CHANDRAKANT M . SHAH, MUMBAI V. ASST CIT 13(2), MUMBAI

ITA 8802/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1702 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 17-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 16-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RAHUL K HAKANI; DR K SHIVARAM
• Keywords: Business income; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTAT MEMBER I.T.A. NO. 8802/M/2010 (AY: 2007-2008) I.T.A. NO. 7325/M/2011 (AY: 2008-2009) SHRI CHANDRAKANT M. SHAH, 201, GUNDECHA CHAMBERS, CLIVE X LANE NO.4, NAGINDAS MASTER ROAD, FORT, MUMBAI 400 023. PAN: AAGPS 1059 K VS. ACIT-13(2), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : DR. K. SHIVARAM & MR. RAHUL K. HAKANI RESPONDENT BY : SHRI RAJARSHI DWIVEDY, DR DATE OF HEARING: 17.1.2013 DA TE OF ORDER: 08 .3.2013 O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE TWO APPEALS UNDER CONSIDERATION. THESE TWO APPEALS ARE FILED B Y THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE CIT (A)-24, MUMBAI FOR THE ASSESSMENT YEARS 2007-08 AND 2008-09. FOR THE SAKE OF CONVENIENCE, THESE TWO APPEALS ARE CLUBBED AND THEY ARE BEING ADJUDICATED IN THIS COMMON ORDER. 2. FIRSTLY, WE SHALL TAKE UP ITA NO. 8802/M/2010 FO R AY 2007-2008, WHICH IS FILED BY THE ASSESSEE ON 16.12.2010 AGAINST THE ORD ER OF CIT (A)-24, MUMBAI DATED 26.10.2010. IN THIS APPEAL, ASSESSEE RAISED THE FOLL OWING GROUNDS WHICH READ AS UNDER: 1. THE LD CIT (A) ERRED IN DIRECTING THE AO TO FOL LOW A METHOD WHICH IS NOTHING BUT RULE 8D FOR MAKING DISALLOWANCE U/S 14A WITHOUT APPRECIATING THAT AS PER THE DECISION OF BOMBAY HIG H COURT IN GODREJ AND BOYCE MFG. COM LTD . VS. DCIT (2010) 328 ITR 81 (BOM) IT IS FOR THE AO TO DETERMINE A REASONABLE METHOD AND HAS FURTHER NOT F OLLOWED THE PROCEDURE AS LAID DOWN BY THE BOMBAY HIGH COURT HENCE THE DIRECT ION OF LD CIT (A) MAY BE SET ASIDE. 2. THE LD CIT (A) FAILED TO APPRECIATE THAT S. 14A DOES NOT APPLY WHERE EXPENSES ARE INCURRED FOR THE PURPOSES OF BUSINESS OF TRADING IN S HARES . 2 3. WITHOUT PREJUDICE TO ABOVE, DIVIDEND IS RS. 97,350/- AND HENCE DISALLOWANCE U/S 14A CANNOT EXCEED RS. 36,537/-. 4. THE LD CIT (A) ERRED IN NOT ADJUDICATING GROUND NO.3 RELATING TO DISALLOWANCE OF RS. 13,765/- BEING ELECTRICITY EXPENSES. 5. THE LD CIT (A) AND AO FAILED TO APPRECIATE THAT EXPENDITURE OF RS. 68,824/- ON ACCOUNT OF ELECTRICITY EXPENSES IS INCU RRED WHOLLY AND EXCLUSIVELY FOR BUSINESS AND HENCE DISALLOWANCE OF RS. 13,765/- MAY BE DELETED. 