ACIT, Ludhiana V. M/s Rico Auto Industries Ltd., Ludhiana

ITA 1418/CHANDI/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5480 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Earning of tax free income; Rule 8D; Set aside
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI D.K.SRIVASTAVA, ACCOUNTANT MEMBER AND MS.SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1418 /CHD/2010 (ASSESSMENT YEAR : 2006-07) THE A.C.I.T., VS. RICO AUTO INDUSTRIES LTD., CIRCLE 1, B-26, FOCAL POINT, LUDHIANA. LUDHIANA. AND C.O.NO.18/CHANDI/2011 ARISING OUT OF ITA NO.1418 /CHD/2010 (ASSESSMENT YEAR : 2006-07) RICO AUTO INDUSTRIES LTD., VS. THE A.C.I.T., B-26, FOCAL POINT, CIRCLE 1, LUDHIANA. LUDHIANA. PAN: AAACR8724R (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SUBHASH AGGARWAL DEPARTMENT BY : SHRI N.K.SAINI O R D E R PER SUSHMA CHOWLA, J.M, : THE APPEAL FILED BY THE REVENUE IS AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME-TAX (A), DATED 17.9.2010 REL ATING TO ASSESSMENT YEAR 2006-07 AGAINST THE ORDER PASSED U/S 143(3) OF THE INCOME-TAX ACT. 2. THE ASSESSEE HAS FILED CROSS OBJECTION AGAINST T HE APPEAL FILED BY THE REVENUE. BOTH THE APPEAL OF THE REVENUE AND TH E CROSS OBJECTION 2 FILED BY THE ASSESSEE WERE HEARD TOGETHER AND ARE B EING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE . 3. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS UNDER : 1. THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN RESTRICTING THE DISALLOWANCE MADE BY THE AO U/S 14A OF THE INCOME-TAX ACT, 1961 READ WITH RULE 8D(2) OF THE INCOME TAX RULES TO RS.2,00,000/- ON ESTIMATE BASIS WITHOUT ASSIGNING ANY REASON AS AGAINST THE TOTAL DISALLOWANCE OF RS.11,47,628/- MADE BY AO. 2. THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AN D THAT OF THE A.O. BE RESTORED BECAUSE THERE IS NOTHING WRONG IN REASONABLE ADDITION BY TAKING THE HELP OF A RULE (WHICH CAME LATER ON) INSTEAD OF MAKING A BLIND ESTIMATED ADDITION. 4. THE GROUND RAISED BY THE ASSESSEE IN CROSS OBJEC TION IS AS UNDER : 1. THAT THE LEARNED CIT(A)-I, LUDHIANA, HAS ERRED IN CONFIRMING AN ADDITION OF RS.2,00,000/- U/S 14A OF THE INCOME TAX ACT, 1961. 5. THE ISSUE RAISED IN THE PRESENT APPEAL IS IN CON NECTION WITH THE APPLICATION OF THE PROVISIONS OF SECTION 14A OF THE INCOME-TAX ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSEE WAS FOUND TO HAVE INVESTED A SUM OF RS.5.20 CRORES IN SECURITIES INCOME FROM WHICH WAS EXEMPT FROM TAX. THE ASSESSING OFFICER SHOW C AUSED THE ASSESSEE AS TO WHY INTEREST RELATABLE TO THE DIVIDEND INCOME BE NOT DISALLOWED UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME-T AX ACT READ WITH RULE 8D. IN REPLY, IT WAS CLAIMED BY THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED DURING THE YEAR FOR EARNING THE DIVIDE ND INCOME, AGAINST THE TOTAL INVESTMENT OF RS.4.24 CRORES, THE ASSESSE E HAD RECEIVED DIVIDEND INCOME OF RS.5.03 CRORES. THE CLAIM OF TH E ASSESSEE WAS THAT 3 NO NEW INVESTMENT WAS MADE DURING THE YEAR. THE AS SESSING OFFICER APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT D ISALLOWED RS.11,47,628/-. 6. THE CIT(A) HELD AS UNDER : 4.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE AR. THE ASSESSEE HAS INVESTED AN AMOUNT OF RS.5,20,40,861/- AS INVESTMENT IN TAX FREE INCOMES. ASSESSING OFFICER HAS DISALLOWED EXPENSES OF RS.11,47,628/- AS EXPENDITUR E INCURRED ON TAX FREE INCOMES U/S 14A OF THE ACT REA D WITH RULE 8D(2) OF INCOME TAX RULES, 1962. ASSESSEE HOW EVER, HAS CONTENDED THAT ASSESSING OFFICER WAS NOT JUSTIF IED IN DISALLOWING SAID SUM OF RS.11,47,628/- FOR THE ASSE SSMENT YEAR 2006-07 AS THE AMENDMENT U/S 14A HAS BEEN MADE W.E.F. A.Y. 2007-08. MOREOVER, THE COMPANY HAS NO T INCURRED ANY EXPENDITURE FOR THE RECEIPT OF DIVIDEN D ON THE INVESTMENT MADE DURING THE FINANCIAL YEAR 1999- 2000 OUT OF ITS OWN INTERNAL RESOURCES. THE ORIGINAL PR OVISION OF SECTION 14A DID NOT PROVIDE THE METHOD OF COMPUT ING EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME. IN VIEW OF THE ABOVE AR STATED THAT DISALLOWANCE OF RS.11,47,628/- BE DELETED. 4.3 --------------------------(NOT PRODUCED). ASSE SSEE HAS MADE HUGE INVESTMENTS FOR WHICH ASSESSEE IN MY OPIN ION REQUIRES AT LEAST BARE MINIMUM INFRASTRUCTURE IN TH E FORM OF OFFICE, FURNITURE AND CONSEQUENTIAL EXPENSES, ST AFF ETC. ETC. AN INCOME CANNOT BE EARNED IN VACUUM. NO DOU BT ASSESSEE IS HAVING ITS BUSINESS OF MANUFACTURING AN D SALE OF AUTO PARTS AND CAN CLAIM THAT EXISTING INFRASTRU CTURE AND MAN POWER WAS BEING USED TO HANDLE THE INVESTME NTS AND EARNING TAX FREE INCOME THEREFROM BUT AS ALREAD Y SAID PART OF SUCH INFRASTRUCTURE AND SERVICES OF TH E EMPLOYEES HAVE TO BE USED FOR EARNING SUCH TAX FREE INCOME. SINCE IN THE ABSENCE OF SPECIFIC DETAILS T HE EXPENDITURE TO EARN SUCH TAX FREE INCOME CANNOT BE QUANTIFIED AND RULE 8D IS APPLICABLE FROM A.Y. 2007 -08 IN 4 MY OPINION IT WOULD BE REASONABLE TO ESTIMATE EXPENDITURE OF RS.2 LACS FOR EARNING SUCH TAX FREE INCOME. ACCORDINGLY ADDITION OF RS.2 LAC IS SUSTAINED OUT O F TOTAL ADDITION OF RS.11,47,628/- AND REMAINING ADDITION O F RS.9,47,628/- IS DELETED. 7. THE ASSESSING OFFICER HAD DISALLOWED RS.11,47,62 8/-, WHICH WAS RESTRICTED TO RS.2 LACS BY THE CIT(A). THE REVENUE IS IN APPEAL AGAINST THE SAID REJECTION IN DISALLOWANCE AND THE ASSESSEE HAS FILED CROSS OBJECTION AGAINST THE DISALLOWANCE OF RS.2 LACS. 8. THE LEARNED D.R. FOR REVENUE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 9. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT TH AT THE DISALLOWANCE IS NOT JUSTIFIED AS THE ASSESSEE HAS ONLY RECEIVED ONE DIVIDEND WARRANT. FURTHER, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE CHANDIGARH BENCH OF TRIBUNAL IN DCIT VS. M/S HERO CYCLES LTD. (I.T. A.NO. 899/CHANDI/2008). 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED RECORDS. THE CONSTITUTIONAL VALIDITY OF SECTION 14A(2)&(3) OF I. T. ACT AND RULE 8D OF THE INCOME TAX RULES WAS CHALLENGED BEFORE THE HON'BLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG.CO.LTD., 234 CTR 1. THE COURT H ELD THAT THE PROVISIONS OF RULE 8D WERE NOT ULTRA VIRUS THE PROV ISIONS OF SECTION 14A AND IT WAS ALSO HELD THAT THE SAME DO NOT OFFEND AR TICLE 14 OF THE CONSTITUTION. IT WAS FURTHER HELD THAT THE PROVISI ON OF RULE 8D WAS TO BE APPLIED PROSPECTIVELY W.E.F. 01.04.2007 I.E. IN REL ATION TO ASSESSMENT YEAR 2008-09 AND SUBSEQUENT YEARS AS THE MEMORANDUM EXPL AINING THE PROVISIONS OF THE FINANCE BILL 2006 STATES THAT THIS AMENDMENT WOULD TAKE EFFECT FROM 01.04.2007. THE COURTS FURTHER HELD THAT EVEN IN T HE ABSENCE OF SUB-SECTION 5 (2) AND (3) OF SECTION 14A AND RULE 8D, THE ASSESSI NG OFFICER WAS NOT PRECLUDED FROM MAKING APPORTIONMENT ON ACCOUNT OF E XPENDITURE RELATABLE TO EARNING OF EXEMPT INCOME. 11. WE FIND NO MERIT IN THE CONTENTION OF THE ASSES SEE THAT NO EXPENDITURE IS ATTRIBUTABLE TO THE EARNING OF THE DIVIDEND INCO ME, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN GODRE J & BOYCE MFG.CO.LTD. (SUPRA). FOLLOWING THE SAME WE UPHOLD THE ORDER OF THE CIT(A) IN RESTRICTING THE DISALLOWANCE OF RS.2 LACS BEING THE EXPENDITURE ATTRIBUTABLE TO THE EARNING OF TAX FREE INCOME. TH E PROVISIONS OF RULE 8D ARE APPLICABLE W.E.F. ASSESSMENT YEAR 2008-09 AND C ONSEQUENTLY HAVE NO APPLICATION TO THE YEAR UNDER APPEAL. ACCORDINGLY, THE ESTIMATE MADE BY THE ASSESSING OFFICER BY APPLYING THE AFORESAID PROVISI ONS OF RULE 8D ARE NOT WARRANTED. UPHOLDING THE ORDER OF THE CIT(A) WE D ISMISS THE GROUNDS OF APPEAL RAISED BY REVENUE AND CROSS OBJECTION RAISED BY THE ASSESSEE.. 12. IN THE RESULT, BOTH THE APPEAL OF REVENUE AND C ROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH DAY OF APRIL, 2011. SD/- SD/- (D.K.SRIVASTAVA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 28 TH APRIL , 2011 RATI COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH