Derive Trading P.Ltd, Mumbai vs Department Of Income Tax

आयकर अपीलीय अिधकरण, Ûयायपीठ, मुंबई अिधकरण मुंबई डȣ, Ûयायपीठ, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES 'D' MUMBAI ौी जोिग᭠दर ᳲसह, ᭠याियक सद᭭य एवं ौी राजेÛि, लेखा सदःय के सम¢ BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER

आयकर अपील सं. / ITA No.3101/MUM/2012 िनधा[रण वष[ /Assessment Year: 2008-09

DCIT M/s Derive Trading Pvt. Ltd. Circle 3(1), 903, Dalamal House, Vs. Room No.607, 6th Floor, Nariman Point, Mumbai- Aaykar Bhavan, M.K. Marg, 400021 Mumbai-400020 (राजःव /Revenue) (ू×यथȸ /Respondent) P.A. NUMBER : AACCD5211D

राजःव कȧ ओर से /Revenue by : Shri Akhilendra Yadav ू×यथȸ कȧ ओर से /Respondent by Shri Behari lal

सुनवाई कȧ तारȣख / 29/12/2014 Date of Hearing : घोषणा कȧ तारȣख / 01/01/2015 Date of Pronouncement :

ORDER

PER JOGINDER SINGH, JM:

The Revenue is aggrieved by the impugned order dated 29/02/2012 of the ld. First Appellate Authority, Mumbai. The assessee has raised the following grounds:

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i. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income tax (Appeals) has appreciate that the disallowance u/s. 14A, Rule 8D(2)(ii) in respect of speculation business has been separately identified and excluded, and the remaining interest expenses have to be allocated in proportional basis. The Ld. Commissioner of Income tax (Appeals) has failed to appreciate that the interest costs for earning dividends, be it incidental or not, have to be disallowed, and the same has been computed at Rs.8,82,64,345/- as against Rs. Nil computed by the assessee.

ii. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income tax (Appeals) has failed to appreciate that the disallowance u/s 14A, Rule 8D(2)(iii) equivalent to ½ % of the average investments has been rightly made by the Assessing Officer at Rs.42,78,828/- as against the adhoc disallowance of Rs.5,00,000/- offered by the assessee which has not basis. iii. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income tax (Appeals) has failed to appreciate that the adhoc disallowance of Rs.5 lakhs made by the assessee is without any basis, and that the application of Rule 8D is justified given the facts and circumstances of the case. The ld. Commissioner of Income tax (Appeals) has failed to appreciate that the application of Rule 8D is mandatory when the A.O. is not satisfied with the correctness of disallowance made by the assessee.

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iv. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

2. At the time of hearing, Shri Akhilendra Yadav, ld. counsel for the Revenue defended the conclusion arrived at in the assessment order by submitting that the ld. Commissioner of Income tax (Appeals) granted relief ignoring the facts and also without assigning any valid reason. On the other hand, the ld. counsel for the assessee, Shri Bihari Lal, defended the conclusion arrived at in the impugned order by further explaining that issue in hand is covered in favour of the assessee in its own case for Assessment Year 2009-10 by the order of the Tribunal dated 10/12/2014 (ITA No.878/Mum/2013). This factual matrix could not be controverted by the Revenue with the help of any positive material/judicial pronouncements.

2.1. We have considered the rival submissions and perused the material available on record. Before coming to any conclusion, we are reproducing hereunder the relevant portion from the impugned order for ready reference:-

"5) Ground No.2(a) - Disallowance U/S 14A ;-

(i) The quantum of disallowance u/s 14A r. w. Rule 80 is totally illegal, unjustified and unwarranted on the facts of the case. There is no nexus between investment and expenditure incurred. There cannot be a presumption that certain expenditure is bound to be incurred for earning exempt income, The disallowance u/s 14A requires finding of incurrence of expenditure for earning exempt income. The 4 M/s Derive Trading Pvt. Ltd.

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contention of the AO that directly or indirectly some expenditure always incurred which must be disallowed U/s 14A is not acceptable, Reliance in support on the same is placed on the following decisions:

i) CIT vs. Hero Cycle 3231TR 518 (P & H)

ii) CIT vs Metal Man Auto P. Ltd. 336 ITR 434 (P & H)

(ii) It is further submitted that Appellant company is engaged in the business of dealing in Future and Option and trading shares and, commodities. The shares were held as 'Stock in trade' not as an 'Investment'. The details of share trading account are given In Schedule G of Profit & Loss account, On perusal of the same your honour would appreciate that Appellant's only business in trading large scale and all expense incurred during the course of business and therefore no expenditure was incurred in relation to earning the exempted Income. The dividend Income is only incidental to the trading activity. A dealer in shares does not acquire a share to earn dividend income, the dominant and immediate object being acquisition of shares is to earn profit on sale of shares at the earliest point which is chargeable to tax and hence there was no question of making any disallowance u/s.14A of the I. T. Act.

The Learned AO however rejected the contention of the Appellant on the ground that the provisions of Rule 8D(2) &

(iii) does not make any distinction as to whether the investment made in shares/securities is of the nature of 'Stock in Trade' or 'Investment'. He also relied upon the decision of Hon'ble ITAT Special Bench (Mumbai) in the case of Capital Management Pvt. Ltd.

In this context we seek to rely on the following two latest decision which supports the view that when the shares were held as Slack In Trade disallowance u/s 14A cannot be made: .

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i) Yatish Trading Co. (P) Ltd. Vs. ACIT 50 DTR (Mumbai) (Trib)158 : (2011) 129 1TD 237

ii) Kerla High Court in case of CIT Vs. Leela Ramchandran, ITA No.1784 of 2009

5.1) Disallowance of Interest U/S 14A. at Rs. 8,82,64,3451- under rule 8D 2(ii):-

In this context it is submitted that Appellant made the borrowings during the course of share trading business consisting of Future and Option and trading in shares and commodities. The interest debited to the Profit and Loss account is Rs. 11,34,67,539/-. The interest on borrowed funds used for trading activity is an allowable expenditure under s. 36(1)(iii) and the same cannot be treated as the expenditure for earning the dividend income which is incidental to the trading activity. When the real purpose and intent to use the borrowed funds was for trading activity and if incidentally resulted some dividend income on the shares purchased for trading then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure (interest) incurred for trading activity then the same cannot be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income has to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression "in re/aticn to"

used in s. 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure u/s. 14A there must be a live nexus between the expenditure incurred and the income not forming the part of the total income. Disallowance cannot be made on the basis of presumption and estimation. If the expenditure is incurred

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with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income then as such no disallowance can be made u/s. 14A merely because some tax exempt income is received incidentally. In case of dealer in shares and, securities the primary object and intention for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of the shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale also incidentally yields some dividend income on the shares held by him as stock-in-trade such dividend income is not intended at the time of purchase of such shares and accordingly there is no live connection between the expenditure incurred and dividend income.

Relinace in support of the same is placed on the following decision:

a) Kerla High Court in case of CIT Vs. Leela Ramchandran, ITA NO.1784 of 2009.

b) Yatish Trading Co. (P) ltd. Vs. ACIT 50 DTR (Mumbai)(Trib)158: (2011) 1291TD 237.

The Learned AO a/so accepted the above fact. In this context his following finding given in para 5.4 of the assessment order is very relevant:

"This shows that the borrowed funds were utilized in the form of Stock in Trade for the purpose of speculation business of the assessee. Hence the borrowed funds has direct nexus with speculation business, therefore, the interest paid on borrowed funds directly relates to the speculation business."

In view of the above the Learned AO is not justified in making disallowance of Interest of Rs.8,82,64,345/- u/s 14A r.w. Rule 8D (2)(ii)."

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2.2. We are also reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 10/12/2014 for ready reference:-

"4. We have heard the Ld. DR as well as Ld. AR and considered the relevant material on record. The Ld. DR has relied upon the decision of this Tribunal in the case of D.H. Securities Ltd. Vs. DCIT (41 taxmann.com 352)and submitted that it has been held that section 14A is applicable even in the case of trading in shares so far as the dividend income from the shares held as stock in trade is concerned.

5. On the other hand, the Ld. Authorized Representative has submitted that in the latest decision dated 27.08.2014 of this Tribunal in the case of Ramkumar Venugopal Investments Pvt. Ltd. Vs. ACIT in ITA no. 6324//Mum2012, the Tribunal after considering the third member decision in the case of D.H. Securities Ltd. Vs. DCIT, has held that the disallowance should be restricted to 5% of the amount arrived under Rule 8D(2)(ii)(iii) and 10% of the amount calculated by the Assessing Officer under Rule 8D(2)(iii).

6. Having heard the rival submissions as well as careful perusal of relevant material on record, we are of the view that when the assessee is in the business of share trading as well as future & option then the expenditure incurred by the 8 M/s Derive Trading Pvt. Ltd.

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assessee in the course of business activity of trading in shares would be considered exclusively for business activity and the same cannot be apportioned being an expenditure incurred for earning the dividend income. The Tribunal in the case of Ramkumar Venugopal Investments Pvt. Ltd. Vs. ACIT (supra) after considering the third member decision in the case of D.H. Securities Vs. DCIT (supra) as well as the decision of Hon'ble Karnataka High Court in the case of CCL Ltd. Vs. JCIT held in para 3 to 5 as under:-

"3. We may observe that the issue relating to the disallowance under section 14A in relation to shares held in stock in trade was discussed by the coordinate bench of Mumbai Tribunal in the case of "D.H. Securities (P) Ltd. vs. DCIT" (2014) 41 taxmann.com 352 and the matter was referred to the Third Member. The decision of the Hon'ble Karnataka High Court in the case of "CCI Ltd. vs. JCIT"

(2012) 250 CTR (Kar) 291 was referred to and discussed before the Tribunal and it has been held that in view of the decision of the Hon'ble jurisdictional High Court of Bombay in the case of "Godrej & Boyce Mfg. Co. Ltd. vs. DCIT" [2010] 328 ITR 81 (Bom) and the Hon'ble Kolkata High Court in the case of "Dhanuka & sons vs. CIT" [2011] 339 ITR 319, section 14A is attracted even in the case of dividend income from shares held as stock in trade. While holding so, it has been observed by the Tribunal that the investment component or element is in built in the expenditure incurred for purchase and sale of shares even held as stock in trade for business purposes. The expenditure attributable towards earning of exempt income, immaterial of the fact whether such exempt income was actually earned or not, is embedded in the expenditure incurred for share trading activity and is liable to be apportioned in the light of the provisions of section 14A of the Act. The decision of the Hon'ble Karnataka High Court relied upon by the assessee has been duly discussed and distinguished in the Third Member Case of "D.H. Securities (P) Ltd. vs. DCIT"(supra).

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However, it has been further observed in the said Third Member decision of the Tribunal that the shares which yield tax exempt dividend income, interest qua which is to be disallowed, when held as stock in trade, yield taxable income also. In fact, the shares are bought and held primarily for the purpose of earning income from trading in shares. Hence, while calculating the interest disallowance under Rule 8D(2)(ii), the disallowance of the entire amount is not justified. The Tribunal therefore held that the amount calculated as per Rule 8D(2)(ii) would need to be scaled down as the income earned from share trading is offered for taxation. The tribunal observed that while scaling down the said amount no hard and fast rule can be applied and the same can be determined only on adhoc basis. The Tribunal also observed that where the share trading is the dominant object of purchase and sale of shares, the turnover of the year would be very high in comparison to the available share holding because of the continuous activity of sale and purchase of shares. Hence, mechanical application of Rule 8D(2)(ii) would be wrong. The Tribunal, accordingly, purposed to restrict the disallowance to 20% of the amount in relation to interest disallowance under Rule 8D(2)(ii), i.e., in relation to indirect expenses. The tribunal further held that so far the direct expenses are concerned, no such disallowance u/s.14A was attracted because of the fact that no direct expenditure is incurred by the assessee for earning of dividend income when the purpose of sale and 10 M/s Derive Trading Pvt. Ltd.

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purchase of shares is trading. The almost similar view had been made by the Co-ordinate Bench of the Tribunal in the case of Damani Estates & Finance Pvt. Ltd. (in ITA No. 3029/Mum/2012 dated 17.07.2013).

4. In our view, taking into consideration the fact that the primary object of holding the shares is trading and the dividend income is incidental and further that due to continuous activity of sale and purchase of the shares, the annual turnover would be much higher in case of share trading as compared to the investments made for the purpose of earning of exempt income, even the disallowance @ 20% of the amount calculated under Rule 8D(2)(ii) will be on higher side. We feel that it will be appropriate if the said disallowance is restricted to 5% of the amount so arrived.

5. So far the disallowance under Rule 8D(2)(iii) is concerned, since in the share trading activity, investment is not made for the purpose of earning exempt income, hence, the managerial/administrative expenses in relation to dividend income calculated under Rule 8D(2)(iii) are also required to be scaled down which we think that should be restricted to 10% of the amount so calculated under Rule 8D(2)(iii). In view of our above observations, the disallowance u/s.14A read with Rule 8D is, accordingly, restricted to 5% of the amount arrived at under Rule 8D(2)(ii) and 10% of the amount calculated by the A.O. under Rule 8D(2)(iii)."

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7. As regards the view of the Tribunal that the expenditure attributable towards the earning of the exempt income directly related to the dividend income has to be disallowed as the same cannot be claimed against the taxable income of the assessee. We do agree and concur with the said view. Therefore, the disallowance computed under Rule 8D of the Income Tax Rules cannot be more than the actual expenditure incurred by the assessee for the dividend income excluding the activity of share trading which is the business activity of the assessee. Even the computation of disallowance arrived as per the Rule 8D should be restricted only to the extent of actual expenditure or to the extent of the expenditure which can be attributable to the activity of the dividend income excluding the business activity of share trading. Accordingly, we direct the Assessing Officer to re-compute the disallowance u/s 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of the dividend income excluding the expenditure related to business activity of share trading."

2.3. In view of the above, if the conclusion arrived at by the Tribunal in the case of the assessee itself for Assessment Year 2009-10 is analyzed with the facts of the present Assessment Year, uncotrovertedly the disallowance computed under Rule 8D of the Income Tax Rules cannot be more than the actual expenditure incurred by the assessee for the dividend income excluding the activity of share trading which is the business 12 M/s Derive Trading Pvt. Ltd.

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activity of the assessee. The computation of disallowance arrived at as per Rule 8D of the Rules should be restricted only to the extent of actual expenditure or to the extent of the expenditure which can be attributable to the activity of the dividend income excluding the business activity of share trading. Thus, we direct the Assessing Officer to re-compute the disallowance u/s 14A with the rider to the actual expenditure which can be attributable to the receipt or earning of dividend income excluding the expenditure related to business activity of share trading.

The appeal of the Revenue is disposed of in terms indicated hereinabove.

This order was pronounced in the open court in the presence of ld. Representatives from both sides at the conclusion of the hearing on 29/12/2014.

Sd/- Sd/- (RAJENDRA) (JOGINDER SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, DATED - 01/01/2015 f{x~{tÜ? P.S/.िन.स. आदे श कȧ ूितिलǒप अमेǒषत/Copy षत of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. ू×यथȸ / The Respondent. 3. आयकर आयुƠ(अपील) / The CIT(A)- 4. आयकर आयुƠ / CIT 13 M/s Derive Trading Pvt. Ltd. .

5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai

6. गाड[ फाईल / Guard file.

आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy//

उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुब ं ई / ITAT, Mumbai