Hrishikesh J Thackersey, Mumbai vs Assessee

आयकर अपीलीय अिधकरण "एच" एच" यायपीठ मुब ं ई म । IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH "F", MUMBAI ी आर आर.. सी सी.. शमा , लेखा सद य एवं ी िववेक वमा , याियक सद य के सम$ । BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA No. : 2941/Mum/2013 (Assessment year: 2009-10) Shri Hrishikesh J Thackersey, Vs Income-tax Officer-12(1)(4), 213, Sir Vithaldas Chambers, Room No. 115, 1st Floor, 16, Mumbai Samachar Marg, Aayakar Bhavan, Fort, Mumbai -400 023 M K Road, ःथयी लेखा सं.:PAN: ABZPT 8307 M Mumbai -400 020

अपीलाथ (Appellant) ू यथ (Respondent) अपीलाथ क औरसे : ौी के गोपाल Appellant by मीस नेहा परांजपे Shri K Gopal & Ms. Neha Paranjpe यथ क औरसे : ौी जीतेि कुमार Respondent by Shri Jitendra Kumar

सुनवाई क# तार$ख /Date of Hearing : 08-01-2015 घोषणा क# तार$ख /Date of Pronouncement : 04-03-2015

आदेश ORDER ी िववेक वमा , या स: PER VIVEK VARMA, JM:

This appeal is filed by the assessee against the order of CIT(A) 23, Mumbai, dated 04.02.2013, wherein, the only issue pertains to the sustaining of disallowance u/s 14A to the extent of Rs. 1,60,393/-.

2. The AO while conducting the assessment proceedings found out that the assessee had declared dividend income on equity shares as well as units of mutual funds to the extent of Rs. 4,70,760/- out of the total income declared at Rs. 5,14,966/-. The brief facts of the case, are that the assessee is engaged in the trading and investment in shares & securities and also units of mutual funds by availing portfolio management 2 Shri Hrishikesh J Thackersey ITA 2941/M/2013

services through M/s Parag Parikh Financial Advisory Services Ltd. The assessee also does transactions in the derivatives. The AO while examining the amount of dividend declared by the assessee and claimed as exempt, show caused the assessee as to why the provisions of section 14A r.w. Rule 8D should not be invoked and a prescribed disallowance be not computed under these provisions.

3. In response to this, the assessee filed a detailed reply, "a. The assessee is an individual who maintains two separate set of books of accounts. One set for dealing Shares and Securities managed by PPFAS and the other set for personal investments made in shares and Mutual Funds.

b. assessee makes his personal investments in shares and Mutual funds for which separate set of Books of accounts are maintained. The income earned i.e. Dividend income (Tax-free income) from the above personal investments is offered to tax under the head "Income from Other Sources". The assesses has incurred Demat charges (Drawings a/c) of Rs. 1,686/- and the some has not been claimed wile computing "Total Income". Also the assessee has not sold any investments during the year. The assessee has purchased 1000 shares of SDI Smart Box Solution P. Ltd. which is a non listed securities and thus no expenditure is incurred with respect to same.

c. Thus no disallowance u/s 14A is required with respect to the Dividend earned from personal Investments as no expenditure in relation to such exempt income is claimed in computing "Total Income".

d. The assessee is also carrying on business of buying and selling of shares and securities. The same has managed by PPFAS a portfolio management services. The income earned from portfolio managed by PPFAS is offered to tax under the head "Profits and gains from Business and Profession". The dividend income earned is incidental to the business of dealing in share and securities. The profits earned from PMS a/c are correctly offered to tax under the appropriate head. The expenses claimed in Profit & Loss a/c of PMS are necessary for running the business. The main object is to trade in shares and earn profit from trading. Dividend income is an incidental income of the same business. Thus there arises no question of disallowance u/s 14A. e. Your appellant is relying on the decision of the Hon'ble Tribunal in the case of Pawar Kumar Parmeshwarlal V ACIT 4(2) [ITA -530/Mum/2009/AY 05-06] and Sundhir Kapadia in ITA No. 7888/M/03 in support of the claim that no expenses have been claimed for the purpose of earning exempt income.

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f. In view of the above facts and legal position on the matter no disallowance is warranted under the provisions of Section 14A of the Income Tax Act, 1961"

4. This reply of the assessee did not find favour with the AO. He, therefore, computed the disallowance under section 14A as per the provisions of Rule 8D at Rs. 1,60,393/-.

5. Aggrieved, the assessee approached the CIT(A), before whom he reiterated the submissions made before the AO and pleaded that the disallowance made u/s 14A r.w. Rule 8D was inapplicable.

6. The CIT(A), on going through the submissions of the assessee relied on the decision of ITAT Chennai in the case of Lakshmi Ring Travellers reported in TS-210-ITAT-2012 (Chny.) wherein it was held that section 14A is a deeming provision for presumptive disallowance which would be attracted by the face of the statute even when the assessee claims that no expenditure incurred in relation to the exempt income. According to him when the deeming provision is made on the basis of statutory presumption, the requirements of factual evidence gets replaced and in that case the AO has to follow the consequences as per the statute. He, therefore, sustained the disallowance on further reliance on the decision of co-ordinate Bench at Mumbai in the case of JV Industries Ltd. in ITA 7088/Mum/2011. Against this order of the CIT(A), the assessee is in appeal before the ITAT.

7. Before us the AR reiterated the submissions made by the assessee before the revenue authorities and submitted that the revenue authorities have mechanically proceeded to invoke the provisions of section 14A and computed the disallowance thereon. The provisions of section 14A(2) and 14A(3) are 'very specific in their own fields' wherein they have provided that the 4 Shri Hrishikesh J Thackersey ITA 2941/M/2013

disallowance could be made only when the AO proceeds the expense through the books of account, as maintained by the assessee.

8. Consequent to this, the AO has to pass a speaking order as to why and how the computation of disallowance is being made. But here is a case where the AO has computed the disallowance on a mechanical basis. Nowhere in the orders of the revenue authorities do we find that what are the exact contents of the dividend totaling to Rs. 4,70,760/- and nowhere in the order of the AO do we find that any description with regard to the expenses debited to the P&L account have been discussed by the AO.

9. When we read section 14A(2), it says, "The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be 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 in relation to income which does not form part of the total income under this Act."

10. The words that need reference in the section are, "if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim....", which means that before going to the computation, the AO has to cross the barrier of the satisfaction with the correctness of the claim, then, the AO would be permitted to apply the provision under Rule 8D. But once, the AO observes that the reply of the assessee has been considered, then he gets the license to move forward and compute the disallowance as per prescribed Rule. But, in the instant case, the AO neither deciphered the exact contents of the dividend totaling to Rs. 4,70,760/- nor did he bother to dissect the expenses as debited to the P&L Account.

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11. In the light of these, placing reliance on the decision of J K Industries as in ITA 7088/Mum/2011 for AY 2008-09 vide order dated 21.11.2012 (wherein one of us was a party) have held that the disallowance computed in a mechanical manner cannot be sustained, as it is not allowed by the statute. In ITA 7088/Mum/2011 in the case of J K Industries, the Tribunal held as under:

We have heard the rival contentions and we are of the view that on both the counts, i.e. the application of the ratio laid down by the Bombay High Court in Godrej & Boyce Mfr. Co. Ltd., reported in 328 ITR 81 (Bom), where the Hon'ble jurisdictional High Court has held that Rule 8D shall be applicable from assessment year 2008-09 onwards and also the ratio laid down by the Special Bench of the Hon'ble ITAT at Delhi in the case of Cheminvest Ltd. Vs ITO 317 ITR -AT 86 (Del-SB)), relied on by the CIT(A), the case is against the assessee.

12. We therefore are of the opinion that the revenue authorities committed an error in computing the disallowance mechanically. We, therefore, set aside the order of the CIT(A) and direct the AO to recompute the disallowance in accordance with the provisions of section 14A(2) & 14A(3) and in accordance with the decided case laws, as referred to by us in the order and by the decision of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs DCIT, reported in 43 DTR 177(Bom).

13. In the result, appeal is treated as allowed for statistical purposes.

Order pronounced in the open Court on 04/03/2015.

(आर.

आर. सी.

सी. शमा ) (िववेक वमा ) Sd/- Sd/-

लेखा सदःय ,याईक सदःय (R.C. SHARMA) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 04/03/2015

ूित/Copy to:- 6 Shri Hrishikesh J Thackersey ITA 2941/M/2013

1) अपीलाथ /The Appellant. 2) ू यथ /The Respondent. 3) The CIT(A) -23, Mumbai.

4) The CIT-12, Mumbai/CIT -12, Mumbai.

5) िवभागीय ितिनिध "एच", आयकर अपीलीय अिधकरण, मुंबई/ The D.R. "H" Bench, Mumbai.

6) गाड/ फाईल Copy to Guard File.

आदे शानुसार/By Order / / True Copy / /

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, मुबं ई Dy./Asstt. Registrar I.T.A.T., Mumbai

*च हान व.िन.स *Chavan, Sr.PS