RAJPAL YADAV, JUDICIAL MEMBER 
AND PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER

P.F. Jain, AR for the Appellant.
Prasoon Kabra, Sr. DR for the Respondent.

ORDER

Pradip Kumar Kedia, Accountant Member - This appeal by the Assessee is directed against the order of the Commissioner of Income Tax(Appeals)-III, Ahmedabad [CIT(A) in short] dated 18/12/2013 for Assessment Year Assessment Year (AY) 2008-09).

2. The grounds of appeal raised by the assessee read as under:—

3. The first and second ground concerns disallowance of Rs.12,19,173/- under section 14Aof the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The aforesaid disallowance has been worked out with reference to Rule 8D(2)(iii) being administrative and general expenses estimated at 0.5% of the average value of investment.

4. A few facts relevant to controversy involved as per Ground Nos.1 & 2 may be noted. The assessee-company is engaged in the business of sales and purchase of shares. The major income of the assessee is derived by way of dividend income flowing from investment in shares. Other source of income includes interest income from money advanced to various parties. During the relevant assessment year, the assessee has declared receipt of dividend income to the tune of Rs.2,70,17,059/- which is exempt from tax. The assessee has shown investment of Rs.24,38,34,685/- as on 31.3.2008. The Assessing Officer (AO) observed that in view of the tax-free income earned by the assessee, disallowance of indivisible expenditure attributable to dividend income is called for in terms of section 14A read with Rule framed thereon by way of Rule 8D of the income Tax Rules, 1962. He accordingly calculated disallowance as per statutory formula prescribed under Rule 8D of the IT Rules. The aggregate disallowance arrived at Rs.19,44,064/- inter alia included Rs.12,19,173/- towards common administrative expenses as per Rule 8D (2)(iii) of the IT Rules. In the first appeal, the CIT(A) while granting relief towards disallowance computed under other limbs, confirmed the disallowance made by AO under third limb for Rs.12,19,173/-.

5. The relevant operative para of the order of the CIT(A) reads as under:—

"9. It was held in the case of Visual Graphics Computing Services (I)(P) Ltd. vs. ACIT [21 taxmann.com 145/52 SOT 172 (URO)/15 ITR (Trib.) 393, by Hon'ble ITAT, Chennai Bench that even if there may not be any direct visible expenditure to earn dividend income, a reasonable portion of top management time/expenditure could be attributed to earning of that income. Therefore, second argument of the appellant that no disallowance is required out of indirect expenses is not acceptable. I therefore hold that AO has rightly made disallowance of Rs.12,19,173/- under "Rule 8D(2)(iii) and the disallowance is confirmed. Thus the total disallowance under Rule 8D is restricted to Rs.12,19,173/- as against 16,32,367/- made by A.O. Ground No.2 of the appeal is thus partly allowed."

6. Aggrieved by the order of the CIT(A) in denying relief claimed towards applicability of Rule 8D(2)(iii), the assessee preferred appeal before the Tribunal.

7. The Ld.AR for the assessee Mr.P.F. Jain, at the outset, submitted that the impugned disallowance of Rs.12,19,173/- is highly excessive in the facts and circumstances of the case and therefore requires to be cancelled. The Ld.AR adverted our attention to the final statements placed by way of paper-book and submitted that the major expenses, are towards "professional charges" amounting to Rs.11,25,240/- and "rent" Rs.2,17,650/-. Such expenditure by its very nature are not required to be incurred for earning self generated dividend income. The Ld.AR next contended that in the earlier assessment year 2005-06, the disallowance has been made on a reasonable estimated basis unlike the staggering amount disallowed this year. It was thus submitted that estimation of administrative expenses with reference to average value of investment is highly unjust because many expenses, as pointed out, are not relatable and not incurred for earning of dividend income. The Ld.AR next contented that requisite "satisfaction" has not been recorded in writing while applying Rule 8D of the IT Rules. In the absence of "satisfaction" contemplated in section 14A, the action of the AO falls short of the statutory requirement and thus a nullity. Therefore, the order of the CIT(A) confirming the disallowance on the basis of Rule 8(2)(iii) is erroneous and requires to be viewed with disfavor.

8. The Ld.DR Mr.Prasoon Kabra, on the other hand, submitted with reference to the financial statement that major part of its resources have been applied towards investments. Various expenditure incurred as reflected in Profit & Loss Account including "professional charges" and "rent expenses" thus necessarily are attributable to the investments yielding exempt income. Therefore, the disallowance has been rightly worked out by applying newly introduced formula prescribed as per Rule 8D of the I.T.Rules. The Ld.DR next contended that the AO has duly issued show cause notice for applying Rule 8D of IT Rules and therefore presence of "satisfaction" of the AO cannot be brushed aside. The satisfaction of the AO is implicit having regard to the facts and the circumstances of the case notwithstanding that it may not have been reduced in writing in explicit terms. The Ld.DR accordingly contended that the assessee cannot escape the applicability of statutory formula prescribed under rule 8D of the IT Rules.

9. We have considered the rival submissions with regard to objection of the assessee on disallowance of expenditure incurred in relation to dividend income not forming part of total income in terms of S. 14A of the Act. From the facts culled out above and on perusal of records placed before us, we note that Rule 8D prescribes statutory formula for computation of disallowance under S. 14A. Rule 8D has come into force with effect from AY 2008-09. Therefore, statutory Rule 8D would ordinarily apply for computation of disallowance barring exceptional circumstances. An appraisal of financial statements filed by the assessee would reveal that major portion of funds have been applied towards acquisition and holding of investments in shares etc. The source of tax free dividend income is investment in these shares. The total resources at the disposal of the assessee as on 31.03.2008 stands at Rs. 25.93 crores. The investment in shares stands at Rs. 24.38 cores as on that date. The major contributory of income comprises of dividend at Rs. 270.01 lakhs and profit on sale of investments Rs. 81.40 lakhs out of gross income Rs. 364.10 lakhs. As a corollary, the expenditure as returned in the Profit & Loss Account has been incurred for the purpose of acquisition and holding the investments, dividend income on which form integral part of investments. Thus, as per financial data before us, the substantive part of expenditure incurred obviously has proximate connection with the earning of dividend income. The expenditure incurred is towards all business activities including investment activities and remains undivisible. Hence, we are unable to guage the rationale for not applying Rule 8D for apportionment of expenditure in relation to dividend income. The proposition towards reasonable estimated expenditure with reference to dividend income as propounded on behalf of assessee cannot be ordinarily accepted in derogation of the statutory frame work provided by the statue. No tangible cause has been shown by the assessee for doing so. Thus, in the given set of facts, in our considered opinion, the formula provided under Rule 8D would come into play.

10. We shall now delineate on the next limb of argument canvassed on behalf of assessee towards non-recording of requisite 'satisfaction' for invoking section 14A r.w. Rule8D of the I.T.Rules. To address this aspect of controversy, we observe that the AO has issued show-cause notice (SCN) for disallowance under section 14A r.w.Rule 8D and sought explanation from the assessee in this regard. As noted earlier, the Profit & Loss Account filed by the assessee also makes its manifest the expenditure noted therein are overwhelmingly attributable to both tax- free and taxable income and remains indivisible. The expression 'accounts' used in section 14A is not confined to books of account but includes financial statements. Thus, there exists adequate and prima facie material to support formation of satisfaction. Therefore, presence of satisfaction contemplated under section 14A having regard to accounts cannot be discredited. It would be pertinent here to say that phraseology employed in section 14A(2) of the Act suggests that what is required to trigger section 14A among others is that AO is 'not satisfied' with the correctness of the claim of the assessee having regard to its accounts. It nowhere indicates that the "satisfaction" is required to be explicitly reduced in writing. This language employed is not akin to 'record his reasons' employed in section 148(2) of the Act. When seen in the context, such difference in phraseology in the context of different clauses of the Act would permit us to draw inference that the expression "is not satisfied" is in variance with the expression "record reasons" as a jurisdictional requirement as noted with reference to section 148(2) of the Act. Thus, the indication of prima facie presence of satisfaction can be deemed to be substantial compliance of the provisions without there being any explicit assertion about the same. As noted, the affirmative steps by way of SCN on the issue in the first instance tantamount to subsistence of 'satisfaction' in the instant case. Hence, in our view, S. 14A as presently codified does not provide impetus on explicit recording of satisfaction per se. The requirement of section would stand addressed when the satisfaction is otherwise discernible in the action of the AO. Applying the aforesaid view in the context, we are of the opinion that requisite satisfaction was subsisting for invoking section 14A and Rule 8D. Consequently, we hold that the objection of the assessee on this score is not sound.

11. Thus, in the totality of the facts and circumstances, we are of the considered opinion that the AO has correctly applied formula prescribed under Rule 8D(2) for determination of expenditure attributable to dividend income. Hence, we decline to interfere with the order of the CIT(A). Ground Nos.1 & 2 of the assessee's appeal are accordingly dismissed.

12. Ground No.3 concerns treating the "Short Term Capital Gain" (STCGs) as "business income" arising from sale of shares and securities which are held for less than 30 days. The AO noted that the assessee has inter alia declared gains amounting to Rs.55,79,921/- as STCGs. It was observed by him that the assessee is engaged in the purchase and sales of shares as a continuous course of activity with a profit motive. Thus, in view of high volume, frequency and magnitude of the transactions, the AO was of the view that character of transactions giving rise to impugned gains are in the nature of business and therefore requires to be assessed under the head "business income". He accordingly assessed the STCGs of Rs.55,79,921/- as "business income" of the assessee.

13. In first appeal, the CIT(A) however on consideration of host of factors as noted in paras-11 to 13 of its order granted partial relief. By the same token, the CIT(A), however, endorsed the action of the AO in treating the "capital gains" arising on sale of shares as "business income" where shares were held for less than 30 days during the year.

14. In second appeal before the Tribunal, the Ld.AR for the assessee relied upon the facts placed before the CIT(A) and contended that only at six instances, the assessee has derived gains on sale of shares which were held for less than 30 days. Therefore, inference of profit motive cannot be drawn adverse to the assessee. The Ld.AR submitted that the scheme of the Act does not allow artificial bifurcation of capital gains arising on sale of shares on considerations of holding for more than 30 days or less than 30 days. It was contended that the action of the CIT(A) is therefore not sustainable in law. The Ld.AR further submitted that the assessee has inter alia earned Long Term Capital Gains (LTCGs) during the year which has not been called into question. The adversarial action has been taken only with reference to STCGs to simply collect more revenue for the Department. The Ld. AR pointed out that in the earlier assessment year 2005-06, the assessee incurred 'loss' on sale of shares and therefore no SCN was issued while framing the assessment under section 143(3) as it was convenient to the revenue to accept the position declared by the assessee. The position is sought to be altered in this year merely because the assessee could earn some surplus from sale of its capital investments. It was pointed out that the break-up of STCGs as noted in the order of the CIT(A) at page No.16 would show that out of the impugned amount of Rs.55,79,921/-, gains to the tune of Rs.20,50,788/- is in relation to unlisted shares where the tax is chargeable at regular rate of 30%. Concessional rate of 10% has been availed only in respect of remaining amount of Rs.35.29 lakhs where security transaction tax has been paid. The Ld.AR submitted that in view of very few transactions held for less than thirty days, the action of CIT(A) in denying relief on gains arising therefrom merely owing to smaller period of holding is not quite befitting.

15. The Ld.DR, on the other hand, relied upon the order of the CIT(A).

16. To adjudicate the issue, we have carefully considered the rival submissions and perused the records. As pointed out on its behalf, the assessee has declared income both by way of LTCGs as well as by way of STCGs. The LTCGs have not been disturbed during the year or in the preceding year. The Short Term Capital 'Loss' (STCL) has been accepted by the revenue in Ay 2005-06 whereas gains arising from the similar set of transactions is attempted to be treated differently as "business income". No cogent reasons have been asigned for such deviation. The CIT(A) has mechanically applied a formula that capital gains arising on sale of shares held for less than thirty days should be treated as "business income". No such impugned formula is apparently known to law. Needless to say, the issue as to whether the shares held prior to its sale is capital asset or a trading asset is essentially a question of fact. The issue is thus required to be decided as per the facts and the circumstances of the individual case and not having regard to the smaller period of holding alone. As pointed out by the assessee before the CIT(A), the assessee has sold the shares held for less than thirty days in only six instances which in our view does not give any indication of systematic and organized business activity. The loss declared on similar transactions as capital loss which is detrimental to assessee was duly accepted by the revenue in the past. No aspersions have cast on LTCG either. Therefore, in the totality of the facts, it is difficult to agree with the view rendered by the CIT(A). While one set of transaction have been treated as capital assets, there is no reason to treat other set of transactions similar nature as trading assets merely owing to lesser period of holding. In the circumstances, the plea of the assessee deserves acceptance. The action of revenue is accordingly liable to be struck down.

17. As a result, the order of the CIT(A) is modified and the appeal of the assessee is allowed on this score. Consequently ground No.3 of assessee's appeal is allowed.

18. In the result, appeal of the Assessee is partly allowed.