LEE & MUIRHEAD P.LTD, MUMBAI V. DCIT RG 2(2), MUMBAI

ITA 1231/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3131 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 24-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A RAMACHANDRAN
• Keywords: Opportunity of being heard; Principle of natural justice; Earning of tax free income
• Section: 143(3); 14A; 10

Judgement Text

A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.1231 /MUM/2014 ( / ASSESSMENT YEAR : 2010-11) M/S LEE & MUIRHEAD PVT. LTD., ORICON HOUSE, 2 ND FLOOR, 12-K, DUBHASH MARG, FORT, MUMBAI 400 023. / V. DEPUTY COMMISSIONER OF INCOME TAX RANGE 2(2), ROOM NO. 548, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 400 020. ./ PAN : AAACL0918M ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY MS. AARTI VISSANJI REVENUE BY : SHRI A. RAMACHANDRAN / DATE OF HEARING : 14-6-2016 / DATE OF PRONOUNCEMENT : 08-09-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE ASSESSEE COMPANY, BEING ITA NO. 1231/MUM/2014, IS DIRECTED AGAINST THE APPELLATE OR DER DATED 27 TH DECEMBER, 2013 PASSED BY LEARNED COMMISSIONER OF IN COME TAX (APPEALS)- 5, MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE A SSESSMENT YEAR 2010-11, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 15 TH FEBRUARY, 2013 PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME TAX ACT,1961 (HEREINAFTER CALLED THE ACT). ITA 1231/MUM/2014 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE COM PANY IN THE MEMO OF APPEAL FILED WITH THE INCOME TAX APPELLATE TRIBUNAL , MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING THE DISALLOWANCE U/S.14A AMOUNTING TO RS. 9,26,019/- WORKED OUT AS PER RULE 8D. YOUR APPELLANTS SUBMIT THAT THE DISALLOWANCE IS UNWARRANTED AND THE SAME OUGHT TO BE D ELETED. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANTS SUBMIT THA T THE DISALLOWANCE IS EXCESSIVE AND OUGHT TO BE REDUCED SU BSTANTIALLY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS RECOGNIZED CUSTOME HOUSE AGENT ENGAGED IN THE BUSINESS OF RENDERING SE RVICES OF THE CLEARING AND FORWARDING BUSINESS. DURING THE YEAR UNDER CONSIDE RATION, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAS EARNED DIVIDEND INC OME OF RS. 1,50,33,481/- WHICH WAS CLAIMED AS EXEMPT U/S 10 OF THE ACT. FRO M THE P&L ACCOUNT THE A.O. OBSERVED THAT THE ASSESSEES INVESTMENT AS ON 31 ST MARCH 2010 WAS RS. 15,52,80,656/-. SINCE THE ASSESSEE HAS EARNED EXEM PT INCOME, THE A.O. APPLIED SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 AND DISALLOWED AN AMOUNT OF RS. 10,10,669/-. THE A SSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE ACT SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERING SE RVICES AS CLEARING AND FORWARDING AGENTS. THE ASSESSEE HAS MADE INVESTMEN TS IN UNITS OF LIQUID MUTUAL FUNDS. THE ASSESSEE SUBMITTED THAT THE INVE STMENT ACTIVITY WAS ONLY INCIDENTAL TO THE MAIN ACTIVITIES OF THE ASSESSEE A ND THERE WAS NO BUSINESS OF INVESTMENTS OR SHARE TRADING. THE ASSESSEE HAD MAD E INVESTMENT OUT OF ITS SURPLUS FUNDS AND THERE WERE NO BORROWINGS MADE FOR THE SAID INVESTMENTS, HENCE, INTEREST EXPENDITURE CANNOT BE ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. THE ASSESSEE SUBMITTED THAT IT HAS HUGE AM OUNT OF ACCUMULATED RESERVES AS AT 31 ST MARCH, 2010 OF RS. 61,32,10,811/- WHILE AS ON 31 ST MARCH 2009 THE ACCUMULATED RESERVES WERE AT RS. 58,49,44, 840/-. THE ASSESSEE SUBMITTED THAT INVESTMENT IN MUTUAL FUNDS IS RS 15, 31,55,660/- AS ON 31- ITA 1231/MUM/2014 3 03-2010 WHICH WAS MUCH LESS THAN ACCUMULATED RESERV ES. THE PROFIT AFTER TAX FOR THE YEAR WAS RS. 5,20,63,839/-. IT WAS SUBMITTE D THAT THE ASSESSEE HAS INVESTED ONLY THE SURPLUS FUNDS AND HAS NOT BORROWE D ANY FUNDS FOR THE PURPOSE OF INVESTMENTS WHICH IS CLEAR FROM THE ABOV E DETAILS. THE INVESTMENTS ARE MADE FROM THE SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE AND NO FINANCE COST, I.E. INTEREST EXPENSE WAS INCURRED FOR THE SA ME. IT WAS SUBMITTED THAT THE INCOME EARNED BY WAY OF DIVIDEND WAS DIRECTLY C REDITED THROUGH ECS TO THE ASSESSEE'S BANK ACCOUNT AND NO EXPENSES WERE IN CURRED FOR REALIZING THE DIVIDEND INCOME. THE ASSESSEE HAS EARNED TAX FREE D IVIDEND INCOME FROM MUTUAL FUNDS AMOUNTING TO RS. 1,50,33,481/- DURING THE YEAR. THE ASSESSEE SUBMITTED THAT THE RATIO OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD.(2010) 328 ITR 81(BOM. HC) IS NOT APPLICABLE TO THE ASSESSEE'S CASE AS THERE IS N O NEXUS BETWEEN THE INVESTMENTS MADE IN THE MUTUAL FUNDS THE INCOME FRO M WHICH IS EXEMPT AND THE EXPENDITURE INCURRED AS ALL THE INVESTMENTS WER E MADE BY THE ASSESSEE OUT OF ASSESSEES OWN FUNDS. NO INTEREST WAS PAID F OR THE PURPOSES OF EARNING EXEMPT INCOME. THE ASSESSEE SUBMITTED THAT THERE W AS REDEMPTION OF INVESTMENTS DURING THE YEAR AND THE INVESTMENTS IN MUTUAL FUNDS AS ON 31- 03-2010 WAS RS.15,31,55,660/- AS AGAINST RS.21,30,0 1,868/- AS ON 31-03- 2009. THE ASSESSEE EXPLAINED THE DETAILS OF INTERE ST PAID DURING THE YEAR WHICH IS AS UNDER:- S NO. PARTICULARS AMOUNT (RS) 1 CC A/C WITH CORPORATION BANK 4,14,218/- 2 DHL LEMUIR LOGISTICS PVT. LTD. 1,19,257 3 DELAYED PAYMENT OF SERVICE TAX 1,543/- 4 INTEREST TO OTHERS 4,351/- 5 VEHICLE LOANS 33,307/- TOTAL 5,72,676/ - HENCE, IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE AO THAT NO DISALLOWANCE CAN BE MADE U/S 14A OF THE ACT TOWARDS INTEREST EX PENSES AS INTEREST ITA 1231/MUM/2014 4 EXPENSES WERE INCURRED FOR BUSINESS PURPOSES. THE A SSESSEE SUBMITTED THAT NO ADMINISTRATIVE EXPENSES WERE INCURRED FOR THE PU RPOSE OF EARNING THE EXEMPT INCOME AS THERE WAS NO NEXUS WITH THE EARNIN G OF EXEMPT INCOME AND THE EXPENSES INCURRED. IT WAS SUBMITTED THAT THE AO IS REQUIRED TO PROVE THAT THE EXPENDITURE HAS BEEN INCURRED TOWARDS EARNING O F EXEMPT INCOME. THE ASSESSEE SUBMITTED THAT NO EXPENDITURE HAS BEEN INC URRED FOR EARNING EXEMPT INCOME. THE A.O. REJECTED THE CONTENTIONS OF THE ASSESSEE A ND HELD THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE OF RS. 5,72,676/- WHICH IS TOWARDS MIXED ACTIVITY OF BUSINESS AND TAX FREE INVESTMENT . THE AO RELIED UPON DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED IN ITA NO. 626 OF 2010 WHEREIN HON BLE BOMBAY HIGH COURT HELD THAT EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN FUNDS FOR MAKING INVESTMENTS WHICH HAD RESULTED IN EXEMPT INCOME BUT STILL THE DISALLOWANCE OF EXPENDITURE INCURRED IN THE EARNING OF EXEMPT IN COME IS TO BE MADE. THE AO ACCORDINGLY WORKED OUT THE DISALLOWANCE OF RS. 1 0,10,669/- U/S 14-A READ WITH RULES 8-D OF THE INCOME TAX RULES, 1962 V IDE ASSESSMENT ORDER DATED 15-02-2013 PASSED BY THE AO U/S 143(3) OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 15-02-20 13 PASSED BY THE AO U/S. 143(3) OF THE ACT, THE ASSESSEE FILED APPEAL W ITH THE LEARNED CIT(A) AND REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE AO. THE ADDITIONS MADE BY THE AO OF RS. 84,650/- U/S 14A OF THE ACT READ W ITH RULE 8D(2)(II) OF INCOME TAX RULES, 1962 WAS DELETED BY THE LEARNED C IT(A) ON THE GROUNDS THAT THE ASSESSEE HAS ITS OWN SURPLUS FUNDS WHICH A RE FAR IN EXCESS OF THE INVESTMENTS IN MUTUAL FUNDS MADE BY THE ASSESSEE AS SET OUT ABOVE. THE LEARNED CIT(A) SUSTAINED THE ADDITIONS MADE BY THE AO U/S 14A OF THE ACT READ WITH RULE 8D(2)(III) OF INCOME TAX RULES, 1962 OF RS.9,26,018/- ON ACCOUNT OF ADMINISTRATIVE AND OTHER INDIRECT COSTS WHICH WAS CONSIDERED BY ITA 1231/MUM/2014 5 LEARNED CIT(A) TO BE REASONABLE ADMINISTRATIVE AND OTHER INDIRECT COSTS WHICH NEEDED TO BE DISALLOWED AND ACCORDINGLY BY APPLYING RULE 8-D(2)(III) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT, 0 .5% OF THE AVERAGE INVESTMENTS FOR SUCH ADMINISTRATIVE AND OTHER INDIR ECT EXPENSES WAS WORKED OUT WHICH COMES TO RS. 9,26,018/- AND THE SAID DISA LLOWANCE WAS SUSTAINED BY THE LEARNED CIT(A) THUS, OUT OF THE TOTAL DISAL LOWANCE OF RS. 10,10,669/- , THE ADDITION TO THE EXTENT OF RS. 9,26,018/- ON ACC OUNT OF ADMINISTRATIVE AND OTHER INDIRECT EXPENSES WAS CONFIRMED BY LEARNED CI T(A) AND THE ASSESSEE GOT RELIEF OF RS. 84,650/- VIDE APPELLATE ORDER DATED 2 7.12.2013 PASSED BY LEARNED CIT(A). 5. AGGRIEVED BY THE APPELLATE ORDER DATED 27.12.201 3 PASSED BY THE LD. CIT(A), THE ASSESSEE IS IN SECOND APPEAL BEFORE TH E TRIBUNAL. 6. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OUTSET, SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSES SEES OWN CASE VIDE COMMON ORDERS DATED 15-02-2016 IN ITA NO. 7435/MUM/2011 AN D ITA NO. 7849/MUM/2011 BOTH FOR THE ASSESSMENT YEAR 2008-09 AND ITA NO. 6518/MUM/2012 FOR THE ASSESSMENT YEAR 2009-10 WHERE BY DISALLOWANCE MADE BY THE AUTHORITIES BELOW BY APPLYING RULE 8D(2 )(III) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT WAS REDUCED B Y THE TRIBUNAL FROM RS.14,61,622/- TO RS. 6,61,622/- FOR THE ASSESSMENT YEAR 2008-09.SIMILAR RELIEF WAS GRANTED BY THE TRIBUNAL FOR THE ASSESSME NT YEAR 2009-10 THE LD. COUNSEL DREW OUR ATTENTION TO THE PAPER BOOK PAGE N O. 22, 25 & 26 WHICH CONSISTS OF PART OF AUDITED FINANCIAL STATEMENT OF THE ASSESSEE WHEREBY ALL THE DETAILS OF INVESTMENTS WERE SHOWN WHICH ARE MOSTLY IN MUTUAL FUNDS TO THE TUNE OF RS. 153,155,660/- AND IN SHARES, SECURITIES AND CAPITAL GAINS BONDS TO THE TUNE OF RS. 2,124,996/-. THE LD. COUNSEL AL SO DREW OUR ATTENTION TO THE VARIOUS EXPENSES INCURRED TOWARDS PERSONAL COSTS AN D ADMINISTRATIVE EXPENSES AND CONTENDED THAT THE A.O. HAS ERRED IN M AKING THE ADDITION UNDER ITA 1231/MUM/2014 6 RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT AS NONE OF THE EXPENSES INCURRED BY THE ASSESSEE WE RE ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. 7. THE LD. D.R., ON THE OTHER HAND, RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND ALS O PERUSED THE MATERIAL PLACED ON RECORD INCLUDING THE TRIBUNAL ORDERS. WE HAVE OBSERVED THAT THE ASSESSEE HAS MADE INVESTMENT TO THE TUNE OF RS. 155 ,280,656/- AS ON 31 ST MARCH 2010 AND IN THE PRECEDING YEAR TO THE TUNE OF RS. 215,126,864/-. THE LD. COUNSEL DREW OUR ATTENTION TO THE PAPER BOOK PA GES 22, 25 AND 26 WHICH CONSISTS OF AUDITED FINANCIAL STATEMENT AND CONTEND ED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENSES TOWARDS EARNING OF EXEMPT INCOME. WE FIND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERIN G SERVICES AS CLEARING AND FORWARDING AGENTS. IN OUR CONSIDERED VIEW THE DISA LLOWANCE UNDER RULE 8D(2)(III) OF INCOME TAX RULES, 1962 READ WITH SECT ION 14A OF THE ACT CAN BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AS PER THE MANDATE OF SECTION 14A(2) OF THE ACT AND IT CANNOT BE APPLIED STRAIGHT-AWAY WITHOUT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE ASSESSEE HAS NOT SUBMITTED ANY DETAILS OF THE EXPENSES INCURRED AND CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED WHICH COULD BE ATTRIB UTABLE TO THE EARNING OF EXEMPT INCOME. THE ASSESSEE HAS INCURRED EXPENSES OF RS. 8.31 CRORES TOWARDS PERSONNEL COSTS AND RS. 10.05 CRORES TOWARD S ADMINISTRATIVE EXPENSES WHICH NEEDED TO BE SCRUTINIZED BY THE AUT HORITIES TO COMPUTE INDIRECT EXPENSES WHICH WERE INCURRED FOR EARNING T HE EXEMPT INCOME FOR WHICH ONUS IS ON THE ASSESSEE TO SUBMIT THE DETAILS BEFORE THE AUTHORITIES. IN OUR CONSIDERED VIEW, THE MATTER NEEDS TO BE SET ASI DE AND RESTORED TO THE FILE OF THE A.O. FOR DE-NOVO DETERMINATION OF THE ADMINI STRATIVE AND OTHER INDIRECT EXPENSES TO BE DISALLOWED U/S 14A OF THE ACT AND AC CORDINGLY WE SET ASIDE ITA 1231/MUM/2014 7 MATTER TO THE FILE OF THE A.O. WHO IS DIRECTED TO W ORK OUT THE REASONABLE DISALLOWANCE TOWARDS INDIRECT EXPENSES INCURRED FOR EARNING EXEMPT INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE . THE ASSESSEE IS DIRECTED TO PRODUCE BEFORE THE A.O. ALL NECESSARY AND RELEVANT DETAILS FOR COMPUTING THE DISALLOWANCE OF INDIRECT AND ADMINISTRATIVE EXPENSE S U/S. 14A OF THE ACT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND I N THE ABSENCE THEREOF , IF THE AO IS NOT SATISFIED THEN INVOCATION OF RULE 8D( 2)(III) OF INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT FOR COMPUTING DISALLOWANCE OF ADMINISTRATIVE AND OTHER INDIRECT EXPENSES U/S 14A OF THE ACT WILL BE JUSTIFIED. WHILE PASSING THE ORDER, THE A.O. SHALL CONSIDER TH E AFORESTATED TRIBUNAL ORDERS DATED 15 TH FEBRUARY, 2016 (SUPRA) AND DETERMINE THE ISSUE DE NOVO AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN AC CORDANCE WITH LAW .WE ORDER ACCORDINGLY. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN I TA NO. 1231/MUM/2014 FOR THE ASSESSMENT YEAR 2010-11 IS ALLOWED FOR STAT ISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH SEPTEMBER, 2016. # $% &' 08-09-2016 ( ) SD/- SD/- (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 08-09-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS ITA 1231/MUM/2014 8 !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI A BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI