M/s. Select Holiday Resorts Pvt. Ltd, New Delhi V. ITO, New Delhi

CO 339/DEL/2009

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5283 (ITAT-DELHI)
• Duration Of Justice: 1 year(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 08-10-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 06-10-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 08-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KISHORE B
• Keywords: Earning of tax free income; Source of fund
• Section: 43B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G BEFORE HONBLE VICE PRESIDENT SHRI G.E.VEERABHADRAP PA AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO.3476/DEL/2009 ASST.YEAR: 2006-07 INCOME-TAX OFFICER, VS M/S SELECT HOLIDAY RESORTS WARD 8(1), NEW DELHI. PVT.LTD., SUITE NO.101-103 , IST FLOOR, KANCHANJANGA BLDG BARAKHAMBA ROAD, NEW DELHI. AND C.O.NO.339/DEL/09 (ITA NO.3476/DEL/09) ASSTT.YEAR: 2006-07 M/S SELECT HOLIDAY RESORTS P.LTD. VS INCOME-TAX OFF ICER, NEW DELHI. WARD 8(1), NEW DELHI. PAN; AAACS3260M. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI AJAY VOHRA, ADV. & GAURAV JAIN, C A DEPARTMENT BY: SHRI KISHORE B., DR O R D E R PER G.E.VEERABHADRAPPA, VP THE REVENUES APPEAL AND THE ASSESSEES CROSS OBJEC TION ARISE OUT OF THE ORDER DATED 12.5.2009 OF THE CIT (APPEALS)-XI, NEW DELHI FOR THE ASSESSMENT YEAR 2006-07. ITA NO.3476/DEL/2009 & CO NO.339/DEL/09 2 2. THE MAIN DISPUTE IN THE DEPARTMENTAL APPEAL AND THE ASSESSEES CROSS OBJECTION RELATES TO THE DISALLOWANCE MADE BY THE A SSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT. IT MAY BE POINTED OUT THE A. O. HAS APPLIED THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES, 1962 FOR WORKING OUT THE DISALLOWANCE U/S 14A. 3. THE FINDINGS OF THE CIT (APPEALS) ARE AS UNDER: 2.4 I HAVE CAREFULLY CONSIDERED SUBMISSIONS MADE ON BEHALF OF APPELLANT. SO FAR AS THE APPELLANT CONTENTION ABOUT APPLICATION OF SECTION 14A(2) & (3) READ WITH RULE 8D IS CONCERNED , IT MAY BE MENTIONED THAT SPECIAL BENCH, ITAT, MUMBAI IN ITS D ECISION IN THE CASE OF DAGA CAPITAL MANAGEMENT HAS HELD THAT THESE PROVISIONS WERE OF PROCEDURAL NATURE. HENCE THEY WERE APPLICAB LE TO ALL PENDING PROCEEDINGS. IN EFFECT THEY ARE TO BE RETROSPECTIVE LY APPLIED. THEREFORE, THIS CONTENTION IS NOT ACCEPTED AND IT I S ALSO THAT DISALLOWANCE OF EXPENSES RELATABLE TO EXEMPT INCOME HAS TO BE WORKED OUT AS PER RULE 8D. AS REGARDS RECORDING OF SATISFA CTION BY THE AO IT MAY BE MENTIONED THAT THE AO HAD REQUIRED THE APPEL LANT TO FURNISH THE DETAILS OF UTILIZATION OF BORROWED FUNDS VIS-- VIS VARIOUS SOURCES OF INCOME. SHOW CAUSE NOTICE FOR DISALLOWANCE U/S 14A WAS ALSO GIVEN. THE APPELLANTS EXPLANATION TO THIS QUERY WAS REJEC TED BY THE AO AND HE COMPUTED DISALLOWANCE AS PER RULE 8D IN THE ASSE SSMENT ORDER. IT MAY BE NOTED THAT THERE IS NO SPECIFIC LANGUAGE PRE SCRIBED FOR NOTING OF SATISFACTION OR NON-SATISFACTION BY THE AO. THE ACTION OF THE AO TO REJECT APPELLANTS EXPLANATION AND MAKE DISALLOWANC E ITSELF PROVES THAT HE WAS NOT SATISFIED ABOUT THE CORRECTNESS OF APPELLANTS CLAIM OF EXPENDITURE RELATABLE TO EXEMPT INCOME. THE AO HAS NOTED ON PAGE 2 OF THE ASSESSMENT ORDER THAT IN ABSENCE OF ANY SATI SFACTORY EVIDENCE & HAVING REGARD TO THE FACTS & CIRCUMSTANCES DISALLOW ANCE WAS CALLED FOR. THIS SHOWS CLEARLY THAT THE AO WAS NOT SATISFI ED ABOUT THE CORRECTNESS OF CLAIM. WITHOUT PREJUDICE TO THIS IT MAY ALSO BE MENTIONED THAT IT IS SETTLED ISSUE THAT THE POWERS OF CIT (A) ARE COTERMINOUS OF THAT AO. THEREFORE EVEN IF IT TREATE D THAT THE AO HAS NOT RECORDED SATISFACTION, THE CIT(A) CAN DO SO. I HAVE IN THE COURSE OF APPEAL PROCEEDINGS SEEN THE ACCOUNTS OF APPELLAN T, THE BIFURCATION ITA NO.3476/DEL/2009 & CO NO.339/DEL/09 3 OF VARIOUS EXPENSES TO DIFFERENT DIVISIONS THE UTIL IZATION OF BORROWED FUNDS ETC. COMMON FUNDS ARE USED MOST OF THE ACTIVI TIES. MANY EXPENSES ARE ALSO COMMON TO VARIOUS ACTIVITIES. IN FACT THE APPELLANT HAS SPECIFICALLY BORROWED SOME FUNDS IN ITS TREASUR Y DIVISION WHERE THE INVESTMENT ACTIVITY IS CARRIED ON. THEREFORE, A PPELLANTS CLAIM THAT THE EXPENSES RELATABLE TO EXEMPT INCOME DISALLOWED BY IT ON ESTIMATED/PROPORTIONATE BASIS BE ACCEPTED I NOT COR RECT. THE DISALLOWANCE HAS TO BE WORKED OUT AS PER PROCEDURE PRESCRIBED IN RULE 8D. 2.5 AS REGARDS ACTUAL COMPUTATION OF DISALLOWANCE UNDER RULE 8D, I AGREE WITH THE CONTENTION OF THE AR THAT RULE 8D SH OULD BE APPLIED ONLY TO THE TREASURY DIVISION OF THE COMPANY WHERE THE INVESTMENT ACTIVITY IS CARRIED ON. THE INTEREST DEBITED TO THE HOTEL DIVISION OF MANESAR AND GOA WAS SPECIFICALLY TO THE LOANS TAKEN FOR HOTEL BUSINESS AND NOT FOR INVESTMENT IN SHARES. HENCE TH E INTEREST PERTAINING TO THOSE DIVISIONS IS NOT TO BE CONSIDER ED FOR THE PURPOSE OF RULE 8D THE CHANGE IS REQUIRED ONLY IN CLAUSE (II). THEREFORE, INSTEAD OF THE ITEMS A, B & C AS DEFINED IN CLAUSE (II) OF RULE 8D(2) BEING COMPUTED FOR COMPANY AS A WHOLE, THEY SHOULD BE TAK EN ONLY FOR THE TREASURY DIVISION OF THE COMPANY. IT MAY BE MENTION ED THAT IN THE REVISED COMPUTATION (WITHOUT PREJUDICE) OF DISALLOW ANCE IN RULE 8D FILED BY THE APPELLANT ALSO THE TOTAL ASSETS WERE T AKEN FOR THE COMPANY AS WHOLE. HOWEVER, IF THE RULE 8D(2) IS TO BE APPLI ED ONLY TO TREASURY DIVISION, THE VALUE OF TOTAL ASSETS IS ALSO TO BE T AKEN ONLY FOR TREASURY DIVISION WHICH ARE RS 165,86,70,120 & RS 140,06,54, 755 AS ON 31.03.2006 & 1.4.05. IN VIEW OF THIS:- A= INTEREST OF TREASURY DIVISION 1,55,29,591 B= AVERAGE VALUE OF INVESTMENTS OF TREASURY DIVISIO N: 91,72,01,497 C= AVERAGE VALUE OF TOTAL ASSETS OF TREASURY DIVISI ON: 152,96,62,438 IN VIEW OF THIS THE AMOUNT TO BE DISALLOWED AS PER CLAUSE (II) OF RULE 8D(2) WORKS OUT TO RS 93,11,704 AS AGAINST RS 1,30, 09,324. THE APPELLANT THEREFORE GETS RELIEF OF RS 36,97,620 OUT OF DISALLOWANCE OF RS 1,00,94,103 MADE BY AO. 4. THE GRIEVANCE OF THE REVENUE ON THIS ORDER IS TH AT LEARNED CIT(APPEALS) ERRED, IN LAW AND ON THE FACTS AND CIR CUMSTANCES OF THE CASE, IN ITA NO.3476/DEL/2009 & CO NO.339/DEL/09 4 ALLOWING THE ASSESSEE RELIEF OF RS 36,97,620/- OUT OF THE ADDITIONS MADE BY THE AO U/S 14A OF I.T.ACT, 1961 READ WITH RULE 8D O F THE I.T.RULES, 1962. 5. THE ASSESSEE HAS FILED THE CROSS OBJECTION AND H IS GROUNDS ARE TO THE FOLLOWING EFFECT: 1. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NO T HOLDING THAT DISALLOWANCE UNDER SECTION 14A OF THE INCOME-TAX AC T, 1961 (THE ACT) COULD NOT HAVE BEEN WORKED OUT AS PER THE MET HOD PROVIDED IN RULE 8D OF THE INCOME-TAX RULES, 1962 (THE RULES) SINCE THE SAME WAS PROSPECTIVE IN OPERATION AND WERE NOT APPLICABL E TO THE YEAR UNDER CONSIDERATION. 2. WITHOUT PREJUDICE, THAT THE CIT (APPEALS) ERRED ON FACTS AND IN LAW IN ADOPTING AVERAGE VALUE OF TOTAL ASSETS OF TREASU RY DIVISION ONLY AS OPPOSED TO AVERAGE VALUE OF TOTAL ASSETS OF THE COM PANY AS A WHOLE, WHILE COMPUTING DISALLOWANCE UNDER SECTION 14A AS P ER METHOD PROVIDED IN RULE 8D OF THE RULES. 6. BOTH THE PARTIES AGREE THAT THE ISSUE IS NOW DEC IDED BY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE TIOL (2010) -564. AFTER GOING THROUGH THE RECORDS, AND IN THE LIGHT OF THE DECISI ON OF THE BOMBAY HIGH COURT, WHICH HELD THAT THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES, 1962, WHICH WERE INSERTED BY INCOME-TAX FIFTH AMEND MENT RULES, 2008 W.E.F. 24.3.2008, IS NOT RETROSPECTIVE IN NATURE AN D THEY ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE AO I S DIRECTED TO FRAME THE DISALLOWANCE, IF ANY, U/S 14A IN THE LIGHT OF THE P RINCIPLE LAID DOWN BY THE BOMBAY HIGH COURT. 7. THE NEXT GROUND RELATES TO DISALLOWANCE OF RS 4, 49,365/- MADE BY THE A.O BY APPLYING THE PROVISIONS OF SECTION 43B OF TH E INCOME-TAX ACT IN RESPECT OF UNPAID BONUS. THE A.O NOTICED THAT THERE WAS UNPAID BONUS OF RS ITA NO.3476/DEL/2009 & CO NO.339/DEL/09 5 2,56,955 AT MANESAR AND RS 1,92,410/- AT GOA AGGREG ATING TO RS 4,49,635/- WHICH REMAINED UNPAID. ON THE BASIS OF THE OBSERVAT IONS MADE IN THE TAX AUDIT REPORT, THE SUMS IN QUESTION WERE DISALLOWED. BEFORE THE A.O, A CERTIFICATE OF ANOTHER CHARTERED ACCOUNTANT WAS PLA CED ON RECORD TO SAY THAT THE SUM OF RS 2,56,955 WAS PAID ON 16.10.2006 IN RE SPECT OF MANESAR AND THE SAME CHARTERED ACCOUNTANT CERTIFIED THAT THE BO NUS TO EMPLOYEES AT GOA WAS ACTUALLY PAID ON 18.10.2006. IN OTHER WORDS THE RE WERE TWO CERTIFICATES FROM TWO CHARTERED ACCOUNTANTS. THE A.O WENT BY THE TAX AUDIT REPORTS AND MADE THE DISALLOWANCE. THE CIT (APPEALS) WENT BY TH E CERTIFICATE ISSUED BY ANOTHER CHARTERED ACCOUNTANT, AS REGARDS THE PAYMEN T AND DELETED THE SAME. 8. WE HAVE HEARD BOTH SIDES AND GONE THROUGH THE RE CORDS. THE ASSESSEE SHOULD PRODUCE THE ACTUAL PROOF OF PAYMENT BEFORE T HE A.O AS THERE ARE TWO CERTIFICATES ISSUED BY DIFFERENT CHARTERED ACCOUNTA NTS. THE A.O AFTER VERIFYING THE ACTUAL PROOF OF PAYMENT, MAY DECIDE T HE ISSUE IN ACCORDANCE WITH LAW. 9. IN THE RESULT, THE ASSESSEES CROSS OBJECTION IS ALLOWED AND THE REVENUES APPEAL IS PARTLY ALLOWED. PRONOUNCED IN OPEN COURT ON 08.10.2010. SD/- SD/- (RAJPAL YADAV) (G.E.VEERABHADRAPPA) JUDICIAL MEMBER VICE PRESIDENT DATED: OCTOBER 8 TH ,2010 DRS ITA NO.3476/DEL/2009 & CO NO.339/DEL/09 6 COPY OF ORDER FORWARDED TO: 1. ITO, WARD 8(1), NEW DELHI. 2. M/S SELECT HOLIDAY RESORTS PVT.LTD., SUITE NO. 1 01-103, IST FLOOR, KANCHANJANGA BLDG., BARAKHAMBA ROAD, NEW DELHI. 3. CIT 4. CIT(A) XI, NEW DELHI. 5. DR DY.REGISTRAR, ITAT