POONAWALLA INVESTMENTS & INDUSTRIES P LTD, MUMBAI V. DCIT 3(2), MUMBAI

ITA 1631/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88145 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Assessee Lawyers: PRASAD BAPAT
• Keywords: Opportunity of being heard; Diversion of income; Earning of tax free income; Cost of acquisition
• Section: 143(3); 14A; 132

Judgement Text

C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER ./ I.T.A. NO.1631 /MUM/2013 ( / ASSESSMENT YEAR : 2009-2010 POONAWALLA INVESTMENTS & INDUSTRIES PVT. LTD., 508, DALAMAL TOWERS, NARIMAN POINT, MUMBAI 400 021. / VS. DY. CIT 3 ( 2 ), MUMBAI. ./ PAN : AAACP 3265 B ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI PRASAD BAPAT R E SPONDENT BY : SHRI PREMANAND J / DATE OF HEARING : 10-12-2014 / DATE OF PRONOUNCEMENT : 21-01-2015 [ !' / O R D E R PER R.C. SHARMA, A.M . : THIS IS AN APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) -4, MUMBAI DATED 6-12-2012 FOR THE A.Y. 2009-10 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 . 2. THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE AS SESSEE IN THIS APPEAL:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-4, MUMBAI ERRED IN CONFIRMING DISALLOWANCE OF EXPENSES AMOUNTING TO RS. 83,44,713/- U/S. 14A READ WITH RULE 8D THE DISALLOWANCE CONFIRMED BY THE LEARNED CIT(A) BE EITHER DELETED OR AT LEAST SUITABLY REDUCED. ITA 1631/M/13 2 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-4, MUMBAI ERRED IN NOT REDUCING DISALLOWANCE U/S 14A BY AN AMOUNT OF RS. 60,00.000/- BEING CONTINGENCIES' AS PER DECLARATION MADE BY THE COMPANY DURING ACTION U/S 132 OF THE INCOME TAX ACT, 1961 WHILE COMPUTING DISALLOWANCE U/S 14A. 3 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-4, MUMBAI ERRED IN CONFIRMING DISALLOWANCE OF RS. 1,12,032/- BEING PROVISION MADE FOR LEAVE ENCASHMENT ON ACTUARIAL VALUATION. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-4, MUMBAI ERRED IN NOT ALLOWING AMOUNT OF RS. 17,15,457/- BEING PMS FEES CLAIMED AS DEDUCTION U/S 48 WHILE COMPUTING CAPITAL GAIN. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -4, MUMBAI ERRED IN NOT ALLOWING AN AMOUNT OF RS. 4,20,863/- BEING EXPENSES/REDUCING FROM CONSIDERATION WHILE WORKING OUT CAPITAL GAIN ON TRANSFER OF INVESTMENT IN VENTURE CAPITAL FUND. 3. THE FACTS IN BRIEF ARE THAT THE ASSSSEE IS ENGA GED IN THE BUSINESS OF DEALING IN SHARES/SECURITIES AND INVESTMENTS IN SHARES/SECURITIES/BONDS/MUTUAL FUNDS AND FINANCE ET C. DURING THE YEAR THE ASSSSEE RECEIVED DIVIDEND INCOME AND SHARE FROM PAR TNERSHIP FIRM OF RS. 24,55,39,132/- WHICH IS CLAIMED EXEMPT FROM INCOME- TAX AND OFFERED RS.39,69,299/ FOR DISALLOWANCE U/S. 14A, WHEREAS, H OWEVER THE A.O. HAS APPLIED RULE 8D OF THE INCOME TAX RULES, 1962 AND M ADE DISALLOWANCE OF RS.99,30,165/- U/S. 14A, WHICH HAS BEEN DISPUTED BY THE ASSESSEE CLAIMING THAT INDIRECT EXPENSES ARE NOT TO BE ALLOC ATED TO THE EXEMPT INCOME BECAUSE A.O. IS NOT AUTHORIZED TO ESTIMATE E XPENDITURE WHICH ITA 1631/M/13 3 ASSESSEE WOULD HAVE INCURRED IN RELATION TO EXEMPT INCOME. ASSESSEE HAS CLAIMED THAT IT HAS MADE INVESTMENTS UNDER THE PORTFOLIO MANAGEMENT SCHEME (PMS) AND, THEREFORE, NO EXPENDIT URE IS INCURRED BY THE ASSESSEE. IT IS ALSO CLAIMED THAT CYRUS POON AWALLA GROUP OF COMPANIES WERE SUBJECTED TO SEARCH U/S. 132 AND THE GROUP DECLARED RS.60 LAKH AS ADDITIONAL INCOME TOWARDS DISALLOWANC E OF EXPENSES FOR THE YEAR UNDER CONSIDERATION AND, THEREFORE, THAT SHOUL D ALSO BE SET OFF AGAINST THE DISALLOWANCE U/S. 14A. HOWEVER, THE A.O . REJECTED ASSESSEES CONTENTION AND DISALLOWED RS. 99,30,165/ - U/S 14A OF THE ACT. BY THE IMPUGNED ORDER, THE LD. CIT(A) CONFIRME D THE DISALLOWANCE MADE BY THE A.O. 4. IT WAS CONTENDED BY THE LD. A.R. THAT INVESTMENT WAS MADE IN FOREIGN COMPANY, INCOME FROM WHICH ARE LIABLE TO TA X IN ADDITION TO ITS INVESTMENT IN SHARES OF CO-OPERATIVE SOCIETY WHICH YIELDED TAXABLE DIVIDEND INCOME. AS PER THE LD. A.R. ALL THESE INV ESTMENT WERE NOT EXCLUDED BY A.O. WHILE APPLYING RULE -8D. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFU LLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT SIMILAR ISSUE WAS DEALT BY THE TRIBUNAL IN THE IMMEDIATELY PRECEDING YEAR I.E A.Y. 2008- 09 IN ITA NO. 5118/MUM/2012 VIDE ORDER DATED 25-7-2 014IN ASSESSEES OWN CASE WHEREIN THE TRIBUNAL HAS HELD AS UNDER:- THIS IS THE CASE WHERE ASSESSEE MADE HUGE INVESTME NT IN SHARES OF THE COOPERATIVE SOCIETY WHICH YIELDED TAXABLE DIVID END INCOME OR INVESTMENT IS MADE FROM THE FOREIGN COMPANIES, WHOS E INCOME IS ALSO TAXABLE IN INDIA. FURTHER, LD COUNSEL MENTIONED TH AT CERTAIN INVESTMENTS WERE MADE IN THE SHORT TERM CAPITAL GA INS WITH AN INTENTION TO EARN GAINS RATHER THAN EXEMPT INCOME, THUS, THE INVESTMENTS HAVE DIFFERENT SEGMENTS WHICH SHOULD BE CONSIDERED BY THE AO WHILE APPLYING THE RULE 8D. LD COUNSEL ALSO MENTIONED THAT AO ALREADY QUANTIFIED THE DISALLOWABLE EXPENDITURE TO THE TUNE OF RS. 28,63,916/- ON THE BASIS OF PROPORTIONALITY QUA THE EXPENSES TO THE ITA 1631/M/13 4 INVESTMENTS, WHEREAS THE AO MECHANICALLY ADOPTED TH E RULE 8D @ 0.5% OF THE AVERAGE AMOUNT OF INVESTMENT OF RS. 151 .05 CRS. THE AO DID NOT ANALYZE THE INVESTMENT PATTERNS AND CONSIDE RED ALL THE ACCOUNTS OF INVESTMENT WITHOUT EXAMINING IF THE REL ATED DIVIDEND INCOME IS OTHERWISE TAXABLE OR NOT. HE ALSO MENTIO NED ABOUT THE ABSENCE OF AOS SATISFACTION IN REJECTING THE ASSES SEES COMPUTATION OF DISALLOWABLE EXPENDITURE U/S 14A WITHOUT MAKING PRO PER SPEAKING ORDER. 4. ON THE OTHER HAND, LD DR MENTIONED THAT THE AO H AS NO OPTION BUT TO QUANTIFY THE DISALLOWANCE AS PER THE PROVISI ONS OF SECTION 14A READ WITH RULE 8D AND THEREFORE, THERE IS NO NEED F OR DISCUSSION INTO INVESTMENT PATTERNS TO THE ASSESSEE. IN RESPONSE, LD COUNSEL FOR THE ASSESSEE MENTIONED THAT NO DISALLOWANCE IS CALLED F OR UNDER SECTION 14A IF THERE IS NO DIVIDEND INCOME FROM CERTAIN INV ESTMENTS. HE ALSO MENTIONED THAT CERTAIN INVESTMENTS WERE MADE IN SIS TER CONCERNS TO OBTAIN CONTROL AND MANAGEMENT OF THE CONCERNS AND N OT WITH AN INTENTION TO EARN DIVIDEND INCOME. LD COUNSEL IS O F THE OPINION THAT SUCH INVESTMENTS SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPUTING THE AVERAGE INVESTMENTS TO ARRIVE AT THE NET INVESTMENT S BEFORE APPLYING THE FORMULA OF 0.5% OF THE AVERAGE INVESTMENT. FOR THIS PURPOSE, LD COUNSEL MENTIONED THAT THE MATTER MAY REMAND TO THE FILE OF THE AO FOR A FRESH ADJUDICATION. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE O RDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIA L PLACED BEFORE US. ON HEARING BOTH THE PARTIES, WE FIND MERIT IN THE A RGUMENT OF THE LD COUNSEL AND PROCEED TO REMAND THE MATTER TO THE FIL E OF THE AO FOR ADJUDICATING THE MATTER AFRESH AFTER AFFORDING A RE ASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUN D NO.1 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . 6. AS THE FACTS AND CIRCUMSTANCES OF THE ISSUE ARE SIMILAR, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES O WN CASE, THE MATTER WITH REGARD TO COMPUTATION OF DISALLOWANCE U/S 14A READ WITH RULE 8-D IS RESTORED BACK TO THE FILE OF THE A.O. FOR DECIDING THE ISSUE AFRESH IN TERMS OF THE DIRECTIONS GIVEN BY THE TRIBUNAL IN ITS ORDER DATED 25-7-2014. 7. WITH REGARD TO GROUND NO. 2, THE CLAIM OF THE AS SESSEE THAT AMOUNT OFFERED DURING SEARCH FOR TAXATION NEEDS TO BE SET OFF AGAINST DISALLOWANCE U/S 14A WAS NOT EXAMINED BY THE A.O. THE LD. A.R. DRAW N OUR ATTENTION TO THE ITA 1631/M/13 5 ORDER OF A.O. IN CASE OF ANOTHER GROUP MEMBER OF AS SESSEE WHEREIN SET OFF WAS ALLOWED BY THE A.O. AFTER HAVING FOLLOWING OBSERVAT IONS:- FURTHER, THE COMPANY HAS OFFERED A SUM OF RS 75 LACS AS ADDITIONAL INCOME UNDER THE HEAD CONTINGENCIES TOWARDS DISALLOWANCE OF EXPENSES , CLAIMS OTHER ADDITIONS, ERRORS, OMISSIONS ETC FOR CURRENT ASSESSMENT YEAR AN D HENCE ANY DISALLOWANCE MADE IN THE ASSESSMENT PROCEEDINGS (INCLUDING U/S 14A) SHOU LD BE SET OFF OR ADJUSTED FIRST AGAINST THIS CONTINGENCY. AS THERE IS A FURTHER DISALLOWANCE IN RESPECT OF AB OVE EXPENDITURE IN THE ASSESSMENT, HENCE THE DISALLOWANCE U/S 14A FURTHER REDUCED TO R S 5,74,397/- AS COMPUTED BELOW IN ORDER TO MAINTAIN CEILING OF EXPENDITURE T O THE EXTENT OF DEBITED TO PROFIT & LOSS ACCOUNT: PARTICULARS AMOUNT AMOUNT DISALLOWANCE AS COMPUTED IN PARA 4 ABOVE 88,89,961 DISALLOWANCE OF AIRCRAFT EXPENSES 8,15,564 CONTINGENCY TOWARDS DISALLOWANCE OF EXPENSES, CLAIMS, OTHER ADDITIONS, ERRORS, OMISSIONS ETC. 75,00,000 83,15,564 NET DISALLOWANCE U/S 14A 5,74,397 WE FOUND THAT IN CASE OF OTHER GROUP MEMBER WHEREIN SIMILAR ADDITIONAL INCOME WAS OFFERED UNDER THE HEAD CONTINGENCIES WAS ALLOWED BY THE A.O. TO BE SET OFF AGAINST DISALLOWANCE MADE U/S 14A IN CAS E OF ADURJEE & BROTHERS P. LTD. (COVERED UNDER THE SAME SEARCH ON 21-6-2011 IN CASE OF POONAWAL GROUP). THE A.O. VIDE HIS ORDER DATED 16-12-2011 A T PAGE 13 & 14 HAD GIVEN THE NECESSARY ADJUSTMENT AS REPRODUCED ABOVE. ACCOR DINGLY WE RESTORE THIS ISSUE ALSO TO THE FILE OF A.O. FOR NECESSARY VERIFI CATION AND DECIDING THE ISSUE AFRESH AS PER LAW. 8. THE GRIEVANCE TAKEN IN GROUND NO. 3 IS WITH REGA RD TO THE PROVISION MADE FOR LEAVE ENCASHMENT ON ACTUARIAL VALUATION. WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSSSEES OWN C ASE IN THE PRECEDING ASSESSMENT YEAR 2008-09 VIDE ITS ORDER DATED 25-7-2 014. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL ORDER 25-7-2 014 (SUPRA). THE LD. A.R. ITA 1631/M/13 6 FAIRLY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED AG AINST THE ASSESSEE. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE SUPRA, WE CONFIRM THE ORDER OF THE LD. CIT(A) FOR DISALLOW ANCE OF RS. 1,12,032/- BEING PROVISION MADE FOR LEAVE ENCASHMENT ON ACTUARIAL VA LUATION. 9. IN GROUND NO. 4 THE ASSESSEE HAS AGITATED THE DI SALLOWANCE OF RS. 17,15,457/- BEING PMS FEES CLAIMED AS DEDUCTION U/S 48 OF THE ACT WHILE COMPUTING CAPITAL GAIN. 10. IT WAS CONTENDED BY THE LD. A.R. THAT THE ASSESSEES CLAIM OF PORTFOLIO MANAGEMENT SERVICES (PMS) FEES RS.17,15,4 57/- SHOULD BE ALLOWED U/S. 48 WHILE CALCULATING CAPITAL GAIN ON ACCOUNT O F PURCHASE AND SALE OF SECURITIES, WHICH HAS BEEN REJECTED BY THE A.O. REL YING ON THE DECISION OF PRADEEP KUMAR HARLALKA 14 TAXMAN.COM 42 (MUM). RELIANCE WAS PLACED ON THE DECISION OF SHRI HOMI K. BHABHA VS. ITO (ITA T MUMBAI BENCH) ORDER DATED 1-10-201. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FO UND THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE MUMBAI BEN CH OF THE TRIBUNAL IN THE CASE OF SHRI HOMI K. BHABHA VS. ITO ORDER DATED 01-10-2011. PRECISE OBSERVATION OF THE BENCH WAS UNDER:- WHILE IN DEVENDRA MOTILAL KOTHARI 50 DTR 369, THE M UMBAI BENCH HELD THAT THE FEES PAID FOR PORTFOLIO MANAGEM ENT SERVICES WAS NEITHER DIVERSION OF INCOME BY OVERRIDING TITLE NOR COST OF ACQUISITION NOR COST OF IMPROVEMENT, A CONTRARY VIE W WAS TAKEN BY THE PUNE BENCH IN KRA HOLDING & TRADING BY RELYI NG ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN SHAKUNTALA KAN TILAL 190 ITR 56 (BOM). SUBSEQUENTLY, THE MUMBAI BENCH IN PR ADEEP KUMAR HARLALKA (INCLUDED IN THE FILE) DECLINED TO F OLLOW THE PUNE BENCH ON THE GROUND THAT THE JUDGMENT OF THE BOMBAY HIGH COURT IN SHAKUNTALA KANTILAL HAD BEEN HELD TO NOT B E GOOD LAW IN ROSHANBABU MOHAMMED 275 ITR 231 (BOM). THE MAJORIT Y OPINION (IN TERMS OF NUMBER OF ORDERS) AND THE LATE ST ORDER (IN THE POINT OF TIME) WERE AGAINST THE ASSESSEE). ITA 1631/M/13 7 RESPECTFULLY FOLLOWING THE ORDER OF TRIBUNAL, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LOWER AUTHORITIES DECLINI NG THE CLAIM OF PORTFOLIO MANAGEMENT SERVICE. 12. THE ASSESSEE HAS CLAIMED INCIDENTAL EXPENSES S. 4 ,20,863/- TO BE REDUCED FROM CAPITAL GAIN FROM VENTURE FUNDS. THE A.O. HAS NOT DISCUSSED THE ISSUE IN HIS ORDER. BY THE IMPUGNED O RDER, THE LD. CIT(A) CONFIRMED THE ACTION OF THE A.O. 13. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT BEFORE THE LD. CIT(A) ASSESSEE HAD FURNISHED FULL DETAILS OF E XPENSES SO INCURRED FOR EARNING CAPITAL GAINS. IN THE INTEREST OF JUST ICE, MATTER IS RESTORED BACK TO FILE OF A.O. FOR DECIDING AFRESH AFTER GIVI NG DUE OPPORTUNITIES. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JANUARY, 2015. !' # $% &! ' 21-01-2015 ( ) SD/- SD/- (SANJAY GARG) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED 21-01-2015 [ .6../ RK , SR. PS ITA 1631/M/13 8 ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. 7 () / THE CIT(A) 4,, MUMBAI 4. 7 / CIT 3MUMBAI 5. :;( 66<= , <= , $ 5 / DR, ITAT, MUMBAI C BENCH 6. (?@ A / GUARD FILE. ' / BY ORDER, : 6 //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 5 / ITAT, MUMBAI