ACIT, CHENNAI V. M/s. Sundaram Fastners Ltd., CHENNAI

ITA 1011/CHNY/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73743 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 19-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 06-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , !' # , $ % BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 1011/MDS/2011 ( / ASSESSMENT YEAR : 2006-07) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-VI(4), AAYAKAR BHAVAN, NEW BLOCK, 7 TH FLOOR, 121, MG ROAD, CHENNAI-600 034. VS. M/S.SUNDARAM FASTNERS & INVESTMENTS LTD., 98A, 7 TH FLOOR,AURAS CORPORATE CENTRE, DR.R.K.SALAI, MYLAPORE, CHENNAI-600 004. PAN:AAACS9063L ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. ANIRUDH RAI, CIT /RESPONDENT BY : MR. R.VIJAYARAGHAVAN, ADVOCATE / DATE OF HEARING : 19 TH FEBRUARY, 2014 ! /DATE OF PRONOUNCEMENT : 7 TH MARCH, 2014 & / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI DATED 24.03.2011 FOR THE ASSESSMENT YEAR 2006-07. THE ON LY GRIEVANCE OF THE REVENUE IS THAT COMMISSIONER OF IN COME TAX (APPEALS) ERRED IN DELETING THE DISALLOWANCE MA DE UNDER SECTION 14A OF THE ACT. ITA NO.1011/MDS/2011 2 2. THE ASSESSING OFFICER WHILE COMPLETING THE ASSES SMENT DISALLOWED ` 47,69,464/- UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES STATING THAT ASSES SEE INCURRED EXPENDITURE ATTRIBUTABLE FOR EARNING DIVID END INCOME. HOWEVER, COMMISSIONER OF INCOME TAX (APPEALS) DELET ED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER REFERRIN G TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF M/S. GODREJ & BOYCE MANUFACTURING CO.LTD., (234 CTR 1) AND THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES (323 ITR 518), AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE US. 3. DEPARTMENTAL REPRESENTATIVE SUPPORTS THE ORDER O F ASSESSING OFFICER DISALLOWING THE CLAIM BY APPLYING PROVISIONS OF SECTION 14A READ WITH RULE 8D. HE FURTHER SUBMIT S THAT EVEN PROVISIONS OF SECTION 14A READ WITH RULE 8 D A RE NOT APPLICABLE FOR THE ASSESSMENT YEAR 2006-07, STILL R EASONABLE DISALLOWANCE SHOULD BE MADE. HE RELIES ON THE DECIS ION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF M/S.SIMPSO N & CO.LTD., VS. DCIT IN TAX CASE (APPEAL) NO.2621 OF 2 006 ITA NO.1011/MDS/2011 3 DATED 15.10.2012 AND SUBMITS THAT 2% OF DIVIDEND IN COME IS REASONABLE DISALLOWANCE UNDER SECTION 14A OF THE AC T. 4. COUNSEL FOR THE ASSESSEE RELIES ON THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E DISALLOWANCE MAD BY THE ASSESSING OFFICER. 5. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND CASE LAWS RELIED ON. THE ASSESSING OFFICER APPLYING RULE 8D MADE DISALLOWANCE UNDER SECTION 14 A AT ` 47,69,464/- AS AGAINST DIVIDEND INCOME OF ` 30,88,638/- RECEIVED BY THE ASSESSEE DURING THE ASSESSMENT YEAR . THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE EN TIRE DISALLOWANCE FOLLOWING THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF M/S. GODREJ & BOYCE MANUFACTURING CO.LTD (SUPRA) AND THE DECISION OF HONBLE PUNJAB & HARYAN A HIGH COURT IN THE CASE OF HERO CYCLES (SUPRA OBSERVING A S UNDER:- 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE, TH E REASONS GIVEN BY THE ASSESSING OFFICER AND THE SUBMISSIONS OF THE AR. FROM THE RECORDS IT IS SEEN THAT AS ON 31-03- 2006, THE TOTAL SHARE CAPITAL AND RESE RVES ITA NO.1011/MDS/2011 4 AND SURPLUS AS ON 31-03-2006 WAS RS.3,87,80,41 7/- AND UNSECURED LOAN OF RS . 47,82,24,831/-. ASSESSEE COMPANY WAS HAVING INVESTMENTS IN THE FORM OF QUOTE D AND UNQUOTED EQUITY SHARES TO THE TUNE OF ` 25,99,54,080/-. ASSESSEE HAS BORROWED INTEREST BEAR ING LOAN FROM I TS HOLDING COMPANY M/S .S UNDRAM FASTENERS LTD AND LENT THE SAME AS INTEREST BEARING LOANS TO ITS SUBSIDIARIES. DETAILS OF INTEREST BEARING LOANS BOR ROWED AND LENT TO ITS SUBSIDIARIES WERE FURNISHED. ASSESS EE HAS EARNED INTEREST INCOME OF RS . 50,76,152/ - FROM ITS SUBSIDIARIES AND ON THE OTHER HAND PAID INTEREST AMOUNTING TO RS . 47,69,464/ - ON THE MONEY BORROWED FROM ITS HOLDING COMPANY. HON'BLE BOMBAY HIGH COURT IN THE CASE OF M/S.GODREJ BOYCE & MFG. CO. (234 CTR 1) HAS HELD OVER RULED THE DECISION OF THE MUMBAI SPEC IAL BENCH IN THE CASE OF CIT(VS) M/S.DAGA CAPITAL MANAGEMENT LTD TO THE EXTEN T THAT RULE 80 IS PROSPECTIVE AND CANNOT BE APPLIED FOR ASST YEARS PRIOR TO 2008- 09 . . - . - . . ... . , ... , ~ 4.4 SEC . 14A REQUIRES THE EX I STENCE OF DIRECT NEXUS BETWEEN THE INTEREST EXPENDITURE AND D IVIDEND INCOME. IN THE PRESENT CASE ASSESSEE HAS ESTABLISHED THE NE XUS BETWEEN THE I N TEREST EXPENDITURE AND INTEREST INCOME EARNED. THE INVESTMENTS FROM WHICH DIVIDEND INCOME ' EARNED WAS FOUND TO HAVE BEEN MADE IN THE EARLIER YEARS AND OUT OF ITS INTERNAL ACCRUALS. IN CIT VS. HERO CYCLES 323 ITR 518 (P&H) IT WAS HELD THAT D I SALLOWANCE U/S 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISA L LOWANCE U/S 14A COULD NOT STAND. THE HON'BLE BOMBAY HIGH COURT (SUPRA) HAS HELD THAT ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS TO IDENTIFY THE EXPENSES IN RELAT I ON TO EARNING OF EXEMPT INCOME. SINCE THE ASSESSEE HAS ESTABLISHED THE NEXUS BETWEEN THE INTERE S T EXPENDITURE AND INTEREST INCOME THE DISALLOWANCE U/S.14A IS NOT WARRANTED. ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO DELETE THE DISALLO WANCE MADE U/S. 1 4A R.W. RULE 8D. _ 6. HOWEVER, WE FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S. SIMPSON & CO. LTD., HELD THAT IN THE ABSENCE ITA NO.1011/MDS/2011 5 OF ANY MATERIALS REGARDING INCURRING OF EXPENDITURE , THE TRIBUNAL WAS JUSTIFIED IN CONFIRMING THE ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS) THAT DEDUCTION OF 2% MANAGERIA L EXPENSES HAD TO BE MADE WHILE CALCULATING THE DEDUC TION UNDER SECTION 14A OF THE ACT. FOLLOWING THE SAID DECISION , WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DEDUCTION TO 2% O F THE DIVIDEND INCOME EARNED BY THE ASSESSEE AS EXPENDITURE ATTRIB UTABLE FOR EARNING DIVIDEND INCOME. 7. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, TH E 7 TH DAY OF MARCH, 2014 AT CHENNAI. SD/- SD/- (A.MOHAN ALANKAMONY) (CHALLA NAGEN DRA PRASAD) ACCOUNTANT MEMBER JUDI CIAL MEMBER CHENNAI, DATED THE 7 TH MARCH, 2014. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R (3) CIT (6) G.F.