ITO 12(1)4, MUMBAI V. RATILAL V. SHAH, MUMBAI

ITA 848/MUM/2012

• Counselvise Citation: 84819914 RSA 2012
• Duration Of Justice: 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 30-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 08-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KRINA DINESH PASAD
• Keywords: Earning of tax free income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH: MUMBAI BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.848/MUM/2012 (ASSESSMENT YEAR: 2007-08) INCOME TAX OFFICER -12(1)(4), R.NO.115, 1ST FLOOR, AAYAKAR BHAVAN, MUMBAI ...... APPELLANT VS SHRI RATILAL V. SHAH, 34, MARUTI LANE, RATAN DEEP, 1ST FLOOR, FORT, ITO -18(2)(1), MUMBAI ..... RESPONDENT PAN: AADPS 6100 N APPELLANT BY: SHRI CHARANJIT SINGH RESPONDENT-REVENUE BY: MISS KRINA DINESH PASAD DATE OF HEARING: 30.04.2012 DATE OF PRONOUNCEMENT: 25.05.2012 O R D E R R.S. PADVEKAR, JM: IN THIS APPEAL THE REVENUE HAS CHALLENGED THE IMPUG NED ORDER OF THE LD. CIT (A)-21, MUMBAI DATED 14.11.2011 FOR THE A.Y. 2007-08. THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUN D: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT (A) ERRED IN DELETING AN AMOUNT OF ` 43,44,388/- BY RELYING ON THE DECISION OF THE HONB LE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG LTD. WHICH IS STILL PENDING BEFORE THE HONBLE SUPREME C OURT. 2. BRIEFLY STATED THE FACTS ARE AS UNDER. THE ASSE SSEE IS AN INDIVIDUAL AND IS IN THE TRADING OF SHARES. THE R ETURN FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY. THE A.O. HAS O BSERVED THAT THE ASSESSEE HAS EARNED TAX FREE INCOME OF ` 4,79,592/- WHICH COMPRISES ITA 848/M/2012 SHRI RATILAL V. SHAH 2 OF DIVIDEND AS WELL AS LONG-TERM CAPITAL GAIN. IN THE OPINION OF THE A.O. THE ASSESSEE SHOULD HAVE MADE THE DISALLOWANCE IN RESPECT OF THE EXPENDITURE INCURRED FOR EARNING THE SAID EXEMPTED INCOME AS PER THE PROVISIONS OF SEC.14A R.W. RULE 8D. THE A.O. SOUGH T THE EXPLANATION OF THE ASSESSEE, THE ASSESSEE STATED THAT THE INTEN TION TO BORROW THE FUND WAS TO GENERATE THE TRADING INCOME AND NOT TO EARN THE MEAGRE DIVIDEND INCOME OF ` 4,71,975/-. ALTERNATIVELY, HE PLEADED FOR MAKING THE PROPORTIONATE DISALLOWANCE CONSIDERING THE TAXA BLE INCOME. HE OFFERED FOR MAKING THE DISALLOWANCE OF ` 4,83,626/-. THE A.O. WAS NOT IMPRESSED WITH THE SUBMISSION OF THE ASSESSEE AND H E RELIED ON THE DECISION OF THE DAGA CAPITAL MANAGEMENT P. LTD. 117 ITD 169 (SB) AND MADE THE DISALLOWANCE TO THE TUNE OF ` 43,44,388/-. THE ASSESSEE CHALLENGED THE DISALLOWANCE BEFORE THE LD. CIT (A) AND LD. CIT (A) SUSTAINED THE SAME TO ` 6,33,626/-. THE OPERATIVE PART OF THE LD. CIT (A) ARE AS UNDER: 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE. THE APPELLANT WAS ENGAGED IN THE BUSINESS OF SHARE TRADING ACTIVITY. THE APPELLANT EARNED DIVIDEND AND LONG TERM CAPITAL GAIN OF ` 4,79,592/-. THE A.O. MADE DISALLOWANCE U/S.14A OF THE ACT AT ` 44,44,779/- (RESTRICTED TO THE EXTENT OF INTEREST CLAIMED AT ` 43,44,388/-) AS PER FORMULA PROVIDED IN RULE 8D. HOWEVER, AS PER D ECISION OF BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCEE MF G. CO. LTD. THE PROVISIONS OF RULE 8D WERE NOT APPLICABLE IN TH E YEAR UNDER CONSIDERATION. HOWEVER, THE BOMBAY HIGH COURT ALSO HELD THAT IN THE YEARS IN WHICH PROVISIONS OF RULE 8D ARE NOT AP PLICABLE, THE A.O. IS DUTY BOUND TO EXAMINE AS TO WHETHER ANY EXP ENSES ARE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME, IF SO, DI SALLOW THE SAME U/S.14A(1) OF THE ACT. IN THE FACTS AND CIRCUMSTAN CES, THOUGH THE PROVISIONS OF RULE 8D WERE NOT APPLICABLE, HOWEVER, IT REQUIRED EXAMINATION AS TO WHETHER SOME EXPENSES WERE ATTRIB UTABLE TO THE EARNING OF EXEMPT INCOME. VARIOUS COURTS AND TRIBUNALS HAVE HELD THAT WITHOUT INCURRING OF ADMINISTRATIVE AND MANAGERIAL EXPENSES THE EXEMPT ITA 848/M/2012 SHRI RATILAL V. SHAH 3 INCOME COULD NOT HAVE BEEN EARNED. IN THE FACTS AN D CIRCUMSTANCE THE APPELLANTS CLAIM WAS NOT ACCEPTAB LE THAT NO ADMINISTRATIVE OR MANAGERIAL EXPENSES WERE INCURRED FOR EARNING OF EXEMPT INCOME. THE APPELLANT WAS ENGAGED IN THE BUSINESS OF SHARE TRADING ACTIVITY. THE SPECIAL BENCH OF MUMBAI ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT LTD. 117 ITD 169 HELD THAT THE SEC.14A WOULD APPLY WHETHER THE SHARES ARE HELD AS INVESTMENT OR STOCK IN TRADE. IT WAS ALSO HELD THAT SEC.14A H AS OVERRIDING EFFECT ON ALL OTHER SECTIONS INCLUDING SEC.36(1)(II I) OF THE ACT. THUS, THOUGH THE APPELLANT BORROWED FUNDS FOR THE PURPOSE OF BUSINESS OF SHARE TRADING ACTIVITY BUT PART OF SUCH FUNDS WE RE ALSO ATTRIBUTABLE TO EARNING OF EXEMPT DIVIDEND INCOME A ND LONG TERM CAPITAL GAIN. THOUGH THE EARNING OF DIVIDEND INCOM E MAY BE INCIDENTAL TO THE SHARE TRADING BUSINESS BUT AT THE SAME TIME IT COULD NOT BE SAID THAT NO INTEREST EXPENDITURE WAS ATTRIBUTABLE TO EARNING OF SUCH INCIDENTAL EXEMPT DIVIDEND INCOME. IN THE FACTS AND CIRCUMSTANCES IT IS HELD THAT SOME INTEREST EXP ENDITURE WAS DEFINITELY ATTRIBUTABLE TO EARNING OF EXEMPT INCOME . IN THE BALANCE SHEET THE APPELLANT HAD CAPITAL OF ` 43.53 LAKHS, SECURED LOANS AT ` 2,39,352/- AND UNSECURED LOANS AT ` 3.21 CRORES. IN THE ASSETS SIDE OF BALANCE SHEET THE APPELLANT WAS HAVING LOANS & ADVANCES RECOVERABLE AT ` 15,62,644/- AND CLOSING BALANCE AT ` 3.90 CRORES. BESIDES, CASH AND BANK BALANCES WAS A T NEGATIVE FIGURE OF ` 33.05 LAKHS. IN THE P&L ACCOUNT THE APPELLANT HAD SALES OF SHARES OF ` 7.23 CRORES. THE APPELLANT HAS ALSO SHOWN GROSS LOSS AT ` 37.08 LAKHS. HOWEVER, THE SPECULATION GAIN OF SHARES HAD BEEN SHOWN AT ` 1.79 CRORES AND THEREAFTER NET LOSS HAS BEEN WORKED OUT AT ` 80.07 LAKHS. IN THE P&L ACCOUNT, THE APPELLANT HAS DEBITED INTEREST EXPENSES OF ` 43,44,388/-. THIS ENTIRE INTEREST EXPENSES HAS BEEN DISALLOWED BY A.O . U/S.14A HOLDING THAT THE ENTIRE INTEREST EXPENSES WAS ATTRI BUTABLE TO EARNING OF DIVIDEND INCOME OF ` 4,78,975/-. HOWEVER, THE A.OS FINDING CANNOT BE ACCEPTED. IN THE TRADING, PROFIT & LOSS ACCOUNT ITA 848/M/2012 SHRI RATILAL V. SHAH 4 THERE WERE SALES OF SHARES AT ` 7.23 CRORES, CLOSING STOCK OF SHARES AT ` 3.90 CRORES AND SPECULATION GAIN ON SHARES AT ` 1.79 CRORES. THE TOTAL INTEREST EXPENSES DEBITED WAS ` 43.44 LAKHS. IN THE FACTS AND CIRCUMSTANCES SUCH INTEREST EXPENSES WAS ALSO ATTRIBUTABLE TO THE TURNOVER / SALES OF SHARES, CLO SING STOCK OF SHARES AND ALSO THE SPECULATION ACTIVITY IN SHARES. IT CANNOT BE DENIED THAT THE APPELLANT WAS EXCLUSIVELY ENGAGED I N THE ACTIVITY OF TRADING IN SHARES. CONSEQUENTLY THE EARNING OF EXEMPT INCOME WAS INCIDENTAL TO SUCH BUSINESS ACTIVITY. IN THE F ACTS AND CIRCUMSTANCES ONLY THE PART OF THE INTEREST EXPENDI TURE COULD BE HELD TO BE ATTRIBUTABLE TO THE EARNING OF EXEMPT IN COME. NOW THE QUESTION FOR CONSIDERATION IS AS TO WHAT WAS THE EX TENT OF INTEREST EXPENDITURE ATTRIBUTABLE TO THE EARNING OF SUCH EXE MPT INCOME. IN MY CONSIDERED VIEW THE APPELLANT HAS CORRECTLY WORK ED OUT SUCH INTEREST EXPENDITURE ATTRIBUTABLE TO DIVIDEND INCOM E AT ` 4,83,626/- IN PROPORTION TO INTEREST EXPENDITURE : DIVIDEND INCOME : TAXABLE INCOME. IN THE FACTS AND CIRCUMSTANCES I T IS HELD THAT THE INTEREST EXPENSES OF ` 4,83,626/- WAS ATTRIBUTABLE TO THE EARNING OF EXEMPT DIVIDED INCOME AND THEREFORE, WAS DISALLOWABLE U/S.14A(1) OF THE ACT. 3. I HAVE HEARD THE PARTIES AND PERUSED THE RECORDS . IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. 328 ITR 81 (BOM), TH E HONBLE HIGH COURT HAS CONSIDERED THE DECISION OF THE DAGA CAPIT AL MANAGEMENT P. LTD. (SUPRA) WHEREIN IT IS HELD THAT RULE 8D IS APP LICABLE PROSPECTIVELY. I FIND THAT THE LD. CIT (A) MADE THE ANALYSIS OF TH E BALANCE SHEET OF THE ASSESSEE CONSIDERING THE SECURED LOANS AND UNSECURE D LOANS, ADVANCES RECOVERABLE ETC. HE HAS OBSERVED THAT IN THE PROFIT AND LOSS ACCOUNT THERE WERE SALES OF SHARES OF ` 7.23 CRORES, CLOSING STOCK OF SHARES OF ` 3.90 CRORES AND SPECULATION GAIN ON THE SHARES AT ` 1.79 CRORES, HENCE, THE ASSESSEE HAS NOT ONLY USED THE F UNDS FOR EARNING THE EXEMPT INCOME AND EARNING EXEMPT INCOME WAS INC IDENTAL TO SUCH BUSINESS ACTIVITY. HE, THEREFORE, ACCEPTED THE WOR KING GIVEN BY THE ASSESSEE IN RESPECT OF THE DISALLOWANCE OF THE INTE REST EXPENDITURE TO THE EXTENT OF ` 4,83,626/-. HE ALSO MADE THE DISALLOWANCE OF ` 1.5 ITA 848/M/2012 SHRI RATILAL V. SHAH 5 LAKHS OUT OF THE ADMINISTRATIVE AND MANAGERIAL EXPE NSES. IN MY VIEW THE DISALLOWANCE SUSTAINED BY THE LD. CIT (A) IS RE ASONABLE AND NO INTERFERENCE IS REQUIRED. I, ACCORDINGLY, CONFIRM THE ORDER OF THE LD. CIT (A). 4. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 2 5TH MAY 2012. SD/- ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI, DATE: 25TH MAY 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-21, MUMBAI. 4) THE CIT MCX, MUMBAI. 5) THE D.R. SMC BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN