2015 (11) TMI 1013 - AT - Income Tax

Disallowance u/s. 14A - Held that - We find that the assessee is in the business of share broking and share trading activity. Earning of dividend income is incidental to such business activity and whatever expenditure is incurred i.e. for the business. The assessee has earned total dividend income during the year under consideration at ₹ 2,72,349/- out of the total income declared at ₹ 15,39,12,042/-, which is a meagre 0.18% of the total income. Further, we have noticed from the assessment order that the AO has not recorded any satisfaction for application of the provisions of section 14A of the Act read with Rule 8D of the Rules. In fact, there is no whisper of any satisfaction in the assessment order that the provisions of section 14A of the Act are applicable. We find that the AO made disallowance mechanically calculating the figures solely on the basis of Rule 8D of the Rules. Here, the coordinate Bench of ITAT in the case of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA has held that for applicability of Rule 8D of the Rules, satisfaction of the AO about the correctness of the accounts of the assessee is necessary - Decided in favour of assessee. Disallowance in respect to those unsold shares which have yielded dividend - Held that - As the assessee undisputedly dealing in the shares and securities as admitted by AO itself while mentioning the nature of business as dealing in shares and securities . This earning of dividend on such shares is merely incidental to such business activities. Accordingly, on this aspect also the assessee succeeds. Hence, this issue of assessee s CO is allowed and revenue s ground is dismissed. - Decided in favour of assessee. Rebate u/s. 88E - CIT(A) restricted the rebate - whether the rebate u/s. 88E of the I. T. Act should be allowed after allocating expenses and after deducting the full amount of the STT paid? - Held that - CIT(A) required the assessee to give calculation of the turnover in different business segments and found that the turnover of share business segment to the gross turnover was 5.87% under the head own business turnover in term of % of total turnover. Therefore CIT(A) apportioned the expenses on share segments and some of the expenses were apportioned @ 5.87% and some of the expenses i.e. balance other expenses on income basis as per calculation c @68.83%. We find that revenue has not disputed the proportionate determination on turnover basis but has contested the AO s method to bifurcate the expenses on proportionate of income basis. According to assessee, all the expenses should bifurcated in proportion to turnover of share business segment to the gross turnover. We find that qua the expenses, the plea of the assessee that all the expenses should be bifurcated in proportion to turnover of share business segment to that of the gross turnover is quite reasonable. Therefore, the part of the expenses, which were bifurcated by the CIT(A) on income basis is directed to be determined on the basis of percentage of turnover of own business @ 5.87%. - Decided in favour of assessee

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of expenses under Section 14A of the Income-tax Act, 1961.
3. Rebate under Section 88E of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The revenue's appeal was delayed by 21 days. A petition for condonation of delay was filed, and the assessee's counsel conceded that the cause shown by the revenue was reasonable. Consequently, the delay was condoned, and the appeal was admitted.

2. Disallowance of Expenses under Section 14A:
The primary issue was the disallowance of Rs. 11,47,078/- by the AO under Section 14A read with Rule 8D, which was restricted to Rs. 27,235/- by the CIT(A). The AO noticed that the assessee earned exempt income (dividend) of Rs. 2,73,349/- but did not disallow any expenditure related to this income. The AO made disallowances for depository charges, interest, and 1/2 % of the average value of investments. The CIT(A) observed that the assessee's dividend income was incidental to its business activities and that no direct or indirect expenditure was incurred to earn this income. Therefore, CIT(A) upheld a disallowance of 10% of the exempt income.

The Tribunal found that the AO did not record any satisfaction regarding the correctness of the assessee's claim before applying Section 14A read with Rule 8D. Citing the case of REI Agro Ltd., the Tribunal held that the AO must record satisfaction about the correctness of the accounts before applying Rule 8D. Since the AO failed to do so, the Tribunal allowed the assessee's CO and dismissed the revenue's appeal.

Additionally, the Tribunal referred to the Karnataka High Court's decision in CCI Ltd., which held that no disallowance could be made for unsold shares yielding dividend if no expenditure was incurred to earn the dividend. The Tribunal concluded that the assessee's dividend income was incidental to its business of share dealing, and thus, no disallowance was warranted.

3. Rebate under Section 88E:
The AO allowed a rebate under Section 88E only to the income relating to STT transactions, amounting to Rs. 1,78,55,901/-. The CIT(A) directed the AO to apportion expenses between share trading and brokerage business based on turnover and income. The CIT(A) allowed a rebate of Rs. 2,69,69,781/-.

The Tribunal found that the CIT(A)'s method of apportioning expenses based on turnover was reasonable. The Tribunal noted that the revenue did not dispute the proportionate determination on a turnover basis but contested the AO's method of bifurcating expenses based on income proportion. The Tribunal directed that all expenses should be bifurcated in proportion to the turnover of the share business segment to the gross turnover. This method was supported by precedents from the Mumbai Bench of ITAT and the Delhi High Court. Consequently, the Tribunal dismissed the revenue's appeal and allowed the assessee's Cross Objection.

Conclusion:
The revenue's appeal was dismissed, and the assessee's Cross Objection was allowed. The Tribunal emphasized the need for the AO to record satisfaction before applying Section 14A read with Rule 8D and upheld the method of apportioning expenses based on turnover for calculating the rebate under Section 88E.