DIRECT INTERNET SOLUTIONS PVT LTD, MUMBAI V. I.T.O. CIRCLE 9(1)(3), MUMBAI

ITA 1588/MUM/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2945 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-07-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 24-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Assessee Lawyers: FIROZE ANDHYARUJINA
• Keywords: Business income; Opportunity of being heard
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.1588/M/2011 ASSESSMENT YEAR: 2007-08 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD., 102, OSIA FRIENDSHIP, GAOTHAN LANE NO.4, OFF: J.P. ROAD, OPP. RAM MANDIR, ANDHERI WEST, MUMBAI 400 058 PAN: AACCG4058M VS. INCOME TAX OFFICER, CIRCLE-9(1)(3), MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI FIROZE ANDHYARUJINA, A.R. REVENUE BY : SHRI B.S. BIST, D.R. DATE OF HEARING : 28.07.2016 DATE OF PRONOUNCEMENT : 14.09.2016 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER DATED 12.01.11 PASSED BY LD. COMMISSIONER OF INCOME TAX ( APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)]-19, MUMBAI RELEVANT TO A SSESSMENT YEAR 2007-08. 2. THE GROUNDS OF APPEAL BY THE ASSESSEE GIVE RISE TO THE FOLLOWING ISSUES: 1. TREATMENT OF INTEREST INCOME OF RS.23.94 LAKHS. 2. DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 3. APPORTIONMENT OF COMMON EXPENDITURE BETWEEN STP I AND NON STPI UNITS. 3. THE ASSESSEE COMPANY IS ENGAGED IN INFORMATION T ECHNOLOGY, COMPUTER SOFTWARE AND IT ENABLED SERVICES, MORE PARTICULARLY IN WEB DEVELOPMENT AND THE WEBSITE SERVICES SUCH AS DOMAIN NAME REGISTRATI ON, WEB USING SERVICES ETC. ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 2 THE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTIO N 10A OF THE ACT IN RESPECT OF PROFITS DERIVED FROM STPI UNIT. 4. THE FIRST ISSUE RELATES TO TREATMENT OF INTEREST INCOME OF RS.23.94 LAKHS RECEIVED BY THE ASSESSEE FROM INTER-CORPORATE LOAN GIVEN BY IT. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD TAKEN A LOAN OF RS.3 CRORES FROM KARNATAKA BANK LTD. FOR THE PURPOSE OF PURCHASING A N OFFICE PREMISE. SINCE THE PAYMENT TOWARDS THE PURCHASE OF OFFICE PREMISES WAS NOT REQUIRED TO BE MADE IMMEDIATELY, THE ASSESSEE ADVANCED THE ABOVE S AID AMOUNT OF RS.3 CRORES TO M/S. ACME HOUSING INDIA PVT. LTD., AT INTEREST R ATE OF 18% PER ANNUM. THE ASSESSEE HAD BORROWED THE MONEY FROM KARNATAKA BANK LTD., AT THE RATE OF 11% PER ANNUM. THE INTEREST INCOME OF RS.23.94 LAK HS RECEIVED ON THE INTER CORPORATE LOAN SO GIVEN WAS OFFERED BY THE ASSESSEE AS ITS BUSINESS INCOME. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS T HE AO), HOWEVER, TREATED THE SAME AS INCOME FROM OTHER SOURCES AND THE SAME WAS ALSO CONFIRMED BY THE LD. CIT(A). 5. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS GIV EN THE LOAN OF RS.3 CRORES TO M/S. ACME HOUSING INDIA PVT. LTD. IN THE ORDINARY COURSE OF ITS BUSINESS AND HENCE THE INTEREST INCOME SHOULD BE AS SESSED UNDER THE HEAD BUSINESS. ALTERNATIVELY, THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS PAID A SUM OF RS.15,38,239/- TO KARNATAKA BANK LTD. FOR AV AILING THE LOAN OF RS.3 CRORES AND THE SAME SHOULD BE SET OFF AGAINST THE I NTEREST INCOME OF RS.23.94 LAKHS AND THE BALANCE AMOUNT OF RS.8.56 LAKHS OF LO AN MAY BE CONSIDERED AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 6. ON THE CONTRARY, THE LD. D.R. SUBMITTED THAT GIV ING OF INTER CORPORATE LOAN IS NOT THE BUSINESS ACTIVITY OF THE ASSESSEE A ND HENCE THE LD. CIT(A) WAS JUSTIFIED IN CONFIRMING THE ASSESSMENT OF INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 3 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAS FURNISHED THE COPIES OF BANK ACCOUNT A ND ALSO LEDGER ACCOUNT COPY OF M/S. ACME HOUSING INDIA PVT. LTD. A PERUSAL OF THE BANK ACCOUNT SHOWS THAT THE TERM LOAN AMOUNT OF RS.3 CRORES HAS BEEN C REDITED TO THE ACCOUNT OF THE ASSESSEE ON 29.09.06. ON THE VERY SAME DAY THE ASS ESSEE HAS TRANSFERRED RS.1.50 CRORES TO M/S. ACME HOUSING INDIA PVT. LTD. AND ON 03.10.06 ANOTHER AMOUNT OF RS.1.50 CRORES HAS BEEN TRANSFERRED. THU S, WE NOTICE THAT THE TERM LOAN OF RS.3 CRORES HAS BEEN FULLY UTILIZED FOR GIV ING LOAN TO M/S. ACME HOUSING INDIA PVT. LTD. WE HAVE NOTICED EARLIER TH AT THE BUSINESS OF THE ASSESSEE IS RELATED TO INFORMATION TECHNOLOGY AND I T ENABLED SERVICES. HENCE, WE DO NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSE SSEE THAT THE ABOVE SAID LOAN OF RS.3 CRORES WAS GIVEN IN THE ORDINARY COURSE OF CARRYING ON BUSINESS. THE ASSESSEE ITSELF HAS SUBMITTED THAT THE LOAN WAS GIV EN TO M/S. ACME HOUSING INDIA PVT. LTD., SINCE THE TERM LOAN PROCEEDS WERE NOT IMMEDIATELY REQUIRED. THE LD D.R HAS ALSO POINTED OUT THAT THE LENDING OF MONEY IS NOT PART OF BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE. HE NCE THE INTEREST INCOME CANNOT BE CONSIDERED TO BE THE BUSINESS INCOME OF T HE ASSESSEE, SINCE THE INTEREST CORPORATE LOAN WAS GIVEN OUT OF THE TERM L OAN AVAILED BY THE ASSESSEE FOR PURCHASING A HOUSE PROPERTY, I.E., THE LOAN HAS BEEN GIVEN AS THE TERM LOAN WAS NOT REQUIRED TO BE USED IMMEDIATELY. UNDER TH ESE SET OF FACTS, WE ARE OF THE VIEW THAT THE TAX AUTHORITIES ARE JUSTIFIED IN ASSESSING THE INTEREST INCOME OF RS.23.94 LAKHS AS INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES. 8. WITH REGARD TO ALTERNATIVE CONTENTION OF THE ASSESSEE THAT THE INTEREST PAID ON TERM LOAN SHOULD BE SET OFF AGAINST THE INTEREST INCOME, WE ARE OF THE VIEW THAT THE SAME REQUIRES EXAMINATION AT THE END OF TH E AO, SINCE THE ALTERNATIVE CONTENTION HAS NOT BEEN EXAMINED BY HIM. IT IS NO T CLEAR FROM THE RECORD AS TO HOW THE INTEREST EXPENDITURE RELATING TO THE TERM L OAN WAS TREATED IN THE BOOKS ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 4 OF ACCOUNT AND HOW IT WAS ALLOWED BY THE AO. IF TH E ALTERNATIVE CLAIM OF THE ASSESSEE IS ACCEPTED, THEN THE CORRESPONDING ADJUST MENTS ARE REQUIRED TO BE MADE IN OTHER HEADS ALSO. ACCORDINGLY WE RESTORE T HE ALTERNATIVE CONTENTION OF THE ASSESSEE TO THE FILE OF THE AO WITH A DIRECTION TO EXAMINE THE SAME AFRESH AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 9. THE NEXT ISSUE RELATES TO DISALLOWANCE MADE UNDE R SECTION 14A OF THE ACT. THE ASSESSEE HAS DECLARED DIVIDEND INCOME OF RS.2,03,820/- AND CLAIMED THE SAME AS EXEMPT. THE AO COMPUTED THE DISALLOWAN CE UNDER SECTION 14A OF THE ACT AT RS.5.70 LAKHS BY APPLYING THE PROVISIONS OF RULE 8D OF IT RULES. THE LD. CIT(A) HOWEVER RESTRICTED THE ADDITION TO R S.50,000/-, SINCE THE HONBLE HIGH COURT HAS HELD THAT THE PROVISIONS OF RULE 8D SHALL NOT APPLY TO THE YEAR UNDER CONSIDERATION. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE HONBLE JURISDICTIONAL BOMBAY HIGH COURT HAS HELD I N THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)] THAT THE PROVISIONS OF RULE 8D SHALL BE APPLICABLE FROM ASSE SSMENT YEAR 2008-09 ONWARDS AND FOR THE EARLIER YEARS THE DISALLOWANCE SHOULD BE MADE ON REASONABLE BASIS. THE CONTENTION OF THE ASSESSEE I S THAT THE INTEREST FREE FUNDS AVAILABLE WITH WAS MORE THAN THE INVESTMENTS MADE A ND HENCE, NO DISALLOWANCE IS REQUIRED OUT OF INTEREST EXPENDITUR E. WE FIND MERIT IN THE SAID CONTENTIONS. HENCE THE DISALLOWANCE, IF ANY, IS RE QUIRED TO BE MADE ONLY IN RESPECT OF ADMINISTRATIVE EXPENSES INCURRED IN THE DIVIDEND INCOME. ACCORDINGLY, WE ARE OF THE VIEW THAT THE DISALLOWAN CE OF RS.50,000/- CONFIRMED BY LD. CIT(A) IS ALSO ON THE HIGHER SIDE. ACCORDINGLY, WE MODIFY THE ORDER OF LD. CIT(A) AND DIRECT THE AO TO RESTRI CT THE DISALLOWANCE TO 2% OF THE DIVIDEND INCOME AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AGROVET LTD. VS. DCIT 232 ITR 97 (BOM.). ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 5 11. THE NEXT ISSUE RELATES TO ALLOCATION OF COMMON EXPENSES BETWEEN STPI AND NON-STPI UNITS. THE AO NOTICED THAT THE ASSESS EE HAS FOLLOWED DIFFERENT CRITERIA FOR APPORTIONING THE COMMON EXPENSES BETWE EN STPI AND NON-STPI UNITS. THE AO WAS NOT CONVINCED WITH THE SAME AND ACCORDINGLY ALLOCATED THE EXPENSES IN THE RATIO OF SALES. THE LD. CIT(A) ALS O CONFIRMED THE SAME. 12. THE LD. A.R. CONTENDED THAT THE ASSESSEE HAS FO LLOWED A SCIENTIFIC BASIS FOR ALLOCATING VARIOUS EXPENSES AND HENCE THE SAME SHOULD BE UPHELD. ON THE CONTRARY, THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS NOT GIVEN ANY JUSTIFICATION FOR ADOPTING DIFFERENT CRITERIA FOR A LLOCATING VARIOUS EXPENSES. HE FURTHER SUBMITTED THAT THE LD CIT(A) HAS ALSO HIGHL IGHTED THE FLAW IN THE METHOD ADOPTED BY THE ASSESSEE. 13. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISS UE AND PERUSED THE RECORD. WE NOTICE THAT THE LD. CIT(A) HAS UPHELD THE ACTION OF THE AO WITH THE FOLLOWING OBSERVATION: 8. I HAVE CONSIDERED THE SAID SUBMISSIONS. THERE I S NO DISPUTE AS REGARDS ALLOCATION OF DIRECT EXPENSE SINCE THEY ARE CHARGED TO THE RESPECTIVE UNITS. THE DISPUTE IS WITH REGARD TO ALL OCATION OF INDIRECT EXPENSES. THE A.O. HAS TAKEN THE VIEW THAT SUCH IND IRECT EXPENDITURE IS TO BE ALLOCATED IN PROPORTION OF SALES OF THE ELIGIBLE UN IT TO THAT OF TOTAL SALES. IN THIS REGARD, I HAVE CALLED FOR THE SPECIFIC DETAILS OF A LLOCATION AS CARRIED OUT BY THE APPELLANT. AS PER THE DETAILS SUBMITTED BY THE APPE LLANT, IT IS SEEN THAT NO UNIFORM STANDARDS OR PARAMETERS HAS BEEN APPLIED BY THE APPELLANT COMPANY FOR THE PURPOSE OF ALLOCATION. IN FACT, DIFFERENT VARIA BLES HAVE BEEN USED FOR THE PURPOSE OF ALLOCATION. FOR INSTANCE, IT IS SEEN THA T IN RESPECT OF EXPENSES DEBITED UNDER THE HEAD 'ADMINISTRATIVE EXPENSES', CANTEEN E XPENSES ARE APPORTIONED BETWEEN THE DOMESTIC AND STPI UNIT ON THE BASIS OF EMPLOYEE RATIO, COURIER CHARGES IN THE RATIO OF DOMAIN NAME REGISTRATION EXPENSES, ELECTRICITY CHARGES ON THE BASIS OF EMPLOYEE RATIO, INSURANCE ON THE BASIS OF EMPLOY EE RATIO, TRAVELING ON THE BASIS OF EMPLOYEE RATIO. AS REGARDS PERSONAL EX PENSES THE ALLOCATION IS ON THE BASIS OF EMPLOYEE RATIO BETWEEN THE DOMESTIC AND THE STPI UNIT. THE SELLING AND DISTRIBUTION EXPENSES ARE SEEN ALLOCATE D EITHER ON THE BASIS OF EMPLOYEE RATIO OR ON THE BASIS OF DOMAIN NAME REGISTRATION E XPENSES. THE FOREIGN TRAVEL IS SEEN ALLOCATED ON THE BASIS OF DOMAIN NAME REGIS TRATION EXPENSES RATIO BETWEEN THE DOMESTIC AND STP UNIT. AS REGARD FOREIG N EXCHANGE FLUCTUATION IT IS SEEN THAT THE ALLOCATION HAS BEEN DONE ON THE BASIS OF DOMAIN NAME REGISTRATION EXPENSES/SERVER RATIO/EMPLOYEE RATIO/D IGITAL CERTIFICATION ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 6 SALES RATIO. THUS, IT IS SEEN THAT DIFFERENT VARIAB LES HAVE BEEN USED FOR THE PURPOSE OF ALLOCATION OF COMMON EXPENSES. ON A CONS IDERATION OF THE STANDARDS USED IT CANNOT BE STATED THAT THERE IS AN Y SCIENTIFIC BASIS FOR THE SAME. FOR EXAMPLE IT IS SEEN THAT ELECTRICITY EXPEN SES HAS BEEN ALLOCATED ON THE BASIS OF EMPLOYEE RATIO RATHER THAN SPACE. HENCE, I AM UNABLE TO AGREE WITH THE CONTENTION OF THE APPELLANT THAT IT IS BASED ON PRU DENCE AND PAST PRACTICE THAT ALLOCATION AS CARRIED OUT BY HIM HAS BEEN MADE . ON THE OTHER HAND THE A.O. HAS UNDERTAKEN A PRO-RATA APPROACH WHICH A PPEARS TO BE MOST REASONABLE CONSIDERING THE FACT THAT THE VARIABLE A S ADOPTED BY THE APPELLANT COMPANY IS BASED ON SUBJECTIVE JUDGMENT, RATHER THA N ANY RATIONAL OR SCIENTIFIC METHOD AMENABLE TO ANY TRANSPARENT YARDS TICK OF MEASUREMENT IN THE CIRCUMSTANCES, THE BEST COURSE OPEN IS TO ALLOCATE THE COMMON EXPENSES PRO-RATA ON THE BASIS OF TURNOVER, WHICH IS A STANDARDIZED A ND REASONABLE METHOD AS CARRIED OUT BY THE A.O. THE ACTION OF THE A.O. IN THIS REGA RD IS CONFIRMED. 14. WE NOTICE THAT THE ASSESSEE HAS NOT GIVEN THE J USTIFICATION FOR ADOPTING DIFFERENT CRITERIA FOR APPORTIONING THE EXPENSES. HENCE, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE THAT THE CRITERIA ADOPTED BY IT WAS SCIENTIFIC, PARTICULARLY IN THE CASE OF ELECTRICITY EXPENSES, I.E., THE ALLOCATION HAS BEEN DONE ON THE BASIS OF EMPLOYEE RATIO INSTEAD OF FLOOR SPACE USED. 15. AT THE SAME TIME, WE ARE OF THE VIEW THAT TH E ALLOCATION OF CANTEEN EXPENSES ON THE BASIS OF EMPLOYEE RATIO, COURIER CH ARGES ON THE BASIS OF DOMAIN NAME REGISTRATION EXPENSES RATIO, PERSONAL E XPENSES ON THE BASIS OF EMPLOYEE RATIO CANNOT BE FOUND FAULT WITH. HOWEVER, THE ALLOCATION OF ELECTRICITY EXPENSES, INSURANCE EXPENSES, TRAVELLIN G EXPENSES, SELLING & DISTRIBUTION EXPENSES ON THE BASIS OF EMPLOYEE RATI O DOES NOT APPEAR TO BE SCIENTIFIC. SIMILARLY, THE ALLOCATION OF FOREIGN E XCHANGE FLUCTUATION ON THE BASIS OF DOMAIN REGISTRATION ETC. DOES NOT APPEAR T O BE SCIENTIFIC. THE FOREIGN EXCHANGE FLUCTUATION CAN BE LINKED TO SPECIFIC ITEM S AND HOW IT IS NOT UNDERSTANDABLE AS TO HOW THE SAME WAS TREATED AS CO MMON EXPENSES. AT THE SAME TIME, ADOPTION OF SALES RATIO AS THE BASIS FOR ALLOCATION OF EXPENSES ACROSS THE BOARD ALSO DOES NOT APPEAR TO BE CORRECT. ACCO RDINGLY WE ARE OF THE VIEW THAT THIS ISSUE ALSO REQUIRES FRESH EXAMINATION AT THE END OF THE AO. ITA NO.1588/M/2011 M/S. DIRECTI INTERNET SOLUTIONS PVT. LTD. 7 ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CI T(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIR ECTION TO EXAMINE THIS ISSUE AFRESH AFTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE TO PRESENT MORE SUITABLE METHOD OF ALLOCATION AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14.09.2016. SD/- SD/- (PAWAN SINGH) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 14.09.2016. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.