Mint Properties Pvt Ltd., CHENNAI V. ITO Corporate Ward 4(1), CHENNAI

ITA 1018/CHNY/2019

• Counselvise Citation: [2020] 109 COUNSELVISE.COM (IT) 9786 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 11-04-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 20

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , . , % BEFORE SHRI V.DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.1018/CHNY/2019 ( / ASSESSMENT YEAR: 2015-16) M/S. MINT PROPERTIES PVT.LTD.., 122, BROADWAY, CHENNAI -600 108. VS THE INCOME TAX OFFICER, CORPORATE WARD-4(1) CHENNAI. PAN: AAACM 5348Q ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. M.KARUNAKARAN, ADVOCATE /RESPONDENT BY : MR. G.JOHNSON, ADDL.CIT /DATE OF HEARING : 17.12.2020 /DATE OF PRONOUNCEMENT : 31.12.2020 / O R D E R PER G. MANJUNATHA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF THE LEARNED CIT(APPEALS)-8, CHENNAI DATED 06.02. 2019 AND PERTAINS TO ASSESSMENT YEAR 2015-16. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND S OF APPEAL:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.16,23,47 0/- MADE UNDER SECTION 14A OF THE ACT. 2. THE AUTHORITIES BELOW ERRED IN TAKING THE INTER EST PAID OF RS.10,76,939/- AS ATTRIBUTABLE TO INVESTMENTS IN THE FIRMS, THE SHARE INCOME FROM WHICH IS EXEMPT FROM T AX U/S 10(2A) OF THE ACT FOR DISALLOWANCE U/S 14A R/W RULE 8D(2)(II). 3 THE AUTHORITIES BELOW SHOULD HAVE SEEN THAT THE BORROWALS ON WHICH INTEREST WAS PAID WERE DIRECTLY 2 ITA NO.1018/CHNY/2019 ADVANCED TO VARIOUS PARTIES FOR INTEREST AND SUCH I NTEREST OF RS. 27,62,380/- WAS OFFERED FOR TAX AS INCOME. 4. THE APPELLANT SUBMITS THAT THERE IS A DIRECT NEX US BETWEEN THE BORROWALS AND ADVANCES/LOANS GIVEN AND THEREFORE THE INTEREST PAID HAS TO BE ADJUSTED AGAI NST THE INTEREST RECEIVED AND OFFERED FOR TAX. 5 THE APPELLANT SUBMITS THAT NO PART OF THE BORROWE D FUNDS WERE INVESTED IN THE FIRMS AND IN FACT THE AP PELLANT HAS BECOME A PARTNER IN VARIOUS FIRMS IN 2002- 2008 WHEREAS THE BORROWALS WERE MADE ONLY IN THE YEAR 20 13. 6 THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN OBSERVING THAT THE BORROWED FUNDS WERE MIX ED WITH THE COMMON FUNDS AND THEREFORE IT CANNOT BE SA ID THAT BORROWED FUNDS WERE NOT USED FOR INVESTMENT IN THE FIRMS WHEN THE BORROWED FUNDS WERE DIRECTLY GIVEN A S LOANS TO OTHERS ON INTEREST AS EVIDENCED FROM THE B ANK STATEMENTS SUBMITTED, 7. THE ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF RS. 7,66.662/- UNDER SECTION 14A R/ W RULE 8D(2)(III). 8. THE APPELLANT SUBMITS THAT NONE OF THE EXPENSES CLAIMED CAN BE ATTRIBUTABLE TO EARNING OF EXEMPTED SHARE INCOME FROM THE FIRMS AND THE APPELLANT HAD NOT INC URRED ANY EXPENDITURE FOR INVESTMENT IN THE FIRMS TO GET ANY EXEMPTED INCOME. 9. THE APPELLANT SUBMITS THAT THE PROVISIONS OF SEC TION L4A CANNOT BE APPLIED TO SHARE INCOME FROM THE FIRM S AS TAX HAS BEEN PAID BY THE FIRM AND HE OTHER INCOME RECEIVED BY THE PARTNER AS INTEREST AND REMUNERATIO N FROM THE FIRMS ARE TAXED IN THE BANDS OF THE PARTNE RS. THE SHARE IN PROFIT OF THE FIRM WHICH HAS SUFFERED TAX IN THE HANDS OF THE FIRM IS THEREFORE NOT AN INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME FOR MAKING THE DISALL OWANCE U/S 14A OF THE ACT. 10. THE APPELLANT THEREFORE PRAYS THAT THE DISALLOW ANCE OF RS,16,23,470/- MADE UNDER SECTION 14A MAY BE DELETED AND JUSTICE RENDERED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF PROPERTY FILED ITS RETURN 3 ITA NO.1018/CHNY/2019 OF INCOME FOR THE ASSESSMENT YEAR 2015-16 ON 28.10 .2015 DECLARING TOTAL INCOME OF ` 34,15,840/-.THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS EARNED EXEMPT INCOME BEING SHARE OF PROFIT FROM PARTNERSHIP FIR M, WHEREAS NOT DISALLOWED EXPENDITURE INCURRED IN RELATION TO INC OME WHICH DO NOT FORM PART OF TOTAL INCOME UNDER THE INCOME TAX ACT , 1961 (HEREINAFTER REFERRED TO AS THE ACT), THEREFORE, CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCES CONTEMP LATED UNDER SECTION 14A OF THE ACT SHALL NOT BE DISALLOWED IN ACCORDANCE WITH RULE 8D OF THE INCOME TAX RULES, 1962. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY E XPENDITURE IN RELATION TO EXEMPT INCOME AND FURTHER SHARE OF PRO FIT FROM PARTNERSHIP FIRM CANNOT BE EQUATED WITH DIVIDEND I NCOME WHICH IS EXEMPT U/S.10(34) OF THE ACT TO MAKE DISALLOWANCE O F EXPENDITURE IN RELATION TO SUCH INCOME. THE ASSESSING OFFICER WAS NOT HOWEVER, CONVINCED WITH EXPLANATION FURNISHED BY THE ASSESS EE AND ACCORDING TO HIM, AS PER SUB-SECTION (2) AND (3) OF SECTION 14A, DISALLOWANCES CONTEMPLATED UNDER SECTION 14A SHALL BE DETERMINED IN ACCORDANCE WITH PRESCRIBED FORMULA PROVIDED UNDE R RULE 8D AND ACCORDINGLY COMPUTED DISALLOWANCE UNDER RULE 8D(2) (II) TOWARDS 4 ITA NO.1018/CHNY/2019 INTEREST EXPENDITURE OF ` 8,56,808/- AND MADE FURTHER DISALLOWANCE OF ` 7,66,662/- UNDER RULE 8D(2)(III) @ 0.5% OF AVERAGE VALUE OF INVESTMENTS AND THUS, MADE TOTAL DISALLOWANCE OF ` 16,23,470/- AND ADDED BACK TO THE TOTAL INCOME. THE ASSESSING OFFIC ER HAS ALSO MADE SIMILAR ADDITIONS TO BOOK PROFIT COMPUTED U/S .115JB OF THE ACT TOWARDS DISALLOWANCE U/S.14A OF THE ACT. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT(A). BEF ORE THE LEARNED CIT(A), THE ASSESSEE HAS FILED DETAILED WRITTEN S UBMISSIONS WHICH HAS BEEN REPRODUCED AT PARA 3 ON PAGE 4 TO 6 OF TH E LEARNED CIT(A)S ORDER. THE SUM AND SUBSTANCE OF THE ARGUM ENTS OF THE ASSESSEE BEFORE THE LEARNED CIT(A) ARE THAT IT HA S NOT INCURRED ANY EXPENDITURE IN RELATION TO EXEMPT INCOME BEING SHA RE OF PROFIT FROM THE PARTNERSHIP FIRM AND HENCE, QUESTION OF DISALLO WANCE U/S.14A OF THE ACT DOES NOT ARISE. THE LEARNED CIT(A), AFTER CONSIDERING THE RELEVANT SUBMISSIONS OF THE ASSESSEE AND BY RELIED UPON CERTAIN JUDICIAL PRECEDENTS INCLUDING THE DECISION OF HONB LE SUPREME COURT IN THE CASE OF M/S. GODREJ & BOYCE MANUFACTURING C O.LTD., IN CIVIL APPEAL NO.7020/2011 UPHELD THE ADDITIONS MADE BY T HE ASSESSING OFFICER TOWARDS DISALLOWANCE OF EXPENDITURE U/S.1 4A OF THE ACT. 5 ITA NO.1018/CHNY/2019 5. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT T HE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDITIONS MAD E BY THE ASSESSING OFFICER TOWARDS DISALLOWANCE OF EXPEND ITURE INCLUDING INTEREST UNDER RULE 8D(2) (II) & (III) IGNORING THE FACT THAT ASSESSEE HAS NOT INCURRED ANY INTEREST EXPENDITURE TOWAR DS INVESTMENT IN PARTNERSHIP FIRM AND CONSEQUENTLY NO DISALLOWANCE C AN BE MADE TOWARDS INTEREST PAID ON LOANS, WHICH WAS SPECIFIC ALLY BORROWED FOR THE PURPOSE OF BUSINESS. THE LEARNED AR FURTHER S UBMITTED THAT IF AT ALL INTEREST DISALLOWANCE IS TO BE MADE, ONLY NET I NTEREST EXPENDITURE NEEDS TO BE CONSIDERED AS HELD BY THE HONBLE GU JARAT HIGH COURT IN THE CASE OF PCIT VS. NIRMA CREDIT & CAPITAL P.L TD. IN T.C.APPEAL NO.409 & 514 OF 2017 VIDE ORDER DATED 31.08.2017. F URTHER, IF NET INTEREST EXPENDITURE IS CONSIDERED, INTEREST EXPE NDITURE INCURRED BY THE ASSESSEE IS LESS THAN INTEREST INCOME EARNED FOR THE YEAR AND HENCE, THERE CANNOT BE ANY DISALLOWANCE TOWARDS INT EREST EXPENDITURE. AS REGARDS OTHER EXPENSES, THE ASSESSI NG OFFICER HAS FAILED TO MAKE OUT A CASE OF ANY SPECIFIC EXPEND ITURE WHICH IS HAVING DIRECT NEXUS TO EXEMPT INCOME AND THEREFORE, EVEN UNDER RULE 8D(2)(III), NO DISALLOWANCE CAN BE MADE. 6 ITA NO.1018/CHNY/2019 6. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING THE ORDER OF THE LEARNED CIT(A) SUBMITTED THAT FROM THE ASSESSMENT Y EAR 2008-09 ONWARDS DISALLOWANCES CONTEMPLATED U/S.14ASHALL BE COMPUTED IN ACCORDANCE WITH RULE 8D, WHERE A PROCEDURE HAS BEEN PROVIDED AND HENCE THE ASSESSING OFFICER HAS NO DISCRETIONA RY ROLE TO COMPUTE DISALLOWANCE IGNORING SPECIFIC PROVISIONS P ROVIDED UNDER THE ACT. THEREFORE, THERE IS NO MERIT THE ARGUMENTS OF THE ASSESSEE THAT NO DISALLOWANCE CAN BE MADE TOWARDS INTEREST EXPENDITURE AND OTHER EXPENSES. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS O F THE AUTHORITIES BELOW ALONG WITH THE CASE LAWS CITED BY THE LEARN ED COUNSEL FOR THE ASSESSEE . THERE IS NO DISPUTE WITH REGARD TO THE F ACT THAT ASSESSEE HAS EARNED EXEMPT INCOME BEING SHARE OF PROFIT FR OM THE PARTNERSHIP FIRM WHICH IS EXEMPT U/S.10(2A) OF THE ACT. THEREFORE, ONCE THERE IS EXEMPT INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THEN DISALLOWANCE OF EXPENDIT URE IN RESPECT OF SAID INCOME REQUIRED TO BE COMPUTED U/S.14A, READ W ITH RULE 8D OF IT RULES,1962. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO MERIT IN THE ARGUMENTS OF THE ASSESSEE THAT P ROVISIONS OF 7 ITA NO.1018/CHNY/2019 SECTION 14A HAS NO APPLICATION TO EXEMPT INCOME BE ING SHARE OF PROFIT FROM PARTNERSHIP FIRM. AS REGARDS DISALLOWA NCE OF INTEREST EXPENDITURE, ALTHOUGH THE ASSESSING OFFICER HAS AD OPTED RULE 8D(2)(II) OF IT RULES, 1962 TO DETERMINE INTEREST D ISALLOWANCE, BUT FACT REMAINS THAT FOR THE YEAR UNDER CONSIDERATION INTEREST PAID BY THE ASSESSEE IS LESS THAN INTEREST INCOME EARNED F OR THE YEAR. IT IS WELL SETTLED PRINCIPLE OF LAW THAT FOR THE PURPOS E OF APPLYING CLAUSE (II) OF RULE 8D PRIOR TO ITS AMENDMENT W.E.F 02.06. 2016, AMOUNT OF EXPENDITURE BY WAY OF INTEREST WOULD BE INTEREST P AID BY THE ASSESSEE ON BORROWINGS LESS TAXABLE INTEREST EARN ED DURING THE FINANCIAL YEAR. THIS VIEW IS FORTIFIED BY THE DECI SION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PCIT VS. NIRMA C REDIT & CAPITAL P.LTD, WHERE THE HONBLE COURT HELD THAT ONLY NET INTEREST EXPENSES IS TO BE CONSIDERED FOR THE PURPOSE OF MAKING DIS ALLOWANCE U/S.14AOF THE ACT. IN THIS CASE, INTEREST PAID IS LESS THAN INTEREST EARNED FOR THE YEAR. THEREFORE, WE DIRECT THE ASS ESSING OFFICER TO DELETE THE ADDITIONS MADE TOWARDS INTEREST EXPENSES UNDER RULE 8D(2)(II) OF IT RULES, 1962. AS REGARDS DISALLOWANC E OF OTHER EXPENSES UNDER RULE 8D(2)(III) @ 0.5% OF AVERAGE V ALUE OF INVESTMENTS, LAW IS VERY CLEAR INASMUCH AS THERE IS NO SCOPE FOR ASSESSING OFFICER TO GO FOR AD-HOC DISALLOWANCE, W HEN ASSESSEE 8 ITA NO.1018/CHNY/2019 HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR INVESTMENTS ACTIVITY AND BUSINESS. WHEN THERE IS NO SEPARATE B OOKS OF ACCOUNT FOR BOTH ACTIVITIES COMMON EXPENDITURE RELATABLE TO INVESTMENT ACTIVITY AND BUSINESS ACTIVITY HAS TO BE ALLOCATED ON A SYSTEMATIC BASIS FOR WHICH A SEPARATE METHOD IS PRESCRIBED UN DER RULE 8D OF IT RULES, 1962. IN THIS CASE, THE ASSESSING OFFICER HAS APPLIED METHOD PROVIDED UNDER RUE 8D(2) (III) @ 0.5% OF AVERAGE VALUE OF INVESTMENTS TO COMPUTE DISALLOWANCE OF OTHER EXPENS ES. WE DO NOT FIND ANY ERROR IN THE FINDINGS RECORDED BY THE AUTHORITIES BELOW, WHICH IS IN ACCORDANCE WITH LAW AND HENCE, WE ARE I NCLINED TO UPHOLD THE ORDER OF THE LEARNED CIT(A) AND REJEC T THE GROUNDS TAKEN BY THE ASSESSEE IN RESPECT OF DISALLOWANCE O F OTHER EXPENSES UNDER RULE 8D(2)(III) OF IT RULES, 1962. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2020 SD/- SD/- ( . ) ( . ) (V.DURGA RAO) (G.MANJUNATHA ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 31 ST DECEMBER, 2020 DS *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /G