IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH `C' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI N.K.BILLAIYA (ACCOUNTANT MEMBER)
ITA No.8361/Mum/2011
Assessment Year: 2009-2010
Prescient Securities Pvt Ltd., ACIT -10(1),
102, Windsor, Vidya Nagari Marg, Mumbai.
Off CST Road, Kalina, Santacruz(E),
Mumbai-400 098 Vs.
PA No.AADCP 0490 P
(Appellant) (Respondent)
Appellant by : Dr K Shivram & Ajay R Singh
Respondent by: Shri Rajarshi Dwivedy
Date of hearing: 11 .2.2013
Date of pronouncement: 13 .2.2013
ORDER
Per B.R.Mittal, JM:
The assesee has filed this appeal for assessment year 2009-10 against order
dated 16.9.2011 of ld CIT(A) -21, Mumbai on following grounds:
"1 The learned CIT(A) erred in upholding the disallowance of Rs. 75,92,735/-
u/s. 14A r.w. Rule 8D (i.e. Rs. 77,12,735 -- Rs. 1,20,000) without appreciating
that no direct or indirect expenditure was attributable to earning of exempt
income as the assessee was carrying on business of trading in shares and
securities.
2. The learned CIT(A) erred in not appreciating that Rule 8D cannot be invoked
facts of present case as the shares are held as stock in trade, secondly the
investment in shares of subsidiary company of Rs. 70,000/- was made out of
own funds of Rs. 24.61 Crores and no interest expenditure was incurred,
however without prejudice the assessee had offered Rs. 1,20,000/- in Tax Audit
Report / Return of Income being expenditure incurred for earning exempted
income, therefore there cannot be any notional disallowance.
3. The learned CIT(A) failed to appreciate that the borrowings made were
utilised for the purpose of assessee's business i.e. trading in shares, hence
interest expenditure of Rs. 1,68,45,167/- was allowable u/s. 36(1)(iii) of the Act."
2 ITA No.8361/Mum/2011
Assessment Year: 2009-2010
2. Briefly stated the facts are that assessee, in the relevant assessment year, was
engaged as dealer in shares and securities. During the course of assessment
proceedings, the Assessing Officer noticed that assessee received dividend income of
Rs.65,15,916 which was claimed as exempt u/s.10 of the Act. In reply to Assessing
Officer's requisition to furnish the details of expenses attributable for earning exempt
income as per provisions of Section 14 r.w. Rule 8D of the Act, it was submitted that
assessee had not incurred any expenditure for earning exempt income. Before the AO,
assessee filed working of disallowance u/s.14 A at Rs.73,87,320 and submitted that
based on the working made in earlier assessment year, it had worked out the
attributable expenses for earning exempt income u/s.14A at Rs.1,20,000, as reported in
tax audit report. AO did not accept the assessee's contention and held that Rule 8D is
applicable in the year under consideration and, accordingly, worked out the disallowance
u/s.14A at Rs.75,92,735, as per formula provided in Rule 8D, mentioned at page 3 of
the assessment order. In first appeal, the addition made by the AO was confirmed.
Being aggrieved, assessee is in further appeal before the Tribunal.
3. At the time of hearing, ld A.R. submitted that similar issue had come up for
consideration before the Tribunal in assessee's own case for the preceding assessment
year viz;2008-09 in I.T.A. No.5281/MN/2011 and the Tribunal vide order dt.21.11.2012
after following the decision of Hon'ble Karnataka High Court in the case of CCL Ltd vs
JCIT, 250 CTR (Kar) 291 has confirmed the order of ld CIT(A) to delete the disallowance
made by the AO u/s.14A of the Act. He submitted that the issue is now fully covered in
favour of the assessee by the said order of the Tribunal dt.21.11.2012 (supra). Ld D.R.
did not dispute above contention of ld A.R. save and except relying on orders of
authorities below.
4. We have considered submissions of ld representatives of parties and orders of
authorities below as well as the decision of the Tribunal in assessee's own case for
assessment year 2008-09(supra).
3 ITA No.8361/Mum/2011
Assessment Year: 2009-2010
5. We observe that the Tribunal, in assessee's own case for assessment year 2008-
09(supra), have considered the similar issue and confirmed in deleting the addition
made u/s.14A of the Act, inter alia, by observing in paras 5 to 9 as under:
"5. We have heard both the parties, perused the orders 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 proposition at the level of Hon'ble
High Court of Karnataka that the provision of section 14A has no application to
the dividend income arising out of the shares held as stock-in-trade which is an
undisputed fact in the present case. 6. Hon'ble Karnataka High Court has
examined the issue and held that the earning of dividend income out of the
shares held on 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 14A are not applicable. This being a direct judgment of Hon'ble High
Court of Karnataka on this issue in the present case, the same has to be followed
in preference to the decision of Special Bench in the case of M/s. Daga Capital
Management Pvt. Ltd. (supra). We have considered the principle of judicial
hierarchy. 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 issue in favour
of the assessee. Considering the settled nature of the issue 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 the 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
applicable 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 disallowed even in respect of dividend income received from trading
shares. The Tribunal followed the decision of Special Bench of the Tribunal in
the case of ITO vs. Daga Capital Management Pvt. Ltd. (supra). The assessee in
that case had relied on the judgment of Hon'ble High Court of Kerala 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 dividend received from trading
shares. The Tribunal had however, distinguished the said judgment of Hon'ble
High Court of Kerala on the ground that in that case the acquisition of shares
with the borrowed funds was for the purpose of controlling the company.
