J V Holdings Pvt Ltd , Bangalore V. The Income Tax officer Ward-4(1)(1), Bangalore

ITA 1469/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4091 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 22-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M NARSIMHA RAJU
• Assessee Lawyers: S VENKATRAM
• Keywords: Opportunity of being heard; Earning of tax free income; Proportionate interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI N. V. VASUDEVANV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER I.T.A. NO. 1429/BANG/2017 (ASSESSMENT YEAR: 2013 - 14) THE INCOME TAX OFFICER, WARD 4 (2) (1), APPELLANT. BENGALURU. VS. M/S. J. V. HOLDINGS PVT. LTD., NO. 150, 1 ST FLOOR, EMBASSY POINT, INFANTRY ROAD, BENGALURU - 560052, PAN AABCJ9763F RESPONDENT & I.T.A. NO. 1469/BANG/2017 (ASSESSMENT YEAR: 2013 - 14) M/S J. V. HOLDINGS PVT. LTD., NO. 150, 1 ST FLOOR, EMBASSY POINT, INFANTRY ROAD, BENGALURU - 560052, PAN AABCJ9763F APPELLANT. VS. THE INCOME TAX OFFICER, WARD 4 (2) (1), BENGALURU. RESPONDENT ASSESSEE BY : SHRI S. VENKATRAM, C. A. RE VENUE BY : S H R I M. NARSIMHA RAJU, JC IT ( DR ) DATE OF HEARING : 01.0 8.2018. DATE OF PRONOUNCEMENT : 10.08.2018. O R D E R PER SHRI A. K. GARODIA, A.M. : THESE ARE CROSS APPEALS FILED BY THE REVENUE AND TH E ASSESSEE AND THESE ARE DIRECTED AGAINST THE ORDER OF THE CIT (A) - 4, BANG ALORE DATED 24.03.2017 FOR A. Y. 2013 - 14. 2 ITA NOS.1429 & 1469/BANG/2017 2. FACTS IN BRIEF ARE THAT IT IS NOTED BY THE AO IN PARA 4 OF THE ASSESSMENT ORDER THAT THE ASSESSEE HAS MADE SOME INVESTMENTS IN EQUI TY SHARES AND ALSO IN SOME PARTNERSHIP FIRMS. HE HAS ALSO NOTED THAT EXEM PT INCOME WAS ALSO EARNED. THE AO HAS NOTED THE PROVISIONS OF SECTION 14A, RULE 8D AND SOME CBDT CIRCULAR AND THE JUDGMENT OF HONBLE BOMBAY HI GH COURT RENDERED IN THE CASE OF GODREJ & BOYCE LTD., 328 ITR 81 AND OF HON BLE DELHI HIGH COURT RENDERED IN THE CASE OF MAXOPP INVESTMENTS LTD., 24 7 CTR 162. THE AO ALSO NOTED THAT THE ASSESSEE HAS NOT SPECIFIED ANY AMOUN T OF DISALLOWANCE U/S 14A. HE COMPUTED THE DISALLOWANCE OF RS. 114,17,664/- OU T OF INTEREST EXPENDITURE AS PER RULE 8D (II) AND RS. 882,539/- OUT OF ADMINI STRATIVE EXPENDITURE UNDER RULE 8D (III), TOTAL RS. 123,00,203/-. BEING AGGRIE VED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE CIT (A) AND HE DELETED THE DISALLOWANCE OF RS. 114,17,664/- MADE BY THE AO OUT OF INTEREST EXPENDI TURE AS PER RULE 8D (II) AND CONFIRMED THE DISALLOWANCE OF RS. 882,539/- OUT OF ADMINISTRATIVE EXPENDITURE UNDER RULE 8D (III). NOW THE ASSESSEE IS IN APPEAL FOR THE DISALLOWANCE CONFIRMED BY CIT (A) AND THE REVENUE IS IN APPEAL A GAINST THE DISALLOWANCE DELETED BY CIT (A). 3. LEARNED DR OF THE REVENUE SUBMITTED THAT AS PER PARA 6.1 OF THE ORDER OF CIT (A), THIS IS THE BASIS OF THE DELETION OF THE DISAL LOWANCE THAT THE AO HAS NOT POINTED OUT ANY SPECIFIC LINK OF BORROWED FUNDS AND INVESTMENT. HE SUBMITTED THAT IF A DIRECT NEXUS IS ESTABLISHED BY THE AO BET WEEN INTEREST BEARING BORROWED FUNDS AND INVESTMENTS FOR EARNING EXEMPT I NCOME THAN THE ENTIRE INTEREST EXPENDITURE ON SUCH BORROWED FUNDS IS TO B E DISALLOWED AND NOT PROPORTIONATE INTEREST EXPENDITURE AS DISALLOWED BY THE AO IN THE PRESENT CASE. HE FURTHER SUBMITTED THAT IF THE ASSESSEE ESTABLISH ES DIRECT NEXUS BETWEEN INVESTMENT AND INTEREST FREE FUNDS THAN NO DISALLOW ANCE CAN BE MADE OUT OF INTEREST EXPENDITURE AND SIMILARLY IF THE ASSESSEE ESTABLISHES DIRECT NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND EARNING OF TAXABLE INCOME THAN ALSO NO DISALLOWANCE CAN BE MADE OUT OF INTEREST EX PENDITURE BUT WHERE NEITHER SIDE IS ABLE TO ESTABLISH ANY DIRECT NEXUS THAN PRO PORTIONATE INTEREST EXPENDITURE HAS TO BE DISALLOWED AS HAS BEEN DONE B Y THE AO IN THE PRESENT CASE. HE SUBMITTED THAT THE ORDER OF CIT (A) REGARD ING DELETION OF DISALLOWANCE OF INTEREST EXPENDITURE SHOULD BE REVERSED AND THAT OF THE AO SHOULD BE 3 ITA NOS.1429 & 1469/BANG/2017 RESTORED. REGARDING DISALLOWANCE OUT OF ADMINISTRAT IVE EXPENDITURE, HE SUPPORTED THE ORDER OF CT (A). 4. AS AGAINST THIS, REGARDING THE APPEAL OF THE REV ENUE, LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF CIT (A). REGARDING THE APPEAL OF THE ASSESSEE, HE SUBMITTED A COPY OF THE LEDGER ACCOUNT OF DIVIDEND RECEIVED AND POINTED OUT THAT AS PER THE SAME OUT OF TOTAL D IVIDEND RECEIVED OF RS. 315 LACS, THERE ARE RECEIPTS ON FOUR DATES ONLY BY WAY OF FOUR CHEQUES DEPOSITED IN ING VYSYA BANK LIMITED AND THEREFORE, IT CANNOT BE SAID THAT ANY EXPENDITURE WAS INCURRED IN RESPECT OF THIS DIVIDEND RECEIPT. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE ARE OF THE CONSIDERED OPINION THAT AS SUBMITTED BY THE LEARNED DR OF THE REVENUE, IF A DIRECT NEXUS IS ESTABLISHED BY THE AO BETWEEN INTEREST BEARING BORR OWED FUNDS AND INVESTMENTS FOR EARNING EXEMPT INCOME THAN THE ENTI RE INTEREST EXPENDITURE ON SUCH BORROWED FUNDS IS TO BE DISALLOWED AND NOT PRO PORTIONATE INTEREST EXPENDITURE AS DISALLOWED BY THE AO IN THE PRESENT CASE. IF THE ASSESSEE ESTABLISHES DIRECT NEXUS BETWEEN INVESTMENT AND INT EREST FREE FUNDS THAN NO DISALLOWANCE CAN BE MADE OUT OF INTEREST EXPENDITUR E AND SIMILARLY IF THE ASSESSEE ESTABLISHES DIRECT NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND EARNING OF TAXABLE INCOME THAN ALSO NO DISALLOW ANCE CAN BE MADE OUT OF INTEREST EXPENDITURE BUT WHERE NEITHER SIDE IS ABLE TO ESTABLISH ANY DIRECT NEXUS THAN PROPORTIONATE INTEREST EXPENDITURE HAS TO BE D ISALLOWED. HENCE, THE DELETION OF THE DISALLOWANCE OF PROPORTIONATE INTER EST EXPENDITURE BY CIT (A) IS NOT JUSTIFIED BY SAYING THAT THE AO HAS NOT POINTED OUT ANY SPECIFIC LINK OF BORROWED FUNDS AND INVESTMENT. WE FEEL IT PROPER TO RESTORE THIS MATTER BACK TO CIT (A) FOR A FRESH DECISION AFTER AFFORDING BOTH S IDES TO ESTABLISH DIRECT NEXUS AS DISCUSSED ABOVE AND IF ANY SIDE IS ABLE TO ESTAB LISH DIRECT NEXUS AS DISCUSSED ABOVE THAN THE ISSUE ABOUT DISALLOWANCE O UT OF INTEREST EXPENDITURE SHOULD BE DECIDED ON THAT BASIS I.E. IF A DIRECT NE XUS IS ESTABLISHED BY THE AO BETWEEN INTEREST BEARING BORROWED FUNDS AND INVESTM ENTS FOR EARNING EXEMPT INCOME THAN THE ENTIRE INTEREST EXPENDITURE ON SUCH BORROWED FUNDS IS TO BE DISALLOWED AND IF THE ASSESSEE ESTABLISHES DIRECT N EXUS BETWEEN INVESTMENT AND INTEREST FREE FUNDS THAN NO DISALLOWANCE CAN BE MADE OUT OF INTEREST 4 ITA NOS.1429 & 1469/BANG/2017 EXPENDITURE AND SIMILARLY IF THE ASSESSEE ESTABLISH ES DIRECT NEXUS BETWEEN INTEREST BEARING BORROWED FUNDS AND EARNING OF TAXA BLE INCOME THAN ALSO NO DISALLOWANCE CAN BE MADE OUT OF INTEREST EXPENDITUR E. IN CASE, NEITHER SIDE IS ABLE TO ESTABLISH DIRECT NEXUS IN RESPECT OF ENTIRE OR PART INVESTMENTS THAN DISALLOWANCE OUT OF INTEREST EXPENDITURE SHOULD BE ON PROPORTIONATE BASIS AS PROVIDED IN RULE 8D (II) IN RESPECT OF SUCH INVESTM ENT. 6. REGARDING DISALLOWANCE UNDER RULE 8D (III) OUT O F ADMINISTRATIVE EXPENDITURE TO THE EXTENT OF 0.5% OF AVERAGE INVESTMENT, WE FIND T HAT AS PER THE P & L ACCOUNT FOR THE PRESENT YEAR SUBMITTED BEFORE US, THE ASSES SEE HAS INCURRED EXPENSES OF ONLY RS. 767,355/- IN ADDITION TO FINANCE COSTS RS. 609,69,527/- AND SHARE OF LOSS FROM PARTNERSHIP FIRMS RS. 240,068/-. DETAI LS OF SUCH EXPENSES OF RS. 767,355/- IS AVAILABLE IN SCHEDULE 17. AS PER THIS SCHEDULE, THESE EXPENSES INCLUDE RS. 583,158/- BEING LEGAL & PROFESSIONAL EX PENSES, RS. 10,000/- RATES & TAXES, RS. 110,033/- BROKERAGE & COMMISSION, RS. 197/- BANK CHARGES AND RS. 63,967/- BEING MISC EXPENSES. WE FIND NO MERIT IN THIS ARGUMENT OF THE LEARNED AR OF THE ASSESSEE THAT ONLY DIVIDEND COLLE CTION EXPENSES CAN BE DISALLOWED UNDER RULE 8D (III) AND SINCE THERE ARE ONLY FOUR CHEQUES COLLECTED, NO EXPENDITURE WAS INCURRED IN THIS REGARD AND HENC E, THERE SHOULD BE NO DISALLOWANCE UNDER RULE 8D (III) BECAUSE IN OUR CON SIDERED OPINION, THE DISALLOWANCE UNDER RULE 8D (III) IS NOT IN RESPECT OF ONLY COLLECTION EXPENSES OF DIVIDEND AND IT INCLUDES ALL ADMINISTRATIVE EXPENSE S INCURRED IN RESPECT OF EARNING OF EXEMPT INCOME WHICH INCLUDES THE DECISIO N MAKING FOR PURCHASE/ SALE/ RETAINING OF INVESTMENTS BY THE DIRECTORS. A T THE SAME TIME, IF 0.5% OF AVERAGE INVESTMENT IS MORE THAN ADMINISTRATIVE EXPE NSES DEBITED IN P & L ACCOUNT, THAN THE DISALLOWANCE UNDER RULE 8D HAS TO BE RESTRICTED TO ADMINISTRATIVE EXPENSES DEBITED TO P & L ACCOUNT BE CAUSE THE DISALLOWANCE CANNOT EXCEED THE EXPENSES CLAIMED BY THE ASSESSEE. SIMILARLY, IN WORKING OUT THE AMOUNT ADMINISTRATIVE EXPENSES DEBITED TO P & L ACCOUNT, THOSE EXPENSES SHOULD BE EXCLUDED WHICH ARE SPECIFICALLY INCURRED FOR EARNING TAXABLE INCOME ONLY IF THE ASSESSEE IS EARNING TAXABLE INCOME ALSO . IN THE PRESENT CASE, THE ASSESSEE IS EARNING TAXABLE INCOME ALSO BEING CONSU LTANCY FEES RS. 120 LACS, CAPITAL GAIN ON SALE OF SHARES RS. 124,999/- AND IN TEREST INCOME RS. 484,10,030/-. IN THE FACTS OF THE PRESENT CASE, WE FEEL IT PROPER THAT IN THE 5 ITA NOS.1429 & 1469/BANG/2017 INTEREST OF JUSTICE, AN OPPORTUNITY SHOULD BE PROVI DED TO THE ASSESSEE TO ESTABLISH THAT ANY AMOUNT OF THE ADMINISTRATIVE EXP ENSES DEBITED TO P & L ACCOUNT IS SPECIFICALLY INCURRED FOR EARNING TAXABL E INCOME. WE THEREFORE, SET ASIDE THE ORDER OF CIT (A) AND RESTORE THE ENTIRE M ATTER BACK TO HIS FILE FOR A FRESH DECISION IN THE LIGHT OF ABOVE DISCUSSION AFT ER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO BOTH SIDES. 7. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE AND REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DA TE MENTIONED ON THE CAPTION PAGE. SD/- SD/- (N. V. VASUDEVAN) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED: 10.08.2018. MS* COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.