ITO, New Delhi V. M/s. Exotique Exports, New Delhi

ITA 17/DEL/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2745 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-07-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 02-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR SENIOR
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.17/DEL/2013 (ASSESSMENT YEAR : 2009-10) ITO, WARD 22 (4), VS. M/S. EXOTIQUE EXPORTS, NEW DELHI. ; Z 45, OKHLA INDL. AREA, PHASE II, NEW DELHI 110 020. (PAN NO.AAAFE1843K) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.S. SINGHVI, CA REVENUE BY : MS. Y. KAKKAR, SENIOR DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE REVENUE EMANATES FROM THE ORDER OF THE CIT (APPEALS)-XXIII, NEW DELHI DATED 18.10.2012. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING AND EXPORT OF READYMADE GARMENTS. THE RETURN OF INCOME FOR THE AS SESSMENT YEAR UNDER CONSIDERATION FILED ON 20.09.2009 DECLARING A LOSS OF RS.1,06,63,290/-; SHORT TERM/LONG TERM CAPITAL GAIN OF RS.2,67,006/- ON SAL E OF UNITS OF MUTUAL FUNDS; DIVIDEND INCOME OF RS.1,40,41,005/- AND INTEREST IN COME OF RS.92,96,954/-. ASSESSEE HAS DEBITED INTEREST EXPENSES OF RS.74,41, 311/- ON OVERDRAFT BANK ITA NO.17/DEL/2013 2 ACCOUNT FOR THE YEAR. THE ASSESSING OFFICER MADE TH E DISALLOWANCE OF INTEREST PAYMENT OF RS.18,71,500/- BEING PROPORTIONATE OF IN TEREST FREE NON-BUSINESS ADVANCES AGAINST THE TOTAL INTEREST BEARING FUNDS. THE ASSESSING OFFICER ALSO DISALLOWED INTEREST OF R.29,92,496/- BY APPLYING TH E PROVISIONS OF RULE 8D(B) AND RS.6,73,909/- BEING 0.5% OF THE AVERAGE INVESTM ENT BY APPLYING THE PROVISIONS OF RULE 8D(C). THUS, TOTAL DISALLOWANCES U/S 14A READ WITH RULE 8D WAS RS.36,66,405/-. THE CIT (A) DELETED BOTH THE SE ADDITIONS BY OBSERVING A UNDER :- 8. IN RESPECT OF GROUND NO.1 & 2, IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT RECORDED A SPECIFIC FINDI NG THAT EXPENDITURE WAS INCURRED FOR THE EARNING OF THE DIV IDEND INCOME SUCH AS ON INTEREST, PORTFOLIO MANAGEMENT SE RVICES, AND OVERHEADS AND OFFICE EXPENSES. HE HAS HELD THAT IF THE APPELLANT HAD NOT MADE INVESTMENT IN MUTUAL FUND UN ITS AND NOT GIVEN INTEREST FREE LOAN TO ITS SISTER CONCERNS , THE NEED FOR BORROWING FROM THE BANK 'AND PAYING INTEREST THEREO N WOULD NOT HAVE ARISEN. HE MADE THE DISALLOWANCE U/S 14A R EAD WITH RULE 8D OF RS.36,66,405/- AND U/S 36(1)(III) OF RS. 18,71,506/-. THE APPELLANT'S ARGUMENT THAT THE TWO ADDITIONS AMO UNTED TO DOUBLE ADDITION ON THE SAME BASIS OUT OF THE TOTAL AMOUNT OF INTEREST OF RS.74,41,311/- IS NOT MISPLACED. FROM T HE SUBMISSIONS MADE BY THE APPELLANT, IT IS EVIDENT TH AT THE APPELLANT HAD SUFFICIENT FUNDS AND EVEN AFTER MAKIN G THE INVESTMENTS IN MUTUAL FUNDS AND PROVIDING INTEREST FREE ADVANCES, IT HAD SURPLUS INTEREST FREE FUNDS OF RS.16,66,62,392/-. NOT ONLY IS IT CLEAR THAT THE 'A PPELLANT HAD SURPLUS INTEREST FREE FUNDS, THERE IS ALSO NO EVIDE NCE TO INDICATE THAT INTEREST BEARING BORROWINGS WERE DIVERTED TO S ISTER CONCERNS OR TO INVESTMENTS MADE IN MUTUAL FUND UNIT S, HENCE DISALLOWANCE U/S 36(1)(III) CANNOT BE MADE. RELIANC E IS PLACED ON THE DECISION OF THE APEX COURT IN S.A. BUILDERS LTD. VS. CIT (2000) 288 ITR 1 AND THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. TIN BOX CO. (2003) 260 ITR 637. REGARDING THE DISALLOWANCE U/S 14A, THE VARIOUS CAS E LAWS ITA NO.17/DEL/2013 3 RELIED ON BY THE APPELLANT MAKE IT CLEAR THAT DISAL LOWANCE U/S 14A REQUIRES A FINDING OF FACT THAT EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPTED INCOME. THERE IS NO POSITI VE FINDING BY THE ASSESSING OFFICER WITH REGARD TO THE ACTUAL EXPENDITURE INCURRED ON EARNING INCOME FROM DIVIDEND. HENCE THE DISALLOWANCE U/S 14A CANNOT BE UPHELD. MOREOVER, TH E APPELLANT HAS CORRECTLY ARGUED THAT THE ADDITION OF RS.6,73,909/- HAS BEEN MADE TWICE OVER, AS THE APPE LLANT HAD ITSELF DISALLOWED THIS AMOUNT IN THE COMPUTATION OF INCOME. AFTER CAREFULLY CONSIDERING THE ORDERS PASSED BY TH E ITAT, DELHI AND THE CIT(AS) IN A NUMBER OF PRECEDING ASSE SSMENT YEARS, THE FOLLOWING DISALLOWANCES ARE DELETED: (A) RS.18,71,506/- OUT OF INTEREST PAID ON LOANS FR OM BANKS. (B) RS.36,66,405/- UNDER SECTION 14A READ WITH RULE 80. NOW, THE REVENUE IS IN APPEAL BY TAKING THE FOLLOWI NG GROUNDS :- '1. WHETHER ON THE FACTS AND ON THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITI ON OF RS.18,71,506/- MADE ON ACCOUNT OF INTEREST EXPENDIT URE PAID TO BANKERS FOR AVAILING CREDIT FACILITIES. 2. WHETHER ON THE FACTS AND ON THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITI ON OF RS.36,66,405/- MADE U/S 14A (RULE 8D) OF THE ACT. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OF THE GROUNDS OF APPEAL BEFORE OR DURING THE COURSE O F HEARING OF THE APPEAL.' 3. AT THE OUTSET OF THE HEARING, THE LD. AR SUBMITT ED THAT GROUND NO.1 IS WITH REGARD TO THE DELETION OF ADDITION OF RS.18,71 ,506/- MADE ON ACCOUNT OF INTEREST EXPENDITURE IS COVERED IN FAVOUR OF THE AS SESSEE BY THE DECISION OF ITAT IN ASSESSEES OWN CASE IN ITA NO.1409/DEL/2010 FOR ASSESSMENT YEAR 2004-05 DATED 15.07.2011. ITA NO.17/DEL/2013 4 4. WE HAVE HEARD BOTH THE SIDES ON THIS ASPECT. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY DECISION OF IT AT, COORDINATE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05, AS STATED ABOVE. THERE IS NO CHANGE IN THE FACTS OF THE CASE, THEREFORE, WE A RE TAKING THIS CASE COVERED BY THE COORDINATE BENCH. THE RELEVANT PARA OF THE D ECISION OF ITAT IN ITA NO.1409/DEL/2010 READ AS UNDER :- 4. WITH THE ASSISTANCE OF REPRESENTATIVE, WE HAVE GONE THROUGH /THE RECORD CAREFULLY. LEARNED FIRST APPELL ATE AUTHORITY HAS DELETED THE DISALLOWANCE ON THE GROUN D THAT ASSESSEE HAS MORE SURPLUS INTEREST FREE FUNDS THAN THE ADVANCES AND INVESTMENT. IN OTHER WORDS ON THE RECORD ASSESS ING OFFICER FAILED TO ESTABLISH THAT INTEREST BEARING FUNDS WER E USED EITHER FOR MAKING ADVANCES TO THE SISTER CONCERN OR FOR IN VESTMENT IN THE MUTUAL FUNDS. IF THAT BE SO, THEN HOW DISALLOWA NCE CAN BE MADE. THE STAND OF THE ASSESSING OFFICER IS THAT AS SESSEE SHOULD HAVE USED ITS OWN FUND INSTEAD OF INTEREST B EARING BORROWINGS FOR RUNNING THE BUSINESS. IN OUR OPINION , ASSESSING OFFICER CANNOT FORCE THE ASSESSEE TO EARN INTEREST INCOME OR SAVE INTEREST EXPENSES FOR RUNNING THE BUSINESS. TH E ASSESSING OFFICER WAS UNABLE TO DEMONSTRATE THAT INTEREST BEA RING LOANS WERE USED BY THE ASSESSEE OTHER THAN BUSINESS PURPO SE. LEARNED FIRST APPELLATE AUTHORITY HAS APPRECIATED T HE FACTS AND CIRCUMSTANCES IN RIGHT PERSPECTIVE AND WE DO NO T SEE ANY REASON TO INTERFERE IN HIS ORDER. HENCE, THIS APPEA L OF THE REVENUE IS DISMISSED. KEEPING THESE FACTS IN VIEW, WE DISMISS THIS GROUND OF REVENUES APPEAL. 5. IN THE GROUND NO.2, THE ISSUE INVOLVED IS DELETI NG THE ADDITION OF RS.36,66,405/- MADE U/S 14A OF THE INCOME-TAX ACT, 1961 READ WITH RULE 8D. 6. LD. DR SUBMITTED THAT THIS ISSUE MAY BE RESTORED BACK TO THE ASSESSING OFFICER TO BE DECIDED IN VIEW OF THE DECISION OF HO N'BLE DELHI HIGH COURT IN ITA NO.17/DEL/2013 5 THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT [2011] 203 TAXMANN 364 (DELHI) AS HAS BEEN DONE IN ASSESSEES OWN CASE IN ITA NO.3488/DEL/2011 DATED 28.02.2013. 7. AFTER HEARING BOTH THE SIDES, WE FIND THAT THE D ECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD., C ITED SUPRA, IS RELEVANT TO THE ISSUE INVOLVED. THE HON'BLE DELHI HIGH COURT I N PARAS 41 & 42 HAS HELD AS UNDER :- 41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEE N, STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDAN CE WITH SUCH METHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSI NG OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTIO N 14A(2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A COND ITION PRECEDENT IS ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINI NG SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A, EVEN P RIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIR E THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN TH AT THE QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY TH E ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INT RODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASONABLE AND ACCE PTABLE METHOD. 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPE CTIVELY (AND, NOT RETROSPECTIVELY) DOES NOT MEAN THAT THE A SSESSING ITA NO.17/DEL/2013 6 OFFICER IS NOT TO SATISFY HIMSELF WITH THE CORRECTN ESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO SUCH EXPENDITU RE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REFLECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE OTHER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS A ND FOR COGENT REASONS THAT THE AMOUNT OF SUCH EXPENDITURE AS CLAI MED BY THE ASSESSEE IS NOT CORRECT, HE IS REQUIRED TO DETERMIN E THE AMOUNT OF SUCH EXPENDITURE ON THE BASIS OF A REASONABLE AN D ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD BE APPROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT (SUPRA) TO TH E FOLLOWING EFFECT:- THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A.' SO, EVEN FOR THE PRE-RULE8D PERIOD, WHENEVER THE IS SUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF T HE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY T HE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING O FFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGAR D TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASS ESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFIC ER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPEND ITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSES SING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTE R GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVIN G DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AM OUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METH OD OF APPORTIONMENT. ITA NO.17/DEL/2013 7 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D ON THE BASIS OF EARLIER DECISION OF ITAT IN THE ASSESSEES OWN CASE FOR ASS ESSMENT YEAR 2006-07 IN ITA NO.3488/DEL/2011, CITED SUPRA, WE ARE OF THE OP INION THAT IN THE INTEREST OF JUSTICE AND EQUITY, THIS ISSUE REQUIRES TO BE RE STORED BACK TO THE FILE OF THE ASSESSING OFFICER TO BE DECIDED IN VIEW OF THE DECI SION OF HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD., CITED SUPRA. HENCE, THIS ISSUE IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER. 8. GROUND NO.3 IS GENERAL IN NATURE AND DOES NOT RE QUIRE SPECIFIC ADJUDICATION. THE SAME IS ACCORDINGLY DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF JULY, 2013. SD/- SD/- (U.B.S. BEDI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 31 ST DAY OF JULY, 2013 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XXIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.