The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the AO has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of Rs. 20,000 out of business expenditure as being incurred for earning tax free income is not acceptable.
IN THE INCOME TAX APPELLATE TRIBUNAL
“C” Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 530/Mum/2009 (Assessment Year: 2005- 06)
Shri Pawan Kumar Parmeshwarlal Vs. ACIT 4(2) Mumbai
ORDER
Per B. Ramakotaiah, A.M.
This appeal by the assessee is against the order of the CIT(A)-IV, Mumbai dated 19.11.2008.
2. Assessee has raised the following two grounds: –
“I. On the facts & circumstances of the case the learned CIT erred applying Rule 8D which is an exhaustive calculating system toward interest, while interest is not wholly/solely/completely and/or exhaustively associated/devoted to only one factor of dividend and as such the complete implication of interest factor towards the factional out-come factor i.e. entitlement of dividend through the application of rule 8D is improper and unjust and need to be deleted/set aside.
II. Claim of Bad debts: – the learned CIT erred in disallowing the claim of bad debts of Rs.1316192/- without appreciating the facts on record and the law pertaining to allowance of Bad Debts.”
3. Assessee is an individual who is also a stock broker and member of the Bombay Stock Exchange. He is the proprietor of M/s. Pawankumar Parmeshwarlal dealing in shares and securities. Assessee has filed return of income declaring total income of ~14,34,977/- for the impugned assessment year which included income from share transactions undertaken as a broker, business income, capital gains being long term capital gains and income from other sources being interest received. While scrutinizing the return the A.O. noticed that the assessee has earned a dividend of 3,19,797/-, interest on RBI bonds of 1,1 1,617/- and PPF interest of 6,696/- apart from bank interest of 97,252/-. The first three items were claimed as exempt. The A.O. asked the assessee why expenditure should not be disallowed on earning interest from incomes. It was the submission of the assessee that no expenditure was incurred by him as most of the shares were in his demat account for long years and dividend was automatically credited to the bank account as and when the companies declared dividend and interest on RBI bonds were also tax free interest and likewise PPF interest is also on the investments made for income tax purposes. It was his submission that none of these activities require any expenditure and as such no amount is dis allowable under section 14A. The A.O. was of the view that assessee would have spent some amount for earning the tax free incomes and disallowed an amount of 2O,OOO/- under section 14A. When it was contested before the CIT(A), the CIT(A) instead of examining the issue on factual basis analyzed provisions of section 1 4A and Rule 8D and directed the A.O. to compute deduction as per Rule 8D. Assessee is contesting the same.
4. After hearing the assessee in person and arguments of the learned D.R. we are of the opinion that no dis allowance is called for under section 1 4A. Obviously the assessee is maintaining separate books of account for the purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of 2O,OOO/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this dis allowance so made under section 14A of 2O,OOO/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the assessment year involved is before the introduction of sub-section (2) & (3) of section 14A, there is no question of disallowing the amounts invoking Rule 8D. Therefore, the CIT(A)’s direction on this is set aside and the additions so made by the A.O. in the computation of business income is deleted. Ground is considered allowed.
5. Ground No. 2 pertains to the claim of bad-debts of 13, 16,192/-. Assessee claimed the following three amounts of bad debts in the business of vyaj badla:
