Aryan Granites adn Monuments Pvt. Ltd., CHENNAI V. JCIT (OSD), CHENNAI

ITA 14/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8042 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 04-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Keywords: Earning of tax free income; Question of law; Initiation of penalty proceedings; Rule 8D; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 14A; 143(1); 201; 143(2)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 14 /MDS/2016 / ASSESSMENT YEAR :20 09 - 1 0 M/S. ARYAN GRANITES AND MONUMENTS PVT. LTD., 24, SUBHAGRAHA, BALARAMAN STREET, ADYAR, CHENNAI 600 020. [PAN: A ADCA0862E ] VS. THE JOINT COMMISSIONER OF INCOME T AX (OSD) , COMPANY CIRCLE I (1) , CHENNAI . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI N. VIJAYAKUMAR, C.A. / RESPONDENT BY : S HRI S HIVA SRINIVAS , J CIT / DATE OF HEA RING : 1 7 . 1 1 .201 6 / DATE OF P RONOUNCEMENT : 25 . 01 .201 7 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : TH I S APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMIS SIONER OF INCOME TAX (APPEALS) 1 , C HENNAI DATED 2 3. 09 .201 5 RELEVANT TO THE ASSESSMENT YEAR 20 09 - 1 0 . THE ASSESSEE HAS RAISED MANY GROUNDS IN ITS APPEAL, BUT THE MAIN ISSUE S ARE (I) CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] AND (II) THE LD. CIT(A) HAS ERRED IN REJECTING THE SUBMISSION OF THE I.T.A. NO . 14 / M/ 1 6 2 ASSESSEE THAT THE EXPORT SHIPMENT EXPENSES OF .11,83,176/ - OU GHT NOT TO BE DEDUCTED WHILE COMPUTING THE FOB VALUE OF EXPORTS. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A MANUFACTURER AND EXPORTER OF CUT AND POLISHED GRANITE MONUMENTS FROM ITS 100% EOU REGISTERED WITH THE MADRAS EXPORT PR OCESSING ZONE, TAMIL N ADU (MEPZ) WHICH HAS BECOME SEZ FROM THE YEAR 2004. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009 - 10 ON 29.9.2009 ADMITTING A TOTAL INCOME OF .1,19,22,070 / - . THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT ON 22.2.2011. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U NDER SECTION 143(2) OF THE ACT WAS SERVED ON THE APPELLANT ON 18.8.2010. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND VERIFICATION OF RECORDS FILED BY THE ASSESSEE , THE ASSESSME NT WAS COMPLETED U NDER SECTION 143(3) OF THE ACT ON 7.12.2011 DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT .1,83,88,815 / - BY MAKING VARIOUS ADDITIONS / DISALLOWANCES . 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS AND VERIFYING THE DETAILS, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. WITH REGARD TO THE CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A R.W.S. RULE 8D, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ISSUE I.T.A. NO . 14 / M/ 1 6 3 IS SQUARELY COVERED IN FAVOUR OF TH E ASSESSEE BY THE DECISION IN THE CASE OF ACIT V. FARIDA SHOES PVT. LTD. IN ITA NO. 2102 & 2103/MDS/2015 [2016(2) TMI 376 ITAT, CHENNAI] AND PRAYED THAT THE ORDER OF THE LD. CIT(A) ON THIS ISSUE SHOULD BE REVERSED. 5. ON THE OTHER HAND, THE LD. DR SU PPORTED THE ORDERS OF AUTHORITIES BELOW. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THIS CASE, T HE ASSESSEE HAS EARNED DIVIDEND INCOME OF .7,16,794/ - AND CLAIMED EXEMPT ION UNDER SECTION 10(34) OF THE ACT . THE ASSESSING OFFICER HAS OBSERVED THAT AS PER SECTION 14A OF THE ACT , NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. BEFORE THE ASS ESSING OFFICER THE ASSESSEE HAS CONTENDED THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INCOME, BUT HE HAS NOT ACCEPTED THE SAME FOR THE FOLLOWING REASONS: (I) THE APPELLANT HAS INCURRED .96,83,119/ - UNDER THE HEAD FINANCE CHARGES DURING THE YEAR. THE APPELLANT COULD NOT CLEARLY ESTABLISH THAT BORROWED FUNDS WERE NOT UTI LIZED FOR MAKING INVESTMENTS. (II) A PORTION OF ROUTINE EXPENDITURES TO MAINTAIN ITS ESTABLISHMENT AND ADMINISTRATION CAN BE ATTRIBUTABLE TOWARDS THE ACTIVITY OF MAKING INVESTMENTS TO EARN DIVIDEND. FURTHER SINCE THE MANA G ER IAL STAFFS ARE INVOLVED IN MAKING DECISIONS ON INVESTMENTS, A PORTION OF MANAGERIAL REMUNERATION AND I.T.A. NO . 14 / M/ 1 6 4 DIRECTOR'S REMUNERATION CAN DEFINITELY BE ATTRIB UTED TOWARDS EARNING SUCH EXEMPT INCOME. BY APPLYING THE SECOND AND THIRD LIMB OF RULE 8D, THE ASSESSING OFFICER HAS ARRIVED AT A DISALLOWANCE OF .15, 8 8,293/ - . W HILE COMPUTING THE SECOND LIMB OF RULE 8D , THE ASSESSING OFFICER CONSIDERED .96,83,119/ - DEBITED BY THE ASSESSEE UNDER THE HEAD FINANCE CHARGES WHICH INCLUDES BANK CHARGES, LOAN PROCESS ING CHARGES, FORWARD CONTRACT CANCELLATION CHARGES TOT AL LING TO . 46,64,589/ - AND THE ACTUAL VALUE OF INTEREST WAS ONLY . 46,95,441/ - . THIS BEING A MISTAKE APPARENT FROM RECOR D, A PETITION UNDER SECTION 154 WAS FILED ON 23.03.2012 TO THE ASSESSING OFFICER. THE ASSESSING OFFICER VIDE ORDER UNDER SECTION 154 OF THE ACT DATED 27. 0 3.2012 ADDRESSED THE SAID MISTAKE AND RECOMPUTED THE DISALLOWANCE BY ONLY CONSIDERING THE INTEREST COST OF .46,95,441/ - AND ARRIVED AT A DISALLOWANCE OF .8,25,047/ - . CONCLUSIVELY, FOR EARNING DIVIDEND INCOME OF . 7,16,794/ - , THE ASSESS ING OFFICER MADE DISALLOWANCE OF EXPENDITURE OF .8,25,047/ - . AGAINST THE DISALLOWANCE, THE ASSESSEE HAS SPECIFICALLY CONTENDED BEFORE THE LD. CIT(A) THAT WITHOUT RECORDING SATISFACTION, THE ASSESSING OFFICER PROCEEDED TO INVOKE THE PROVISIONS OF SECTION 1 4A OF THE ACT AND MADE DISALLOWANCE. THE LD. CIT(A) HAS HELD THAT THERE IS NO MANDATE IN THE STATUTE TO RECORD SUCH SATISFACTION AND THEREFORE, THE PLEA OF THE ASSESSEE HAS NO MERIT. FIRST OF ALL, THE ASSESSEE HAS NOT DECLARED ANY EXPENDITURE HAVING BEEN I NCURRED TO EARN THE EXEMPT INCOME. HAD THE ASSESSEE DECLARES ANY EXPENDITURE TO EARN THE I.T.A. NO . 14 / M/ 1 6 5 DIVIDEND INCOME AND THE ASSESSING OFFICER HAS NOT ACCEPTED THE SAME, THEN THE ASSESSING OFFICER IS BOUND TO RECORD THE SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCO UNTS OF THE ASSESSEE. IN THE PRESENT CASE, THE ASSESSEE HAS NOT DECLARED ANY EXPENDITURE TOWARDS EARNING OF DIVIDEND INCOME AND THEREFORE, THE QUESTION OF RECORDING SATISFACTION BY THE ASSESSING OFFICER DOES NOT ARISE. 7. ADMITTEDLY, THE ASSESSEE HAS NOT FURNISHED THE EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME. BY WAY OF PAPER BOOK THE ASSESSEE HAS FILED VARIOUS DECISIONS INCLUDING GODREJ & BOYCE MFG. CO. LTD. V. DCIT & ANR. [2010] 328 ITR 81 (BOM . ), WHEREIN , THE HON BLE BOMBAY HIGH COURT HAS HELD T HAT THE ASSESSING OFFICER IS DUTY - BOUND TO COMPUTE THE EXTENT OF THE DISALLOWANCE BY THE APPLICATION OF A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES OF THE CASE . THUS, THE ASSESSING OFFICER HAS DETERMINED THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER SECTION 14A OF THE ACT R.W.S RULE 8D (I), (II) & (III) OF THE INCOME TAX RULES AND MADE THE DISALLOWANCE. THE PROVISIONS OF S EC TION 14A OF THE ACT AND SUB - SECTION (1) DECLARES THE LAW THAT THE E XPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART I.T.A. NO . 14 / M/ 1 6 6 OF THE TOTAL INCOME UNDER THE ACT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. SEC TION 14A(2) PROVIDES FOR DETERMINING THE QUANTU M OF SUCH EXPENDITURE WHICH SHALL NOT BE ALLOWED AS A DEDUCTION. THAT IS THE MACHINERY PROVISION AS FAR AS SEC TION 14A IS CONCERNED. IN THAT PROVISION, IT HAS BEEN PROVIDED THAT IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE COMPUTA TIONS MADE BY AN ASSESSEE, HE SHALL COMPUTE THE QUANTUM IN ACCORDANCE WITH THE METHOD THAT MAY BE PRESCRIBED. FOR THIS MATTER, RULE 8D HAS ALREADY BEEN PRESCRIBED. SUB - SEC.(3) FURTHER PROVIDES THAT EVEN IN A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDIT URE WAS INCURRED, THE ASSESSING AUTHORITY HAS TO PRESUME THE INCURRING OF SUCH EXPENDITURE AS PROVIDED UNDER SUB - SEC.(2) READ WITH RULE PRESCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS SO INCURRE D, THE STATUTE HAS PROVIDED FOR A PRESUMPTIVE EXPENDITURE WHICH HAS TO BE DISALLOWED BY FORCE OF THE STATUTE. IN A DISTANT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMING PROVI SION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STATUTORY PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. IT MEANS THAT EVEN IN A CASE WHERE NO EXPENDITURE IS STATED TO HAVE BEEN INCURRED, THE ASSESSING AUTHORITY HAS TO APPLY RULE 8D. IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, IT CANNOT BE SAID THAT THE PROVISIONS OF I.T.A. NO . 14 / M/ 1 6 7 SECTION 14A R.W. RULE 8D CANNOT BE INVOKED. HOWEVER, ASSESSING OFFICER HAS MADE THE DISALLOWANCE OVER AND ABOVE THE DIVIDEND INCOME EARNED BY THE ASSESSEE IS NOT ACCEPTABLE UNDER LAW. AGAINST THE DIVIDEND INCOME OF .7,16,794/ - , THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE TO THE EXTENT OF .8,25,047/ - . AS PER THE CASE LAW FILED BY TH E ASSESSEE, IN CASE OF JOINT INVESTMENTS PVT. LTD. V. CIT 372 ITR 694, THE HON BLE DELHI HIGH COURT HAS OBSERVED AND THE HEAD - NOTES ARE AS UNDER: INCOME - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - DISALLOWANCE - ASSESSEE WAS ENG AGED IN DIVERSE INVESTMENT ACTIVITIES AND IN THE COURSE OF ITS BUSINESS DERIVED INCOME FROM RENT, SALE OF INVESTMENTS, DIVIDEND AND INTEREST - FOR AY 2009 - 10, ASSESSEE HAD REPORTED A LOSS OF SPECIFIED AMOUNT - ASSESSEE DECLARED TAX EXEMPT INCOME IN THE FORM OF DIVIDEND TO THE TUNE OF RS.4 8 ,90,000 - ASSESSEE VOLUNTEERED RS.2,97,440 AS ATTRIBUTABLE U/S14A FOR THE PURPOSE OF DISALLOWANCE - AO ON THE BASIS OF HIS OWN UNDERSTANDING OF RULE 8 D OF THE INCOME TAX RULES DISALLOWED THE SUM U/S 14A READ WITH RULE 8 D - ASSESSEE CLAIMED THAT THE ENTIRE TAX EXEMPT INCOME OF RS.48,90,000 WAS LOWER THAN THE DISALLOWANCE - CIT(A) AND ITAT UPHELD AO'S ORDER - HELD, IN CASE OF CIT(A) V. TAIKISHA ENGINEERING INDIA LTD., IT WAS HELD BY PRESENT COURT THAT IN VIEW OF THE PECULIAR WORDING OF SEC TION 14A (2) THAT COMPUTATION OR DISALLOWANCE OF THE ASSESSEE, OR CLAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMINED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSESSEE'S EXPLANATION WAS UNSATISFACTORY, CAN THE AO PROCE ED FURTHER - IN THE PRESENT CASE, FIRSTLY IT WAS NOT DISCLOSED BY THE AO THAT THE APPELLANT/ASSESSEE'S CLAIM FOR ATTRIBUTING RS.2,97,440 AS A DISALLOWANCE U/S 14A HAD TO BE REJECTED - SECONDLY, THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO A N ASPECT WHICH WAS COMPLETELY UNNOTICED BY THE CIT(A) AND THE ITAT - THIRDLY, AN IMPORTANT ANOMALY WHICH INSTANT COURT CANNOT BE UNMINDFUL OF WAS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME WAS RS.48,90,000, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NE ARLY 110 PERCENT OF THAT SUM, THAT IS RS.52,56,197 - BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME WAS TO BE DISALLOWED - THE WINDOW FOR DISALLOWANCE WAS INDICATED IN SECTION 14A, AND WA S ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY I.T.A. NO . 14 / M/ 1 6 8 THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME' - THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE - ITAT AS WELL AS THE AO AND CIT(A) HAD ESCAPED THE MANDATE OF SECTION 14A(2) - IMPUGNED ORDER OF THE ITAT WAS SET ASIDE - QUESTION OF LAW WAS ANSWERED IN FAVOUR OF THE ASSESSEE - ORDER OF THE AO WAS SET ASIDE - INITIATION OF PENALTY PROCEEDINGS ALSO WAS SET ASIDE - MATTER WAS REMITTED TO THE AO FOR FRESH CONSIDERATION IN ACCORDANCE WITH THE ABOVE DIRECTIONS ASSESSEE S APPEAL ALLOWED. 8. IN THE PRESENT CASE, T HE ASSESSING OFFICER DISALLOWED THE EXPENSES TO THE TUNE OF . 8,25,047/ - , BY INVOKING SECTION 14A R.W.R. 8D OVER AND ABOVE THE E XEMPT DIVIDEND INCOME OF . 7,16,794/ - . BY TAKING INTO CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND KEEPING IN VIEW OF THE ABOVE DECISION OF THE HON BLE DELHI HIGH COURT, WE ARE OF THE OPINION THAT THE ASSESSING OFFICER IS NOT JUSTIF IED IN MAKING EXCESSIVE DISALLOWANCE. THUS, WE DIRECT THE ASSESSING OFFICER TO EXAMINE THE ACCOUNTS OF THE ASSESSEE CAREFULLY AND SEGREGATE THE INTEREST COMPONENT TO THE LOANS PAID BY THE ASSESSEE AND WORK OUT THE PROPORTIONATE ADMINISTRATIVE EXPENSES AS M AY BE ATTRIBUTABLE TO EARN THE DIVIDEND INCOME. THE ASSESSEE IS ALSO DIRECTED TO FURNISH THE ADMINISTRATIVE EXPENSES THAT MIGHT HAVE INCURRED TO EARN THE DIVIDEND INCOME AND AFTER EXAMINING THE SAME, THE ASSESSING OFFICER SHALL RECOMPUTE THE DISALLOWANCE U NDER SECTION 14A OF THE ACT AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. IF THE ASSESSEE FAILS TO FURNISH EXPENDITURE DETAILS FOR EARNING THE DIVIDEND INCOME, THE ASSESSING OFFICER IS DIRECTED TO RESTRICT THE DISALLOWANCE TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE. I.T.A. NO . 14 / M/ 1 6 9 9. THE NEXT GROUND RAISED BY THE ASSESSEE IS WITH REGARD TO DEDUCTION OF EXPORT SHIPMENT EXPENSES OF .11,83,176/ - WHILE COMPUTING THE FOB VALUE OF EXPORT S. NO DETAIL IS EMANATING FROM THE ASSESSMENT ORDER AS TO WHY THE ASSESSING OFFICER HAS DEDUCTED EXPORT SHIPMENT EXPENSES WHILE COMPUTING THE FOB VALUE OF EXPORTS OR THE LD. CIT(A) HAS NOT GIVEN ANY FIND ING FOR REJECTING THE PLEA OF THE ASSESSEE, THOUGH THE LD. CIT(A) HAS AGREED FOR THE SECOND PLEA WITH REGARD TO APPLICATION OF THE RATIO IN ITO V. SAKSOFT LTD. 121 TTJ(CHENNAI)(SB) 865 . THUS, WE DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH BY P ASSING SPEAKING ORDER AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 10 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON THE 25 TH JANUARY , 201 7 AT CHENNAI. SD/ - SD/ - (CHANDRA POOJARI) ACC OUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 25 . 0 1 .201 7 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6 . / GF.