KJMC FINANCIAL SERVICES LTD, MUMBAI V. DCIT 3(2), MUMBAI

ITA 1818/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2681 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 06-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H M WANARE
• Assessee Lawyers: SUNIL NAHATA
• Keywords: Earning of tax free income
• Section: 142(1); 14A; 115JB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE HONBLE S/SHRI JOGINDER SINGH (JM), AND RAJESH KUMAR, ( AM ) ./ I.T.A. NO . 1818 /MUM/20 1 3 ( / ASSESSMENT YEAR : 20 09 - 1 0 ) M/S KJMC FINANCIAL SERVICES LTD , 168 ATLANTA TOWER, NARIMAN POINT, MUMBAI - 400021 / VS. DY. COMMISSIONER, INCOME TAX , MUMBAI. ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAACK4714E / APPELLANT BY: SHRI SUNIL NAHATA / RESPONDENT BY S HRI H M WANARE / DATE OF HEARING : 1 8 . 7 .201 6 / DATE OF PRONOUNCEMENT : 26. 7.2016 / O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) - 4, MUMBAI DT. 1 8 .12 .201 2 PERTAINING TO A.Y. 20 09 - 10. 2. THE ISSUE RAISED IN GROUND NO.1 IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE OF RS.11,28,990/ - BY THE LD.CIT(A) BY UPHOLDING T HE O R DER OF THE AO AS MADE BY INVOKING THE PROVISIONS OF SECTION14A OF THE INCOME TAX ACT, 1961 ( HEREINAFTER CALLED AS THE ACT ) A S AGAINST RS.41,753/ - ITA NO. 1818 /M/1 3 2 DISALLOWED BY THE APPELLANT UNDER SECTIO N 14A ON ITS OWN AND THE ISSUE RAISED IN THE SECOND GROUND OF APPEAL , WITHOUT PREJUDICE , TO THE FIRST GROUND IS WITH RESPECT TO THE INVESTMENT MADE IN SUBSIDIARIES COMPANY / SISTER CONCERNS AMOUNTING TO RS.16.61 CRORES WHICH W ERE WRONGLY CONSIDERED BY T HE AO WHILE WORKING OUT THE AVERAGE INVESTMENT FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE U/S 14A R.W.R. 8D ( 2 ) (III) WHICH WAS WRONG AND AGAINST THE PROVISION OF THE ACT. 3 . BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 2 9.09.2009 DECLARING LOSS OF RS.6,22,06,413 / - W HICH WAS REVISED ON 30.3.2010 AND AGAIN ON 28.1.2011 . THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT ON 8.3.2011 AND THEREAFTER SELECTED FOR SCRUTINY AND STATUTORY NOTICES U/S 142(1) AND 143(2) WER E ISSUED AND SERVED UPON THE ASSESSEE . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.4,33,671/ - AND LONG TERM CAPITAL GAINS OF RS.13,96,588/ - WHICH WAS COVERED U/S 10(38) OF THE ACT AND W AS CLAIMED EXEMPT ACCORDINGLY. THE ASSESSEE WAS ISSUED SHOW CAUSE NOTICE WHICH WAS REPLIED BY THE ASSESSEE VIDE IS SUBMISSIONS DATED 29.6.2011 AND 30.11.2012 BY SUBMITTING TH A T NO INTEREST EXPENSES W ERE INCURRED AS INVESTMENT S WERE MADE OUT OF OWN FUNDS A ND NOT MADE OUT OF LOAN FUND . THE SUBSTANTIAL PART OF INVE ST MENT S RS.16.61 CRO R ES OUT OF THE TOTAL RS.20.34 CRO R ES WERE INVESTED IN THE SISTER ITA NO. 1818 /M/1 3 3 CONCERNS/SUBSIDIARIES AND WERE OF STRATEGIC NATURE AND NOT MADE WITH THE PROFIT MOTIVE . U LTIMATELY THE LD AR SUB MI TT ED THAT NO EXPENSES WERE INCURRED FOR EARNING THE ABOVE SAID EXEMPT INCOME . THE ASSESSEE ITSELF ON ITS OWN DISALLOWED THE EXPENDITURE OF RS.14.70 LAKHS. 