The DCIT, 1(1), Indore V. Shri Arun Nahar, Indore

ITA 117/IND/2012

• Counselvise Citation: 11722714 RSA 2012
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 02-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R A VERMA
• Keywords: Rule of consistency; Earning of tax free income
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO.117/IND/2012 A.Y. 2005-06 DY. COMMISSIONER OF INCOME TAX 1(1), INDORE :: APPELLANT VS ARUN NAHAR INDORE PAN ABNRN-8096M :: RESPONDENT APPELLANT BY SHRI R.A. VERMA RESPONDENT BY SHRI TEJ SHAH DATE OF HEARING 08.08.2012 DATE OF PRONOUNCEMENT 04.09.2012 O R D E R PER JOGINDER SINGH, JUDICIAL MEMBER THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 22 ND DECEMBER, 2011 PASSED BY THE LEARNED FIRST APPELLAT E AUTHORITY, BHOPAL, ON THE GROUND THAT THE LEARNED CIT(A) WAS N OT JUSTIFIED IN DELETING THE ADDITION OF RS.44,15,229/- MADE ON ACC OUNT OF DISALLOWANCE U/S 14A OF THE INCOME TAX ACT. 2 2. DURING HEARING, WE HAVE HEARD SHRI R.A. VERMA, L EARNED SENIOR DR AND SHRI TEJ SHAH, LEARNED COUNSEL FOR TH E ASSESSEE. THE CRUX OF ARGUMENTS ON BEHALF OF THE REVENUE IS T HAT THE ASSESSEE MADE INVESTMENT IN SHARES OUT OF LOAN TAKE N FROM BANK, THEREFORE, SECTION 14A IS APPLICABLE BY FURTHER SUB MITTING THAT RES-JUDICATE IS NOT APPLICABLE TO INCOME-TAX PROCEE DINGS, THEREFORE, THE ASSESSMENT ORDER WAS STRONGLY DEFEND ED. THE LEARNED SENIOR DR PLACED ON THE DECISION ON 339 ITR 296 (KER); 339 ITR 319 (CAL) AND 302 ITR 218 (P&H). ON THE OT HER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI TEJ SHAH , STRONGLY DEFENDED THE IMPUGNED ORDER BY SUBMITTING THAT THE CASES RELIED ON BY THE REVENUE ARE ON DIFFERENT FACTS AND THE AS SESSEE HAS NOT SHOWN SUCH INCOME AS EXEMPT INCOME ESPECIALLY WHEN HUGE FUNDS WERE AVAILABLE IN THE CAPITAL ACCOUNT OF THE ASSESSEE FOR WHICH OUR ATTENTION WAS INVITED TO PAGE 5 OF THE PA PER BOOK. A PLEA WAS ALSO RAISED THAT NECESSARY EVIDENCE WAS PR ODUCED BEFORE THE ASSESSING OFFICER EVIDENCING THAT SUFFICIENT FU NDS WERE AVAILABLE WITH THE ASSESSEE FOR WHICH OUR ATTENTION WAS INVITED TO LAST PAGE OF THE ASSESSMENT ORDER. IT WAS ALSO POIN TED OUT THAT FOR THE A.Y. 2004-05 SCRUTINY ASSESSMENT WAS MADE IN WH ICH THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE AND NO DISALLOWANCE 3 WAS MADE FOR THE A.Y. 2006-07, THEREFORE, THE RULE OF CONSISTENCY APPLIES. IT WAS ALSO PLEADED THAT FOR THE A.Y. 2004 -05 THE DEPARTMENT IS NOT IN APPEAL FOR WHICH OUR ATTENTION WAS INVITED TO PAGE 4 OF THE PAPER BOOK ALONG WITH PAGE 24 OF T HE PAPER BOOK (ASSESSMENT YEAR 2004-05). OUR SPECIFIC ATTENTION W AS DRAWN TO PARA 3.2 OF THE IMPUGNED ORDER AND PLACED RELIANCE ON THE DECISION IN 313 ITR 340 (BOM). IT WAS ALSO PLEADED THAT SO FAR AS CONDUCTING THE BUSINESS IS CONCERNED, IT IS FOR THE ASSESSEE TO TAKE DECISION AND NOT THE REVENUE. RELIANCE WAS PLA CED ON 328 ITR 81 (BOM). IT WAS ALSO PLEADED THAT THE CASES C ITED BY THE REVENUE ARE NOT ON SECTION 14A OF THE ACT. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE DECLARED INCOME OF RS.1,01,61,740/- IN ITS RETURN FILED ON 1.8.2005 WHICH INCLUDES INCOME OF RS.3,41,600/- UNDER THE HEAD SALARIES, LONG TERM CAPITAL GAIN OF RS. 53,1 9,667/- ALONG WITH SHORT TERM CAPITAL GAIN OF RS.26,07,611/-. TH E REVENUE HAS CHALLENGED THE ADDITION OF RS.44,15,229/- WHICH WAS DELETED BY THE LEARNED CIT(A) ON ACCOUNT OF DISALLOWANCE MADE U/S 14A OF THE ACT. BEFORE ADVERTING FURTHER, WE ARE REPRO DUCING 4 HEREUNDER THE RELEVANT OBSERVATIONS/CONCLUSION OF T HE LEARNED CIT(A) :- 3.2 GROUND NO. (3) :- THROUGH THIS GROUND, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF INTERES T PAID TO BANK AMOUNTING TO RS.44,15,229/-. ON THIS ISSUE, IT IS POINTED OUT THAT ASSESSEE HAD EARNED INTEREST ON AM OUNT GIVEN TO THE COMPANIES AS WELL AS ON FDRS TOTALLING TO RS. 59,44,945/-. THIS FACT IS VERIFIABLE FROM THE PROF IT AND LOSS ACCOUNT. THE A.O. HAS CONSIDERED THE ENTIRE AMOUNT OF INTEREST PAID TO THE BANK FOR DISALLOWANCE U/S 14A (WITH RESPECT TO THE EXEMPT DIVIDEND AND LONG TERM CAPITA L GAIN) BUT HAD NOT TAKEN INTO ACCOUNT HIS EARNINGS BY WAY OF INTEREST WHICH IS MORE THAN WHAT HAS BEEN PAID TO T HE BANKS. IN THESE FACTS, I AM OF THE VIEW THAT DISALL OWANCE WAS NOT CALLED FOR. ACCORDINGLY, THE ADDITION BY W AY OF DISALLOWANCE OF INTEREST AMOUNTING RS. 44,15,229/- STANDS DELETED. 3.1 IF THE CONCLUSION DRAWN IN THE ASSESSMENT ORDER /IMPUGNED ORDER AND THE ASSERTION MADE BY THE LEARNED RESPECT IVE COUNSEL ARE KEPT IN JUXTAPOSITION AND ANALYSED, WE FIND THA T THERE IS CATEGORICAL FINDING IN THE IMPUGNED ORDER THAT THE ASSESSEE EARNED INTEREST ON THE AMOUNT GIVEN TO COMPANIES AS WELL AS FDRS TOTALLING RS. 59,44,945/- AND THIS FACTUM WAS VERIFIABLE FROM THE PROFIT AND LOSS ACCOUNT WHEREAS THE LEARNE D ASSESSING OFFICER CONSIDERED THE ENTIRE AMOUNT OF INTEREST PA ID TO THE BANK FOR DISALLOWANCE U/S 14A OF THE ACT WITH RESPECT TO EXEMPT DIVIDEND AND LONG TERM CAPITAL GAIN BUT COULD NOT C ONSIDER THE EARNINGS BY WAY OF INTEREST WHICH IS MORE THAN WHAT WAS PAID TO 5 THE BANKS. THIS FACTUAL MATRIX WAS NOT CONTROVERTED BY THE REVENUE AND NO POSITIVE MATERIAL WAS BROUGHT ON REC ORD. 4. DURING HEARING, THE LEARNED SENIOR DR RELIED UPO N THE DECISION IN THE CASE OF CIT VS. SMT. LEENA RAMACHAN DRAN (2011) 339 ITR 296 (KER.). WE FIND THAT IN THE CASE OF SM T. LEENA RAMCAHANDRAN (SUPRA) THE ASSESSEE RECEIVED ONLY DIV IDEND INCOME OF RS. 3 LACS AND NO OTHER BENEFIT WAS DERIV ED FROM THE COMPANY FOR THE BUSINESS CARRIED ON BY HER. APART F ROM THE INVESTMENT IN SHARES, THERE WAS NOTHING TO INDICATE THAT THE ASSESSEES BUSINESS WAS FULLY LINKED WITH THE BUSIN ESS OF THAT COMPANY. THE WHOLE TRANSACTION WAS A TOTAL FIASCO AND THE ASSESSEE RECEIVED A MAJOR DIVIDEND INCOME OF RS. 3 LACS. IN THOSE CIRCUMSTANCES, IT WAS HELD THAT THE ASSESSEE WAS NO T ENTITLED TO DEDUCTION OF ANY AMOUNT TOWARDS INTEREST. IT IS PE RTINENT TO MENTION HERE THAT THERE WAS A FINDING BY THE TRIBUN AL FOR DISALLOWANCE OF RS. 2 LACS WHICH FAIRLY APPLIED TO THE WHOLE OF THE INTEREST PAID ON BORROWED FUNDS AS THE ENTIRE FUNDS WERE UTILISED FOR ACQUISITION OF SHARES BY THE ASSESSEE WHEREAS T HERE IS A CATEGORICAL FINDING IN THE IMPUGNED ORDER THAT ASSE SSING OFFICER CONSIDERED THE ENTIRE AMOUNT PAID TO THE BANK WHILE MAKING SUCH DISALLOWANCE AND DID NOT CONSIDER THAT THE EAR NING BY WAY 6 OF INTEREST WAS MORE THAN WHAT THE ASSESSEE PAID TO THE BANKS, THEREFORE, THIS JUDICIAL PRONOUNCEMENT, IN OUR HUMB LE OPINION, MAY NOT HELP THE REVENUE. ANOTHER DECISION CITED B Y THE LEARNED SENIOR DR IS FROM HONBLE CALCUTTA HIGH COURT IN TH E CASE OF DHANUKA & SONS VS. CIT; 339 ITR 319 WHEREIN THE ASS ESSEE WAS UNABLE TO PRODUCE ANY MATERIAL BEFORE THE AUTHORITI ES SHOWING THE SOURCE ON WHICH SHARES WERE ACQUIRED. IT WAS HE LD BY THE HONBLE HIGH COURT THAT IT WAS FOR THE ASSESSEE TO BRING MATERIAL EVIDENCE TO SHOW THAT THE SHARES WERE ACQUIRED FROM THE FUNDS AVAILABLE IN ITS HANDS AT THE RELEVANT POINT OF TIM E. HOWEVER, THE SITUATION IS ALTOGETHER DIFFERENT IN THE IMPUGNED A PPEAL. ANOTHER DECISION RELIED UPON BY THE REVENUE IS HARYANA LAND RECLAMATION & DEV.CORPN. VS. CIT (302 ITR 218) (P&H ). IN THAT CASE ALSO THERE WAS NO EVIDENCE ON RECORD THAT THE PAYMENTS WERE MADE IN RESPECT OF STAFF ENGAGED IN BUSINESS O F THE ASSESSEE FOR BUSINESS OPERATION AND NOT IN RESPECT OF STAFF ENGAGED IN THE WORK AS AGRICULTURAL FARM AND IN VIEW OF THE MATTER THE HONBLE HIGH COURT REACHED TO A PARTICULAR CONCLUSION. 4.1 THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION FROM HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIA NCE UTILITIES & POWER LIMITED (2009) 313 ITR 340 (BOM), 221 CTR 4 35 (BOM). 7 IN THAT CASE, THERE WAS FINDING BY THE CIT(A) AS WE LL AS BY THE TRIBUNAL THAT THE ASSESSEE HAD INTEREST FREE FUNDS OF ITS OWN AND IN TERMS OF BALANCE SHEET, THERE WAS AVAILABILITY O F FUNDS INCLUDING FROM SHARE CAPITAL. THE QUESTION BEFORE THE HONBLE COURT WAS WHETHER IF FUNDS ARE AVAILABLE BOTH INTER EST FREE AND OVERDRAFT AND/OR LOANS TAKEN THEN A PRESUMPTION WOU LD ARISE THAT INVESTMENT WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY. IT WAS HELD IN AFFIRMA TIVE. THE RELEVANT PORTION AS CONTAINED IN PARA 10 IS REPRODU CED HEREUNDER :- 10. IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT T HE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTERES T FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME C OURT IN EAST INDIA PHARMACEUTICAL WORKS LTD.S CASE (SUP RA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CA LCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD.S CASE (SUP RA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPRE ME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUM ED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE P AID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS A ND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO C LAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSIDERING TH E FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARL IER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.S CASE (SUPRA) THE CALCUT TA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROF ITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY A ND THE 8 PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED T HAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THE REFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INT EREST FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WI TH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTIO N IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH TH E CIT(APPEALS) AND ITAT. 11. CONSIDERING THE ABOVE, IN OUR OPINION, THERE IS NO MERIT IN THIS APPEAL WHICH IS ACCORDINGLY DISMISSED . 4.2 SO FAR AS THE APPLICATION OF RULE 8D IS CONCERN ED, IT WAS NOTIFIED WITH EFFECT FROM 24.3.2008, MEANING THEREB Y, SHALL APPLY WITH EFFECT FROM A.Y. 2008-09. EVEN PRIOR TO ASSESS MENT YEAR 2008-09, WHEN 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAD TO ENFORCE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A AND FOR THAT PURPOSE, THE ASSESSING OFFICER WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAD BEEN INCURRED IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDER THE ACT BY ADOPTING A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELE VANT FACTS AND CIRCUMSTANCES. THE WORD EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES AND INTEREST, ETC. IN 9 RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR U/S 30 TO 37. FOR ATTRACTING SECTION 14A, THERE HAS TO BE AN APPROXIM ATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH TAX EXE MPT INCOME. THEREFORE, FOR MAKING DISALLOWANCE U/S 14A OF THE A CT, IT REQUIRES A FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED DISALLOWANCE U/S 14A CANNOT STAND. IN THE PRESENT APPEAL, ON THE BASIS OF RECORD, THERE IS CATEGORICAL UNCONTROV ERTED FINDING THAT THE ASSESSEE HAS EARNED INTEREST ON AMOUNTS GI VEN TO THE COMPANIES AS WELL AS ON FDRS AND THE ASSESSING OFFI CER DID NOT CONSIDER THE EARNINGS BY WAY OF INTEREST WHICH WERE MORE THAN WHAT WAS PAID TO THE BANKS, THEREFORE, NO DISALLOWA NCE WAS CALLED FOR, CONSEQUENTLY, WE FIND NO INFIRMITY IN T HE STAND OF THE LEARNED CIT(A). IT IS AFFIRMED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 4 TH SEPTEMBER, 2012. SD SD (R.C.SHARMA) (JOGINDER SINGH ) ACCOUNTANT MEMBER JUDICIAL ME MBER DATED: 4 TH SEPTEMBER, 2012 COPY TO: APPELLANT, RESPONDENT, CIT, CIT(A), DR, GU ARD FILE DN/-33