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Vinod K. Nevatia 206, Kakad Chambers, Dr. A. B. Road, Worli, Mumbai-400 018 Vs. Asst. CIT-4(2), Aayakar Bhavan, Room No. 647, M. K. Road, Mumbai-400 020
September, 26th 2014

              ,                                     ,                                 

                     ./I.T.A. No. 2398/Mum/2012
                    (   / Assessment Year: 2008-09)

Vinod K. Nevatia                                    Asst. CIT-4(2),
206, Kakad Chambers,                       /        Aayakar Bhavan, Room No. 647,
Dr. A. B. Road, Worli,                     Vs.      M. K. Road, Mumbai-400 020
Mumbai-400 018
     . /  . /PAN/GIR No. AAEPN 8175 H
         ( /Appellant)                        :            (     / Respondent)

         / Appellant by                       :    Shri S. C. Tiwari &
                                                   Ms. Natasha Mangat
           /Respondent by                     :    Shri Jiten Kumar

                          /                   :    18.09.2014
                    Date of Hearing
                     Date of Order            :    23.09.2014

                                     / O R D E R
Per Sanjay Arora, A. M.:
       This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-8, Mumbai (`CIT(A)' for short) dated 12.01.2012, dismissing
the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961
(`the Act' hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated

2.     The appeal comprising eight grounds, raises, in effect, two issues, with Gd. # 6 to
8 being general in nature, warranting no adjudication. We shall proceed issue-wise.
                                                    ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                 Vinod K. Nevatia vs. Asst. CIT

3.     The first issue, projected per grounds 1 to 3, is in respect of the confirmation of the
disallowance u/s.14A at Rs.17,93,668/-. The brief facts are that the assessee, in the
business of share broking, was observed during the course of assessment proceedings to
have earned dividend income at Rs.84.70 lacs, which was claimed tax-exempt. Further,
as no expenditure there-against had been disallowed u/s.14A, the Assessing Officer
(A.O.) proceeded to work the same in terms of Rule 8D, mandatory for the current year,
and which worked to the impugned disallowance of Rs.17.94 lacs. The matter was
examined by the ld. CIT(A) in appeal at length with reference to the several objections
raised by the assessee before him. The assessee had not maintained any separate accounts
for expenses, i.e., in relation to the income/s not forming part of the total income, for the
A.O. to be able to examine the veracity of the assessee's claim of having not incurred any
expenditure in relation to the said income. The provision of rule 8D, which is essentially
a rule of apportionment, would therefore come into play. There was accordingly no merit
in the assessee's argument that the same would not in-as-much as section 14A does not
provide for apportionment of expenses, as (say) s.80HHC. The assessee's accounts being
combined, i.e., for the income/s forming part of, and not so, of the total income, the A.O.
was justified in applying the proportionate method as prescribed by rule 8D, confirmed as
mandatory by the hon'ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. v.
Dy. CIT [2010] 328 ITR 81 (Bom) w.e.f. AY 2008-09, the current year.

4.     The assessee's case before us, placing reliance on the decisions in the case of CCI
Ltd. vs. Jt. CIT (in ITA No. 359 of 2011 dated 28.02.2012/PB pgs. 1-8) and CIT vs. Smt.
Leena Ramachandran [2011] 339 ITR 296 (Ker) (PB pgs.9-12), was that section 14A
would not apply in-as-much as the shares are held by the assessee as stock-in-trade, or at
least to the extent they are so held, i.e., as stock-in-trade; the assessee having also
returned capital gains, both long term and short term, on the sale of the shares. The ld.
Authorized Representative (AR) would in this regard contend that the entire dividend
income, share-wise details of which are available, stands received on shares held as
stock-in-trade. On the decision by the Tribunal in the case of D. H. Securities (P.) Ltd. vs.
                                                      ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                   Vinod K. Nevatia vs. Asst. CIT

Dy. CIT [2014] 146 ITD 1 (Mum) (TM), which is by its larger bench, as also Dy. CIT vs.
Damani Estates & Finance (P.) Ltd. [2013] 25 ITR 683 (Mum)(Trib) being brought to
his notice by the Bench, he pleaded ignorance, though confirmed of being aware of the
decision by the Special Bench in the case of Cheminvest Ltd. vs. ITO [2009] 121 ITD 318
(Del)(SB), which he would though contend of being no consequence in view of the
decisions by the hon'ble high courts in the case of CCI Ltd. (supra) and Leena
Ramachandran (supra). The ld. Departmental Representative (DR), would on the other
hand rely on the orders by the Revenue authorities.

5.     We have heard the parties, and perused the material on record.
       We firstly find the arguments by the ld. CIT(A) in meeting the assessee's case, as
made before him, as unexceptional. In fact, the assessee before us did not raise any of the
issues he did before the first appellate authority.
       Coming to the assessee's case, i.e., as made before us, we find it as untenable both
on facts and in law. Earning of income is not a condition precedent for the claim of
expenditure, either u/ss. 36(1)(iii) and 37(1), i.e., qua business income, or s.57(iii), i.e.,
qua income from other sources. As such, the extent of income, or even it being at nil,
would not be a relevant consideration for the purpose of allowance of expenditure and,
thus, for its disallowance u/s.14A where it is in relation to income/s not forming part of
the total income, even as clarified by the tribunal per its larger bench decision in
Cheminvest Ltd. (supra) applying CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519
(SC). This would also at once resolve the issue of s. 14A being inapplicable on account of
some shares being held as stock-in-trade, or as also so, i.e., apart from as investment, as
was also the case in Cheminvest Ltd. (supra). The assessee's claim of the dividend earned
being on shares held as stock-in-trade, which does not appear to have been made before
the authorities below in-as-much as there is no finding thereon by them, is thus of no
consequence. Expenditure, whether on administration/management or on interest, is
incurred on the basis of and with reference to investment/holding, and is therefore
allowed or disallowed, as the case may be, in computing the total income, on that basis.
                                                      ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                   Vinod K. Nevatia vs. Asst. CIT

The statutory disallowance u/s.14A, i.e., qua income not forming part of the total income,
would therefore again be on that basis. Why, if expenditure were to be incurred only on
the income being earned, i.e., is a function of income, there would be no occasion to and,
thus, incurring of loss and, rather, income would stand to earned at a predetermined level
(i.e., vis-à-vis the expenditure incurred), even as explained by the tribunal in D. H.
Securities (P.) Ltd. (supra) and Damani Estates & Finance (P.) Ltd. (supra). It is thus
immaterial whether the dividend income stands earned on shares held as stock-in-trade or
as investment or as both; it being decidedly an incident of share-holding, the nature of
which (holding) is relevant only for determining the classification of income that inures
on their sale, i.e., as `capital gains' or as `business income'.
       The assessee's next argument is of section 14A being not attracted as the shares
yielding dividend income, or part thereof, are held as stock-in-trade in view of the
decision in CCI Ltd. (supra) and Leena Ramachandran (supra), which would take
precedence over the decisions by the tribunal. The argument is not without merit.
However, even as pointed out during the hearing itself, the question examined by the
tribunal in D. H. Securities (P.) Ltd. (supra) was if the decision by the hon'ble
jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. (supra), explaining the
principles of apportionment governing the application of section 14A, would cover a case
where shares yielding exempt dividend income were held as stock-in-trade of the
assessee's business. This was confirmed as so by the third member; rather, holding the
issue as squarely covered by the decision in Godrej & Boyce Mfg. Co. Ltd. (supra), as
also by, following it, Dhanuka & Sons vs. CIT [2011] 339 ITR 319 (Cal), even as was
found earlier by the tribunal in Damani Estates & Finance (P.) Ltd. (supra). We are under
the circumstances unable to observe any controversy, at-least in-so-far as this tribunal is
concerned. The decision in the case of CCI Ltd. (supra) and Leena Ramachandran
(supra) stood rendered without noticing the decision in Godrej & Boyce Mfg. Co. Ltd.
(supra), even as observed by the third member. The assessee's said argument thus fails.
       So, however, as also observed during hearing, the tribunal in D. H. Securities (P.)
Ltd. (supra) as well as in Damani Estates & Finance (P.) Ltd. (supra), has held that the
                                                     ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                  Vinod K. Nevatia vs. Asst. CIT

disallowance of interest u/s.14A qua shares yielding tax exempt income would be at
twenty per cent (20%) of the interest attributable thereto, i.e., in terms of rule 8D(2),
where the shares are held as stock-in-trade. This, it was explained, is for the reason that
the said shares yield both income forming part of the total income (by way of share
trading income) as well as that not forming part thereof (by way of dividend income), so
that ascribing the entire interest referable to such share-holding to dividend income would
imply no interest expenditure against share trading income and, thus, be against the very
principles of apportionment which s. 14A and, thereby, r. 8D, stand by and seek to
mandate. The relevant discussion is at pgs. 697-698 of the reports in Damani Estates &
Finance (P.) Ltd. (supra). The ld. AR would, upon this, signify his acceptance of the said
       In the facts of the instant case, in-so-far as it appears to us, the assessee holds
shares both by way of investment and stock-in-trade, even as contended by him per
ground # 3 of its appeal. Maintenance of two portfolios by the assessee, which he is well
entitled to, would imply classifying all the shares into one or the other category, i.e., as
investment or stock-in-trade, on acquisition. Though the ld. AR was unable to exhibit the
same before us, the very fact that the assessee returns income on sale of shares also by
way of capital gains ­ both short-term and long-term, which stands accepted by the
Revenue, clearly indicates so. The trading account of the assessee's proprietary firm, M/s.
Gaurav Trading Co., for the relevant accounting period shows an opening and closing
stock (of shares and debentures) at Rs.195.76 lacs and Rs.65.72 lacs respectively as on
31.03.2008, the year-end (PB pg.12), yielding an average holding of Rs.130.74 lacs. The
same, however, does not agree with the total value of investment (Rs.700.40 lacs) and
stock-in-trade (at Rs. 531 lacs) held by the assessee as at the year-end (PB pg. 4), as also
with the average value of shares for the year adopted by the A.O. (Rs. 945.70 lacs) (para
5 of the assessment order), on which we again observe no dispute.
       We have already clarified of the shares forming part of the assessee's trading stock
as being liable to interest disallowance u/r. 8-D(2) at a fraction of the interest attributable
thereto. Under the circumstances, we only consider it fit and proper to restore the matter
                                                     ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                  Vinod K. Nevatia vs. Asst. CIT

back to the file of the assessing authority for determining (with reference to the assessee's
annual accounts for the current and immediately preceding year) the interest disallowance
u/r. 8D(2) separately for shares held as investment and stock-in-trade, and restrict the
disallowance relatable to the latter to twenty per cent thereof, while retaining that in
respect of the former. The disallowance u/r. 8-D(2)(iii), on which in fact no specific
arguments were made, would stand undisturbed. We decide accordingly.

6.     The second issue, raised per grounds # 4 and 5, is qua disallowance of loss of
Rs.21,71,097/- claimed by the assessee on the basis of mark to market, of contracts (i.e.,
futures and options) in which he deals, as outstanding as at the year-end (31.03.2008).
While the assessee stakes its claim relying on the decision in the case of CIT vs.
Woodward Governor India P. Ltd [2009] 312 ITR 254 (SC), in the view of the Revenue
the said reliance is misplaced in the facts of the case. This is as the assessee is only
debiting the loss and not accounting for the profit on account of mark to market
valuation, so that its claim is inconsistent with conditions (iii) & (iv) of the six conditions
specified by way of guidelines by the apex court per para 21 of its said decision. The ld.
AR before us would contend of it being in fact so, with the assessee having rather
disclosed profit on account of such exercise, i.e., marking the outstanding contracts as at
the year-end to market, being followed consistently from year to year, for the earlier
years, to in fact its' acceptance by the Revenue. The non-acceptance by the Revenue for
the current year is for the reason that the same results in a loss.

7.     We have heard the parties, and perused the material on record.
       The issue, therefore, before us is of the assessee's method of accounting being
consistent with the guidelines issued by the apex court in the case of Woodward
Governor India P. Ltd. (supra); the Revenue finding it as not so, with the relevant
findings by the ld. CIT(A) being at para 3.11 of his order. In this regard we observe that
the booking of loss, which is only the resultant figure of marking the outstanding
contracts to market, is in terms of the Accounting Standard (AS) 11 by the ICAI, so that
there is no question of it being a notional loss.
                                                     ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                                                  Vinod K. Nevatia vs. Asst. CIT

       Our second observation in the matter is that the loss for the current year, as per its
details submitted before the A.O., which is at Rs.21,69,696/- (PB pg. 19), is the net of the
positive and negative figures arising on the marking of the contracts to market. As such,
there is no grain in the ld. CIT(A) stating of the assessee having done so ignoring the
profits. There is however nothing on record to show that the assessee is following this
method consistently from year to year. Under the circumstances, therefore, we only
consider it fit and proper, even as stated during the course of hearing itself, that the matter
is restored back to the file of the A.O. to verify the assessee's claim in this regard and
decide the matter by issuing definite findings of fact in accordance with law. We may
also clarify that this could however not lead to or result, in any case, a double claim, so
that the accounting treatment being adopted by the assessee may also be required to be
examined by the A.O. In-as-much as the figure of the profit and loss, as the case may be,
as reflected in the operating statement, is only a provisional figure, i.e., with reference to
the market rate as at the year-end, the final profit and loss arising on the maturity of the
contract/s would have to be adjusted therefor, so that it is only the incremental profit/loss
that is booked for and, thus, claimed for the year of the maturity of the contract/s. One of
the methods normally followed is the reversal of the provisional figure, profit or loss, on
the day immediately following the year-end, through corresponding debit or credit, as the
case may be, to the profit and loss account, so that the booking of the entire income
arising on the maturity of the contract would lead to only the net amount being brought to
charge for the relevant year. We decide accordingly.

8.     In the result, the assessee's appeal is allowed for statistical purposes.

    Order pronounced in the open court on September 18, 2014 at the conclusion of the
            Sd/-                                         Sd/-
      (Joginder Singh)                                (Sanjay Arora)
         / Judicial Member                              / Accountant Member
 Mumbai;  Dated : 23.09.2014
                                 ITA No. 2398/Mum/2012 (A.Y. 2008-09)
                                              Vinod K. Nevatia vs. Asst. CIT

. ../Roshani, Sr. PS

         /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent
3.     () / The CIT(A)
4.      / CIT - concerned
5.             ,     ,  / DR, ITAT, Mumbai
6.     / Guard File
                                   / BY ORDER,

                             /  (Dy./Asstt. Registrar)
                            ,  / ITAT, Mumbai
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