ACIT, CHENNAI V. Mustang Trading & Investments P Ltd., CHENNAI

ITA 1455/CHNY/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68769 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 28-06-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: TANUJA PATNAIK
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NOS. 1455 & 1456/MDS/2013 (ASSESSMENT YEARS : 2008-09 & 2009-10) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(3), CHENNAI - 600 034. (APPELLANT) V. M/S MUSTANG TRADING & INVESTMENTS P. LTD., ELDORADO, 5 TH FLOOR, NO.112, NUNGAMBAKKAM HIGH RD., CHENNAI - 600 034. PAN : AAACM 4620 P (RESPONDENT) APPELLANT BY : SHRI GURU BASHYAM, JCIT RESPONDENT BY : MS. TANUJA PATNAIK, CA DATE OF HEARING : 25.09.2013 DATE OF PRONOUNCEMENT : 30.09.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE REVENUE, DIRECTED AGAINST ORDERS DATED 28.3.2013 OF COMMISSIONER OF INCOME TA X (APPEALS)-V, CHENNAI. IN BOTH THESE APPEALS, REVENUE ASSAILS DE LETION OF DISALLOWANCE MADE BY THE A.O. UNDER SECTION 14A OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') AS ATTRIBUTABLE TO EARNIN G OF EXEMPT DIVIDEND INCOME. I.T.A. NOS. 1455 & 1456/MDS/13 2 2. APPEAL FOR ASSESSMENT YEAR 2009-10 IS TAKEN AS R EPRESENTATIVE CASE. 3. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN THE BUSINESS OF FERTILIZER AND PESTICIDE TRADING, AS ALSO INVESTMEN TS, HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARING AN INCOM E OF ` 3,56,60,996/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEES BALA NCE SHEET REFLECTED INVESTMENTS AS UNDER:- AS ON 01.04.2008 : ` 14,89,89,508/ - AS ON 31.03.2009 : ` 16,07,83,602/ - ASSESSEE HAD RECEIVED DIVIDEND OF ` 1,08,367/-. THE TOTAL EXPENDITURE, INCLUDING INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT, CAME TO ` 4,50,73,232/-. ASSESSEE HAD NOT MADE ANY DISALLOWANCE BY ITS OWN FOR EXPENDITUR E IN RELATION TO INCOME CONSIDERED AS EXEMPT. ASSESSING OFFICER PUT THE ASSESSEE ON NOTICE AS TO WHY A DISALLOWANCE OUGHT NOT BE MAD E UNDER SECTION 14A READ ALONG WITH RULE 8D OF INCOME-TAX RULES, 19 62. REPLY OF THE ASSESSEE WAS THAT THE DIVIDEND OF ` 1,08,367/- RECEIVED BY IT, WHICH WAS EXEMPT UNDER SECTION 10(34) OF THE ACT WAS EARN ED OUT OF INVESTMENTS MADE DURING FINANCIAL YEAR 2002-03 AND EARLIER PERIODS. AS PER ASSESSEE, IT HAD NOT INCURRED ANY EXPENDITUR E FOR EARNING SUCH I.T.A. NOS. 1455 & 1456/MDS/13 3 INCOME, SINCE INVESTMENTS WERE MADE OUT OF SURPLUS FUNDS AVAILABLE WITH IT, THAT TOO OF EARLIER PERIODS. AS PER ASSES SEE, WHATEVER THE BORROWED FUNDS WERE THERE, WERE USED ONLY FOR ACQUI RING CURRENT ASSETS RELATING TO ITS BUSINESS. IN OTHER WORDS, A S PER THE ASSESSEE, THERE WAS NO NEXUS BETWEEN BORROWED FUNDS AND INVES TMENTS AND THEREFORE, NO DISALLOWANCE COULD BE MADE UNDER SECT ION 14A OF THE ACT. 4. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED BY THE ABOVE SUBMISSION OF THE ASSESSEE. ACCORDING TO HER, SINC E ASSESSEE WAS RECEIVING DIVIDEND, WHICH WAS CLAIMED AS EXEMPT, IT WAS NECESSARY TO APPLY SECTION 14A READ ALONG WITH RULE 8D. AS PER THE A.O., THE INVESTMENTS OF THE ASSESSEE HAD INCREASED BY A SUM OF ` 1,17,94,094/- DURING THE RELEVANT PREVIOUS YEAR. T HOUGH ASSESSEE HAD STATED THAT THE INVESTMENTS WERE MADE OUT OF OW N FUNDS, ITS PROFIT & LOSS ACCOUNT DID NOT REFLECT ANY SURPLUS. AS PER A.O., THERE WAS A SECURED LOAN OF ` 40,81,87,701/- RECEIVED BY THE ASSESSEE FROM ONE M/S INFRASTRUCTURE LEASING AND FINANCIAL S ERVICES LIMITED (IL&FS) DURING THE PREVIOUS YEAR RELEVANT TO ASSESS MENT YEAR 2007- 08. INTEREST OF ` 4,50,73,232/- CLAIMED BY THE ASSESSEE, WAS PAID TO M/S IL&FS. IF THE ASSESSEE HAD OWN FUNDS, IT WOULD NOT HAVE GONE I.T.A. NOS. 1455 & 1456/MDS/13 4 FOR A BORROWAL. THEREFORE, AS PER THE A.O., INTERE ST EXPENDITURE WERE INCURRED IN RELATION TO EXEMPT INCOME AS WELL. REL YING ON THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN THE C ASE OF CHEMINVEST LTD. V. ITO (121 ITD 318), OF HONBLE KERALA HIGH C OURT IN THE CASE OF CIT V. SMT. LEENA RAMACHANDRAN (339 ITR 296) AND TH AT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GORDREJ& BOYCE MFG . CO. LTD. V. DY. CIT (328 ITR 81), ASSESSING OFFICER REACHED AN OPINION THAT A DISALLOWANCE WAS CALLED FOR AS SET-OUT UNDER RULE 8 D. DISALLOWANCE MADE BY HER UNDER SUB-CLAUSE (I) OF RULE 8D(2) WAS NIL. DISALLOWANCE UNDER SUB-CLAUSE (II) TO RULE 8D(2) WA S WORKED OUT APPLYING THE RATIO OF AVERAGE ASSETS TO AVERAGE INV ESTMENT ON THE INTEREST OUTGO OF ` 4,50,73,232/-. DISALLOWANCE MADE UNDER SUB- CLAUSE (III) OF RULE 8D(2) WAS ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT. THE AGGREGATE OF SUCH DISALLO WANCES CAME TO ` 1,09,14,686/-. 5. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE CIT(A PPEALS). AS PER THE ASSESSEE, IT HAD NOT INCURRED ANY EXPENDITU RE FOR EARNING EXEMPT DIVIDEND INCOME. BORROWED FUNDS WERE USED F OR ACQUIRING CURRENT ASSETS FOR THE PURPOSE OF BUSINESS AND NOT FOR ANY INVESTMENTS. WHEN THERE WAS NO NEXUS BETWEEN EXPEN DITURE I.T.A. NOS. 1455 & 1456/MDS/13 5 INCURRED AND EXEMPT INCOME, AS PER THE ASSESSEE, AP PLICATION OF SECTION 14A READ WITH RULE 8D WAS NOT WARRANTED. O UT OF THE LOANS GIVEN BY M/S IL&FS, ` 39.87 CRORES WAS IN THE NATURE OF TERM LOANS. ENTIRE BORROWED FUNDS WERE USED FOR ACQUIRING SHARE S IN SHREE AMBIKA SUGARS LTD. AND SUCH SHARES WERE HELD AS SEC URITY IN TRADING BUSINESS. PURCHASE OF SHARES AND DEALING IN SHARES WAS ONE OF THE BUSINESS ACTIVITIES OF THE ASSESSEE. RELIANCE WAS ALSO PLACED ON THE DECISION OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. HERO CYCLES (323 ITR 158). ASSESSEE ALSO BROUGHT TO THE NOTICE OF CIT(APPEALS) THAT IN PRECEDING ASSESSMENT YEAR 2004 -05, SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS DELE TED BY CIT(APPEALS) ON ITS APPEAL. 6. LD. CIT(APPEALS) WAS APPRECIATIVE OF THE CONTENT IONS OF THE ASSESSEE. ACCORDING TO HIM, HIS PREDECESSOR IN ASS ESSEES APPEALS FOR ASSESSMENT YEARS 2004-05 AND 2005-06 HAD HELD T HAT INTEREST PAID BY THE ASSESSEE WAS ONLY FOR THE PURPOSE OF IT S BUSINESS AND NOT FOR THE PURPOSE OF EARNING INCOME EXEMPTED TAX. AS PER LD. CIT(APPEALS), THE INVESTMENTS ON WHICH ASSESSEE HAD EARNED DIVIDEND WERE MADE LONG BACK WHEN ASSESSEE HAD SUFF ICIENT FUNDS. I.T.A. NOS. 1455 & 1456/MDS/13 6 HE, THEREFORE, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 7. NOW BEFORE US, SHRI GURU BASHYAM, APPEARING FOR REVENUE, STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMI TTED THAT WHETHER THE SHARES HELD WERE OLD OR NOT, WAS NOT MATERIAL. RELYING ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF DHANUKA & SONS V. CIT (339 ITR 319) LEARNED D.R. ARGUED THAT ASSESSEE WAS OBLIGED TO PRODUCE MATERIAL TO SHOW THAT SHARES WER E ACQUIRED FROM FUNDS AVAILABLE IN ITS HANDS WITHOUT TAKING BENEFIT OF ANY LOAN. AS PER LEARNED D.R., HERE THE ASSESSEE HAD NOT PRODUCED AN Y SUCH MATERIALS. ACCORDING TO HIM, BY VIRTUE OF DECISION OF HONBLE CALCUTTA HIGH COURT MENTIONED SUPRA, IN THE ABSENCE OF ANY S UCH MATERIAL, ASSESSING OFFICER WAS ENTITLED TO MAKE A PROPORTION ATE DISALLOWANCE OF INTEREST UNDER SECTION 14A OF THE ACT. FURTHER, AS PER LEARNED D.R., RULE 8D WAS MANDATORY AND THERE WAS NO OPTION WHATEVER LEFT WITH ASSESSING OFFICER. THE BUSINESS OF THE ASSESS EE WAS AN INDIVISIBLE ONE AND THEREFORE, EXPENDITURE HAD TO B E ALLOCATED BASED ON FORMULA SET OUT IN RULE 8D. EVEN IF ASSESSEE HA D NOT MADE ANY INVESTMENT OUT OF LOAN FUNDS, THERE WAS AN OPPORTUN ITY COST INCURRED, I.T.A. NOS. 1455 & 1456/MDS/13 7 SINCE ASSESSEE COULD HAVE USED ITS SURPLUS FUNDS FO R SQUARING UP THE LOAN FUNDS, INSTEAD OF MAKING INVESTMENTS. 8. PER CONTRA, MS. TANUJA PATNAIK, APPEARING FOR AS SESSEE, SUPPORTED THE ORDER OF CIT(APPEALS). 9. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IMPUGNED ASSESSMENT YEAR BEING 2009-10, ASSESSING O FFICER WAS ENTITLED TO INVOKE SECTION 14A READ ALONG WITH RULE 8D. NEVERTHELESS, ARGUMENT OF THE ASSESSEE BEFORE THE A .O. WAS THAT IT HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO THE INVESTMENTS WHICH HAD RESULTED IN TAX-FREE INCOME. ASSESSEE HAD SPEC IFICALLY MENTIONED THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME OF ` 1,08,367/-. ASSESSEE ALSO MENTIONED THAT INVESTMENTS MADE IN THE EARLIER YEARS WERE FROM SUR PLUS FUNDS WITH IT. ASSESSING OFFICER THOUGH HE MENTIONED THAT THE CLAI M OF THE ASSESSEE WAS NOT ACCEPTABLE, HAD NOT MADE A VERIFIC ATION AS TO WHETHER INTEREST EXPENDITURE INCURRED WAS IN RELATI ON TO TERM LOANS RAISED FROM M/S IL&FS, WHICH WERE USED FOR PURPOSES OTHER THAN INVESTMENTS WHICH EARNED TAX-FREE INCOME. RULE 8D CAN BE INVOKED ONLY IF ASSESSING OFFICER WAS NOT SATISFIED WITH TH E CORRECTNESS OF THE CLAIM OF THE ASSESSEE REGARDING THE EXPENDITURE INC URRED FOR EARNING I.T.A. NOS. 1455 & 1456/MDS/13 8 THE TAX-FREE INCOME. CO-ORDINATE BENCH OF THIS TRI BUNAL IN THE CASE OF ACIT V. BEST AND CROMPTON ENGINEERING (I.T.A. NO. 1 603/MDS/2012 DATED 16.7.2013), AS WELL AS CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT V. CHAMPION COMMERCIAL COMPANY LTD. (I .T.A. NO. 644/KOL/2012) HAVE HELD THAT UNLESS AND UNTIL INTER EST EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR MAKING INVESTMENTS RESULTING IN TAX- FREE INCOME, A DISALLOWANCE UNDER SUB-CLAUSE (II) T O RULE 8D(2) COULD NOT BE DONE. SINCE AN ANALYSIS OF THE CLAIM OF ASS ESSEE THAT IT HAD INCURRED NO EXPENDITURE FOR EARNING TAX-FREE INCOME WAS NOT DONE BY THE LOWER AUTHORITIES, WE ARE OF THE OPINION THAT T HE MATTER REQUIRES A FRESH LOOK BY THE ASSESSING OFFICER. WE, THEREFORE , SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE REG ARDING DISALLOWANCE UNDER SECTION 14A BACK TO THE FILE OF THE A.O. FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 10. SINCE FACTS RELATING TO ASSESSMENT YEAR 2008-09 ARE ALSO SIMILAR, SAME DIRECTIONS ARE GIVEN FOR THE SAID ASS ESSMENT YEAR AS WELL. 11. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NOS. 1455 & 1456/MDS/13 9 ORDER WAS PRONOUNCED IN THE COURT ON MONDAY, THE 30 TH OF SEPTEMBER, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 30 TH SEPTEMBER, 2013. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-V, CHENNAI-34 / CIT, CHENNAI-III, CHENNAI/D.R./GUARD FILE