IN INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & N.K. PRADHAN, ACCOUNTANT MEMBER & SHRI I.T.A. No.1668/Mum/2014 (Assessment Year : 2011-12) Quest Portfolio Services Pvt. Ltd. DCIT - 10(3), 1202, Neelkanth Heights, Near Bank Mumbai. of India, B.P.S. Cross Road, Mulund (W), Mumbai-400080. Vs. PAN: AAACQ1454B (Appellant) (Respondent) I.T.A. No.2420/Mum/2014 (Assessment Year : 2011-12) DCIT - 10(3), Quest Portfolio Services Pvt. Ltd. Room No. 451, 4th Floor, 11, 2nd Floor, Krishna Kunj, Near Aayakar Bhavan, M.K. Road, Deep Mandir Cinema, LBS Marg, Mumbai-400020. Vs. Mulund (W), Mumbai-400080. PAN: AAACQ1454B (Appellant) .. ( Respondent) Assessee by Shri S.C.Tiwari (AR) Revenue by Shri Satyapal Kumar (DR) Date of Hearing : 25.08.2016 Date of Pronouncement : 23.09.2016 ORDER SAKTIJIT DEY, JM: 2 ITA Nos.1668 & 2420/M/2014 1. These cross appeals by assessee and Revenue are against common order of Ld. CIT(A)-22, Mumbai dated 15.01.2014 for Assessment Year (AY) 2011-12. ITA No. 1668/Mum/2014 2. only issue in dispute in assessee s appeal is in relation to disallowance of Rs. 39,61,235/- u/s 14A r.w. Rule 8D. 3. Briefly, facts are assessee-company is engaged in trading & dealing in shares, Securities, Currency & Commodity Derivatives. For year under consideration, assessee filed its return of income on 27.08.2010 declaring income of Rs. 1,04,66,701/-. During assessment proceeding, AO noticed that in relevant previous year assessee had earned exempt income by way of dividend amounting to Rs. 6,30,349/- and assessee suo- moto has disallowed expenditure of Rs. 31,517/- being 5% of dividend income u/s 14A of Act. It was also submitted by assessee that it had not incurred any specific expenditure for earning dividend income. AO however, did not find merit in submissions of assessee. He was of view that disallowance u/s 14A has to be made in terms of procedure laid down under Rule 8D. Thus, AO applying Rule 8D of Rules, worked out disallowance u/s 14A at Rs. 39,61,235/-. Being aggrieved of such disallowance assessee preferred appeal before CIT(A). Before First Appellate Authority (FAA), it was argued by assessee that since shares, securities, mutual funds were held as stock-in-trade by assessee no 3 ITA Nos.1668 & 2420/M/2014 disallowance u/s 14A can be made. Ld. CIT(A) however, was not convinced with submissions of assessee. Relying upon decision of ITAT, Mumbai (3rd Member) in case of M/s B.H. Securities Pvt. Ltd., ld. CIT(A) sustained disallowance by holding that even where shares are held as stock-in-trade, disallowance u/s 14A can be made. 4. ld. AR submitted before us that issue is now settled in favour of assessee by virtue of decision of Hon ble Bombay High Court in case of CIT vs. India Advantage Securities Ltd. (380 ITR 471). Ld. AR submitted, at best, keeping in view provisions of Rule 8D(iii) disallowance can be made @ 10% of dividend income earned. ld. DR, though, agreed that issue is covered by decision of Hon ble jurisdictional High Court, however, he relied upon observations of AO and CIT(A). 5. We have considered submissions of parties and perused materials on record. There is no dispute that transaction in share, securities, mutual funds has been undertaken as trading activity by assessee and income derived therefrom has been shown under head Business Income . As can be seen, it is contention of assessee from stage of assessment proceeding itself that no disallowance u/s 14A can be made in respect of share, securities, mutual funds etc. held as stock-in- trade. We find, aforesaid issue has been decided in favour of assessee by Hon ble jurisdictional High Court while upholding order of ITAT in case of CIT vs. India Advantage Securities Ltd.(supra) laying down 4 ITA Nos.1668 & 2420/M/2014 proposition that no disallowance u/s 14A can be made in respect of income earned from shares, securities, mutual funds, held as stock-in-trade. However, applying principle laid down in case of CIT vs. India Advantage Securities Ltd.(supra), we direct AO to disallow amount of 10% of dividend income to comply with provisions of section 14A. Ground raised by assessee is partly allowed. ITA No. 2420/Mum/2014 6. In this appeal, only issue raised by Department is against decision of CIT(A) in deleting addition made by AO u/s. 40A(2)(b) of Act on account of performance bonus paid to Director of Company. 7. Briefly, facts are in course of assessment proceeding, AO noticed that assessee had paid Rs. 10 Crores as performance bonus to one of its Director in addition to remuneration paid to him. He also observed, share holding of Director in company is 91%. Therefore, he called upon assessee to justify payment of such huge performance bonus to Director. Though, assessee submitted it s explanation justifying payment of performance bonus. However, AO rejecting explanation of assessee hold that quantum of performance bonus paid to Director is not reasonable in terms of section 40A(2)(b) of Act. Accordingly, he disallowed expenditure. Being aggrieved of such disallowance, assessee preferred appeal before CIT(A). 5 ITA Nos.1668 & 2420/M/2014 8. Ld. CIT(A) after considering submissions of assessee found that in assessee s own case for AY 2008-09, Tribunal while deciding identical nature of dispute relating to disallowance of performance bonus paid to Director has allowed assessee s claim, therefore, following decision of ITAT, Ld. CIT(A) deleted addition. Ld. Counsels appearing for both parties have agreed before us that issue in dispute is covered by decision of ITAT in assessee s on case for AY 2008-09. 9. We have considered submissions of parties and perused material on record. As could be seen, dispute involved in present appeal is disallowance of payment of performance bonus of Rs. 10 Crores to Director of company viz; Shri Ravindra R. Dharamshi by invoking provisions of section 40A(2)(b) of Act by AO. It is further observed, similar disallowance was also made by AO in AY 2008-09. When issue came up for consideration before ITAT in AY 2008-09 in ITA No. 1630/Mum/2011 dated 10.06.2011, ITAT after considering submissions of parties in context of facts and materials on record deleted addition holding as under: 11. We have considered rival submissions and also perused relevant material on record. It is observed that performance bonus of RS.B.5 crores paid by assessee company to its director Shri Ravindra Raichand Dharamshi has been disallowed by authorities below to extent of Rs. 4.25 crores on ground that same to that extent was excessive and unreasonable and that this excess payment was made by assessee company in order to avoid dividend distribution tax. It is, therefore, important to ascertain whether amount of Rs.8.5 crores paid by assessee company to its director on account of performance bonus is excessive and unreasonable or not in facts and circumstances of case. first objection raised by authorities below in this, regard is that (;1e decision to 6 ITA Nos.1668 & 2420/M/2014 pay performance bonus of Rs.8.5 crores was taken in board meeting held in February, 200B on basis of unaudited financial results for three quarters ending 31.12.2007 'which disclosed net profit of Rs.6.61 crores only which did not justify payment of performance bonus of Rs. 8 3 crores. It has also been alleged by the. Assessing Officer that decision to pay performance bonus was after thought and it was done to avoid dividend distribution tax. However, as rightly submitted by learned counsel for assessee, entire performance bonus was paid by assessee company to concerned director on 31st March, 200B itself and keeping in view this undisputed position; it cannot be said that decision to pay performance bonus was after thought. We also find merit in argument of learned counsel for assessee that even though unaudited financial results for 3 quarters ending 31st Dec.2007 were available for consideration in Board Meeting held In month of February 2008, Directors must have been aware of financial performance of assessee company in month of January 2008 as well as projections for remaining 2 months while deciding quantum of performance bonus to be paid to concerned director. In this regard, learned counsel for assessee has prepared and furnished statement giving month-wise profitability position for month of January, February and March 2008 which clearly shows that profit of Rs. 537 crores was earned by assessee company in month of January 2008 itself making total profit earned for period of 10 months ending January 2008 to Rs. 12.52 crores. This makes it clear that payment of performance bonus of Rs.8.5 crores was fully justified on basis of profit earned by assessee company upto January 2008 of which directors were expected to aware of while taking decision to pay performance bonus of Rs. 8.5 crores to concerned director. 12. In any case, performance .bonus of Rs.8.5 crores was paid to concerned director for financial year 2007-08 and reasonability of same, therefore, has to be ascertained keeping in view financial performance of assessee company for entire year as whole. In this regard, it is noted from audited Profit and Loss Account of assessee company placed at page No.2 of paper book that total profit of Rs. 15.69 crores was eamed by assessee for year under consideration before payment of performance bonus to director and even after said payment, net profit before tax of assessee company was Rs. 7.19 crores. After making provision of tax of Rs. 2.52 crores, net profit of assessee company after tax was Rs 4.667 crores which as compared to paid up capital of Rs. 1 crores gave fabulous rate of return. It may be pertinent to note here that there was no major expenditure incurred by assessee company under any head including salary and remuneration paid to others except Executive Director to whom performance bonus of Rs. 8.5 crores was paid in addition to salary of Rs.30 lakhs. AO these facts and figures of present case clearly show that huge profit was earned by assessee company mainly as result of efforts of said Executive Director utilizing his skills, expertise and experience in field and it, therefore, cannot be said 7 ITA Nos.1668 & 2420/M/2014 that performance bonus of Rs.8.5 crores paid to said director was excessive or unreasonable. 13. Moreover, as submitted by learned counsel for assessee, major amount of profit earned by assessee company to extent of Rs. 8.38 crores was earned from F & 0 transactions and fact that jobbers for such transaction are paid charges to extent of 50% of profit as per prevailing market practice further shows that performance bonus paid by assessee company to director which is about 55% of profit is fair and reasonable. As noted by Assessing Officer at page No.5 of assessment orders similar performance bonus of Rs. 5 crores was paid to director in immediately succeeding year against profit of Rs. 9.40 crores and same being 53% of profits further shows that payment of performance bonus at 55% of profits in year under consideration was fair and reasonable and it was certainly not decision taken as after thought to avoid payment of distribution tax. While making disallowance out of performance bonus, A.O. has invoked provisions of section 4OA(2)(a). It is settled position of law that for making disallowance by invoking provisions of section 40A(2)(a), onus Is on department to show that payment of expenditure made by assessee which is sought to be disallowed is excessive and unreasonable. In present case, noting has been brought on record by A.O. to show that performance bonus of Rs.8.5 crores paid by assessee company to its director was excessive and unreasonable and therefore, onus that lay on department to justify disallowance made by invoking provisions of section 40A(2)(a) was not discharged. As such considering all facts, and circumstances of case, we are of view that disallowance made by Assessing Officer out of performance bonus paid to director to extent of Rs. 4.25 crores and confirmed by learned CIT(A) is not sustainable. In that view of matter, we delete said disallowance and allow ground Nos. 3 and 4 of assessee's appeal. 10. We have noted, Ld. CIT(A) has given factual finding that in impugned AY, AO has not established that payment of performance bonus to Director is unreasonable to enable appellate authorities to take different view. 11. Before us, also department has not brought any material to demonstrate that facts relating to disallowance of performance bonus in year under consideration is in any way different from AY 2008-09. That being factual position, respectfully following decision of Co- 8 ITA Nos.1668 & 2420/M/2014 ordinate Bench in assessee s own case for AY 2008-09 as referred to above, we uphold order of CIT(A) by dismissing ground raised. 12. In result, assessee s appeal is partly allowed and Department s appeal is dismissed. Order pronounced in open court on this 23rd day of September, 2016. Sd/- Sd/- (N.K. PRADHAN) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 23.09.2016 Sharwan P.S. Copy to: Appellant Respondent CIT, Concerned, Mumbai CIT(A) Concerned, Mumbai DR D Bench By Order Dy/Asstt. Registrar, ITAT, Mumbai. Quest Portfolio Services Pvt. Ltd. v. DCIT-10(3), Mumbai