DCIT 3(1), MUMBAI V. DERIVE TRADING P.LTD, MUMBAI

ITA 878/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8314 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 02-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 01-02-2013
• Court: TRIBUNAL
• Department Lawyers: IN CIRCUMSTANCES OF CA SE
• Assessee Lawyers: LOVE KUMAR; S D SRIVASTAVA SH
• Keywords: Earning of tax free income; Speculation loss
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.878/MUM/2013 ASSESSMENT YEAR: - 2009-10 DY. CIT CIRCLE 3(1), ROOM NO. 607, 6 TH FLOOR, AAYAKAR BHAWAN, MUMBAI 400 020.. VS.` M/S DERIVE TRADING PVT. LTD. 903, DALAMAL HOUSE, 206, J.B. MARG, NARIMAN POINT, MUMBAI 400 021. PAN:- AACCD5211D APPELLANT RESPONDENT ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 12.11.2012 OF CIT(A) FOR THE A.Y. 2009-10. THE REVENUE HAS RAISED FOLLOWING GROUNDS:- 1. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT (A) WAS JUSTIFIED IN HOLDING THAT STOCK IN TRADE BE EXCLUDED FROM AVERAGE VALUE OF INVESTMENT FOR THE PURPOSE OF DISA LLOWANCE MADE U/ S 14A R.W. RULE 8D (2)(II), WITHOUT APPRECIATING THE FACT THAT AS PER THE PROVISIONS OF THE SAID RULES THERE IS NO SUCH DISTINCTION.' 2. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) WAS JUSTIFIED IN ALLOWING RELIEF TO THE ASSESSEE IN RESPECT OF DISALLOWANCE MADE U/ S 14A R.W. RULE 8D (2)(II), WI THOUT APPRECIATING THE FACT THAT AS PER THE PROVISIONS OF SECTION 14A(2), ONCE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE CLAIMED, HE HAS NO OPTION BUT TO DISALL OW SUCH EXPENDITURE IN ACCORDANCE WITH METHOD PRESCRIBED UNDER RULE 8D(2)( II). REVENUE BY SHRI LOVE KUMAR AND SHRI S.D. SRIVASTAVA ASSESSEE BY SHRI BEHARILAL DATE OF HEARING 02.12.2014 DATE OF PRONOUNCEMENT 10.12.2014 M/S DERIVE TRADING PVT. LTD 2 | P A G E 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DEALING IN FUTURE & OPTION AS WELL AS TRADING IN SHARES & SECURITIES AN D COMMODITIES. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME O F RS. 297.48 CRORES AND CLAIMED SPECULATION LOSS ON ACCOUNT OF SHARE TRADING AND CO MMODITIES TRADING AT RS. 28.80 CRORES TO BE CARRIED FORWARD FOR SET OFF IN T HE SUBSEQUENT YEARS. THE ASSESSEE HAS ALSO EARNED DIVIDEND INCOME OF RS. 340 ,47310/- AND CLAIMED THE SAME AS EXEMPT. THE ASSESSEE ITSELF HAS MADE A DISA LLOWANCE OF RS. 34,04,731/- U/S 14A. THE ASSESSING OFFICER APPLIED RULE 8D AND MADE A DISALLOWANCE OF RS. 1,13,34,297/- U/S 14A. SINCE THE ASSESSEE ITSELF HA S MADE A DISALLOWANCE OF RS. 34,04,731/-, THEREFORE, THE NET DISALLOWANCE WAS MA DE BY THE ASSESSING OFFICER TO THE TUNE OF RS. 79,29,566/-. 