Jitendra Babulal Lalwani, Pune V. Deputy Commissioner of Income-tax,

ITA 1214/PUN/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1501 (ITAT-PUNE)
• Duration Of Justice: 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2011-2012
• Appeal Filed On: 06-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

- IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC , PUNE PUNE BENCH SMC , PUNE , BEFORE MS. SUSHMA CHOWLA, JM . / ITA NO. 1214 /PN/201 6 / ASSESSM ENT YEAR : 20 11 - 1 2 JITENDRA BABULAL LALWANI, SR.NO.209 2, PLOT NO.1, MAHAVIR PARK SOCIETY, MAHAVIR PARK SOCIETY, VIMANNAGAR, PUNE 411014 . / APPELLANT PAN: A AFPL0832Q VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 2, PUNE . / RESPON DENT / APPELLANT BY : SHRI SUHAS P. BORA / RESPONDENT BY : SHRI HITENDRA NINAWE / DATE OF HEARING : 25 . 0 7 .201 6 / DATE OF PRONOUNCEMENT: 29 . 0 7 .201 6 / ORDER PER SU SHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) , PUNE - 5, PUNE , DATED 1 9 . 02 .20 1 6 RELATING TO ASSESSMENT YEAR 20 11 - 1 2 AGAINST ORDER PASSED UNDER SECTION 14 3(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2 . THE ASSES SEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO OF RS.1,42,974/ - U/S 14A OF THE ACT ON THE GROUND THAT INSERTION OF RULE 8D FROM THE SAID ASSESSMENT YEAR WAS A MANDATORY PROVISION WHIC H PROVIDES FROM THE SAID ASSESSMENT YEAR WAS A MANDATORY PROVISION WHIC H PROVIDES FOR METHOD OF COMPUTATION OF EXPENDITURE FOR EXEMPT INCOME, THE PROVISIONS ITA NO. 1214 /PN/20 1 6 JITENDRA BABULAL LALWANI 2 OF SECTION 14A ARE TO BE READ WITH RULE 8D AND THE AO CANNOT DEVIATE FROM THE ENACT MENT SO MADE WITHOUT APPRECIATING THE FACTS THAT THERE IS NO NEXUS BETWEEN EXPENDITURE INCURRED AND EXEMPTED INCOME EARNED BY THE ASSESSEE . 3. THE ONLY ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT AT RS. 1,42,974/ - . 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS AN INDIVIDUAL AND FOR T HE YEAR UNDER CONSIDERATION HAD FILED THE RETURN OF INCOME DECLARING TAXABLE INCOME OF RS.26,98,060/ - . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD EARNED INCOME WHICH WAS EXEMPT FROM TAX. THE ASSESSING OFFICER DIRECTED THE ASSESSEE TO CALCULATE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AND THE TOTAL DISALLOWANCE UNDER SECTION 14A OF THE ACT AS SUBMITTED BY THE ASSESSEE CAME TO RS. 1,42,974/ - , WHICH WAS VERIFIED AND ADDED BACK BY THE ASSESSING OFFICER. 5. BEFORE THE CIT(A), THE CLAIM OF THE ASSES SEE WAS THAT WORKING OF AFORESAID DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS ADMITTED LY FILED BY THE ASSESSEE ON INSISTENCE OF ASSESSING OFFICER, WHICH DOES NOT MEAN THAT THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE OR THE ASSESSEE WAS IN AGRE EMENT WITH THE SAID ADDITION AND THE SAME WAS MENTIONED IN THE SAID LETTER ITSELF. HE FURTHER POINTED OUT THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS WARRANTED IN THE CASE AS THE INVESTMENT WAS MADE OUT OF OWN FUNDS. FURTHER, HE POINTED OUT THA T NO INTEREST COST WAS DEBITED TO THE PROFIT & LOSS ACCOUNT OR INCURRED IN RESPECT OF INVESTMENTS AND HENCE, NO SUCH DISALLOWANCE WAS TO BE MADE UNDER SECTION 14A OF THE ACT. IN RESPECT OF BALANCE DISALLOWANCES, THE ASSESSEE POINTED OUT THAT NO EXPENDITUR E INCURRED BY IT WAS RELATABLE TO EARNING OF EXEMPT INCOME AND HENCE, NO DISALLOWANCE ON THAT ITA NO. 1214 /PN/20 1 6 JITENDRA BABULAL LALWANI 3 ACCOUNT WAS ALSO MERITED. THE CIT(A) NOTED THAT THE ASSESSING OFFICER HAD MADE THE DISALLOWANCE AS PER WORKING GIVEN BY THE ASSESSEE AND IN THIS CASE THUS, THERE WAS NO ISSUE OF FURTHER VERIFICATION AND THE RULE OF ESTOPPEL CAME INTO PLAY. 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE LETTER FILED BEFORE THE ASSESSING OFFICER , WHICH IS PLACED AT PAGE 7 OF THE PAPER BOOK, UNDER WHICH IT WAS CLARIFIED THAT THE EXEMPT INCOME AROSE ON ACCOUNT OF DIVIDEND INCOME, INTEREST ON PP F AND SHARE OF PROFIT FROM PARTNERSHIP FIRM AND THE SAID INVESTMENTS WERE MADE OUT OF OWN FUNDS AND WERE N OT MADE OUT OF BORROWED FUNDS. HE ALSO POINTED OUT THAT NO INTEREST COST WAS DEBITED TO PROFIT & LOSS ACCOUNT OR INCURRED IN RESPECT OF EXEMPT INCOME. IN THIS REGARD, THE CLAIM OF ASSESSEE WAS THAT THERE IS NO MERIT IN MAKING ANY DISALLOWANCE UNDER SECTI ON 14A OF THE ACT AS PROPOSED BY THE ASSESSING OFFICER. THE ASSESSEE FURTHER STATED IN THE SAID LETTER HOWEVER, WITHOUT PREJUDICE TO OUR ABOVE CONTENTION, WORKING OF DISALLOWANCE AS PER RULE 8D, AS PROPOSED BY YOUR HONOUR IS ENCLOSED. HE FURTHER REITER ATED THAT THE SUBMISSION OF THIS WORKING DOES NOT MEAN THAT THEY HAD CONSENTED FOR THE DISALLOWANCE. 8. IN THE LIGHT OF THE ABOVE DECLARATION MADE BY THE ASSESSEE BEFORE THE ASSESSING OFFICER, THERE IS NO MERIT IN THE ORDER OF CIT(A) IN HOLDING THAT THE A SSESSEE HAD CONSENTED TO THE ABOVE SAID DISALLOWANCE. IF THE WORKING HAS BEEN PLACED BEFORE THE ASSESSING OFFICER IT DOES NOT IMPLY THAT THE ASSESSEE HAD CONSE NTED TO THE DISALLOWANCE. THE FACTS OF THE CASE HAS TO BE SEEN IN THIS REGARD AND IN THE SET OF FACTS, THERE IS MERIT IN THE CLAIM OF ASSESSEE THAT HE HAD ITA NO. 1214 /PN/20 1 6 JITENDRA BABULAL LALWANI 4 NOT AGREED TO THE AFORESAID DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 (IN SHORT THE RULES). 9. NOW, COMING TO THE NEXT CONTENTION OF THE ASSESSEE I.E. ON MERITS. THE ASSESSEE IN THIS REGARD CLAIMS THAT HE HAD SUFFICIENT NON - INTEREST BEARING FUNDS BY WAY OF HIS CAPITAL IN ORDER TO INVEST IN THE PARTNERSHIP FIRM AND TO MAKE PP F INVESTMENTS AND ALSO IN THE SHARES OF INDIAN COMPANIES, INCOME FROM WHICH WAS EXEMPT FROM TAX. THE COPIES OF FINANCIAL STATEMENTS ARE PLACED AT PAGES 15 AND 16 OF THE PAPER BOOK. THE OPENING CAPITAL BALANCE OF THE ASSESSEE WAS RS.5.63 CRORES AND THE CLOSING BALANCE AS ON 31.03.2011 AFTER INCLUDING INCOME OF RS.1.09 CRORES WAS RS.6.66 CRORES. AS AGAINST THE SAME, THE ASSESSEE MADE INVESTMENT IN DIFFERENT PARTNERSHIP FIRMS TOTALING RS.2.75 CRORES, IN PPF OF RS. 7,77,222/ - AND IN SHARES OF INDIAN COMPANIES TOTALING RS. 18,15,844/ - , BANK OVERDRAFT WAS ON ACCOUNT OF CURREN T ACCOUNT AT THE END OF YEAR WAS RS. 26,51,498/ - , ON WHICH INTEREST OF RS.80,437/ - WAS PAID. THE PERUSAL OF INCOME AND EXPENDITURE ACCOUNT REFLECTS THE ASSESSEE TO HAVE EARNED INCOME OF RS.1.12 CRORES DURING THE YEAR AND THE TOTAL EXPENDITURE CLAIMED BY TH E ASSESSEE WAS RS.2,26,419/ - AND THE BALANCE SUM OF RS.1.09 CRORES WAS TRANSFERRED TO THE CAPITAL ACCOUNT. THE EXPENSES INCLUDED PROFESSIONAL FEES OF RS.7,500/ - , D.P. CHARGES OF RS.383/ - , BANK CHARGES OF RS.2,057/ - , INTEREST ON CC ACCOUNT OF RS.80,437/ - , PMC TAX OF RS. 5,762/ - , VEHICLE EXPENSES OF RS.11,935/ - AND DEPRECIATION OF RS.1,18,345/ - . THE PERUSAL OF LIST OF EXPENSES REFLECTS THAT NONE OF THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION W ERE RELATABLE TO EARNING OF EXEMPT I NCOME. IN THE ABSENCE OF SAME, THERE IS NO MERIT IN DISALLOWING EXPENDITURE UNDER 8D(III) OF THE RULES BEING EQUAL TO % OF AVERAGE INVESTMENT OF INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME. FURTHER, NO DISALLOWANCE OUT OF ITA NO. 1214 /PN/20 1 6 JITENDRA BABULAL LALWANI 5 INTEREST IS TO BE MADE IN THE GIVEN FACTS WHERE THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT. IN THIS REGARD, I FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN HDFC BANK LTD. VS. DCIT (2016) 383 ITR 529 (BOM), WHEREIN THE HONBLE HIG H COURT HELD THAT IT IS CLEAR THAT FOR TH E FIRST TIME IN THE CASE OF CIT VS. HDFC BANK LTD. (2014) 366 ITR 505 (BOM) THAT THIS COURT TOOK A VIEW THAT THE PRESUMPTION WHICH HAS BEEN LAID DOWN IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 ( BOM) WITH REGARD TO INVESTMENT IN TAX - FREE SECURITIES COMING OUT OF THE ASSESSEES OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCERNED MAY ALSO HAVE TAKEN SOME FUNDS ON IN TEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) FOR THE FIRST TIME ON JULY 23, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIES AND POWER LTD. (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY TH E REVENUE INASMUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN, VIZ., BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE OF INVOKING THE PRINCIPLES LAID DOWN IN R ELIANCE UTILITIES AND POWER LTD. (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. THE ASSESSEE HAS PLACED ON RECORD THE WORKING FILED BEFORE THE ASSESSING OFFICER, WHICH IS AVAILABLE AT PAGE 14 OF THE PAPER BOOK. THE PERUSAL OF THE SAME REFLECTS THA T THE DISALLOWANCE OF RS.1,42,974/ - RELATES TO THE DISALLOWANCE TO BE MADE UNDER RULE 8D(III) OF THE RULES. THE DISALLOWANCE ON ACCOUNT OF INTEREST UNDER RULE 8D OF THE RULES IS NIL AND ALSO UNDER SECTION ITA NO. 1214 /PN/20 1 6 JITENDRA BABULAL LALWANI 6 8D(I) OF THE RULES IS NIL. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE OF RS.1,42,974/ - IS DELETED. 1 0 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 29 TH DAY OF JU LY , 201 6 . SD/ - (SUSHMA CHOWLA) / JUDICIAL MEMBER / PUNE ; DATED : 29 TH JU LY , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPOND ENT; 3. ( ) / THE CIT(A) , PUNE - 5, PUNE ; 4. / THE PR. CIT , PUNE - 4, PUNE ; 4. / THE PR. CIT , PUNE - 4, PUNE ; 5. 6. , , , - / DR SMC , ITAT, PUNE; / GUARD FILE . / BY ORDER , / / TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE