K.Jawarilal Jain, Gudiyatham V. DCIT, Vellore

CO 29/CHNY/2013

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8313 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 14-03-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJIV KUMAR SHAH
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH CHENN AI BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI V.DURGA RAO, JUDICIAL MEMBER .. ITA NO.25/MDS./2013 ASSESSMENT YEAR:2009-10 & C.O. NO.29/MDS./13 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE I, VELLORE 632 001. VS. SHRI K. JAWARILAL JAIN, NO.89,SANTHAPET, GUDIYATTAM 632 602. PAN AADPJ 3814 C (APPELLANT) (RESPONDENT/ CROSS OBJECTOR) APPELLANT BY : SHRI GURU BASHYAM JCIT D.R. RESPONDENT BY : SHRI SANJIV KUMAR SHAH, C.A. DATE OF HEARING : 14.03.13 DATE OF PRONOUNCEMENT : 21.0 3.13 O R D E R PER ABRAHAM P GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEAL OF REVENUE AND THE CROSS OBJECTIO N OF THE ASSESSEE BOTH DIRECTED AGAINST AN ORDER DATED 24.09 .12 OF CIT(A)-IX, CHENNAI. REVENUE ASSAILS DELETION OF DI SALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHORT ITA. 25/MDS/13 CO NO.29/MDS.12 2 THE ACT) READ WITH RULE-8D OF THE INCOME TAX RULE S, 1962. CROSS OBJECTION OF ASSESSEE IS IN SUPPORT OF THE OR DER OF THE CIT(A). 2. FACTS APROPOS ARE THAT ASSESSEE, AN INDIVIDUAL, DEALING IN EQUITY SHARES, PLOTS & ENGAGED IN THE BUSINESS MON EY LENDING, FILED ITS RETURN FOR THE ASSESSMENT YEAR DECLARING AN INCOME OF RS.15,19,200/-. DURING THE COURSE OF ASSESSMENT, I T WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD CLAIMED INTEREST EXPENDITURE TOTALING TO RS.1,62,20,921/-. AS PER A SSESSING OFFICER, SUCH INTEREST EXPENDITURE WAS NOT ATTRIBUT ABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THEREFORE, SEC.14A READ WITH RULE 8D APPLY. ON THE BASIS OF THIS FINDING, HE MA DE A DISALLOWANCE OF ` 51,01,806/- UNDER RULE 8D(2)(II) AND ` 2,00,030/- UNDER RULE 8D(2)(III). FOR WORKING OUT, THE PRO-RATA INTEREST DISALLOWABLE UNDER RULE 8D(II)(III), ASSES SING OFFICER CONSIDERED THE AVERAGE VALUE OF INVESTMENTS, INCLUD ING THE VALUE OF IMMOVABLE PROPERTIES, SHARES, AGRICULTURAL LANDS AND HOUSE PROPERTY UNDER CONSTRUCTION, AS ON 01.04.08 AND AS ON 31.03.09. HE APPLIED HALF PERCENT ( %) ON SUCH AVERAGE VAL UE OF INVESTMENTS. ITA. 25/MDS/13 CO NO.29/MDS.12 3 3. ASSESSEE MOVED IN APPEAL BEFORE THE CIT(A) AGA INST THE DISALLOWANCES MADE UNDER SECTION 14A OF THE ACT. A RGUMENT OF THE ASSESSEE WAS THAT ASSESSING OFFICER ERRONEOUSLY CONSIDERED INVESTMENTS WHICH GAVE RISE TO TAXABLE INCOME ALSO WHILE APPLYING THE FORMULA PRESCRIBED UNDER RULE 8D(2)(I I) . ACCORDING TO HIM, ONLY SUCH ITEMS WHICH WOULD YIELD INCOME WH ICH WAS NOT TAXABLE, COULD BE CONSIDERED FOR SUCH CALCULATION. ASSESSEE POINTED OUT THAT IT HAD ADMITTED LEASE RENT FROM IM MOVABLE PROPERTIES, BUSINESS INCOME AS WELL AS INCOME FROM HOUSE PROPERTY. IT HAD ALSO SHOWN INCOME ON SALE OF PROP ERTY AS SHORT TERM CAPITAL GAINS. IN SO FAR AS AGRICULTURAL INCO ME WAS CONCERNED, ASSESSEE SUBMITTED THAT ONLY NET AGRICUL TURAL INCOME WAS SHOWN AFTER CLAIMING EXPENDITURE RELATABLE TO A GRICULTURE OPERATIONS. FURTHER, AS PER ASSESSEE, THERE WAS NO BORROWED FUNDS FOR MAKING INVESTMENTS, WHICH WOULD GIVE RISE TO ANY TAX FREE INCOME. RELIANCE WAS PLACED ON THE DECISION O F HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD VS. JCI T (2012) 71 DTR 141.AS PER ASSESSEE, IT HAD BY ITSELF MADE A DI SALLOWANCE OF 5% OF THE DIVIDEND INCOME AS EXPENDITURE INCURRED F OR EARNING SUCH INCOME. ASSESSING OFFICER COULD NOT HAVE APPL IED RULE 8D WITHOUT GIVING A FINDING THAT CLAIM OF THE ASSESSEE WAS NOT CORRECT. ITA. 25/MDS/13 CO NO.29/MDS.12 4 4. CIT(A) WAS APPRECIATIVE OF THESE CONTENTIONS. ACCORDING TO HIM, ASSESSING OFFICER COULD NOT ESTABLISH ANY NEXU S BETWEEN THE EXPENDITURE, IF ANY INCURRED BY THE ASSESSEE FOR EA RNING THE EXEMPT INCOME, AND THE EXEMPT INCOME. THEREFORE, A CCORDING TO HIM, DISALLOWANCE UNDER RULE 8D WAS NOT CALLED FOR . HE DELETED SUCH DISALLOWANCE. 5. NOW BEFORE US LD. DEPARTMENTAL REPRESENTATIVE S TRONGLY ASSAILING THE ORDER OF CIT(A) SUBMITTED THAT ASSESS EE NEVER PRODUCED PROOF THAT THERE WAS NO NEXUS BETWEEN THE EXPENDITURE CLAIMED BY HIM IN HIS PROFIT AND LOSS ACCOUNT AND T HE EXEMPT INCOME. AS PER LD. D.R, IT WAS WRONG FOR THE ASSES SEE TO SAY THAT NO EXPENDITURE WAS INCURRED OR THAT THE EXPEND ITURE CLAIMED TO HAVE BEEN INCURRED AGAINST EARNING OF EXEMPT WAS CORRECT. UNLESS AND UNTIL IT WAS SHOWN THAT THE CLAIM OF ASS ESSEE WAS CORRECT, IT WAS ALWAYS LEFT OPEN TO THE ASSESSING O FFICER TO INVOKE SEC 14A READ WITH RULE 8D FOR MAKING THE REQUIRED D ISALLOWANCE. RELIANCE WAS PLACED ON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.LAKSHMI RING TRAVELLERS IN ITA NO.2083/MDS./11 DATED 2 ND MARCH, 2012. ACCORDING TO HIM, EVEN WHERE THE ASSESSEE CLAIMED NO EXPENDITURE WAS INCUR RED, THERE ITA. 25/MDS/13 CO NO.29/MDS.12 5 WAS A REQUIREMENT FOR MAKING A DISALLOWANCE UNDER S ECTION 14A OF THE ACT, FOR A REASON THAT IT WAS A DEEMING PROV ISION. 6. WE HAVE PERUSED THE ORDERS OF LOWER AUTHORITIES AND HEARD RIVAL CONTENTIONS. THERE IS NO DOUBT THAT ASSESSME NT YEAR INVOLVED IS 2008-09 AND RULE 8D APPLIED. ASSESSEE HAS FILED A COPY OF PROFIT AND LOSS ACCOUNT, BALANCE SHEET AND COMPUTATION STATEMENT FOR THE RELEVANT PREVIOUS YEARS BEFORE US . IT HAS ALSO BEEN CERTIFIED THAT SUCH RECORDS WERE FURNISHED ALO NG WITH HIS RETURN OF INCOME. ASSESSEE HAD PREPARED SEPARATE P &L ACCOUNTS FOR ITS TRADING IN EQUITY SHARES, AND FOR ITS TRADING IN PLOTS AND BUILDINGS. THERE IS A CHARGE OF INTEREST OF ` 1,62,20,921/- APPEARING IN SUCH PROFIT AND LOSS ACCOUNT. TRADING ACCOUNT FOR SHARES, SHOW AN OPENING STOCK OF ` 46,20,420/- AND CLOSING STOCK OF ` 81,12,463/-. A LOOK AT THE BALANCE SHEET FILED BY THE ASSESSEE WHICH APPEARS TO BE COMMON FOR BOTH ITS SH ARE TRADING BUSINESS AS WELL AS FOR ITS PLOT BUSINESS, SHOW TH AT ITS ASSETS AS ON 31.03.09 WERE AS UNDER:- CASH ON HAND 6,60,847 BAL WITH BANKS 16,87,880 INVESTMENTS 2,43,000 ITA. 25/MDS/13 CO NO.29/MDS.12 6 ASSETS (WDV) A/C 55,23,202 LOANS & ADVANCE 1,21,27,271 DEPOSIT A/C 6,89,351 RENTAL ADVANCE 40,000 STOCK IN HAND A)SHARES A/C 81,12,463 B) PLOTS 6,07,61,947 SUNDRY DEBTORS 5,02,652 TRADE DEBTORS 64,90,074 EDUCATION LOAN 2,00,000 SILVER A/C 36,890 IMMOVABLE PROPERTIES 3,84,87,318 SHARES A/C 7,87,296 NSC A/C 10,000 HA TRUST 20,788 CURRENT A/C WITH AGRI BOOKS A/C 1,09,34,459 HOUSE PROPERTY-OWN UNDER CONSTRUCTION 1,16,09,639 15,89,25,177 ITA. 25/MDS/13 CO NO.29/MDS.12 7 IN THE FIRST PLACE WHAT WE FIND IS THAT ASSESSING O FFICER HAS CONSIDERED VALUE OF THE SHARES AS ON 31.03.09 AS W ELL AS ON 01.04.08 AT ` 7,87,296/- . HE HAS OBVIOUSLY OMITTED THE STOCK OF SHARES ` 46,20,420/- AND ` 81,12,463/-. A LOOK AT SEC.14A AND RULE 8D IS REQUIRED AT THIS JUNCTURE. SEC.14A: (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED , IF THE ASSESSING OFFICER, HAVING RE GARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTN ESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THIS ACT.: RULE-8D WHICH EXPLAINS HOW AN ASSESSING OFFICER HA S TO WORK OUT THE DISALLOWANCE, READS AS UNDER:- RULE 8D. (1) WHERE THE ASSESSING OFFICER, HAVING R EGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, ITA. 25/MDS/13 CO NO.29/MDS.12 8 IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORD ANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWIN G AMOUNTS, NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTE D IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME F ROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPE ARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAS T DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN TH E BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS Y EAR. 3. FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSETS SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. ITA. 25/MDS/13 CO NO.29/MDS.12 9 7. TWO ASPECTS, WHICH ARE CLEAR FROM THE ABOVE IS THAT ASSESSING OFFICER HAS TO FIRST REACH A SATISFACTION THAT CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE IN RELAT ION TO THE INCOME CLAIMED AS EXEMPT, IS NOT CORRECT. SECOND IS THAT WHEN APPLYING RULE 8D FOR THE PURPOSE OF CALCULATIN G THE DISALLOWANCE UNDER RULE-8D (2) (II), AVERAGE VALUE OF INVESTMENTS WHICH COMES IN THE NUMERATOR OF THE FOR MULA ARE ONLY THOSE INVESTMENTS WHICH WILL GIVE RISE TO AN I NCOME, WHICH DOES NOT FORM A PART OF THE TOTAL INCOME. THERE IS MUCH STRENGTH IN THE ARGUMENT OF THE ASSESSEE THAT INVES TMENTS ON IMMOVABLE PROPERTY AND HOUSE PROPERTY WILL NOT FORM A PART OF INVESTMENTS MENTIONED IN RULE-8D(2). IN SO FAR AS AGRICULTURAL LAND IS CONCERNED, AS LONG AS AGRICULTURAL INCOME R ETURNED BY THE ASSESSEE IS NET OF THE AGRICULTURAL EXPENSES, T HERE IS NO QUESTION OF ANY FURTHER EXPENDITURE BEING DISALLOWE D UNDER SECTION 14A OF THE ACT. ASSESSING OFFICER HIMSELF H AD NOTED PARA-3 OF HIS ORDER THAT THE AGRICULTURAL INCOME OF ` 17,94,056/- CLAIMED BY THE ASSESSEE FROM HIS HOLD ING OF 69.83 ACRES WAS AFTER CONSIDERING AGRICULTURAL EXPE NSES OF ` 3,42,575/- . HIS ONLY QUALM WAS THAT EXPENDITUR E CLAIMED WAS IN-ADEQUATE. NEVERTHELESS FOR THIS, HE HAD MAD E AN ADDITION OF RUPEES 3 LAKHS TO THE TOTAL INCOME. TH IS BEING THE ITA. 25/MDS/13 CO NO.29/MDS.12 10 CASE THERE WAS NO ROOM FOR ANY FURTHER ALLOWANCE UN DER SECTION 14A, WITH REGARD TO THE AGRICULTURAL INCOME . 8. IT IS TRUE THAT ASSESSEE HAD IN HIS COMPUTATION STATEMENT MADE A SUO-MOTU DISALLOWANCE OF 5% OF DIVIDEND IN COME OF ` 41,779/- CLAIMED AS EXEMPT. HOWEVER, ASSESSING OF FICER HAS NOTED AT PARAGRAPH FOUR OF HIS ASSESSMENT ORDER THAT SEC.14A READ WITH RULE 8D WAS APPLICABLE, TO INTER EST EXPENSES ALSO. DISSATISFACTION OF THE ASSESSING O FFICER WITH REGARD TO THE CLAIM OF ASSESSEE IS IN OUR OPINION W RIT LARGE ON THE FACE OF THE ASSESSMENT ORDER, THOUGH NOT MENTIO NED IN SO MANY WORDS. SUO-MOTU DISALLOWANCE MADE BY THE ASS ESSEE WAS ONLY ON ESTIMATES AND NOT BASED ON THE VALUE OF INVESTMENTS IN SHARES. THEREFORE, THERE WAS EVERY REASON FOR THE ASSESSING OFFICER TO COME TO A CONCLUSION THAT THE CLAIM MADE BY THE ASSESSEE WITH REGARD TO THE EXPENDITURE AGAINST THE EXEMPT INCOME WAS NOT IN TUNE WITH THE ACCOUNTS OF THE ASSESSEE. IN OUR OPINION SUCH A SATISFACTION NEE D NOT BE STATED IN SO MANY WORDS, BUT ONCE IT IS DISCERNABLE FROM THE ASSESSMENT ORDER, IT WOULD SUFFICE FOR INVOCATION O F RULE 8D. AS FOR THE DECISION OF A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.LAKSHMI RING TRAVELLERS(SUPRA), REL IED ON BY LD. D.R, THERE THE CLAIM OF THE ASSESSEE WAS THAT N O ITA. 25/MDS/13 CO NO.29/MDS.12 11 EXPENDITURE WAS INCURRED AT ALL. ON THE OTHER HAND , HERE ADMITTEDLY ASSESSEE HAD AT LEAST MADE A SUO-MOTU DISALLOWANCE. THEREFORE, THAT DECISION MAY NOT BE APPLICABLE ON FACTS HERE. NEVERTHELESS, CONSIDERING THE ENTIRE GAMUT OF THE FACTS AND ERRONEOUS MANNER IN WHICH AVERAGE OF VALUE OF INVESTMENTS WAS WORKED OUT BY THE ASSESSING OFFICER FOR APPLICATION OF RULE 8D, WE ARE OF THE OPINION THE M ATTER REQUIRES A FRESH LOOK. WE THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REMIT THE ISSUE OF DISALLOWAN CE UNDER SECTION 14A OF THE ACT BACK TO THE FILE OF THE ASSE SSING OFFICER FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 9. IN THE RESULT, APPEAL OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES AND CROSS OBJECTION OF ASSESSEE IS DISMISS ED AS INFURCTUOUS. ORDER PRONOUNCED ON THURSDAY, THE 21 ST MARCH, 2013 AT CHENNAI SD/- SD/- (V.DURGA RAO) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED 21 ST MARCH, 2013 . K S SUNDARAM COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE ITA. 25/MDS/13 CO NO.29/MDS.12 12