Therefore, even though the purpose for acquiring the shares was business, the
High Court had upheld the disallowance u/s 14A of the IT Act. The Tribunal also
noted that the High Court in that case had only observed that the interest paid
on borrowed funds utilized for acquiring shares could be allowed as deduction
u/s 36(1)(iii) only if shares were held as stock-intrade. These observations were
4 ITA No.8361/Mum/2011
Assessment Year: 2009-2010
only obiter dicta and not the ratio decidendi of the judgment. The ratio
decidendi of the judgment was disallowance of interest u/s 14A which had been
upheld by the Tribunal. The Tribunal, therefore, did not accept the arguments
based on the judgment of Hon'ble High Court of Kerala in the case of Smt. Leena
Ramachandran (supra) which was not directly on the issue of disallowance of
expenses in relation to the dividend income received from trading in shares."
6. However, the Hon'ble High Court of Karnataka have 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 distributor 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
under 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 was relatable to earning of dividend income as the loan had been
utilized for the purchase of shares and the profit shown from the sale of shares
had been offered as business income. The Tribunal, therefore directed 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 income derived was offered to tax
as business income. The remaining 30% 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 intention 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 shares. Thus, there being a direct
judgment of a Hon'ble High Court on this issue, the same has to be followed in
preference to the decision of the Special Bench of the Tribunal in the case of
M/s. Daga Capital Management Pvt. Ltd. (supra). In fact, we note that the
Tribunal in the case of Ganjam Treading Co. Ltd. (surpa) has already considered
this situation and held that in view of the judgment of Hon'ble 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 shares cannot be made. We,
therefore, see no infirmity in the order of the ld CIT (A) in deleting the
disallowance u/s 14A computed by the AO in relation to the stock-in-trade. The
order of the Ld CIT (A) is accordingly upheld."
7. Further, it is a fact that the assessee offered disallowance u/s 14A at Rs.
5,64,531/-. In this regard, Ld DR raised an argument that the assessee having
offered for disallowance u/s 14A is bound to offer in accordance with the
provisions of Rule 8D. This argument was considered by the CIT(A) in his order
vide para 2.3. We perused the order of the CIT (A) and the contents of the said
Para 2.3 and find the reasoning given by the CIT(A) therein is quite reasonable.
The contents of the said para are reproduced as under:
5 ITA No.8361/Mum/2011
Assessment Year: 2009-2010
"The AO considered the opening balance of investment at Rs. 13.36
crores and closing balance of investment at Rs. 41.42 crores thereby
taking average investment at Rs. 27.39 crores. However, as per balance
sheet the appellant was having opening balance of investment at Rs. NIL
whereas the closing balance of investment was at Rs. 70,000/-. Thus,
the average value of investment during the year was at Rs. 35,000/- only.
As per the provisions of Rule 8D, it was only the investment which had to
be considered for the purpose of disallowance. However, in the case
under consideration, the AO incorrectly adopted the figures of opening
and closing balance of stock in trade. Thus, in my considered view, the
opening and balance of stock in trade was not required to be considered
for working out the disallowance as per formula provided in Rule 8D. As
per interpretation of the provisions of Rule 8D, it was only the opening
and closing balance of investment which was required to be considered
for working the disallowance. The appellant's average value of
investment during the year was only at Rs. 35,000/- only, the indirect
expenditure disallowance as per clause (ii) of Rule 8D(2) was working out
at Rs. 3240/- only. Consequently, the O.5% of average value of
investment of Rs. 35,000/- was working out to Rs. 2000/- only. In the
facts and circumstances, the disallowance as per formula provided in Rule
8D was required to be worked out as under:-
` (i) Direct interest expenditure Rs. Nil
(ii) Indirect interest expenditure Rs. 340/-
(iii)0.5% of average investment Rs. 2000/-
Rs. 2,340/-
The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. 234
CTR 1 has held that provisions of Rule 8D are applicable from AY 2008-2009
onwards. The provisions of Rule 8D are statutorily mandatory and any working
of disallowance u/s 14A is required to be worked out as per formula provided in
Rule 8D(2) only. As per the provisions of Rule 8D(2) the disallowance u/s 14A
worked out to Rs. 340/- only whereas the appellant itself had offered
disallowance u/s 14A at Rs. 5,64,531/-. In the facts and circumstances, the AO
was not justified in disallowing further expenditure of Rs. 34,68,900/- u/s 14A of
the Act. The disallowance made by the AO is, therefore, deserved to be
deleted."
8. The decision of the CIT (A) is well reasoned and in our opinion, the same is
sustainable. Therefore, order of the CIT (A) does not call for any interference.
Accordingly, grounds raised by the Revenue are dismissed and cross objection
raised by the assessee as per Rule 27 of the Income Tax Appellate Rules, 1962 is
are also dismissed as academic.
` 9. In the result, the appeal filed by the Revenue is dismissed."
6. Respectfully following the decision of a coordinate bench (supra), we reverse
the orders of authorities below and allow ground Nos. 1 & 2 of appeal taken by
assessee.
6 ITA No.8361/Mum/2011
Assessment Year: 2009-2010
7. In respect of Ground No.3, ld A.R. submitted that said ground is consequential
and if Ground Nos.1 & 2 are decided in favour of assessee, same need not be decided.
As in respect of Ground Nos.1 & 2, we have decided the issue in favour of assessee, this
ground is accordingly allowed for statistical purposes.
8. In the result, appeal filed by assessee is allowed
Pronounced in the open court on 13TH February, 2013
SD/- Sd/-
(N.K.BILLAIYA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 13th February, 2013
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),21, Mumbai
4. Commissioner of Income Tax, MC-X , Mumbai
5. Departmental Representative, Bench `C' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI
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