Pardeep Mercantile Company Pvt. Ltd. (now known as Devakar Investment & Trading Co. P. Ltd.), Ludhiana V. DCIT, C-1, Ludhiana

ITA 1513/CHANDI/2017

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4432 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 30-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ,च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, “B”, CHANDIGARH BEFORE SHRI N.K. SAINI, VICE PRESIDENT & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER आयकर अपील सं./ ITA No.1513/CHD/2017 नधा रण वष / Assessment Year :2012-13 Pardeep Mercantile Company Pvt Ltd.,Ludhiana (Now known as Devakar Investment & Trading Co. P. Ltd.) Vrdhman Premises,Ludhiana बनाम The DCIT, Ludhiana थायी लेखा सं./PAN NO: AADCP0496M अपीलाथ /Appellant यथ /Respondent नधा रती क ओर से/Assessee by : Sh. Pankaj Gupta, Advocate and Sh. Rishit Dhingra,CA राज व क ओर से/ Revenue by : Sh. Akashdeep, JCIT, Sr. DR and Dr.Ranjeet Kaur, Sr. DR स ु नवाई क तार$ख/Date of Hearing : 26.07.2022 उदघोषणा क तार$ख/Date of Pronouncement : 22.08.2022 आदेश/Order PerSudhanshuSrivastava, Judicial Member: This appeal is preferred by the assessee against order dated 22.08.2017 passed by the Ld. Commissioner of Income Tax (Appeals), [hereinafter called the CIT(A)] for assessment year 2012-13 and the sole issue for consideration before us is the confirmation of disallowance of Rs. 4,02,747/- in terms of section 14A of the Income Tax Act,1961 (hereinafter called ‘the Act’) read 2 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana with Rule 8D(2)(iii) of the Income Tax Rules,1962 (hereinafter called ‘the Rules’). 2.0 The brief facts of the case are that the assessee is engaged in the business of derivatives. The return of income was filed declaring income of Rs. 2,98,83,170/-. After processing of the return, the case was selected for scrutiny under CASS guidelines. During the course of assessment proceedings, the Assessing Officer (AO) noted that the assessee company has made investments in shares and mutual funds amounting to Rs. 7,48,72,437/- and had earned dividend income to the tune of Rs. 6,25,920/-. The assessee was asked to show cause by the AO as to why not disallowance under section 14A of the Act be made in respect of the expenditure incurred for earning exempt income in terms of the provisions of Rule 8D of the Rules. In reply to the said show cause notice, the assessee’s response was that during the year under consideration the assessee had earned taxable income of Rs. 3,21,92,636/- and exempt income of Rs. 6,25,920/- and that the assessee had suo moto allocated an amount of Rs. 20,435/- under section 14A of the Act out of the total expenses of Rs. 10,71,443/- on proportionate basis on account of expenditure incurred in earning dividend income. 3 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana However, the AO did not accept the submissions of the assessee and proceeded to compute the total disallowance under section 14A at Rs. 11,49,903/- and completed the assessment at Rs. 3,10,12,638/-. 2.1 Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the disallowance and the Ld. CIT (A) directed the AO to account for only those investments which had yielded exempt income during the year for the purpose of computation of the impugned disallowance. Thus, the Ld. CIT (A) directed that Amended Rule 8D, which came into effect from 02.06.2016, should be applied in case of the assessee which resulted in an enhancement of the disallowance. 2.2 Now, the assessee has approached this Tribunal and challenged the impugned order by raising the following Grounds of appeal: 1. That the order passed by the Ld. CIT (A) is contrary to law and facts of the case. 2. That the Ld. CIT (A) erred in law and as on facts in upholding the disallowance of Rs.4,02,747/- made by assessing officer under Rule 8D(2)(iii). 4 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 3. That the Ld. CIT (A) erred in law and on facts in enhancing the disallowance made by assessing officer under Rule 8D(2)(iii) by Rs.4,092,747/- by applying amended Rule 8D and thus by making total disallowance under Rule 8D(2) of Rs.8,05,494/- (Rs.4,02,747/- + Rs.4,02,747/-). 4. That the appellant craves leave to add/alter/amend any ground of appeal on or before the due date of hearing of appeal 3.0 The Ld. Authorized Representative (hereinafter called ‘the AR’) submitted that during the year under consideration, the assessee had earned dividend to the tune of Rs. 6,25,920/- but fresh investments made during the year were nil. It was further pointed out that the Reserves and Surplus as on 31.03.2012 were to the tune of Rs. 10.91 crores whereas the total investments as on that date stood at Rs. 7.28 crores. It was submitted that, thus, the total investments of the assessee were covered by the Reserves and Surplus of the assessee. It is was further submitted that the assessee has allocated expenses between taxable income and exempt dividend income in a propionate manner and that on identical facts, in the case of Devakar Investments and Trading Company Limited (with which the assessee-company has now merged), the Chandigarh Bench of the ITAT in ITA No. 691/Chd/2016, vide order dated 5 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 24.04.2018, had held that since the assessee had disallowed expenses in proportion of the dividend income to the total income, the order of the Ld. CIT (A) ordering to delete the disallowance made by the AO was to be upheld. It was further submitted that a similar view had been taken vide ITAT Chandigarh Bench in the case of the sister concern of the assessee namely Vardhman Acrylics Limited in assessment year 2013-14 in ITA No.88/Chd/2018 vide order dated 03.07.2019. It was further submitted that in this order, it had further been held by the ITAT that application of Amended Rule 8D was to be prospective in nature and was to take effect from 02.06.2016 only and that the same could not have been applied for assessment year 2013-14. The Ld. AR submitted, therefore, the direction of the Ld. CIT (A) that the AO should apply the provisions of Amended Rule 8D was not legally sustainable. The Ld. AR also placed reliance on another order of the ITAT Chandigarh Bench in the case of Vardhman Holdings Limited in ITA No.550/Chd/2015 wherein, vide order dated 04.09.2015, the ITAT Chandigarh Bench had held that where the AO had created a situation where no expenditure was allowed as deduction to the assessee against taxable income in the garb of computing 6 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana disallowance under section 14A, such disallowance was totally bad in law and the Ld. CIT (A) had rightly deleted the disallowance. 4.0 Per Contra, the Ld. Sr. DR vehemently supported the order of the AO and the Ld. First Appellate Authority and argued that the suo moto disallowance of Rs.20,453/- was not sufficient disallowance in as much as the assessee-company was having common funds for the purpose of the investments as well as for the business purposes. 5.0 We have hearing rival submissions and have also perused the material on record as well as the various orders of the ITAT which have been relied upon by the Ld. AR in support of his contentions. As far as the question of Amendment to Rule 8D being prospective in nature is concerned, the Chandigarh Bench of the ITAT in the case of the sister concern of the assessee i.e. Vardhman Acrylics Limited Vs. ACIT (supra) has held that as far as the application of the substituted provision of Rule 8D w.e.f. 02.06.2016 was concerned, the issue is settled by the judgment of the Hon'ble Apex Court in the case of CIT Vs. Essar Teleholding Ltd. reported in (2018) 90 Taxman.cim 2(SC) wherein it was held by the Hon'ble Apex Court that the Amended Rule 8D 7 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana of the Income Tax Rules was applicable prospectively. Therefore, in view of the judgment of the Hon'ble Apex Court in the case of CIT Vs. Essar Teleholding Ltd. (supra), we hold that the Ld. CIT(A) was not justified in directing the AO to apply the provisions of amended Rule 8D. 5.1 As far as the issue of application of Rule 8D vis-à-vis the provisions existing that particular time i.e. assessment year 2012-13 is concerned, it is seen that the assessee has already made suo moto disallowance in terms of the provisions of section 14A which is undisputedly in proportion to the dividend income earned. It is also a case in point that the assessee has not made any fresh investments during the year under consideration and still further the AO has also not given any cogent reason for not accepting the suo moto disallowance made by the assessee and has simply mentioned in the assessment order the onus was on the assessee to prove that it had not incurred any expenditure to earn exempt income. The AO has observed that as per the provisions of Rule 8D, if the AO is not satisfied with the correctness of claim of expenditure made by the assessee or the claim by the assessee that no expenditure has been incurred, the AO shall apply provisions of rule 8D(2). After that, the AO has 8 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana proceeded to make a further disallowance without recording the reason as to why he was dissatisfied with the assessee’s suo moto disallowance. We are of the considered opinion that the action of the AO of recording the so called satisfaction was, thus, lacking any logic or sound reasoning and, therefore, he had no basis to make any further disallowance in the present case. The Ld. CIT (A) has also upheld the disallowance without appreciating this aspect of the case. 5.2 Therefore, for reasons as stated in the preceding paragraphs, we are unable to concur with the findings of the lower authorities and we set-aside the order of the Ld. CIT (A) and direct the AO to delete the impugned disallowance. 6.0 In the final result the appeal of the assessee stands allowed. Order pronounced on 22.08.2022. Sd/- Sd/- ( N.K. SAINI) (SUDHANSHU SRIVASTAVA) Vice President Judicial Member Dated : 22.08.2022 “आर.के.” आदेशक त+ल,पअ-े,षत/ Copy of the order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकरआय ु .त/ CIT 9 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 4. आयकरआय ु .त (अपील)/ The CIT(A) 5. ,वभागीय त न1ध, आयकरअपील$यआ1धकरण, च3डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड फाईल/ Guard File आदेशान ु सार/ By order, सहायकपंजीकार/ Assistant Registrar