TMI Blog2015 (11) TMI 1067X X X X Extracts X X X X X X X X Extracts X X X X ..... d be excluded for the purpose of computing disallowance u/s 14A of the Act, since they can not be said to be the “investment” made for the purpose of earning dividend income. In the case of India Advantage Securities Ltd (2015 (6) TMI 140 - BOMBAY HIGH COURT), the Hon’ble Bombay High Court has noticed that the CIT(A) took into account the words of the Rule and found that the figures as derived by the Assessing officer cannot be taken into consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head “Investment” could be taken and some charges apportioned for the purpose of computing expenses. Thus the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made. - I.T.A. No. 2663, 2664 and 2665/Mum/2015 - - - Dated:- 28-10-2015 - Shri B. R. Baskaran, AM And Lalit Kumar, JM For the Appellant : Shri Rajiv Khandelwal For the Respondent : Ms. Anu Aggarwal ORDER Per B. R. Baskaran All the three appeals filed by the assessee are directed against the orders passed by Ld CIT(A)-8, Mumbai for assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the assessee had given advances only to purchase the shares and hence the tax authorities are not justified in rejecting the claim without bringing any other material on record. On the contrary, the Ld D.R placed strong reliance on the order passed by Ld CIT(A). 5. Having heard rival contentions, we find that there is merit in the submissions made by Ld A.R. First of all, the assessee s claim that the interest free advances were given in connection with the purchase of shares was not disproved with any material. It is an admitted fact that the assessee s business consisted of investing and trading in shares. Hence, the explanations furnished by the assessee should not have been rejected without bringing any material on record. Secondly, we notice that the Ld CIT(A) has not considered the interest free unsecured loans availed by the assessee. We notice that the interest free unsecured loans along with the own funds available in the form of share capital, share application money and reserves and surplus are sufficient enough to cover the interest free advances given by the assessee, even if the said advances were not considered to be for the purposes of business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sofkit Educom Pvt Ltd 400.00 ------------ 450.00 lakhs ------------ 559.97 lakhs In view of the availability of interest free funds, the disallowance of interest made by the tax authorities is liable to deleted in view of the decision of Hon ble Bombay High Court in the case of Reliance Utilities infrastructre Ltd (supra). Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance made out interest expenditure. 9. The next issue relates to the disallowance made u/s 14A of the Act. In this year, the assessee earned dividend income of ₹ 2,52,781/-, but did not make any disallowance u/s 14A of the Act. However, the assessing officer worked out the disallowance as per the provisions of Rule 8D of I.T rules at ₹ 55,46,090/- and added the same. The Ld CIT(A) also confirmed the said addition. 10. The Ld A.R submitted that the assessee is a trader in shares and hence he has held the shares as stock in trade only. He further submitted that the disallowance as per rule 8D is required to be made only if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n rendered by the Tribunal in the case of India Advantage Securities Ltd (supra) was found to be neither perverse nor vitiated by any error of law apparent on the face of record by Hon ble Bombay High Court. 13. We notice that the Tribunal in the case of India Advantage Securities Ltd (supra) has also noted the fact that the decision rendered by the Hon ble Karnataka High Court in the case of CCI Ltd (supra) has already been followed by the Tribunal in the case of Ganjam Trading Co.P.Ltd (supra) and also the Special Bench of the Tribunal in the decision rendered in ITO V/s.Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (MUM.) (SB). However, following the decision of Hon ble Karnataka High Court in the case of CCI Ltd (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made. 14. In the result, the appeal filed for AY 2009-10 is allowed and the appeals filed for AY 2010-11 and 2011-12 are partly allowed. Pronounced accordingly on 28th Oct, 2015. CORRIGENDUM The above said three appeals were pronounced on 28.10.2015. Thereafter we noticed that signatures of the Members have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. On the contrary, the Ld D.R placed strong reliance on the order passed by Ld CIT(A). 