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TMI Blog2013 (1) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... No.848/Ahd/2012 - - - Dated:- 10-12-2012 - D.K. Tyagi and A. Mohan Alankamony, JJ. Appellant Rep by: Shri Samir Tekriwal, Sr. DR Respondent Rep by: Shri S.N. Saporkar Ms Urvashi Shodhan, ARs. ORDER Per: D.K. Tyagi: This is assessee s appeal against the order of ld. CIT(A)-1, Baroda dated 01.02.2012. 2. Assessee is aggrieved by the action of ld. CIT(A) in confirming the addition of Rs.36,99,760/- made by the A.O. by making disallowance u/s 14A read with Rule 8D of the Act. 3. The assessee is engaged in the business of exporting goods and dealing in shares and securities. During the assessment proceeding the A.O. observed that company has shown exempt dividend income of Rs.59,79,502/- in view of the provision of Section 14A of the Act. The assessee was asked to show cause as to why interest and other expenses incurred in relation to earning of income not includable in total income should not be disallowed u/s 14A of the Act. The assessee relied on the following submissions:- Our business is of exporting Goods and Dealing in Shares and Securities. Our main business activities in P.Y. 2007-08 are of exporting goods and F O business. We have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this we have already treated Rs.59,795/- as expenses @1% of dividend income disallowable in relation to dividend Income. Hence, Sir the provisions of Rule 8D have no application in our case and disallowance offered by us in ROI is equitable and justified. Without prejudice to the above and to comply with your requirements, we submit hereunder the working of disallowance u/s 14A read with Rule 8D, if at all it is considered that if the provision of section 14A and Rule 8D are applicable. 4. This explanation of the assessee was not acceptable to the A.O. and he made a disallowance of Rs.36,99,760/- by observing as under:- The contentions raised by the assessee as above have been considered by me but the same is not acceptable since the sizable fund had been blocked by the assessee in inventory, income from which is not includible in the total income being exempted income. The assessee has thus blocked its funds for making purchases of shares and securities and thereby, consciously incurred interest and other expenses for business activities which otherwise would have been saved. In the circumstances, I am with no alternative but to draw support from the amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 20,34,27,966 Total [Opening + Closing] 35,86,88,902 Average Total Assets 17,93,44,451 Working of Disallowance under Rule 8D (i) Expenditure directly attributable to exempt income NIL (ii)Interest 4349895(Int.)x126468421(average invt.) = 30,67,418 179344451 (Average total assets) (iii) 0.54% of Average Investments Of 12,64,68,421 6,32,342 Total Disallwance (A+B) 36,99,760 Accordingly, as per the foresaid working, I disallow interest and other expenditure of Rs.36,99,760/- U/s 14A of the Act under the normal provisions and under book profit u/s 115JB. As the assessee has disallowed Rs.59,795/- in ROI, the effective addition works out to Rs.36,39,965/-. The assessee had furnished inaccurate particulars of income and thereby concealed income within the meaning of explanation 1 to the section 271(1)(c) rws 274 of the Income Tax Act. Therefore, penalty proceedings for concealment of income u/s 271(1)(c) rws 274 of the Act are initiated. 6. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appellant submits that blanket application of Rule 8D is without any justification and hence, could not be made applicable in the facts of the case of the appellant. 6. "Our business is of exporting Goods and Dealing in Shares and Securities. Our main business activities in P. Y. 2007-08 are of exporting goods and F O business. We have also dealt with Shares Securities to some extent. The expenses incurred by us are in respect of our regular business activities and Dividend earned by us is return on our inventory. We have not incurred any direct expenses to earn Dividend Income. We require shares for dealing in Derivatives which is our major business activities. We are allowed to carry on this business in large volume depending upon the Margin given by us in the form of shares and also payment of amount of different in M to M as per SEBI / Stock Exchange Rules. We require huge funds for this business and holding shares for offering Margin and Payment of M to M differences. In view of this facts, We strongly contend that Rule 8D could not be applied to us as it does not take all aspect of our business and therefore, arbitrary in nature. It is very strange that the Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares as against this we have already treated Rs.59,795/- as expenses @1% of dividend income disallowable in relation to dividend Income. Hence, Sir the provisions of Rule 8D have no application in our case and disallowance offered by us in ROI is equitable and justified. 9. In terms of Rule 8D(2)(ii), the appellant submits that the appellant has not incurred any expenditure by way of interest since there is no investments in shares and securities but the same are stock in trade of the appellant and thus, the said clause is not applicable in the facts and circumstances of the case of the appellant and thus no question of applying the formula given therein. 10. In terms of Rule 8D(2)(ii), the appellant submits that as per the said rule, the computation is in respect of 0.5% of the average value of investment the income from which is not forming part of total income. In the instant case of the appellant, though in the balance sheet, there is no investment a such, the AO has considered the stock in trade as investment made in shares and securities, which is not correct. The appellant submits that since it is in the business of trading in shares and securities, the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend of Rs. 59,79,503/- and we have earned gross profit of Rs.3 crore. Hence against the expenditure of interest expenses relating to shares and securities purchased by us. We have earned substantial profit on this shares during the previous year relevant to AY 2008-09. We therefore request your kind honor to determine disallowance out of interest expenses considering the nature of our business, our own fund blocked in inventory of shares and securities and profit on trading in shares securities and turnover of our various business segments. And not only the dividend income. We will be highly obliged if the disallowance is worked out either on the basis of turnover or in ratio of inventory of shares securities to average own funds and borrowed funds or any other reasonable formula as may be considered appropriate by your kind honor to grant us due justice. The appellant would be pleased to furnish any other information, if any required in the matter." 6. After taking into consideration the submissions of the assessee ld. CIT(A) confirmed the action of the A.O. by observing as under:- I have considered the submissions and facts of the case. Appellant's conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of any loan and where no such material was produced by assessee, disallowance of proportionate amount of interest was justified. Appellant has not demonstrated with any evidence that investment in shares was out of own interest free funds. Further, as held in the case of Dhanalaxmi Bank Ltd. (2011), if appellant had a case that funds available or funds sourced other than through borrowing only were utilized for investing in shares which yielded tax free income, it could have maintained such separate accounts and produce the same before the Assessing Officer when proportionate disallowance was proposed by the Assessing Officer. By subsequent amendment through sub section (2) of section 14A and by prescribing Rule 8D, specific guidelines for disallowance in cases where separate accounts are not available on the expenditure incurred for earning tax free income were prescribed. In view of this, in appellant's case, application of Rule 8D by invoking section 14A(2) is upheld. Appellant's contention challenging the method of apportionment of expenses for the purpose of section 14A by applying Rule 8D due to it being not equitable etc. is not tenable, since legislation framed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us and at the time of hearing ld. counsel of the assessee submitted that there is no dispute about the fact that assessee was dealing in shares and securities and shares were held by him in stock in tread and therefore in view of the decision of Karnataka High Court in the case CCI Ltd. vs. Jt. CIT (Kat) reported in (2012) 71 DTR (Kar) 141 and the decision of the ITAT Pane Bench in the case of Apoorva Patni vs. ACIT reported in [2012] no disallowance u/s 14A of the Income Tax Act was called for in this case. On the other hand ld. D.R. relied on the order of lower authorities. 8. After hearing both the parties and perusing the record we find that assessee is engaged in the business of dealing in shares and securities and there is no dispute about the fact that shares were held by the assessee as stock in trade. The intention of assessee was not to earn dividend income and this income being incidental to business of sale of shares, no notional expenditure could be deducted by invoking the provisions of Section 14A of the Act. On similar facts Hon ble Karnataka High Court in the case of CCI Ltd. vs. Jt. CIT (supra) has held as under:- When no expenditure is incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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