3. THE ASSESSEE CHALLENGED THE ACTION OF ASSESSING OFFICER BEFORE CIT(A) AND CONTENDED THAT THE ASSESSEE IS IN THE BUSINESS OF T RADING IN SHARES AND COMMODITIES AND, THEREFORE, NO DISALLOWANCE CAN BE MADE U/S 14A. THE CIT(A) DELETED THE DISALLOWANCE MADE BY ASSESSING OFFICER U/S 14A BY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF DCIT VS. INDIA ADVANTAGE SECURITIES LTD. 4. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND C ONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. DR HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF D.H. SECURITIES LTD. VS. DCIT (41 TAXMANN.COM 352) AND SUBMITTED THAT IT HAS BEEN HELD THAT SECTION 14A IS APPLICABL E EVEN IN THE CASE OF TRADING IN SHARES SO FAR AS THE DIVIDEND INCOME FROM THE SHARE S HELD AS STOCK IN TRADE IS CONCERNED. 5. ON THE OTHER HAND, THE LD. AUTHORIZED REPRESENTA TIVE HAS SUBMITTED THAT IN THE LATEST DECISION DATED 27.08.2014 OF THIS TRI BUNAL IN THE CASE OF RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ACIT IN ITA NO . 6324//MUM2012 , THE TRIBUNAL AFTER CONSIDERING THE THIRD MEMBER DECISIO N IN THE CASE OF D.H. SECURITIES LTD. VS. DCIT, HAS HELD THAT THE DISALL OWANCE SHOULD BE RESTRICTED TO M/S DERIVE TRADING PVT. LTD 3 | P A G E 5% OF THE AMOUNT ARRIVED UNDER RULE 8D(2)(II)(III) AND 10% OF THE AMOUNT CALCULATED BY THE ASSESSING OFFICER UNDER RULE 8D(2 )(III). 6. HAVING HEARD THE RIVAL SUBMISSIONS AS WELL AS CA REFUL PERUSAL OF RELEVANT MATERIAL ON RECORD, WE ARE OF THE VIEW THAT WHEN TH E ASSESSEE IS IN THE BUSINESS OF SHARE TRADING AS WELL AS FUTURE & OPTION THEN TH E EXPENDITURE INCURRED BY THE ASSESSEE IN THE COURSE OF BUSINESS ACTIVITY OF TRAD ING IN SHARES WOULD BE CONSIDERED EXCLUSIVELY FOR BUSINESS ACTIVITY AND TH E SAME CANNOT BE APPORTIONED BEING AN EXPENDITURE INCURRED FOR EARNING THE DIVID END INCOME. THE TRIBUNAL IN THE CASE OF RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD . VS. ACIT (SUPRA) AFTER CONSIDERING THE THIRD MEMBER DECISION IN THE CASE O F D.H. SECURITIES VS. DCIT (SUPRA) AS WELL AS THE DECISION OF HONBLE KARNATAK A HIGH COURT IN THE CASE OF CCL LTD. VS. JCIT HELD IN PARA 3 TO 5 AS UNDER:- 3. WE MAY OBSERVE THAT THE ISSUE RELATING TO THE DIS ALLOWANCE UNDER SECTION 14A IN RELATION TO SHARES HELD IN STOCK IN TRADE WA S DISCUSSED BY THE CO- ORDINATE BENCH OFMUMBAI TRIBUNAL IN THE CASE OF D. H. SECURITIES (P) LTD. VS. DCIT (2014) 41 TAXMANN.COM 352 AND THE MATTER WAS REFERRED TO THE THIRD MEMBER. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT (2012) 250 CTR (KAR) 291 WAS RE FERRED TO AND DISCUSSED BEFORE THE TRIBUNAL AND IT HAS BEEN HELD THAT IN VI EW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM) AND THE HONBLE KOLKATA HIGH COURT IN THE CASE OF DHANUKA & SONS VS. CIT [2011] 339 ITR 319, SECTION 14A IS ATTRACTED EVEN IN THE CASE OF DIVIDE ND INCOME FROM SHARES HELD AS STOCK IN TRADE. WHILE HOLDING SO,IT HAS BEEN OBSE RVED BY THE TRIBUNAL THAT THE INVESTMENT COMPONENT OR ELEMENT IS IN BUILT IN THE EXPENDITURE INCURRED FOR PURCHASE AND SALE OF SHARES EVEN HELD AS STOCK IN TRADE FOR BUSINESS PURPOSES. THE EXPENDITURE ATTRIBUTABLE TOWARDS EARN ING OF EXEMPT INCOME, IMMATERIAL OF THE FACT WHETHER SUCH EXEMPT INCOME W AS ACTUALLY EARNED OR NOT, IS EMBEDDED IN THE EXPENDITURE INCURRED FOR SHARE TRADING ACTIVITY AND IS LIABLE TO BE APPORTIONED IN THE LIGHT OF THE PROVISIONS OF SECTION 14A OF THE ACT. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT RELIED UPON BY THE ASSESSEE HAS BEEN DULY DISCUSSED AND DISTINGUISHED IN THE THIRD MEMBER CASE OF D.H. SECURITIES (P) LTD. VS. DCIT(SUPRA). HOWEVER, IT HAS BEEN FURTHER OBSERVED IN THE SAID T HIRD MEMBER DECISION OF THE M/S DERIVE TRADING PVT. LTD 4 | P A G E TRIBUNAL THAT THE SHARES WHICH YIELD TAX EXEMPT DIV IDEND INCOME, INTEREST QUA WHICH IS TO BE DISALLOWED, WHEN HELD AS STOCK I N TRADE, YIELD TAXABLE INCOME ALSO. IN FACT, THE SHARES ARE BOUGHT AND HEL D PRIMARILY FOR THE PURPOSE OF EARNING INCOME FROM TRADING IN SHARES. HENCE, WH ILE CALCULATING THE INTEREST DISALLOWANCE UNDER RULE 8D(2)(II), THE DIS ALLOWANCE OF THE ENTIRE AMOUNT IS NOT JUSTIFIED. THE TRIBUNAL THEREFORE HEL D THAT THE AMOUNT CALCULATED AS PER RULE 8D(2)(II) WOULD NEED TO BE S CALED DOWN AS THE INCOME EARNED FROM SHARE TRADING IS OFFERED FOR TAXATION. THE TRIBUNAL OBSERVED THAT WHILE SCALING DOWN THE SAID AMOUNT NO HARD AND FAST RULE CAN BE APPLIED AND THE SAME CAN BE DETERMINED ONLY ON ADHOC BASIS. THE TRIBUNAL ALSO OBSERVED THAT WHERE THE SHARE TRADING IS THE DOMINANT OBJECT OF PURCHASE AND SALE OF SHARES, THE TURNOVER OF THE YEAR WOULD BE VERY HIGH IN COMPARISON TO THE AVAILABLE SHARE HOLDING BECAUSE OF THE CONTINUOUS A CTIVITY OF SALE AND PURCHASE OF SHARES. HENCE, MECHANICAL APPLICATION O F RULE 8D(2)(II) WOULD BE WRONG. THE TRIBUNAL, ACCORDINGLY, PURPOSED TO RESTR ICT THE DISALLOWANCE TO 20% OF THE AMOUNT IN RELATION TO INTEREST DISALLOWA NCE UNDER RULE 8D(2)(II), I.E., IN RELATION TO INDIRECT EXPENSES. THE TRIBUNA L FURTHER HELD THAT SO FAR THE DIRECT EXPENSES ARE CONCERNED, NO SUCH DISALLOWANCE U/S.14A WAS ATTRACTED BECAUSE OF THE FACT THAT NO DIRECT EXPENDITURE IS I NCURRED BY THE ASSESSEE FOR EARNING OF DIVIDEND INCOME WHEN THE PURPOSE OF SALE AND PURCHASE OF SHARES IS TRADING. THE ALMOST SIMILAR VIEW HAD BEEN MADE B Y THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DAMANI ESTATES & FIN ANCE PVT. LTD. (IN ITA NO. 3029/MUM/2012 DATED 17.07.2013). 4. IN OUR VIEW, TAKING INTO CONSIDERATION THE FACT THAT THE PRIMARY OBJECT OF HOLDING THE SHARES IS TRADING AND THE DIVIDEND INCO ME IS INCIDENTAL AND FURTHER THAT DUE TO CONTINUOUS ACTIVITY OF SALE AND PURCHASE OF THE SHARES, THE ANNUAL TURNOVER WOULD BE MUCH HIGHER IN CASE OF SHA RE TRADING AS COMPARED TO THE INVESTMENTS MADE FOR THE PURPOSE OF EARNING OF EXEMPT INCOME, EVEN THE DISALLOWANCE @ 20% OF THE AMOUNT CALCULATED UND ER RULE 8D(2)(II) WILL BE ON HIGHER SIDE. WE FEEL THAT IT WILL BE APPROPRI ATE IF THE SAID DISALLOWANCE IS RESTRICTED TO 5% OF THE AMOUNT SO ARRIVED. 5. SO FAR THE DISALLOWANCE UNDER RULE 8D(2)(III) IS CONCERNED, SINCE IN THE SHARETRADING ACTIVITY, INVESTMENT IS NOT MADE FOR T HE PURPOSE OF EARNING EXEMPT INCOME, HENCE, THE MANAGERIAL/ADMINISTRATIVE EXPENSES IN RELATION TO DIVIDEND INCOME CALCULATED UNDER RULE 8D(2)(III) ARE ALSO REQUIRED TO BE SCALED DOWN WHICH WE THINK THAT SHOULD BE RESTRICTE D TO 10% OF THE AMOUNT SO CALCULATED UNDER RULE 8D(2)(III). IN VIEW OF OUR ABOVE OBSERVATIONS, THE DISALLOWANCE U/S.14A READ WITH RULE 8D IS, ACCORDIN GLY, RESTRICTED TO 5% OF THE AMOUNT ARRIVED AT UNDER RULE 8D(2)(II) AND 10% OF THE AMOUNT CALCULATED BY THE A.O. UNDER RULE 8D(2)(III). M/S DERIVE TRADING PVT. LTD 5 | P A G E 7. AS REGARDS THE VIEW OF THE TRIBUNAL THAT THE EXP ENDITURE ATTRIBUTABLE TOWARDS THE EARNING OF THE EXEMPT INCOME DIRECTLY R ELATED TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AS THE SAME CANNOT BE C LAIMED AGAINST THE TAXABLE INCOME OF THE ASSESSEE. WE DO AGREE AND CONCUR WITH THE SAID VIEW. THEREFORE, THE DISALLOWANCE COMPUTED UNDER RULE 8D OF THE INCO ME TAX RULES CANNOT BE MORE THAN THE ACTUAL EXPENDITURE INCURRED BY THE AS SESSEE FOR THE DIVIDEND INCOME EXCLUDING THE ACTIVITY OF SHARE TRADING WHIC H IS THE BUSINESS ACTIVITY OF THE ASSESSEE. EVEN THE COMPUTATION OF DISALLOWANCE ARRIVED AS PER THE RULE 8D SHOULD BE RESTRICTED ONLY TO THE EXTENT OF ACTUAL E XPENDITURE OR TO THE EXTENT OF THE EXPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE AC TIVITY OF THE DIVIDEND INCOME EXCLUDING THE BUSINESS ACTIVITY OF SHARE TRADING. A CCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE DISALLOWANCE U /S 14A WITH THE RIDER TO THE ACTUAL EXPENDITURE WHICH CAN BE ATTRIBUTABLE TO THE RECEIPT OR EARNING OF THE DIVIDEND INCOME EXCLUDING THE EXPENDITURE RELATED TO BUSINESS ACTIVITY OF SHARE TRADING. 8. IN THE RESULT APPEALS OF THE REVENUE IS PARTLY A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF DECEMBER 2014. SD/- SD/- (N.K.BILLAIYA) (VIJAY PAL RAO) (ACCOUNTANT MEMBER/ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; ) MUMBAI DATED 10-12-2014 SKS SR. P.S, COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, E BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI