Disallowance under section 14A read with rule 8D AO has to be only on those investments which had yielded exempt income during the year

Short overview: 

To compute disallowance under section 14A read with rule 8D AO was directed to consider only those investments which had yielded exempt income during the year.

Assessee earned dividend income exempt under section 10(34) and claimed voluntary disallowance under section 14A. AO invoked rule 8D and worked out additional disallowance. Assessee’s case was that additional disallowance arose only on account of the fact that assessee had excluded those investments which had yielded no exempt income.

 

 

Judgement- AO was directed to consider only those investments which had yielded exempt income during the year.

Decision: Matter remanded.

IN THE ITAT, MUMBAI BENCH

MAHAVIR SINGH, J.M. & MANOJ KUMAR AGGARWAL, A.M.

Brics Securities Ltd. v. Dy. CIT

ITA No. 1087/Mum/2014

ITA No. 3682/Mum/2016

2 November, 2018

Assessee by: Yogesh A. Thar, Foram Bhanushali & Shreeja Gangwal, learned Authorised Representatives

Revenue by: Padma Ram, learned Departmental Representative

ORDER

Mano Kumar Aggarwal, A.M.

Aforesaid appeals by assessee for assessment years (AY) 2010- 11& 2011-12 contest separate order of first appellate authority. Since common issues are involved, we dispose-off both the appeals by way of this common order for the sake of convenience and brevity. First we take up ITA No. 1087/Mum/2014 for assessment year 2010-11 which contest the order of learned Commissioner (Appeals)-8 (Commissioner (Appeals)), Mumbai, Appeal No. Commissioner (Appeals)-8/Cir.4/252/2012-13, dt. 3-1-2014by raising following grounds of appeal :–

1. On the facts and in the circumstances of the case and in law, the learned Deputy Commissioner (hereinafter referred as “Deputy Commissioner”) has erred in disallowing depreciation on BSE Trading rights of Rs. 6,400,000 and the Honorable Commissioner (Appeals) (hereinafter referred to as Commissioner (Appeals)) has erred in confirming the action of the learned Deputy Commissioner. The learned Deputy Commissioner be directed to allow Depreciation claim on BSE Trading Rights amounting to Rs. 6,400,000 and reduce the total income accordingly.
2. On the facts and in the circumstances of the case and in law, the learned Deputy Commissioner has erred in disallowing expenses under section 14A of the Income Tax Act, 1961 of Rs. 45,606 and the honorable Commissioner (Appeals) has also erred in confirming the action of the learned Deputy Commissioner. The learned Deputy Commissioner be directed to allow expenses of Rs. 45,606 and reduce the total income accordingly.

The assessment for impugned assessment year was framed by learned Deputy Commissioner, Circle 4(1), Mumbai (AO) under section 143(3) on 29-1-2013 wherein the income of the assessee has been assessed at Rs. 227 Lacs after certain disallowances as against returned income of Rs. 160.17 Lacs e-filed by the assessee on 13-10-2010. During impugned assessment year, the assessee being resident corporate entity was engaged in the business of share broking, trading in securities and depository participants etc.

2.1 During assessment proceedings, it was noted that the assessee claimed depreciation @25% on BSE Trading Right valued at Rs. 2.56 Crores treating the same as an intangible asset. However, consequent to demutualization and corporatization Scheme of BSE, 2005, the shares were allotted to the assessee in lieu of the membership card and therefore, the depreciation against the same, in the opinion of learned assessing officer, could not be allowed to the assessee. Disregarding the assessee’s submissions made in this regard, depreciation on the same amounting to Rs. 64 Lacs was disallowed in the quantum assessment.

2.2 The second addition pertains to disallowance under section 14A. It was noted that the assessee earned exempt dividend income under section 10(34) for Rs. 31.01 Lacs and against the same, offered suo moto disallowance of Rs. 3.05 Lacs. However, not convinced, learned assessing officer applying rule 8D, computed aggregate disallowance of Rs. 3.50 Lacs which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs. 0.46 Lacs and expense disallowance u/r 8D(2)(iii) for Rs. 3.03 Lacs. After ad usting the suo moto disallowance of Rs. 3.05 Lacs as offered by the assessee, the net disallowance thus worked out to Rs. 0.45 Lacs, which was added to the income of the assessee. Both the additions/disallowances, upon confirmation by first appellate authority, are under appeal before us.

3. So far as the Ground Number-1 qua depreciation on BSE membership right is concerned, learned Authorised Representative for the Assessee (AR), Shri Yogesh Thar, fairly submitted that the issue, at present, stood covered against the assessee by the decision of this Tribunal rendered in Sino Securities (P.) Ltd. v. ITO (16 Taxmann.com 354). The copy of the udgment has been placed on record. In view of the admitted position, this ground stand dismissed.
4. So far as disallowance under section 14A read with rule 8D is concerned, as per learned Authorised Representative’s submissions, additional disallowance of Rs. 45,606 arises only on account of the fact that the assessee has excluded those investments which have yielded no exempt income during impugned assessment year or which were not capable of yielding any exempt income while arriving at the disallowance u/r 8D whereas learned assessing officer has considered the Gross Investments whether or not the same has yielded any exempt income. We find that the action of the assessee is in line with the judgment of Delhi Tribunal (Special Bench) rendered in ACIT v. Vireet Investment (P.) Ltd. (82 Taxmann.com 415)whereas it has been held that for the purpose of computing disallowance, only those investments which yielded exempt income during impugned assessment year were to be considered. Therefore, finding strength the argument of learned Authorised Representative, the matter stand remitted back to the file of learned assessing officer to verify the computations made by the assessee in this regard. The learned assessing officer is directed to consider only those investments which have yielded exempt income during the year. The assessee, in turn, is directed to provide necessary computations in this regard. This ground stand allowed for statistical purposes. The appeal stand partly allowed for statistical purposes.

ITA No. 3672/Mum/2016, assessment year 2011-12

5. The effective grounds raised under the appeal read as under :–
6. On the facts and in the circumstances of the case and in law, the learned Additional Commissioner (hereinafter referred as “ACommissioner”) has erred in disallowing depreciation on BSE Trading rights of Rs. 48,00,000 and the Honorable Commissioner (Appeals) (hereinafter referred to as Commissioner (Appeals)) has erred in confirming the action of the learned ACommissioner. The learned ACommissioner be directed to allow Depreciation claim on BSE Trading Rights of Rs. 48,00,000 and reduce the total income accordingly.
7. On the facts and in the circumstances of the case and in law, the learned ACommissioner has erred in disallowing expenses under section 14A read with rule 8D of the Income Tax Act, 1961 of Rs. 11,50,488 and the Honorable Commissioner (Appeals) has erred in partially allowing the relief. The learned ACommissioner be directed to delete the entire disallowance of Rs. 11,50,488 and reduce the total income accordingly.
8. On the facts and in the circumstances of the case and in law, the learned ACommissioner has erred in disallowing loss on account of dealing error of Rs. 1,05,355 treating the same as speculation loss and the Honorable Commissioner (Appeals) has erred in confirming the action of ACommissioner. The learned ACommissioner be directed to allow dealing error loss of Rs. 1,05,355 as business loss and reduce the total income accordingly.
9. On the facts and in the circumstances of the case and in law, the learned ACommissioner has erred in allowing TDS credit of Rs. 73,24,978 as against Rs. 76,77,809 claimed in the Return of Income i.e. short TDS credit of Rs. 3,52,831. The Honorable Commissioner (Appeals) has directed the assessing officer to verify the TDS claim and allow it accordingly. The learned ACommissioner be directed to allow the TDS credit of Rs. 3,52,831 and increase the refund accordingly.
10. On the facts and in the circumstances of the case and in law, the learned ACommissioner has erred in not granting deduction under Chapter VIA for Rs. 25,500 under section 80G. The Honorable Commissioner (Appeals) has directed the assessing officer to verify the claim and allow deduction of 50% accordingly. The learned ACommissioner be directed to allow deduction under section 80G of Rs. 25,500 and reduce the total income accordingly.
11. That on the facts and in the circumstances of the case and in law, the learned ACommissioner has erred in charging excess interest under section/234B and interest under section 234C of the Income Tax Act, 1961. The Honorable Commissioner (Appeals) has directed the assessing officer to re-compute the interest and charge accordingly. The learned ACommissioner be directed to charge interest under section 234B and interest under section 234C as per law thereby reduce the total income tax demand accordingly.

6.1 Ground Number-1, being similar as in assessment year 2010-11, stands dismissed in view of the admission made by learned Authorised Representative that the issue stood covered against the assessee by the cited order of this Tribunal.

6.2 Ground Number-2 is related with disallowance under section 14A. The assessee has suffered additional disallowance of Rs. 11.50 Lacs in the quantum assessment order. The facts being largely the same, the matter stand remitted back to the file of learned assessing officer on similar lines to verify the computations made by assessee and consider only those investments which have yielded any exempt income during the impugned assessment year The ground stand allowed for statistical purposes.

6.3 Ground number-3 is related with disallowance of dealing error for Rs. 1.05 Lacs. As per learned Authorised Representative’s submissions, the same represent loss arising out of punching errors while executing trades/orders on NEAT/BOLT system of stock exchange and therefore, the same represent inherent risks associated with the brokerage business being carried out by the assessee. The learned assessing officer has disallowed the same invoking the explanation to section 73 treating the same as speculation business loss. The learned Commissioner (Appeals) has confirmed the same. After due consideration, we find that both the lower authorities have proceeded on wrong footing in view of the fact that these were mere punching errors which arose in the normal course of brokerage business. The complete details of these transactions have already been placed in the paper-book. Viewing from any angle, these transactions cannot be said to have arisen out of speculation business as being concluded by the lower authorities. These losses have arisen on account of the fact that these are punching errors while executing the trades and considering the volume of overall business being carried out by the assessee, the proportion of these losses was very miniscule in nature. Therefore, by deleting the same, we allow this ground of appeal.

6.4 In the remaining grounds, the learned Authorised Representative is merely seeking endorsement of directions as already given by first appellate authority. In ground no.5, the assessee is aggrieved by short grant of TDS credit. The learned Commissioner (Appeals) has directed learned assessing officer to verify the TDS and allow the same as per law. In ground no.6, the assessee is aggrieved by denial of deduction under section 80G. The learned Commissioner (Appeals) has directed learned assessing officer to verify the claim and allow exemption @50% as per law. Similarly, in ground no.7, the assessee is aggrieved by charging of excess interest under section 234B & 234C. The learned Commissioner (Appeals) has already directed the learned assessing officer to re-compute the same. Therefore, learned assessing officer is directed to comply with the directions of learned Commissioner (Appeals) forthwith. All these grounds stands allowed for statistical purposes.

7. The appeal stand partly allowed in terms of our above order.