TMI Blog2018 (4) TMI 1670X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the assessee, before rejecting the assessee’s claim of quantification of disallowable expenditure relatable to the earning of exempt income. In this case, assessee disallowed the entire PMS fee – the only expenditure incurred by him for earning of the exempt income. Without giving any satisfaction and reasons AO rejected the same before applying the said provisions and disallowing. In our view, this kind of approach of the AO is unsustainable in law. Thus disallowance made by the AO is required to be deleted in the absence of any satisfaction recorded by him while making disallowance u/s.14A of the Act. See CAPGEMINI TECHNOLOGY SERVICES INDIA LIMITED, VERSUS THE DY. COMMISSIONER OF INCOME TAX, AND VICE-VERSA [2018 (3) TMI 540 - ITAT PUNE] - Decided in favour of assessee. - ITA No.378/PUN/2016 /Assessment Year : 2010-11,C.O.No.05/PUN/2018 (Arising out of ITA No.378/PUN/2016) - - - Dated:- 18-4-2018 - Shri D.Karunakara Rao, And Shri Vikas Awasthy, JJ. Assessee by : Shri C.H. Naniwadekar Revenue by : Shri Ajay Modi, JCIT ORDER D. Karunakara Rao, The Revenue filed the main appeal ITA No.378/PUN/2016 and the assessee filed the Cross Objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst take up the appeal of the Revenue. ITA No.378/PUN/2016 By Revenue A.Y. 2010-11 4. The only ground raised by the Revenue reads as under : Whether on the facts and in the circumstances of the case and in law, the Hon ble CIT(A) was justified in holding the activity of transaction in shares/mutual fund by engaging PMS was an investment activity and resultant gain/loss was assessable under the head capital gains . 5. Before us, at the very outset, Ld. Counsel for the assessee submitted that earning of profits on purchase and sale of shares employing the services of Portfolio Management Services is taxable under the head capital gains. Further, Ld. Counsel submitted that, on similar facts, the Pune Bench of the Tribunal has decided number of cases treating the said income as capital gains only. Before us, Ld. Counsel for the assessee filed the order of Pune Bench of the Tribunal in the case of Yugmarg Investment Trading Pvt. Ltd. Vs. DCIT ITA No.310/PUN/2015, dated 12-05-2017 for the A.Y. 2008-09. Ld. Counsel for the assessee submitted that the decision is relevant for the similar proposition. The said decision was delivered relying on the decisions of Pun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olume and frequency of transactions are concerned, it has been explained that actually the number of scrip traded was not very large being 62 across all the 3 PMSs, engaged during the year, which was not much considering that about 2000 companies' shares were actively traded in the stock exchanges. It was also clarified that the frequencies of transactions was not much. Sometimes several transactions may have to be made in the same scrip, which increases the frequency. It was emphasised that the total sales turnover in the investments made through PMS during the year was 19.06 crores involving 62 scrips, whereas, in the share trading business separately shown by the appellant, the sales turnover was 73.21 crores involving 76 scrips. This shows that in the share trading business activity, the turnover was almost 4 times higher even though the number of scrips were only marginally high. It was emphasized that in the trading activity even though the shares involved were proportionately much less as compared to the turnover, since the intention was to carry on business activity, the same was shown under the head Business income'. It also included speculative transaction and day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some shares just before the dates of the shares becoming ex-dividend on the stock exchanges. However, a perusal of the chart given in the assessment order showed that the information regarding date of declaration of dividend has not been given. For example, in the case of scrip of Amtek Auto, the sale was made on 19.9.2005 whereas the ex-dividend date was 22.12.2005; i.e. the sale was made more than 3 months before the shares became exdividend. It does not necessarily follow that the dividend was already declared in this case and still the appellant sold the same before the shares becoming ex-dividend. Similarly, in the case of ACC, two particular sale dates mentioned when the scrip was transacted by DSPML, were 24.3.2005 and 16.11.05, whereas the ex- dividend date has been mentioned as 29.3.2006. It cannot therefore be said that the appellant had knowingly sold the shares after declaration of the dividend before it became ex-dividend. Again in respect of shares of Jet Airways, the exdividend date has been mentioned as 14.9.2005 by the AO, and the date of sale has been mentioned as 17.10.2005 and 23.1.2006 in the case of two different PMS's. This instance points out to a wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is as under: 4.17 The AO also pointed out to some instances when shares of the same company have been repurchased sometimes after the sale. In this connection, it is explained that such instances were not much and there were reasons for churning of the investments by the Portfolio Manager at different instances during the year. It is relevant to notice that the appellant also pointed out that there were many shares held for a long time, even upto 18 months, by the PMS, and substantial amount of long term capital gain of ₹ 83,09,187/- was also shown. In fact, the AO has treated even this LTCG of ₹ 83,09,187/- as Business income, which cannot be justified. On the other hand, depending on the market conditions, vis-a-vis the analysis of the fundamentals of particular scrip, decision may have to be taken to exit at a particular point of time, and to re-enter after a few months on change of fundamentals. This does not mean that it was in the nature of repeated trading activities in the same commodity; in which case there could be multiple repetitions within a few days; or even during the same day. 14. In this context, we find that the Assessing Officer has treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.378/PUN/2016 A.Y. 2010-11 9. Assessee filed the following solitary cross objection and the same reads as under : The Ld.CIT(A) erred on the facts and in law in upholding disallowance to the extent of ₹ 11,61,912/- u/s.14A of the Income Tax Act, 1961. He failed to appreciate the contentions and arguments advanced in this behalf. 10. Elaborating the said ground, Ld. Counsel for the assessee submitted that this is a case where AO invoked the provisions of section 14A read with Rule 8D of the I.T. Rules, 1961 without recording any satisfaction with regard to the applicability of the said provisions before making disallowance of ₹ 14,98,985/-. 11. In this regard, Ld. Counsel for the assessee drew our attention to the assessment order in general and the contents of Para No.4 in particulars and demonstrated the fact of absence of satisfaction of any kind before making disallowance under the said section/rules amounting to ₹ 14,98,985/-. 12. Ld. DR for the Revenue relied heavily on the order of the AO. 13. We heard both the sides on this issue. We proceed to extract Para No.4 of the assessment order which reads as under : 4. Disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-11 was DSP Merrill Lynch Fund Managers. From the above, on going through the above paragraph, we find the AO has not recorded the satisfaction of any kind before resorting to quantification of disallowance u/s.14A r.w. Rule 8D of the I.T. Rules, 1961. It is settled legal proposition that the AO is under obligation to give a satisfaction in writing having regard to the books of account of the assessee, before rejecting the assessee s claim of quantification of disallowable expenditure relatable to the earning of exempt income. In this case, assessee disallowed the entire PMS fee the only expenditure incurred by him for earning of the exempt income. Without giving any satisfaction and reasons AO rejected the same before applying the said provisions and disallowing a sum of ₹ 14,98,985/-. In our view, this kind of approach of the AO is unsustainable in law. 14. We find, on similar facts, the Pune Bench of the Tribunal in the case of capgemini Technology Services India Limited Vs. DCIT ITA Nos. 216 360/PUN/2015, dated 25-01-2018 for the A.Y. 2010 dismissed the appeal filed by the Revenue by holding as under : 34. We have heard the rival contentions and perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. (underline provided by us for emphasis) 36. The ratio laid down by the Hon ble High Court of Delhi in Indiabulls Financial Services Ltd. Vs. DCIT (supra) is thus, not applicable. The ground of appeal No.3 raised by the Revenue is thus, dismissed. 15. Further, we find the Pune Bench of the Tribunal in the case Poonawalla Investment Industries Pvt. Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of tax free dividends and in the computation of income, the assessee has disallowed sum of ₹ 50 lakhs under section 14A of the Act. Then, reference is made to the Note filed by the assessee on expenditure disallowable under section 14A of the Act. The Assessing Officer thereafter, takes note of the contents of said explanation and observed as under:- I have gone through the submissions made by the assessee. It is observed that apart from investments in the overseas subsidiaries (where there is no tax-free income since the dividend is also taxable) the investments made by the assessee are in mutual funds. The entire investment in mutual fund is in non-equity scheme. In respect of investment in mutual funds, except for growth funds, the company receives tax free dividend. The amount of dividend received by the company is substantial. This is a clear case for application of Rule 8D. Hence, the contention of the assessee cannot be accepted. The disallowance u/s 14A is required to be made by applying Rule 8D. As per the working of disallowance u/s 14A as per Rule 8D, the amount of disallowance comes to ₹ 5,68,32,323/-. The assessee has already disallowed ₹ 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and also having regard to the correctness of the claim of the assessee. In that sense of the matter, the satisfaction recorded by the AO is extremely generic and which falls short of the legal requirement for assuming jurisdiction u/s.14A of the Act. Considering the above position, we are of the view that the AO failed to record the sustainable satisfaction before invoking the provisions of section 14A of the Act. Therefore, the disallowance made by the AO is unsustainable technically. Accordingly, this part of the argument of Ground No.1 is allowed. We find adjudication of the other issues of the said ground relating to merits becomes an academic exercise. Therefore, the same are dismissed as academic. In the present case, AO failed to record satisfaction having regard to the books of account of the assessee before resorting to invoking the provisions of section 14A r.w. Rule 8D of the I.T. Rules. In view of the above discussion, we are of the opinion that the disallowance made by the AO is required to be deleted in the absence of any satisfaction recorded by him while making disallowance u/s.14A of the Act. Thus, the only cross objection raised by the assessee is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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