4 . THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE AS SE SSEE CAME TO THE CONCLUSION THAT THE ASSESS EE HAS INCURRED RS.13.17 LAKHS AS SALARIES AND ALLOWANCES , RS.14.70 LAKHS ON ACCOUNT OF OPERATING AND ADMINISTRATIVE EXPENSES AND RS.9.22 LAKHS AS FINANCIAL CHARGES . THE ASSESSEE HAS ENTERED INTO SEVERAL TRANSACTIONS OF SALES AND PURCHASES OF SHARES OUT OF WHICH IT HAS INVESTMENT S FOR ITS PORTFOLIO BESIDES UNDERTAKING THE SIMILAR TYPE OF TRANSACTION S IN THE MUTUAL FUNDS. THE AO OBSERVED THAT THE ASSESSEE MUST HAVE MONITORED THE SAID TRANSACTIONS AND THEREFORE INVOLVE D APPLICATION OF SOME HUMAN AND FINANCIA L RESOURCES AND REJECTED THE ADHOC DISALLOWANCE OF RS.41 , 753/ - AS MADE BY THE ASSESSEE SUO - MOTTU AND DISALLOWED A SUM OF RS.11,52,084/ - BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D 2(III) . AGGRIEVED BY THE ORDER OF AO, THE AS SESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO ALSO DISMISSED THE APPEAL BY OBSERVING AND HOLDING S UNDER : 4. I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF THE ASSESSEE. HON'BLE BOMBAY HIGH COURT HAS HELD IN THE CASE OF GODREJ & BOYC E MFG. CO. LTD. VS. CIT 328 ITR 81, THAT RULE 8D IS APPLICABLE FROM A.Y. 08 - 09 AND, THEREFORE, A.O. HAS RIGHTLY APPLIED RULE 8D IN THE CASE OF THE ASSESSEE. THE ASSESSEE HAS CLAIMED THAT DISALLOWANCE CANNOT BE MADE OF EXPENSES NOT RELATING TO THE DIVIDEND AND EXEMPT INCOME, BUT THE A. O . HAS COMPUTED THE ITA NO. 1818 /M/1 3 4 DISALLOWANCE ON THE BASIS OF THE AVERAGE INVESTMENT AS PER RULE 8D AND NOT ON THE BASIS OF THE EXPENSES FOUND RELATING TO EXEMPT OR NON - EXEMPT INCOME. THE DISALLOWANCE IS NOT MORE THAN THE TOTAL ADMINISTRAT IVE EXPENSES CLAIMED; THEREFORE, THE DISALLOWANCE IS CONFIRMED. 4.1 THE A. O . HAS ALSO ADDED THE DISALLOWANCE U/S. 14A READ WITH RULE 8D TO THE BOOK - PROFIT UNDER SECTION 115JB, WHEREAS, ASSESSEE HAS CLAIMED LONG TERM CAPITAL GAIN EXEMPT U/S. 10(38) RS.13, 96,588/ - , WHICH ARE CREDITED TO THE PROFIT AND LOSS ALC. AND THE SAME ARE NOT REDUCED WHILE COMPUTING THE BOOK - PROFIT U/S. 115JB BECAUSE IT IS SPECIFICALLY PROHIBITED BY SUB - CLAUSE - II BELOW CLAUSE - I OF EXPLANATION 1 TO SECTION 115JB(2) OF I T. ACT. THEREFO RE, NO EXPENDITURE WHICH IS DISALLOWED UNDER THE NORMAL PROVISIONS OF LAW FOR COMPUTING THE TAXABLE INCOME OF THE ASSESSEE, NEEDS TO BE AGAIN ADDED BACK TO BOOK - PROFIT, WHICH RELATES TO THE LONG TERM CAPITAL GAIN. SIMILARLY EXPENSES RELATING TO DIVIDEND IN COME WHICH ARE CHARGED TO PROFIT AND LOSS ALC. CAN ONLY BE ADDED BACK U/S. 115JB AND NOT THE NOTION AL DISALLOWANCE CALCULATED AS PER RULE 8D OTHER THAN THE DIRECT EXPENSES AND SAME IS THE DECISION OF HON'BLE ITAT IN THE CASE OF S.R. TELEHOLDINGS LTD.(SUPRA ), RELIED BY THE ASSESSEE, COPY OF WHICH HAS BEEN FILED. THEREFORE, THE A.O.IS DIRECTED TO RESTRICT THE AMOUNT TO BE ADDED TO RS.41,753/ - WHICH ARE THE DIRECT EXPENSES RELATING TO DIVIDEND INCOME AND WHICH ARE OFFERED FOR DISALLOWANCE BY THE ASSESSEE ALSO IN THE RETURN OF INCOME. IN RESULT, GROUND OF APPEAL NO.1 IS REJECTED AND GROUND OF APPEAL NO.2 IS ALLOWED. 5. THE LD. AR VEHEMENTLY ARGUED BEFORE US THAT THE ORDERS PASSED BY THE AUTHORITIES BELOW WERE TOTALLY WRONG AS THESE ORDERS WERE PASSED MECHANIC ALLY WITHOUT POINTING OUT ANY MISTAKE IN THE DISALLOWANCE MADE BY THE ASSESSEE SUO - MOTTO AND ALSO WITH NO SATISFACTION WAS RECORDED BY THE AO. THE LD. COUNSEL PLACED STRONG RELIANCE ON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CA S E OF M/S PUJA IMPEX PVT LTD V/S ITO IN ITA NO.4904/MUM/2012 (AY - 2008 - 09) DATED 22.1.2015 . WITHOUT PREJUDICE TO THE ISSUE RAISED IN THE FIRST GROUND OF APPEAL, THE LD.AR SUBMITTED THAT ITA NO. 1818 /M/1 3 5 THE INVESTMENT S WERE SUBSTANTIALLY MADE IN THESE SUBSIDIARY COMPANIES/SISTER CONCERNS AND T HEREFORE COULD NOT BE CONSIDERED FOR T HE PURPOSE OF WORKING OUT DISALLOWANCE U/S 14A R.W. RULE 8D ( 2 ) (III). THE LD. COUNSEL IN DEFENCE OF HIS ARGUMENTS STRONGLY RELIED ON THE DECISION IN THE CASE OF INTERGLOBE ENTERPRISES LTD V/S DCIT IN ITA NO.1362 AND 1032/DEL/2013 (AY - 2008 - 09 AND 2009 - 10) DATED 4.4.2014. 6. ON THE OTHER HAND, THE LD.DR HEAVILY RELIED ON THE ORDERS OF AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE SHALL FIR ST DECIDE THE ISSUE RAISED IN THE GROUND NO.2 OF APPEAL THAT INVESTMENT S MADE BY ASSESSEE WERE OF STRATEGIC NATURE AS THESE WERE NOT MADE WITH THE PURPOSE OF EARNING ANY DIVIDEND ON THE INVESTMENT S BUT WERE PROMPTED BY STRATEGIC CONSIDERATION S IN ORDER TO GAIN CONTROL OVER THESE SUBSIDIAR IES/SISTER CONCERN AND THUS SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE U/S 8D(2)(III).THE CASE OF THE ASSESSEE IS ALSO FORTIFIED BY THE DECISIONS IN THE CASE OF INTERGLOBE ENTERPRISES LTD (SUP RA), IN WHICH THE COORDINATE BENCH OF THE TRIBUNAL OBSERVED AND HELD AND UNDER (PG 9 PARA 2 ONWADS): HOWEVER, WE FIND THAT THE CALCULATION OF DISALLOWANCE UNDER RULE 8D(III) MADE BY THE ASSESSING OFFICER AND UPHELD BY LD CIT(A) IS NOT CORRECT IN VIEW OF T HE FACT THAT ASSESSING OFFICER HAD INCLUDED THE VALUE OF TOTAL INVESTMENTS FOR CALCULATION OF DISALLOWANCE WHEREAS IN ITA NO. 1818 /M/1 3 6 OUR OPINION THE VALUE OF THOSE INVESTMENTS SHOULD HAVE BEEN INCLUDED WHICH WERE MADE FOR THE PURPOSE OF EARNING EXEMPT INCOME. THE ASSESSE E HAD MADE SIGNIFICANT INVESTMENTS IN THE SHARES OF SUBSIDIARY COMPANIES WHICH ARE DEFINITELY NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME. THE HON'BLE TRIBUNAL IN I.T.A. NO.3349/DEL/2011 IN THE CASE OF PROMAIN LTD., AFTER RELYING UPON A KOLKATTA JUDGMENT OF TRIBUNAL IN I.T.A. NO.1331 HAS HELD THAT STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR THE PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). THE TRIBUNAL HAD RELIED UPON THE FINDINGS OF KOLKATTA TRIBUNAL IN THE CASE OF REI AGRO LTD. V. DCIT IN I.T.A . NO./ 1331/DEL/2011 DATED 29.7.2011. THE RELEVANT PORTION OF TRIBUNAL FINDINGS AS CONTAINED IN THE KOLKATTA TRIBUNAL ARE REPRODUCED BELOW: - (III) FURTHER IN RULE 8D(2)(II), THE WORDS USED IN NUMERATOR B ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. THE ASSESSING OFFICER WAS WRONG IN TAKING INTO CONSIDERATION THE INVESTMENT OF RS.103 CRORE S MADE DURING THE YEAR WHICH HAS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VALUE OF THE INVESTMENT FROM WHICH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLING WITHIN THE PART OF THE TOTAL INCOME THAT IS TO BE CONSIDERED. THUS,. IT IS NOT THE TOTAL INVESTMENT AT ALL BEGINNING OF THE YEAR AND AT THE END OF THE YEAR, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENTS WHICH HAS GIVEN RISE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS USED TO TAKE CARE OF CASES WHERE THERE IS THE ISSUE OF DIVIDEND STRIPING. IV) UNDER RULE 8D(2)(III), WHAT IS DISALLOWABLE IS AN AMOUNT EQUAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTME NT THE INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME/. THUS, UNDER SUB CLAUSE (III), WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)III). THIS HAS TO BE CALCULATED ON THE SAME LINES AS MENTIONED EARLIER IN RESPEC T OF NUMERATOR B IN THE RULE 8D(2)(II). THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT MATTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE U/S 14A READ WITH RULE 8D. THE DISALLOWANCE U/S 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND ITA NO. 1818 /M/1 3 7 THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. (A.Y.) (I.T.A. NO.1331/KOL/2011 DATED 29.7.2011. FOLLOWING THE ABOVE J UDICIAL PRECEDENTS, WE HELD THAT VALUE OF STRATEGIC INVESTMENTS SHOULD BE EXCLUDED FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D)III) FACTS, WE DIRECT THE ASSESSING OFFICER TO CALCULATE THE DISALLOWANCE UNDER RULE8D(III) BY EXCLUDING THE VALUE OF STRATEGIC INVESTMENTS IN THE CALCULATION OF DISALLOWANCE. AS REGARDS DISALLOWANCE UNDER RULE 8D(I) AND 8D(II) WE HAVE ALREADY HELD THAT NO DISALLOWANCE IS WARRANTED. 10. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES WH EREAS THE APPEAL FILED BY THE REVENUE IS DISMISSED. WE HAVE PERUSED THE FACTS OF THE CASE BEFORE US IN THE LIGHT OF THE DECISION OF THE TRIBUNAL (SUPRA) AND FIND THAT THE ASSESSEE HAS MADE INVESTMENT S IN THE SUBSIDIARY COMPANIES TO THE TUNE OF RS.16.61 CRORES WHICH IN OUR OPINION SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF WORKING OUT THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D (2)(III) OF THE ACT. THE FACTS OF THE ASSESSEE ARE FULLY COVERED IN ITS FAVOUR BY THE ABOVE SAID DECISION. WE, T HER EFORE, RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE ABOVE CASE , SET ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE AO TO VERIFY THE STRATEGIC INVESTMENT AND RECALCULATE THE DISALLOWANCE ACCORDINGLY BY NOT CONSIDERING THE INVESTMENT S MADE IN SUBSIDIARY COMPANIES/SISTER CONCERN. ITA NO. 1818 /M/1 3 8 8 . IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 26TH JULY, 2016 . 26TH JULY, 2016 SD SD (JOGINDER SINGH ) ( RAJESH KUMAR ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 26TH JULY, 2016 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CI T(A) - CONCERNED 4. / CIT CONCERNED 5. 6. , , / DR, ITAT, MUMBAI CONCERNED / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI