2015 (11) TMI 1013 - AT - Income Tax

Revenue's appeal dismissed, Assessee's Cross Objection allowed. Tribunal emphasizes AO's satisfaction for Section 14A, Rule 8D. Method: turnover-based.

Deputy Commissioner of Income-tax, Circle-6, Kolkata Versus M/s. Crosses Capital Services Pvt. Ltd and Vica-Versa

Deputy Commissioner of Income-tax, Circle-6, Kolkata Versus M/s. Crosses Capital Services Pvt. Ltd and Vica-Versa - TMI 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.