The order of the Bench was delivered by
Manish Borad, Accountant Member.-This appeal of assessee is directed against the order of CIT(A)- XVI, Ahmedabad dated 24th August, 2011 for AY 2008-09. The assessment was completed under section 143(3) of the I.T. Act (herein after referred to as the Act) on 15.12.2010 by ITO Ward- 11(4), Ahmedabad. Assessee has raised following grounds of appeal :-
The CIT(A)-XVI, Ahmedabad (herein after referred to as the CIT(A) has erred both in law and on fact in passing order on the following amongst the other grounds
I.(a) The CIT(A) has erred both in law and in fact in confirming the Applicability of sec.14A and the disallowance of Rs. 4,04,204/- stating that the same is incurred for earning non-taxable dividend of Rs. 58,963/-.
Appellant is a dealer in shares and shares are held as stock in trade and the appellant has also earned share trading profit of Rs. 6,69,715/- as its business income. All expenses including interest paid are wholly and exclusively incurred for the purpose of the business and hence, provisions of section 14A/Rule 8D are not applicable.
(b) Alternatively it is further submitted that the CIT(A) has erred in confirming the quantification of disallowance under Rule 8D at Rs. 4,04,204/-. It is submitted that if at all there is a disallowance to be made, it should be done in accordance with the provisions of Rule -8D.
(c) Alternatively and without prejudice the CIT(A) ought to held that Rs. 6,09,715/- being surplus in sale of shares should have been taken as capital gain since the AO has treated purchase & sale of shares as investment of your appellant while arriving disallowance u/s 14A of the Act.
II. The CIT(A) has erred in confirming 50% out of the disallowance Rs. 60,068/- being 20% expenses out of shop, traveling convergence etc. on ad hoc basis stating that some of the vouchers are self made/office vouchers.
It is submitted that since the entire expenses under various heads amounting to Rs. 3,00,358/- are duly supported by evidence and have been incurred during the course of business and for purposes of business and not being of capital or personal nature, CIT(A) ought to have deleted the entire disallowance made the AO.
It is therefore submitted that reliefs claimed above be allowed and the order of the AO be modified accordingly. Your appellant reserves the right to add, alter, amend or to withdraw any or all of the above grounds of appeal.
2. Briefly stated the facts of the case gathered from the records are that the assessee is in the business of trading of shares, cloth, commission and real estate rent. The assessee filed its return of income on 22.9.2008 and further revised on 23.9.2008 at a total income of Rs. 39,421/-. Scrutiny assessment as per CASS was framed by AO under section 143(3) of the Act making addition of Rs. 4,04,204/- by invoking section 14A of the Act and disallowance of expenses of Rs. 60,068/- being 20% of 3,00,338/- for various expenses incurred. Aggrieved, assessee went in appeal before CIT(A) who upheld the addition made by AO. Aggrieved, the assessee is now in further appeal before the Tribunal.
3. Ground No.1 relates to confirmation of applicability of section 14A and disallowance of Rs. 4,04,204/- stating that the same is incurred for earning non-taxable dividend of Rs. 58,960/-. During the course of assessment proceedings the AO noticed that assessee earned dividend income of Rs. 58,963/- which is claimed exempt by the assessee and long term investment of Rs. 51,000/- was appearing in the balance sheet. The AO further noticed that interest expenses of Rs. 14,78,043/- and bank interest of Rs. 1,79,000/- was debited to profit and loss account and there were no bifurcation of the interest expenses in relation to trading activity and investment activity, thus he made disallowance under section 14A worked out as per Rules 8D of the I.T. Rules, 1962 and made addition of Rs. 4,04,204/-.
4. At the outset the ld. AR of the assessee submitted that assessee being in business of trading in equity shares, cloth and real estate and has filed the return of income showing income from trading of shares under the head “business and profession”. Investment in equity shares as on 31.3.2008 as shown in the audited balance sheet was Rs. 41,67,992/- out of which closing stock of shares shown in the trading account was Rs. 41,16,992/- and only Rs. 51,000/- was shown under the head investment in the balance sheet. The dividend income earned by the assessee during the FY 2007-08 was Rs. 58,963/- which was earned from the equity shares held in stock in trade. Ld. AR further submitted that total turnover of cloth and shares for the FY 2007-08 was Rs. 1,05,49,908/- out of which sales of cloth was at Rs. 88,63,407/- and sale of shares at Rs. 16,86,501/- and the interest expenses of Rs. 16,57,043/- (1478,043 + 1,79,000) has been incurred for the total business of the assessee and not specifically for trading in shares. The ld. AR in support of his ground further submitted as under :-
“2. For making this disallowance, the AO has observed that we have dividend income of Rs. 58,963/-, there is a Long term investment of Rs. 51,000/- yielding non-taxable income by way of dividend, we have incurred interest expenses of Rs. 14,78,043/- and interest paid to Bank is Rs. 1,79,000/- which is not bifurcated into expenses in relation to trading activity or investment activity and therefore disallowance u/s 14A is worked out as per Rule 8D which is quantified at Rs. 4,04,204/-.
3. We firstly state that the AO has proceeded on wrong factual footings in making these observations. Investments of Rs. 51,000/- referred to by the AO is by way of holding of shares of Textile Traders Co-op. Bank Ltd. Rs. 50,000 and Maskati Cloth Dealer Co-op. Shop and Warehouse Rs. 1,000. Dividend received on these shares is not exempt u/s 10(36) and u/s 10(36) as observed by the AO. We, therefore, strongly submit that provisions of Sec.14A/Rule 8D are wrongly applied on the facts our case which are wrongly applied by the AO.
4. Alternatively, we state that if intention of the AO is to correlate provisions of sec.14A/Rule 8D vis-à-vis dividend income of Rs. 58,963/- we may state that the AO has once again made a factually incorrect observation as, same is not by way of dividends received on shares held as investments. We are engaged in the business of trading of cloth, shares, securities, real estate and financing as supported by the relevant business close in our Partnership Deed and also, in Form 3CD forming part of Tax Audit Report u/s 44AB.
5. We therefore hold shares as stock in trade and not as investments as may be verified from our balance sheet and profit & loss account where, closing stock of shares as on 31.3.2008 is verifiable at Rs. 41,16,992/-.
6. We further invite your Honour’s kind attention our share trading account wherein, we have opening stock of shares at Rs. 40,02,123/- purchase of shares at Rs. 11,31,654 and sale of shares at Rs. 16,86,500 yielding profit from share trading activity at Rs. 6,69,715. Since we are engaged in the business of trading in shares and securities, shares are purchased with an intention of treating the same as stock in trade and not to hold them as investment. The income derived from trading of shares is a business income and not long term/short term capital gains and holding of shares as on 31.3.2008 is by way of stock in trade and not by way of investment.
7. We also refer to Circular No.4/2007 dated 15-6-07 issued by Hon. CBDT wherein circumstances which distinction between shares held as stock in trade and shares held as investments are enumerated. On analysis of the cases referred to in the above Circular as well as on applying the tests mentioned therein we can once again be established as traders of shares and not investors in shares.
8. Since this is an establish fact that we are traders of shares and not investors, warns of Sec.14A/Rule 80 are of applicable to the facts of our case as held by Hon. Courts in the following judgements which are strongly relied upon by us.
(a) "The assessee had not made any investment in shares for the purpose of earning dividend. No doubt, the assessee had received dividends but these were incidental receipts, as the assessee purchased shares for the purpose of selling the same and during that process the assessee received some dividend. Therefore, it could not be said that the assessee was dealing in the transactions which were exempt from tax. Therefore, on the facts of the instant case, the provisions of section 14A were not applicable, if the assessing officer was of the view that the assessee had made investment for the purpose of earning dividend, then onus was on him to prove the same, which the Assessing Officer had failed to discharge. Therefore, the addition made was to be deleted."
Leo Industries Ltd. vs. ITO 143 Taxman page 92 & 93 (Delhi)
(b) "The dividend earned by the assessee was merely incidental to the holding of shares for a particular period when the dividend was declared. As per the accounts, the stock of shares held as stock-in-trade was merely Rs. 21.27 lakhs. The shares were purchased merely for trading in the same and not earning dividned thereon. Thus, it could not be said that the expenses on interest were incurred or the depository/custodial charges were incurred merely to earn dividend income. The intention was to earn the profit on share trading and not to earn dividend income. Thus, the provisions of section 14A could not-be invoked to hold that the expenses by way of interest and depository/custodial charges were incurred in relation to dividend income which did not form part of the total income.
Therefore, no part of the interest expenses and depository/custodial charges could be disallowed by holding the same as incurred in relation to earning an exempt income [Para 2.8]"
Vidyut Investment Ltd. vs. ITO [2006] 10 SOT 284 (Delhi)
9. In the light of the above circumstances, the additions of Rs. 4,04,204 made u/s. 14A/Rule 8D be deleted.
10. Without prejudice to above, we submit that as laid down by Hon. Courts in the following judgements, the AO is required to corelate incurring of the expenses with earning of non-taxable income.
(i) Disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand - CIT v. Hero Cycles Ltd. [2010] 323ITR 518 (Punj. & Har.)
(ii) Words 'expenditure incurred' in section 14A refer to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for under sections 30 to 37 ; a return of investment or a pay - back is not 'expenditure incurred' in terms of section 14A' for attracting section 14A, there has to be a proximate cause for disallowance which is its relationship with tax exempt income and since pay-back or return of investment is not such proximate cause, section 14A is not applicable in such cases - CIT v. Walfort Share & Stock Brokers (P) Ltd. [2010] 326 ITR 1 (SC).
(iii) Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under Act by adopting reasonable basis or method consistent with all relevant facts and circumstances -Godrej & Boyee Mfg. Co.Ltd. v. Dy.CIT[2010] 328 ITR 81 (Bom.)
In our case, the AO has not established any such nexus or a correlation between expenses incurred for earning non taxable income and hence, provisions of sec.14A/RSD are wrongly applied. As a matter of fact, we have not incurred any expenditure to earn income from dividends. We get dividend under ECS and the dividend is directly credited to our bank account. We therefore do not have even the administrative expenses by way of salary, conveyance, telephone, travelling, postage, interest or any expenses close to the above list that can be correlated as having been incurred for earning dividend income of Rs. 58,963.
11. Without prejudice to above and assuming and without admitting that even if disallowance is required to be worked out as per the formula laid down in Rule-8D, we submit that the AO has wrongly quantified the disallowance at Rs. 4,04,204 treating interest paid Rs. 16,57,043 (14,78,043 + 1,79,000) as if it is for investment of shares of Rs. 51.000/-. It is submitted that interest is paid on funds which are utilized in our composite business activities of trading in both, shares and securities, real-estate and financing, and the same is not on investment in shares of Rs. 51,000/-. Therefore, the interest is allowable as a deduction u/s.36(1)(iii). Under the circumstances, the correct working under Rule 8D if made in our case will work out to Rs.NIL and therefore also, no disallowance can be quantified u/s. 14A/Rule 8D. It will create an unrealistic, artificial and if we may venture to say so, an absurd situation even to image that a prudent business man would incure expenditure of Rs. 4,04,204 for earning non taxable income of Rs. 58,963 !
12. Looking at the disallowance from all or any of the above aspects, it would establish without doubt that the disallowance of Rs. 4,04,204 is wrongly made u/s.14A/Rule 8D and hence, the same is required to be deleted.
13. Alternatively and without prejudice to above submissions and assuming without admitting that the stand of the AO is correct to the effect that the shares are held by us as investment and not as stock in trade so as to attract provisions of Sec. 14A/Rule 80, we state that as a matter of pure consequence of the AO's, stand as above, the income earned on transfer of capital assets viz: shares held as investments amounting to Rs. 6,69,77 5 results into "Capital Gain" either short term or long term as the case may be. The AO therefore be directed to rework taxable income and tax payable by treating Rs. 6,69,715 as short term/long term capital gains and issue refund of additional Tax paid on the above amount at flat rate of 30% applicable to business Income.”
The ld. AR has relied on various judicial pronouncements which he has bifurcated under three heads :-
I. Finding of Assessing Officer necessary to the effect that the assessee has incurred expenses related to exempt income and when no such expenditure incurred they cannot be disallowed u/s 14A.
1. Kamal Madanmohan Mangaldas vs. ITO, Ward 1(1), Ahmedabad ITA NO.2839/Ahd/2011 of AY 2008-09 in ITAT “C” Bench, Ahmedabad.
2. Dismn Pharmaceuticals and Chemicals Ltd. vs. DCIT, 45 SOT page 37(Ahd)
3. Patco Investment & Consultancy Services Pvt. Ltd. vs. ACIT/(Madras H.C.)
4. CIT vs. Reliance Industries Ltd.339 ITR page 632 (Bom)
5. Balrampur Chini Mills Ltd. vs. DCIT 140 TTJ (Calcutta)
6. CIT vs. Galileo India (P) Ltd. 220 Taxman,page 115 (Delhi)
7. CIT vs. Walfort Share & Stock Brokers Pvt. Ltd. 326 ITR p.1 (SC)
II. Where assessee is dealer in shares and profit in share business is Taxed as Business Income Sec.14A does not apply as per following judgments:
1. Chart showing Share Business –Dividend Income
2. Zaveri Virjibhai Mandalia vs. ACIT 152 TTJ P.20 (Ahd.ITAT)
3. Vidyut Investment Ltd. vs. ITO Ward 17(3), New Delhi, 10 SOT page 284 (Delhi ITAT)
4. CCI Ltd. vs. JCIT 250 CTR p.291 (Kar H.C.)
III. Disallowance u/s 14A cannot be more than exempt income
1. Chudgar Ranchodlal Jethalal vs. DCIT (OSD) Range-1, Ahmedabad ITA No.245/Ahd/2013 AY 2008-09 –ITAT “B” Bench, Ahd.
2. Jivraj Tea Ltd., Surat vs. DCIT, Circle-1, Surat. ITA No.866/Ahd/2012 –AY 2008-09, Ahmedabad.
3. M/s Daga Global Chemicals Mumbai vs. ACIT-9(1), Mumbi ITA No.5592/Mum/2012 AY 2009-10 ITAT “D” Bench Mumbai.
5. On the other hand, ld. DR relied on the orders of lower authorities and did not produce any new material on record.
6. We have heard rival contentions and gone through the facts and circumstances of the case as well as available records including Paper Book and case laws relied by the ld. AR. Addition of Rs. 4,04,204/- has been made by the AO against dividend income of Rs. 58,963/-. Nothing contrary has been brought to the fact that assessee is a dealer in shares and profit in share business has been shown by the assessee under the head “income from business”. A.O. has not made any specific finding to support the disallowance made by him. Further in case of Zaveri Virjibhai Mandalia vs. ACIT in ITA No.469/Ahd/2007 for AY 2004-05, the co-ordinate Bench held where the assessee is a dealer in share and profit in share business is taxed as business income section 14A of the Act does not apply. The relevant portion of the decision is reproduced below -
“12. In the present case before us it is seen that the assessee is in the business of purchase and sale of shares, the income from which is also assessed under the head income from business and profession”. The assessee had borrowed funds from Kotak Mahindra Investment Ltd. for the purpose of purchase of units and shares which in fact have been utilized for purchase of units and shares. The assessee has paid interest on the amount borrowed from Kotak Mahindra Investment Ltd. These facts have not been controverted by Revenue. The assessee has incurred interest expenses for purchase of shares and units of mutual fund and the borrowed funds have been used for acquisition of units are in dispute. The AO also held that assessee is in the business of purchase/sale of shares and while framing assessment under section 143(3) the loss of Rs. 1,51,21196 incurred on the sale/purchase of units has been treated as business loss. In view of the aforesaid facts, it can be stated that assessee is in the business of purchase and sale of shares. Once the purchase and sale of shares is held to be a business activity, the interest paid thereon has to be treated as business expenses in view of the Hon’ble High Court decision in the case of Addl. CIT vs. Laxmi Agents (supra). Thus following the decision of the Co-ordinate Bench and the Hon’ble High Court, we are of the view that in the present facts of the case, the interest expenses incurred by the assessee have to be treated as business expenses and no disallowance can be made under sec.14A. We accordingly direct the deletion of the disallowance made by AO. Thus this ground of assessee is allowed.
13. In the result, appeal of the assessee is allowed.”
7. Further in the case of Jivraj Tea Ltd. vs. DCIT, Circle-1, Surat in ITA No.866/Ahd/2012 and others, the co-ordinate Bench held that disallowance under section 14A cannot be more than the exempt income. The relevant portion of the decision is reproduced below
“20. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the assessee received exempt dividend income of Rs. 900/-. The Assessing Officer was of the opinion that expenditure incurred for earning the exempt dividend income was not allowable to the assessee and the assessee has not disallowed any expenditure towards the earning of the exempted dividend income, he by invoking the provisions of Section 14A computed expenditure attributable to the earning of exempt dividend income under Rule 8D of the Income-tax Rules and made disallowance for interest expenditure of Rs. 1,49,710/- and administrative expenses of Rs. 12,750/-. The assessee unsuccessfully appealed before the CIT(A). The contention of the assessee is that the interest free funds available with the assessee in the form of share capital and free reserves as on the date of balancesheet was Rs. 17,86,69,501/- and the investments at the end of the year was at Rs. 1,26,00,538/- only. Therefore, in view of the decision of the Hon’ble Gujarat High Court in the case of Hitachi Home and Life Solutions (I) Ltd. (supra) and Torrent Power Ltd. (Supra), no disallowance towards interest expenditure incurred for earning exempt income can be made. Regarding the disallowance of administrative expenses of Rs. 12,750/-, we find that the Chandigarh Bench of the Tribunal in the case of A.C.I.T. Vs. Punjab State Coop & Marketing Fed. Ltd. in ITA No. ITA No.548/Chd/2011 for AY 2007- 08 has held that disallowance u/s. 14A read with Rule 8D cannot exceed the exempt dividend income. Therefore, we restrict the disallowance of administrative expenses to Rs. 900/- only, being the exempt dividend income earned by the assessee. Thus, this ground of appeal of the assessee is partly allowed.”
8. The facts of the case of assessee are well covered by the above referred judicial pronouncements of the Co-ordinate Benches. So much so that it is undoubted that assessee is a dealer in shares, trading of shares has been shown as income from business, stock in trade in shares is at Rs. 41,16,992 investment in shares not held for business are only Rs. 51,000, and dividend income earned during the year is Rs. 58,963. However, assessee has maintained same books of accounts for his business of trading in cloth, trading in shares, commission income, income from real estate and exempt income. There is no bifurcation available on record to segregate the entire expenses incurred on the type of business activities carried on and some element of cost for earning exempt income cannot be ignored in these circumstances. The assessee has demonstrated that it has carried out the business activity of sale and purchase of shares. The Revenue on the other hand could not place any contrary material on record. Therefore, in the light of decision of the co-ordinate Benches we are of the considered view that the AO was not justified in invoking the provisions of section 14A of the Act. The dividend so earned is incidental to normal business activities of the assessee. Moreover, the AO has made disallowance of Rs. 4,04,204/- whereas the assessee has earned exempt income in the form of dividend of Rs. 58,963/-. Even assuming that some expenditure is required to be disallowed but such disallowance should not exceed the quantum of exempt income. Therefore, in view of the decision of the Co-ordinate Benches we hereby hold that the addition under section 14A cannot be more than the exempt income and should therefore be restricted to Rs. 58,963/-. This ground of the assessee is partly allowed.
9. Ground No.2 has not been pressed. Hence the same is dismissed as not pressed.
10. In the result, the appeal is partly allowed.
The order pronounced in the open court on 24/09/2015