5. Having heard rival contentions, we find that there is merit in the submissions made by Ld A.R. First of all, the assessee s claim that the interest free advances were given in connection with the purchase of shares was not disproved with any material. It is an admitted fact that the assessee s business consisted of investing and trading in shares. Hence, the explanations furnished by the assessee should not have been rejected without bringing any material on record. Secondly, we notice that the Ld CIT(A) has not considered the fact that the assesssee has availed interest free unsecured loans. We notice that the interest free unsecured loans along with the own funds available in the form of share capital, share application money and reserves and surplus are more than the amount of interest free advances given by the assessee. Hence, even if the said advances were not considered to be for the purposes of business of the assessee, disallowance of interest is not warranted. We notice that the interest free advances noticed by the AO were ₹ 5.75 crores, whereas the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 450.00 lakhs ------------ 559.97 lakhs In view of the availability of interest free funds, the disallowance of interest made by the tax authorities is liable to deleted in view of the decision of Hon ble Bombay High Court in the case of Reliance Utilities infrastructre Ltd (supra). Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance made out interest expenditure. 9. The next issue relates to the disallowance made u/s 14A of the Act. In this year, the assessee earned dividend income of ₹ 2,52,781/-, but did not make any disallowance u/s 14A of the Act. However, the assessing officer worked out the disallowance as per the provisions of Rule 8D of I.T rules at ₹ 55,46,090/- and added the same. The Ld CIT(A) also confirmed the said addition in principle. However, since there was some error in the computation of average value of investments, the Ld CIT(A) rectified the same, which resulted in reduction of the disallowance to ₹ 50,41,315/-. 10. The Ld A.R submitted that the assessee is a trader in shares and hence he has held the shares as stock in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head Investment could be taken and some charges apportioned for the purpose of computing expenses. The decision rendered by the Tribunal in the case of India Advantage Securities Ltd (supra) was found to be neither perverse nor vitiated by any error of law apparent on the face of record by Hon ble Bombay High Court. We further notice that the decision rendered in the case of CCI Ltd (supra) has been followed by the co-ordinate benches of Tribunal in the case of India Advantage Securities Ltd (ITA No.6711/Mum/2011 and Ganjam Trading Co. Pvt Ltd (supra). 13. In the case of Ganjam Trading Co.P.Ltd (supra), the Tribunal took note of the decision rendered by the Special Bench of the Tribunal in the case of ITO V/s. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum)(SB) also. However, following the decision of Hon ble Karnataka High Court in the case of CCI Ltd (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing discussions, we are of the view that there is no requirement to disallow interest on both merits as well as on legal basis. Rule 8D(2)(iii) of I.T Rules also prescribes disallowance of 0.5% of average value of investments . However, considering the fact that the assessee has claimed the dividend income as exempt, we feel that a reasonable amount out of other expenses should be disallowed. The assessee before us has furnished copies of Rule 8D workings made by the Ld CIT(A) in the case of India Advatage Securities Ltd (supra) at page 35 of the case law paper book. We notice that the Ld CIT(A), in the case of India Advantage Securities Ltd (supra), has disallowed 10% of bank charges under Rule 8D(2)(i). We further notice that the Hon ble Bombay High Court, in its order, has observed that the disallowance was made to the extent of 10% of income. Hence, we are of the view that the expenses relatable to the earning of income out of expenses is required to be estimated on a reasonable basis and the same is required to be disallowed. Accordingly, in the facts and circumstances of the case, we are of the view that disallowance of 5% of the dividend income would be reasonable to take c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he approach of the AO would give distorted working of interest. In any case, since the assessee was possessing sufficient amount of interest free advances, we are of the view that the decision rendered by the jurisdictional Hon ble Bombay High Court in the case of Reliance Utilities Infrastructure Ltd (supra) shall be applicable to the year under consideration also. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to delete the impugned addition. 19. The next issue relates to the disallowance made u/s 14A of the Act. During this year, the assessee received dividend income of ₹ 12,85,175/- and it did not make any disallowance u/s 14A of the Act. The assessee has earned profit on sale of shares at ₹ 3,44,30,149/-. The value of shares sold by the assessee in this year was ₹ 45.15 crores. Thus, it can be noticed that the dividend received by the assessee in this year also very negligible when compared with the profit earned by the assessee as well as with the sale value of shares held as stock in trade. Hence, as held in the preceding year, we are of the view that there is no requirement to disallow interest on both ..... X X X X Extracts X X X X X X X X Extracts X X X X
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