ACIT 21(2), MUMBAI V. VIVEK MEHROTRA, MUMBAI

ITA 915/MUM/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3326 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 14-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 04-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Earning of tax free income; Question of law
• Section: 143(3); 14A

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.915 /MUM/2013 ( / ASSESSMENT YEAR : 2009-10) ACIT 21(2), R. NO. 508. C-10, 5 TH FLOOR, BKC, BANDRA (E), MUMBAI 400 051. / V. SHRI VIVEK MEHROTRA, 225, BRIJ BHUSHAN, SION (EAST), MUMBAI- 400 022. ./ PAN : AAHPM 4127 B ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY : SHRI SATYA PAL KUMAR (D.R.) ASSESSEE BY : NONE / DATE OF HEARING : 14-01-2016 / DATE OF PRONOUNCEMENT : 16-03-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE REVENUE, BEING ITA NO. 91 5/MUM/2013, IS DIRECTED AGAINST THE ORDER DATED 05-11-2011 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 32, MUMBAI (H EREINAFTER CALLED THE CIT(A)), THE APPELLATE PROCEEDINGS BEFORE THE CIT( A) AROSE FROM THE ASSESSMENT ORDER DATED 28.12.2011 PASSED BY THE LEA RNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE IN COME TAX ACT,1961(HEREINAFTER CALLED THE ACT), FOR THE AS SESSMENT YEAR 2009-10. 2. AT THE TIME OF HEARING BEFORE US, NONE APPEARED ON BEHALF OF THE ASSESSEE THEREFORE, WE PROCEED TO DISPOSE OF THE A PPEAL AFTER HEARING THE LD. D.R. ITA 915/MUM/2013 2 3. THE GROUNDS RAISED BY THE REVENUE IN THE MEMO OF APPEAL FILED WITH THE TRIBUNAL READ AS UNDER:- 1. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER U/S.14A. 2. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING PARA.23.9 OF THE HONBLE ITAT'S ORDER IN THE CASE OF DAGA CAPITAL MANAGEMENT P LTD (I TA NO.8057/MUM/2003) WHEREIN IT IS HELD THAT A PERSON MAY MAKE INVESTMENT IN SHARES AND THE SHARES SO PURCHASED MAY BE HELD AS 'STOCK IN TRADE OR 'INVESTMENT'. THE WORD 'INVESTMEN T' IN THIS RULE REFERS TO THE MAKING OF PURCHASE OF SHARES NOT HOLDING IT AS INVESTMENT. 3. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF M/S. GODREJ & BOYCE MFG CO. LT D, MUMBAI VS. DCIT (ITA 626/10 & WP 758/10) VIDE ORDER DATED 12.8 .2010 WHEREBY THE HON'BLE COURT HAS UPHELD THE VALIDITY OF SECTION 14A OF THE INCOME TAX ACT, 1961 AND THAT THE HON'BLE HIGH COURT HAS ALS O HELD THAT THE PROVISIONS OF RULE 8D ARE APPLICABLE FROM ASSESSMEN T YEAR 2008-09.' THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND MATTER MAY BE DECIDED ACCORDING TO LAW. TH E APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD NEW GROUND WHICH MAY BE NECESSARY. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF SHARE TRADING AND HAS RECEIVED C OMMISSION, RENTAL AND CONSULTANCY INCOME . THE ASSESSEE IS ALSO PARTNER I N M/S RASHI INVESTMENTS, A PARTNERSHIP FIRM AND HAS RECEIVED INCOME FROM SUC H FIRM (SHARE OF PROFIT) WHICH IS CLAIMED EXEMPT. THE ASSESSEE IS ALSO PROP RIETOR OF M/S KHATTRI AROMAS, SITUATED AT PANT NAGAR, BUSINESS OF WHICH I S NOT YET COMMENCED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143 (3) R.W.S. 143(2) OF THE ACT, THE A.O. ASKED THE ASSESSEE TO SHOW CAUSE AS T O WHY DISALLOWANCE U/S 14A OF THE ACT SHOULD NOT BE MADE FOR EXEMPTED INCO ME. THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS SUO-MOTU DISALLOWED AN AMOUNT OF RS ITA 915/MUM/2013 3 19,80,509/- IN THE RETURN OF INCOME FILED WITH THE REVENUE AND SINCE THE ASSESSEE HAS SUO-MOTU DISALLOWED AN EXPENSE, PROVIS IONS OF RULE 8D OF INCOME TAX RULES,1962 SHALL NOT BE APPLICABLE UNLES S THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WI TH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND COMES TO A CONCLUSION THA T THE DISALLOWANCE OFFERED BY THE ASSESSE IS INCORRECT IN ACCORDANCE WITH SECT ION 14A OF THE ACT. THE ASSESSEE SUBMITTED THAT HE MAINTAINS TWO SEPARATE B OOKS OF ACCOUNT, ONE IN RESPECT OF ITS BUSINESS ASSETS AND THE OTHER IN RES PECT OF HIS PERSONAL ASSETS. THE BUSINESS SET WAS SUBMITTED BEFORE THE AO. THE A SSESSEE SUBMITTED THAT THE BUSINESS TRANSACTIONS ARE SEPARATE FROM THE PER SONAL SET. HOWEVER, AS BOTH THE BOOKS OF ACCOUNTS RELATE TO THE SAME PERSO N, A CONSOLIDATED BALANCE SHEET HAD TO BE PREPARED SO AS TO FILL IN THE RETUR N OF INCOME WITH THE REVENUE FILED FOR THE RELEVANT YEAR REFLECTING BOTH BUSINESS ACTIVITIES AND PERSONAL TRANSACTIONS AS THE RETURN FORM (ITR-4) DO ES NOT HAVE SEPARATE DEMARCATION FOR SUCH CIRCUMSTANCES. THE ASSESSEE SU BMITTED THAT MOST OF THE INVESTMENTS WHICH ARE NON-TAXABLE ARE MADE THROUGH THE PERSONAL SET AND THUS MOST OF THE TAX-FREE INCOME IS IN THE PERSONAL SET. AS REGARDS DISALLOWANCE OF EXPENSES U/S. 14A OF THE ACT, IN RE LATION TO THE EXEMPT INCOME SHOWN IN PERSONAL SET IT IS SUBMITTED THAT N ONE OF THE EXPENDITURE HAS BEEN CLAIMED IN THE RETURN OF INCOME FILED WITH THE REVENUE AS BUSINESS EXPENDITURE EXCEPT THAT THE EXPENDITURE ON RATES AN D TAXES HAS BEEN CLAIMED AS A DEDUCTION FROM INCOME FROM HOUSE PROPERTY. THU S IN NUTSHELL, NO EXPENSE HAS BEEN CLAIMED IN RESPECT OF PERSONAL SET . THE ASSESSEE FURTHER SUBMITTED THAT INVESTMENTS HAVE BEEN MADE OUT OF SE LF ACCUMULATED SURPLUS AND CAPITAL ACCOUNT OF THE ASSESSEE, NO FUNDS HAVE BEEN BORROWED FOR MAKING SUCH INVESTMENTS AND, THEREFORE, NO INTEREST HAS BE EN PAID IN MAKING ANY INVESTMENTS IN PERSONAL ACCOUNT. THUS, THERE IS A DIRECT NEXUS BETWEEN THE OWN FUNDS AND PERSONAL INVESTMENTS. THUS, AS REGAR DS PERSONAL SET, NO QUESTION OF DISALLOWANCE OF INTEREST OR EXPENSES AR ISES AS NEITHER ANY INTEREST NOR ANY EXPENDITURE HAS BEEN CLAIMED IN THE PERSONA L SET. THE ASSESSEE ITA 915/MUM/2013 4 RELIED UPON THE DECISION OF MUMBAI-TRIBUNAL IN THE CASE OF SH PAWAN KUMAR PARMESHWARLAL IN ITA NO. 530/MUM/2009. WITH RESPECT TO THE SPECIFIC ISSUE OF DISALLOWANCE OF INTEREST EXPENDITURE , IT WAS SU BMITTED BY THE ASSESSEE THAT DURING THE YEAR INTEREST EXPENDITURE HAS BEEN INCUR RED FOR BUSINESS PURPOSES AND INVESTMENTS HAVE BEEN MADE OUT OF PROFITS EARNE D BY THE ASSESSEE IN PAST, THEREFORE, NO QUESTION OF DISALLOWANCE OF INT EREST ARISES. THE INTEREST CLAIMED AS EXPENDITURE IN BOOKS OF ACCOUNTS OF SHAR E BUSINESS DURING THE YEAR HAS BEEN PAID TO SHARE BROKERS FOR AMOUNT FUND ED FOR PURCHASE OF SHARES THE INCOME IN RESPECT OF WHICH IS CHARGEABLE TO TAX AND THE SHARES HAVE BEEN HELD AS STOCK IN TRADE , THUS PROVISIONS OF SECTION 14A OF THE ACT DO NOT APPLY AS THE SAME APPLY TO EXPENSES INCURRED FO R EARNING EXEMPTED INCOMES. THE ASSESSEE SUBMITTED THAT HE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF SHARES. THE EXPENSES INTER-ALI A INCLUDE DIRECT EXPENSES I.E. EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO SH ARE TRADING ACTIVITY SUCH AS DE-MAT CHARGES, STAMP CHARGES, AUCTION CHARGES, SER VICE TAX, TRANSACTION CHARGES ETC. WHICH ARE DIRECTLY ATTRIBUTABLE TO THE TRADING OF THE ASSESSEE AND HAVE NOTHING TO DO WITH THE GENERAL EXPENSES. WITH RESPECT TO THE INTEREST EXPENSE SO INCURRED AGAIN HAS A DIRECT NEXUS WITH T HE PURCHASE AND SALE OF SHARES AS THE INTEREST HAS BEEN PAID ON TEMPORARY F UNDING RECEIVED FOR THE PURCHASE OF TRADING SHARES. THE TEMPORARY FUNDING H AS BEEN RECEIVED ON A PARTICULAR DAY AND IMMEDIATELY UTILIZED FOR THE BUS INESS PURPOSES ON THE SAME DAY FROM THE SAME BANK ACCOUNT. THERE IS A DIR ECT NEXUS OF INTEREST BEARING FUNDS TO THE PURCHASE FOR TRADING AND THUS THIS ALSO FORMS PART OF DIRECT EXPENSES. FURTHER, INTEREST CLAIMED AS EXPEN DITURE IN BOOKS OF ACCOUNTS OF SHARE BUSINESS DURING THE YEAR HAS BEEN PAID TO SHARE BROKERS FOR AMOUNT FUNDED FOR PURCHASE OF SHARES, THE INCOME IN RESPECT OF WHICH IS CHARGEABLE TO TAX AND THAT NO LOANS FROM ANY BANKS HAS BEEN AVAILED BY THE ASSESSEE. THE ASSESSEE RELIED ON THE FOLLOWING JUDG MENTS:- ITA 915/MUM/2013 5 I) MUMBAI-TRIBUNAL ORDER IN THE CASE OF GODREJ INDU STRIES LTD V. DCIT (ITA NO. 1090/MUM/09). II) HON'BLE PUNJAB & HARYANA HIGH COURT JUDGMENT IN THE CASE OF CIT V. HERO CYCLES 323 ITR 158 (PH). III) RELIANCE UTILITIES & POWER LTD (ITA NO 1398 OF 2008) ORDER DATED 09.01.2009. IV) HON'BLE KERELA HIGH COURT IN THE CASE OF CIT V. SMT.LEENA RAMACHANDRAN 2010 TIOL 541 HC KERALA IT (ITANO.1784 OF 2009). V) YATISH TRADING CO. P LTD, VS ACIT 1(3), ITAT (MU MBAI) ORDER DATED 10.11.2010. VI) VIDYUT INVESTMENTS LTD 10-S0T -0284. THE A.O. AFTER CONSIDERING THE SUBMISSION OF THE AS SESSEE, REJECTED THE CLAIM OF ASSESSEE BY FOLLOWING THE DECISION OF HIS PREDEC ESSOR FOR THE ASSESSMENT YEAR 2008-09 WHEREBY DISALLOWANCE OF RS. 1,19,68,21 8/- U/S. 14A OF THE ACT WAS MADE FOR THE ASSESSMENT YEAR 2008-09 AND ON FUR THER APPEAL BEFORE THE CIT(A) BY THE ASSESSEE, THE CIT(A) RESTRICTED THE D ISALLOWANCE MADE BY THE AO U/S. 14A TO RS. 24,64,871/-. THE DECISION OF THE CI T(A) WAS NOT ACCEPTED BY THE REVENUE AND APPEAL TO THE MUMBAI-TRIBUNAL WAS F ILED, DECISION OF WHICH WAS PENDING TILL THE FINALIZATION OF THE ASSESSMENT ORDER FOR THE IMPUGNED ASSESSMENT YEAR BY THE AO. THEREFORE, FOLLOWING THE DECISION OF HIS PREDECESSOR FOR THE ASSESSMENT YEAR 2008-09, THE A. O. MADE DISALLOWANCE U/S 14A OF THE ACT AMOUNTING TO RS. 57,53,785/- BY APPLYING RULE 8D(2)(II) AND (III) OF THE INCOME TAX RULES, 1962 , VIDE ASSE SSMENT ORDERS DATED 28.12.2011 PASSED BY THE AO U/S 143(3) OF THE ACT. 5. AGGRIEVED BY THE ASSESSMENT ORDER DATED 28.12.2 011 PASSED BY THE A.O. U/S 143(3) OF THE ACT, THE ASSESSEE PREFERRED FIRST APPEAL BEFORE THE CIT (A). ITA 915/MUM/2013 6 6. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT T HE A.O. HAS JUST FOLLOWED THE DECISION OF HIS PREDECESSOR FOR THE AS SESSMENT YEAR 2008-09 WITHOUT CONSIDERING THE FACTS OF THE CASE AND SUBMI SSIONS MADE BY THE ASSESSEE. THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS SUO-MOTU DISALLOWED AN AMOUNT OF RS. 19,80,509/- U/S 14A OF THE ACT AT THE TIME OF FILING RETURN OF INCOME WITH REVENUE AND ONCE THE ASSESSEE HAS SUO-M OTU DISALLOWED AN EXPENSE, PROVISIONS OF RULE 8D OF INCOME TAX RULES, 1962 SHALL NOT BE APPLICABLE UNLESS THE A.O. IS NOT SATISFIED WITH TH E CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND COMES TO A CONCLUSION THAT THE DISALLOWANCE IS INCO RRECT. THE ASSESSEE SUBMITTED THAT THE A.O. WITHOUT RECORDING THE REASO NS OF HIS NON-SATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE, PROCEEDED TO APPLY RULE 8D OF INCOME T AX RULES, 1962 TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT, WHICH IS NOT CORRECT AS PER LAW. TO SUPPORT HIS CONTENTION, HE RELIED UPON THE DECIS ION OF MUMBAI-TRIBUNAL IN THE CASE OF AUCHTEL PRODUCTS LTD. IN ITA NO. 3183, 2649 & 3185/MUM/2011 AND ALSO DECISION OF TRIBUNAL-DELHI IN THE CASE OF DCIT V. JINDAL PHOTO LTD. IN ITA NO. 814(DEL) 2011. THE ASSESSEE SUBMITTED THAT HE MAINTAINS TWO SEPARATE BOOKS OF ACCOUNT, ONE IN RESPECT OF ITS BU SINESS ASSETS AND THE OTHER IN RESPECT OF HIS PERSONAL ASSETS. THE BUSINESS TR ANSACTIONS ARE SEPARATE FROM THE PERSONAL SET, THE DETAILS OF WHICH ARE AS UNDER:- PARTICULARS PERSONAL SET BUSINESS SET SEPARATE BANK ACCOUNTS YES YES SEPARATE BALANCE SHEETS YES YES NATURE OF TRANSACTIONS PERSONAL INVESTMENTS SHARE/SECURITIES TRADING SHARES HELD AS INVESTMENTS STOCK-IN-TRADE FUNDING OF ASSETS OWN SOURCES PROFITS + LOAN EXPENDITURE CLAIMED NO YES WHETHER DIVIDEND MAIN SOURCE OF INCOME YES NO, INCIDENTAL IN RESPECT OF SHARES HELD AS STOCK-IN- TRADE. ITA 915/MUM/2013 7 THE ASSESSEE SUBMITTED THAT SINCE BOTH THE BOOKS O F ACCOUNT RELATE TO THE SAME PERSON, A CONSOLIDATED BALANCE SHEET HAD TO BE PREPARED SO AS TO FILL IN THE RETURN OF INCOME WITH THE REVENUE FOR THE RELEV ANT YEAR REFLECTING BOTH BUSINESS ACTIVITIES AND PERSONAL TRANSACTIONS AS TH E RETURN FORM DOES NOT HAVE SEPARATE DEMARCATION FOR SUCH CIRCUMSTANCES. T HE ASSESSEE SUBMITTED THAT HE HAS OFFERED THE FOLLOWING EXEMPT INCOME IN THE RETURN OF INCOME FILED WITH THE REVENUE:- EXEMPT INCOME TOTAL PERSONAL SET BUSINESS SET DIVIDEND 65,80,590/- 50,85,430/- 14,95,160/- INTEREST ON RBI BONDS 2,05,59,563/- 2,05,59,563/- THUS, IT IS CLEAR FROM THE ABOVE THAT INVESTMENTS W HICH ARE NON-TAXABLE MADE THROUGH THE PERSONAL SET AND THUS MOST OF THE TAX F REE INCOME IS IN THE PERSONAL SET. THE ASSESSEE SUBMITTED THAT IT HAS D EBITED EXPENDITURE OF RS.4,45,510/- IN PERSONAL SET , WHICH THE ASSESSEE SUBMITTED WAS ADDED BACK WITH RESPECT TO PERSONAL SET WHILE PREPARING THE CO MPUTATION OF INCOME AND THESE INVESTMENTS HAVE BEEN MADE OUT OF SELF ACCUMU LATED SURPLUS AND CAPITAL ACCOUNT OF THE ASSESSEE AND NO FUNDS HAVE B EEN BORROWED FOR MAKING SUCH INVESTMENTS AND THEREFORE NO INTEREST HAS BEEN PAID IN MAKING ANY INVESTMENTS IN PERSONAL ACCOUNT AND THERE IS A DIRE CT NEXUS BETWEEN THE OWN FUNDS AND PERSONAL INVESTMENTS, THUS AS REGARDS PER SONAL SET NO QUESTION OF DISALLOWANCE OF INTEREST OR EXPENSES ARISE AS NEITH ER ANY INTEREST NOR ANY EXPENDITURE HAS BEEN CLAIMED IN THE PERSONAL SET. T HE ASSESSEE SUBMITTED THAT THE A.O. WITHOUT VERIFYING THE FACT THAT THE I NVESTMENT TRANSACTIONS ARE BEING MADE THROUGH SEPARATE BANK ACCOUNT MAINTAINED FOR BUSINESS AND PERSONAL PURPOSES DISALLOWED THE EXPENSES U/S.14A O F THE ACT BY APPLYING RULE 8D OF INCOME TAX RULES, 1962. THUS, THE DISALL OWANCE HAS BEEN MADE BY THE A.O. MERELY ON THE BASIS OF CONJECTURES AND SURMISES AND NOT ON THE BASIS OF ANY EVIDENCE. THE ASSESSEE RELIED UPON THE DECISION OF THE MUMBAI- ITA 915/MUM/2013 8 TRIBUNAL IN THE CASE OF SHRI PAWAN KUMAR PARMESHWAR LAL IN ITA NO. 530/MUM/2009, DECISION OF MUMBAI-TRIBUNAL IN THE CA SE OF GODREJ INDUSTRIES LTD. V. DCIT IN ITA NO. 1090/MUM/09, DEC ISION OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V. HERO C YCLES 323 ITR 158(P&H) AND DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF RELIANCE UTILITIES AND POWER LIMITED IN ITA NO. 1398 OF 2008, ORDER DA TED 09-01-2009. IT WAS SUBMITTED THAT AO WITHOUT CONSIDERING THE FACTS OF THE CASE HAS APPLIED THE PROVISIONS OF RULE 8D OF INCOME TAX RULES, 1962 TO COMPUTE DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE REITERATED THE SUBMIS SION WHICH WERE MADE BEFORE THE A.O. WHICH ARE NOT REPEATED FOR SAKE OF BREVITY AND SUBMITTED THAT IN THE BUSINESS SET OF THE ASSESSEE, THE TOTAL DIVI DEND EARNED IS ONLY RS. 14,95,160/-, THEREFORE, BY NO STRETCH OF IMAGINATIO N, IT CAN BE CONTENDED THAT THE ASSESSEE INCURRED AN INTEREST OF RS. 1,78,05,98 1/- TO EARN AN EXEMPT INCOME OF ONLY RS. 14,95,160/-. THE ASSESSEE SUBMI TTED THAT THE ASSESSEE IS IN THE BUSINESS OF SHARE TRADING AND THE INTENTION OF TAKING LOAN IS TO DO SHARE TRADING AND NOT TO EARN DIVIDEND AND THIS DIV IDEND INCOME EARNED IS ONLY INCIDENTAL TO THE TRADING ACTIVITY OF SHARES C ARRIED ON BY THE ASSESSEE. THE ASSESSEE HAS EARNED DIVIDEND IN THIS SET ONLY O N ACCOUNT OF SHARES WHICH WERE PURCHASED AND SOLD AND WERE HELD AS STOCK-IN-T RADE AT THE BEGINNING AND CLOSE OF THE PREVIOUS YEAR, INCOME FROM WHICH H AS ALREADY BEEN SHOWN AS PART OF TOTAL TAXABLE INCOME. THE ASSESSEE RELIED ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. V. JCI T [206 TAXMAN 563], DECISION IN THE CASE OF VIDYUT INVESTMENTS LIMITED 10-SOT-0284 , DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. SMT . LEENA RAMACHANDRAN, 2010 TIOL 541 HC KERALA (ITA NO. 1784 OF 2009) AND ALSO DECISION OF MUMBAI-TRIBUNAL IN THE CASE OF YATISH TRADING CO. P VT. LIMITED V. ACIT VIDE ORDERS DATED 10.11.2010. THE ASSESSEE SUBMITTED THA T THE CIT(A) IN HIS ORDER DATED 22 ND JULY, 2011 FOR ASSESSMENT YEAR 2008-09 HAS NOT ACC EPTED THE CONTENTION OF THE ASSESSEE THAT DISALLOWANCE OF INT EREST IN RELATION TO DIVIDEND RECEIVED FROM TRADING SHARES CANNOT BE MADE , IN VI EW OF THE DECISION OF ITA 915/MUM/2013 9 SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA C APITAL MANAGEMENT (P) LTD. IN THIS CONNECTION, THE ASSESSEE RELIED ON THE RECE NT DECISION OF TRIBUNAL IN THE CASE OF GANJAM TRADING CO. V. DIT, DATED 20-07- 2012 WHEREIN THE JUDGMENT OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CCI LTD. (SUPRA) WAS RELIED UPON WHICH DIRECTLY COVERS THE ISSUE. THUS , IT WAS CONTENDED THAT NO DISALLOWANCE CAN BE MADE U/S RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962. AS REGARDS THE ISSUE OF DISALLOWANCE OF EXPENDITURE BY APPLYING RULE 8D(2)(III) OF INCOME TAX RULES, 1962 @ 0.5% OF EXPENSES IS CON CERNED, IT WAS SUBMITTED THAT THE A.O. HAS TREATED THE SHARES AS STOCK-IN-TR ADE AND HAS COMPUTED THE DISALLOWANCE OF 0.5%. THE ASSESSEE SUBMITTED THAT THERE IS NO INVESTMENTS UNDER THE BUSINESS SET WHICH GENERATE AN INCOME WHI CH DOES NOT FORM PART OF TOTAL INCOME. THE ASSESSEE SUBMITTED THAT THE ASSE SSEE IS CARRYING ON TRADING IN SHARES AND IF THERE WERE NO INVESTMENTS, RULE 8D OF INCOME TAX RULES, 1962 AUTOMATICALLY BECOMES INOPERATIVE AS THE SAME IS BASED ON CALCULATION OF INVESTMENTS AND RULE 8D OF INCOME TAX RULES, 196 2 SPECIFICALLY TALKS OF CALCULATION BASED ON INVESTMENTS. THE ASSESSEE REL IED UPON THE DECISION OF DELHI BENCH OF ITAT IN THE CASE OF M/S GILLETTEE GR OUP INDIA V. ACIT. 7. THE CIT(A) AFTER CONSIDERING THE ARGUMENTS OF T HE ASSESSEE HELD THAT IT IS A PRE-REQUISITE THAT BEFORE INVOKING RULE 8D OF INCOME TAX RULES, 1962, THE A.O. MUST RECORD HIS SATISFACTION TO SHOW THAT EXPE NDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING TAX-FREE INCOME OR HOW THE ASSESSEES CLAIM OF APPORTIONMENT IS INCORRECT. THE. CIT (A) HELD THAT THE A.O. CANNOT APPLY RULE 8D OF INCOME TAX RULES, 1962 WITHOUT POINTING OUT A NY INACCURACY IN THE METHOD OF APPORTIONMENT OR ALLOCATION OF EXPENSES A DOPTED BY THE ASSESSEE. THE CIT(A) OBSERVED THAT THE ASSESSEE IN THE INSTAN T CASE MAINTAINS SEPARATE BOOKS OF ACCOUNT, SEPARATE BANK ACCOUNTS FOR HIS SH ARE TRADING ACTIVITY AND THE PERSONAL INVESTMENTS. IN BUSINESS BALANCE SHEE T THE SHARES ARE HELD AS STOCK-IN-TRADE. IN BUSINESS ACTIVITY, THE DIVIDEND INCOME HAS BEEN EARNED ON THE SHARES HELD AS STOCK-IN-TRADE AND THERE WERE NO OTHER INVESTMENTS IN ITA 915/MUM/2013 10 BUSINESS BALANCE SHEET WHICH YIELD EXEMPT INCOME. THE INTEREST HAS BEEN PAID BY THE ASSESSEE TO BROKERS THROUGH WHOM THE AS SESSEE HAS PURCHASED/SOLD THE SHARES FOR TRADING AND INTEREST HAS BEEN PAID TO BROKERS ON THE OUTSTANDING BALANCES FROM TIME TO TIME ON AC COUNT OF SHARES HELD AS STOCK-IN-TRADE ONLY. IN THE PERSONAL BALANCE SHEET , THE ASSESSEE IS HAVING TAXABLE INCOME EARNING INVESTMENTS AS WELL AS TAX F REE EARNING INVESTMENTS. IN THE PERSONAL BOOKS, THE EXPENDITURE CLAIMED BY T HE ASSESSEE IS ONLY SOME DE-MAT CHARGES AND BANK COMMISSION, RATES AND TAXES ETC. AND THERE WERE NO BORROWED FUNDS APPEARING IN THE PERSONAL BALANCE SH EET WHICH WAS DISALLOWED BY THE ASSESSEE IN COMPUTATION OF INCOME WHILE FILING RETURN OF INCOME WITH THE REVENUE. THE CIT(A) HELD THAT THE HONBLE KARNATKA HIGH COURT IN THE CASE OF CCI LTD. (SUPRA) AND HONBLE K ERALA HIGH COURT IN THE CASE OF LEENA RAMCHANDRAN (SUPRA) HELD THAT DISALLO WANCE U/S 14A IN RESPECT OF DIVIDEND RECEIVED ON SHARES HELD AS STOC K-IN-TRADE CANNOT BE MADE AND THESE DECISIONS HAVE OVER-RULED THE SPECIAL BEN CH OF THE MUMBAI- TRIBUNAL DECISION IN THE CASE OF DAGA CAPITAL MANAG EMENT (P) LTD(SUPRA). THE CIT(A) HELD THAT RECENTLY THE MUMBAI TRIBUNAL IN TH E CASE OF INDIA ADVANTAGE SECURITIES LTD. (ITA NO. 6711/MUM/2011), GANJAM TRA DING CO. P. LTD. (ITA NO. 3724/MUM/2005) AND IN THE CASE OF ESQUARE PVT. LTD. (ITA NO. 5688/MUM/2011) HAS HELD THAT SECTION 14A OF THE ACT IS NOT APPLICABLE IN RESPECT OF DIVIDEND RECEIVED FROM SHARES HELD AS ST OCK-IN-TRADE. THUS, NO DISALLOWANCE OF INTEREST U/S 14A READ RULE 8D(2)(II ) CAN BE MADE IN THE ASSESSMENT YEAR 2009-10 DUE TO THE REASONS ELABORAT ED BY THE CIT(A) HEREINABOVE. THE ASSESSEE SUBMITTED THAT HE MAINTA INS SEPARATE BOOKS FOR PERSONAL INVESTMENTS AND TRADING STOCK OF SHARES AN D NO ADMINISTRATIVE EXPENSES WERE REQUIRED TO BE INCURRED FOR SUCH PERS ONAL INVESTMENTS AND ONCE IT IS HELD THAT SECTION 14A OF THE ACT CANNOT BE INVOKED FOR EARNING THE DIVIDEND ON SHARES HELD AS STOCK-IN-TRADE AS THE DI VIDEND WAS ONLY INCIDENTAL TO THE TRADING ACTIVITY , IT FOLLOWS THAT NO DISALL OWANCE OUT OF ADMINISTRATIVE EXPENSES CAN BE MADE OUT OF BUSINESS SET OF . THE T AX FREE INVESTMENTS IN ITA 915/MUM/2013 11 PERSONAL BALANCE SHEET SUCH AS RBI RELIED BONDS ARE ONE TIME INVESTMENT