ACIT, New Delhi V. M/s Moods Hospitality Pvt. Ltd., New Delhi

ITA 1693/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58603 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 24-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 07-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANIL KUMAR GOEL; PAWAN KUMAR MISHRA
• Assessee Lawyers: R S NEGI
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 69C; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `E: NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER I.T. A. NO.1443/DEL/2011 ASSESSMENT YEAR : 2007-08 MOODS HOSPITALITY PVT. LTD., INCOME-TAX OFFICER, D-363, DEFENCE COLONY, VS. WARD NO.5(4), NEW DELH I. NEW DELHI. PAN: AADCM5127C I.T. A. NO.1693/DEL/2011 ASSESSMENT YEAR : 2007-08 ASSTT. COMMISSIONER OF INCOME-TAX, MOODS HOSPITALI TY PVT. LTD., CIRCLE 5(1), NEW DELHI. VS. D-363, DEFENCE COLONY , NEW DELHI. PAN: AADCM5127C (APPELLANTS) (RESPONDE NTS) ASSESSEE BY : SHRI ANIL KUMAR GOEL, CA & SHRI PAWAN KUMAR MISHRA, ADVOCATE. RESPONDENT BY : SHRI R.S. NEGI, SR. DR. O R D E R PER K.D. RANJAN, ACCOUNTAT MEMBER: THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE FOR ASSESSMENT YEAR 2007-08 ARISE OUT OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX 2 (APPEALS)-VIII, NEW DELHI. THESE APPEALS HEARD TOG ETHER AND FOR THE SAKE OF CONVENIENCE, THEY ARE DISPOSED OF BY THIS COMMON ORDER. 2. FIRST ISSUE WHICH IS COMMON IN BOTH THE APPEALS RELATES TO ADDITION MADE UNDER SEC. 14A OF THE ACT. THE FACTS OF THE C ASE STATED IN BRIEF ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN CHAIN OF CHINE SE FOOD RESTAURANTS. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE RE CEIVED DIVIDEND OF RS.19,73,982/-. IN RESPONSE TO A QUERY, IT WAS SUB MITTED BY THE ASSESSEE THAT DIVIDEND INCOME HAS BEEN EARNED BY IT FROM MUTUAL F UNDS THE INVESTMENT WHEREIN WAS MADE OUT OF FRESH CAPITAL RECEIVED DURI NG THE YEAR UNDER CONSIDERATION AND ALSO FROM ZERO COUPON PREFERENCE SHARES ISSUED BY THE ASSESSEE COMPANY. ACCORDING TO THE ASSESSEE, SHARE CAPITAL OBTAINED DURING THE YEAR UNDER CONSIDERATION WAS NOT IMMEDIATELY RE QUIRED FOR ANY BUSINESS ACTIVITY AND THEREFORE, SAME WAS PARKED TEMPORARILY IN MUTUAL FUNDS. THUS, ACCORDING TO THE ASSESSEE, THERE WAS NO INTEREST EX PENDITURE INCURRED IN ACCORDANCE WITH THE EARNING OF DIVIDEND INCOME. SI MILARLY IN REGARD TO OTHER INDIRECT EXPENSES ALSO, IT WAS CLAIMED THAT T HE ASSESSEE DID NOT INCUR ANY EXPENDITURE DIRECT OR INDIRECT FOR EARNING DIVI DEND INCOME AND ALSO NO MAN POWER WAS DEPLOYED FOR THIS PURPOSE ENTAILING A NY EXPENSES. HOWEVER, THIS CONTENTION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER. THE AO RELYING ON THE DECISION OF ITAT, SPECIAL BENCH I N THE CASE OF ITO VS. 3 DAGA CAPITAL MANAGEMENT (P) LTD., MADE DISALLOWANCE BY APPLYING RULE 8D OF THE INCOME-TAX RULES, 1962 OF RS.13,83,959/- WHI CH INCLUDED INTEREST EXPENSES OF RS.7,25,050/- AND THE BALANCE INDIRECT EXPENSE WAS OF RS.6,58,909/-. 3. BEFORE THE CIT(A), SIMILAR ARGUMENTS WERE ADVANC ED BY THE ASSESSEE. RELIANCE WAS ALSO PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD., WHEREIN APPLICABILITY OF RULE 8D HAS BEEN HELD TO BE WITH PROSPECTIVE EFF ECT. THE LEARNED CIT(A) ON EXAMINATION OF FACTS OBSERVED THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST-FREE FUNDS AT ITS DISPOSAL PARTICULARLY AF TER INVESTMENT AGREEMENT WITH MATRIX PARTNERS INDIA INVESTMENT HOLDING, LLC , DATED 9 TH NOVEMBER, 2006 AND THEREFORE, THERE WAS NO JUSTIFICATION IN M AKING DISALLOWANCE ON ACCOUNT OF INTEREST BY ADOPTING RULE 8D OF THE INCO ME-TAX RULES, 1962. HE ALSO OBSERVED THAT INTEREST PAYMENT MADE BY THE ASS ESSEE WAS IN CONNECTION WITH EXCLUSIVE NEEDS OF THE ASSESSEE AND THEREFORE, THE SAME COULD NOT HAVE BEEN APPORTIONED ON THE BASIS OF AVERAGE VALUE OF I NVESTMENT AND AVERAGE TOTAL VALUE OF ASSETS. THE LEARNED CIT(A) THEREFOR E, HELD THAT DISALLOWANCE ON ACCOUNT OF INTEREST WAS NOT JUSTIFIED. HOWEVER, AS REGARDS THE DISALLOWANCE OF EXPENDITURE, HE REJECTED THE CONTEN TION OF THE COUNSEL OF THE ASSESSEE THAT NO EXPENDITURE WAS AT ALL INCURRED BY THE ASSESSEE IN RELATION TO 4 EARNING DIVIDEND INCOME OF RS.19,73,982/-. HE THER EFORE, ESTIMATED 10% OF DIVIDEND INCOME AS DISALLOWANCE AMOUNTING TO RS.1,9 7,398/-. 4. THE ASSESSEE IS AGGRIEVED BY AFFIRMING THE ADDIT ION OF RS.1,97,398/- AND THE REVENUE IS AGGRIEVED AGAINST DELETION OF BA LANCE ADDITION MADE BY THE ASSESSING OFFICER. BEFORE US, THE LEARNED AUTH ORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT RS.25 CRORE WAS INVESTE D IN MUTUAL FUNDS AND THERE WAS NO EXPENDITURE INCURRED BY THE ASSESSEE F OR EARNING THE DIVIDEND ON MUTUAL FUNDS. HE REFERRED TO PAGE 129 OF PAPER BOOK IN SUPPORT OF HIS CONTENTION THAT BORROWED FUNDS WERE NOT UTILIZED FO R THE PURPOSE OF INVESTMENT IN UNITS OF MUTUAL FUND. IT WAS ALSO SU BMITTED THAT NO EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNIN G DIVIDEND INCOME. ON THE OTHER HAND, THE LEARNED SR. DR STRONGLY SUPPORT ED THE ORDER OF THE ASSESSING OFFICER. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT (2010) 328 I TR 81 HAS HELD THAT PROVISIONS OF RULE 8D ARE APPLICABLE PROSPECTIVELY I.E. FROM THE ASSESSMENT YEAR 2008-09. IT HAS ALSO BEEN HELD THAT UNDER SEC . 14A, THE AO CAN DISALLOW THE AMOUNT WHICH HAS DIRECT NEXUS WITH THE EXEMPT INCOME AND EXPENDITURE INCURRED. IN THE CASE OF THE ASSESSEE, THE AO HAS ESTIMATED THE 5 DISALLOWANCE BY APPLYING RULE 8D IN VIEW OF THE DEC ISION OF ITAT, SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMEN T (P) LTD. (2009) 117 ITD 169 (MUM.)(SB), WHICH HAS BEEN OVER-RULED BY TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. (SUPRA). DISALLOWANCE UNDER SEC. 14A CAN BE MADE IF THE EXPE NDITURE INCURRED HAS NEXUS WITH THE EXEMPT INCOME. SINCE THE ASSESSING OFFICER HAD NOT EXAMINED THE ISSUE RELATING TO NEXUS BETWEEN THE EX PENDITURE INCURRED AND EXEMPT INCOME EARNED, WE SET ASIDE THE MATTER TO TH E FILE OF THE ASSESSING OFFICER WITH THE DIRECTIONS TO EXAMINE WHETHER ANY ADMINISTRATIVE EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INC OME. THE AO IS DIRECTED TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO. LTD. (SUPRA). NEEDLESS TO SAY, THE ASSESSING OFFICER WILL PROVIDE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6. THE NEXT ISSUE FOR CONSIDERATION IN ASSESSEES A PPEAL RELATES TO DISALLOWANCE OF RS.5,00,000/- MADE BY THE AO ON AD HOC BASIS. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASKED T HE DETAILS OF PACKING MATERIAL. HOWEVER, DETAILS WERE NOT FILED NOR THE BOOKS OF ACCOUNTS WERE PRODUCED FOR VERIFICATION, AND IN THE ABSENCE OF QU ANTITATIVE DETAILS, THE AO 6 MADE AD HOC DISALLOWANCE OF RS.5,00,000/- INVOKING THE PROVISIONS OF SEC. 69C OF THE ACT. 7. ON APPEAL BEFORE THE LEARNED CIT(A), IT WAS SUBM ITTED BY THE ASSESSEE THAT COMPLETE DETAILS OF EXPENDITURE WERE FURNISHED BEFORE THE AO AND THERE WAS NO SPECIFIC QUERY REGARDING ANY SPECIFIC ITEM O F EXPENDITURE, WHICH REMAINED UNANSWERED/UN-REPLIED. IT WAS SUBMITTED T HAT NO SPECIFIC EXPLANATION OR INFORMATION REGARDING PACKING MATERI AL EXPENSES OR OTHER EXPENSES WAS SOUGHT FOR. THEREFORE, IT WAS ARGUED THAT THERE WAS NO JUSTIFICATION FOR MAKING AD HOC DISALLOWANCE OF RS. 5,00,000/-. THE LEARNED CIT(A) HOWEVER, OBSERVED THAT THE ASSESSEE HAS NOT BEEN MAINTAINING QUANTITATIVE DETAILS OF OPENING STOCK, PURCHASES, C ONSUMPTIONS AND CLOSING STOCK. THE ASSESSEE WAS ALSO NOT MAINTAINING ANY R ECORDS SO THAT THE ITEMS OF PACKING MATERIAL COULD BE CO-RELATED WITH THE RE VENUE GENERATED BY IT IN THE RESPECTIVE ACCOUNTING YEARS. THEREFORE, IN THE ABSENCE OF ANY SPECIFIC EXPLANATION, THE LEARNED CIT(A) UPHELD THE DISALLOW ANCE. 8. BEFORE US, THE LEARNED AR OF THE ASSESSEE SUBMIT TED THAT NO SPECIFIC QUERY WAS RAISED BY THE ASSESSING OFFICER. THE ASS ESSEE FILED ALL THE DETAILS. THEREFORE, DISALLOWANCE MADE BY THE AO IS NOT JUSTI FIED. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IT WAS SUBMITTED BY THE ASSES SEE BEFORE THE LEARNED 7 CIT(A) THAT COMPLETE DETAILS OF EXPENDITURE WERE FU RNISHED BEFORE THE AO AND NO DEFECT HAS BEEN POINTED OUT BY THE ASSESSING OFFICER. NO SPECIFIC QUERY REGARDING PACKING MATERIAL EXPENSES OR OTHER EXPENSES HAS BEEN RAISED BY THE AO. IT IS A SETTLED LAW THAT AD HOC DISALLO WANCE WITHOUT POINTING OUT ANY MISTAKE IS NOT JUSTIFIED. WE THEREFORE, DELETE THE ADDITION MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(A). 10. IN THE RESULT, APPEALS FILED BY THE ASSESSEE IS PARTLY ALLOWED AND BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 11. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 31 ST JANUARY, 2012. SD/- SD/- (R.P. TOLANI) (K.D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 ST JANUARY, 2012. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.