ITA No. 3906/Ahd/2008 and ITA No. 1370/Ahd/2009 and CO No. 107/Ahd/2009, (Assessment Year: 2005-2006;2006-2007). Case: ACIT Vs Torrent Pvt. Ltd.. ITAT (Income Tax Appellate Tribunal)

Case Number:ITA No. 3906/Ahd/2008 and ITA No. 1370/Ahd/2009 and CO No. 107/Ahd/2009, (Assessment Year: 2005-2006;2006-2007)
Party Name:ACIT Vs Torrent Pvt. Ltd.
Counsel:For Appellant: Roopchand, DR and For Respondents: S.N. Soparkar
Judges:N.S. Saini, Member (A) and Kul Bharat, Member (J)
Issue:Income Tax Act, 1961 - Sections 111A, 115JA, 115JB, 115JB(1), 115JB(2), 14A, 35D, 35D(1), 35D(2), 36(1)(vii)
Judgement Date:May 08, 2015
Court:ITAT (Income Tax Appellate Tribunal)
 
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Order:

N.S. Saini, Member (A), (ITAT Ahmedabad 'B' Bench)

  1. ITA No. 3906/Ahd/2008 is filed by the Revenue against the order of the CIT(A)-XIV, Ahmedabad dated 25.9.2008 for the Asstt.Year 2005-06.

    ITA No. 1370/Ahd/2009 is the appeal filed by the Revenue and Cross Objection No. 107/Ahd/2009 filed by the assessee against the order of the CIT(A)-XIV, Ahmedabad dated 25.2.2009 for the Asstt.Year 2006-07.

  2. The ground No. 1 of the appeal of the Revenue for the Asstt.Year 2005-06 is directed against the order of the CIT(A) deleting the disallowance of Rs. 4,50,000/- out of total disallowance of Rs. 5,00,000/- made by the AO under section 14A of the Act.

  3. Brief facts of the case are that the in the Asstt.Year 2005-06, the AO observed that the assessee has earned exempt dividend income of Rs. 15,47,57,591/-. The business of the assessee is of investment in shares, debentures and securities of companies etc. Therefore, the staff employed by the assessee was utilized for the purpose of investment portfolio and share trading portfolio of the company. The assessee submitted before the AO that most of investments were made in the earlier years and no major efforts were required for earning dividend income, and these investments have been made out of large amount of interest free funds available with the company in the form of share capital and reserve. However, the AO observed that the part of the employees' cost and administrative expenses is attributable to earning of dividend income, and therefore, made a lumpsum disallowance of Rs. 5,00,000/-.

  4. On appeal, the CIT(A) in the Asstt.Year 2005-06 observed that the AO has made the addition merely on estimation. The CIT(A) observed that the expenses incurred on account of salary to staff, stamp duty, transfer fee and other such expenses do relate to earning of dividend, and therefore, part of such expenses needed to be apportioned to earning of dividend income on the assumption that the assessee might have incurred such expenditure for earning dividend income. The CIT(A) held that in view of the facts, it is held that an ad hoc disallowance of Rs. 50,000/- would be proper in the facts of the case, and accordingly restricted the disallowance to Rs. 50,000/- in place of Rs. 5,00,000/- made by the AO.

  5. We have considered rival submissions and perused the orders of the lower authorities and material available on record. We find that the disallowance of Rs. 5,00,000/- made by the AO was on ad hoc estimate basis, and the CIT(A) also sustained Rs. 50,000/- out of the same on ad hoc estimate basis. The DR could not bring any material before us to show that any amount more than Rs. 50,000/- was incurred by the assessee for earning of dividend income. Therefore, we do not find any good reason to interfere with the estimate made by the CIT(A). Thus, this ground of appeal of the Revenue is dismissed.

  6. The ground No. 2 of the Cross Objection of the assessee for the Asstt.Year 2006-07 is directed against the order of the CIT(A) confirming the disallowance under section 14A of Rs. 6,79,897/-.

  7. For the very same reasons as in Asstt.Year 2005-06, the AO made disallowance under section 14A in the Asstt.Year 2006-07. In the Asstt.Year 2005-06, the AO had made a lumpsum disallowance of Rs. 5,00,000/- whereas in the Asstt.Year 2006-07, the AO has made disallowance at the rate of 5% of the expenditure of Rs. 1,35,97,939/-.

  8. The CIT(A) held that the expenditure incurred on account of salary to staff, stamp duty, transfer fee and such other expenses do relate to earning of dividend income, and therefore, a part of such expense needs to be apportioned to earning of dividend income, and in view of that he held that the disallowance made under section 14A amounting to Rs. 6,79,897/- was justified and no interference was called for.

  9. After hearing both the sides, and perusing of the orders of the lower authorities and material available on record, we find that the AO made disallowance under section 14A at the rate 5% of the dividend income earned during the year by the assessee. The rate 5% is an ad hoc estimate without any basis. On appeal, the CIT(A) confirmed the action of the AO.

  10. We find that in similar circumstances, the Hon'ble Madras High Court in the case of M/s. Simpson and Co. Ltd. Vs. DCIT, Tax Case (Appeal) No. 2621 of 2006 order dated 15.10.2012 confirmed the disallowance made at the rate 2% of dividend income earned during the year as fair and reasonable. We, therefore, following the same, are of the considered opinion that it shall meet ends of justice to restrict the disallowance under section 14A at the rate of 2% of the dividend income earned during the year by the assessee. We, therefore, set aside the order of the lower authorities on this issue, and direct the AO to disallow 2% of the dividend income earned by the assessee during the year under consideration under section 14A, as expenditure incurred for earning of dividend income. Thus, this ground of appeal of the assessee is partly allowed.

  11. The ground No. 1 in the Asstt.Year 2006-07 is directed against the order of the CIT(A), directing the AO to accept the gain as short term capital gains and not business income as treated by the AO of an amount of Rs. 3,36,66,893/-.

    The ground No. 2 of the appeal of the Revenue in the Asstt.Year 2005-06 is directed against the order of the CIT(A) accepting the gain as short term capital gain and not business income as treated by the AO of an amount of Rs. 30,65,299/- u/s. 111A of the Act.

  12. Brief facts of the case are that the AO Asstt.Year 2005-06, observed that the assessee has shown short term capital gain of Rs. 30,65,299/- and Rs. 3,39,98,565/-. The AO observed that the business of the assessee was of dealing in shares and securities and debentures and is engaged in frequent buying and selling of securities and the quantum of purchase and redemption was Rs. 197.81 crores and Rs. 200.75 crores. The AO also observed that the assessee had explained that shares and mutual fund investments were not by way of stock-in-trade. It was explained that merely because of frequency of transaction, the income cannot be categorized as business income. The AO observed that the contentions of the assessee were not acceptable for the reason that a perusal of the Schedule-5 of the balance sheet shows that almost entire stock-in-trade comprises of shares of same subsidiary company which were appearing in the investment portfolio, and there was large transactions in mutual funds involving substantial sums of money, and therefore, in view of the fact that the business of the assessee is dealing is shares and securities, and the assessee is engaged in large volume of transactions in shares and securities, the short term capital gains shown by the assessee is...

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