M/s Rashi Developers, Bangalore V. ACIT, Bangalore

ITA 1380/BANG/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7031 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 30-09-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P DHIVAHAR JT
• Assessee Lawyers: V K GURUNATHAN
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.1380/BANG/2013 ASSESSMENT YEAR : 2007-08 M/S. RASHI DEVELOPERS, NO.C-205, HOUSE OF LORDS, 2 ND FLOOR, ST. MARKS ROAD, BANGALORE 560 001. PAN: AAHFR 5560M VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V.K. GURUNATHAN, ADVOCATE RESPONDENT BY : SHRI P. DHIVAHAR, JT. CIT (DR) DATE OF HEARING : 27.11.2014 DATE OF PRONOUNCEMENT : 12.12.2014 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL FILED BY THE ASSESSEE, ITS GRIEVAN CE IS THAT A DISALLOWANCE OF RS.12,88,799 MADE BY THE AO U/S. 14 A OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT] R.W. RULE 8D OF THE INCOME-TAX RULES, WAS CONFIRMED BY THE CIT(APPEALS) . ITA NO. 1380/BANG/2013 PAGE 2 OF 5 2. FACTS APROPOS ARE THAT ASSESSEE, A BUILDER, HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARING INCOME OF RS .6,73,24,920. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED THAT ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS.15,17,194 AS EXEMPT FROM TAX. AO PUT ASSESSEE ON NOTICE AS TO WHY DISALLOWANCE U/S. 14A SHOULD NOT BE MADE FOR EARNING EXEMPT DIVIDEND INCOME. IT WAS NOT FOR THCOMING FROM THE ASSESSMENT ORDER, AS TO WHETHER ASSESSEE HAD PROVID ED ANY EXPLANATION TO THE AO ON THIS ISSUE. IN ANY CASE, AO APPLIED R ULE 8D AND MADE DISALLOWANCE OF RS.13,42,626 UNDER RULE 8D(2)(II) A ND RS.3,91,292 UNDER RULE 8D(2)(III), AGGREGATING TO RS.17,33,918. 3. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE C IT(APPEALS). ARGUMENT OF ASSESSEE WAS THAT AO HAD NOT RECORDED R EASON WHY HE WAS NOT SATISFIED WITH THE CLAIM OF ASSESSEE, THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR EARNING TAX FREE INCOME. AS PER AS SESSEE, IT HAD SUFFICIENT FUNDS FOR MAKING INVESTMENTS OF RS.17 CRORES IN UNI TS OF TEMPLETON INDIA TREASURY MANAGEMENT FUND, WHICH YIELDED THE DIVIDEN D. 4. LD. CIT(APPEALS) WAS OF THE OPINION THAT IN VIEW OF DECISION IN GODREJ & BOYCE MFG. CO. LTD. V. DCIT (2010) 328 ITR 81 (BOM) AND MAXOPP INVESTMENT LTD. V. CIT (2012) 347 ITR 272 (D EL) , RULE 8D HAD ONLY PROSPECTIVE OPERATION. HOWEVER, A CCORDING TO HIM, A REASONABLE DISALLOWANCE HAD TO BE MADE FOR YEARS PR IOR TO A.Y. 2008-09 U/S. 14A OF THE ACT, THOUGH NOT UNDER RULE 8D. HE FINALLY HELD THAT ITA NO. 1380/BANG/2013 PAGE 3 OF 5 DISALLOWANCE OF EXPENDITURE HAD TO BE WORKED OUT BA SED ON THE FOLLOWING FORMULA:- EXEMPTED DIVIDEND INCOME X TOTAL EXPENDITURE TOTAL INCOME I.E. RS.15,17,194 X RS.36,44,60,147 RS.42,90,47,818 = RS.12,88,709. HE THUS DIRECTED THE AO TO RESTRICT THE DISALLOWANC E TO RS.12,88,709. 5. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE ORD ER OF CIT(APPEALS) SUBMITTED THAT ONCE HE FOUND RULE 8D TO BE PROSPECT IVE, HE SHOULD NOT HAVE APPLIED AN ARBITRARY FORMULA FOR FIXING THE DI SALLOWANCE. ACCORDING TO HIM, ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT A LL FOR EARNING EXEMPT INCOME. ASSESSEE HAD OWN FUNDS OF RS.21.21 CRORES, WHICH MORE THAN SATISFIED THE INVESTMENT OF RS.17 CRORES IN TEMPLET ON INDIA TREASURY MANAGEMENT FUND. THEREFORE, TO MAKE ANY DISALLOWA NCE FOR INTEREST WAS UNREASONABLE. FURTHER, ACCORDING TO HIM, WHOLE OF THE INVESTMENT IN TEMPLETON INDIA TREASURY MANAGEMENT FUND WAS DONE I N ONE GO AND THEREFORE NO INDIRECT EXPENDITURE WAS INCURRED FOR THIS PURPOSE. RELIANCE WAS PLACED ON THE DECISION OF DCIT V. EICHER MOTORS LTD ., ITA NO.5435/DEL/2011 DATED 21.11.2014. ACCORDING TO HIM, AT BEST, THE DISALLOWANCE THAT COULD BE SUSTAINED WAS 0.5% OF TH E AVERAGE VALUE OF INVESTMENT IN SHARES. ITA NO. 1380/BANG/2013 PAGE 4 OF 5 6. PER CONTRA, LD. DR SUPPORTED THE ORDER OF CIT(APPEALS). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL S UBMISSIONS. IN VIEW OF DECISION OF HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AND HONBLE DELHI HIGH COURT IN MAXOPP INVESTMENT LTD. (SUPRA), THERE CANNOT BE ANY DISPUTE THAT RULE 8D WILL APPLY ONLY PROSPECTIVELY FROM A.Y. 2008-09. THE IMPUGNED ASSE SSMENT YEAR BEING 2007-08, THERE IS NO QUESTION OF APPLYING RULE 8D O F THE RULES. HOWEVER, DISALLOWANCE U/S. 14A WAS NECESSARY, SINCE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.15,17,194 DURING THE RELEVANT PREVIOUS YEAR WHICH WAS CLAIMED AS EXEMPT. FIGURES APPEARING IN THE BALANC E SHEET OF ASSESSEE HAS BEEN REPRODUCED BY CIT(A) AT PARA 3.7 OF HIS OR DER. THIS, IN OUR OPINION, WOULD CLEARLY SHOW THAT ASSESSEE HAD SUFFI CIENT INFLOW OF OWN FUNDS DURING THE YEAR. THESE FIGURES ARE REPRODUCE D HEREUNDER:- LIABILITIES PARTICULARS AS ON 31/03/2006 AS ON 31/03/2007 PARTNERS CAPITAL 6,12,02,384 21,21,65,151 LOAN FROM BANK 3,99,83,083 84,88,239 VEHICLE LOAN 28,31,112 12,14,263 LOAN FROM OTHERS 4,25,73,652 1,69,58,000 ADVANCE FROM CUSTOMER 16,34,39,176 18,41,34,490 PARTNERS CAPITAL ITSELF HAD GONE UP BY MORE THAN R S.15 CRORES AND CUSTOMER ADVANCE HAD ALSO GONE UP BY ABOUT RS.2 CRO RES. NO DOUBT, LOAN AMOUNTS HAD GONE DOWN. HOWEVER, AS LONG AS ASSESSE E HAD OWN FUNDS SUFFICIENT TO COVER THE INVESTMENT MADE BY IT, THER E CAN BE NO DISALLOWANCE ITA NO. 1380/BANG/2013 PAGE 5 OF 5 OF INTEREST AT LEAST PRIOR TO A.Y. 2008-09. A ONE-T O-ONE NEXUS IS NOT REQUIRED TO BE ESTABLISHED, IF SURPLUS OWN FUNDS ARE AVAILAB LE. IN SOFARAS DISALLOWANCE FOR INDIRECT EXPENSES IS CONCERNED, WE ARE OF THE OPINION THAT 0.5% OF THE AVERAGE VALUE OF INVESTMENT SUGGESTED B Y LD. AR WILL BE APPROPRIATE, IN VIEW OF ORDER OF DELHI BENCH OF TRI BUNAL IN THE CASE OF EICHER MOTORS LTD. (SUPRA) . THEREFORE, AO IS DIRECTED TO RESTRICT DISALLOWANCE U/S. 14A TO 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. ORDERED ACCORDINGLY. 8. IN THE RESULT, APPEAL IS TREATED AS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF DECEMBER , 2014 . SD/- SD/- ( N.V. VASUDEVAN ) ( ABRAHAM P. GEOR GE ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 12 TH DECEMBER, 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.