MADE IN EARLIER YEARS ONLY AND HENCE DO NOT REQUIRE ANY ADMINISTRATIVE EXPENSES. THE ASSESSEE HAS HIMSELF MADE A DISALLOW ANCE OF RS. 19,80,509/- U/S 14A OF THE ACT. THE A.O. HAS NOT RECORDED HIS SATISFACTION AS TO THE INCORRECT CLAIM MADE BY THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE WHICH IS SINE QUA-NON FOR INVOKING THE APP LICABILITY OF RULE 8D OF INCOME TAX RULES, 1962. THE A.O. HAS NOT AT ALL ST ATED AS TO HOW THE SAID DISALLOWANCE MADE BY THE ASSESSEE WAS INCORRECT, HE NCE, RULE 8D(2)(III) OF INCOME TAX RULES, 1962 CANNOT BE INVOKED IGNORING T HE DISALLOWANCE U/S 14A OF THE ACT MADE BY THE ASSESSEE. ACCORDINGLY, THE CIT(A) RESTRICTED THE DISALLOWANCE U/S 14A OF THE ACT TO RS. 19,80,509/- , VIDE ORDERS DATED 05-11- 2011. 8.AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 9. THE LD. D.R. FAIRLY CONCEDED THAT SIMILAR ISSUE AROSE IN THE ASSESSMENT YEAR 2008-09 IN ITA NO. 6332/MUM/2011 IN ASSESSEES OWN CASE WHEREBY THE TRIBUNAL HAS ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER:- 5.WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THESE APPEALS IS R EGARDING DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN RELATION TO EXEMPT INCOME. THE ASSESSEE HAS RECEIVED EXEMPT INCOME IN THE FORM OF DIVIDEND FROM PERSONAL INVESTMENT AS WELL AS DIVIDEND INCOME FROM TRADING IN SHARES. IT ALSO RECEIVED TAX FREE INTEREST FROM RELIEF BONDS. THE ASSESSEE HAS CLAIMED THAT IT HAD MADE SEPARATE ACCOUNTS INCLUDIN G SEPARATE BANK ACCOUNTS AND BALANCE SHEETS FOR PERSONAL INVESTMENT S AND TRADING ACTIVITIES IN WHICH EXPENSES RELATING TO THESE TWO ACTIVITIES HAVE BEEN SHOWN SEPARATELY. CIT(A) HAS GIVEN A CLEAR FINDING THAT THE ASSESSEE HAD MADE SEPARATE ACCOUNTS AND BALANCE SHEETS FOR THE T WO ACTIVITIES. NOTHING HAS BEEN PRODUCED BEFORE US TO CONTROVERT T HE FINDING OF THE CIT(A). THEREFORE, THE CLAIM OF THE ASSESSEE THAT S EPARATE ACCOUNTS INCLUDING BANK ACCOUNTS AND BALANCE SHEETS HAD BEEN MAINTAINED FOR THE TWO ACTIVITIES HAS TO BE ACCEPTED. WITH REGARD TO P ERSONAL INVESTMENT FOR WHICH SEPARATE ACCOUNT HAS BEEN MAINTAINED CIT(A) H AS GIVEN A CLEAR ITA 915/MUM/2013 12 FINDING THAT INVESTMENTS HAD BEEN MADE FROM OWN FUN DS. THE INVESTMENTS IN RBI RELIEF BONDS AND LIC HAD BEEN MA DE IN EARLIER YEARS AND SINCE THE ASSESSEE HAVING VAST EXPERIENCE IN TH ESE MATTERS WAS PERSONALLY HANDLING THESE INVESTMENTS, THERE WERE N O EXPENSES REQUIRED. SIMILARLY THE SHARES WHICH WERE OF UNLISTED GROUP C OMPANIES HELD FOR THE PURPOSE OF RETAINING CONTROL OVER THESE COMPANIES, DID NOT REQUIRE ANY DAY TO DAY EXPENSES. CIT(A), THEREFORE, HAS GIVEN A CLEAR FINDING THAT NO EXPENSES HAD BEEN INCURRED IN RELATION TO PERSONAL INVESTMENTS AND THESE FACTUAL FINDINGS HAVE NOT BEEN CONTROVERTED B EFORE US BY PRODUCING ANY MATERIAL. THEREFORE, ORDER OF CIT(A) IN RELATIO N TO DELETING DISALLOWANCE OF EXPENSES IN RELATION TO PERSONAL IN VESTMENT IS REASONABLE AND UPHELD. 5.1 CIT(A) HAS HOWEVER DISALLOWED EXPENSES RELATING TO TRADING ACTIVITY AS PER RULE 8D. NO DOUBT, IT IS TRUE THAT RULE 8D W AS APPLICABLE FOR THE RELEVANT ASSESSMENT YEAR. HOWEVER, THE ISSUE IS WHE THER THE DISALLOWANCE OF ANY EXPENSES CAN BE MADE UNDER SECT ION 14A IN RELATION TO TRADING IN SHARES. THE DEPARTMENT HAS PLACED REL IANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA), IN WHICH IT HAS BEEN HELD THAT SECTION 14A WOULD APPLY EVEN TO THE DIVIDEND INCOME FOR TRADING IN SHARES. HOWEVER, SUBSEQUENTLY 'THE HON'BLE HIGH COURT OF KARNATAKA I N THE CASE OF CCI LTD. VS. JCIT (SUPRA), HAVE, IN RELATION TO TRADING SHARES HELD THAT THE ASSESSEE HAD NOT RETAINED SHARES WITH THE INTENTION OF EARNING DIVIDEND INCOME WHICH WAS ONLY INCIDENTAL TO THE SHARES REMA INED UNSOLD BY THE ASSESSEE. THE HIGH COURT, THEREFORE, HELD THAT NO D ISALLOWANCE OF EXPENSES WAS REQUIRED IN RELATION TO DIVIDEND FROM TRADING SHARES. RECENTLY, MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. M/S. INDIA ADVANTAGE SECURITIES (SUPRA), HAVE HELD THAT IN VIEW OF THE JUDGMENT OF HON'BLE HIGH COURT OF KARNATAKA IN CASE OF CCI LTD. VS. JCIT (SUPRA), THE DECISION OF THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. COULD NOT BE FOLL OWED AND NO DISALLOWANCE COULD BE MADE OF EXPENSES IN RELATION TO DIVIDEND RECEIVED FROM TRADING SHARES. IN VIEW OF THIS POSITION THE O RDER OF CIT(A) IN RELATION TO DISALLOWANCE IN RESPECT OF TRADING SHARES CAN NO T BE UPHELD. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND DELETE D THE DISALLOWANCE UPHELD BY HIM IN RELATION TO TRADING IN SHARES. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AND THAT BY THE REVENUE IS DISMISSED. THE LD. D.R. SUBMITTED THAT ALTHOUGH THE MUMBAI-TRI BUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2008- 09 IN ITA NO. 6332/MUM/2011 , BUT THE REVENUE HAS NOT ACCEPTED TH E DECISION OF THE ITA 915/MUM/2013 13 MUMBAI-TRIBUNAL AND THE REVENUE IS IN APPEAL BEFORE THE HONBLE JURISDICTIONAL HIGH COURT OF BOMBAY. 10. WE HAVE HEARD THE LD. D.R. WE HAVE OBSERVED TH AT THE MUMBAI TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO. 6332/MUM/2011 VIDE ORDERS DATED 11-01-2013 SET ASID E THE ORDER OF CIT(A) AND DELETED THE DISALLOWANCE UPHELD BY THE CIT(A) I N RELATION TO TRADING IN SHARE. WE HAVE ALSO NOTED THAT IN THE RECENT JUDGM ENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF HDFC BANK LTD. V. DCIT VID E WRIT PETITION NO. 1753 OF 2016 DATED FEBRUARY, 25, 2016 [2016] 67 TAXMANN. COM 42 (BOMBAY) HAS APPROVED THE PROPOSITION THAT NO DISALLOWANCE OF EX PENDITURE CAN BE MADE U/S 14A OF THE ACT WITH RESPECT TO THE SHARES HELD BY TAX PAYERS AS STOCK-IN- TRADE WHEREBY THE DECISION OF THE MUMBAI TRIBUNAL I N INDIA ADVANTAGE SECURITIES LIMITED (2013) TAXPUB(DT)2301(MUM-TRIB.) WAS CONFIRMED BY HONBLE BOMBAY HIGH COURT IN ITA NO. 1131/31 DECIDE D ON 31-04-2014 ((2016) 380 ITR 0471 (BOM.) ) WHEREBY HONBLE BOMBA Y HIGH COURT HELD THAT NO SUBSTANTIAL QUESTION OF LAW ARISE FROM THE DECIS ION OF MUMBAI TRIBUNAL IN THE CASE OF INDIA ADVANTAGE SECURITIES PRIVATE LIMI TED. RESPECTFULLY FOLLOWING THE ABOVE BINDING JUDICIAL PRECEDENTS OF HONBLE B OMBAY HIGH COURT IN INDIA ADVANTAGE SECURITIES PRIVATE LIMITED AND HDFC BANK LIMITED(SUPRA) AND DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CCI LIMITED(SUPRA) , WE DISMISS THE APPEAL FILED BY THE REVENUE. WE ORDE R ACCORDINGLY. ITA 915/MUM/2013 14 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IN ITA N0. 915/MUM/2013 FOR THE ASSESSMENT YEAR 2009-10 IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH MARCH, 2016. # $% &' 16-03-2016 ( ) SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 16-03-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI F BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI