TaxTMI 
TaxTMI 
2014 (10) TMI 655
X X X X Extracts X X X X
X X X X Extracts X X X X
....end income of Rs. 1684.70 lacs, claimed tax exempt u/s.10(34) of the Act, i.e., as had been estimated by the Revenue itself in its case for A.Y. 2004-05 (PB pgs. 36-39). Without prejudice, it was further claimed that the said disallowance be restricted to the amount of expenditure actually claimed per its return of income (PB pgs. 30-35). In view of the Assessing Officer (A.O.), the working of the disallowance for the current year had to be necessarily made following Rule 8D. The assessee having not incurred any interest expenditure for the year, the indirect administrative expenditure was estimated by him applying rule 8D(2)(iii), i.e., at 0.5% of the average investment for the year, which worked to Rs. 130.51 lacs. The assessee having already disallowed Rs. 35.47 lacs, a further disallowance of Rs. 93,17,949/- was made, i.e., by taking into account the expenditure incurred by the assessee at Rs. 128.65 lacs. In appeal, the ld. CIT(A), citing Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), validated the invocation of r. 8D, mandatory w.e.f. the current year, in assessment. The A.O., however, had also included the value of shares held as stock-intrade. It was, he....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ifically relied on ITO vs. Daga Capital Management Pvt. Ltd. [2009] 312 ITR (AT) 1 (Mum) (SB). There was nothing on record to show that the dividend received by the assessee was only on shares held as investment. Accordingly, the direction by the ld. CIT(A) for excluding the shares held as stock-in-trade is without basis, both in law and on facts. The issue arising thus for our consideration is the correct quantum of disallowance u/s. 14A(1) in the facts and circumstances of the case. 4.2 Before, however, we may proceed to discuss the issue at hand, it would be in order to consider the assessee's another contention, made with reference to its ground of appeal 2, i.e., that the A.O. having not recorded any dissatisfaction with the assessee's working, no disallowance could at all be made by him, even as the assessee before us did not raise any argument qua the said ground. In fact, to the extent the assessee does not disclose any basis for its suo motu disallowance and, further, with reference to its accounts, there is no merit in its claim. How, in fact, we wonder could the A.O. express his satisfaction or otherwise therewith without being communicated the basis of the assessee's w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) Ltd. [2013] 25 ITR 683 (Mum)(Trib) (paras 10-11, 15- 16), rendered, again, following the decision in Godrej & Boyce Mfg. Co. Ltd. (supra), besides also by its special bench in Cheminvest Ltd. vs. ITO [2009] 121 ITD 318 (Del)(SB), relying on CIT vs. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), each of which discuss this and relevant aspects at length. The apex court in CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), as also noted by the tribunal in these decisions, clarified that expenditure having been incurred would be allowable even if there was no income. Accordingly, a disallowance would arise where the said income does not form part of the total income. Continuing further, we observe the ld. CIT(A) has, and very appropriately, considered and dealt with the assessee's said objection, raised per its ground no. 3 before him by the assessee (refer para 4.3 of the impugned order). The assessee's revenue streams are from trading operations; sale of investments; dividend; and interest. It maintaining composite accounts for its indivisible business, or qua its business segments (if these are reckoned as separate, though related, businesses), determination of any expend....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s are completely arbitrary, having no basis in fact, i.e., the expenditure actually incurred, which is the only relevant basis, if it is to be made with reference to the accounts, where the same is reflected. Two persons incurring the same expenditure would stand subjected to largely different disallowances depending not only the volume of the tax exempt income earned during the respective period, to which no ratio can be predicated, but also taxable income/s arising during the same period, which may be in different fields, further subject to or dependent on a variety of other factors. This in fact is precisely what we sought to explain earlier (para 4.2), clarifying that expenditure, particularly indirect expenditure, and income in relation to which it is incurred, are largely independent of each other. Though they may have some common ground, there are large areas, or impulses to which they may respond, which have no overlap, so that there is no established or discernable correlation between the two, so as to enable estimation of one with reference to the other. The working furnished by the assessee, thus, rather than proving or supporting its case actually disproves it. The only....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The investment portfolio as on 31.03.2008 (at Rs. 210.41 crs.) almost matches the funds consumed in current assets (Rs.220.42 crs.) (PB pg.7). No wonder, the income from investment, i.e., profit on sale of investments and dividend (at a total of Rs. 340.77 crs.) stands at 98.84% of the total income for the financial year (f.y.) 2006-07 (PB pg.8). Further, it is on account of this heavy investment in shares held by way of trading stock (Rs.132.26 crs. as on 31.03.2008), that its inclusion results in, as rightly pointed out by the ld. CIT(A), the estimation per r. 8D(2)(iii) (Rs.130.51 lacs) exceeding the actual expenditure, which though is to be reckoned at the sum claimed per the return of income, i.e., Rs. 116.44364 lacs (and not at Rs. 128.65 lacs as considered by the Revenue authorities/refer PB pgs.30- 35). The question nevertheless arises, and is to be answered, both in legal and factual terms. The ld. CIT(A) directs for exclusion of stock-in-trade, which has to have a basis, both on facts as well as in law. His reason for the same, i.e., a high estimation of disallowance under r.8D, which is in any case to be restricted to the amount actually claimed, skirts, rather than add....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laced. 4.6 The proposition qua non-application of r. 8D(2)(iii) came up before, and stood discountenanced by the tribunal in D. H. Securities (P.) Ltd. (supra) and Damani Estates & Finance (P.) Ltd. (supra), with reference to the decisions in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and Daga Capital Management Pvt. Ltd. (supra), since approved by the former. The relevant discussion in the latter appears at pages 47-56 of the reports, whereat the tribunal considers the scope of the expenditure incurred in relation to the exempt income. In D. H. Securities (P.) Ltd. (supra), it held that r. 8D(2)(iii), prescribing a ratio (of investment) in respect of indirect expenditure, could not be altered, as on account of hardship (see para 6.5, pgs. 9-10 of the reports). The same (ratio) was in fact nominal, recommending itself to easy acceptance, as also observed by it in Damani Estates & Finance (P.) Ltd. (supra). Reference for the same may be made to the discussion at para 6.5 (pgs. 9-11) and para 20 (pgs. 698-700) of the said decision, which we reproduce as under for ready reference: 'Continuing further, the part of the rule prescribing the ratio in respect of indirect expenditur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yield dividend income, which is not taxable, i.e., besides share trading income, is itself relevant and sufficient for attracting the provision of s.14A(1). In fact, an argument to this effect, i.e., r. 8D(2)(iii) as being not applicable to shares held as stock-in-trade, was specifically assumed in the case of Daga Capital (supra). The tribunal rejected the argument, made with reference to the language of r.8D, clarifying that the words used are 'value of investment' and not 'held as investment'. We may reproduce the relevant part of the order for the sake of better clarity (page 55 of 312 ITR (AT)): "Learned Counsel for the assessee ....... We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word 'investment' in this rule refers to the making of purchase of shares and not holding it as investment." We decide accordingly.' We accordingly, do not find any scope for either non-application of, or even sca....