TaxTMI 
TaxTMI 
2018 (4) TMI 1670
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....provisions of section u/s.14A r.w. Rule 8D of the I.T. Rules, 1962 and made an addition of Rs. 14,98,985/ too-. While filing the return of income, assessee suo moto disallowed the entire PMS fee paid to the DSP Merrill Lynch as expenditure relatable to the earning of the exempt income. 3. During the First Appellate proceedings, assessee submitted that the assessee engaged the Portfolio Manager in earning the said income on sale of shares. Therefore, assessee justified the claim of profits on sale of shares as capital gains/investment activity. For this proposition, assessee relied on the order of CIT(A) in the case of sister concern of the assessee by name M/s. Yusmarg Investment and Trading Company Ltd. where assessee got relief in that case on similar facts. DSP Merrill Lynch is the common Portfolio manager in both the cases. Assessee also relied on the decisions of Pune Bench of the Tribunal in the case of KRA Holding & Trading Pvt. Ltd. Vs. DCIT - ITA No. 500/PN/2008, dated 31-05-2011for the A.Y. 2004-05 and Shri Apoorva Patni Vs. ACIT - ITA No.239/PN/2011, dated 21-06-2012 for the A.Y. 2006-07. He also relied on the CBDT Circular No.04/2007 dated 15-06-2007 and the judgment....
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....case of Shri Apoorva Patni Vs. Addl. Commissioner of Income Tax (supra). The Tribunal in the said case after considering the decisions rendered in the cases of KRA Holding & Trading P. Ltd. Vs. Dy. Commissioner of Income Tax (supra) and ARA Trading & Investments P. Ltd. Vs. Dy. Commissioner of Income Tax (supra) held that the profit arising on investment carried out by the assessee through PMS does not result in gain assessable under the head business income. The relevant extract of the findings of Tribunal are as under : "10. In any case, in so far as the very nature of Discretionary Portfolio Management scheme is concerned, the same has already been considered by our co-ordinate Bench in the case of ARA Trading & Investments (P.) Ltd. (supra) and KRA Holding & Trading (P.) Ltd (supra). According to the Tribunal, the scheme is for an activity of wealth maximization rather than a profit maximization and accordingly, it has been held that gain from such activity was liable to be considered as derived from an activity of investments and not trading. Therefore, on this aspect of the controversy, we find that the Commissioner of Income-tax (Appeals) made no mistake in followin....
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....d the shares as investment and not as stock in trade. Similar explanation has been given once again by the letter dt 14.6.2010 by the appellant in response to the AO's report." We have examined the position, in particular the analysis made out by the Commissioner of Income-tax (Appeals) in the extracted portion with reference to the statement and transactions which have been placed n the Paper Book filed before us. In our considered opinion, the inference drawn out by the Commissioner of Income-tax (Appeals) clearly establishes that the volume and frequency of transactions sought to be made out by the Assessing Officer with regard to the impugned activity stands on an entirely different footing and is quite distinct from the activity of trading in shares carried out by the assessee. In fact, it is notable that in the share trading business carried on by the assessee, he has carried out certain speculative and trading activities and that in the case of a PMS provider, such activities are prohibited in law. Having regard to the aforesaid discussion by the Commissioner of Incometax (Appeals), which is borne out of the record, we, therefore, find no reasons to uphold the p....
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....re the shares becoming ex-dividend; and there was a possibility that the dividend would have been declared and known to the PMS. However, such instances are few and far between; and it cannot lead to a conclusion of indulging in a business activity. Moreover, as has been explained elsewhere by the appellant, such day to day decisions regarding purchase and sale of particular scrips are not that of the appellant, but of the portfolio manager since the appellant's case was that of engagement of Discretionary Portfolio Management Services. It was explained that as per SEBI Regulations, there were two types of PMSs i.e. Discretionary and Non- discretionary. It was explained that in case of Discretionary PMS as availed by the appellant, he appellant did not have control on the day to day activities and did not give any directions, except for the broad guideline for not purchasing the shares of Patni Computers Systems Ltd. since it was promoted by the appellant and his family members. It was also explained during the appellate proceedings that in accordance with the Accounting Standard and CBDT Circular, dividend earning was not the only criterion and in any case substantial amount o....
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....as we have observed earlier. In any case, in so far as the present case is concerned, the Investment Objective of the assessee mandated to the PMS provider was to achieve growth prospects and the actuality of transactions carried out by the PMS provider in order to achieve the stated Investment objective of the assessee cannot be made a basis to charge the assessee of having a different objective. Considering the aforesaid matters, we, therefore, are of the view that the objections made out by the Assessing Officer have been adequately addressed by the Commissioner of Income-tax (Appeals) in coming to his findings that the investments carried out by the assessee through the PMS provider do not result in a gain assessable as business income. 15. In view of the aforesaid discussion, and having regard to the reasonings extended by the Commissioner of Income-tax (Appeals) with which we hereby affirm, we find that the grievance of the Revenue in this appeal is misdirected and accordingly the conclusion arrived at by the Commissioner of Income-tax (Appeals) on this aspect is hereby affirmed. Thus, on this Ground, Revenue fails." 9. The ld. DR has neither been able to di....
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....f Rs. 11,61,912/- which is claimed as exempted income for which no expenditure is taken for disallowance with the following rationale. For s.14A to apply there should be proximate relationship between the expenditure and the tax-free income. No such expenditure has been incurred for earning the exempt income. In order to disallow the expenditure u/s.14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the tax-free income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made u/s.14A merely because some tax exempt income is received. The relevant working as per Rule 8D is as follows : . . . . . . . . . . . . Rule 8D has been inserted in the Income Tax Rules since 01-04-2007. For this purpose, reliance is placed on the decision of Hon'ble Special Bench, Mumbai ITAT in the case of ITO Vs....
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....id explanation and observed as under:- "I have gone through the submissions made by the assessee. It is observed that apart from investments in the overseas subsidiaries (where there is no tax-free income since the dividend is also taxable) the investments made by the assessee are in mutual funds. The entire investment in mutual fund is in non-equity scheme. In respect of investment in mutual funds, except for growth funds, the company receives tax free dividend. The amount of dividend received by the company is substantial. This is a clear case for application of Rule 8D. Hence, the contention of the assessee cannot be accepted. The disallowance u/s 14A is required to be made by applying Rule 8D. As per the working of disallowance u/s 14A as per Rule 8D, the amount of disallowance comes to Rs. 5,68,32,323/-. The assessee has already disallowed Rs. 50,00,000/- in the computation of income." 35. The requirement of section 14(2) of the Act is that the Assessing Officer is to record as to why the disallowance made by the assessee i.e. Rs. 50 lakhs under section 14A of the Act is not correct. The Assessing Officer takes note of the disallowance, considers the explanat....
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....are relevant. Hon'ble Supreme Court explained the provisions of sub-section (2) and (3) of section 14A of the Act. For the sake of completeness, we proceed the extract the same here as under : "37. We do not see how in the aforesaid fact situation a different view could have been taken for the assessment year 2002-03. Sub-sections (2) and (3) of section 14A of the Act read with rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) read with rule 8D of the Rules or a best judgment dete....
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....on to be recorded by Assessing Officer, before making disallowance under section 14A of the Act read with Rule 8D of the Rules, is missing in the case; in the absence of the same, there is no merit in the disallowance made by the Assessing Officer. We find support from the ratio laid down by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). "37. We do not see how in the aforesaid fact situation a different view could have been taken for the assessment year 2002-03. Sub-sections (2) and (3) of section 14A of the Act read with rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generat....