The P.D. Sekhsaria Trading Compny Pvt. Ltd, Bathinda V. The Dy. Commissioner of Income Tax, Bathinda

ITA 145/ASR/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3258 (ITAT-AMRITSAR)
• Duration Of Justice: 3 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 20-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 27-02-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 08-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR. BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER I. T. A. NO. 145/(ASR)/2016 ASSE SSMENT YEAR: 2012-13 P. D. SEKHSARIA TRADING COMPANY PVT. LTD., GURDWARA SINGH SABHA STREET, BATHINDA [PAN: AABCP 1720E] VS. DCIT, CIRCLE-2, CR BUILDING BATHINDA (APPELLANT) (RESPONDENT) APPELLANT BY : SH. ASHWANI KALIA (A DV.) RESPONDENT BY: SH. CHARAN DASS (D.R.) DATE OF HEARING: 27.02.2019 DATE OF PRONOUNCEMENT: 18.03.2019 ORDER PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE AGITATING THE ORD ER BY THE COMMISSIONER OF INCOME TAX (APPEALS), BATHINDA (CIT(A) FOR SHO RT) DATED 07.01.2016, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, ('THE ACT' HEREINAFTER) D ATED 16.02.2015 FOR ASSESSMENT YEAR (AY) 2012-13. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E-COMPANY, IN THE BUSINESS OF COTTON TRADING AND EXPORT, WAS FOUND DURING THE ASS ESSMENT PROCEEDINGS TO HAVE EARNED DIVIDEND INCOME, CLAIMED TAX-EXEMPT U/S. 10( 38) OF THE ACT, AT RS.5.79 LACS. IN EXPLANATION DURING THE COURSE OF THE ASSES SMENT PROCEEDINGS, FOR NO DISALLOWANCE U/S. 14A HAVING BEEN EFFECTED PER ITS RETURN OF INCOME, IT CLAIMED ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 2 HAVING NOT INCURRED ANY DIRECT EXPENDITURE FOR EARNING THE SAID INCOME. THE DECISION TO INVEST WAS BASED ON THE UNDERSTANDING O F THE STOCK AND DEBT MARKETS OF THE DIRECTORS OF THE COMPANY. RATHER, THE DIVIDEND INCOME BEING SUBJECT TO DIVIDEND DISTRIBUTION TAX, THE SAID INCOME COULD NO T BE REGARDED AS HAVING NOT SUFFERED TAX AND, ACCORDINGLY, WOULD NOT ATTRACT DI SALLOWANCE U/S. 14A. THIS DID NOT FIND FAVOUR WITH THE ASSESSING OFFICER (AO), WHO CO MPUTED THE DISALLOWANCE U/S. 14A AS PER RULE 8D, AT RS.5,77,090, INCLUDING RS.66 ,644 QUA INDIRECT ADMINISTRATIVE EXPENDITURE (AT THE RATE OF 0.5% OF THE AVERAGE VALUE OF THE INVESTMENTS HELD DURING THE RELEVANT YEAR). THE SAM E STOOD CONFIRMED IN FIRST APPEAL, I.E., IN PRINCIPLE, EVEN AS THE LD. CIT(A) DIRECTED EXCLUSION OF THE INVESTMENT IN GOLD AND SILVER, WHICH HAD BEEN INCLU DED BY THE AO IN THE AVERAGE VALUE OF THE INVESTMENT HELD, REVISING THE DISALLOW ANCE TO RS.3,80,234, I.E., AT RS.3,36,324 AND RS.43,910 UNDER RULE 8D(2)(II) AND R. 8D(2)(III) RESPECTIVELY. THE ASSESSEES PLEA OF HAVING SUFFICIENT INTEREST-FREE FUNDS, MADE BEFORE HIM, WAS NOT ACCEPTED AS THE ASSESSEE HAD NOT REBUTTED THE STATU TORY PRESUMPTION, IN THE ABSENCE OF SEPARATE ACCOUNTS, OF A PRO-RATA APPLICATION OF ALL FUNDS BORROWED OR OTHERWISE, TOWARD ALL ASSETS, INCLUDING TAX-EXEMPT INVESTMENTS . THE FACT THAT THERE WAS A DEBIT (POSITIVE) BALANCE IN THE BANK CASH CREDIT (CC) ACC OUNT ON THE DATE/S THE INVESTMENT/S WAS MADE, AS CONTENDED, WAS OF LITTLE CONSEQUENCE. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 OUR FIRST OBSERVATION IN THE MATTER IS THAT THE ASSESSEE HAS, AT NO STAGE, RAISED ANY PLEA IN RESPECT OF DISALLOWANCE OF INDIRECT ADM INISTRATIVE EXPENDITURE, RESTRICTED BY THE LD. CIT(A) TO RS.43,910, I.E., UP ON EXCLUDING THE VALUE OF GOLD AND SILVER INCLUDED IN THE INVESTMENT AS AT THE BEGINNI NG (AT RS.10.82 LACS) AND CLOSE (AT RS.80.11 LACS) OF THE YEAR. DISALLOWANCE U/S. 14A R /W R. 8D(2)(III) IS IN RESPECT OF ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 3 INDIRECT ADMINISTRATIVE EXPENDITURE, I.E., IS NOT QUA DIRECT EXPENDITURE, SO THAT THE ASSESSEE STATING THAT IT HAS NOT INCURRED ANY DIREC T ADMINISTRATIVE EXPENDITURE IS OF NO MOMENT. RATHER, IT ITSELF CLAIMS THE DIRECTORS ( OF THE COMPANY) TO BE INVOLVED IN THE EXERCISE. INVESTMENT PORTFOLIOS, OR THE DECISIO NS GOVERNING THE SAME, I.E., HOW MUCH, WHEN, AND WHICH INVESTMENT TO BE MADE, IS NOR MALLY A TOP MANAGEMENT FUNCTION, ASSISTED BY FUND MANAGERS AND, PERHAPS, A N IN-HOUSE CELL. THE INVESTMENT IN THE PRESENT CASE IS, IN FACT, IN BOTH CURRENT A ND NON-CURRENT AVENUES, SO THAT INVESTMENTS ARE MADE WITH BOTH LONG-TERM AS WELL AS SHORT-TERM TIME PERSPECTIVE AND, THEREFORE, AS IT APPEARS, FOR STRATEGIC AS WEL L AS TACTICAL REASONS. IN FACT, ACTIVE ASSISTANCE FROM THE FINANCE AND ACCOUNTS DEPARTMENT S IS ALSO REQUIRED IN-AS-MUCH AS THEY PROVIDE INFORMATION ON THE FUND POSITION, O R LIKELY TO BE, AS WELL AS THE VARIOUS FINANCING OPTIONS, INCLUDING THE ASSOCIATED COSTS AND RELATIVE BENEFITS. WHY, DURING THE CURRENT YEAR ITSELF THE ASSESSEE HA S REFUNDED SHORT-TERM BORROWINGS AT RS.939 LACS (OUT OF THE TOTAL SUCH BO RROWING AT RS.1250 LACS AS AT 31.03.2011) (REFER BALANCE-SHEET AS AT 31.03.2012/C OPY ON RECORD). THERE IS, ACCORDINGLY, NO INFIRMITY IN THE DISALLOWANCE OF IN DIRECT ADMINISTRATIVE EXPENDITURE, COMPUTED U/R. 8D(2)(III). RATHER, AS A PERUSAL OF THE BALANCE-SHEET SHOWS, THE VALUE OF THE CURRENT INVESTMENT (SCHEDUL E 11, AT RS.328.54 LACS), REPRESENTING INVESTMENT IN UNITS OF MUTUAL FUNDS MA DE DURING THE YEAR, HAS NOT BEEN TAKEN INTO ACCOUNT BY THE LD. CIT(A) IN ARRIVI NG AT THE VALUE OF THE CLOSING INVESTMENT. THE SAME APPEARS TO BE A MISTAKE THE INVESTMENT BEING SHOWN IN A SEPARATE SCHEDULE (TO THE BALANCE-SHEET). THE AO SH ALL, THEREFORE, WHILE GIVING APPEAL-EFFECT TO THIS ORDER, CONSIDER THE INCLUSION THEREOF, OF COURSE AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY TO STATE ITS OBJECTION /S, IF ANY, TO THE SAID INCLUSION. WE DECIDE ACCORDINGLY. ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 4 3.2 THIS LEAVES US WITH THE PRINCIPAL DISALLOWANCE MADE, I.E., QUA INDIRECT INTEREST EXPENDITURE, ESTIMATED U/R. 8D(2)(II). AS A READING OF THE ASSESSMENT AND THE IMPUGNED ORDER SHOWS, THE ISSUE THAT ARISES AND , ACCORDINGLY, REQUIRES BEING ANSWERED IS IF THE ASSESSEE HAS DISCHARGED THE ONUS ON IT TO SHOW, EVEN IF PRIMA FACIE , THAT NO SUCH DISALLOWANCE IS CALLED FOR, AND WHIC H IT HAS TO WITH REFERENCE TO ITS ACCOUNTS. MERE RAISING A BALD CLAIM THAT THE E NTIRE INVESTMENT IS FUNDED ONLY BY EQUITY (OR EVEN INTEREST-FREE) CAPITAL, WOULD BE OF NO MOMENT WHERE NOT SUBSTANTIATED, I.E., SUPPORTED BY FACTS AND FIGURES . IT IS ONLY WHEN THE ASSESSEE SO DOES THAT THE AO IS REQUIRED TO EXAMINE THE CORRECT NESS OF THE ASSESSEES CLAIM. AND IT IS ONLY WHERE HE IS NOT SATISFIED WITH THE A SSESSEES CLAIM/S, MADE WITH REFERENCE TO ITS ACCOUNTS, AS BEING CORRECT, THAT HE MAY PROCEED TO MAKE THE DISALLOWANCE U/S. 14A BY INVOKING R. 8D. THE AO, WH ERE PARTLY SATISFIED (AS TO THE CORRECTNESS OF THE ASSESSEES CLAIM/S), MAY ADOPT S UCH OTHER METHOD AS THE FACTS AND CIRCUMSTANCES ADMIT, TO ASCERTAIN THE EXPENDITU RE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOME. RULE 8D, IN THAT SENSE, ONLY ENABLES ESTIMATION, PRESUMING AN APPLICATION OF ALL FUNDS, ON A PRO-RATA BASIS, TOWARD ALL ASSETS, SO THAT INTEREST GETS DISALLOWED ON A PROPO RTIONATE BASIS, RECKONING THE AVERAGE INVESTMENT AS THE SIMPLE AVERAGE OF THE OPE NING AND THE CLOSING INVESTMENT FOR THE YEAR. 3.3 WE MAY NEXT EXAMINE THE ASSESSEES RELIANCE ON THE ORDER BY THE FIRST APPELLATE AUTHORITY IN ITS CASE FOR AY 2013-14, TH E FOLLOWING YEAR (PB PGS. 22-27), WHEREIN SIMILAR DISALLOWANCE HAD BEEN DELETED. THE RELEVANT FINDING BY THE FIRST APPELLATE AUTHORITY IS AS UNDER: 3.3 I HAVE GIVEN CAREFUL CONSIDERATION TO THE FACT S OF THE CASE AND THE LEGAL CONTENTION RAISED BY THE APPELLANT. THERE IS NO DISPUTE ABOUT THE FACT THAT NO EXPENDITURE HAS BEEN ATTRIBUTED BY THE APPELLANT TOWARDS THE EARNING THE INCOME. THE HONBLE JURISDICTIONAL HIGH ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 5 COURT IN THE CASE OF CIT V. DEEPAK MITTAL [2013] 38 TAXMANN.COM 83 (PUNJAB & HARYANA) WAS CONSIDERING THE FACTS THAT THE ASSESSEE HAD EAR NED DIVIDEND INCOME AND CLAIMED THAT NO EXPENSES WERE INCURRED AGAINST EARNING OF SUCH INCO ME. THE ASSESSING OFFICER DISAGREEING WITH THE PLEA OF THE ASSESSEE HELD THAT INTEREST BE ARING FUNDS HAD BEEN INVESTED FOR GENERATING DIVIDEND INCOME AND HAD MADE AN ADDITION BY MAKING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. HOWEVER, IN COMPLETE DISAGREEMENT WIT H THE ABOVE HONBLE COURT WAS PLEASE TO HOLD AS UNDER: A) PERUSAL OF SECTION 14A LEAVES NO MANNER OF DOUBT TH AT PLEA OF THE REVENUE THAT ONUS WAS UPON THE ASSESSEE TO PROVE QUANTUM OF EXPENDITU RE INCURRED ON EARNING OF TAX- FREE INCOME OF DIVIDEND IS CORRECT. [PARA 8 OF THE ORDER] B) WHEN CONSISTENT CASE OF THE ASSESSEE, DESPITE NOTIC E GIVEN BY THE ASSESSING OFFICER TO GIVE DETAILS OF THE EXPENDITURE MADE ON EARNING OF EXEMPTED INCOME IN THE NATURE OF DIVIDEND WAS THAT HE HAD NOT MADE ANY EXPENDITURE O N EARNING SUCH INCOME, THE ASSESSING OFFICER IN TERMS OF SUB-SECTION (2) OF SE CTION 14A WAS TO PROCEED FURTHER TO COLLECT SUCH MATERIAL OR EVIDENCE TO DETERMINE EXPE NDITURE, IF ANY, INCURRED BY THE ASSESSEE BUT THE ASSESSING OFFICER INSTEAD RELYING ON RULE 8D OF THE RULES APPLIED AS A FORMULA, APPLICABLE TO AN ASSESSEE WHO HAS INCURRED EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT WHICH IS NOT THE CASE OF THE PRESENT ASSESSEE, WHICH WAS CLEARLY A W RONG APPLICATION INTRODUCED AS A SUBSTITUTE FOR SUB-SECTION (2) OF SECTION 14A AND, THUS, WAS NOT PERMISSIBLE IN LAW. [PARA 9 OF THE ORDER] IN THE PRESENT CASE TOO, THERE IS NO EFFORT TO BRIN G ON RECORD ANYTHING CONTRARY TO THE CONTENTION OF THE APPELLANT AND MECHANICALLY THE AF ORESAID PROVISIONS HAVE BEEN APPLIED MERELY BY REFERRING TO THE ACCOUNT STATEMENTS. THE ADDITION MADE BY THE ASSESSING OFFICER IS UNSUSTAINABLE AND HENCE DELETED. THE GROUND OF APPE AL IS ALLOWED. THE ACCEPTANCE BY THE FIRST APPELLATE AUTHORITY OF THE ASSESSEES CASE FOR THAT YEAR, AS THUS APPARENT, IS NOT ON MERITS, BUT ON ACCOUNT OF THE AO HAVING NOT DISCHARGED THE ONUS CAST ON HIM U/S. 14A(2). IN THE FACTS OF T HE PRESENT CASE, ON THE CONTRARY, THE ASSESSEE CLAIM IS THAT IT HAS NOT INCURRED ANY DIRECT EXPENDITURE FOR EARNING TAX- EXEMPT INCOME, FOR WHICH NO DISALLOWANCE HAS BEEN E FFECTED BY THE AO. FURTHER, THE ASSESSEE ITSELF ADMITS OF THE DIRECTORS BEING I NVOLVED IN THE INVESTMENT EXERCISE, REQUIRING, IN FACT, MONITORING THE MARKET (AND MARK ET DEVELOPMENTS) ON A REGULAR ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 6 BASIS. FURTHER, NO CLAIM QUA NON-APPLICATION OF BORROWED FUNDS ON WHICH INTER EST IS CLAIMED, STATING THE BASIS THEREOF, IS MADE BEFO RE THE AO. RATHER, IF THE FIRST APPELLATE AUTHORITY CANNOT, AS THE APPELLATE ORDER FOR AY 2013-14 SEEMS TO SUGGEST, REMOVE THE DEFICIENCY OBTAINING IN THE ASSESSEES C ASE, OR IN ADDRESSING ITS CASE WHERE MADE, BY THE AO, HE COULD NOT POSSIBLY, FOR T HE CURRENT YEAR, ENTERTAIN THE ASSESSEES CLAIM MADE BEFORE HIM, ADMITTEDLY FOR TH E FIRST TIME, I.E., OF THE ENTIRE INVESTMENT/S HAVING BEEN FINANCED BY EQUITY (OR INT EREST-FREE) CAPITAL (SO THAT NO DISALLOWANCE OF EVEN INDIRECT INTEREST EXPENDITURE WOULD ALSO ARISE). THE SAID ORDER, THUS, IN RATIO, DEFEATS THE ASSESSEES CASE FOR THE CURRENT YEAR, I.E., RATHER THAN SUPPORTING IT. HOWEVER, WE DO NOT THINK THAT THE LD . CIT(A) WAS NOT CORRECT IN ENTERTAINING THE ASSESSEES CLAIM MADE BEFORE HIM F OR THE FIRST TIME, THOUGH OUGHT TO HAVE, STRICTLY SPEAKING, REQUIRED THE AO TO EXAM INE THE SAID CLAIM AND REPORT TO HIM AFTER HEARING THE ASSESSEE. THAT IS, THE LD. CI T(A) WAS CORRECT IN ADMITTING THE ASSESSEES CLAIM, WHICH THOUGH, AS OBSERVED EARLIER , IS SANS ANY REFERENCE TO THE ACCOUNTS. IT CONTINUES TO BE SO BEFORE US AS WELL. 3.4 WE SHALL, NEVERTHELESS, EXAMINE THE ASSESSEES CASE ON MERITS, AND IT WAS IN THIS CONTEXT THAT ITS BALANCE-SHEET (AS ON 31.3.20 12) WAS REQUIRED TO BE PLACED ON RECORD. THE ASSESSEES ARGUMENT THAT THE INVESTMENT /S HAVING BEEN MADE FROM OWN FUNDS IN-AS-MUCH AS THE BANK CC ACCOUNT WAS AT DEBI T AT THE RELEVANT TIME, IS WITHOUT MERIT. THE SAME, FIRSTLY, EXCLUDES THE OPEN ING INVESTMENT OF RS.108.68 LACS, WHICH IS AS MUCH A PART OF THE AVERAGE VALUE OF THE INVESTMENTS HELD DURING THE YEAR AS THAT MADE DURING THE YEAR. TWO, THE DIS ALLOWANCE U/S. 14A QUA INTEREST EXPENDITURE IS IN RESPECT OF INDIRECT INTEREST EXPE NDITURE AND NOT DIRECT INTEREST EXPENDITURE . THE ARGUMENT, AT BEST, CAN ONLY BE TAKEN TO MEAN THAT THERE IS NO DIRECT APPLICATION OF BORROWED FUNDS TO INVESTMENTS , SO THAT NO DISALLOWANCE OF DIRECT INTEREST EXPENDITURE U/S. 14A (R/W RULE 8D(2 )(I)) CAN OBTAIN. CONTINUING ITA NO. 145/ASR/2016 (AY 2012-13) P. D. SEKHSARIA TRADING CO. P. LTD. V. DCIT 7 FURTHER, THE ASSESSEES BALANCE-SHEET (AS ON 31/3/2 012) STANDS PERUSED. THE SAME MAKES IT ABUNDANTLY CLEAR THAT IT IS THE EQUITY FUN DS THAT HAVE FUNDED THE RELEVANT INVESTMENTS. AS AGAINST THE TOTAL (OTHER THAN INVES TMENTS) ASSETS OF RS.3898.11 LACS (RS.3844.54 LACS) (AS ON 31.03.2011), THE OUTSIDE C APITAL (INCLUDING BORROWINGS) IS AT RS.2945.83 LACS (RS.3046.70 LACS), SO THAT THE B ALANCE RS.952.28 LACS (RS. 797.84 LACS) IS FINANCED BY OWN CAPITAL, I.E., APAR T FROM FINANCING INVESTMENT AT RS.70.36 LACS (RS.524.75 LACS). THE FIGURES IN BRAC KETS ARE THE CORRESPONDING FIGURES AS ON 31.03.2012. NO DISALLOWANCE U/S. 14A R/W R. 8D(2)(II) IS THEREFORE CALLED FOR. WE DECIDE ACCORDINGLY. 9. IN THE RESULT, THE ASSESSEE APPEAL IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON MARCH 18, 201 9 SD/- SD/- (N. K. CHOUDHRY) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 18.03.2019 /GP/SR. PS. COPY OF THE ORDER FORWARDED TO: (1) THE APPELLANT: P. D. SEKHSARIA TRADING COMP ANY PVT. LTD., GURDWARA SINGH SABHA STREET, BATHINDA (2) THE RESPONDENT: DCIT, CIRCLE-2, CR BUILDING BATHINDA (3) THE CIT(APPEALS), BATHINDA (4) THE CIT CONCERNED TRUE COPY (5) THE SR. DR, I.T.A.T. BY ORDER