TMI Blog2018 (12) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... has filed necessary evidences to prove availability of own funds. In view of the binding nature of decision of Reliance Power & Utilities Ltd vs CIT [2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC Bank Ltd vs CIT [2014 (8) TMI 119 - BOMBAY HIGH COURT] once the availability of funds is established even though there is borrowed funds, then a general presumption is drawn in favour of the assessee that investment is made out of own funds. Therefore, the question of disallowance of interest expenses does not arise. Accordingly, we direct the AO to delete disallowance made towards interest expenses u/r 8D(2)(ii) of I.T. Rules, 1962. As regards other expenses .CIT(A) has directed the AO to restrict the disallowance to the extent of 2%, we find that considering the nature of expenses incurred by the assessee and quantum of exempt income, the rate applied by the Ld.CIT(A) appears to be on lower side. Therefore, to meet the ends of justice, we deem it appropriate to direct the AO to restrict the disallowance of expenses to the extent of 5% of total exempt income u/r 8D(2)(iii) for AY 2006-07 & 2007-08. Insofar as AY 2008-09, there is no dispute with regard to the direct expenses which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of hearing of appeal. 3. The assessee, in its appeal, has taken a single ground on the issue of disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961. The ground taken by the assessee is extracted below:- 1) On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in confirming the addition u/s.14A amounting to Rs.14,51,5097- without appreciating the fact that there was no expenditure incurred to earn the Exempt Income. 4. The brief facts of the case are that the assessee company is engaged in the business of manufacturing synthetic rubber and latex. The assessee has filed its return of income for AY 2007-08 on 31-10-2007 declaring total income of ₹ 2,06,64,383 being short term capital gain taxable at 10% and claimed carry forward of business loss of ₹ 1,58,38,935. During the course of assessment proceedings, the AO noticed that the assessee has declared short term capital gains from sale of shares. Therefore, called upon the assessee to file necessary evidence including period of holding, frequency of purchase and sales and the volume in order to verify wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is actively involved in managing assesse s portfolio investment, therefore, assessee does not have any control over purchase and sale of shares and which is at the discretion of PMS in order to maximize its investments. Assessee further submitted that even otherwise, except in one or two cases, the period of holding of shares is compared to be long, therefore, by taking one or two instances of short term holding, the activity undertaken by the assessee cannot be considered as business. 6. The Ld.CIT(A), after considering submissions of the assessee and also by following certain judicial precedents including the decision of Hon ble Bombay High Court in the case of Gopal Purohit vs CIT 336 ITR 287 (Bom) held that the investment was made only through portfolio manager for which PMS have been charged. Secondly, number of transactions undertaken by the assessee are few and far between. Thirdly, the assessee has earned substantial long term gains and in the past also the Ld.AO in AY 2005-06 had accepted the claim of capital gains. Similarly in AYs 2009-10, 2010-11 2012-13 also similar stand has been accepted. Therefore, by following the decision of Hon ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he material available on record and gone through the orders of authorities below. The AO has treated profit generated from sale of shares under the head profit and gains from business or profession for the reason that the assessee is involved in systematic activity of share trading which is evident from the fact that the holding period of some shares is less than 30 days and also there is voluminous transactions in purchase and sales. According to the AO, although the assessee claims to have used its own funds generated from business activity for investments, but fact reveals that the assessee has incurred losses from its business and also there is huge borrowings from banks and financial institutions and hence, the possibility of using borrowed funds for the purpose of share trading cannot be ruled out. The AO never disputed the fact that the assessee has accounted investments in shares under the head current investments in its balance-sheet. The assessee also filed certain evidences to controvert the findings of the AO with regard to the events, as per which the findings of the AO insofar as use of borrowed funds for the investment activity is not supported by any cogent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated from sale of listed shares would be treated as capital gain or business income issued a circular No.6 of 2016 dated 29-02-2016 clarifying its earlier circular No.4 of 2007 dated 15-06-2007 as per which listed share and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desired to treat the income deriving therefrom as capital gain, the same shall not be put to dispute by the AO as long as the stand once taken by the assessee in a particular assessment year shall remain applicable to subsequent assessment years. Therefore, we are of the considered view that insofar as the issue of taxability of long term capital gain, there is no ambiguity and it has been clarified by the Board itself vide its circular. Therefore, we are of the view that the AO was incorrect in treating long term capital gain derived from sale of shares under the head, Income from business or profession . 11. Coming to the short term capital gain. The Hon ble Gujarat High Court in the case of PCIT vs Bhanuprasad D Trivedi, HUF (2017) 87.taxmann.com 137 held that where assessee had purchased share with clear intention of being an investor and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of assessment proceedings, the AO observed that the assessee has not made any disallowance of expenses in relation to exempt income, therefore, called upon the assessee to explain as to why the provisions of section 14A r.w.r. 8D(2) shall not be invoked to determine disallowance of expenses in relation to exempt income. In response to notice, the assessee has submitted that it has disallowed on its own direct expenses incurred in relation to exempt income being PMS fees and demat charges in the statement of total income and, therefore, further disallowance of other expenses including interest does not arise as its investment in shares are out of its own interest free funds and the assessee has entrusted its investment portfolio management to PMS services for which a separate fee has been paid. The AO, after considering the submissions of the assessee and also by relying upon certain judicial precedents held that with the introduction of section 14A of the Act, any expenditure incurred in relation to earning income not forming part of total income is not allowable as deduction. The administrative other expenses incurred by the assessee company facilitate earning of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court in the case of Reliance Power Utilities Co Ltd vs CIT 313 ITR 340 (Bom) and HDFC Bank Ltd vs CIT 366 ITR 505 (Bom). Aggrieved by the order of Ld.CIT(A), the assessee as well as the revenue are in appeal before us. 15. The Ld.DR submitted that the Ld.CIT(A) was erred in deleting disallowance of interest expenses made by the AO u/s 14A of the Act despite the fact that the expenditure incurred in relation to the income does not form part of total income cannot be allowed as deduction. The Ld.DR further submitted that although the provisions of rule 8D has no application prior to AY 2008-09, yet, the disallowance restricted by the Ld.CIT(A) at 2% of total exempt income is not commensurate with the exempt income earned by the assessee and relevant expenses incurred in relation to exempt income. Insofar as assessment year 2008-09, although the Ld.CIT(A) has accepted the fact that rule 8D(2) has to be strictly applied for computation of disallowance, still, not given any clear finding in respect of interest expenses, therefore, the matter may be set aside to the file of the AO for fresh verification. 16. The Ld.AR, on the other hand, submitted that the Ld.CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs Godrej Boyce Mfg Co Ltd (supra). Once the provisions of rule 8D(2) has no application, the expenses incurred in relation to exempt income has to be determined on proportionate basis considering the nature of expenses incurred by the assessee and the quantum of exempt income earned for the year. The Ld.CIT(A) has restricted expenses in relation to exempt income to the extent of 2% of total exempt income. There is no hard and fast rule for applying the percentage in determining the quantum of expenses. Various courts and tribunals have taken rate of 1 to 10% depending upon facts of each case. In this case, the assessee has earned substantial dividend income from shares and mutual funds. Although the assessee has disallowed direct expenses being PMS charges and demat charges, but did not disallow interest expenses and other expenses. Insofar as interest expenses, the assessee has filed necessary evidences to prove availability of own funds. In view of the binding nature of decision of Hon ble Bombay High Court in the case of Reliance Power Utilities Ltd vs CIT (supra) and HDFC Bank Ltd vs CIT (supra),once the availability of funds is established even though there is bor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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