The Pimpalgaon Merchants Co.op. Bank Ltd., Nashik V. Assistant Commissioner of Income-tax,

ITA 160/PUN/2014

• Counselvise Citation: 16024514 RSA 2014
• Duration Of Justice: 1 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 27-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Assessee Lawyers: PRAMOD SHINGTE
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#$ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 160/PN/2014 #% & '& / ASSESSMENT YEAR : 2010-11 THE PIMPALGAON MERCHANTS CO - OP. BANK LTD., DHANSHREE BANK STREET, AT POST PIMPALGAON BASWANT, NASHIK-422302 . / APPELLANT PAN : AAAAT5305Q (% V/S. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 1, NASHIK . / RESPONDENT / APPELLANT BY : SHRI PRAMOD SHINGTE / DEPARTMENT BY : SHRI B.C. MALAKAR ) DATE OF HEARING :18-05-2015 / DATE OF PRONOUNCEMENT :15-07-2015 *) ORDER PER VIKAS AWASTHY, JM : THE APPEAL BY ASSESSEE IS AGAINST THE ORDER OF COMMISSIO NER OF INCOME TAX (APPEALS)-I, NASHIK DATED 18-12-2013 FOR THE ASSESSMENT YEAR 2010-11. THIS APPEAL IS IN SECOND ROUND BEFORE THE TRIBUN AL. EARLIER, THE APPEAL OF THE ASSESSEE WAS PARTLY ALLOWED FOR STATISTICAL P URPOSES BY THE TRIBUNAL, VIDE ORDER DATED 25-04-2014. IN APPEAL THE A SSESSEE HAS IMPUGNED THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) ON TWO GROUNDS: 2 ITA NO. 160/PN/2014, A.Y. 2010-11 I. DISALLOWANCE U/S. 14A R.W. RULE 8D. II. DISALLOWANCE U/S. 40(A)(IA) OF THE INCOME TAX ACT, 1961 (HEREINA FTER REFERRED TO AS THE ACT). 2. IN THE FIRST ROUND BEFORE THE TRIBUNAL, DISALLOWANCE MA DE U/S. 14A R.W. RULE 8D WAS CONFIRMED. THE SECOND GROUND RELATING T O DISALLOWANCE U/S. 40(A)(IA) WAS RESTORED TO ASSESSING OFFICER FOR FRESH EXAMIN ATION. THE ASSESSEE FILED MISCELLANEOUS APPLICATION NO. 87/PN/2014 FOR RE CALLING THE ORDER OF THE TRIBUNAL ON THE GROUND THAT THE FIRST GROUN D RAISED BY THE ASSESSEE IN APPEAL WITH RESPECT TO DISALLOWANCE U/S. 14A R .W. RULE 8D WAS NOT ADJUDICATED PROPERLY. THE ISSUE IN APPEAL IS COV ERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF CO-ORDINATE BENCH IN THE CASE OF DHARMAVEER SAMBHAJI URBAN CO-OP. BANK LTD. VS. ACIT IN ITA NO. 1287/ PN/2012 (ASSESSMENT YEAR 2008-09) DECIDED ON 20-09-2013. THE T RIBUNAL VIDE ORDER DATED 14-11-2014 ACCEPTED THE MISCELLANEOUS APPLIC ATION OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: 4. NOW, THE ASSESSEE HAS COME WITH THE PLEA THAT A T THE TIME OF HEARING LD. DR ALSO AGREED THAT ASSESSEES CASE IS COVERED BY DECISION IN CASE OF DHARMVEER SAMBHAJI URBAN CO-OP. BANK LTD., PUNE (SUPRA) AND HENCE, THE ASSESSEE WAS PREVENTED FROM MAKING ARGUM ENT ON THE SAID ISSUE. HE ALSO SUBMITS THAT THE DECISION IN THE CA SE OF DHARMVEER SAMBHAJI URBAN CO-OP. BANK LTD., PUNE (SUPRA) IS SQ UARELY APPLICABLE TO THE ASSESSEES CASE. IT IS SEEN THAT AT THE TIME O F HEARING THE LD. DR ALSO IMPLIEDLY CONCEDED TO THE SUBMISSION OF THE LD. AR. IN OUR OPINION IN THE INTEREST OF JUSTICE THE ORDER NEEDS TO BE RECALLED ON THE ISSUE OF DISALLOWANCE U/S. 14A OF THE ACT FOR GIVING AN OPPO RTUNITY TO THE ASSESSEE TO MAKE HIS SUBMISSIONS. 5. WE, ACCORDINGLY, RECALL THE ORDER TO THE EXTENT OF GROUND NO. 1 IN ITA NO. 160/PN/2014 DATED 15-04-2014 (A.Y. 2010-11) AND RESTORE THE APPEAL FILE FOR HEARING ON THE GROUND NO. 1. THIS APPEAL IS FIXED FOR HEARING IN THE REGULAR COURSE ON 02-03-2015. IN THE BACKDROP OF THESE FACTS, THE APPEAL OF THE ASSESS EE IS LISTED BEFORE US TO ADJUDICATE GROUND NO. 1, WHICH READS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, LOWER AUTHORITIES HAVE ERRED IN DISALLOWING A SUM OF RS.1 9,00,512/- BY INVOKING 3 ITA NO. 160/PN/2014, A.Y. 2010-11 THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT , 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 BY COMPLETELY DISREGA RDING APPELLANTS CONTENTION. 3. THE FACTS OF THE CASE AS EMANATING FROM RECORDS ARE : THE ASSESSEE IS A CO-OPERATIVE BANK REGISTERED UNDER THE MAHARASHTR A STATE CO- OPERATIVE SOCIETY ACT. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11 ON 30-09-2010 DECLARING TOTAL INCOME OF RS.1,16,30,500/-. DURING THE COURSE OF SCRUTINY ASSESSMEN T, THE ASSESSING OFFICER MADE ADDITIONS/DISALLOWANCES INTER ALIA U/S. 14A R.W. RULE 8D ON DIVIDEND INCOME. THE ASSESSEE CHALLENGED THE A SSESSMENT ORDER DATED 08-01-2013 BEFORE THE COMMISSIONER OF INCOM E TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) UPHELD T HE FINDINGS OF ASSESSING OFFICER AND CONFIRMED THE DISALLOWANCE. AGGRIEVED BY THE ORDER OF FIRST APPELLATE AUTHORITY, THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL. 4. SHRI PRAMOD SHINGTE APPEARING ON BEHALF OF THE ASSESS EE SUBMITTED THAT THE ASSESSEE BANK HAS MADE INVESTMENT IN MUTUAL FU NDS OUT OF ITS OWN FUNDS AND NOT OUT OF ANY BORROWED FUNDS. THE ASSES SEE HAS NON- INTEREST BEARING FUNDS TO THE TUNE OF RS.23,64,79,341/- AND THE INVESTMENT IN THE MUTUAL FUNDS IS ONLY RS.4,00,00,000/-. SINC E, THE ASSESSEE IS HAVING SUFFICIENT NON-INTEREST BEARING FUNDS FOR MAKING INVESTMENT IN MUTUAL FUNDS, THERE IS NO QUESTION OF MAKING D ISALLOWANCE U/S. 14A. THE LD. AR FURTHER SUBMITTED THAT DECISIONS RELA TING TO MAKING INVESTMENT OR WITHDRAWAL OF INVESTMENTS ARE MADE BY THE DIRECTORS IN THE BOARD OF MEETINGS. ALL DIRECTORS OF THE ASSESSEE BANK WOR K ON HONORARY BASIS AND DO NOT DRAW ANY REMUNERATION FOR THE SERVICE S RENDERED BY THEM TO THE BANK. THEREFORE, THERE IS NO QUESTION OF ANY ADMINISTRATIVE EXPENSES IN MAKING INVESTMENT DECISIONS. THE LD. AR FURTHER CONTENDED THAT DURING THE YEAR, THE ASSESSEE HAS MADE LIMITED INVE STMENT OF 4 ITA NO. 160/PN/2014, A.Y. 2010-11 RS.4,00,00,000/- ONLY. THERE ARE 5 PURCHASE AND 5 SALE T RANSACTIONS IN THE ENTIRE YEAR. SOME OF THE INVESTMENTS MADE ARE WITH DIVIDEND INVESTMENT OPTIONS AND IN SOME INVESTMENTS THE DIVIDEND IS DIRECTLY CREDITED TO THE BANK ACCOUNT OF THE ASSESSEE BY ECS. IN SUCH CIRCUMSTANCES, THE ASSESSEE IS NOT REQUIRED TO MONITOR O R MANAGE DIVIDEND RECEIPTS. THUS, THERE IS NO EXPENDITURE ON PORT FOLIO MANAGEMENT. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF CO-ORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF DHARMAVEER SAMBHAJI URBAN CO-OP. BANK LTD. VS. ACIT (SUPRA). NO REASON HAS BEEN RECORDED BY THE ASSE SSING OFFICER FOR INVOKING THE PROVISIONS OF SECTION 14A. WHERE THE ASSES SEE HAS BOTH INTEREST BEARING FUNDS AS WELL AS NON-INTEREST BEARING FUND S, THERE IS NO NEED TO DRAW NEXUS TO SHOW THAT THE INVESTMENT HAS BEEN MADE FROM INTEREST BEARING FUNDS. TO BUTTRESS HIS SUBMISSIONS THE LD. AR DRAWS SUPPORT FROM THE FOLLOWING DECISIONS: I. CIT VS. HDFC BANK LTD.; INCOME TAX APPEAL NO. 330 OF 201 2 DECIDED ON 23RD JULY, 2014 BY HON'BLE BOMBAY HIGH COURT. II. ACIT VS. MAGARPATTA TOWNSHIP DEVELOPMENT & CONSTRUCTION CO. LTD.; 46 TAXMANN.COM 284 (PUNE-TRIB.). 5. ON THE OTHER HAND SHRI B.C. MALAKAR REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF THE AUTHORITIES BELOW . THE LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS RECORDED SATISFAC TION AND HAS GIVEN DETAILED REASONS FOR INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D. THE LD. DR SUBMITTED THAT THE OBJECTIONS RAISED BY T HE ASSESSEE ARE MISPLACED. THE LD. DR HAS SUBMITTED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS CONSIDERED ALL THE CONTENTIONS OF THE ASS ESSEE AND HAS THEREAFTER UPHELD THE DISALLOWANCE. THE LD. AR OF THE ASSES SEE HAS MERELY REITERATED THE SUBMISSIONS THAT WERE MADE BEFORE THE FIR ST APPELLATE 5 ITA NO. 160/PN/2014, A.Y. 2010-11 AUTHORITY. THE LD. DR PRAYED FOR UPHOLDING THE IMPUGNED O RDER AND DISMISSING THE APPEAL OF THE ASSESSEE. 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IT IS AN U NDISPUTED FACT THAT THE ASSESSEE HAS MADE INVESTMENT OF RS.4,00,00,000/- IN MU TUAL FUNDS DURING THE IMPUGNED ASSESSMENT YEAR. A PERUSAL OF PRO FIT AND LOSS A/C. FOR THE FINANCIAL YEAR 2009-10 WHICH IS PLACED AT PAGES 5 A ND 6 OF THE PAPER BOOK REVEAL THAT THE ASSESSEE HAS EARNED DIVIDEN D INCOME OF RS.5,19,446.44 ON MUTUAL FUNDS DURING THE PERIOD RELEVANT TO ASSES SMENT YEAR 2010-11. THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.19,00,512/- ON TAX FREE DIVIDEND INCOME EARNED BY TH E ASSESSEE DURING THE RELEVANT PERIOD. IN OUR CONSIDERED VIEW DISA LLOWANCE U/S. 14A R.W. RULE 8D CANNOT EXCEED EXEMPT INCOME. SIMILAR VIEW HAS BEEN TAKEN BY MUMBAI BENCH IN THE CASE OF DAGA CHEMICALS PVT. LTD. VS. ACIT IN ITA NO. 5592/MUM/2012 DECIDED ON 01-01-2015. 7. THE ASSESSEE HAS FURTHER CONTENDED THAT INVESTMENT IN MUTUAL FUNDS ARE MADE FROM OWN FUNDS. THE LD. AR OF THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE BALANCE SHEET AS ON 31-03-2010 A T PAGES 1 TO 4 OF THE PAPER BOOK. THE LD. AR POINTED OUT THAT THE ASSESSEE IS HAVING NON- INTEREST BEARING FUNDS TO THE TUNE OF RS.23,64,79,341/-. THE ASSESSEE HAS MADE INVESTMENT IN MUTUAL FUNDS OUT OF THESE NON-INTE REST BEARING FUNDS. THE LD. AR HAS ALSO DRAWN OUR ATTENTION TOWARDS T HE DETAILS OF INVESTMENT MADE IN MUTUAL FUNDS WHICH ARE AT PAGE 7 OF TH E PAPER BOOK. WE OBSERVE THAT DURING THE YEAR THE ASSESSEE HAS PUR CHASED MUTUAL FUNDS FOR RS.5,00,00,000/-. IN FINANCIAL YEAR 2009-10, THE AS SESSEE HAS MADE 7 TRANSACTIONS FOR PURCHASE OF MUTUAL FUNDS AND 5 T RANSACTIONS FOR SALE OF MUTUAL FUNDS. AT NO POINT OF TIME THE INVESTMENT IN MUTUAL FUNDS HAS EXCEEDED NON-INTEREST BEARING FUNDS OF THE ASSESSEE . THE HON'BLE 6 ITA NO. 160/PN/2014, A.Y. 2010-11 BOMBAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LTD. (SUPRA) HAS HELD THAT WHERE THE ASSESSEE IS HAVING OWN FUNDS AS WELL AS INTEREST BEARING FUNDS AND WHERE OWN FUNDS ARE SUFFICIENT TO MEET IN VESTMENTS, IT WOULD BE PRESUMED THAT THE INVESTMENTS ARE MADE BY TH E ASSESSEE OUT OF INTEREST FREE FUNDS AVAILABLE. THE HON'BLE HIGH COURT WHILE C OMING TO SUCH A CONCLUSION PLACED RELIANCE ON THE DECISION RENDERED IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. REPORTED AS 313 ITR 340 (BOM). 8. THE ASSESSEE HAS FURTHER PLACED RELIANCE ON THE ORDER OF CO-ORDINATE BENCH IN THE CASE OF ACIT VS. MAGARPATTA TO WNSHIP DEVELOPMENT & CONSTRUCTION CO. LTD. (SUPRA) TO REITERATE T HAT THE PROVISIONS OF SECTION 14A R.W. RULE 8D CANNOT BE APPLIED WH ERE THE INVESTMENTS ARE MADE OUT OF OWN FUNDS. IN THE SAID CASE , THE ASSESSEE HAD EARNED EXEMPT INCOME BY WAY OF DIVIDEND ON INVESTMEN TS MADE IN THE MUTUAL FUNDS. THE ASSESSING OFFICER INVOKED THE PROVISIO NS OF SECTION 14A R.W. RULE 8D. THE TRIBUNAL OBSERVED THAT IT IS NO LONG ER RES INTEGRA THAT INVOKING OF RULE 8D IN ORDER TO COMPUTE THE DISALLOWAN CE U/S. 14A OF THE ACT IS NEITHER AUTOMATIC NOR IS DEPENDENT MERELY ON THE EXISTENCE OF AN EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. THE ASS ESSING OFFICER BEFORE INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D H AS TO BRING OUT SATISFACTION WHICH IS MANDATE IN TERMS OF SECTION 14A(2 ) BASED ON REASONS AND RELEVANT CONSIDERATION. THE TRIBUNAL FURTHER HELD THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE AVAILABILITY OF INTEREST FREE FUNDS AND THE INVESTMENT MADE BY THE ASSESSEE IN MUTUAL FUNDS DURING THE YEAR. THE TRIBUNAL DELETED THE DISALLOWANCE MADE BY ASSE SSING OFFICER U/S. 14A OF THE ACT. 9. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DHARMAVEER SAMBHAJI URBAN CO-OP. BANK LTD. VS. ACIT (SUPRA) WHILE DEALIN G WITH THE SIMILAR ISSUE DELETED THE DISALLOWANCE U/S. 14A ON THE GROUN D THAT NO 7 ITA NO. 160/PN/2014, A.Y. 2010-11 CATEGORICAL FINDING WAS GIVEN BY THE ASSESSING OFFICER THAT T HE ASSESSEE HAS UTILIZED INTEREST BEARING FUNDS FOR MAKING INVESTMENT IN MUTUAL FUNDS. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ARE AS UNDE R: 6.3 WE FIND THAT THERE IS NO CATEGORICAL FINDING O F THE AO THAT THE ASSESSEE UTILISED THE INTEREST BEARING FUND FOR MAK ING THE INVESTMENT IN THE MUTUAL FUNDS. WE FURTHER FIND THAT AO HAS APPLIED SECTION 14A(2) BUT SECTION 14A(2) ONLY VESTS POWERS IN THE AO FOR QUAN TIFICATION OF THE EXPENDITURE FOR MAKING THE DISALLOWANCE BUT AT THE SAME TIME SECTION 14A(2) DOES NOT OVERRIDE SECTION 14A(1) OF THE INCO ME TAX ACT. 6.4 IN THE CASE OF HERO CYCLES LTD. (SUPRA) THE HON BLE HIGH COURT OF PUNJAB AND HARYANA HAS OBSERVED THAT DISALLOWANCE U /S.14A REQUIRED FINDING OF INCURRING OF EXPENDITURE FOR EARNING EXE MPTED INCOME, AND WITHOUT SAID FINDING NO EXPENDITURE CAN BE DISALLOW ED U/S.14A OF THE ACT. THE HONBLE HIGH COURT CONSIDERED SECTION 14A(2) AN D RULE 8D(1) ALSO. IN THE CASE OF CCI LTD. (SUPRA) THE ASSESSEE EARNED TH E DIVIDEND INCOME ON THE ASSETS WHICH WAS CLAIMED EXEMPT BUT THE PROFIT ON THE SALE WAS OFFERED AS BUSINESS INCOME. IN THIS CASE, THERE CANNOT BE PROFIT ON THE TRANSFER OF THE MUTUAL FUNDS BUT AS WE HAVE HELD THAT THERE IS NO SPECIFIC FINDING BY THE AO NOR BY THE CIT(A) THAT INFACT THE ASSESSEE H AS USED THE INTEREST BEARING FUNDS FOR INVESTMENT, ON THIS FACTUAL ASPEC T, WE HOLD THAT THERE IS NO JUSTIFICATION TO MAKE THE DISALLOWANCE. WE ACCO RDINGLY DELETE THE ADDITION MADE BY THE AO U/S.14A R.W. RULE 8D AS THE MANDATE OF SECTION 14A(1) IS NOT FULFILLED. 10. IN THE PRESENT CASE, WE FIND THAT THE REVENUE HAS M ADE DISALLOWANCE OF MORE THAN RS.19 LACS U/S. 14A ON THE TAX FR EE DIVIDEND INCOME OF MERELY RS.5,19,446/-. THE REVENUE HAS ALSO NO T DENIED THE FACT THAT DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND S CORRESPONDING TO THE INVESTMENT MADE IN MUTUAL FUNDS. TH ERE IS NO CATEGORICAL FINDING OF FACT BY THE AUTHORITIES BELOW THAT I NVESTMENT IN MUTUAL FUNDS BY ASSESSEE IS FROM INTEREST BEARING FUNDS. I T IS A WELL SETTLED LAW THAT DISALLOWANCE CANNOT BE MADE BY INVOKING T HE PROVISIONS OF SECTION 14A R.W. RULE 8D IN AN ARBITRARY MANNER. THE REVENUE HAS NOT CONTROVERTED THE CONTENTIONS OF THE ASSESSEE THAT THE RE HAS BEEN NO EXPENDITURE ON MANAGING THE INVESTMENT PORTFOLIO SINCE, THE DIVIDEND ARE EITHER REINVESTED IN THE SAME FUND OR ARE CREDITED TO TH E BANK ACCOUNT OF THE ASSESSEE THROUGH ECS. FURTHER, IT HAS NOT BEEN RE FUTED THAT THE INVESTMENT DECISIONS ARE TAKEN BY THE BOARD OF DIRECTORS WHO ARE WORKING 8 ITA NO. 160/PN/2014, A.Y. 2010-11 ON HONORARY BASIS WITHOUT DRAWING ANY REMUNERATION FOR T HE SERVICES RENDERED BY THEM TO THE ASSESSEE BANK. 11. IN VIEW OF THE FACTS OF THE CASE AND VARIOUS CASE LAW S DISCUSSED ABOVE, WE FIND MERIT IN THE APPEAL OF THE ASSESSEE. THE IM PUGNED ORDER IS SET ASIDE, DISALLOWANCE U/S. 14A R.W. RULE 8D IS THUS, DELETED. 12. IN THE RESULT, THE FIRST GROUND OF THE APPEAL OF ASSES SEE WHICH IS BEFORE US FOR ADJUDICATION, IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 15 TH DAY OF JULY, 2015 AT PUNE SD/- SD/- ( ! / R.K. PANDA) ( ' # / VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER $ PUNE; %& /DATED : 15 TH JULY, 2015 RK/PS *+,#-. / '- $ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ' ( ) / THE CIT(A)-I, NASHIK 4. ' /THE CIT-I, NASHIK 5. '*+ ,,-. / -. / 0 1 23 / $ DR, ITAT, B BENCH, PUNE 6. +!4 5 $ GUARD FILE. ' , //TRUE COPY// *% / BY ORDER, #%0 1) PRIVATE SECRETARY, ' /ITAT, PUNE