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TMI Blog2018 (5) TMI 2166X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance. As regards the disallowance of administrative expenditure we find no reason to interfere with the finding of the learned Commissioner of Income Tax (Appeals) who has sustained the addition by keeping in view the investments made in quoted shares as well as unquoted shares as well as looking to the aspect that the assessee is engaged in the business of purchase and sale of shares. Disallowance of penalty levied by Stock Exchange for procedural defaults such a delay in submission of return, etc. - Allowable business expenditure or not? - HELD THAT:- From a perusal of the finding of CIT (Appeals) as well as going through the submissions given by the assessee in the light of the judgment of the Hon ble High Court of Bombay in the case of CIT vs The Stock Bond Trading Company [ 2011 (10) TMI 172 - BOMBAY HIGH COURT] we are of the considered view that the assessee made no offence prohibited by law which can be contemplated to be covered under Explanation to section 37 of the Act and, therefore, the payment of penalty made by the assessee to the Stock Exchange is a regular business expenditure and the impugned disallowance has rightly been deleted by the learned Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR has no objection. We, therefore, dismiss the grounds raised in cross objection of the assessee. 4. Now we are left with the revenue's appeal. Apropos ground no. 1 relating to disallowance u/s 14A of the Act read with Rule 8D, briefly stated the facts are that the assessee declared income of Rs.3,14,87,710/- in the return of income filed for the assessment year 2013-14 on 26.9.2013. Case selected for scrutiny and necessary notices u/s 143(2) and 142(1) of the Act duly served upon the assessee. The Assessing Officer on going through the financial statements observed that the assessee has made investments in quoted/unquoted shares and also incurred expenditure on interest. However, no expenditure has been disallowed u/s 14A of the Act. The Assessing Officer accordingly applying the method provided under Rule 8D of the Income Tax Rules read with section 14A of the Act made disallowance of Rs. 52,26,627/- which comprised of interest disallowance of Rs. 42,64,143/- and disallowance for administrative expenses of Rs. 9,62,484/-. 5. Aggrieved with the findings of the Assessing Officer, the assessee went in appeal before the learned Commissioner of Income Tax (Appeals) and majorly suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 99 - 104 (ii) Decision of Honorable High Court of Bombay in the case of CIT V/s HDFC Bank Ltd 366 ITR 505 (2014). 105 - 109 B While apportioning interest expenditure under Rule 8D(2)(ii), interest expenditure incurred for earning taxable income should be excluded from consideration Decision of Honorable High Court of Delhi in the case of Pr CIT vs Bharti Overseas Pvt Ltd [TS-5584-HC-2015] (2016) 237 Taxman 0417 (Delhi) 110 - 116 C Only investments yielding exempt income ought to be considered. The Honourable Delhi High Court in the case of ACB India Ltd v/s ACIT [(2015) 374 ITR 0108 (DEL)] has held that for the purpose of Rule-8D, only those investments shall be considered which have actually yielded exempt income during the relevant previous year. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. D In respect of the investments made in unlisted subsidiaries companies which never generated any exempt income - For the proposition that when no e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the provision of section 14A r.w.r. 8D cannot be made applicable in a vacuum i.e. in the absence of exempt income. 203 - 208 Decision of Honorable Gujarat High Court in CIT Vs. Corrtech Energy (P.) Ltd. [(2015) 372 ITR 0097 (Guj) E For the proposition that the disallowance is not tenable where the AO did not recorded proper satisfaction. Decision of Honorable High Court of Calcutta in the case of CIT Central - II v/s. M/s. REI Agro Ltd. GA No. 3022 of 2012 ITAT 161 of 2013 dated 23.12.2013. 120 - 121 Decision of Honorable ITAT Kolkatta Bench in the case of DCIT v/s. M/s. REI Agro Ltd. in ITA No. 1811/Kol/2012 dated 14.05.2013. 122 - 133 Decision of Honourable High court of Punjab & Haryana in the case of Pr. CIT V/s Empire Package (P) Ltd. (2016) 136 DTR 0342 (P&H) 134 - 143 F Circular no. 5 of 2014 dated 11.02.2014 overruled. Redington India Ltd. V/s Addl. CIT (2016) 97 CCH 0219 (Chennai) 203 - 208 8. We have heard both the parties and perused the material available on record and have also gone through the judgments referred to and relied upon by both the parties. The issue before us is with regard to disallowance u/s 14A which relates to disallowance of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r are reproduced at Para No. 2 above and the detailed submissions of the appellant are reproduced at Para No. 3 above. 5.1 On perusal of the assessment order it is seen that the A.O. has rejected the contention of the appellant that no interest bearing funds were utilised in making investments yielding exempt income and such rejection is without considering the detailed explanation of the appellant. From the material placed on record which was also before the A.O. it is seen that the major investments were made in the earlier years from own funds and no borrowed funds were utilised in making these investments. Further the investments made during the year under consideration were also not made from borrowed funds. The capital and reserve funds with the appellant stood at Rs. 51.66 crores as on 31.3.2012 and these were at Rs.52.44 as on 31.3.2013 while the Non Currente investments increased marginally from 7.70 Cr to 7.71 Crore and the current investments reduced from 12.70 Crore to 10.37 crore and the stock in trade stood at Nil as on 31.3.2013 as against 6.81 crores as on 31.3.2012. The own capital and disposable reserves far exceeded the investments. Majority of the investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exchanges according to the open positions taken by its customer. The customers generally pay the amount to the appellant towards their outstanding in 3-4 working days whereas the appellant is required to pay to the exchanges on regular basis. For this reason the ap-p hasa taken working capital limits from bank and on utilisation of such limit the appellant has incurred the interest expense. From the sanction letter issued by the bank in respect of the overdraft limit taken for working capital purpose by the appellant, it is verifiable from the page 2 of the letter that the purpose of the loan taken was "Working capital requirement/Stock Exchange Obligations". From the perusal of the security clause mentioned on the same page it is apparent that the limit taken from bank was secured against the FDRs made and pledged by the appellant. The overdraft facility taken by the appellant is utilised only for pay outs on account of positions held by the clients to stock exchange. The appellants interest cost on overdraft against FDs is thus directly related to the core broking business of the appellant. In view of the above it is thus evident that the interest expenditure was outside the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 563 it has been held that 14A does not apply in respect of shares held as stock in trade. Disallowance on notional basis is invalid "When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares which remained unsold by the assessee. It cannot be said that the expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and that there should be a disallowance u/s 14A". 5.5 Considering the above discussion and keeping in view the appellate decisions in the appellant's own case for A.Y. 2009-10 and A.Y. 2010-11 as the facts for the year under consideration are identical to the facts prevailing in the earlier years, the disallowance worked out by the A.O. under section 14A read with Rule 8D at Rs. 5226627/- is directed to be restricted to 0.05% of the average investments excluding the investment in unquoted subsidiaries and also excluding the investment in stock in trade which works out to Rs. 577013/-. This ground of the appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in so far as that the disallowance can be contemplated only when exempt income is earned and there is some expenditure incurred. The Honourable Supreme Court also upheld its own findings rendered in CIT v/s Wallfort Shares & Stock Brokers Pvt. Ltd. (2010) 326 ITR 1 (SC) that the basic principal of taxation is to tax the net income and on the same analogy the exemption is also in respect of net income entailing that when there is no exempt income, disallowance is not attracted. 15. The above distinguishing facts prove that the finding of the Hon'ble Apex Court cannot be applied to the facts of the assessee's case because it is well evident that the borrowed funds have not been utilised for the purpose of making investments in shares and securities. It has also been consistently held by various Hon'ble Courts that if the assessee possesses sufficient capital and reserves as well as interest free funds and if there is no finding by the revenue authorities that interest bearing funds have been applied for investing in shares and securities, it has to be presumed that the assessee has invested its own capital and reserves i.e. interest free funds for making the investments. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k & Bond Trading Company (supra), we are of the considered view that the assessee made no offence prohibited by law which can be contemplated to be covered under Explanation to section 37 of the Act and, therefore, the payment of penalty made by the assessee to the Stock Exchange is a regular business expenditure and the impugned disallowance has rightly been deleted by the learned Commissioner of Income Tax (Appeals). We uphold the same.
20. As regards the disallowance of Rs. 15,508/- being treated as prior period expenses by the learned Assessing Officer we find that the payment related to service tax and the necessary proof of payment was placed on record. Therefore, as the liability has crystalised during the year, the learned Commissioner of Income Tax (Appeals) has rightly allowed the assessee's claim of expenditure of Rs.15,508/-. No interference is, therefore, called for in the findings of the learned Commissioner of Income Tax (Appeals). We accordingly uphold the same. Revenue's ground no. 2 is, therefore, dismissed.
21. In the result, the appeal of the revenue and cross objection of the assessee stand dismissed.
Pronounced in open Court on 31st May, 2018. X X X X Extracts X X X X X X X X Extracts X X X X
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