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2016 (8) TMI 682 - ITAT KOLKATA

2016 (8) TMI 682 - ITAT KOLKATA - TMI - Disallowance under section 14A - Held that:- 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 Rule 8D refers to the making of purchase of shares and not holding it as investment. The applicability of Rule 8D to compute the disallowance to be made under section 14A on account of expenditure in relation to the exempt dividend income earned by the assessee from shar .....

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disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted. - Interest income - business income or income from other sources - Held that:- There was a direct nexus between the earning of interest income in question as well as the business income of the assessee, inasmuch as the same was earned on Fixed Deposits kept by the .....

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ourt) as well as Chinna Nachimuthu Constructions (2007 (11) TMI 40 - HIGH COURT, KARNATAKA ). - I.T.A. No. 1351/KOL/ 2013 - Dated:- 8-6-2016 - Shri P.M. Jagtap, Accountant Member and Shri N.V. Vasudevan, Judicial Member For The Department : Shri S.S. Alam, JCIT, Sr. D.R. For The Assessee : Shri Subash Agarwal , Advocate ORDER Per Shri P.M. Jagtap : - This appeal is preferred by the Revenue against the order of the ld. Commissioner of Income Tax-(Appeals)-XXIV, Kolkata, dated 22.02.2013. 2. The i .....

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said return, dividend income of ₹ 92,64,034/- received during the year under consideration was claimed to be exempt by the assessee and a disallowance of ₹ 1,20,000/- was offered under section 14A on account of expenditure incurred in relation to the said exempt income. The Assessing Officer having regard to the accounts of the assessee was not satisfied about the correctness of the disallowance offered by the assessee under section 14A on account of expenditure in relation to exemp .....

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before the ld. CIT(Appeals) and after considering the submissions made by the assessee before him as well as the case laws cited in support, the ld. CIT (Appeals) deleted the said disallowance made by the Assessing Officer for the following reasons given in paragraph No. 2.3 of his impugned order:- "2.3. I have carefully considered the observation of the Assessing Officer in the assessment order and also the submission of the ld. A.R. During the course of the appellate proceedings, the ld. .....

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sheet also reveals that all the shares held by the appellant has been shown as stock-in-trade. The ld. A.R. has informed that the AO has calculated the disallowance u/s 14A by treating the stock- in-trade as investment in shares. In this regard, the ld. AR has relied on the decision of the Karnataka High Court in the case of CCI Limited -vs.- JCIT [2012] 206 Taxman 563 (Ker.). In this case, the Hon'ble Court has held that when the assessee has not retained the shares with the intention of ea .....

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would be eligible for deduction u/s 36(1)(iii) on borrowed fund utilized for acquisition of shares only if shares are held as stock-in-trade which arises only if the assessee is engaged in trading in shares. As regards the acquisition of shares in the form of investment, the Hon'ble High Court has held that the only benefit derived by the assessee is dividend and the disallowance u/s 14A is attracted for acquisition of shares in the form of investments. The ld. AR has explained that the appe .....

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company has already disallowed a sum of ₹ 1,20,000/- u/s 14A in relation to the dividend income which is exempt from tax. Considering the facts of the case, I am of the view that the appellant has held the shares as stock-in-trade and the AO has wrongly treated its stock-in-trade as investment in shares and computed the disallowance of ₹ 2,43,90,464/- u/s 14A read with Rule 8D. The appellant has already made a disallowance of ₹ 1,20,000/- u/s 14A. In view of it, the AO is dire .....

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hanuka & Sons -vs.- CIT (2011) 339 ITR 319.. He contended that the Hon'ble Mumbai Bench of the ITAT in its Third Member decision rendered in the case of DH Securities Pvt. Ltd. - vs. - DCIT (2014) 41 taxmann.com 352 has decided a similar issue in favour of the Revenue by following the decision of the Hon'ble Calcutta High Court in the case of Dhanuka & Sons (supra) by holding that the same is squarely covered by the principles laid down by the Hon'ble Calcutta High Court in t .....

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R 296 (Ker.)] relied upon by the ld. CIT(Appeals) in his impugned order, wherein it was held that the assessee would be entitled for deduction of interest under section 36(1)(iii) of the Act on the funds borrowed and utilized for the acquisition of shares as stock-in-trade and the disallowance under section 14A is attracted only when the acquisition of shares is in the form of investment and the benefit derived by the assessee is only in the form of dividend income, which is exempt from tax. He .....

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allowed under section 14A. 7. The ld. counsel for the assessee also cited the decision of the Mumbai Bench of ITAT in the case of CIT v. India Advantage Securities Ltd. [IT Appeal No. 6711/Mum/2011, dated 14-09-2012], wherein the decision of the Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) has been followed by the Tribunal to hold that the disallowance of interest in relation to the dividend received from trading shares could not be made. He submitted that the appeal filed by .....

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tage Securities Limited (supra) thus has merged with the order of the Hon'ble Bombay High Court and the Third Member decision of the Tribunal in the case of DH Securities (P.) Ltd. (supra) relied upon by the ld. D.R. stands impliedly overruled. He also relied on the latest decision of the Hon'ble Bombay High Court dated 25.02.2016 rendered in the case of HDFC Bank -vs. - DCIT [67 taxmann.com 42], wherein the action of the Tribunal in not following the decision of its Coordinate Bench in .....

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R., the ld. counsel for the assessee contended that the issue involved in the said case before the Hon'ble High Court was in regard to applicability of section 14A with respect to "investment in shares" and not "stock-in-trade". He contended that although there was a reference to "business of trading in shares" in Question No. (ii) referred to the Hon'ble Calcutta High Court in the case of Dhanuka & Sons (supra), the same was of no consequence as it was .....

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ember decision has already been overruled impliedly by the decision of the Hon'ble Bombay High Court rendered in the case of India Advantage SecuritiesLtd. (supra). He contended that Third Member decision in the case of D.H. Securities (P)Ltd (supra). even otherwise has wrongly read the decision of the Hon'ble Calcutta High Court in the case of Dhanuka & Sons (supra). He also contended that the Hon'ble Calcutta High Court in the case of Dhanuka & Sons (supra) had no occasion .....

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in the situations in which shares are held as investments and this rule will not have any application when the shares are held as stock-in-trade. It was held that the application of Rule 8D(2)(i), however, is not excluded and in a case where shares are held as stock-in-trade and not as investments, the disallowance even under rule 8D is restricted to the expenditure directly relatable to earning of exempt income. It was held that section 14A thus will still apply in the cases where shares are h .....

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oyed in Rule 8D. 10. Without prejudice to his main argument and as an alternative, the ld. counsel for the assessee contended that the disallowance under section 14A has been wrongly worked out by the Assessing Officer under Rule 8D by taking the entire value of stock-in-trade instead of taking the value of shares, which actually yielded dividend income during the year under consideration. In this regard, he relied on the decision of the Coordinate Bench of this Tribunal in the case ofREI Agro L .....

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A read with Rule 8D is held to be applicable in the case of the assessee, the Assessing Officer may be directed to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. 11. In the rejoinder, the ld. D.R. invited our attention to the provisions of section 14A and submitted that sub-section (1) of section 14A spells out in unambiguous terms that the expenditure incurred by the assessee in relation .....

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tipulation of section 14A(1) is clear in the sense that if there is any exempt income, the disallowance of expenditure under section 14A in relation to such income is automatic. He contended that even the word 'investment' used in Rule 8D refers to the making of purchase of shares and when the dividend earned on such shares is exempt, the provisions of section 14A read with Rule 8D are clearly applicable. 12. The ld. D.R. contended that while deciding the issue relating to the applicabil .....

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computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the n .....

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s not form part of the total income under the Income-tax Act". The ld. D.R. also relied on CBDTs Circular No. 5/2004 dated 11.02.2014, wherein it has been further clarified and emphasized that legislative intent behind introduction of section 14A is to allow only that expenditure which is relatable to earning of income and it, therefore, follows that the expenses, which are relatable to exempt income are to be considered for disallowance. 13. The ld. D.R. finally reiterated that the issue u .....

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case of Dhanuka & Sons (supra). He contended that even the Mumbai Bench of this Tribunal in its Third Member decision rendered in the case of DH Securities (P.) Ltd. (supra) has held categorically that the issue under consideration is squarely covered by the principles laid down by the Hon'ble Calcutta High Court in the case of Dhanuka & Sons (supra). He pleaded that the said Third Member decision has a force of Special Bench and this Division Bench of the Tribunal, therefore, has t .....

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the Third Member decision of the Tribunal in the case of D.H. Securities (P.) Ltd. (supra), wherein a similar issue was involved and while deciding the same, the ld. Accountant Member took a view that section 14A has application even in the case where the exempt dividend income is received from the shares held as stock-in-trade and the disallowance on account of expenditure incurred in relation to such exempt income can be made by applying the said provision. The ld. Judicial Member, however, di .....

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to a Third Member to resolve the point of difference, the decision of the Hon'ble Karnataka High Court in the case of CCI Ltd. (supra), as well as various other judicial pronouncements were cited on behalf of the assessee in support of its case. The ld. Third Member, however, held that the issue is squarely covered by the principles laid down by the Hon ble Bombay High Court in the case of Godrej Boycee Manufacturing Company Limited (supra) as also by the judgment of the Hon ble Calcutta Hi .....

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ns (supra) is not directly applicable to the issue under consideration and the same has wrongly been read by the ld. Third Member in the case of DH Securities Pvt. Limited (supra) while applying the same to decide the issue against the assessee. However, as rightly contended by the ld. D.R., the Third Member decision in the case of DH Securities (P.) Ltd. (supra) is binding on us having the force of a Special Bench and it is, therefore, not permissible for us to take a different view than the on .....

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interest expenditure was incurred by the assessee from its indivisible business of trading of shares, granting of loans and advances and investing in shares. It was also mentioned as undisputed fact in paragraph No. 8 of the judgment that part of the income of the assessee from its business was from dividend, which was exempt from tax. The assessee in the case of Dhanuka & Sons thus was very much involved in the business of trading in shares and the undisputed fact noted by the Hon'ble .....

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he Hon'ble Jurisdictional High Court in the case of Dhanuka & Sons (supra) are squarely applicable to the issue under consideration as rightly held by the ld. Third Member in the case of DH Securities (P.) Ltd. (supra). 16. The ld. counsel for the assessee has contended that the Hon'ble Mumbai Bench of this Tribunal in the case of India Advantage Securities Ltd. (supra) has decided a similar view in favour of the assessee by following the decision of the Hon'ble Karnataka High Co .....

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s merged with the order of the Hon'ble Bombay High Court passed in the said case, we are unable to comprehend as to how the Hon'ble Third Member decision of the Tribunal in the case of DH Securities (P.) Ltd. (supra) gets overruled when it was not the subject matter of the appeal before the Hon'ble Bombay High Court nor even the same was cited or considered by the Hon'ble Bombay High Court while dismissing the appeal filed by the Revenue against the order of the Tribunal in the c .....

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ubsequently taking a different view, which has been brought to our notice. The decision of the Hon'ble Calcutta High Court in the case of Dhanuka & Sons upholding the applicability of section 14A for making a disallowance on account of expenditure incurred in relation to the exempt income in the form of dividend earned by the assessee on shares held as stock-in-trade thus still holds the field and respectfully following the said decision of the Hon'ble Jurisdictional High Court, we h .....

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income is earned by the assessee from shares held as stock-in-trade, the next question that arises for our consideration is how to compute the disallowance to be made under section 14A on account of expenses incurred in relation to such exempt income by applying Rule 8D. In this regard, the ld. counsel for the assessee has relied on the decision of the Coordinate Bench of this Tribunal in the case of Gulshan Investment Co. Ltd. (supra) to contend that even if section 14A read with Rule 8D is he .....

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l even in the case of DH Securities (P.) Ltd. (supra) by placing reliance on the decision in the case of Gulshan Investment Co. Ltd. (supra). The ld. Accountant Member, with whom the ld. Third Member finally concurred, however, did not accept the same by relying on the decision of Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Limited (supra), wherein a similar contention was rejected by the Tribunal by observing that the reference in Rule 8D is to the "value of i .....

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ee from shares held as stock-in-trade thus was upheld by the Tribunal in its Third Member decision rendered in the case of DH Securities (P.) Ltd. (supra) and respectfully following the same, we reject the contention of the ld. counsel for the assessee that the disallowance in the case of the assessee can be restricted only to direct expenses incurred in relation to the earning of exempt dividend income by applying Rule 8D(2)(i). 18. Before us, the ld. counsel for the assessee has raised an alte .....

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nal in the case of REI Agro Ltd. (supra), we direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted. Ground No. 1 of the assessee's appeal is thus partly allowed. 19. In Ground No. 2, the Revenue has challenged the action of the ld. CIT(Appeals) in treating the interest incom .....

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l, the ld. CIT(Appeals) accepted the claim of the assessee on this issue and directed the Assessing Officer to assess the interest income as business income of the assessee instead of income from other sources after discussing the submissions made by the assessee as well as the case laws relied upon by the assessee in support of paragraph No. 3.3 of his impugned order, which reads as under:- "3.3. I have carefully considered the observation of the Assessing Officer in the assessment order a .....

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rules prescribed by the SEBI, the Broker can not utilize these FDRs for its own business purpose. In the present case, the broker is M/s. Anvil Share & Stock Broking Pvt. Ltd. and its client is the appellant i.e. M/ s. Teenlok Advisory Services Pvt. Ltd. It has been clarified that the appellant company had given the cheque to its broker i.e. Anvil Share & Stock Broking Pvt. Ltd. which took out the FDRs and gave to the NSE as Margin Money on behalf of the appellant. The bank had paid inte .....

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een held that interest can be assessed under the head "Income from Other Sources" only if it cannot be brought within one or the other of the specific heads of charge and the interest payable to the assessee partakes of the same character as the receipt for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between them. The ld. AR has relied on the decision of the Hon'ble Delhi High Court in the case .....

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Chinna Nachimuthu Constructions [2008] 297 ITR 70 (Kar) wherein the Hon'ble Karnataka High Court has held that "as the investment of amount in fixed deposits by the assessee was only to secure a bank guarantee to be offered to KPTCL in order to acquire a contract work, it could not, therefore, be treated as an income from other sources and interest occurred on such fixed deposits had to be treated as business income only". In the present case, the appellant had given the cheque to .....

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