Whether disallowance u/s 14A can exceed total administrative expenditure debited by assessee in Profit & Loss account - NO: ITAT

THE issue before the Bench is - Whether disallowance under section 14A can exceed the total administrative expenditure debited by the assessee in the Profit & Loss account. And the answer goes against the Revenue.

Facts of the case

The assessee is a non–banking financial company deriving interest income from money lending and income from investment. The assessee had shown short term capital gain and long term capital gain from the sale of shares. The assessee, during the course of assessment proceedings, in response to the show cause notice, filed details submissions with regard to the overall

transactions of shares, holding period, treatment given in the books, number of transactions undertaken and the history of the assessee’s case in the earlier years. Assessing Officer rejected the assessee’s contention on the ground that the purchase and sale of shares was not an unrelated activity but incidental to the business of the assessee. The assessee had continuously and systematically carried out the activity of trading in shares over the period of one year and had borrowed funds to fund his activity for purchase and sale of shares. The Assessing officer was of the view that the assessee had shown all the characteristics of a trader rather than an investor. Thus, the profit claimed as capital gain was taxed as business income.

In appeal, Commissioner (Appeals) noted that the reasons given by the Assessing Officer were pari materia with the assessment order passed for the assessment year 2007–08 and 2008–09. In those years, the Commissioner (Appeals) had rejected the reasoning of the Assessing Officer. Commissioner (Appeals) held that the facts prevailing in the present assessment year were identical and, therefore, on similar grounds and conclusion, the income shown from the sale of shares by the assessee in this year also should be taxed as capital gain and not as business income.

B) The assessee had earned long term capital gain and dividend income which was claimed as exempt. As regards the direct expenditure incurred in relation to the investment, the assessee had already disallowed expenditure in the return of income as relatable to the investment activities. Besides this, the assessee had also submitted that the amount paid in respect of STT (Security Transaction Tax) and donation had already been disallowed in the return of income. The balance expenditure debited to the Profit & Loss account were general administrative expenditure which were not specifically related to earning of tax free income. The Assessing Officer rejected the assessee’s working and held that the disallowance had to be made as per the formula prescribed in rule 8D and, accordingly, he made the disallowance after computing the administrative expenditure @ 0.5% of average investments.

In appeal, Commissioner (Appeals), following the earlier year’s order passed by the Commissioner (Appeals), held that the Assessing Officer should disallow the administrative expenditure as per rule 8D(2)(iii), however, the disallowance should not exceed the total administrative expenditure incurred.

Having heard the parties, the tribunal held that,

+ similar nature of issue has come up for consideration before the Tribunal in assessee’s own case in the assessment year 2007–08 and 2008–09, wherein the Tribunal, in Revenue’s appeal, has upheld the order of the Commissioner (Appeals) after observing and holding as under:–

"6. We have considered the rival submissions and per used the orders of authorities below. The dispute is regarding the nature of income from sale and purchase of shares by the assessee. The issue whether the income from sale and purchase in a particular case should be treated as capital gain or as business income is a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its factual situation. In the present case, the total number of transaction is 68 out of which 40 transactions relate to LTCG. 15 transactions relate to STCG and 30 transactions relate to close out transaction of STCG. The total number of scrips dealt by the assessee is 26. Further average holding period for capital gains is 37 days or 1.75 years. The average holding period for STCG is 217 days. These facts speak for themselves. In a stock market where more than 5000 company’s shares are traded every day, the transaction of the assessee cannot be held as in the nature of trading. The past history of the assessee also shows that right from assessment years 2001-02 to 2006-07, when the assessments has been made after thorough scrutiny u/s 143(3) of the Act, the Department has accepted the profit under the he ad capital gain. Even for the sake of argument, it is accepted that resjudicata does not apply to the income tax proceedings, but rule of consistency is to be followed. When the facts are same and the law has not changed, we do not find any reason to take a different view as from the past assessment of the assessee. We, therefore, do not find any merit in Revenue’s appeal and accordingly the finding of the CIT(A) is confirmed. Ground No.1 of Revenue’s appeal is dismissed.”

++ in this year also, it is an admitted fact that the reasoning given by the Assessing Officer and the Commissioner (Appeals) are akin to that of the earlier years and, therefore, consistent with the view taken by the Tribunal in earlier years, we uphold the finding of the Commissioner (Appeals) that the income derived by the assessee from the transactions of the shares is to be taxed under the head “capital gain” and not “income from business”. Accordingly, ground no.1, raised by the Revenue stands dismissed;

B) after hearing both the parties and considering the order of the Commissioner (Appeals), we find no infirmity in the order passed by the Commissioner (Appeals) as the disallowance under section 14A, cannot exceed the total administrative expenditure debited by the assessee in the Profit & Loss account. Even under the formula given in rule 8D, the disallowance cannot exceed the overall expenditure claimed in the Profit & Loss account. Thus, we do not find any merit in the ground raised by the Revenue and the same stands dismissed.