3. GROUNDS 1 AND 2 RELATES TO THE ISSUE OF DISALLOW ABILITY OF THE EXPENDITURE U/S 14A OF THE ACT IN RESPECT OF THE EXEMPT INCOME/ DIV IDEND OF RS 97,350/- WHICH IS EARNED OUT OF THE SHARES HELD AS STOCK IN TRADE . AT THE OUTSET, DR. K. SHIVARAM, LD COUNSEL FOR THE ASSESSEE MENTIONED THAT THE ISSUE U NDER CONSIDERATION RELATION TO APPLICABILITY OF SECTION 14A READ WITH THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. CIT (2010) 328 ITR 81 (BOM) TO THE DIVIDEND EARNED ON SHARES HELD AS STOCK IN THE BUSINESS OF T HE ASSESSEE. IN THIS REGARD, LD COUNSEL MENTIONED THAT THE ISSUES IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE COORDINATE BENCH DECISION IN THE CASE OF DCIT VS. I NDIA ADVANTAGE SECURITIES LTD (MUM) (TRIB) ITA NO. 6711/M/2011, ORDER DATED 20.7. 2012 AND ANOTHER DECISION IN THE CASE OF ESQUIRE PVT. LTD. VS. DCIT VIDE ITA NO. 5688/M/2012, ORDER DATED 9.8.2012. LD COUNSEL MENTIONED THAT THE SAID DECIS IONS WERE DECIDED IN FAVOUR OF THE ASSESSEE HOLDING THAT THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE DIVIDEND EARNED OUT OF SHARES HELD AS STOCK-IN- TRADE . THE SAID DECISIONS WERE TAKEN BY THE MUMBAI BENCH OF THE TRIBUNAL BY R ELYING ON THE HONBLE KARNATAKA HIGH COURT DECISION IN THE CASE OF CCL LT D. VS. JCIT [2001] 250 ITR 291. BESIDES, LD COUNSEL ALSO FILED ANOTHER ORDER OF THE TRIBUNAL, WHERE ONE OF US IS A PARTY, IN THE CASE OF ACIT VS. M/S. PRESCIENT SECUR ITIES PVT. LTD. VIDE ITA NO. 5281/M/2011 (AY: 2008-09), ORDER DATED 21.11.2012 A ND MENTIONED THAT PARA 5 AND 6 ARE RELEVANT IN THIS REGARD AND STATED THAT THE I SSUES UNDER CONSIDERATION RAISED IN GROUND NO.1 TO 3 SHOULD BE ALLOWED IN FAVOUR OF THE ASSESSEE. 4. ON THE OTHER HAND, LD DR RELIED ON THE ORDER OF THE REVENUE AUTHORITIES. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE ORDE RS OF THE REVENUE AUTHORITIES AND THE CITATIONS QUOTED BY THE LD COUN SEL FOR THE ASSESSEE. IT IS UNDISPUTED FACT THAT THE SOURCE OF THE DIVIDEND IS SHARES WHICH ARE HELD BY THE 3 ASSESSEE AS STOCK-IN-TRADE. IN SUCH CIRCUMSTANCES, THE DECISIONS RELIED UPON BY THE LD COUNSEL HAVE APPLICATION TO THE FACTS OF THE CAS E. FURTHER, WE PERUSED THE PARA 5 AND 6 OF THE TRIBUNALS ORDER IN THE CASE OF ACIT V S. M/S. PRESCIENT SECURITIES PVT. LTD. (SUPRA) AND THE SAME ARE REPRODUCED AS UNDER: 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE ORD ERS OF THE REVENUE, THE PAPERS AVAILABLE ON RECORD AND THE DECISIONS CITED BY THE LD COUNSEL TO SUPPORT THE CONTENTIONS OF THE ASSESSEE. IT IS A SETTLED P ROPOSITION AT THE LEVEL OF HONBLE HIGH COURT OF KARNATAKA THAT THE PROVISION OF SECTION 14A HAS NO APPLICATION TO THE DIVIDEND INCOME ARISING OUT OF T HE SHARES HELD AS STOCK-IN- TRADE WHICH IS AN UNDISPUTED FACT IN THE PRESENT CA SE. 6. HONBLE KARNATAKA HIGH COURT HAS EXAMINED THE IS SUE AND HELD THAT THE EARNING OF DIVIDEND INCOME OUT OF THE SHARES HELD O N TRADING ACCOUNT IS MERELY AN INCIDENTAL INCOME AS THE ASSESSEE IS ALWAYS WANT THOSE SHARES TO BE PARTED OR SOLD AND ONLY THE UNSOLD SHARES IS THE SOURCE OF SUCH INCIDENTAL DIVIDEND INCOME. IN SUCH CASE, THE PROVISIONS OF SECTION 14 A ARE NOT APPLICABLE. THIS BEING A DIRECT JUDGMENT OF HONBLE HIGH COURT OF KA RNATAKA ON THIS ISSUE IN THE PRESENT CASE, THE SAME HAS TO BE FOLLOWED IN PREFER ENCE TO THE DECISION OF SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANA GEMENT PVT. LTD. (SUPRA). WE HAVE CONSIDERED THE PRINCIPLE OF JUDICIAL HIERAR CHY. WE HAVE ALSO PERUSED PARA 5 AND 6 OF THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. INDIA ADVANTAGE SECURITIES LTD (SUPRA) WHICH CONSIDERED THE SAID JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA FOR DECIDING THE ISS UE IN FAVOUR OF THE ASSESSEE. CONSIDERING THE SETTLED NATURE OF THE ISS UE AND THE IMPORTANCE OF THE SAID DECISION OF THE TRIBUNAL, RELEVANT PARAGRAPHS ARE REPRODUCED AS UNDER: 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TH E DISALLOWANCE OF EXPENSES U/S 14A IN RELATION TO THE EXEMPT DIVIDEND INCOME RECEIVED FROM SHARES HELD ON TRADING ACCOUNT . THE AO DISALLOWED THE EXPENSES HOLDING THAT THE PROVISIONS OF SECTION 14A WERE APP LICABLE EVEN IN RELATION TO THE DIVIDEND RECEIVED FROM THE TRADING SHARES. THE LD CIT (A) HAS HOWEVER HELD THAT THE PROVISIONS OF SECTION 14A WILL NOT APPLY TO THE SHARES HELD ON TRADING ACCOUNT. THE REVENUE HAS PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. AMERICAN EXPRESS BANK LIMITED (SUPRA) IN WHICH THE TRIBUNAL HAS HELD THAT THE EXPENDITURE U/S 14A HAS TO BE DISALLO WED EVEN IN RESPECT OF DIVIDEND INCOME RECEIVED FROM TRADING SHARES. THE TRIBUNAL FOLLOWED THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CA SE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD RELIED ON THE JUDGMENT OF HONBLE HIGH COURT OF KER ALA IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE THAT THE DISALLOWANCE COULD NOT BE MADE IN RELATION TO THE D IVIDEND RECEIVED FROM TRADING SHARES. THE TRIBUNAL HAD HOWEVER, DISTINGUISHED THE SAID JUDGMENT OF HONBLE HIGH COURT OF KERALA ON THE GROUND THAT IN THAT CASE THE ACQUISITION OF SHARES WITH THE BORROWED FU NDS WAS FOR THE PURPOSE OF CONTROLLING THE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING THE SHARES WAS BUSINESS, THE HIGH COU RT HAD UPHELD THE DISALLOWANCE U/S 14A OF THE IT ACT. THE TRIBUNAL AL SO NOTED THAT THE HIGH COURT IN THAT CASE HAD ONLY OBSERVED THAT THE INTER EST PAID ON BORROWED 4 FUNDS UTILIZED FOR ACQUIRING SHARES COULD BE ALLOWE D AS DEDUCTION U/S 36(1)(III) ONLY IF SHARES WERE HELD AS STOCK-IN-TRADE . THESE OBSERVATIONS WERE ONLY OBITER DICTA AND NOT THE RAT IO DECIDENDI OF THE JUDGMENT. THE RATIO DECIDENDI OF THE JUDGMENT WAS DISALLOWANCE OF INTEREST U/S 14A WHICH HAD BEEN UPHELD BY THE TRIBU NAL. THE TRIBUNAL, THEREFORE, DID NOT ACCEPT THE ARGUMENTS BASED ON TH E JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CASE OF SMT. LE ENA RAMACHANDRAN (SUPRA) WHICH WAS NOT DIRECTLY ON THE ISSUE OF DISA LLOWANCE OF EXPENSES IN RELATION TO THE DIVIDEND INCOME RECEIVED FROM TRADI NG IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAV E RECENTLY CONSIDERED THE DISALLOWANCE OF EXPENSES INCURRED ON BORROWINGS MADE FOR PURCHASE OF TRADING SHARES U/S 14A OF THE IT ACT IN THE CASE OF CCL LTD. VS. JCIT (SUPRA). THE ASSESSEE IN THAT CASE WAS DI STRIBUTOR OF STATE LOTTERIES AND DEALER IN SHARES AND SECURITIES. THE ASSESSEE HAD TAKEN LOANS FOR THE PURCHASE OF CERTAIN SHARES AND IT HAD INCURRED EXPENDITURE FOR BROKING THE LOANS WHICH HAD BEEN DISALLOWED UND ER RULE 8D BY THE AO AND CONFIRMED BY THE LD CIT (A). THE TRIBUNAL AGREED WITH THE AUTHORITIES BELOW THAT THE EXPENDITURE RELATION TO EARNING OF DIVIDEND INCOME THOUGH INCIDENTAL TO THE TRADING IN SHARES WAS ALSO TO BE DISALLOWED U/S 14A OF THE IT ACT . THE TRIBUNAL HOWEVER, HAD OBSERVED THAT THE ENTIRE BROKING COMMISSIONS WA S RELATABLE TO EARNING OF DIVIDEND INCOME AS THE LOAN HAD BEEN UTI LIZED FOR THE PURCHASE OF SHARES AND THE PROFIT SHOWN FROM THE SALE OF SHA RES HAD BEEN OFFERED AS BUSINESS INCOME. THE TRIBUNAL, THEREFORE DIRECT ED THE AO TO BIFURCATE THE EXPENDITURE PROPORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY THE HIGH COURT. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE PURCHASED WERE SOLD AND IN COME DERIVED WAS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 3 0% OF SHARES WHICH REMAINED UNSOLD HAD REVERTED TO DIVIDEND INCOME FOR WHICH THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT ALL. THE HIGH COURT ALSO OBSERVED THAT THE ASSESSEE HAD NOT RETAINED THE SHARES WITH THE INTEN TION OF EARNING DIVIDEND INCOME WHICH WAS INCIDENTAL DUE TO HIS SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSEE. THE HIGH COURT, THEREFORE, DID NOT UPHOLD THE ORDER OF THE TRIBUNAL DISALLOWING THE EXPENDITURE IN RELATION TO THE DIVIDEND FROM SH ARES. THUS, THERE BEING A DIRECT JUDGMENT OF A HONBLE HIGH COU RT ON THIS ISSUE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISI ON OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DAGA CAPI TAL MANAGEMENT PVT. LTD. (SUPRA). IN FACT, WE NOTE THAT THE TRIBUNAL IN THE CASE OF GANJAM TREADING CO. LTD. (SURPA) HAS ALREADY CONSIDERED TH IS SITUATION AND HELD THAT IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (SUPRA) THE DISALLOWANCE OF INTEREST IN RELATION TO THE DIVIDEND RECEIVED FROM TRADING SHAR ES CANNOT BE MADE. WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF T HE LD CIT (A) IN DELETING THE DISALLOWANCE U/S 14A COMPUTED BY THE A O IN RELATION TO THE STOCK-IN-TRADE. THE ORDER OF THE LD CIT (A) IS ACC ORDINGLY UPHELD. 6. THUS, WHEN THE DIVIDEND IS EARNED OUT OF THE SHA RES HELD AS STOCK IN TRADE, THERE IS APPLICABILITY OF THE PROVISIONS OF SECTION 14A OF THE ACT. IN THIS REGARD, THE HONBLE HIGH COURT OBSERVED THAT THE ASSESSEE HAS NO T RETAINED THE SHARES WITH THE INTENTION OF EARNING THE DIVIDEND INCOME , WHICH IS INCIDENTAL INCOME OUT OF THE 5 SHARES REMAINED UNSOLD WITH THE ASSESSEE CONSIDERIN G THE ABOVE SETTLED NATURE OF THE ISSUE, WE ARE OF THE OPINION THAT THE GROUND NO .1 TO 3 RAISED BY THE ASSESSEE SHOULD BE ALLOWED IN FAVOUR OF THE ASSESSEE. ACCOR DINGLY, THE SAME ARE ALLOWED . 7. THE SECOND ISSUE RAISED BY THE LD COUNSEL RELATE S TO GROUND NO.4 AND 5, WHERE THE ASSESSEE QUESTION THE DISALLOWANCE OF RS. 13,765/- OUT OF THE TOTAL CLAIM OF RS. 68,824/- CLAIMED BY THE ASSESSEE ON ACCOUNT OF ELECTRICITY EXPENSES. AT THE OUTSET, LD COUNSEL MENTIONED THAT PRIMARILY, THE GROUND NOS. 4 & 5 ARE NOT ADJUDICATED BY THE CIT (A) DURING THE FIRST APPELLATE PROCEEDINGS. ON THIS I SSUE, WE HAVE PERUSED THE IMPUGNED ORDER OF THE CIT (A) A ND FOUND THAT THE CLAIM OF THE ASSESSEE IS CORRECT. ACCORDINGLY, WE SET ASIDE THE SE GROUNDS (4 & 5) TO THE FILES OF THE CIT (A) FOR ADJUDICATION OF THE SAME AFRESH AFT ER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORD INGLY, GROUND NO.4 AND 5 ARE ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. I.T.A. NO. 7325/M/2011 (AY: 2008-2009) 9. THIS APPEAL FILED BY THE ASSESSEE ON 1.11.2011 I S AGAINST THE ORDER OF CIT (A)- 24, MUMBAI DATED 8.8.2011 FOR THE ASSESSMENT YEAR 2 008-09. 10. AT THE OUTSET, LD COUNSEL BROUGHT TO OUR NOTICE THAT THE GROUND NO.1 TO 3 RAISED BY THE ASSESSEE IN THIS APPEAL AGAIN RELATES TO THE ISSUE OF APPLICABILITY OF PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 19 61 TO THE EXEMPT INCOME (DIVIDEND) EARNED OUT OF SHARES HELD AS STOCK-IN-TRADE . THIS ISSUE BEING IDENTICAL TO THE ONE RAISED IN GROUND NO.1 TO 3 OF THE ASSESS EES APPEAL VIDE ITA NO.8802/M/2010 (AY: 2007-2008), WE ARE OF THE OPINI ON THAT THE ADJUDICATION WE HAVE GIVEN IN CONNECTION WITH THE SAME ISSUE IS REL EVANT. FURTHER, AO IS DIRECTED TO GRANT RELIEF IN THIS REGARD ALSO. ACCORDINGLY, GRO UND NO.1 TO 3 RAISED BY THE ASSESSEE ARE ALLOWED. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. 6 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF MARCH, 2013. SD/- SD/- (R.K. GUPTA) (D. KARUNAKAR A RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 8.3.2013 AT :MUMBAI OKK COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR C, BENCH, ITAT, MUMBAI. 6. GUARD FILE. // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI