MAKALU TRADING CO LTD, MUMBAI V. DCIT 1(2), MUMBAI

ITA 1065/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93274 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN V P SR
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI B BENCH , , , BEFORE S/SH. JOGINDER SINGH ,JUDICIA L MEMBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO. 1065 & 1066 /MUM/201 3 , / ASSESSMENT YEAR - 200 8 - 0 9 AND 2009 - 10 M/S. MAKALU TRADING LIMITED 1 PEARL MANSION (N) 91, M. KARVE ROAD MUMBAI - 400 020. PAN: ASSESSEE ACM 9511 H VS DCIT - 1(2) ASSE SSEE YAKAR BHAVAN, MK ROAD MUMBAI - 400 020. ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY : MS. SNEHAL SHAH / REVENUE BY :SHRI ASGHAR ZAIN V.P. - SR.AR / DATE OF HEARING : 08 - 0 7 - 2015 / DATE OF PRONOUNCEMENT : 22 - 0 7 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 04.12.2012 OF THE CIT(A) - II, MUMBAI ,THE ASSESSEE HAS RAISED FOLLOWING GROUND S OF APPEAL: ITA NO.1065/MUM/2013 (08 - 09): 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS 'CIT (A)' HAS ERRED IN CONFIRMING THE ADDITION OF RS. 3,30,417/ MADE TO THE INCOME OF THE APPELLANT BY THE LEARNED DCIT 1(2), WITHOU T APPRECIATING THE FACTS OF THE CASE IN THE RIGHT PERSPECTIVE. 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ABOVE ADDITION OF RS 3,30,417/ ON ACCOUNT OF DISALLOWANCE U/S 14A READ WITH RULE 8D TREATING THE SAME AS EXPENDITURE INCURRED FOR EARNING INC OME NOT FORMING PART OF TOTAL INCOME WITHOUT APPRECIATING THE FACTS OF THE CASE IN THE RIGHT PERSPECTIVE. 3. THE APPELLANT RESERVE THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. ITA NO.106 6 /MUM/2013 1. THE LD. COMMISSIONER OF INCOME TAX (APP EALS) [HEREINAFTER REFERRED TO AS 'CIT (A)' HAS ERRED IN CONFIRMING THE ADDITION OF RS.67,271/ MADE TO THE INCOME OF THE APPELLANT BY THE LEARNED ACIT 1(2), WITHOUT APPRECIATING THE FACTS OF THE CASE IN THE RIGHT PERSPECTIVE. 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ABOVE ADDITION OF RS.67,271/ ON ACCOUNT OF DISALLOWANCE U/S 14A READ WITH RULE 8D TREATING THE SAME AS EXPENDITURE INCURRED FOR EARNING INCOME NOT FORMING PART OF TOTAL INCOME WITHOUT APPRECIATING THE FACTS OF THE CASE IN THE RIGHT PERSPECTIVE. 3. THE APPELLANT RESERVE THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. ASSESSEE - COMPANY , ENGAGED IN THE BUSINESS OF TRADING IN IRON AND STEEL, SHEET/COILS, STEEL PIPES, ETC ., FILED ITS RETURN OF INCOME 15. 0 7. 2008, DECLARING TOTAL INCOME OF RS.4.06 CR ORES. THE ASSESSING ITA/ 1065&66 /MUM/2013,AY. 08 - 9& 09 - 10 - MAKALU 2 OFFICER(AO), COMPLETED THE ASSESSMENT ON 29.12.10 U/S. 143(3) OF THE ACT DETERMINING THE INCOME OF THE ASSESSEE AT RS.4,14,32,510/ - . 2. THE EFFECTIVE G ROUND OF APPEAL IS ABOUT ADDITION OF ABOUT RS.3.30 LACS MADE U/S.14 A OF THE ACT. D URING THE ASSESSMENT PROCEEDING, THE AO FOUND THAT THE ASSESSEE HAD FOUND AN AMOUNT OF RS. 5,48,166/ - AS DIVIDEND A ND HAD CLAIMED THE SAME AS EXEMPT, THAT IT HAD ASSIGNED RS.1.35 LACS AS EXPENSES. HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY T HE EXPENSES RELATABLE TO EXEMPT INCOME SHO ULD NOT BE DISALLOWED U/S. 14A. THE ASSESSEE STATED THAT THE AMOUNT OF DEDUCTION IS INADMISSIBLE IN TERM S OF S.14A DID NOT FORM PART OF TOTAL INCOME, THAT ALL THE INTEREST DEBITED TO PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER APPEAL WAS AT TRIBUTABLE TO BUSINESS INCOME . THE AO WAS NOT SATISFIED WITH THE SUBMISSION AND ACCORDINGLY A DISALLOWANCE AMOUNTING TO RS.4.65 LACS WAS MADE U NDER RULE 8D OF THE INCOME TAX RULE 1962,(RULES) R.W.S 14A OF THE ACT .A S THE ASSESSEE ON IT S OWN HAD ALREADY MADE DISALLOWANCE OF RS. 1.35 LACS, SO HE MADE A FURTHER DISALLOWED RS.3.30 LACS . 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY( FAA ). BEFORE HIM , IT WAS ARGUED THAT THE ASSESSEE HAD RECEIVED D IVIDEND FROM SHARES OF TWO COMPANIES ONLY THAT D IVIDEND INCOME WAS EXEMPT AS PER S.10(34) OF THE ACT, THAT THE MAIN BUSINESS OF THE ASSESSEE WAS TR ADING IN IRON AND STEEL SHEETS, THAT ALL THE EXPENSES WERE INCURRED FOR THE PURPOSE OF TRADING BU SINESS ONLY, THAT THE ENTIRE INTEREST EXPENDITURE WAS FOR BUSINESS, THAT IN THE TAX AUDIT REPORT IT WAS STATED THAT NO INTEREST EXPENSE WAS INCURRED BY IT FOR PURCHASE OF SHARES, THAT NO BORROWED FUNDS WERE UTILI S ED FOR PURPOSE OF MAKING INVESTMENT IN SHAR ES, THAT ALL THE INVESTMENT IN SHARES WERE MADE IN EARLIER YEARS , THAT NO FRESH INVESTMENT WAS MADE IN SHARES, THAT THE AO HAD NOT DISCUSSED ANYTHING ABOUT HIS DISSATISFACTION REGARDING DISALLOWANCE MADE BY THE ASSESSEE .THE ASSESSEE REFERRED TO THE CASE S OF WALFORT SHARES AND STOCK BROKERS LTD. ( 326 ITR 1) AND RELIANCE UTILITIES AND P OWER LTD.(313ITR 340). AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND ASS ESSMEN T ORDER, THE FAA HELD THAT DURING THE YEAR THE ASSESSEE HAD MADE A FRESH INVESTMENT OF RS. 9 8 .00 LACS IN THE SHARES OF GRANDEUR HOTELS P. LTD. , THAT THERE WAS NO DISPUTE WITH REGARD TO DISALLOWANCE MADE U/R8D(III) OF THE RULES, THAT THE ONLY DISPUTE WAS WITH REGARD TO INTEREST EX P E NDIT U RE ATTRIBUTED TO THE E ARNING OF THE TAX FREE INCOME UNDER RUL E 8(2)(II) OF THE RULES, THAT THE CO MPANY HAD HUGE INTEREST BEARING ;LOANS AND HAD PAID INTEREST OF RS.3.94 CR., THAT IT COULD NOT PROVE THAT ONLY INTEREST FREE FUNDS WERE USED FOR MAKING TAX FREE INVESTMENT, THAT THE INTEREST BEARING FUNDS AND INTEREST FR EE FUNDS WERE MIXED UP, THAT THE AO HAD PROPERLY APPLIED RULE8D(2)(II) OF THE RULES.FINALLY, HE UPHELD THE A D DITION MADE BY THE AO. 4. BEFORE US, AUTHORIESED REPRESENTATIVE( AR ) STATED THAT SIMIL A R ISSUE HAD ARISEN IN THE CASE OF THE ASSESSEE FOR THE EARLIER Y EARS,THAT THE TRIBUNAL, VIDE ITS ORDER DATED 16.1. 2008, HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE (ITA NO.3282/MUM/2005 - AY 2001 - 02) .S HE ALSO REFERRED TO THE CHART GIVING DETAILS OF CAPITAL, RESERVE AND SURPLUSES FROM AY 2001 - 02 TO 2007 - 08. THE DEPARTME NTAL REPRESENTATIVE( DR ) SUPPORTED THE ORDER OF THE AO AND THE FAA. 5. WE HAVE PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAS FILED A CHART ABOUT CAPITAL, RESERVE & SURPLUS,INVESTMENTS,DIVIDENDS AND INTEREST EXPENSES FROM THE AY.2001 - 02 TO 2007 - 08 AND SAME READS AS UNDER: ITA/ 1065&66 /MUM/2013,AY. 08 - 9& 09 - 10 - MAKALU 3 A.Y. 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 - 08 CAPITAL 84,995,000 84,995,000 84,995,000 84,995,000 84,995,000 84,995,000 84,995,000 RESERVE & SURPLUS 22,749,000 24,660,929 30,426,955 45,181,801 56,236,742 68,594, 406 82,178,332 TOTAL 107,744,550 109,655,929 115,421,955 130,176,801 141,231,742 153,589,406 167,173,332 INVESTMENTS 6,144,975 15,109,239 16,903,366 16,903,366 20,710,599 25,535,309 22,135,291 DIVIDEND INCOME 1,668,108 364,377 1,005,842 565,078 546,416 4,200,012 2,733,362 INTEREST EXPENSES 3,502,596 4,600,837 15,270,434 12,225,658 2,283,347 20,145,721 4,941,969 AN ANALYSIS OF THE CHART PROVE S THAT INVESTMENT ARE FAR LESS THAN THE AVAILABLE TOTALS(CAPITAL, RESERVE AND SURPLUS). IN THE YEAR UNDER CONSIDER ATION TOTAL SHARE CAPITAL AND INTEREST FREE LOANS AVAILABLE TO THE ASSESSEE WERE AT RS.7.61 CRORES WHEREAS IT HAD MADE INVESTMENT IN SHARES ONLY TO THE TUNE OF RS.61.44 LACS. WE FIND THAT IN THE SIMILAR CIRCUMSTANCES THE H ONBLE B OMBAY H IGH C OURT HAD DECID ED THE ISSUE IN FAVOUR OF THE ASSESSEE IN CASE OF RELIANCE UTILITIES AND POWER LTD.(313 ITR 340).WE FURTHER F I ND THAT WHILE DECIDING THE APPEAL FOR THE AY. 2001 - 02 (SUPRA), THE TRIBUNAL HAD DE A L T THE ISSUE AS UNDER ; 2. FIRST GROUND IS AGAINST THE DELET ION OF DISALLOWANCE OF RS.75,269/ MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.16,68,108/ WHICH WAS CLAIMED AS EXEMPT. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD, DEBITED INTEREST OF RS.35,02,596/ . IT WAS FURTHER NOTED THAT THE INVESTMENTS MADE BY THE ASSESSEE AT RS.61,44,975/ INCREASED IN THIS YEAR FROM THAT OF RS.58.95 LAKHS IN THE PRECEDING YEAR. HE TOOK THE AVERAGE INVESTMENT AT RS.6 0.21 LAKHS. IT WAS OPINED, THAT THESE INVESTMENTS WERE MADE OUT OF MIXED FUNDS. BY CALCULATING THE AVERAGE RATE OF INTEREST AT 1.25%, THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.75,269/ ON THE AVERAGE INVESTMENT OF RS.60.21LAKHS; BEING THE INTEREST RE LATABLE TO EXEMPT INCOME UNDER ,SECTION 10(33) OF THE ACT. THE LEARNED CIT(A), HOWEVER, IN THE FIRST APPEAL DELETED THE DISALLOWANCE BY RELYING ON A DETAILED CHART, INCORPORATED IN THE IMPUGNED ORDER, WHICH DEPICTED THAT THE ASSESSEE HAD ITS OWN SUFF ICIENT INTEREST FREE FUNDS AVAILABLE WITH IT FOR MAKING PURCHASES OF SHARES. HE, THEREFORE, ACCEPTED THE ASSESSEE'S CLAIM. 4. WE' HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS VIVID FROM THE IMPUGN1D ORDER THAT T HE ASSESSEE HAD CLEARLY MADE THE INVESTMENT IN SHARES OUT OF INTEREST FREE FUNDS AVAILABLE AT ITS DISPOSAL. AS AGAINST THE TOTAL SHARE CAPITAL AND INTEREST FREE LOANS AT RS.7.61 CROES THE ASSESSEE HAD INVESTMENT MADE IN HSARES ONLY TO THE TUNE OF RS.61.44 LAKHS. NOT ONLY THAT, THE ASSESSEE ALSO ESTABLISHED THE NEXUS BETWEEN TRHE INTEREST FREE FUNDS AND INVESTMENT MADE IN SHARES BEFORE THE LD. COMMISSIONER OF INCOME TAX(APPEALS), WHICH COULD NOT BE CONVERTED ON BEHALF OF THE REVENUE .UNDER THESE FACTS WE AR E SATISFIED THAT THERE IS NO CASE FOR ITA/ 1065&66 /MUM/2013,AY. 08 - 9& 09 - 10 - MAKALU 4 MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE IMPUGNED ORDER ON THIS SCORE IS UPHELD. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE H ONBLE BOMBAY HIGH COURT AND THE A BOVE REFERRED TRIBUNAL DECISION, WE DECID E EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE . ITA 1066/MUM/2013 - (AY 09 - 10) THE ONLY DIFFERENCE BETWEEN THE TWO AY . S IS AMOUNT S OF DIVIDEND AND DISALLOWANCE MADE U/S.14A OF THE ACT. FO LLO WING OUR ORDER FOR THE EARLIER AY ., WE DECIDE EFFECTIVE GROU ND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL S FILED BY THE A SSESSEE, FOR BOTH THE AYS STANDS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JU LY ,2015. 22 ND , 2015 SD/ - SD/ - ( / JOGINDER SINGH ) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 22.7. 2015 . . . JV . SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.