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M/s K. Ratanchand & Co. Versus Income-tax Officer, Ward 11 (4) , Ahmedabad.

2015 (10) TMI 2171 - ITAT AHMEDABAD

Disallowance u/s 14A - Held that:- 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.

As 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 ₹ 41,16,992 investment in shares not held for b .....

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ssessee 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 Jivraj Tea Ltd. vs. DCIT [2014 (9) TMI 131 - ITAT AHMEDABAD] 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 .....

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Dated:- 24-9-2015 - Shri Kul Bharat, JM, & Manish Borad, AM For The Appellant : Shri Anil R. Shah, AR For The Respondent : Shri R. P. Maurya, Sr. DR ORDER PER 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 groun .....

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rned share trading profit of ₹ 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 ₹ 4,04,204/-. It is submitted that if at all there is a disallowance to be made, it should be done in accordance with .....

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of the vouchers are self made/office vouchers. It is submitted that since the entire expenses under various heads amounting to ₹ 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 re .....

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04,204/- by invoking section 14A of the Act and disallowance of expenses of ₹ 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 ₹ 4,04,204/- stating that the same is incurred for earning non-taxable dividend of ₹ 58,960/-. .....

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us he made disallowance under section 14A worked out as per Rules 8D of the I.T. Rules, 1962 and made addition of ₹ 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 ₹ 41,67,992/- out of wh .....

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t ₹ 16,86,501/- and the interest expenses of ₹ 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 ₹ 58,963/-, there is a Long term investment of ₹ 51,000/- yielding non-taxable income by way of dividend, we have incurred interest expenses of .....

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50,000 and Maskati Cloth Dealer Co-op. Shop and Warehouse ₹ 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 ₹ 58,963/- we may state that the AO has on .....

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e, closing stock of shares as on 31.3.2008 is verifiable at ₹ 41,16,992/-. 6. We further invite your Honour s kind attention our share trading account wherein, we have opening stock of shares at ₹ 40,02,123/- purchase of shares at ₹ 11,31,654 and sale of shares at ₹ 16,86,500 yielding profit from share trading activity at ₹ 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 .....

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ove 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 .....

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f 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 ₹ 21.27 lakhs. The shares were purchase .....

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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 ₹ 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 .....

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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 Offic .....

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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 ₹ 58,963. 11. Without prejudice to above and assuming and without admitting that even if .....

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ares of ₹ 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 ₹ 4,04,204 for earning non taxable income of ₹ 58,963 .....

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t 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 ₹ 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 ₹ 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 bu .....

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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 showin .....

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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 ₹ 4,04,204/- has been made by the AO against dividend income of ₹ 58 .....

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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 intere .....

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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, .....

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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 ₹ 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 dividen .....

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lancesheet was ₹ 17,86,69,501/- and the investments at the end of the year was at ₹ 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 ₹ 12,750/-, we find that the Chandigarh Bench of the Tribunal i .....

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