Pegasus Stocks & Shares P. Ltd, Mumbai vs Assessee

ी संजय अरोड़ा, लेखा सद य के सम एवं ी अ मत शु ला, या यक सद य ।

BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM

आयकर अपील सं./I.T.A. No. 122/Mum/2012 ( नधारण वष / Assessment Year: 2008-09)

Pegasus Stocks & Shares Pvt. Ltd. Asst. CIT-4(2), 320, Yashwant Smruthi, बनाम/ Aayakar Bhavan, M. K. Road, 12th Road, Khar, Vs. Mumbai Mumbai-400 052 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AADCP 3708 N (अपीलाथ /Appellant) : ( यथ / Respondent)

अपीलाथ क ओर से / Appellant by : Shri Vijay Mehta

यथ क ओर से/Respondent by : Shri Akhilendra P. Yadav

सनु वाई क तार ख / : 05.11.2014 Date of Hearing घोषणा क तार ख / : 23.01.2015 Date of Pronouncement

आदे श / 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 03.11.2011, 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 15.12.2010.

2. The only issue arising in the instant appeal is the quantum or the extent of disallowance u/s.14A(1) that could be validly made in law in view of the assessee's 2 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

investment in shares yielding tax-exempt dividend income, which for the current year is at Rs.29.77 lacs. The assessee having not made any disallowance u/s.14A(1), the Assessing Officer (A.O.), applying Rule 8D, worked out the same at Rs.99,72,855/-, comprising interest and indirect administrative expenditure at Rs.81,16,222/- and Rs.18,56,633/- respectively. The assessee having not maintained any separate books of account or record in respect of investment activity in shares, liable to yield income not forming part of the total income, an estimate qua indirect expenses, i.e., as attributable to such income, in the view of the ld. CIT(A), stood validly made by taking recourse to rule 8D, mandatory for the current year, by the A.O. The assessee's contention that it had not utilized any borrowed funds for investment in shares was found by him as not substantiated by the assessee, with its' balance-sheet suggesting otherwise. The disallowance being confirmed thus, the assessee is in further appeal.

3. Before us, the ld. Authorized Representative (AR) would at the outset submit that the assessee's case is covered by the decision by the Tribunal in the case of Dy. CIT vs. Damani Estates & Finance (P.) Ltd. (in ITA No. 3029/Mum/2012 dated 17.07.2013, since reported at [2013] 25 ITR 683 (Mum)(Trib)), placing a copy of the said order on record. The tribunal in that case, he would continue, while confirming that a disallowance u/s.14A(1) would obtain even where the shares, on which the dividend income is earned, formed part of the assessee's stock-in-trade, held that the said shares, also giving rise to share trading income, which is taxable, the entire interest attributable to the investment in shares could not be disallowed by mechanically applying r.8D(2)(ii) (or r.8D(2)(i) for that matter). Accordingly, it opined for a disallowance at 20% of the amount referable to such proportionate interest, considering that the predominant object of the share holding was to earn business profit through share trading activity, taking us through the relevant part of the said order (para 5.6, at pgs. 12, 13). The tribunal was, in so advocating, he would further continue, guided by the 'fact' that the turnover of the share trading activity would easily be four to four times the average share holding. That is, the tribunal while opining a restriction of the disallowance at 20% of the relevant interest, did not lay down 3 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

any hard and fast rule, each fact situation, even as stated by it, being different. The assessee in the present case is in the business of trading in shares and securities, so that the said decision would squarely apply to it. Further, adducing a copy of the balance- sheet (as on 31.03.2008), he pointed out that the sales in the instant case are at Rs.2695.84 crores, about 72 times the average investment of Rs.3713.27 lacs (also refer para 4.3 of the assessment order). There was as such a strong case, in the facts of the case, for scaling down the ratio of 20% (1/5), as indeed was found by the tribunal in the case of Ramkumar Venugopal Investments Pvt. Ltd. vs. Asst. CIT (in ITA No. 6324/Mum(D)/2012 dated 27.08.2014), following D. H. Securities (P) Ltd. vs. DCIT [2014] 41 taxmann.com 352 (Mum) (TM) (which has confirmed the view as taken by the tribunal in Damani Estates & Finance (P.) Ltd. (supra)), and restricted the disallowance on account of interest to 5% of the proportionate interest, adverting to para 5 of the said order, copy of which was furnished by him. Similarly, there was a strong case for, likewise, scaling down the indirect expenditure, as computed under r.8D(2)(iii), in view of the fact that bulk of the indirect expenditure, claimed at Rs.446.09 lacs, consists of securities transaction tax (Rs.342.93 lacs) and legal and professional fees (Rs.88.97 lacs), even as was done by the tribunal in the said case, restricting it to 10% of the amount referable to r.8D(2)(iii).

4. We have heard the parties, and perused the material on record. 4.1 Our first observation in the matter is that the decision by the tribunal in Damani Estates & Finance (P.) Ltd. (supra) shall apply in the facts and circumstances of the case; the view canvassed therein, i.e., the applicability of section 14A where the shares are held as stock-in-trade, having been since upheld by the larger bench of the tribunal in D.H. Securities (P) Ltd. (supra). In fact, there is no dispute with regard to this. There is, as such, a clear case in favour of the assessee for scaling down the disallowance qua interest attributable to the average investment in shares, representing the stock-in-trade of the assessee's business. With regard to the assessee's contention for restricting the disallowance to below 20% of such interest, we consider the assessee's plea as largely 4 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

misconceived. The turnover ratio per se has no bearing on the interest expenditure, a part whereof, i.e., as relatable to the investment in shares, is subject to disallowance u/s.14A(1), which (expenditure) is wholly and directly relatable to such investment only, so that the 'higher' investment would lead to or give rise to a higher allocation of interest expenditure. A 'higher' turnover and, thus, turnover ratio, itself implies a 'lower' (average) investment in shares (stock-in-trade), with reference to which only, i.e., as relatable thereto, the interest expenditure stands to be disallowed. That is, funds are invested or utilized only to such 'lower' extent in stock-in-trade, and the interest expenditure is incurred only qua the funds so invested. The tribunal in fact made it abundantly clear that any income - and by necessary implication, any income attribute, as sales, or 'higher' sales - cannot be the basis for determining the indirect expenditure attributable to a particular activity. Also refer para 5.5 of the order. The argument, as canvassed, thus, rather than bolstering its case for further scaling down, only disproves it.

4.2 The tribunal, in the cited case, candidly admits to its prescription (of 1/5th) as being open to a charge of adhocism, further clarifying of having been guided principally, i.e., in so suggesting, by the fact that the predominant object of acquiring and holding shares - irrespective of the extent of income, was for share trading, income from which activity is liable to tax. The reference to the turnover ratio, which it says would easily be at 4 to 5, stands made by it only toward assigning a weight to this predominant intent for acquiring shares, and no other purpose, itself stating that it cannot be said to be scientific in the sense that it is not amenable to measurement. The said reference has been clearly misconstrued in pleading for lowering the ratio (than 1/5) on the basis of a high turnover ratio. The assessee in the present case has, in fact, rather than earning income, suffered a loss, defeating the assessee's argument. In fact, we observe the entire borrowing in the present case to be toward funding the assessee's current assets. We are, therefore, not moved in any manner to disturb the said ratio from 1/5, which shall apply. We decide accordingly.

5 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

4.3 Coming, next, to the disallowance under r.8D(2)(iii), for which a similar plea stood raised. The said question stands also comprehensively answered by the tribunal in Damani Estates & Finance (P.) Ltd. (supra) (vide the latter part of para 5.6, pgs. 14-15 of the order), to which para reference, albeit selectively, was made by the ld. AR. We may reproduce the same as under:

'Continuing further, the part of the rule prescribing the ratio in respect of indirect expenditure (r. 8D(2)(iii)) cannot be altered on account of hardship (reference is drawn to the section of the judgment in Godrej & Boyce (supra) on the constitutionality of sub-sections (2) & (3) of section 14A and rule 8D/pgs. 113 - 123). Even so, the rule prescribes the same as the ratio of indirect expenditure required to support an investment. We say so as the expenditure prescribed for disallowance is based only on one variable, i.e., the value of the investment (on an average). Investment activity, it may be appreciated, is much stabler in character in comparison to the trading activity, which involves continuous churning of funds and, thus, activity, requiring a much higher level of organizational support/expenditure.

Investments, on the other hand, are long term and strategic, requiring only periodic review of performance with reference to the investment objective/s, besides on account of environmental changes, if any. Why, the prescribed allocation ratio of 0.5% of the investment value qua indirect expenditure is very nominal, recommending itself to easy acceptance, is itself based, even as observed by the hon'ble court (at 116 of the report), on the 2% to 2.5% (of the investment) (fee) usually charged by the Portfolio Management Service (PMS) providers, of which around 1% (of the portfolio value) would be their profit. The nominal rate of 0.5% also eschews the charge of it being harsh, while being at the same time clarificatory of its purpose; the investment activity being essentially sporadic and episodic. In fact, the assessee itself explains of no change in its investment portfolio during the year except for one switch from a company share to units of a Mutual Fund (HDFC Liquid Fund). Our discussion is, however, only toward the nominality and purport of the charge, and does not in any manner imply of it being confined only to shares held as investment. This is as even though purchased with a short term perspective, the shares are purchased only with profit objective, i.e., as representing a good investment opportunity, so that it is perceived as under- priced, and its market price would appreciate in time, yielding 'good' return and, rather, in a shorter period of time. That is, the investment component or element is inbuilt in any purchase and toward which the allocation of indirect expenditure is prescribed per r. 8D(2)(iii). The fact that trading shares also yield dividend income, which is not taxable, i.e., besides share 6 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

trading income, is itself relevant and sufficient for attracting the provision of s.14A(1). In fact, an argument to this effect, i.e., r. 8D(2)(iii) as being not applicable to shares held as stock-in-trade, was specifically assumed in the case of Daga Capital (supra). The tribunal rejected the argument, made with reference to the language of r.8D, clarifying that the words used are 'value of investment' and not 'held as investment'. We may reproduce the relevant part of the order for the sake of better clarity: (pg. 233 of the report in ITD) "23.9 The learned Counsel for the assessee ....................... We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as investment." We decide accordingly.'

A plea for adopting the said ratio (i.e., 1/5) was similarly, after explaining the reasons for the same, discountenanced by the tribunal in the case of HSBC Invest Direct (India) Ltd. (in ITA Nos. 3485/Mum/2012 and 3944/Mum/2012 dated 17.10.2014) and Hathway Investment Pvt. Ltd. (in ITA Nos. 262/Mum/2012 and 8662/Mum/2011 order dated 17.10.2014). It needs to be emphasized that the prescription under r.8D(2)(iii) is not based on the volume or quantum of expenditure incurred by the assessee, but, as tribunal clarifies, only on one variable, i.e., investment in the relevant assets (on an average). As such, raising a claim for a lower disallowance, i.e., than that as statutorily prescribed per r.8D(2)(iii), a constitutionally valid provision, would not obtain. The only exception, which would in fact be in terms of r. 8D itself, would be where the expenditure incurred is below that arrived at per the prescribed formula, so that following the same would lead to an absurdity, as observed by the tribunal in the case of disallowance of total interest attributable to shares held as stock-in-trade. In the facts of the present case, excluding the security transaction tax (STT), would yet leave indirect expenditure at Rs.131.6 lacs, as against the disallowance of Rs.18.57 lacs. There is, in our view, no scope for excluding the legal and professional expenses, details of which are 7 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

absent, incurred as it is in the course of regular business, which gives rise to both taxable income as well as the tax free dividend income. In view of the foregoing, a ratio (1/5 or lower), i.e., as in the case of interest expenditure for indirect expenditure, thus, is not feasible for being prescribed or laid down on facts or in law.

4.4 Before parting with our order, we may also clarify that it may appear that we have not adopted the decision by the tribunal in the case of Ramkumar Venugopal Investments Pvt. Ltd. (supra). However, the same is far from truth. The matter is firstly purely factual. Secondly, we have, as sought to be clarified, only followed and explained the decision by the larger benches of the tribunal, as in the case of ITO vs. Daga Capital Management Pvt. Ltd. [2009] 312 ITR (AT) 1 (Mum.) (SB); Cheminvest Ltd. (supra); D.H. Securities (P) Ltd. (supra), and with which the decision by us (being party thereto) in Damani Estates & Finance (P.) Ltd. (supra) is in consonance with. The hon'ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom) has abundantly clarified that section 14A represents the first serious attempt by the legislature in codifying the law in the matter, which is a complete code in itself and, further, widens the theory of apportionment. At this stage, reference may also be made to paras 4.1 and 4.2 of this order.

5. No arguments qua Ground # 2 were raised before us. The same is accordingly dismissed as not pressed.

6. In the result, the assessee's appeal is partly allowed.

प रणामतः नधा रती क अपील आं शक वीकृत क जाती है ।

Order pronounced in the open court on January 23, 2015

Sd/- Sd/- (Amit Shukla) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; दनांक Dated : 23.01.2015 व. न.स./Roshani, Sr. PS 8 ITA No. 122/Mum/2012 (A.Y. 2008-09) Pegasus Stocks & Shares Pvt. Ltd. vs. Asst. CIT

आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आयु त(अपील) / The CIT(A) 4. आयकर आयु त / CIT - concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai