SHETH MERCNTILE CORPORATIOHN, MUMBAI V. ASST CIT 13(3), MUMBAI

ITA 949/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75425 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 10-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHOK SURI
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI . . , , , BEFORE SHRI B.R. B ASKARAN , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER . / ITA NO. 949 / MUM./ 2012 ( / ASSESSMENT YEAR : 20 0 8 09 ) M/S. SHETH MERCANTILE CORPORATION 11/15, ISSAJI STREET, GROUND FLOOR MANDVI, MASJID (W), MUMBAI 400 003 .. / APPELLANT V/S ASSTT. COMMISSI ONER OF INCOME TAX CIRCLE 13(3), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER / ASSESSEE BY : MR. VIPUL B. JOSHI A/W MR. N ISHIT GANDHI / REVENUE BY : MR. ASHOK SURI / DATE OF HEARING 10 . 0 2 .201 4 / DATE OF ORDER 14.02.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APP EAL HAS BEEN PREFERRED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER DATED 2 ND FEBRUARY 2011 , PASSED BY THE COMMISSIONER (APPEALS) XX IV , MUMBAI, FOR THE QUANTUM OF M/S. SHETH MERCANTILE CORPORATION 2 ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) F OR THE ASSESSMENT YEAR 20 08 09. THE SOLE GROUND RAISED BY THE ASSESSEE IS, DISALLOWANCE OF ` 7,66,741 , UNDER SECTION 14A OF THE ACT. 2 . FACTS IN BRIEF : THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING OF SPICES AND GENERAL MERCHANT AND PURCHASE AND SALE O F SHARES. THE ASSESSEE HAD EARNED DIVIDEND INCOME ON SUCH STOCK OF SHARES HELD AS STOCK IN TRADE, AMOUNTING TO ` 4,25,044 , WHICH HAS BEEN CLAIMED AS EXEMPT IN THE COMPUTATION OF INCOME. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS NOT ATTRIBUTED ANY E XPENSES FOR EARNING OF THIS EXEMPT INCOME. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY PROVISIONS OF RULE 8D SHOULD NOT BE APPLIED FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A, T HE ASSESSEE SUBMITTED THAT IT DEALT IN TRADING OF SHARES AND HAS BEEN PURCHASING AND SELLING SHARES WITH A VIEW TO EARN BUSINESS INCOME. FROM THE SHARE TRADING, THE ASSESSEE HAD SHOWN PROFIT OF ` 27,77,639 AND THE ACCRUAL OF DIVIDEND INCOME IS ONLY INCIDENTAL IN THE COURSE OF BUSINESS. THE SHARES ARE BEING HELD AS CIRCULATIN G CAPITAL FOR THE BUSINESS AND, THEREFORE, ANY EXPENDITURE INCLUDING INTEREST HA S TO BE ALLOWED. RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN VALFORT SHARES AND STOCK BROKERS PVT. LTD., [2008] 219 CTR (BOM.) 409. THE ASSE SSING OFFICER REJECTED THE ASSESSEES CONTENTION ON THE GROUND THAT WHETHER THE ASSESSEE IS EARNING DIVIDEND INCOME AS ITS MAIN ACTIVITY OR SUBSIDIARY ACTIVITY , THE PROVISIONS OF SECTION 14A HAS TO BE INVOKED AS THE EXPENDITURE ALSO ATTRIBUTES TO THE EARNI NG OF EXEMPT INCOME. ACCORDINGLY, HE CALCULATED THE DISALLOWANCE AFTER APPLYING THE PROVISIONS OF RULE 8D AT ` 7,66,741 AS PER THE WORKING GIVEN AT PAGE 3 AND 4 OF THE ASSESSMENT YEAR. M/S. SHETH MERCANTILE CORPORATION 3 3 . THIS DISALLOWANCE HAS ALSO BEEN CONFIRMED BY THE LEARNED COMMISSIONER (APPEALS) AFTER FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 (BOM.) . 4 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ONCE THE ASSESSEE IS ENGAGED IN THE BUSINESS O F SALE AND PURCHASE OF SHARES AND SUCH SHARES HAVE BEEN HELD AT STOCK IN TRADE, THEN NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR AS ITS ENTIRE INCOME IS BUSINESS INCOME . IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE DECISION OF THE TRIBUNAL, MUMBAI BENCHES, IN HALLMARK CORPORATION V/S ACIT, ITA NO.1716/MUM./2012 ORDER DATED 20 TH NOVEMBER 2013 AND THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN DCIT V/S INDIA ADVANTAGE SECURITIES LTD., ITA NO.671/MUM./2011 ORDER DATED 14 TH SEPTEMBER 2012. ALTERNATIVELY , HE SUBMITTED THAT IF RULE 8D IS APPLIED FOR MAKING DISALLOWANCE UNDER SECTION 14A, THEN FOLLOWING THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN DCIT V/S DAMANI ESTATES & FINANCE PVT. LTD., ITA NO. 3029/MUM./2012 , FOR THE ASSESSMENT YEAR 2008 09, ORDER DA TED 17 TH JULY 2013, ONLY 20% OF THE EXPENDITURE , SPECIFICALLY THE INTEREST COMPONENT SHOULD BE APPORTIONED FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D. 5 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT IN THE DECISION OF THE THI RD MEMBER OF THE TRIBUNAL, MUMBAI BENCH IN D.H. SECURITIES PVT. LTD. V/S DCIT, ITA NO.5724/MUM./2011, ORDER DATED 27 TH NOVEMBER 2013, THIS PROPOSITION OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) HAS BEEN UPHELD THAT THE DISALLOWANCE UND ER SECTION 14A R/W RULE 8D CAN BE MADE IN THE CASE WHERE THE DIVIDEND INCOME HAS BEEN M/S. SHETH MERCANTILE CORPORATION 4 EARNED ON THE SHARES HELD AS STOCK IN TRADE. THUS, THE DISALLOWANCE HAS TO BE MADE UNDER SECTION 14A AFTER APPLYING THE PROVISIONS OF RULE 8D. 6 . WE HAVE HEARD THE RIVAL CO NTENTIONS AND PERUSED THE FINDINGS OF THE AUTHORITIES BELOW. IN THE PRESENT CASE, THE ISSUE IS , WHETHER THE DISALLOWANCE UNDER SECTION 14A R/W RULE 8D CAN BE WITH REGARD TO THE DIVIDEND EARNED ON THE SHARES HELD AS STOCK IN TRADE . THE ASSESSEES CASE IS TH AT DEALING IN SHARES IS THE CORE BUSINESS OF THE ASSESSEE AND ANY EXPENDITURE INCURRED THEREON, IS WHOLLY FOR THE PURPOSE OF THE BUSINESS AND EARNING OF DIVIDEND INCOME IS MERELY INCIDENTAL TO SUCH BUSINESS . THIS ISSUE HAS BEEN DEALT BY THE THIRD MEMBER IN D.H. SECURITIES PVT. LTD. (SUPRA), WHEREIN THE THIRD MEMBER , AFTER RELYING UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AND OTHER DECISIONS OF THE CO ORDINATE BENCH OF THE TRIBUNAL , COME TO THE CONCLUS ION THAT EVEN THOUGH THE SHARES HAVE BEEN HELD AS STOCK IN TRADE, THE DIVIDEND INCOME EARNED ON SUCH SHARES HAS TO BE EXAMINED FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A. THUS, THE DISALLOWANCE UNDER SECTION 14A HAS TO BE WORKED OUT EVEN WHEN THE DI VIDEND INCOME HAS BEEN ACCRUED O N THE SHARES HELD AS STOCK IN TRADE. FROM THE WORKING OF THE DISALLOWANCE AS MADE BY THE ASSESSING OFFICER UNDER RULE 8D(2)(II), IT IS SEEN THAT THE MAJOR DISALLOWANCE IS ON ACCOUNT OF INTEREST EXPENDITURE AMOUNTING TO ` 7,0 2,382. ONCE THE SHARES WHICH YIELD TAX EXEMPT DIVIDEND INCOME, THEN IT CANNOT BE HELD THAT UNDER THE FORMULA, THE ENTIRE INTEREST EXPENDITURE IS TO BE DISALLOWED UNDER THE SAID FORMULA AS THESE SHARES ARE ALSO HELD AS STOCK IN TRADE , WHICH YIELDS TRADING I NCOME WHICH IS TAXABLE. THE TRIBUNAL, IN THE DECISION OF DAMANI ESTATES & FINANCE PVT. LTD. (SUPRA) , AFTER DETAIL ANALYSIS, HAS HELD THAT THE AMOUNT OF M/S. SHETH MERCANTILE CORPORATION 5 DISALLOWANCE OF EXPENDITURE AS PER RULE 8D(II) NEEDS TO BE SCALED DOWN UNDER FACTS AND CIRCUMSTANCES. IN TH E SAID CASE, THE TRIBUNAL HELD THAT THE RATIO OF 20% TOWARDS THE TAX EXEMPT DIVIDEND INCOME WOULD BE SUFFICIENT / REASONABLE BASIS FOR ALLOCATING INTEREST EXPENDITURE FOR THE PURPOSE OF TAX EXEMPT DIVIDEND INCOME. THE RELEVANT OBSERVATION OF THE TRIBUNA L IN THIS REGARD ARE AS UNDER: THE SECOND COMPONENT, QUA INTEREST EXPENDITURE IN R. 8D(2)(II), HOWEVER, PRESENTS A PROBLEM IN A CASE AS THE INSTANT CASE. THIS IS AS THE SUB - RULE, AS WOULD BE READILY SEEN, SEEKS TO QUANTIFY THE INTEREST ON THE INVESTMENT S, INCOME FROM WHICH IS NOT TAXABLE, ON A PROPORTIONATE BASIS, AND WHICH THOUGH IS NOT ONLY UNDERSTANDABLE, BUT IS AS APPROPRIATE AND JUSTIFIABLE AS A GENERAL FORMULA COULD BE. HOWEVER, IN THE INSTANT CASE, SHARES, WHICH YIELD THE TAX EXEMPT DIVIDEND INCOM E, INTEREST QUA WHICH IS TO BE DISALLOWED, BEING HELD AS STOCK - IN - TRADE, ALSO YIELD SHARE TRADING INCOME, WHICH IS TAXABLE. THEREFORE, TO SAY THAT THE ENTIRE INTEREST RELATABLE TO THE AVERAGE SHARE HOLDING IS TO BE ATTRIBUTED TO THE TAX EXEMPT DIVIDEND INC OME WOULD BE PATENTLY INCORRECT ON FACTS. THAT, IN FACT, THE SHARES ARE BOUGHT AND HELD PRIMARILY FOR SHARE TRADING INCOME, FURTHER ACCENTUATES THE APPARENT INCONGRUITY OF THE SITUATION ARISING ON THE MECHANICAL APPLICATION OF R. 8D(2)(II). CLEARLY, THEREF ORE, THE AMOUNT AS PER R. 8D(2)(II) WOULD NEED TO BE SCALED DOWN, BIFURCATING THE EXPENDITURE SO ARRIVED AT BETWEEN THESE TWO INCOMES. AS REGARDS THE RATIO OF SUCH SCALING DOWN, NO HARD AND FAST RULE FOR THE PURPOSE WOULD HOLD, EACH FACT SITUATION BEING DI FFERENT. HOWEVER, CONSIDERING THAT THE DOMINANT OBJECTIVE OF THE SHARE HOLDING, WHICH IN OUR VIEW SHOULD BE DISPOSITIVE OF THE MATTER, IS THE SHARE TRADING INCOME, WE PROPOSE A RATIO OF 20% TOWARD THE TAX - EXEMPT DIVIDEND INCOME. ONE COULD ARGUE THAT THE PE RCENTAGE SUGGESTED BY US IS AD HOC OR NOT SCIENTIFIC. WE HAVE ALREADY EXPLAINED THAT AN INDIRECT EXPENDITURE, INCLUDING BY WAY OF INTEREST, HAS NO DIRECT RELATION WITH THE INCOME, MUCH LESS ITS QUANTUM, ALLOCATING IT ON THE BASIS OF THE INCOME GENERATED OR ARISING WOULD NOT BE APPROPRIATE, AND NEITHER DOES RULE 8D SUPPORT THE SAME. FURTHER, THAT IN ARRIVING AT THE SUGGESTED RATE OF 20%, WE HAVE BEEN GUIDED PRINCIPALLY BY THE FACT THAT THE SHARE TRADING IS THE DOMINANT OBJECT OF THE SHARE - HOLDING. WE ALSO CO NSIDER IT PERTINENT TO MENTION THAT THOUGH THE AVERAGE SHARE - HOLDING MAY BE THE SAME, THE SHARE COMPOSITION, IN VIEW OF THE SHARE TRADING ACTIVITY, WOULD VARY CONTINUOUSLY; THE TURNOVER FOR A YEAR BEING EASILY IN THE RANGE OF 4 TO 5 TIMES THE AVERAGE SHARE - HOLDING. ACCORDINGLY, IN ARRIVING AT THE DISALLOWANCE U/R. 8D, THE AMOUNT AS PER R. 8D(2)(II) QUA SHARES HELD AS STOCK - IN - TRADE WOULD STAND TO BE RESTRICTED TO 20% THEREOF. M/S. SHETH MERCANTILE CORPORATION 6 7 . THUS, IN THE PRESENT CASE ALSO, WE ARE OF THE OPINION THAT WHILE ARRIVING AT TH E DISALLOWANCE OF RULE 8D, DISALLOWANCE OF INTEREST EXPENDITURE SHOULD BE RESTRICTED TO 20% OF THE EXEMPT INCOME I.E., DIVIDEND INCOME. CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND PARTLY ALLOW THE GROUND R AISED BY THE ASSESSEE. 8 . 8 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 14 TH FEBRUARY 2014 ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH FEBRUARY 2014 SD / - . . B.R. B ASKARAN ACCOUNTANT MEMBER SD / - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 14 TH FEBRUARY 2014 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT , MUMBAI