Krishnalaxmi Multi Trade Pvt.Ltd., Ahmedabad V. The ACIT(OSD)-1, Range-4, Ahmedabad

ITA 1236/AHD/2011

• Counselvise Citation: 123620514 RSA 2011
• Duration Of Justice: 4 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-09-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 26-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DILEEP KUMAR
• Assessee Lawyers: S N DIVETIA
• Keywords: Reopening of assessment; Business income; Earning of tax free income; Proportionate interest; Reassessment proceedings
• Section: 143(3); 14A

Judgement Text

I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD C BENCH, AHMEDABAD [CORAM : PRAMOD KUMAR AM AND S S GODARA JM] I.T.A. NO. 1 236 /AHD/201 1 A SSESSMENT Y EAR : 20 0 3 - 04 KRISHN A LAXMI MULTI TRADE P. LTD. .APPELLANT PARAG BUNGLOW , NE A R MI T HAK HALI SIX RODS, ELLIS BRIDGE, AHME D ABAD. [P AN: AA ACK 6133 H ] VS. ASSTT. COMMISSIONER OF INCOME TAX (OSD) - 1 . RESPONDENT RANG - 4, AHMEDABAD. APPEARANCES BY: S.N. DIVETIA , FOR THE A PPELLANT D ILEEP KUMAR , FOR THE RESPONDENT D ATE OF CONCLUDING THE HEARING: SEPTEMBER 08 , 201 5 DATE OF PRONOUNCING THE ORDER : DECEMBER 7 TH , 2015 O R D E R PER PRAMOD KUMAR , AM : BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HAS CHALLENGED CORRECTNESS OF THE ORDER DATED 17 TH JANUARY, 2011 PASSED BY THE LEARNED CIT(A), IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 147 OF THE INCOME TAX ACT, 1961 ( THE ACT HEREINAFTER), FOR THE ASSESSMENT YEAR 2003 - 04. 2. WHILE THE ASSESSEE HAS TAKEN AS MANY AS SE V EN GROUNDS OF APPEAL, IN SU BSTANCE, GRIEVANCE OF THE ASSESSEE ARE ONLY TWO FIRST, AGAINST LEARNED CIT(A) S UPHOLDING THE I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 2 OF 6 REOPENING OF ASSESSMENT PROCEEDINGS; AND, SECOND AGAINST, LEARNED CIT(A) S UPHOLDING THE DISALLOWANCE OF RS.5,09,445/ - UNDER SECTION 14A OF THE ACT. 3. LEARN ED COUNSEL FOR THE ASSESSEE SUBMITS THAT HE DOES NOT WISH TO PURSUE THE GRIEVANCE AGAINST THE LEARNED CIT ( A ) S UPHOLDING VALIDITY OF REASSESSMENT PROCEEDINGS. THIS GRIEVANCE IS THUS DISMISSED AS NOT PRESSED. 4. COMING TO THE DISALLOWANCE UNDER SECTION 14 A OF THE ACT, CORRECTNESS OF WHICH IS THE ONLY ISSUE REQUIRED TO BE ADJUDICATED IN THIS APPEAL, RELEVANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AS ALSO IN INVESTMENTS. DURING THE COURSE OF REASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD TAKEN UNSECURED LOANS AGGREGATING TO RS.1,27,08,640/ - , AS AGAINST TOTAL FUNDS OF RS.1,91,19,044/ - AS ON 31.03.2003. I T WAS ALSO NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.15,84,354 / - IN RESPECT OF INTEREST ON THESE BORROWINGS. IT WAS ALSO NOTED THAT THE OPENING AND CLOSING AMOUNTS IN RESPECT OF INVESTMENT IN SHARES AND MUTUAL FUNDS WAS AT R S.50,74,723/ - AND RS.88,45,182/ - RESPECTIVELY. THE AVERAGE INVESTMENTS IN SHARES AND MUTUAL FUND THUS WORKED OUT TO RS.69,59,953/ - . WITH THIS ANALYSIS, THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY INTEREST ON LOANS, WHICH ARE DEPLOYED IN SOURCES LEADING TO TAX EXEMPT INCOME, NOT BE DISALLOWED UNDER SECTION 14A OF THE ACT. THE EXPLANATION OF THE ASSESSEE WAS AS FOLLOWS : - REASON FOR REOPENING OF ASSESSMENT STATED THAT THE ENTIRE INTEREST OF RS.15,84,354/ - IS DISALLOWABLE BECAUSE OF THE FUND DEPLOYED IN INVESTMENT OF RS.69,59,953/ - IS INTEREST BEARING FUND. THE FINDING O F THE LD. A.O. IS NOT CORRECT ON THE FOLLOWING GROUNDS. [A] THE LD. A.O. HA S NOT CONSIDERED THE SOURCES OF THE FUNDS A ND ITS APPLICATION. I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 3 OF 6 SOURCES: RS.IN LACS REDUCTION IN UNSECURED LOAN (129.52 127.08) 02.44 INCREASE IN CURRENT LIABILITIES ( 9.04 7.90) 01.14 REDUCTION IN SHARE INVESTMENT (112.84 71.17) 41.67 45.25 APPLICATION: INCREASE IN FIXED DEPOSITS 17.00 INCREASE IN BANK BALANCES 20.83 LOSS 07.73 45.56 ==== LOOKING TO THE ABO VE TABLE , IT IS REVEALED THAT THERE IS A REDUCTION IN UNSECURED LOAN, REDUCTION IN SHARE INVESTMENT AND INCREASE IN CURRENT LIABILITIES AND SO INFLOW OF RS.45.24 LACS IS INVESTED IN FIXED DEPOSIT AND BANK BALANCES . SO T HE FINDING OF THE LD. AO THAT THE IN VESTMENT WAS MADE IN SHARES AND MUTUAL FUNDS FROM THE INTEREST BEARING FUND IS NOT CORRECT. [B] PLEASE LOOK INTO THE INVESTMENT IN MUTUAL FUND. THE CLOSING BALANCE OF LAST YEAR I.E. ON 31.3.2002 IT WAS AMOUNTED TO RS.44.20 LACS, HOWEVER , ON THE LAST DAY OF THE PERIOD UNDER REVIEW I.E. ON 31.3.2003 IT WAS 9.54 LACS. THEREFORE, IT IS CLEAR AS GOOD AS DAY LIGHT THAT THE ASSESSEE HAS REDEEMED THE MUTUAL FUND AND THE REDEMPTION AMOUNT IS INVESTED IN FIXED DEPOSIT AND BANK BALANCES. THEREFORE , THE FINDING OF THE LD. ASSESSING OFFICER IS NOT CORRECT . [C] THE LD. AO HAS NOT CONSIDERED THE INCOME OF THE INTERE ST . PLEASE NOT THAT THE ASSESSEE HAS EARNED INTEREST INCOME OF RS.2,85,494/ - AND NO DUE WEIGHTAGE HAS BEEN GIVEN BY THE LD. AO IN PROPOSING THE DISALLOWA NCE OF INTEREST . [D] PLEASE LOOK INTO THE INTEREST EXPENDITURE . THE INTEREST EXPENDITURE IN THE EARLIER YEAR WAS RS.15,19,231/ - AND IN THIS YEAR IT WAS RS.15,84,354/ - . THE INTEREST EXPENDITURE IS SAME AS PER THE LAS T A ND THEREFORE IT IS CLEAR T HAT NO AD DITIONAL EXPENDITURE OF INTEREST IS ME DURING THE Y E AR FOR A NY INVESTMENT. [E] PLEASE LOOK INTO THE COMPUTATION OF INCOME. THE LOSS IS BEING SHOWN BECAUSE OF LE S S INCOME OF DIVIDEND. PLEASE NOT THAT IN THE A.Y. 2003 - 04, THE DIVIDEND INCOME WAS TAXABLE, T HE INCOME FROM SHORT TERM CAPITAL GAIN AS WELL A S LONG TERM CAPITAL GAIN WERE ATTRACTED APPROPRIATE R A TE OF INCOME TAX. AS NO CONCESSIONAL RATE IS APPLICABLE TO STCG AND DIVIDEND, THE ASSESSEE REQUESTS THAT THEY ARE AS GOOD AS BUSINESS INCOME AND THEREFOR E INTEREST CANNOT BE DISALLOWED. 5. THE ASSESSING OFFICER REJECTED THE ABOVE EXPLANATION ON THE GROUND THAT INVESTMENTS REDUCE THE AVAILABILITY OF LIQUID FUNDS WITH THE COMPANY WHICH MANY A TIMES I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 4 OF 6 CREATE THE NEED FOR BORROWED FUNDS AND THAT HAD CERTAIN (INTEREST FREE) FUNDS NOT BEEN DIVERTED TO SUCH INVESTMENTS, NEED FOR INTEREST BEARING FUNDS WOULD HAVE BEEN MUCH LESSER . THE ASSESSING OFFICER PROCEEDED TO DISALLOW INTEREST IN THE RATIO OF AVERAGE OF INVESTMENTS IN SHARES AND MUTUAL FUNDS TO TOTAL ASS ETS. THIS AMOUNT WORKED OUT TO RS.5,78,904/ - . AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(A) BUT WITHOUT MUCH SUCCESS. HE UPHELD THE DISALLOWANCE IN PRINCIPLE, THOUGH RESTRICTED THE SAME TO RS.5,09,445/ - . H IS REASONING WAS AS FOLLOWS : - 3.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, FINDINGS OF THE A.O. AND SUBMISSIONS OF THE APPELLANT. IT IS AN ADMITTED FACT THAT THE A VERAGE INVESTMENT IN THE SHARES AND MUTUAL FUNDS HELD AS INVESTMENTS WAS RS. 6959953/ - THROUGHOUT THE YEAR 2002 - 03. FROM THE PERUSAL OF THE ANNUAL ACCOUNTS OF THE COMPANY, IT IS OBSERVED THAT THE COMPANY HA S UNSECURED LOAN OF RS.12708640/ - A S AGAINST TOTAL FUNDS OF RS.19119044/ - AS ON 31.03.2003 . THUS, MAJOR PART OF THE AVAILABLE FUND IS INTEREST BE ARING WHICH IS ALSO ESTABLISHED FROM THE FACT THAT THE APPELLANT CLAIMED INTEREST EXPENSES OF RS.1584354/ - DURING THE RELEVANT ASSESSMENT YEAR. FROM THE FACTS, MENTIONED ABOVE, IT IS CLEAR THAT THERE IS INVOLVEMENT OF PROPORTIONATE INTEREST BEARING FUNDS IN SUCH INVESTMENTS. THE AO HAS DISALLOWED THE INTEREST EXPENDITURE OF RS.578904 CONSIDERING THE SAME AS AN EXPENDITURE ON THE INVESTMENTS FOR NON BUSINESS PURPOSES. WITHOUT PREJUDICE , TO THE FINDINGS OF THE AO, IT IS ALSO A FACT THAT INVESTMENTS IN IMPU GNED SHARES AND MUTUAL FUNDS WOULD GENERATE TAX FREE INCOME AND AS SUCH THE INTEREST A ND ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO SUCH TAX FREE INVESTMENTS SHOULD BE DISALLOWED BY INVOKING PROVISIONS U/S 14A OF THE ACT ALSO. THE FINDINGS OF THE AO ARE ALSO SUPPORTED BY SECTION 14A OF THE A CT. HOWEVER, THE APPELLANT IS ENTITLED FOR THE SET OFF OF INTEREST INCOME OF RS.285494/ - AGAINST THE INTEREST EXPENDITURE OF RS.1584354/ - , IN VIEW OF THE DECISION OF HON BLE HIGH COURT OF PUNJAB A ND HARYANA , IN THE CASE OF HERO CYCLE LIMITED REPORTED IN 323 ITR 22. A SUCH, THE NET INTEREST E XPENDITURE WOULD BE RS.1298860/ - . A S MENTIONED IN PRECEDING PARA, THE AO HAS CONSIDERED THE DISALLOWANCE OF INTEREST ONLY CONSIDERING IT AS NON BUSINESS INVESTMENT, BUT AS THE INVES TMENT IS IN TAX FREE SECURITIES, THE PROVISION OF SECTION 14A R.W. RULE 8D ARE APPLICABLE AND THEREFORE, THE DISALLOWANCE WOULD BE AS UNDER : - I. INTEREST DISALLOWANCE 12,98,860 X 69,59,953/1,90,48,118 = 4,74,645/ - . I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 5 OF 6 II. ADMINISTRATIVE EXP. @ 0.5% ON AVERAGE IN VESTMENTS OF RS.6959953/ - IS RS.34800/ - . THE TOTAL DISALLOWANCE WILL BE RS.509445/ - . AS SUCH, AN ADDITION OF RS.509445/ - IS CONFIRMED AND THE REMAINING ADDITION OF RS.69459/ - IS DELETED. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 6. THE ASSESSEE IS NO T SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF APPLICABLE LEGAL POSITION. 8. WE FIND THAT THERE IS NO DISPUTE THAT SO FAR AS TH E YEAR BEFORE US IS CONCERNED, RULE 8D WILL HAVE N O APPLICATION. TO THIS EXTENT, LEARNED CIT(A) WAS CLEARLY IN ERROR AND THE IMPUGNED ORDER CANNOT HAVE ANY JUDICIAL APPROVAL. THAT, HOWEVER, LEAVES US WITH THE QUESTION AS TO HOW MUCH OF INTEREST SHOULD BE DISALLOWED, IF AT ALL, FOR HAVING BEEN USED I N INVESTMENTS IN SHARES AND MUTUAL FUNDS. 9. W E HAVE NOTED THAT THE TOTAL INVESTMENT IN SHARES AND MUTUAL FUNDS, AS AT T HE END OF THE Y E AR, WAS ONLY RS.50,74,723/ - WHEREAS TOTAL NON INTEREST BEARING FUNDS AV AILABLE TO THE AS SESSEE (I.E. SHARE CAPITAL PLUS RESERVES OF RS.64,10,404/ - PLUS CURRENT LIABILITIES RS.9,04,176/ - ) WERE RS.73,14,580/ - . THE FIGURE OF AVERAGE INVESTMENT IN THE S E ASSETS , AS ADAPTED BY THE ASSESSING OFFICER AT RS.69,59, 953/ - , IS ALSO MUCH BELOW THIS AMOUNT OF RS.73,14,580/ - . IN THIS LIGHT, AND BEARING IN MIND THE SETTLED LEGAL POSITION PERMITTING PRESUMPTION THAT INTEREST FREE FUNDS ARE USED IN SUCH ASSES, WE ARE OF THE CONSIDERED VIEW THAT NO PART OF INTEREST PAYMENT CAN BE S A ID TO BE ATT RIBUTED TO EXPENDITURE FOR EARNING TAX I.T.A. NO. 1 236 /AHD/ 201 1 ASSESSMENT YEAR: 200 3 - 04 PAGE 6 OF 6 EXEMPT INCOME. HOWEVER, WE CONSIDER ADMINISTRATIVE EXPENSE @ 0.5% OF AVERAGE INVESTMENTS OF RS.69,59,953/ - , I.E. RS. 34,800/ - , AS REASONABLE DISALLOWANCE FOR T HIS PURPOSE. WE CONFIRM T HE SAME. 10. THE DISALLOWANCE UN DER SECTION 14A IS THUS RESTRICTED TO R.34,800/ - . THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. P RONOUNCED IN THE OPEN COURT TODAY ON 7 TH DECEMBER, 2015. SD/ - SD/ - S S GODARA PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: THE 7 TH DAY OF DECEMBER , 201 5 . PBN/ * COPIES TO : (1) THE APPE LL ANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD