M/s. Chengmari Tea Co. Ltd, Kolkata V. Dy./ACIT, CIRCLE - 4(1), KOLKATA, Kolkata

ITA 1932/KOL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 1895 (ITAT-KOLKATA)
• Duration Of Justice: 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2010-2011
• Appeal Filed On: 30-08-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SNEHANGSHU BISWAS
• Keywords: Earning of tax free income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BE NCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM] I.T.A NO. 1932/KOL/20 17 ASSESSMENT YEAR : 2010-1 1 M/S. CHENGMARI TEA CO. LTD. -VS.- DY/ACIT, CIRCLE-4(1), KOLKATA KOLKATA [PAN : AABCC 0672 Q] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI SUNIL S URANA, ADVOCATE FOR THE RESPONDENT : SHRI SNEHANGSHU BISWAS, ADDL.CIT DATE OF HEARING : 14.12.2017. DATE OF PRONOUNCEMENT : 03.01.2018. ORDER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 04.08.2017 OF CIT(A) 6, KOLKATA RELATING TO A.Y.2010-11. 2. GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND CALLS FOR NO ADJUDICATION. 3. GROUND NO.2 AND 3 RAISED BY THE ASSESSEE READS AS FOLLOWS :- 2. FOR THAT THE LD. CI.T(A) ERRED IN CONFIRMING TH E ACTION OF THE AO IN MAKING DISALLOWANCE OF RS. 7,17,118/- U/S. 14A READ WITH R ULE 8D WITHOUT RECORDING ANY SATISFACTION THAT THE EXPENSES HAD ANY NEXUS WITH E ARNING OF THE EXEMPT INCOME OF RS. 53,968/ - OR THE CLAIM OF THE ASSESSEE WAS INCO RRECT AND WHEN THE ASSESSEE HAD SUO-MOTTO MADE THE DISALLOWANCE OF RS. 35,440/-. 3. FOR THAT THE LD. CI.T(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN MAKING DISALLOWANCE U / S. 14A WHEN THE CAPITAL AND RESERV ES OF THE ASSESSEE WERE MORE THAN THE INVESTMENT IN SHARES AND EVEN OTHERWISE , THE DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME EARNED. 2 ITA NO.1932/KOL/2017 M/S. CHENGMARI TEA CO.LTD. A.YR.2010-11 2 4. THE FACTS AS FAR AS GROUND NOS. 2 AND 3 ARE THAT THE ASSESSEE WHICH IS IN THE BUSINESS OF GROWING AND MANUFACTURING OF TEA EARNED EXEMPT INCOME OF RS.53,968/- DURING THE RELEVANT PREVIOUS YEAR. THE AO APPLYING THE PROVISION OF RULE 8D MADE DISALLOWANCE OF EXPENSES INCURRED IN EARNING EXEMPT INCOME OF RS.7,52,558/- IN THE FOLLOWING MANNER :- I. DIRECT EXPENSE RELATING TO EXEMPT INCOME = N IL II. A= INTEREST DEBITED TO P & L A/C. = 16014991 B= THE AVERAGE OF VALUE OF INVESTMENT = 70 87901 C= THE AVERAGE OF TOTAL ASSETS = 158290043 A X B/C = 717118 III. 0.5% OF 7087901 (AVERAGE VALUE OF INVESTMENT) 3440 TOTAL 752558 5. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO. BEFORE ME THE LIMITED PRAYER MADE BY THE LD. COUNSEL FOR THE ASSESSEE WAS THAT DISALLOWANCE U/S 14A OF THE ACT BE RESTRICTED TO THE EXTENT OF EXEMP T INCOME EARNED BY THE ASSESSEE. IN THIS REGARD THE LD. COUNSEL PLACED RELIANCE ON THE DECISION OF THE HONBLE DELHI COURT IN THE CASE OF CIT VS HOLLIN INDIA PVT. LTD. 486 OF 20 14 AND 299 OF 2014 JUDGMENT DATED 05.09.2014 WHICH WAS FOLLOWED BY THIS TRIBUNAL IN I TA NO.2278/KOL/2013 ORDER DATED 25.05.2016 IN THE CASE OF GVN FUELS LTD. VS DCIT IN WHICH IT WAS HELD AS FOLLOWS :- IN ANY CASE, WE DIRECT THAT THE DISALLOWANCE TO BE WORKED OUT THEREON SHALL NOT EXCEED THE INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME. WE PLACE RELIANCE IN THIS REGARD ON THE DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF PDGD INVESTMENTS & TRADING PVT. LTD., SUPRA, WHEREI N IT WAS HELD AS UNDER: 3. AFTER HEARING THE RIVAL CONTENTIONS, I AM APPLY ING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS HOLIM INDIA (P) LY D. IN ITA NOS.486/2014 AND 299/2014 JUDGMENT DATED 5TH SEPTEMBER, 2014. THE RE LEVANT PORTION OF THE JUDGMENT IS REPRODUCED HEREIN BELOW :- ON THE ISSUE WHETHER THE RESPONDENT-ASSESSEE COULD HAVE EARNED DIVIDEND INCOME AND EVEN IF NO DIVIDEND INCOME WAS EARNED, Y ET SECTION 14A CAN BE INVOKED AND DISALLOWANCE OF EXPENDITURE CAN BE MADE , THERE ARE THREE DECISIONS OF THE DIFFERENT HIGH COURTS DIRECTLY ON THE ISSUE AND AGAINST THE APPELLANT- REVENUE. NO CONTRARY DECISION OF A HIGH COURT HAS B EEN SHOWN TO US. THE 3 ITA NO.1932/KOL/2017 M/S. CHENGMARI TEA CO.LTD. A.YR.2010-11 3 PUNJAB AND HARYANA HIGH COURT IN COMMISSIONER OF IN COME TAX, FARIDABAD VS. M/S. LAKHANI MARKETING INCL., ITA NO. 970/2008, DEC IDED ON 02.04.2014, MADE REFERENCE TO TWO EARLIER DECISIONS OF THE SAME COUR T IN CIT VS. HERO CYCLES LIMITED, [2010] 323 ITR 518 AND CIT VS. WINSOME TEX TILE INDUSTRIES LIMITED, [2009] 319 ITR 204 TO HOLD THAT SECTION 14A CANNOT BE INVOKED WHEN NO EXEMPT INCOME WAS EARNED. THE SECOND DECISION IS OF THE GU JARAT HIGH COURT IN COMMISSIONER OF INCOME TAX-I VS. CORRTECB ENERGY (P .) LTD. [2014] 223 TAXMANN 130 (GUJ .). THE THIRD DECISION IS OF THE A LIAHABAD HIGH COURT IN INCOME TAX APPEAL NO. 88 OF 2014, COMMISSIONER OF I NCOME TAX (II) KANPUR, VS. M/S. SHIVAM MOTORS (P) LTD. DECIDED ON 05.05.20 14. IN THE SAID DECISION IT HAS BEEN HELD: 'AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CH APTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH D OES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCU RRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUES TION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HE NCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COUL D NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEE N AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTIO N OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2, 03,752/- MADE BY THE ASSE SSING OFFICER WAS IN ORDER' . 15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR,, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN FUTURE YEA RS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUENT YEAR WOULD OR WOULD NOT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSME NT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAX ABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF M ARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX. IT IS AN UNDISPUTED POSITION THAT RESPONDENT A SSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVAT E PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAY OR MAY NO T BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE, A SHARE HOLDER HAS NO CONTROL AND CANNOT INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX. 16. WHAT IS ALSO NOTICEABLE IS THAT THE ENTIRE OR W HOLE EXPENDITURE HAS BEEN DISALLOWED AS IF THERE WAS NO EXPENDITURE INCURRED BY THE RESPOND ENT-ASSESSEE FOR CONDUCTING BUSINESS. THE CTT(A) HAS POSITIVELY HELD THAT THE BUSINESS WA S SET UP AND HAD COMMENCED. THE SAID FINDING IS ACCEPTED. THE RESPONDENT-ASSESSEE, THEREFORE, HAD TO INCUR EXPENDITURE FOR THE BUSINESS IN THE FORM OF INVESTMENT IN SHARES OF CEMENT COMPANIES AND TO FURTHER EXPAND AND CONSOLIDATE THEIR BUSINESS. EXPENDITURE HAD TO BE ALSO INCURRED TO PROTECT THE INVESTMENT MADE. THE GENUINENESS OF THE SAID EXPEND ITURE AND THE FACT THAT IT WAS INCURRED FOR BUSINESS ACTIVITIES WAS NOT DOUBTED BY THE ASSESSING OFFICER AND HAS ALSO NOT BEEN DOUBTED BY THE CIT(A). 4 ITA NO.1932/KOL/2017 M/S. CHENGMARI TEA CO.LTD. A.YR.2010-11 4 BY APPLYING THE PROPOSITION LAID DOWN IN THE FACTS OF THE CASE, I HOLD THAT THE MAXIMUM DISALLOWANCE IN THIS CASE CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME RECEIVED BY THE ASSESSEE I.E. RS.34,445/-. HENCE, I RESTRICT THE DISALLOWANCE TO RS.34,445/- AND ALLOW THE BALANCE IN FAVOUR OF THE ASSESSEE. 6. RESPECTFULLY FOLLOWING THE AFORESAID DECISION I HOLD THAT THE DISALLOWANCE U/S 14A BE RESTRICTED TO THE EXEMPT INCOME EARNED BY TH E ASSESSEE. GROUND NO. 2 AND 3 RAISED BY THE ASSESSEE ARE THUS PARTLY ALLOWED. 7. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOLL OWS :- 4. FOR THAT THE LD. CI.T(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING RS. 23,52,246/- BEING 10% OF REPAIRING EXPENSES ON ESTIMATE BASIS WHEN THE EXPENSE WERE FULLY VOUCHED AND VERIFIABLE , WERE R EASONABLE AND FULLY INCURRED FOR BUSINESS PURPOSES AND EVIDENCE WHEREOF WAS PROD UCED BEFORE THE AO. 8. THE AO DISALLOWED 10% OF THE REPAIRS AND MAINTEN ANCE CLAIMED BY THE ASSESSEE AS DEDUCTION IN COMPUTING THE TOTAL INCOME ON THE G ROUND THAT THE ASSESSEE COULD NOT PRODUCE THE RELATED BILLS AND VOUCHERS. THE CIT(A) CONFIRMED THE ORDER OF THE AO. BEFORE ME THE PRAYER OF THE LD. COUNSEL FOR THE ASS ESSEE WAS THAT THE DISALLOWANCE IS EXCESSIVE AND SHOULD COMMENSURATE WITH THE QUANTUM OF TOTAL EXPENDITURE AND THE SCALE OF BUSINESS OF THE ASSESSEE. I FIND THAT THERE HAS BEEN NO BASIS FOR THE DISALLOWANCE BY THE AO OR CIT(A). IN THE GIVEN CIRCUMSTANCES I AM O F THE VIEW THAT DISALLOWANCE OF 5% OF THE REPAIR EXPENSES WOULD BE JUST AND FAIR. ACC ORDINGLY GROUND NO.4 IS PARTLY ALLOWED. 9. GROUND NO.;5 RAISED BY THE ASSESSEE READS AS FOL LOWS :- 5. FOR THAT THE LD. CI.T(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN TREATING THE RECEIPT OF SURRENDER VALUE OF KEYMAN INSURANCE POLI CY AS CENTRAL INCOME WHEN THE PREMIUM WHEN PAID WAS ALLOWED AS DEDUCTION FROM THE COMPOSITE INCOME OF THE ASSESSEE AT THE TIME OF PAYMENT. 10. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE RECEIVED CASH SURRENDER VALUE ON ASSIGNMENT OF KEYMAN INSURANCE POLICY OF RS.17,87,9 65/-. THE ASSESSEE CLAIMED THAT IT 5 ITA NO.1932/KOL/2017 M/S. CHENGMARI TEA CO.LTD. A.YR.2010-11 5 HAS TO BE PART OF THE COMPOSITE INCOME AS IT RELATE S TO BUSINESS OF GROWING AND MANUFACTURING OF TEA AND IN TERMS OF RULE 8 ONLY 40 % OF THE SAID RECEIPT SHOULD BROUGHT TO TAX. THE AO DID NOT AGREE WITH THE SUBMISSIONS O F THE ASSESSEE AND HE TREATED IT AS INCOME FROM BUSINESS BUT CHARGEABLE @100%. 11. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE HAS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. 12. I HAVE HEARD THE RIVAL SUBMISSIONS. THE ONLY BU SINESS OF THE ASSESSEE IS GROWING AND MANUFACTURING OF TEA. THE SURRENDER VALUE OF KE YMAN INSURANCE POLICY IS ADMITTEDLY CONNECTED WITH THE BUSINESS OF GROWING AND MANUFACT URE BY THE ASSESSEE AND THEREFORE IT HAS TO BE CONSIDERED AS PART OF THE COMPOSITE IN COME ON WHICH RULE 8 SHOULD BE APPLIED. IN THIS REGARD IT IS ALSO NOTICED BY ME TH AT THE INSURANCE PREMIUM WAS PAID WHEN THE POLICY WAS IN FORCE WAS ALLOWED AS DEDUCTI ON WHILE COMPUTING THE COMPOSITE INCOME. THEREFORE THE NEXUS WITH THE BUSINESS OF TH E ASSESSEE HAS BEEN ACCEPTED BY THE REVENUE IN THE PAST. THEREFORE THE SURRENDERED VALU E OF KEYMAN INSURANCE POLICY RECEIVED DURING THE PREVIOUS YEAR HAD ALSO TO BE CO NSIDERED AS PART OF THE COMPOSITE INCOME ON WHICH RULE 8 HAS TO BE APPLIED. I HOLD AC CORDIGLY AND ALLOW GROUND NO.5 RAISED BY THE ASSESSEE. 13. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 03.01.2018. SD/- [ N.V.VASUDEVAN ] JUDICIAL MEMBER DATED : 03.01.2018. [RG SR.PS] 6 ITA NO.1932/KOL/2017 M/S. CHENGMARI TEA CO.LTD. A.YR.2010-11 6 COPY OF THE ORDER FORWARDED TO: 1. M/S. CHENGMARI TEA CO.LTD., 37, SHAKESPEARE SARA NI, 2 ND FLOOR, KOLKATA-700017. 2. DY./A.C.I.T., CIRCLE-4(1), KOLKATA. 3. CIT(A)-16, KOLKATA 4. C.I.T.-2, KOLKA TA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECR ETARY HEAD OF OFFICE/ D.D.O., ITAT KOLKATA BENCHES