Appeal details
Counselvise Citation
[2019] 116 COUNSELVISE.COM (IT) 7285 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 7 month(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
29-07-2019
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
11-07-2019
Assessment Year
2012-2013
Appeal Filed On
29-12-2015
Judgement Text
, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER CROSS OBJECTION NO. 223/AHD/2015 IN ./ I.T.A. NO. 3166/AHD/2015 ( / ASSESSMENT YEAR : 2012-13) CANTON LABORATORIES PVT. LTD. 110A &110B, G.I.D.C. INDUSTRIES ESTATE, MAKARPURS, VADODARA- 390010 / VS. DCIT CIRCLE- 1(1)(1), 1 ST FLOOR, AAYKAR BHAWAN, RACE COURSE CIRCLE, VADODARA. ./ ./ PAN/GIR NO. : AAC CC5 453A ( APPELLANT /RESPONDENT ) .. ( RESPONDENT /CROSS OBJECTOR ) / APPELLANT BY : SHRI M. K. PATEL, A.R. / RESPONDENT BY : SHRI SANTOSH KARNANI, SR. DR / DATE OF HEARING 11/07/2019 !'# / DATE OF PRONOUNCEMENT 29/07/2019 $%/ O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED CROSS OBJECTION HAS BEEN FILED BY THE ASSESSEE IN REVENUES APPEAL IN ITA NO. 3166/AHD/2015 CONCERNIN G A.Y. 2012- 13. THE REVENUE APPEAL WAS EARLIER FILED AGAINST T HE ORDER OF THE CIT(A)-1, VADODARA DATED 25.08.2015 IN THE CONCERNI NG ASSESSMENT C.O. NO. 223/AHD/2015 IN ITA NO.3166/AHD/2015 [DCIT VS.CANTON LABORATORIES PVT. LTD.] A.Y. 2012-13 - 2 - ORDER PASSED BY THE ASSESSING OFFICER DATED 16.02.2 015. THE REVENUE APPEAL WAS STATED TO BE DISPOSED. 2. WHEN THE MATTER WAS CALLED FOR HEARING THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE REVENUES APPEAL BEFO RE THE ITA AGAINST THE ORDER OF THE CIT(A) WAS DISMISSED BY TH E TRIBUNAL OWNING TO LOW TAX EFFECT BY APPLYING CBDT CIRCULAR NO. 21/2015 DATED 10.12.2015. IT WAS THUS SUBMITTED THAT ONLY CROSS OBJECTION OF THE ASSESSEE REMAINS TO BE DECIDED. ADDRESSING THE CROSS OBJECTION, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) FOR RETAINING DISALLOWANCE OF RS. 10,81,692/- OUT OF TOTAL DISALLOWANCE OF RS. 25,06, 920/- CARRIED OUT BY THE AO UNDER S. 14A OF THE ACT. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE COMPANY IS CARRYING O N THE BUSINESS OF MANUFACTURING AND TRADING OF FINE CHEMICALS. THE A SSESSEE HAS EARNED EXEMPT INCOME BY WAY OF DIVIDEND TO THE TUNE OF RS. 1,04,27,249/- ON VARIOUS INVESTMENTS HELD BY THE AS SESSEE. THE LD. AR SUBMITTED THAT THE AO INVOKED RULE 8D OF THE I.T . RULES, 1962 FOR THE PURPOSES OF DISALLOWANCE EXPENSES UNDER S. 14A OF THE ACT AS ATTRIBUTABLE TO SUCH INVESTMENTS. THE DISALLOWA NCE OF RS. 14,25,225/- WAS MADE OUT OF INTEREST EXPENSES AS PE R RULE 8D(2)(II) AND RS. 10,81,692/- WAS MADE TOWARDS ADMINISTRATIVE EXPENSES AS PER THE ESTIMATIONS PROVIDED UNDER RULE 8D(2)(III) OF THE I.T. RULES. THE DISALLOWANCE OF INTEREST EXPENSES OF RS. 14,25, 225/- WAS DELETED BY THE CIT(A) BUT, HOWEVER, THE DISALLOWANC E OF ESTIMATED ADMINISTRATIVE EXPENSES OF RS. 10,81,692/- HAS BEEN RETAINED. THE ASSESSEE IS AGGRIEVED BY THE ACTION OF THE CIT(A) I N UPHOLDING SUCH DISALLOWANCE. THE LD. AR IN THIS CONTEXT FOR THE A SSESSEE SUBMITTED THAT ASSESSEE HAD INVESTED RS. 27,34,58,485/- TILL 31.03.2012 IN VARIOUS MUTUAL FUNDS WHICH GENERATED TAX FREE INCOM E TO THE C.O. NO. 223/AHD/2015 IN ITA NO.3166/AHD/2015 [DCIT VS.CANTON LABORATORIES PVT. LTD.] A.Y. 2012-13 - 3 - ASSESSEE. THE LD. AR SUBMITTED THAT THE INVESTMENT BEING MADE IN MUTUAL FUNDS, WHICH ARE RUN BY THE EXPERT PROFESSIO NALS THE ASSESSEE IS NOT REQUIRED TO DEVOTE ITS ATTENTION AND ENERGY FOR GENERATION OF TAX FREE INCOME. THE ASSESSEE HAS SIMPLY PLOUGH BA CK ITS SURPLUS IN THE MUTUAL FUNDS WITHOUT ANYTHING MORE AND, THEREFO RE, SUBSTANTIAL DISALLOWANCE OF RS. 10,81,692/- IS HIGH EXCESSIVE I N THE CIRCUMSTANCES. THE LD. AR ALSO REFERRED TO THE FIN ANCIAL STATEMENTS AS ANNEXED WITH THE PAPER BOOK TO SUBMIT THAT THE E XPENDITURE REFLECTED IN THE ACCOUNTS ACTUALLY RELATES TO THE M ANUFACTURING AND TRADING ACTIVITY IN FINE CHEMICALS. THE LD. AR THU S SUBMITTED THAT THE ESTIMATION AS PER FORMULA PRESCRIBED SHOULD NOT BE RESORTED TO AND SOME FACT AND REASONABLE ESTIMATE SHOULD BE MAD E. 3. THE LD. DR RELIED UPON THE ORDER OF THE AO AND S UBMITTED THAT IN VIEW OF THE STATUTORY FORMULA FOR ESTIMATION OF DISALLOWANCE AS PRESCRIBED UNDER RULE 8D(2)(III), THE REVENUE WAS J USTIFIED IN ESTIMATE THE QUANTUM OF DISALLOWANCE WITH WHICH NO INVARIANCE IS CALLED FOR. 4. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE SOLI TARY ISSUE IN THE PRESENT APPEAL BY WAY OF CROSS OBJECTION OF THE ASS ESSEE IS DISALLOWANCE OF ADMINISTRATIVE EXPENSES IN TERMS OF RULE 8D(2)(III) BY RESORTING TO SEC. 14A OF THE ACT. AS NOTED EARL IER THE ASSESSEE HAS GENERATED TAX FREE INCOME OF RS. 1,04,27,249/- FROM INVESTMENTS IN MUTUAL FUNDS. THE REVENUE HAS INTER ALIA DISALLOWED 10,81,692/- TOWARDS ADMINISTRATIVE EXPENSES AS QUANTIFIED IN TE RMS OF FORMULA PRESCRIBED UNDER RULE 8D(2)(III) OF THE RULES. THE QUANTUM OF DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE CI T(A) TOWARDS ADMINISTRATIVE EXPENSES HAS BEEN CONTROVERTED IN TH E PRESENT CROSS C.O. NO. 223/AHD/2015 IN ITA NO.3166/AHD/2015 [DCIT VS.CANTON LABORATORIES PVT. LTD.] A.Y. 2012-13 - 4 - OBJECTION. WE STRAIGHTWAY NOTICE THAT EXEMPT INCOM E IS OUT OF INVESTMENTS IN MUTUAL FUNDS. THE CO-ORDINATE BENCH IN ACADEMY FOR COMPUTER TRAINING (GUJ.) PVT. LTD. VS. DCIT IN ITA NO. 3065/AHD/2013 ORDER DATED 30.11.2016 HAS TAKEN A VI EW THAT SEPARATE DISALLOWANCES TOWARDS ADMINISTRATIVE EXPEN SES IS NOT CALLED FOR WHERE EXEMPT INCOME IS GENERATED FROM MUTUAL FU NDS. THE RELEVANT EXTRACT FROM THE AFORESAID DECISION IS REP RODUCED HERE UNDER:- WITH REFERENCE TO THE DISALLOWANCE MADE BY THE AO UNDER RULE 8D(2)(III) AGITATED BY THE ASSESSEE, WE NOTICE THE AVERMENTS MADE ON BEHALF OF THE ASSESSEE THAT TAX-FREE INCOME BY WAY OF DIVIDEND ARISES ENTIRELY OUT OF MUTUAL FUNDS WHICH ARE ONE TIME SIN GLE INVESTMENTS WITHOUT ANY PROACTIVE INVOLVEMENT OF THE MANAGEMENT PER SE. THE SURPLUS FUND OF THE COMPANY HAS BEEN SIMPLY PARKED IN THE MUTUAL FUNDS. WE TAKE COGNIZANCE OF THE ARGUMENT ON BEHA LF OF THE ASSESSEE THAT MUTUAL FUNDS INVESTMENT BEARS DIFFERENT TRAITS AND IS A DIFFERENT SPECIES OF INVESTMENT. THE MUTUAL FUNDS ARE SUPERV ISED BY THE EXPERTS IN THE FIELD AND MANAGEMENT CHARGES FOR SUC H SUPERVISION IS RECOVERED FROM THE CLIENTS. THIS BEING SO, AN INVE STOR IN THE MUTUAL FUND SEPARATELY PAYS ADMINISTRATIVE AND MANAGERIAL EXPENSES UNLIKE A CASE WHERE ASSESSEE CHOOSES TO MAKE INVESTMENT IN SHARES DIRECTLY. IN THE CASE OF A MUTUAL FUNDS, ADMINISTRATIVE AND M ANAGERIAL EXPENSES ARE FACTORED IN THE INVESTMENTS ITSELF. I N SUCH A SCENARIO, THE EXPLANATION OFFERED BY THE ASSESSEE OF NO EXPEN DITURE INCURRED APPEARS TO BE IN CONGRUITY WITH THE MARKET PRACTICE . ACCORDINGLY, WE DO NOT FIND IT A FIT CASE FOR RESORTING TO DOUBLE D ISALLOWANCE OF THE SIMILAR EXPENDITURE IN THE GARB OF RULE 8D(2)(III) OF THE IT RULES. IT WILL BE PERTINENT TO NOTE THAT A BARE READING OF SE CTION 14A OF THE ACT SUGGESTS THAT ITS APPLICABILITY IS NOT AUTOMATIC. IT IS HEDGED BY CONDITIONS PRESCRIBED THEREIN. SECTION 14A INHERES IN IT THE CONCEPT OF REASONABLENESS. THE FORMIDABLE AMOUNT OF EXPEND ITURE AS COMPUTED BY THE AO CANNOT BE SAID TO BE ATTRIBUTABL E TO TAX-FREE INCOME BY APPLYING A STRAIGHT JACKET FORMULA AS PER RULE 8D(2)(III) OF THE IT RULES IN THE GIVEN FACTS. THUS, WE FIND CONSIDERABLE MERIT IN THE PLEA OF THE ASSESSEE. HENCE, WE ARE DISPOSE D TO ADJUDICATE THE ISSUE IN FAVOUR OF THE ASSESSEE. THUS, ORDER OF TH E CIT(A) SUSTAINING THE DISALLOWANCE SECTION 14A DESERVES TO BE VACATED . 5. IN CONSONANCE WITH THE VIEW ALSO TAKEN ON THE SUBJECT, WE FIND MERIT IN THE PLEA TAKEN BY THE ASSESSEE FOR DELETIO N OF DISALLOWANCE. THE ORDER OF THE CIT(A) IS THUS SET-ASIDE AND THE A O IS DIRECTED TO C.O. NO. 223/AHD/2015 IN ITA NO.3166/AHD/2015 [DCIT VS.CANTON LABORATORIES PVT. LTD.] A.Y. 2012-13 - 5 - DELETE THE DISALLOWANCE OF RS. 10,81,692/- MADE TOW ARDS ADMINISTRATIVE EXPENSES UNDER S. 14A R.W.R 8D(2)(II I) OF THE RULES. 6. IN THE RESULT, THE CROSS OBJECTION OF THE ASSE SSEE IS ALLOWED. SD/- SD/- (RAJPAL YADAV) (PRADIP K UMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 29/07/2019 TANMAY TRUE COPY !' #' / COPY OF ORDER FORWARDED TO:- 1. / REVENUE 2. $ / ASSESSEE 3. ) *+ , / CONCERNED CIT 4. ,- / CIT (A) 5. 012 33*+, *+#, 56$)$ / DR, ITAT, AHMEDABAD 6. 289 : / GUARD FILE. BY ORDER / $% , ;/5 *+#, 56$)$ < 1.DATE OF DICTATION ON 11.07.2019 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 12.07.2019 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 22.07.2019 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 22.07.2019 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR . P.S./P.S 29.07.2019 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 29.07.2019 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER THIS ORDER PRONOUNCED IN OPEN COURT ON 2 9/07/2019
