DCIT 3(1), MUMBAI V. EMERGING STAR INVESTMENT P.LTD, MUMBAI

ITA 988/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70727 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 14-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 13-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T R PAJTE
• Assessee Lawyers: PARESH SHAPARIA E
• Keywords: Business income; Transactions in derivatives; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI .. , !'# $ $ $ $ %&. !.'.. $( ) !'# !* BEFORE SHRI P.M. JAGTAP, AM AND DR. S.T.M. PAVALAN, JM !./ I.T.A. NO. 988/MUM/2012 ( )( , $-, )( , $-, )( , $-, )( , $-, / / / / ASSESSMENT YEAR : 2008-09) D.C.I.T. CIRCLE 3(1), ROOM NO. 607, AAYAKAR BHAVAN, MUMBAI 400 020. ( ( ( ( / VS. M/S EMERGING STAR INVESTMENT PVT. LTD., 1108, DALAMAL TOWER, FREE PRESS JOURNAL MARG, NARIMAN POINT, MUMBAI 400 021. #. !./ PAN : AABCE7107L ( ./ / // / APPELLANT ) .. ( 01./ / RESPONDENT ) 01* !/C.O. NO. 28 /MUM/20 13 ARISING OUT OF ITA NO. 988 /MUM/20 12 ( )( , $-, )( , $-, )( , $-, )( , $-, / / / / ASSESSMENT YEARS : 2008-09) M/S EMERGING STAR INVESTMENT PVT. LTD., 1108, DALAMAL TOWER, FREE PRESS JOURNAL MARG, NARIMAN POINT, MUMBAI 400 021. ( ( ( ( / VS. D.C.I.T. CIRCLE 3(1), ROOM NO. 607, AAYAKAR BHAVAN, MUMBAI 400 020. #. !./ PAN : AABCE7107L CROSS OBJECTOR .. ( 01./ / RESPONDENT ) DEPARTMENT BY SHRI T.R. PAJTE ASSESSEE BY : SHRI PARESH SHAPARIA !($ E / // / DATE OF HEARING : 14-08-2013 FG- E / DATE OF PRONOUNCEMENT : 21-08-2013 ITA 988/MUM/2012 & C O 28/MUM/12 2 'H / O R D E R PER P.M. JAGTAP, A.M . : .. , !'# THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A) 6, MUMBAI DTD. 01-11-2011 AND THE SAME IS BEING DISPOSED OF ALONG WITH CROSS OBJECTION FILED BY THE ASSESSEE. 2. THE SOLITARY ISSUE ARISING FROM THE APPEAL OF TH E REVENUE RELATES TO THE DISALLOWANCE U/S 14A READ WITH RULE 8-D OF THE INCO ME TAX RULES, 1962 AND THE SAME IS RAISED BY THE REVENUE BY WAY OF THE FOL LOWING GROUND:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT PAYMENT OF INTEREST TO BROKING COMPANIES AND NBFC ARE EXCLUDABLE FOR THE PURPOSE OF DISALLOW ANCE MADE U/S 14A R.W. RULE 8D(2)(II), WITHOUT APPRECIATING THE F ACT THAT AS PER THE PROVISIONS OF THE SAID RULES THERE IS NO DISTINCTIO N BETWEEN ANY TYPE OF ASSESSEE AS TO WHETHER THE BORROWINGS WERE USED FOR SHARE TRADING OR NOT. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF INVESTING AND TRADING IN SHARES AND SEC URITIES. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED B Y IT ON 15-9-2008 DECLARING TOTAL INCOME OF RS. 2,56,06,196/-. IN THE SAID RETURN, DIVIDEND INCOME OF RS. 4,74,224/- RECEIVED DURING THE YEAR UNDER CONSIDERATION WAS CLAIMED TO BE EXEMPT BY THE ASSESSEE AND DISALLOWAN CE OF RS. 47,422/- WAS MADE SUO MOTU ON ACCOUNT OF EXPENSES INCURRED IN RE LATION TO THE SAID EXEMPT INCOME AS REQUIRED BY SECTION 14A OF THE ACT . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS CALLED UPO N BY THE A.O. TO EXPLAIN THE BASIS OF DISALLOWANCE SO MADE U/S 14A OF THE AC T. IN REPLY, THE FOLLOWING SUBMISSION WAS MADE BY THE ASSESSEE VIDE LETTER DAT ED 30-04-2010:- THERE HAVE BEEN NO SPECIFIC EXPENSES INCURRED TO EA RN THE DIVIDEND INCOME OF RS. 474,224/-. THE DIVIDEND INCOME IS IN CIDENTAL TO THE BUSINESS OF ASSESSEE. THE MAJOR EXPENSES OF THE AS SESSEE ARE ON ITA 988/MUM/2012 & C O 28/MUM/12 3 ACCOUNT OF PURCHASE AND SELL OF SHARES, OTHER ADMIN ISTRATIVE EXPENSE PERSONNEL, ADMINISTRATION, AUDIT FEES, KEY MAN INSU RANCE PREMIUM, INTEREST PAID TO BROKERS FOR USER OF FUNDS FOR F&O ACTIVITY, TRADING ACTIVITY ETC. THE INCOME FROM SUCH ACTIVITY WHICH IS LIABLE TO TAX IE. WHICH IS NOT EXEMPT. IN THE BOOKS OF THE ASSESSEE THERE ARE NO INVESTMEN TS, SO AS TO APPLY THE RULE 8D. THE WORKING AS PER RULE 8D R.W.S. 14A WORKS OUT TO NIL. THE ASSESSEE BEING TRADER IS TAXABLE AT THE MAXIMUM RATE OF INCOME TAX, NO DISALLOWANCE IS CALLED FOR. THE DIVIDEND I NCOME EARNED IS JUST INCIDENTAL. WITHOUT PREJUDICE THE ABOVE, THE WORKING UNDER RULE 8D R.W.S. 14A AS PER SP. BENCH DECISION IN ITO VS. DAGA CAPITAL MANA GEMENT (P) LTD. 26 SOT 603 (SB MUM) IS ENCLOSED HEREWITH WHEREBY THE D ISALLOWANCE WORKS TO RS. 50,16,015/-. 3. THE A.O. DID NOT FIND THE ABOVE SUBMISSION MADE BY THE ASSESSEE TO BE ACCEPTABLE AND APPLYING RULE 8-D OF THE INCOME TAX RULES, 1962, HE WORKED OUT THE DISALLOWANCE TO BE MADE U/S 14A OF THE ACT AT RS. 50,16,015/- AS UNDER:- 1. AMOUNT OF EXPENSES DIRECTLY RELATED TO SUCH INC OME AMOUNT (RS) NIL 2. AMOUNT OF THE INTEREST EXPENSES INDIRECTLY ATTRI BUTABLE TO SUCH INCOME, IN ACCORDANCE WITH THE FORMULA AXB/ C, WHERE A. TOTAL INTEREST EXPENDITURE MINUS DIRECT INTERES T EXPENDITURE ON SUCH INCOME. RS. 13856039 RS. NIL = R S. 13856039(A ) B. AVERAGE OF SUCH INVESTMENT ON THE FIRST AND LAST DAY OF PREVIOUS YEAR 110145 + 195557724 = RS. 48910701(B) 2 C. AVERAGE OF TOTAL ASSETS ON FIRST AND LAST D AY OF PREVIOUS YEAR 88509782 + 195557724 = RS. 142033753(C) 2 AXB/C = 47,71,461 3. 0.5% OF THE B ABOVE 2,44,554 TOTAL DISALLOWANCE U/S 14A 50, 16,015 ITA 988/MUM/2012 & C O 28/MUM/12 4 ACCORDINGLY A FURTHER DISALLOWANCE OF RS. 49,68,593 /- WAS MADE BY THE A.O. U/S 14A OF THE ACT IN THE ASSESSMENT COMPLETED U/S 143(3) OF THE ACT VIDE AN ORDER DATED 8-6-2010. 4. AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3) OF THE ACT, APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) CHA LLENGING THE DISALLOWANCE MADE BY THE A.O. U/S 14A READ WITH RULE 8-D OF THE INCOME TAX RULES, 1962 AND THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF O F THE ASSESSEE BEFORE THE LD. CIT(A) IN SUPPORT OF ITS CASE: (I) THE A.O. HAS NOT GIVEN JUSTIFICATION FOR APPLIC ATION OF RULE 8D FOR COMPUTING DISALLOWANCE U/S 14A. (II) THE APPELLANT WITHOUT PREJUDICE SUBMITTED THAT ITS BUSINESS INCOME CONSTITUTES 99.13% OF ITS INCOME AND THE EXEMPT INC OME CONSTITUTES ONLY 0.87%; (III) THE EXPENDITURE CLAIMED IS AT RS. 2.82 CRORES WHICH ARE RELATED TO BUSINESS INCOME AND FROM THE TOTAL EXPENDITURE, EXP ENSE IN RELATION TO EXEMPT INCOME CAN BE ADJUDICATED; (IV) THE APPELLANTS AVERAGE VALUE OF INVESTMENT IS NIL AS IT HAS DIVIDEND INCOME OF RS. 4,74,224/- FROM SHARES HELD AS STOCK- IN-TRADE. (V) THE APPELLANTS INTEREST EXPENSE CONSISTS OF INTERE ST WHICH HAS DIRECT NEXUS TO EARNING OF BUSINESS INCOME AND THE SAME AR E ALLOWABLE EXPENDITURE U/S 36(1)(III). 5. AFTER CONSIDERING THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AS WELL AS THE MATERIAL AVAILABLE ON RECORD, THE LD. C IT(A) DIRECTED THE A.O. TO RECOMPUTE THE DISALLOWANCE TO BE MADE U/S 14A OF TH E ACT AS PER RULE 8-D OF THE INCOME TAX RULES, 1962 AFTER RECORDING THE FOLL OWING OBSERVATIONS:- 4. I HAVE GONE THROUGH THE ORDER OF THE AO AND TH E SUBMISSION OF THE APPELLANT. THE APPELLANTS SUOMOTTO DISALLOWANC E OF RS 47,422/- IS NOT CORRECT. THE TOTAL EXPENSE OF THE APPELLANT IS AT RS 2,82,56,696I- AND 0.87% OF THE SAME IS 2,45,833/-. THE KEYMAN INS URANCE POLICY PREMIUM, OTHER ADMINISTRATIVE EXPENSES AND DEPRECIA TION AMOUNTING TO RS. 1,11,31,949/- IS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF SHARE BUSINESS BUT IS ALSO ATTRIBUTABLE TO EARNING OF DIV IDEND INCOME AND 0.87% OF THE SAME COMES TO 96,848/- WHICH FAR EXCEE DS THE SUO-MOTTO DISALLOWANCE MADE BY THE APPELLANT AT RS. 47,422/-. THE ASSESSING OFFICER, WAS THEREFORE CORRECTLY NOT SATISFIED WITH APPELLANTS OWN DISALLOWANCE AND UNDER THE CIRCUMSTANCES, ASSESSING OFFICERS ACTION TO MAKE DISALLOWANCE AS PER RULE 8D IS CORRECT. ITA 988/MUM/2012 & C O 28/MUM/12 5 4.1 THE APPELLANTS SUBMISSION THAT THE INTEREST EX PENSE HAS BEEN INCURRED TOWARDS PAYMENTS TO BROKERS AND IT HAS DIR ECT NEXUS WITH EARNING OF BUSINESS INCOME IS FOUND TO BE PRIMA-FAC E CORRECT. THE APPELLANT SUBMITTED THAT IT HAS PAID INTEREST TO TH E FOLLOWING SEVEN PARTIES: PARTY NAME NATURE OF INTEREST EXP. AMOUNT (RS.) SUNIDHI CAPITAL PVT. LTD. BROKER 6,75,199 KOTAK MAHINDRA INV.LTD. NBFC 34,22,588 KOTAK SECURITIES LTD. BROKER 79,591 RELIGARE FINVEST LTD. NBFC 85,45,174 RELIGARE SECURITIES LTD. BROKER 11,30,787 J M FIN. PROD.SERV. LTD. NBFC 1,724 KHANDWALA SECURITIES LTD. BROKER 978 TOTAL INTEREST 1,38,56,040 THE APPELLANT SHALL PRODUCE EVIDENCE AND THE AO SHA LL VERIFY WHETHER THE PAYMENT OF INTEREST MADE TO BROKING COMPANIES A ND NBFC ARE TOWARDS PURCHASE AND SALE OF SHARES AND THE AO, THE REAFTER, SHALL EXCLUDE THE AMOUNT OF SUCH INTEREST FOR THE PURPOSE OF RULE 8D(2)(II) ACCORDINGLY. 4.2 THE APPELLANTS SUBMISSION THAT THE AVERAGE VA LUE OF INVESTMENT IN ITS BOOK IS NIL IS FOUND TO BE NOT CORRECT AS SH ARES OWNED BY APPELLANT IS SHOWN IN SCHEDULE-6 OF THE BALANCE-SHE ET AND ALL INVESTMENTS, WHETHER SHOWN AS INVESTMENTS OR STOCK- IN-TRADE AS HELD BY SPECIAL BENCH OF ITAT MUMBAI IN CASE OF M/S DAGA CAPITAL MANAGEMENT LTD. (119 TTJ 289) IS REQUIRED TO BE CON SIDERED FOR AVERAGE VALUE OF INVESTMENT. THE LD. CIT(A) THUS RESTRICTED THE DISALLOWANCE MAD E BY THE A.O. U/S 14A OF THE ACT AND AGGRIEVED BY THE SAME, THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE LD. CIT(A) HAS RENDERED A WELL CONSIDERED AND WELL DISCUSSED DECIS ION AFTER CONSIDERING EACH AND EVERY ASPECT OF THE MATTER INVOLVED IN THE DISA LLOWANCE TO BE MADE U/S 14A OF THE ACT BY APPLYING RULE 8-D. HE HAS IDENTI FIED THE COMMON EXPENSES WHICH WERE PARTLY ATTRIBUTABLE TO THE EARNING OF EX EMPT DIVIDEND INCOME AND ACCORDINGLY HAS QUANTIFIED THE DISALLOWANCE TO BE M ADE OUT OF THE SAID ITA 988/MUM/2012 & C O 28/MUM/12 6 EXPENSES ON PROPORTIONATE BASIS. HE HAS ALSO DIRECT ED THE A.O. TO VERIFY THE STAND OF THE ASSESSEE OF HAVING INCURRED THE INTERE ST EXPENSES IN RELATION TO THE ACTIVITY OF TRADING IN SHARES AND TO APPLY THE FORMULA GIVEN IN RULE 8-D FOR THE PURPOSE OF MAKING DISALLOWANCE OUT OF INTEREST ON SUCH VERIFICATION. HE HAS ALSO RIGHTLY REJECTED THE CONTENTION OF THE ASS ESSEE THAT THE AVERAGE VALUE OF INVESTMENT IN ITS BOOKS IS NIL AFTER HAVING FOUN D THE SAME TO BE IN-CORRECT RELYING ON THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAP[ITAL MANAGEMENT LTD. (119 TTJ 289). HAVING REGARD TO ALL THESE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE DECISION RENDERED BY TH E LD. CIT(A) ON THIS ISSUE IS WELL FOUNDED AND EVEN THE LD. D.R. HAS NOT BEEN ABL E TO RAISE ANY MATERIAL CONTENTION TO DISPUTE THIS POSITION. IN THAT VIEW OF THE MATTER, WE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DISMISS THIS APPEAL FILED BY THE REVENUE. 7. IN ITS CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- 1. DISALLOWANCE OF RS. 2,44,554/- U/S 14A R.W. RULE 8D(III) BEING 0.5% OF AVERAGE OF OPENING AND CLOSING SHARES HELD AS STOCK IN TRADE. 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING DISALLOWANCE U/S 14A R.W. RULE 8D(III) OF AVERAGE OF OPENING AND CLOSING SHARES HELD AS STOCK-IN-TRADE. 2. THE DISALLOWANCE OF RS. 2,44,554/- U/S 14A RW RU LE 8D(III) REQUIRES TO BE DELETED. 8. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSEL F OR THE ASSESSEE HAS NOT PRESSED THE GROUNDS RAISED BY THE ASSESSEE IN T HE C.O. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. ITA 988/MUM/2012 & C O 28/MUM/12 7 9. IN THE RESULT, APPEAL OF THE REVENUE AS WELL AS C.O. FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST AUGUST, 2013. . 'H E FG- I'(J 21-08-2013 G E SD/- SD/- (DR. S.T.M. PAVALAN) (P.M. JAGTAP ) ) !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; I'( DATED 21-08-2013 $.)(.!./ RK , SR. PS 'H E 0)KL ML- 'H E 0)KL ML- 'H E 0)KL ML- 'H E 0)KL ML-/ COPY OF THE ORDER FORWARDED TO : 1. ./ / THE APPELLANT 2. 01./ / THE RESPONDENT. 3. N () / THE CIT(A)6, MUMBAI. 4. N / CIT 3, MUMBAI 5. L$Q 0))( , , / DR, ITAT, MUMBAI E BENCH 6. %, R / GUARD FILE. 'H(! 'H(! 'H(! 'H(! / BY ORDER, !1L 0) //TRUE COPY// S S S S/ // /!T !T !T !T ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI