TO TAXATION U/S 1150 OF THE ACT. AND SIR, IN RULE 8-D THE WORKING P RESCRIBED IS FOR INVESTMENTS WHEREAS IN OUR CASE THERE IS NO INVESTM ENTS BUT THERE IS INVENTORY AS WE ARE TRADING IN SHARES & SECURITIES. MOREOVER, SIR AS AT 31-3-2008 WE HAVE OWN INTEREST FREE FUND OF RS. 17,43,87,828/-AS ANALYZED HEREUNDER : PARTICULARS AMOUNT A) SHARE CAPITA L6,00,000 B) RESERVE & SURPLUS 11,40,10,4 50 C) INTEREST FREE LOAN FROM DIRECTORS /SHARE HO LDERS 5,97,77,378 TOTAL RS. 17,43,87,828 AS AGAINST RS.17,43 F 87,828/- OUR INVENTORY OF SHARES AND SECURITIES AS AT 31-3-2008 IS OF RS.16,92,00,988/- ONLY. IN VIEW OF THESE FACTS THE INTEREST OF RS.43,29,261/- IS TOWARDS F&O AND EXPOR T BUSINESS AND NOT FOR SHARES & SECURITIES ON WHICH WE HAVE NOT ONLY E ARNED EXEMPT DIVIDEND INCOME OF RS.59,79,503/- BUT PROFIT FAR IN EXCESS OF DIVIDEND INCOME. HENCE WE HEREBY REQUEST YOUR GOOD SELF NOT TO DISALLOW INTEREST EXPENSES. THE DIRECT ADMINISTRATIVE EXPENSES ARE OF RS.4659/- AS DP CHARGES FOR HOLDING SHARES AS AGAINST THIS WE HAVE ALREADY TREATED I.T.A. NO.848/AHD/2012 A.Y.2008-09 3 RS.59,795/- AS EXPENSES @1% OF DIVIDEND INCOME DISA LLOWABLE IN RELATION TO DIVIDEND INCOME. HENCE, SIR THE PROVISIONS OF RU LE 8D HAVE NO APPLICATION IN OUR CASE AND DISALLOWANCE OFFERED BY US IN ROI IS EQUITABLE AND JUSTIFIED. WITHOUT PREJUDICE TO THE ABOVE AND TO COMPLY WITH Y OUR REQUIREMENTS, WE SUBMIT HEREUNDER THE WORKING OF DISALLOWANCE U/S 14 A READ WITH RULE 8D, IF AT ALL IT IS CONSIDERED THAT IF THE PROVISION OF SECTION 14A AND RULE 8D ARE APPLICABLE. 4. THIS EXPLANATION OF THE ASSESSEE WAS NOT ACCEPTA BLE TO THE A.O. AND HE MADE A DISALLOWANCE OF RS.36,99,760/- BY OBSERVING AS UNDER:- THE CONTENTIONS RAISED BY THE ASSESSEE AS ABOVE HA VE BEEN CONSIDERED BY ME BUT THE SAME IS NOT ACCEPTABLE SINCE THE SIZA BLE FUND HAD BEEN BLOCKED BY THE ASSESSEE IN INVENTORY, INCOME FROM W HICH IS NOT INCLUDIBLE IN THE TOTAL INCOME BEING EXEMPTED INCOME. THE ASSE SSEE HAS THUS BLOCKED ITS FUNDS FOR MAKING PURCHASES OF SHARES AN D SECURITIES AND THEREBY, CONSCIOUSLY INCURRED INTEREST AND OTHER EX PENSES FOR BUSINESS ACTIVITIES WHICH OTHERWISE WOULD HAVE BEEN SAVED. IN THE CIRCUMSTANCES, I AM WITH NO ALTERNATIVE BUT TO DRAW SUPPORT FROM THE AMENDMENT MADE BY THE FINANCE ACT 2006 IN SECTI ON 14A AND RULE 8D INSERTED BY THE INCOME TAX (5 TH AMENDMENT) RULES, 2008. IN ADDITION THERETO, IT WOULD BE PATIENT HERE TO MENTION THAT T HE RECENT JUDGMENT OF HON'BLE ITAT (SPECIAL BENCH DELHI) IN CASE OF CHEMI VEST LTD AND UTI BANK LTD (2009-TIOL-515-ITAT-DELCHI-SB) WHEREIN HON 'BLE ITAT HAVE GIVEN THEIR FINDING THAT DISALLOWANCE U/S 14A WOULD BE ATTRACTED EVEN IF THERE IS NO ANY DIVIDEND INCOME EARNED BY THE ASSES SEE IN THE SAID ASSESSMENT YEAR. TWO OUT OF MANY PARAS OF SAID JUDG MENT ARE REPRODUCED AS UNDER: '43. WHAT ONE HAS TO SEE IT WHATEVER ANY EXPENDITUR E WERE INCURRED BY AN ASSESSEE IN RELATING TO AN INCOME THAT DOES NOT FROM PART OF TOTAL INCOME OF THE ASSESSEE UNDER THIS ACT, AND IF THE A NSWER IS IN AFFIRMATIVE THAN THAT EXPENDITURE CAN NOT BE ALLOWED IRRESPECTI VE OF FACT THAT IT WAS ALLOWABLE UNDER DIFFERENT PROVISIONS OF THE ACT WHE RE A DIFFERENCE PHARASEOLOGY IS USED IN ALLOWING THAT EXPENDITURE A S THE FOCUS HAS TO AN DISALLOWANCE WITHIN THE PARAMETERS OF SEC 14A, AN O VERRIDING PROVISION OVER ALLOWANCE PROVISIONS IT WOULD RESULT IN ALLOWA NCE EVEN OF NO INCOME HAS RESULTED OF MADE OR EARNED BY THE ASSEESSE IN T HE YEAR UNDER CONSIDERATION. WE ALSO MAKE IT CLEAR THAT THE ALLOW ANCE HAS TO BE OF THE ENTIRE AMOUNT OF EXPENDITURE SO RELATED AND AS CLAI MED IN THE REVENUE'S APPEAL, CAN BE REDUCED BY THE RECEIPT OF THE INTERE ST WHICH HAS NO RELATION TO SUCH EXPENDITURE. 46. IN THE RESULT, THE QUESTION, WHATEVER DISALLOWANCE U/S 14A CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEE N EARNED OR I.T.A. NO.848/AHD/2012 A.Y.2008-09 4 RECEIVED BY THE ASSESSEE IS ANSWERED AFFIRMATIVELY AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 5.1 IN THE LIGHT OF ABOVE, DISALLOWANCE OF EXPENSES FOR INCOME NOT INCLUDIBLE IN TOTAL INCOME AS PER RULE 8D IS CALCUL ATED AS UNDER: WORKING OF DISALLOWANCE U/S 14A [RULE 8D] DATA:- 1) INTEREST A) INTEREST PAID 43,49,895 2) AVERAGE TOTAL INVESTMENTS OPENING TOTAL INVESTMENTS AS ON 01-04-2007 8,37,35 ,854 CLOSING TOTAL INVESTMENTS AS ON 31-03-2008 16,9 2,00,988 TOTAL [OPENING + CLOSING] 25,29,36,842 AVERAGE TOTAL INVESTMENTS 12,64,68,421 3) AVERAGE ASSESTS OPENING ASSETS AS ON 01-04-2007 15,52,60,936 CLOSING ASSETS AS ON 31-03-2008 20,34,27,966 TOTAL [OPENING + CLOSING] 35,86,88,902 AVERAGE TOTAL ASSETS 17,93,44,451 WORKING OF DISALLOWANCE UNDER RULE 8D (I) EXPENDITURE DIRECTLY ATTRIBUTABLE TO EXEMPT INC OME NIL (II)INTEREST 4349895(INT.)X126468421(AVERAGE INVT.) = 30,67,418 179344451 (AVERAGE TOTAL ASSETS) (III) 0.54% OF AVERAGE INVESTMENTS OF 12,64,68,421 6,32,342 TOTAL DISALLWANCE (A+B) 36,99,760 ACCORDINGLY, AS PER THE FORESAID WORKING, I DISALL OW INTEREST AND OTHER EXPENDITURE OF RS.36,99,760/- U/S 14A OF THE ACT UNDER THE NORMAL PROVISIONS AND UNDER BOOK PROFIT U/S 115JB. AS THE ASSESSEE HAS DISALLOWED RS.59,795/- IN ROI, THE EFFECTIVE ADDITI ON WORKS OUT TO RS.36,39,965/-. THE ASSESSEE HAD FURNISHED INACCUR ATE PARTICULARS OF INCOME AND THEREBY CONCEALED INCOME WITHIN THE MEAN ING OF EXPLANATION 1 TO THE SECTION 271(1)(C ) RWS 274 OF THE INCOME T AX ACT. THEREFORE, PENALTY PROCEEDINGS FOR CONCEALMENT OF INCOME U/S 2 71(1)(C ) RWS 274 OF THE ACT ARE INITIATED. 6. SUBJECT TO THE ABOVE REMARKS AND ALSO FROM THE D ATA MADE AVAILABLE, THE TOTAL INCOME OF ASSESSEE COMPANY IS COMPUTED AS UNDER:- I.T.A. NO.848/AHD/2012 A.Y.2008-09 5 INCOME FROM BUSINESS OR PROFESSION AS PER COMPUTATION OF INCOME RS. 1,86,68,143/- ADD: DISALLOWANCE U/S 14A (AS DISCUSSED IN PARA 5) RS. 36,39,965/- RS.2, 23,08,108/- INCOME FROM OTHER SOURCE RS. 3,550/- RS.2,23,11,658/- LESS: DEDUCTION U/S 80G RS. 5,00,000/- TOTAL INCOME RS.2,18,11,658/- 5. IN APPEAL ASSESSEE MADE FOLLOWING CONTENTION BEF ORE LD. CIT(A):- SUBMISSION DATED 6.5.2011: 'WITH REFERENCE TO THE ABOVE, IT IS SUBMITTED AS UN DER: 1. THE APPELLANT BEFORE YOUR HONOUR IS A PR IVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF EXPORTING OF TRADING GOO DS AND DEALING IN SHARE & SECURITIES. 2. FOR THE ASSESSMENT YEAR 2008-09, THE APP ELLANT FILED ITS RETURN OF INCOME ON 27/09/2008 DECLARING TOTAL INCOME OF RS.1 ,81,68,143/-. THE HARD COPY OF THE RETURN OF INCOME HAS BEEN SUBMITTE D DURING THE COURSE OF ASSESSMENT PROCEEDING ALONG WITH THE COPY OF ANN UAL REPORT AS WELL AS STATUTORY AND TAX AUDIT REPORTS. 3. THE ASSESSMENT WAS TAKEN UP FOR SCRUTINY AND AFTER CONSIDERING THE EXPLANATION OF THE APPELLANT AND THE DETAILS FU RNISHED, THE AO ASSESSED THE TOTAL INCOME OF THE APPELLANT AT RS.2, 18,11,658/-, THEREBY MAKING DISALLOWANCE OF RS.36,99,760/- APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT SINCE THE APPELLANT HAD EARNED DIVID END INCOME OF RS.59,79,503/- BEING EXEMPT FROM TAX. 4. BEING AGGRIEVED BY THE ORDER OF THE AO, THE APP ELLANT PREFERRED THIS APPEAL, AND THE APPELLANT MAKES THE FOLLOWING SUBMI SSION, ON THE GROUNDS THAT ARE WITHOUT PREJUDICE TO ONE ANOTHER. 5. IN THE FACTS OF THE CASE OF THE APPELLANT, THE T OTAL SALES REFLECTED IN THE PROFIT AND LOSS ACCOUNT AGGREGATES TO RS.31,71,31,7 26/- AND AGAINST THIS THE TOTAL ADMINISTRATIVE AND FINANCIAL EXPENSES INC URRED AGGREGATES TO RS.1,12,39,123/-. THE TOTAL DIVIDEND INCOME EARNED IS RS.59,79,503/- AND THE DISALLOWANCE MADE OUT OF THE EXPENSES INCUR RED APPLYING PROVISIONS OF THE SECTION 14A IS RS.36,99,760/- I.E . ALMOST 33% OF THE EXPENSES HAVE BEEN DISALLOWED THOUGH THE QUANTUM OF THE SALES AS COMPARED TO THE EARNING OF THE DIVIDEND INCOME IS Q UITE SUBSTANTIAL. IN THIS VIEW OF THE MATTER, THE APPELLANT SUBMITS THAT BLANKET APPLICATION OF I.T.A. NO.848/AHD/2012 A.Y.2008-09 6 RULE 8D IS WITHOUT ANY JUSTIFICATION AND HENCE, COU LD NOT BE MADE APPLICABLE IN THE FACTS OF THE CASE OF THE APPELLAN T. 6. 'OUR BUSINESS IS OF EXPORTING GOODS AND DEALING IN SHARES AND SECURITIES. OUR MAIN BUSINESS ACTIVITIES IN P. Y. 2 007-08 ARE OF EXPORTING GOODS AND F&O BUSINESS. WE HAVE ALSO DEALT WITH SHA RES & SECURITIES TO SOME EXTENT. THE EXPENSES INCURRED BY US ARE IN RES PECT OF OUR REGULAR BUSINESS ACTIVITIES AND DIVIDEND EARNED BY US IS RE TURN ON OUR INVENTORY. WE HAVE NOT INCURRED ANY DIRECT EXPENSES TO EARN DI VIDEND INCOME. WE REQUIRE SHARES FOR DEALING IN DERIVATIVES WHICH IS OUR MAJOR BUSINESS ACTIVITIES. WE ARE ALLOWED TO CARRY ON THIS BUSINES S IN LARGE VOLUME DEPENDING UPON THE MARGIN GIVEN BY US IN THE FORM O F SHARES AND ALSO PAYMENT OF AMOUNT OF DIFFERENT IN M TO M AS PER SEB I / STOCK EXCHANGE RULES. WE REQUIRE HUGE FUNDS FOR THIS BUSINESS AND HOLDING SHARES FOR OFFERING MARGIN AND PAYMENT OF M TO M DIFFERENCES. IN VIEW OF THIS FACTS, WE STRONGLY CONTEND THAT RULE 8D COULD NOT BE APPLI ED TO US AS IT DOES NOT TAKE ALL ASPECT OF OUR BUSINESS AND THEREFORE, ARBITRARY IN NATURE. IT IS VERY STRANGE THAT THE RULE DOES NOT REFER TO ANY AC TUAL INDIRECT EXPENDITURE BUT THE ALLOWANCE IS BASED ON AVERAGE O F THE VALUE OF INVESTMENT, HENCE ALSO, THE RULE IS UNEQUITABLE AND HARSH. WE ALSO SUBMIT THAT RULE 8D HAS NO APPLICATION IN OUR LINE OF BUSINESS AND IT COULD BE ATTRACTED WHEN THE ASSESSEE HAS INCURRED EXPENSE S TO EARN EXEMPT INCOME. 7. RULE 8D IS NOT OPINION, MANDATORY BUT IS DISCRET IONARY RULE 8D COULD BE APPLIED BY THE LD. AO ONLY WHEN, THE A-O HAVING REGARD TO THE ACCOUNT OF THE ASSESSE OF A PREVIOUS YEAR IS NOT SA TISFIED WITH THE (A) CORRECTNESS OF THE CLAIM OF EXPENDITURES BY THE ASS ESEE , OR (B) THE CLAIM MADE BY THE ASSESEE THAT NO EXPENDITURE HAS BEEN IN CURRED IN RELATION TO EXEMPT INCOME FOR SUCH PREVIOUS YEAR, THE LD. AO HA S NOT REJECTED THE CORRECTNESS OF THE CLAIM OF OUR EXPENSES BUT HAS MA DE THE DISALLOWANCE OF EXPENDITURES U/R 8D ARBITRARILY OR ON SUSPICIOUS BASIS. SIR WE HAVE ALREADY OFFERED FOR TAX RS.59795/- AS DISALLOWANCE U/S 14A IN THE RETURN OF INCOME FURNISHED BY US, AND THEREFORE, HAVE NOT CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED BY US IN RESPECT TO E XEMPT DIVIDEND INCOME FOR THE PREVIOUS YEAR RELEVANT TO A.Y. 2008- 09. 8. MOREOVER, SIR, THE DIVIDEND INCOME RECEIVED IS N OT AT ALL AN EXEMPT INCOME, BUT INCOME WHICH HAS BEEN ALREADY SUBJECTED TO TAXATION U/S 115 O OF THE ACT. AND SIR, IN RULE 8-D THE WORKING PRES CRIBED IS FOR INVESTMENTS WHEREAS IN OUR CASE THERE IS NO INVESTM ENTS BUT THERE IS INVENTORY AS WE ARE TRADING IN SHARES & SECURITIES. MOREOVER, SIR AS AT 31-3-2008 WE HAVE OW N INTEREST FREE FUND OF RS.17,43,87,828/- AS ANALYZED HEREUNDER : PARTICULARS AMOUNT A) SHARE CAPITAL 6,00,000 I.T.A. NO.848/AHD/2012 A.Y.2008-09 7 B) RESERVE & SURPLUS 11,40,10,450 C) INTEREST FREE LOAN FROM DIRECTORS / SHARE HOLDER S 5,97,77,378 TOTAL RS. 17,43,87,828 AS AGAINST RS. 17,43,87,828/- OUR INVENTORY OF SHAR ES AND SECURITIES AS AT 31-3-2008 IS OF RS. 16,92,00,988/- ONLY. IN VIEW OF THESE FACTS THE INTEREST OF RS.43,29,261/- IS TOWARDS F&O AND EXPOR T BUSINESS AND NOT FOR SHARES & SECURITIES ON WHICH WE HAVE NOT ONLY E ARNED EXEMPT DIVIDEND INCOME OF RS.59,79,503/- BUT PROFIT FAR IN EXCESS OF DIVIDEND INCOME. HENCE WE HEREBY REQUEST YOUR GOOD SELF NOT TO DISALLOW INTEREST EXPENSES. THE DIRECT ADMINISTRATIVE EXPENSES ARE OF RS.4659/- AS DP CHARGES FOR HOLDING SHARES AS AGAINST THIS WE HAVE ALREADY TREATED RS.59,795/- AS EXPENSES @1% OF DIVIDEND INCOME DISA LLOWABLE IN RELATION TO DIVIDEND INCOME. HENCE, SIR THE PROVISIONS OF RU LE 8D HAVE NO APPLICATION IN OUR CASE AND DISALLOWANCE OFFERED BY US IN ROI IS EQUITABLE AND JUSTIFIED. 9. IN TERMS OF RULE 8D(2)(II), THE APPELLANT SUBMIT S THAT THE APPELLANT HAS NOT INCURRED ANY EXPENDITURE BY WAY OF INTEREST SIN CE THERE IS NO INVESTMENTS IN SHARES AND SECURITIES BUT THE SAME A RE STOCK IN TRADE OF THE APPELLANT AND THUS, THE SAID CLAUSE IS NOT APPL ICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT AND THUS NO QUESTION OF APPLYING THE FORMULA GIVEN THEREIN. 10. IN TERMS OF RULE 8D(2)(II), THE APPELLANT SUBMITS THAT AS PER THE SAID RULE, THE COMPUTATION IS IN RESPECT OF 0.5% OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHICH IS NOT FORMING PAR T OF TOTAL INCOME. IN THE INSTANT CASE OF THE APPELLANT, THOUGH IN THE BA LANCE SHEET, THERE IS NO INVESTMENT A SUCH, THE AO HAS CONSIDERED THE STOCK IN TRADE AS INVESTMENT MADE IN SHARES AND SECURITIES, WHICH IS NOT CORRECT. THE APPELLANT SUBMITS THAT SINCE IT IS IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES, THE PROFIT ON PURCHASE AND SALE OF SHAR ES AND SECURITIES ARE TAXED AS BUSINESS INCOME, WHICH IS NOT EXEMPT FROM TAX. THUS, IT CANNOT BE SAID THAT THE INVENTORIES ARE TO BE CONSIDERED A S INVESTMENT MADE THE INCOME FROM WHICH IS EXEMPT FROM TAX. IN FACT, IT I S THE OTHER WAY I.E. THE INCOME FROM THE INVENTORIES I.E. THE STOCK IN TRADE IS LIABLE FOR TAXATION AS BUSINESS INCOME AND THE SAME IS NOT EXEMPT FROM TAX . HENCE, THE BORROWED FUNDS UTILIZED FOR THE PURPOSE OF THE BUSI NESS OF THE APPELLANT CANNOT BE CONSTRUED TO BE FOR MAKING INVESTMENTS, T HE INCOME FROM WHICH IS EXEMPT FROM TAX, WHICH IS NOT CASE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE OF THE APPELLANT. 11. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT SUBMITS THAT BEING AGGRIEVED BY THE ORDER OF THE HON.BLE C.I.T. (APPEL S) V, VADODARA, PASSED IN OUR CASE FOR THE A. Y.2006-07 WE HAVE PRE FERRED AN APPEAL BEFORE THE HON.BLE I. T.A.T., AHMEDABAD, AND ISSUE INVOLVED IS SAME. HENCE, SIR PLEASE KEEP THE HEARING OF OUR APPEAL FO R THE A.Y.2008-09 AFTER DISPOSAL OF OUR APPEAL FOR THE A.Y.2006-07 IN THE INTEREST OF JUSTICE. OTHERWISE, THERE WILL BE REPETITIVE APPEALS AND WOU LD PUT AS IN HARDSHIPS. I.T.A. NO.848/AHD/2012 A.Y.2008-09 8 WE SHALL REMAIN HIGHLY BE OBLIGED FOR YOUR KIND ACT TO GRANT US ADJOURNMENT SINE DATE. 12. IN VIEW OF THE ABOVE SUBMISSION, THE APPEL LANT SUBMITS THAT THE DISALLOWANCE U/S 14A, MADE OF RS. 33,99,760/- MAY B E DELETED. 13. THE APPELLANT WOULD BE PLEASED TO FURNISH ANY OTHER INFORMATION, IF ANY, REQUIRED IN THE MATTER.' SUBMISSION DATED 17.8.2O11: 'WITH REFERENCE TO THE ABOVE CITED SUBJECT AND FURT HER TO OUR WRITTEN SUBMISSIONS SUBMITTED ON 6-5-2011 AND OUR PERSONAL HEARING ON 9 -8- 2011, IT IS SUBMITTED AS UNDER: 1. WE SUBMIT HEREWITH FOLLOWING STATEMENTS : A) DIVIDEND REPORT B) SHARE SOLD V/S DIVIDENDS C) SHARES IN WHICH WE HAVE REALIZED PROFIT, D) STATEMENT OF DIVIDEND INC -INTEREST EXP-INVENTOR Y OF SHARES/SECURITIES AND OWN AND LOAN FUNDS. 2. WITH DUE RESPECT TO YOUR KIND HONOR, WE WOULD LI KE TO SUBMIT THAT THE INTEREST EXPENDITURE IS NOT DIRECTLY RELATED TO PUR CHASE OF SHARES AND SECURITIES FOR EARNING DIVIDEND INCOME, AS OUR MAIN BUSINESS IS OF DEALING IN SHARES AND SECURITIES AND FUTURES AND OPTIONS. H ENCE THE INTEREST EXPENDITURE IN OUR OPINION IS NOT DIRECT EXPENDITUR E IN RELATION TO DIVIDEND INCOME. ON OUR SHARE TRADING BUSINESS WE HAVE EARNED DIVIDE ND OF RS. 59,79,503/- AND WE HAVE EARNED GROSS PROFIT OF RS.3 CRORE . HENCE AGAINST THE EXPENDITURE OF INTEREST EXPENSES RELATING TO SHARES AND SECURITIES PURCHASED BY US. WE HAVE EARN ED SUBSTANTIAL PROFIT ON THIS SHARES DURING THE PREVIO US YEAR RELEVANT TO AY 2008-09. WE THEREFORE REQUEST YOUR KIND HONOR TO DETERMINE DISALLOWANCE OUT OF INTEREST EXPENSES CONSIDERING T HE NATURE OF OUR BUSINESS, OUR OWN FUND BLOCKED IN INVENTORY OF SHAR ES AND SECURITIES AND PROFIT ON TRADING IN SHARES & SECURITIES AND TURNOV ER OF OUR VARIOUS BUSINESS SEGMENTS. AND NOT ONLY THE DIVIDEND INCOME . WE WILL BE HIGHLY OBLIGED IF THE DISALLOWANCE IS WORKED OUT EITHER ON THE BASIS OF TURNOVER OR IN RATIO OF INVENTORY OF SHARES & SECURITIES TO AVERAGE OWN FUNDS AND BORROWED FUNDS OR ANY OTHER REASONABLE FORMULA AS M AY BE CONSIDERED APPROPRIATE BY YOUR KIND HONOR TO GRANT US DUE JUST ICE. THE APPELLANT WOULD BE PLEASED TO FURNISH ANY OTHER INFORMATION, IF ANY REQUIRED IN THE MATTER.' 6. AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE ASSESSEE LD. CIT(A) CONFIRMED THE ACTION OF THE A.O. BY OBSERVING AS UN DER:- I.T.A. NO.848/AHD/2012 A.Y.2008-09 9 I HAVE CONSIDERED THE SUBMISSIONS AND FACTS OF THE CASE. APPELLANT'S CONTENTION THAT DIVIDEND INCOME RECEIVED WAS NOT EX EMPT INCOME, DUE TO IT ALREADY HAVING BEEN SUBJECTED TO TAXATION U/S.11 50 CANNOT BE ACCEPTED. DIVIDEND INCOME IS EXEMPT U/S. 10(34) IN THE HANDS OF APPELLANT WHEREAS TAX U/S. 1150 IS PAID BY THE COMP ANY DISTRIBUTING DIVIDEND. HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. PVT. LTD. (2010) 234 CTR (BOM) 1 REJECTED CONTENTION OF THE ASSESSEE THAT SECTION 14A WOULD NOT APPLY TO DIVIDEND INCOME BECAUSE DIVIDEND HAD ALREADY SUFFERED TAX U/S. 1150 . FURTHER CONTENTION OF THE APPELLANT IS THAT INTEREST OF RS.43,29,261/- WAS TOWARDS F & 0 AND EXPORT BUSINESS AND NOT TOWARDS SHARES AND SECURITI ES, FROM WHICH IT NOT ONLY EARNED DIVIDEND INCOME BUT PROFIT FAR IN EXCES S OF DIVIDEND INCOME. IT WAS HELD BY ITAT'S SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT SERVICES PVT. LTD. (2008) 119 TTJ (MUMBA I) (SB) 289 THAT SECTION 14A DOES NOT MAKE ANY DISTINCTION BETWEEN I NCIDENTAL AND MAIN INCOME AND IS ATTRACTED EVEN WHERE INCOME NOT FORMI NG PART OF TOTAL INCOME, LIKE DIVIDEND INCOME IN RESPECT OF SHARES H ELD AS STOCK-IN-TRADE IS INCIDENTAL TO THE MAIN INCOME OF PROFITS FROM TRADI NG IN SHARES. IT WAS FURTHER HELD BY ITAT'S SPECIAL BENCH THAT PROVISION S OF SECTION 14A ARE APPLICABLE WITH RESPECT TO THE DIVIDEND INCOME EARN ED BY THE ASSESSEE ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SE CURITIES ON THE SHARES HELD AS STOCK IN TRADE WHEN EARNING OF SUCH DIVIDEN D INCOME IS INCIDENTAL TO THE TRADING IN SHARES. ITAT'S DECISION AS ABOVE ON THIS ISSUE HAS NOT BEEN OVERRULED BY SUPERIOR COURTS AND IS THEREFORE THE PREVAILING LAW ON ISSUE. WHETHER SHARES WERE HELD AS STOCK IN TRADE O R INVESTMENT IS THEREFORE NOT A RELEVANT CONSIDERATION TO APPLY SEC TION 14A, WHEN ONE KIND OF INCOME FROM SHARES, I.E. DIVIDEND WAS EXEMP T FROM TAXATION. APPELLANT'S CONTENTION THAT SINCE IT WAS IN THE BUS INESS OF TRADING IN SHARES AND SECURITIES, PROFIT FROM WHICH WAS TAXED AS BUSINESS INCOME IS ALSO NOT ACCEPTABLE IN VIEW OF DECISION IN THE CASE OF DAGA CAPITAL MANAGEMENT SERVICES LTD. (SUPRA). REGARDING APPELLA NT'S CONTENTION THAT IT HAD INTEREST FREE FUNDS EXCEEDING INVESTMENT IN SHARES, AS HELD BY HON'BLE HIGH COURT OF CALCUTTA IN THE CASE OF DHANU KA & SONS (2011) 12 TAXMANN.COM 227 (CAL), IF IS FOR THE ASSESSEE TO SH OW BY PRODUCTION OF MATERIALS THAT SHARES WERE ACQUIRED FROM FUNDS AVAI LABLE IN ITS HANDS AT RELEVANT .POINT OF TIME WITHOUT TAKING BENEFIT OF A NY LOAN AND WHERE NO SUCH MATERIAL WAS PRODUCED BY ASSESSEE, DISALLOWANC E OF PROPORTIONATE AMOUNT OF INTEREST WAS JUSTIFIED. APPELLANT HAS NOT DEMONSTRATED WITH ANY EVIDENCE THAT INVESTMENT IN SHARES WAS OUT OF O WN INTEREST FREE FUNDS. FURTHER, AS HELD IN THE CASE OF DHANALAXMI B ANK LTD. (2011) 10 TAXMANN.COM 213 (KERALA), IF APPELLANT HAD A CASE T HAT FUNDS AVAILABLE OR FUNDS SOURCED OTHER THAN THROUGH BORROWING ONLY WER E UTILIZED FOR INVESTING IN SHARES WHICH YIELDED TAX FREE INCOME, IT COULD HAVE MAINTAINED SUCH SEPARATE ACCOUNTS AND PRODUCE THE S AME BEFORE THE ASSESSING OFFICER WHEN PROPORTIONATE DISALLOWANCE W AS PROPOSED BY THE ASSESSING OFFICER. BY SUBSEQUENT AMENDMENT THROUGH SUB SECTION (2) OF SECTION 14A AND BY PRESCRIBING RULE 8D, SPECIFIC GU IDELINES FOR DISALLOWANCE IN CASES WHERE SEPARATE ACCOUNTS ARE N OT AVAILABLE ON THE EXPENDITURE INCURRED FOR EARNING TAX FREE INCOME WE RE PRESCRIBED. IN VIEW I.T.A. NO.848/AHD/2012 A.Y.2008-09 10 OF THIS, IN APPELLANT'S CASE, APPLICATION OF RULE 8 D BY INVOKING SECTION 14A(2) IS UPHELD. APPELLANT'S CONTENTION CHALLENGIN G THE METHOD OF APPORTIONMENT OF EXPENSES FOR THE PURPOSE OF SECTIO N 14A BY APPLYING RULE 8D DUE TO IT BEING NOT EQUITABLE ETC. IS NOT T ENABLE, SINCE LEGISLATION FRAMED BY THE PARLIAMENT AND SUBORDINATE LEGISLATIO N FRAMED BY DESIGNATED AUTHORITIES HAS TO BE IMPLEMENTED AS IT STANDS. BOMBAY HIGH IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. PVT . LTD. VS. DCIT 10) 234 CTR (BOM) 1 HELD THAT LEGISLATURE CONSIDERED IT APPROPRIATE TO PRESCRIBE A PARTICULAR METHOD IN THE WAKE OF DISPUT ES THAT OCCURRED BETWEEN THE ASSESSES AND THE DEPARTMENT. AS REGARDS THE METHOD TO BE ADOPTED IN COMPUTING SUCH EXPENDITURE, THE LEGISLAT IVE CHOICE CANNOT BE HELD TO BE ARBITRARY OR OPPRESSIVE. FURTHER, THE RA TIONALE FOR RULE 8D CANNOT BE REGARDED AS CAPRICIOUS, PERVERSE OR ARBIT RARY AND PROVISIONS OF RULE 8D ARE NOT ULTRA VIRES TO THE PROVISIONS OF SE CTION 14A. FURTHER, HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVE STMENT LTD. (2011) 15 TAXMANN.COM 390 (DEL) HELD THAT EXPRESSION 'IN R ELATION TO' APPEARING IN SECTION 14A CANNOT BE ASCRIBED A NARROW OR CONST RICTED MEANING, THE 'EXPRESSION' 'IN RELATION TO' DOES NOT HAVE ANY EMB EDDED OBJECT AND IT SIMPLY MEANS 'IN CONNECTION WITH' OR 'PERTAINING TO '. THE COURT FURTHER HELD THAT IF THE EXPENDITURE IN QUESTION HAS A RELA TION OR CONNECTION WITH OR PERTAINING TO EXEMPT INCOME, IT CANNOT BE ALLOWE D AS DEDUCTION EVEN IF IT OTHERWISE QUALIFIES UNDER OTHER PROVISIONS OF TH E ACT. APPELLANT'S FURTHER CONTENTION IS THAT FOR THE PURPOSE OF RULE 8D(2)(II ) OF INCOME TAX RULES, AVERAGE VALUE OF 'INVESTMENT' IS REQUIRED WHEREAS A PPELLANT DID NOT HAVE ANY 'INVESTMENT' IN THE BALANCE SHEET DUE TO SHARES HAVING BEEN CONSIDERED AS STOCK IN TRADE. APPELLANT'S CONTENTIO N IS NOT ACCEPTABLE SINCE IN RULE 8D, ASSETS YIELDING EXEMPT INCOME ARE TERMED AS 'INVESTMENT' IN A GENERIC SENSE. MERELY BECAUSE THE ASSETS WERE CATEGORIZED DIFFERENTLY IN THE BALANCE SHEET WOULD NOT MAKE PROVISIONS OF RULE 8D(2)(II) INOPERATIVE. APPELLANT'S CONTENTION TO CARRY OUT WORKING OF DISALLOWANCE OF INTEREST BY NOT APPLYING RULE 8D BU T ON THE BASIS OF TURNOVER RATIO OR IN THE RATIO OF INVENTORY OF SHAR ES AND SECURITIES TO AVERAGE OF OWN FUNDS AND BORROWED FUNDS OR ANY OTHE R REASONABLE FORMULA CANNOT BE ACCEPTED SINCE FROM A.Y.2008-09 O NWARDS, FOR CASES FALLING UNDER SECTION 14A(2), DETERMINATION OF EXPE NDITURE TO BE DISALLOWED IS TO BE DONE MANDATORILY AS PER RULE 8D . DISALLOWANCE OF RS.36,99,760/- WORKED OUT IN ACCORDANCE WITH RULE 8 D U/S.14A IS IN ORDER AND NET ADDITION TO INCOME OF RS.36,39,965/- IS CONFIRMED. 7. FURTHER AGGRIEVED NOW THE ASSESSEE CAME IN APPEA L BEFORE US AND AT THE TIME OF HEARING LD. COUNSEL OF THE ASSESSEE SUBMITT ED THAT THERE IS NO DISPUTE ABOUT THE FACT THAT ASSESSEE WAS DEALING IN SHARES AND SECURITIES AND SHARES WERE HELD BY HIM IN STOCK IN TREAD AND THEREFORE IN VIEW OF THE DECISION OF KARNATAKA HIGH COURT IN THE CASE CCI LTD. VS. JT. CIT (KAT) R EPORTED IN (2012) 71 DTR (KAR) I.T.A. NO.848/AHD/2012 A.Y.2008-09 11 141 AND THE DECISION OF THE ITAT PANE BENCH IN THE CASE OF APOORVA PATNI VS. ACIT REPORTED N [2012] 24 TAXMANN.COM 223 (PUNE) NO DISA LLOWANCE U/S 14A OF THE INCOME TAX ACT WAS CALLED FOR IN THIS CASE. ON THE OTHER HAND LD. D.R. RELIED ON THE ORDER OF LOWER AUTHORITIES. 8. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES AND THERE IS NO DISPUTE ABOUT THE FACT THAT SHARES WERE HELD BY THE ASSESSEE AS STOCK IN TRADE. THE INTENTION OF ASSESSEE WAS NOT TO EARN DIVIDEND INCO ME AND THIS INCOME BEING INCIDENTAL TO BUSINESS OF SALE OF SHARES, NO NOTION AL EXPENDITURE COULD BE DEDUCTED BY INVOKING THE PROVISIONS OF SECTION 14A OF THE AC T. ON SIMILAR FACTS HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JT . CIT (SUPRA) HAS HELD AS UNDER:- WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED F ROM THE SAID INCOME. IT IS NOT THE CASE OF THE ASSESSEE RETAINING ANY SH ARES SO AS TO HAVE THE BENEFIT OF DIVIDEND. 63 PER CENT OF THE SHARES, WH ICH WERE PURCHASED, ARE SOLD AND THE INCOME DERIVED THEREFROM IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 37 PER CENT OF THE SHARES ARE RETAINED. IT HAS REMAINED UNSOLD WITH THE ASSESSEE. IT IS THOSE UNS OLD SHARES THAT HAVE YIELDED DIVIDEND, FOR WHICH, THE ASSESSEE HAS NOT I NCURRED ANY EXPENDITURE AT ALL. THOUGH THE DIVIDEND INCOME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE IS INCURRED IN E ARNING 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 HIS BUSINESS OF SALE OF SHARES, WHICH REMAINED UNSOLD BY THE ASSESSEE. IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HA S TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DI SALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROA CH OF THE AUTHORITIES IS NOT IN CONFORMITY WITH THE STATUTORY PROVISIONS CON TAINED UNDER THE ACT. AND IN THE DECISION OF THE ITAT PANE BENCH IN THE C ASE OF APOORVA PATNI VS. ACIT (SUPRA) IT WAS HELD AS UNDER:- I.T.A. NO.848/AHD/2012 A.Y.2008-09 12 EXPENDITURE INCURRED IN RELATION TO INCOME NOT INC LUDIBLE IN TOTAL INCOME ASSESSMENT YEAR 2006-07 ASSESSING OFFICER FOUND THAT ASSESSEE HAD EARNED EXEMPT DIVIDEND INCOME ACCORDINGLY, BY INV OKING SECTION 14A, HE ATTRIBUTED CERTAIN EXPENDITURE BOTH IN RELATION TO DIVIDEND EARNED ON ACCOUNT OF SHARE TRADING BUSINESS AND ON SHARES KEP T UNDER PMS COMMISSIONER (APPEALS) RETAINED EXPENDITURE ONLY IN RELATION TO DIVIDEND EARNED ON ACCOUNT OF SHARE TRADING BUSINESS AND DEL ETED OTHER ONE WHETHER WHEN ASSESSEE HAD NOT RETAINED SHARES WITH INTENTION OF EARNING DIVIDEND INCOME BUT SUCH INCOME WAS INCIDENTAL TO B USINESS OF SALE OF SHARES, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED B Y INVOKING SECTION 14A HELD, YES WHETHER, THEREFORE, ORDER OF COMM ISSIONER (APPEALS) WAS TO BE SET ASIDE HELD, YES [IN FAVOUR OF ASSES SEE]. 9. IN VIEW OF THE ABOVE, THE ADDITION MADE BY THE A .O. AND SUSTAINED BY LD. CIT(A) IN RESPECT OF DISALLOWANCE U/S 14A READ WITH RULE 8D IS HEREBY DELETED. 10. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 10.12.2012 SD/- SD/- (A.MOHAN ALANKAMONY) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE BY ORDER AR,ITAT,AHMEDABAD