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From the Courts »
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Raptakos Brett & Co. Ltd., 21 A, Mittal Tower, 210 Nariman Point, Mumbai- 400 021 Vs. The DCIT Cen. Cir 46, Mumbai
June, 11th 2015
                  IN THE INCOME TAX APPELLATE TRIBUNAL
                       MUMBAI BENCHES "D", MUMBAI

               Before Shri B R Baskaran, AM & Shri Amit Shukla, JM

                  ITA Nos.3317/Mum/2009 & 1692/Mum/2010
                         Assessment Year : 2007-08

Raptakos Brett & Co. Ltd.,                      The DCIT Cen. Cir 46,
21 A, Mittal Tower,                             Mumbai
210 Nariman Point,                       Vs.
Mumbai- 400 021
PAN : AAACR1772R
           (Appellant)                                     Respondent)


               Appellant By  : S/Shri Soli Dastur & Madhur Agarwal
               Respondent By : Shri Ravi Sawana

Date of Hearing :25.03.2015               Date of Pronouncement : 10.06.2015

                                       ORDER

Per Amit Shukla, Judicial Member

The aforesaid appeals have been filed by the assessee against order dated

08.03.2009 passed by the CIT(A) Central ­ II, Mumbai, for the quantum of

assessment u/s. 143(3) for A.Y. 2007-08 and against order dated 12.01.2010 in

relation to the penalty proceedings u/s. 271(1)(c) for the assessment year 2007-08.


2.       We will first take up the quantum appeal in ITA No. 3317/Mum/2009, vide

which, following grounds have been raised.


     "1.1 On the facts and circumstances of the case and in law, the learned
     Commissioner of Income-tax (Appeals) ­ Central II, Mumbai ["the CIT(A)"]
     erred in confirming the action of Deputy Commissioner of Income Tax (the
     A.O) by not allowing the claim of set off of Long term Capital Loss on sale of
     shares where Security Transaction Tax ("STT") was deducted against the Long
     Term Capital Gain arising on sale of land at Chennai;
                                            2
                                                               ITA Nos. 3317/Mum/2009 &
                                                                          1692/Mum/2010

     1.2 The appellant prays that such set off of the said Long Term Capital Loss be
     allowed

     2.1 On the facts and circumstances of the case and in law, the CIT(A) erred in
     confirming the action of the A.O. in disallowing the expenses of Rs.39,80,215/-
     u/s 14A of the Act by applying Rule 8D of the Income tax Rules 1962 ("the
     Rules");

     2.2 the CIT(A) also erred in confirming the action of the A.O. in applying Rule
     8D in as much as the said rule was ultravires and void;

     2.3 the CIT(A) further erred confirming the action of the A.O. in applying Rule
     8D retrospectively in as much as the said rules would be applicable with effect
     from A.Y. 2008-09;

     2.4 the CIT(A) further erred in confirming the action of the A.O. in disallowing
     the expenses proportionately against the dividend income earned so exempt
     u/s. 10(38) of the Act.

     2.5 the Appellant prays that the said disallowance of expenses be deleted.

     2.6 Without prejudice to above, the Appellant prays that the said disallowance
     of expenses be appropriately reduced."



3.       The brief facts of the case, qua the issue raised in ground no.1 are that the

assessee is a pharmaceutical company, engaged in manufacturing and sale of

pharmaceuticals, formulations, dietetic specialities and animal husbandry.         The

assessee in the computation of income had shown Long term capital loss on sale of

shares amounting to Rs.57,32,835/- and loss on sale of mutual funds units

amounting to Rs.2,61,655/-.       The said Long term capital loss has been set off

against the Long term capital gains of Rs.94,12,00,000/- arising from sale of land at

Chennai. The Assessing Officer held that the losses claimed cannot be allowed since

the income from Long term capital gain on sale of shares and mutual funds are

exempt u/s. 10(38). That apart, of the Long term capital loss in respect of shares

where securities transaction tax has been deducted, would have been exempt from

Long term capital gain had there been profits, therefore, Long term capital loss
                                          3
                                                              ITA Nos. 3317/Mum/2009 &
                                                                         1692/Mum/2010

from sale of shares cannot be set off against the Long term capital gain arising out

of the sale of land.


4.     The learned CIT(A) too has confirmed the action of the Assessing Officer on

the ground that exempt profit or loss construes separate species of income or loss

and such exempt species of income or loss cannot be set off against the taxable

species of income or loss. Tax exempt losses cannot be deducted from taxable

income and, therefore, the Assessing Officer has rightly disallowed the claim of

losses from shares to be set off against the Long term capital gain from sale of land.


5.     Before us the learned senior counsel, Shri Soli Dastur, submitted that what is

contemplated in section 10(38) is exemption of positive income and losses will not

come within the purview of the said section. The set off of Long term capital loss

has been clearly provided in sections 70 and 71. The Legislation has not put any

embargo to exclude Long term capital loss from sale of shares to be set off against

Long term capital gain arising on account of sale of other capital asset. Even in the

definition of capital asset u/s. 2(14), no exception or exclusion has been provided to

equity shares the profit/gain of which are treated as exempt u/s. 10(38). Capital

gain is chargeable on transfer of a capital asset u/s. 45 and mode of computation

has been elaborated in section 48. Certain exceptions have been provided in section

47 to those transactions which are not regarded as transfer.       Nothing has been

mentioned in sections 45 to 48 that capital gain or loss on sale of shares are to be

excluded as section 10(38) exempts the income arising from the transfer of long

term capital asset being an equity share or unit. Legislature has given exemption to

income arising from transfer of Long term capital asset being an equity share in
                                          4
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

company or unit of equity oriented fund, which is chargeable to STT. Section 10(38)

cannot be read into section 70 or71 or sections 45 to 48.          In support of his

contention, he strongly relied upon the decision of Hon'ble Calcutta High Court in the

case of Royal Calcutta Turf Club v. CIT (1983) 144 ITR 709 (Cal). In this decision he

submitted that similar issue with regard to the losses on account of breeding horses

and pigs which are exempt u/s. 10(27) whether can be set off against its income of

other source under the head "business". The Hon'ble High Court after considering

the relevant provisions of section 10(27) and section 70, held that section 10(27)

excludes in expressed terms only any income derived from business of livestock

breeding, poultry or dairy farming. It does not exclude the business of livestock

breeding, poultry or dairy farming from the operation of the Act. The losses suffered

by the assessee in respect of livestock, breeding were held to be admissible for

deduction and were allowed to be set off against other business income. He drew

our attention to the various observations and findings of the Hon'ble High Court and

also the reliance placed by their Lordships to various decisions of Hon'ble Supreme

Court, especially in the case of CIT vs. Karamchand Premchand Ltd. (1960) 40 ITR

106. He also referred to various observations of Hon'ble Supreme Court from the

said decision.   Thus, he submitted that the losses on account of sale of shares

should be allowed to be set off against Long term capital gain on sale of land. In his

fairness, he also pointed out before us that there is a decision of Hon'ble Gujarat

High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR

261 (Guj), which has decided this issue against the assessee.           However, he

submitted that in the said decision, the decision of Hon'ble Calcutta High Court has

not been referred at all. Therefore, this decision does not have precedence value as
                                          5
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

compared to the Calcutta High Court decision, which is based on Supreme Court

decision on this point. He also pointed out that ITAT Mumbai Bench also in the case

of Schrader Duncan Ltd. Vs. Addl. CIT (2012) 50 SOT 68 has decided somewhat

similar issue against the assessee. However, he distinguished the said decision and

highlighted the points as to why said decision cannot be followed.


6.    On the other hand, the learned DR strongly relied upon the order of the AO

and CIT(A) and submitted that, firstly, if the income from the Long term capital gain

on sale of shares is exempt, then the loss from such sale of shares will also not form

part of the total income and therefore, there is no question of set off against other

income or Long term capital gain on different capital asset. Secondly, the decisions

of Hon'ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He

further submitted that it is quite a settled law that income includes loss also and,

therefore, if the income from sale of shares does not form part of the total income,

then the losses from such shares also will not form part of the total income. Thus,

the order of the CIT(A) should be confirmed.


7.    We have heard rival submissions and perused the relevant findings given in

the impugned orders. The main issue before us is, whether Long term capital loss

on sale of equity shares can be set off against Long term capital gain arising on sale

of land or not, as the income from Long term capital gain on sale of such shares are

exempt u/s. 10(38). The nature of income here in this case is from sale of Long

term capital asset, which are equity shares in a company and unit of an equity

oriented fund which is chargeable to STT. First of all, Long term capital gain has

been defined under section 2(39A), as capital gains arising from transfer of a Long
                                            6
                                                                 ITA Nos. 3317/Mum/2009 &
                                                                            1692/Mum/2010

term capital asset. Section 2(14) defines "Capital asset" and various exceptions and

exclusions have been provided which are not treated as capital asset. Section 45 is

the charging section for any profits or gain arising from a transfer of a capital asset

in the previous year i.e. taxability of capital gains.       Section 47 enlists various

exceptions and transactions which are not treated as transfer for the purpose of

capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has

been enumerated from sections 48 to 55. Further sub section (3) of section 70 and

section 71 provides for set off of loss in respect of capital gain.


8.     From the conjoint reading and plain understanding of all these sections it can

be seen that, firstly, shares in the company are treated as capital asset and no

exception has been carved out in section 2(14), for excluding the equity shares and

unit of equity oriented funds that they are not treated as capital asset. Secondly, any

gains arising from transfer of Long term capital asset is treated as capital gain which

is chargeable u/s. 45; thirdly, section 47 does not enlist any such exception that

transfer of long term equity shares/funds are not treated as transfer for the purpose

of section 45 and section 48 provides for computation of capital gain, which is

arrived at after deducting cost of acquisition i.e. cost of any improvement and

expenditure incurred in connection with transfer of capital asset, even for arriving of

gain in transfer of equity shares; lastly, section 70 & 71 elaborates the mechanism

for set off of capital gain. Nowhere, any exception has been made/ carved out with

regard to Long term capital gain arising on sale of equity shares. The whole genre

of income under the head capital gain on transfer of shares is a source, which is

taxable under the Act. If the entire source is exempt or is considered as not to be
                                          7
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010




included while computing the total income then in such a case, the profit or loss

resulting from such a source do not enter into the computation at all. However, if a

part of the source is exempt by virtue of particular "provision" of the Act for

providing benefit to the assessee, then in our considered view it cannot be held that

the entire source will not enter into computation of total income. In our view, the

concept of income including loss will apply only when the entire source is exempt

and not in the cases where only one particular stream of income falling within a

source is falling within exempt provisions. Section 10(38) provides exemption of

income only from transfer of Long term equity shares and equity oriented fund and

not only that, there are certain conditions stipulated for exempting such income i.e.

payment of security transaction tax and whether the transaction on sale of such

equity share or unit is entered into on or after the date on which chapter VII of

Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then

exemption is not given. Thus, the income contemplated in section 10(38) is only a

part of the source of capital gain on shares and only a limited portion of source is

treated as exempt and not the entire capital gain (on sale of shares). If an equity

share is sold within the period of twelve months then it is chargeable to tax and only

if it falls within the definition of Long term capital asset and, further fulfils the

conditions mentioned in subsection (38) of section 10 then only such portion of

income is treated as exempt.       There are further instances like debt oriented

securities and equity shares where STT is not paid, then gain or profit from such

shares are taxable. Section 10 provides that certain income are not to be included

while computing the total income of the assessee and in such a case the profit or

loss resulting from such a source of income do not enter into computation at all.
                                          8
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

However, a distinction has been drawn where the entire source of income is exempt

or only a part of source is exempt. Here it needs to be seen whether section 10(38)

is source of income which does not enter into computation at all or is a part of the

source, the income in respect of which is excluded in the computation of total

income. For instance, if the assessee has income from Short term capital gain on

sale of shares; Long term capital gain on debt funds; and Long term capital gain

from sale of equity shares, then while computing the taxable income, the whole of

income would be computed in the total income and only the portion of Long term

capital gain on sale of equity shares would be removed from the taxable income as

the same is exempt u/s 10(38). This precise issue had come up for consideration

before the Hon'ble Calcutta High Court in Royal Turf Club, wherein the Hon'ble High

Court observed that "under the Income tax Act 1961 there are certain incomes

which do not enter into the computation of the total income at all. In computing the

total income of a resident assessee, certain incomes are not included under s.10 of

the Act. It depends on the particular case; where the Act is made inapplicable to

income from a certain source under the scheme of the Act, the profit and loss

resulting from such a source will not enter into the computation at all. But there are

other sources which, for certain economic reasons, are not included or excluded by

the will of the Legislature. In such a case, one must look to the specific exclusion

that has been made."


The Hon'ble High Court was besieged with the following question


  "Whether under s.10(27) read with s.70 of the I.T.Act, 1961, was the assessee
  entitled to set off the loss on the two heads, namely, Broodmares Account and
                                         9
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

  the Pig Account, against its income of other sources under the head
  "Business""
Their Lordships after analysing the provisions of section 70 and section 10(27)

observed in the following manner:


  "In this case it is important to bear in mind that set-off is being claimed under
  Section 70 of the 1961 Act which permits set off of any income falling under
  any head of income other than the capital gain which is a loss, the assessee
  shall be entitled to have the amount of such loss set off against his income
  from any other source under the same head. We have noticed that in the
  instant case the exclusion has been conceded in computing the business
  income or the source of income from the head of business and in computing
  that business income, the loss from one particular source, that is, broodmares
  account and the pig account, had been excluded contrary to the submission of
  the assessee. The assessee wanted these losses to be set off. The Revenue
  contends that as the sources of the income are not to be included in view of
  the provisions of Clause (27) of s. 10 of the 1961 Act, the loss suffered from
  this source could also not merit the exclusion. Under the I.T. Act, there are
  certain incomes which do not enter into the computation of the total income at
  all. In this connection we have to bear in mind the scheme of the charging
  section which provides that the incomes shall be charged and s. 4 of the Act
  provides that the Central Act enacts that the incomes shall be charged for any
  assessment year and in accordance with and subject to the provisions of the
  1961 Act in respect of the total income of the previous year or years or
  whatever the case may be. The scheme of " total income " has been explained
  by s. 5 of the Act which provides that subject to the provisions of the Act, the
  total income of the previous year of a person who is a resident includes all
  income from whatever source it is derived. In computing the total income,
  certain incomes are not included under s. 10 of the Act. It depends on the
  particular case where certain income, in respect of which the Act is made
  inapplicable to the scheme of the Act, and in such a case, the profit and loss
  resulting from such a source do not enter into the computation at all. But there
  are other sources which for certain economic reasons are not included or
  excluded by the will of the Legislature. In such a case we must look to the
  specific exclusion that has been made. The question is in this case whether s.
  10(27) is a source which does not enter into the computation at all or is a
  source the income in respect of which is excluded in the computation of total
  income. How this question will have to be viewed, has been looked into by the
  Supreme Court in several decisions to some of which our attention was
  drawn. "
                                           10
                                                               ITA Nos. 3317/Mum/2009 &
                                                                          1692/Mum/2010

After discussing the various decisions of the Hon'ble Supreme Court specifically the

decision of in the case of Karamchand Premchand (supra), the Hon'ble High Court

came to the following conclusion:


     "cl.(27) of s.10 excludes in express terms only "any income derived from a
     business of live-stock breeding or poultry or dairy farming. It does not exclude
     the business of livestock breeding or poultry or dairy farming from the
     operation of the Act. Therefore, the losses suffered by the assessee in the
     broodmares account and in the pig account were admissible deductions in
     computing its total income"
Thus, the ratio laid down by the Hon'ble Calcutta High Court is clearly applicable and
accordingly we follow the same in the present case.

9.       Now coming to the argument of the learned DR and learned CIT(A) that

income includes loss and if income is exempt then loss will also not be taken into

computation of the income, and such an argument is with reference to the decision

of Hon'ble Supreme Court in the case of CIT vs. Hariprasad & Company Pvt. Ltd.

(1975) 99 ITR 118 . The Hon'ble Supreme Court, opined that, if loss was from the

source or head of income not liable to tax or congenitally exempt from income tax,

neither the assessee was required to show the same in the return nor was the

Assessing Officer under any obligation to compute or assess it much less for the

purpose of carry forward. Further, the Hon'ble Supreme Court observed that "From

the charging provisions of the Act, it is discernible that the words ' income ' or '

profits and gains' should be understood as including losses also, so that, in one

sense 'profits and gains' represent ' plus income ' whereas losses represent 'minus

income'. In other words, loss is negative profit. Both positive and negative profits

are of a revenue character. Both must enter into computation, wherever it becomes

material, in the same mode of the taxable income of the assessee. Although Section
                                         11
                                                                ITA Nos. 3317/Mum/2009 &
                                                                           1692/Mum/2010

6 classifies income under six heads, the main charging provision is Section 3 which

levies income-tax, as only one tax, on the 'total income ' of the assessee as defined

in Section 2(15). An income in order to come within the purview of that definition

must satisfy two conditions. Firstly, it must comprise the ' total amount of income,

profits and gains referred to in Section 4(1)'. Secondly, it must be 'computed in the

manner laid down in the Act'. If either of these conditions fails, the income will not

be a part of the total income that can be brought to charge."


While concluding the issue their Lordships observed that "it may be remembered

that the concept of carry forward of loss does not stand in vacuo. It involves the

notion of set- off. Its sole purpose is to set off the loss against the profits of a

subsequent year. It pre-supposes the permissibility and possibility of the carried-

forward loss being absorbed or set off against the profits and gains, if any, of the

subsequent year. Set off implies that the tax is exigible and the assessee wants to

adjust the loss against profit to reduce the tax demand. It follows that if such set-

off is not permissible or possible owing to the income or profits of the subsequent

year being from a non-taxable source, there would be no point in allowing the loss

to be "carried forward". Conversely, if the loss arising in the previous year was

under a head not chargeable to tax, it could not be allowed to be carried forward

and absorbed against income in a subsequent year from a taxable source." The

ratio and the principle laid down by the Hon'ble Apex Court would not apply here in

this case, because the concept of income includes loss will apply only when entire

source is exempt or is not liable to tax and not in the case where only one of the

income falling within such source is treated as exempt. The Hon'ble Apex Court on
                                          12
                                                              ITA Nos. 3317/Mum/2009 &
                                                                         1692/Mum/2010

the other hand, itself has stated that if loss from the source or head of income is not

liable for tax or congenitally exempt from income tax, then it need not be computed

or shown in the return and Assessing Officer also need not assess it. This distinction

has to be kept in mind.      Hon'ble Calcutta High Court in Royal Turf Club have

discussed the aforesaid decision of the Hon'ble Supreme Court and held that the

same will not apply in such cases. Thus, in our conclusion, we hold that section

10(38) excludes in expressed terms only the income arising from transfer of Long

term capital asset being equity share or equity fund which is chargeable to STT and

not entire source of income from capital gains arising from transfer of shares. It

does not lead to exclusion of computation of capital gain of Long term capital asset

or Short term capital asset being shares. Accordingly, Long term capital loss on sale

of shares would be allowed to be set off against Long term capital gain on sale of

land in accordance with section 70(3)


10.   Coming to the decision of the ITAT Mumbai Bench in the case of Schrader

Duncan Ltd.(supra), the issue involved there was, whether the loss on transfer of

capital asset being units US 64 Scheme of Unit Trust of India can be allowed and

entitled to carry forward the same for set off of in subsequent assessment years,

when the income arising from such transfer of unit is exempt u/s. 10(33).          The

Tribunal held that the source both capital gain and capital loss on sale of units of

US64 is itself excluded and not only the income arising out of capital gain. The

Hon'ble Tribunal have noted the history of US64 Scheme and the purpose for which

such scheme was launched. In this context of transfer of US64 scheme the Tribunal

held that the provisions were not meant to enable the assessee to claim loss by
                                          13
                                                               ITA Nos. 3317/Mum/2009 &
                                                                          1692/Mum/2010

indexation for set off against other capital gain chargeable to tax. This decision is

slightly distinguishable and secondly, we have already discussed the issue at length

and have held that the ratio of Hon'ble Calcutta is applicable in the present case.

Lastly, coming to the decision of Hon'ble Gujarat High Court in the case of

Kishorebhai Bhikhabhai Virani (supra), we find that the issue involved in the present

case was almost the same, wherein the Hon'ble High Court after following the

decision of Hon'ble Supreme Court in the case of Harprasad & Company Pvt. Ltd.

(supra), had decided the issue against the assessee. Since we have already noted

down the ratio of Hon'ble Calcutta High Court, wherein the Hon'ble High Court has

discussed this issue in detail after relying upon series of decisions of Hon'ble

Supreme Court and have reached to a conclusion as discussed above, and,

therefore, we are respectfully following the ratio of the decision of the Calcutta High

Court.    Further the said decision have not been referred or distinguished by the

Hon'ble Gujarat High Court. Accordingly, we allow the assessee's ground no.1 and

direct the Assessing Officer to allow the claim of set off of Long term capital loss on

sale of shares against the Long term capital gain arising on sale of land.


11.      The next ground relates to disallowance of expenses of Rs.39,80,215/- u/s.

14A which has been made after applying Rule 8D. During the year the assessee had

shown dividend income of Rs.5,15,28,242/- which was claimed as exempt u/s.

10(34).     In response to the show cause notice, the assessee submitted that

investments have been made out of its own capital and internal accruals and,

therefore, no disallowance u/s. 14A is called for. However, the learned Assessing

Officer without examining the assessee's claim and the accounts of the assessee,
                                         14
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

proceeded to apply Rule 8D thereby making the disallowance of Rs.39,80,215/- even

though such Rule has been made applicable w.e.f. 01.04.2008. The CIT(A) too has

confirmed the said addition after following the decision of the Mumbai Special Bench

in the case of ITO vs. Daga Capital management (P.) Ltd. (2008) 119 TTJ 289.


12.    Before us, the learned senior counsel, Shri Soli Dastur, submitted that the

disallowance have been made after applying Rule 8D, which admittedly is not

applicable in the impugned assessment year i.e. A.Y. 2007-08. He submitted that

section 14(2) was brought in the statute by Finance Act 2006, w.e.f. 01.04.2007.

The said subsection provided mechanism for determination /quantification of amount

of    expenditure    incurred   in    relation   to   exempt      income.        Such

quantification/determination was to be done as per the method prescribed if the

Assessing Officer, 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. He

submitted that though subsection (2) was brought in the assessment year 2007-08,

however, the method specified for quantification of expenditure was prescribed u/s.

8D, which was brought in the Rules w.e.f. 24.03.2008. Thus, even if the conditions

of sub section (2) stands fulfilled, then also there cannot be any determination of

expenditure as the formula given in Rule 8D as the same was not existing in the

statute. He submitted that upto the assessment year 2006-07, there could be some

reasonable basis for disallowance. However, in the assessment year 2007-08 the

statute provided for quantification/determination of the disallowance as per the

method prescribed but the said method was not there in the statute or rules.

Therefore, no disallowance can be made because there can be no determination of
                                         15
                                                             ITA Nos. 3317/Mum/2009 &
                                                                        1692/Mum/2010

expenditure. He referred to the decision of Hon'ble Supreme Court in the case of

Chandra Kishore Jha vs. Mahavir Prasad and Others (1999) 8 SCC 266, wherein has

been laid down that if a statute provides for a thing to be done in a particular

manner, then it has to be done in that manner and in other manner.              This

proposition has been earlier laid down by Hon'ble Apex Court in the case of State of

Uttar Pradesh vs. Singhara Singh AIR 1964 SC 358. Accordingly, he submitted that

no disallowance should be made.





13.   On the other hand, the learned DR submitted that there is no allocation of

expenditure by the assessee and, therefore, some disallowance is called for even

though Rule 8D is not applicable in this year. Otherwise also he submitted that once

the statute is provided the determination of amount of expenditure in terms of

subsection (2), then even if Rule 8D has been brought w.e.f. 24.03.2008, then it has

to be implied that same rule is applicable in this year also and, accordingly,

disallowance can be determined in accordance with Rule 8D.


14.   We have heard the rival submissions and also perused the material placed on

record. On perusal of the impugned orders, we find that the assessee had made the

claim before the Assessing Officer that no expenditure can be said to be attributable

in relation to the earning of dividend income. Once such a claim has been made,

the Assessing Officer was required under the statute to satisfy himself having regard

to the accounts of the assessee about the correctness of the claim of the assessee.

This has been specifically provided under sub section (2) which provides for

determination and quantification of the amount of disallowance of expenditure under

14A. If such a condition mentioned in subsection (2) of section 14A is not fulfilled
                                           16
                                                               ITA Nos. 3317/Mum/2009 &
                                                                          1692/Mum/2010

then, needless to say, that the Assessing Officer cannot proceed to disallow the

expenditure.   There has to be some finding of the Assessing Officer that the

assessee's claim is prima facie not tenable. The assessee has pointed out that entire

investments have been made out of its own capital and internal accruals, therefore,

no expenses can be said to be attributable. This claim of the assessee required

examination by the AO having regard to the accounts of the assessee and the nature

of expenditure which can be said to be attributable for earning of the exempt

income.    If such an examination has not been done and no satisfaction has been

arrived, then the learned Assessing Officer cannot reject the assessee's claim and

proceed to disallow u/s. 14A(2).      In the instant case, admittedly, the assessing

officer has not conducted such an examination and the assessment order is also

silent about his satisfaction on the claim of the assessee. Therefore, we are of the

opinion that the matter should be restored back to the file of the AO to examine the

conditions as laid down in section 14A(2) and, thereafter, decide the issue in

accordance     with the provisions of law without resorting to Rule 8D, which

admittedly is not applicable in the impugned assessment year.           The AO while

deciding this issue may consider the decision of Hon'ble Bombay High Court in the

case of Godrej & Boyce Mfg. Co. Ltd. (328 ITR 81). Needless to say that the AO will

give reasonable opportunity of hearing to the assessee and the assessee is free to

raise all the contentions before the AO, which has been raised before us.

Accordingly, ground no.2 is treated as partly allowed for statistical purposes.


15.    In the result, the appeal of the assessee is partly allowed.
                                             17
                                                               ITA Nos. 3317/Mum/2009 &
                                                                          1692/Mum/2010

 16.     Now we come to appeal in ITA No. 1692/Mum/2010.             This appeal is in

 relation to the penalty proceedings u/s. 271(1)(c) wherein penalty has been levied

 on account of disallowance for assessee's claim for set off of loss as discussed in

 ground no.1 and disallowance made u/s. 14A in the quantum appeal. Since, we

 have already allowed the assessee's appeal on first issue and on second issue also

 matter has been set aside, therefore, the penalty on such disallowances have no

 legs to stand. Accordingly, the penalty levied is deleted and the appeal is allowed.


 17.     In the result, the appeal of the assessee in ITA No. 3317/Mum/2009 is partly

 allowed and that in ITA No. 1692/Mum/2010 is allowed.


         Order pronounced in the open court on this 10th day of June 2015.


                  Sd/-                                              Sd/-
           (B R Baskaran)                                     (Amit Shukla)
      ACCOUNTANT MEMBER                                    JUDICIAL MEMBER
 Mumbai; Dated : 10th June, 2015.

 SA

 Copy of the Order forwarded to :

1.     The   Appellant.
2.     The   Respondent.
3.     The   CIT(A), Mumbai.
4.     The   CIT
5.     The   DR, `D' Bench, ITAT, Mumbai

                                                         BY ORDER,

         //True Copy//

                                                  (Dy./Asstt. Registrar)
                                           Income Tax Appellate Tribunal, Mumbai

 
 
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