ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" Bench, Mumbai
Before Shri D. Manmohan, Vice President and
Shri B. Ramakotaiah, Accountant Member and
ITA No.4939/Mum/2011
(Assessment year: 2008-09)
Satguru Capital & Finance Ltd Income Tax Officer 4(2)(2)
5th Floor, Suntek Centre, 6th Floor, Aayakar Bhavan
Vs
37/40 Subhash Road MK Road, Mumbai 400020
Vile Parle (E) Mumbai 400057
PAN AAACS 7189
(Appellant) (Respondent)
Assessee by: Shri Hari Om Tulsyan
Department by: Shri R.D. Burman, DR
Date of Hearing: 03/05/2012
Date of Pronouncement: 20/06/2012
ORDER
Per B. Ramakotaiah, A.M.
This is an assessee's appeal against the orders of the CIT(A)-8
Mumbai dated 29.04.2011. Assessee in the appeal raised three
grounds on three different issues. We have heard the learned
Counsel and the learned DR and also perused the paper book
placed on record. The appeal is decided as under:
2. Ground No.1 raised by assessee is as under:
"On the facts and circumstances of the case and in the
law the learned CIT (A)-8 has erred in passing the order
under section 250 of the Income Tax Act 1961 by
accepting the contention of the learned AO in disallowing
`.355,938/- on second of Bad debts claimed by
assessee under section 36(1)(vii) r.w.s. 36(2) of the act,
though assessee/AR of assessee has submitted all the
facts and legal position in that regard".
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
3. Briefly stated AO disallowed an amount of `3,55,938/- which
was written off as bad debt stating that assessee has not filed the
necessary details. Before the CIT (A) it was pointed out that
assessee filed the relevant details vide letter dated 15-12-2010
which was stated by AO in Para 03.02. After that AO never asked
any further details. It was further contented that it is not necessary
to establish that the debt has become bad/ irrevocable. For
satisfying the conditions stipulated under section 36(2), assessee
submitted that it satisfied the conditions and relied on the Special
Bench decision in the case of Shri Shreyas S. Morakhia in ITA
No.3374/Mum/2004 dated 16-7-2010. Assessee also relied on the
decision of the Hon'ble Supreme Court in the case of TRF Ltd vs.
CIT 323 ITR 397 (SC). However, the learned CIT (A) put the onus on
assessee that it did not furnish any details and accordingly he
upheld the disallowance.
4. Before us the learned Counsel referring to the letter filed with
AO and submissions made before him vide Para 7 of the letter and
also other letters filed and the replies given to the CIT (A) in the
course of appellate proceedings submitted that assessee had only
one debt in question pertains to M/s Rajen Investment and Finance
(P) Ltd and after adjusting the amounts of shares and margin
money available with assessee, the balance amount recoverable was
written off as explained to the authorities. The learned DR relied on
the orders of the authorities.
5. On perusal of the submissions made before AO and the CIT
(A) and perusing the paper book in this regard, we are of the opinion
that assessee has satisfied the conditions stipulated in section
36(2)(i) since these are business debts which could not be recovered
and written off. Following the principles laid down by the Special
Bench in the case of Shreyas S. Morakhia (Supra) we hold that
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
assessee satisfied the conditions prescribed under section 36(2).
Moreover the Hon'ble Supreme Court in the case of TRF Ltd vs. CIT
323 ITR 397 has already considered that it is not necessary to
establish that the debt had in fact had become irrevocable after the
provisions were amended w.e.f. 1.4.1989. Following the above
principles, since necessary details were already filed before the
authorities, we have no hesitation in allowing the ground. AO is
directed to allow the bad debt as claimed.
6. Ground No.2 is as under:
"Further on the facts and in the circumstances of the
case and in the law the learned CIT (A)-8 has erred in
passing the order under section 250 of the Income Tax
Act, 1961 by not allowing the rebate under section 88E
of Income Tax Act as calculated by learned AO in a
wrongful manner on suo moto basis, though
assessee/AR of assessee has submitted all the facts
and legal position in that regard".
7. Briefly stated assessee is in the business of stock broking and
also as a trader/ depository participant. It has paid security
transaction tax on some of the securities and claimed rebate under
section 88E at `25,53,628/-. It has worked out as under:
Speculative Income x Total Tax/Total Income
The amounts are `.75,12,881/- x `.35,97,175/`.105,83,040/-
As can be seen from the above working, the total income arrived at
by assessee was `105,83,040/-. Tax payable on that was worked
out at `35,97,175/-. The average rate of tax was worked out on the
income included thereof and rebate was worked out at
`25,53,628/-. In the course of the assessment proceedings AO did
not agree with assessee's quantum of income earned on securities
transactions as only an amount of `.3,95,416/- i.e. 5% of the gross
income was considered as expenses towards earning this income.
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
He analyzed the expenditure and the incomes and arrived at the
claim of expenditure at 0.5% is not correct as percentage of
brokerage income was to the extent of 61%. He was of the opinion
that for the lack of better measure of estimation, allocation of 25%
expenses incurred by assessee during the year towards earning
share trading income is a fair estimate. Accordingly he attributed
the expenses at `41,61,118/- and arrived at the net share income
at `37,47,179/- and rebate at 30% was worked out at `11,24,153/.
The CIT (A) has confirmed the action of AO as assessee has
maintained common account and allocated mere 5% as
expenditure.
7.2. Before us the learned Counsel contended that assessee has
entered into jobbing agreements and the incomes were offered after
claiming the job work charges and the expenses directly
attributable to the above income was arrived at `3,08,381/. He
referred to page No.42 to submit that the gross income earned was
to the tune of `3,32,31,409/- which was shared with the jobbers at
`253,23,113/-, net share trading profit was arrived at `79,08,296/,
out of which 5% was considered as expenditure attributable to the
above income and accordingly arrived at the net income of
`75,12,881/-. He submitted that assessee has fairly estimated the
expenditure and accordingly claimed a rebate which should be
upheld. The learned DR, however, referred to the Profit & Loss A/c
and AO's action in attributing 25% of the expenditure even though
assessee has more than 61% of the income from this source. His
submission was that the expenditure was reasonable.
8. The learned Counsel also referred to the submissions made
before the CIT (A) that the percentage of expenditure during the
financial year 2006-07 amounted to 85% of the income other than
share trading income and during the present year such expenses
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
were 79% of the income of the assessee company other than share
trading income. Therefore, it was submitted that most of the
expenditure pertains to income other than taxable securities
transactions.
9. We have considered the issue. Even though assessee's claim
is based on the average rate of income tax as provided under section
88E(2), the issue is with reference to the income arising from such
transactions. Assessee's contention is that out of the gross income
offered, it has considered 5% of the expenditure and arrived at the
net income of `75,12,881/-. However, AO was of the opinion that
assessee has not furnished any details of expenditure attributable
to the above transactions and estimated the income at 25% of the
gross expenditure. He allocated an amount of `41,61,118/- to arrive
at the net income from share trading at `37,47,179/-. Per se we are
in agreement with the working of AO as he has considered only
reasonable 25% of the expenditure.
10. It was the contention of the learned Counsel in the arguments
that the expenditure in comparison to the earlier year and income
other than brokerage income has come down to 79% of the total
expenditure and therefore the estimate of 5% of the income should
be accepted. This aspect was examined with reference to the Profit
& Loss A/c and schedules placed on record. One of the major
amount of expenditure is interest claim to the tune of `22,80,089/-
during the year which was not there in earlier years. During the
year assessee has borrowed unsecured loans to the extent of
`1,15,00,000/- and its current assets have gone up to the same
extent. As seen from the investment schedule the investment in
earlier years was at `1,16,75,005/-, whereas in this year it was
`1,17,75,005/- more or less at the same level. However, as seen
from the detailed schedules of the balance sheet, the stock in hand
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
has gone up from Nil in earlier year upto `1,46,27,156/-. It
indicates that the borrowed funds were used for its business in
trading transactions. The volume of income earned before
distributing with jobbers was to the tune of `3,33,31,409/-. This
indicates that assessee's volume of transactions in trading is more.
If an analysis of the borrowed funds and its use was considered
interest payment alone of `22,80,089/- is attributable to the trading
activity. Therefore, in our view AO is very conservative in attributing
only 25% of the expenditure to the share trading activity. There is
no dispute with reference to the inclusion of net income only while
considering the rebate under section 88E(2). In view of this, we
uphold the action of AO and reject the ground. However AO is
directed to work out the rebate while giving effect to this order as
some of the issues may result in variation of income.
11. Ground No.3 is as under:
"On the facts and circumstances of the case and in the
law the learned CIT (A)-8 has erred in passing the order
under section 250 of the Income Tax Act 1961 by
accepting the addition of a sum of `.495,524/- except
for a relief of `.48,472/- by accepting the correct full
calculation of average of total assets as per component
"C" of Rule 8D(2)(ii) under section 14A r.w. rule 8D by
wrongly interpreting and applying by calculation the
said section and the rule of the Indian Income Tax Act &
Rules by the learned AO, even though assessee/AR of
assessee has submitted all the facts and legal position
in that regard".
12. This ground arises as assessee had earned dividend of
`69,820/-. AO invoked the provisions of section 14A r.w. Rule 8D
determined the amount at `4,95,524/-. In the course of assessment
proceedings assessee also gave a working under protest determining
the disallowable income under section 14A at `2,04,464/- whereas
AO determined the amount at `4,95,525/-. Even though there is no
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
dispute with reference to % of average value of investment arrived
at `95,195/-, the dispute arose because of amount of interest. It
was assessee's contention that interest not attributable to any
income directly earned was only `7,08,089/- whereas AO took the
amount at `22,80,089/- without giving credit to the income earned
under the said head. Therefore, there is a difference between the
two workings. Be that as it may it was the contention of assessee
that AO is not correct in working out the deduction without any
satisfaction being recorded as required under the provisions. The
CIT (A) in his order partly upheld the action of AO while directing
that the total amounts should be arrived as per Rule 8D(2)(ii). The
ground indicate that there was a relief of `.48,472/- consequent to
the order of the CIT (A).
13. It was the contention of the learned Counsel that they have
not incurred any expenditure towards earning exempt income and
this dividend was received in the course of its trading/ investment
activity which was in fact a very small amount. Moreover it was also
submitted that AO has not given any satisfaction while invoking
Rule 14A and in this regard relied on the orders of the ITAT Delhi D
Bench in the case of DCIT vs. M/s Jindal Photo Limited, New Delhi
in ITA No.814(Del)2011 dated 23.09.2011 and also reported the
decision of the ITAT in the case of Balarampur Chini Mills Ltd vs.
DCIT Kolkata in 140 TTJ (Kol)(UO)73 to submit that when AO did
not express any satisfaction that assessee's working is not correct
disallowance under section 14A(2) can not be done. The learned DR
relied on the orders of AO and the CIT (A).
14. We have considered the issue. As seen from the record
assessee is having both investments as well as trading incomes in
its business. Section 14A prescribes that the expenditure incurred
towards exempt income is to be disallowed and certain method was
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
prescribed under the rule how to work out the disallowance.
However, it is necessary that AO should express satisfaction while
invoking the provisions of section 14A(2) to r.w. Rule 8D. This issue
was discussed by the Hon'ble Delhi Bench in the case of Jindal
Photo Ltd (Supra) vide Para 10 onwards as under:
"10. Now coming to ground No.3, the Department
alleges that the CIT(A) has erred in restricting the
addition u/s 14A of the Act to `19,43,022, as against
that of `31,01,542/- made by the AO. This issue was
also there before the Tribunal in the assessee's case for
assessment year 2007-08. On behalf of the assessee, it
has been contended that Rule 8D of the I.T. Rules was
not applicable for that year; that however, in the year
under consideration, no satisfaction has been recorded
by the AO as to how the assessee's calculation is not
correct; that however, the AO still went on to apply Rule
8D to the case; that the ld. CIT(A) also applied Rule 8D
but gave only part relief to the assessee by reducing the
interest, whereas regarding 0.5% of exempt
investments, he approved the action of the AO; and that
once Rule 8D cannot be applied, the assessee's working
is to be accepted.
11. The learned DR, on the other hand, has strongly
supported the impugned order in this regard also,
contending that the learned CIT(A) has excluded
security taken from customers .
12. The learned CIT(A), it is seen, restricted the
disallowance u/s 14A to `19,43,022/-, calculating the
disallowance of expenditure in terms of section 14A
read with Rule 8D of the Rules as follows:-
a) Direct expenses attributable to earning of exempt
income: (`.) NIL
b) Average exempt investments 37,82,57,180/-
c) Average assets 157,64,90,333/-
d) Interest payments made by the assessee 2,15,625/-
e) Interest disallowed: (d) x (b)/(c) = 51,736/-
f) 0.5% of exempt investments = 18,91,286/-
Total disallowance u/s 14A [ (e) + (f) ] = 19,43,022/-.
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
13. The Tribunal (supra), for assessment year 2007-08,
had held as follows:-
"17. We have heard the parties on this issue and have
perused the material on record. During the year, the
assessee had earned exempt dividend income of
`17,97,010/- in respect of investment made in mutual
funds. In the return of income filed, a suo moto
disallowance of expenses to the tune of `1,73,038/-
had been made by assessee u/s 14A of the Act. In the
assessment order, the AO made a disallowance of
`32,18,475/- by applying the method provided in Rule
8D of the I.T. Rules, 1962. This was done without
pointing out any inaccuracy in the method of
apportionment or allocation of expenses, as adopted by
the assessee. All through, the assessee was maintained
that the assessee was during the year, carrying on
manufacturing activities at its manufacturing units at
several places. Its head office was at Delhi. The
assessee had maintained separate books of account for
each unit. Common expenses incurred at the head office
and the branches were attributed to all the units
including the head office. Investment in mutual funds,
which gave rise to exempt dividend income, was done
through the head office. It was the case of the assessee
that to earn such dividend income, no direct expenditure
was required and no expenses were incurred to make
investment of surplus amounts in mutual funds. The
suo moto disallowance had, however, been made by the
assessee keeping in consideration, the provisions of
section 14A of the Act.
18. Now, as per section 14A(2) of the Act, if the AO,
having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the
assessee in respect of expenditure incurred in relation
to income which does not form part of the assessee's
total income under the Act, the AO shall determine the
amount incurred in relation to such income, in
accordance with such method as may be prescribed,
i.e., under Rule 8D of the I.T. Rules. However, in the
present case, the assessment order does not evince any
such satisfaction of the AO regarding the correctness of
the claim of the assessee. As such, Rule 8D of the Rules
was not appropriately applied by the AO as correctly
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
held by the CIT(A). It has not been shown by the AO
that any expenditure had been incurred by the
assessee for earning its dividend income. Merely, an ad
hoc disallowance was made. The onus was on the AO
to establish any such expenditure. This onus has not
been discharged. In "CIT v. Hero Cycles" (P&H) 323 ITR
518, under similar circumstances, it was held that the
disallowance u/s 14A of the Act requires a clear finding
of incurring of expenditure and that no disallowance
can be made on the basis of presumptions in "ACIT v.
Eicher Ltd." 101 TTJ (Del)369, that it was held that the
burden is on the AO to establish nexus of expenses
incurred with the earning of exempt income before
making any disallowance u/s 14A of the Act. In "Maruti
Udyog v. DCIT" 92 ITD 119(Del), it has been held that
before making any disallowance u/s 14A of the Act, the
onus to establish the nexus of the same with the exempt
income, is on the revenue. In "Wimco Seedlings Limited
v. DCIT" 107 ITD 267 (Del) (TM), it has been held that
there can be no presumption that the assessee must
have incurred expenditure to earn tax free income.
Similar are the decisions in:
1. Punjab National Bank v. DCIT, 103 TTJ 908(Del);
2. Vidyut Investment Ltd., 10 SOT 284(Del); and
3. D.J. Mehta v. ITO, 290 ITR 238(Mum.)(AT).
19. In view of the above, finding no error with the order
of the CIT(A) on the point at issue, the same is hereby
confirmed. Ground No.3 is thus rejected."
14. In the year under consideration, it is seen that it is
not incorrect when the assessee contends that no
satisfaction has been recorded by AO regarding the
assessee's calculation being incorrect. Even so, Rule 8D
of the Rules has been applied. This, in our opinion, is
not correct. Such satisfaction of the AO is a pre-requisite
to invoke the provisions of Rule 8D of the Rules. The ld.
CIT(A), therefore, erred in partially approving the action
of AO".
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
15. Similar view was also expressed by the Kolkata Bench in the
case of Balarampur Chini Mills Ltd vs. DCIT(supra) wherein on
similar issue it was held as under:
"The computation made by assessee was certified by its
statutory auditors and this fact has been recorded by
AO as well as CIT(A). None of them had pointed out any
defect in the correctness of the assessee's claim of
expenditure amounting to `1,49,995 as certified by its
auditors. It is found from the statement showing
sources of funds and its utilization during financial year
2007-08 that assessee borrowed money primarily for
its main business activities of manufacture and sale of
sugar, industrial alcohol, fertilizer, generation and
distribution of power etc. and no part of borrowed
money had any direct link or nexus with the
investments made by assessee company, which had
yielded tax-free dividend income. The assessee had
substantial capital of its own i.e., share capital plus
reserves amounting to `94,366.07 Lakhs (as on 31st
March, 2007) and `1,02,718.44 lakhs (as on 31st
March, 2008) averaging at ` 98,542.26 lakhs which is
more than 9 times of the average value of investments,
amounting to `10,431.39 lakhs computed by the AO in
the assessment order itself. Assessee had utilized its
entire borrowings in the form of term 10ans/ECBs for
setting up Greenfield projects/expansion of existing
projects. Similarly, borrowings in the form of cash credit
facilities were utilized for its day to day requirements of
working capital to run the business. As per fund flow
statement it is clear that entire amount of investments,
Yielding tax-free dividend income to the assessee, were
acquired from its owned funds represented by the
share capital and free reserves and neither long-term
borrowings in the form of term loans/ECBs etc. nor
short-term borrowings in the form of cash credit
facilities etc. were used for the purpose of acquisition of
investments at any time during the previous year as is
evident from statement prepared on the basis of
audited balance sheet as at 31st March, 2008. From r.
80 it is clear that the AO can invoke this rule in case he
is not satisfied with regard to the account of assessee
that the claim of expenditure made by assessee is not
correct and the claim made by assessee that no
expenditure has been made in relation to income which
does not form part of total income under the Act, he
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
shall determine the amount of expenditure in relation to
such income in accordance with the provisions of r.
80(2). Even the provisions of section 14A(2) clearly state
that the AO shall determine the amount of expenditure
incurred in relation to such income which does not form
part of total income under this Act in accordance with
such method as prescribed (under r. 80), if the AO
having regard to the accounts of the assessee is not
satisfied with the correctness of the claim of the
assessee in respect of such expenditure in relation to
income which does not form part of total income under
the provisions of this Act. In the present case, there is
no linkage or nexus between the funds borrowed by
assessee and the impugned investments, hence, no
interest expenditure can be disallowed by mechanically
applying the provisions of r. 80. The assessee has
explained that the share capital and reserves, that is its
own funds were utilized for the purpose of investment in
shares for earning dividend income and this has not
been negated by lower authorities i.e. neither CIT(A) nor
AO. The assessee has explained each and every
investment with sources of funds and its utilization as
well as opening application of funds and closing
application of funds as noted above. It is an admitted
position in law that expenditure can be disallowed
under s. 14A if and only if it is incurred in relation to
income which does not form part of total income. From
the facts of the present case, it is clear that there is no
link with expenditure for earning of dividend income
incurred by the assessee and once the facts are clear,
no disallowance can be made by invoking r. 80. Neither
the AO nor CIT(A) has recorded any finding that having
regard to the accounts of the assessee, they are not
satisfied with the correctness of the claim of
expenditure made by assessee or the claim made by
assessee that no expenditure has been incurred in
relation to income which does not form part of the total
income under the Act for the relevant assessment year.
In the absence of any such finding, facts of the present
case show that the investment in shares was made out
of own capital employed and not from borrowed funds,
no disallowance on account of interest expenditure can
be made by invoking r. 80".
On the principles of law AO should have expressed satisfaction
about the working given by assessee.
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ITA No 4939 of 2011 Satguru Capital & Finance Pvt. Ltd. Mumbai
16. Even though on legal principles the matter is in favour of
assessee, since assessee has not furnished any details of
expenditure before AO and the working furnished was without
prejudice to its claim, We in the interest of justice, are of the
opinion that this matter requires re-examination by AO keeping in
view of the principles laid down by the above cases and also to see
there is any expenditure incurred in relation to the exempt income.
For this, we set aside the orders of AO and the CIT (A) on the above
issue and restore the matter to the file of AO to examine it afresh.
The ground is considered allowed for statistical purposes.
17. In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 20th June, 2012.
Sd/- Sd/-
(D. Manmohan) (B. Ramakotaiah)
Vice President Accountant Member
Mumbai, dated 20th June, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "E" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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