Dhumal Industries, Nashik V. Assistant Commissioner of Income-tax,

ITA 1953/PUN/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1038 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-07-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 03-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Earning of tax free income
• Section: 14A; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1953/PN/2014 #& & / ASSESSMENT YEAR : 2010-11 DHUMAL INDUSTRIES, E-36, D ROAD, MIDC, SATPUR, NASHIK 422 007 PAN : AACFD0528N . / APPELLANT V/S ACIT, CIRCLE-1, NASHIK . /RESPONDENT / ASSESSEE BY : SHRI NIKHIL PATHAK / RESPONDENT BY : SHRI HITENDRA NINAWE / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 22-09-2014 OF THE CIT(A)-I, NASHIK RELATING TO ASS ESSMENT YEAR 2010-11. 2. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSES SEE DID NOT PRESS GROUND OF APPEAL NO.8 FOR WHICH THE LD. DEPARTMENTA L REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, THE SAID G ROUND IS DISMISSED AS NOT PRESSED. GROUNDS OF APPEAL NO.1 TO 7 BY THE ASSESSEE READ AS UNDER : / DATE OF HEARING :06.09.2016 / DATE OF PRONOUNCEMENT:09.09.2016 2 ITA NO.1953/PN/2014 1. IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THAT LEARNED HON ' BLE COMMISSIONER OF INCOME TAX (APPEALS)-I, NASHIK IS WR ONG IN CONFIRMING THE DISAL L OWANCE U/S. 14A R.W.R. 8D OF RS . 3,41,204/- WITHOUT CONSIDERING THE FACT THAT THE APPELLANT HAS NOT INCUR RED ANY EXPENDITURE TO EARN INCOME OF RS. 31,35,538/- ON MUTUAL FUNDS EXE MPT U/S. 10(35). 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I ERRED IN NOT CONSIDERING THE FACT THAT UNSECURED LOAN OF CHILDREN WERE TAKEN IN BEFORE 6 YEARS USED FOR BUSINESS PURCHASES AND THE INTEREST IS PROV IDED ON RS.1,79,833/- DURING THE YEAR . 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I HAS COMMITTED A MIST A KE OF GIVING NOTICE OF ENHANCEMENT U/S. 251 FOR DISALLOWANCE U/S. 14A OF RS. 60,59,726 SINCE INTEREST A RE PAID ON CAPITAL OF PARTNERS OF RS. 1,49,38,801/-. 4. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT TH E CAPITAL OF PARTNERS ARE NOT BORROWING FROM OUTSIDE AND INTEREST ARE PROVI DED (PAID) OF RS. 1,49,38,801/- ON LAST DAY OF ACCOUNTING YEAR I . E. ON 31/03/2010. INVESTMENT OF MUTUAL FUND DURING THE YEAR OF RS . 4,90,37,517/- IS OUT OF CAPITAL OF PARTNERS. 5. THE LEARNED CIT(A) IS WRONG IN DISALLOWING THE INT EREST OF RS.60,59,726/- INCURRED ON CAPITAL OF RS. 4,90,37,517 /- DEPLOYED FOR INVESTMENT IN MUTUAL FUND TREATING THAT IS NOT EXCLUSI VELY USED FOR BUSINESS U/S. 37. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL)-I FAILED TO APPRECIATE THAT IT IS SURPLUS FUNDS ARE TEMPORARILY INV ESTED IN MUTUAL FUNDS ARE TEMPORARILY INVESTED IN MUTUAL FUNDS MAKE USE THE SAME FOR FUTURE NEED FOR BUSINESS PURPOSES. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL)-I IS WRONG IN APPLYING TO DISALLOW INTEREST U/S. 14A OF RS. 57,18,70 2/- AND U/S. 37 OF RS.60,59,726/- AND DIS A LLOWED U/S. 37 BEING HIGHER AMOUNT . 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING OF POULTRY FIRM PRODUCTS. IT FILED ITS RETURN OF INCOME ON 02-10-2010 DEC LARING TOTAL INCOME OF RS.3,45,67,328/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS APART FROM OTHER THINGS THE AO NOTICED THAT ASSESSEE HAS INCURRED AN EXPENDITURE OF RS.1,79,833/- BY WAY OF INTERES T DURING THE RELEVANT PREVIOUS YEAR. HE NOTED THAT THE ASSESSE E HAS MADE INVESTMENT OF RS.8,17,47,690/- IN MUTUAL FUNDS AND HAS RECEIV ED THE INCOME OF RS.31,35,538/- FROM THE SAID MUTUAL FUNDS WHICH IT CLAIMED AS EXEMPT U/S.10(35) OF THE I.T. ACT. HOWEVER, THE ASSESSEE 3 ITA NO.1953/PN/2014 HAS NOT SHOWN TO HAVE INCURRED ANY EXPENDITURE IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE A CT. ON BEING QUESTIONED BY THE AO IT WAS CLAIMED BY THE ASSESSEE THA T PROVISIONS OF SECTION 14A ARE NOT APPLICABLE BECAUSE THE INVESTMENT IS FROM ITS OWN FUNDS. FOR THE ABOVE PROPOSITION THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF CIT VS. HERO CYCLES LTD. REPORTED IN 223 ITR 518. 4. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT THE ASSESSEE IS ENGAG ED IN THE MANUFACTURING BUSINESS AND ITS FUNDS ARE INTEREST BEARING FUNDS. HE OBSERVED THAT FUNDS TO THE TUNE OF RS.5,72,28,932/- ARE INVESTED IN MUTUAL FUNDS TO EARN EXEMPT INCOME. FURTHER, THE SUBMISS ION OF THE ASSESSEE THAT THE INVESTMENTS ARE FROM PROFITS OR FROM C APITAL OR FROM OWN FUNDS AND NOT FROM INTEREST BEARING FUNDS IS NOT ACC EPTABLE. HE NOTED THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED. ON THE OTHER HAND CE RTAIN AMOUNTS HAD BEEN INVESTED FOR EARNING TAX FREE DIVIDEND INCOME, THE REFORE, A PART OF THE INTEREST LIABILLITY WOULD BE ON ACCOUNT OF INVESTM ENTS MADE FOR EARNING THE TAX FREE DIVIDEND INCOME. HE NOTED THAT BECAUSE OF THE MASSIVE TURNOVER OF THE ASSESSEE AND ITS COMPLICATED FLOW OF FUNDS IT IS DIFFICULT TO IDENTIFY AS TO WHICH FUNDS HAVE BEEN USED FOR WHAT PURPOSE. REJECTING THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS THE AO HELD THAT PROVISIONS OF SECTIO N 14A R.W. RULE 8D ARE APPLICABLE TO THE ASSESSEE COMPANY. HE THEREFORE DISALLOWED AN AMOUNT OF RS.3,41,204/- U/S.14A R.W. RULE 8D OF THE I.T. RULES. 4 ITA NO.1953/PN/2014 5. BEFORE CIT(A) IT WAS ARGUED THAT THE FIRM HAS MADE INVE STMENTS IN MUTUAL FUNDS OUT OF ITS OWN FUNDS AND NOT OUT OF ANY BO RROWED FUNDS. FURTHER, THE ASSESSEE HAS NEITHER INCURRED NOR C LAIMED ANY EXPENDITURE EITHER FOR REALIZING THE INCOME FROM MUTUAL FUNDS OR AGAINST THE INCOME OF SUCH MUTUAL FUNDS. THERE IS NO BORR OWING FROM ANY BANK AND NO INTEREST IS DEBITED ON ACCOUNT OF BANK LOAN. THE INTEREST PAID ON UNSECURED LOAN OF MS. ANAGHA PATIL AND SH RI AKSHAY DHUMAL OF RS.1,79,833/- ON BORROWED AMOUNTS WERE TAKEN 6 -7 YEARS BEFORE AND THE SAID AMOUNT IS USED FOR THE PURPOSE OF BUSINESS PARTICULARLY FOR ACQUIRING PLANT AND MACHINERY ETC. THE SAID BORROWE D AMOUNT HAS NOT BEEN UTILIZED FOR THE PURPOSE OF MAKING INV ESTMENTS THE INCOME OF WHICH IS EXEMPT FROM TAX. THE ASSESSEE HAS CLAIMED INTEREST @18% ON THE UNSECURED LOANS TAKEN FROM THE AB OVE TWO PERSONS. RELYING ON VARIOUS DECISIONS IT WAS ARGUED THAT THE DISALLOWANCE MADE BY THE AO IS NOT CORRECT. 6. HOWEVER, THE CIT(A) WAS NOT SATISFIED WITH THE ARGUMENT S ADVANCED BY THE ASSESSEE. HE OBSERVED THAT THE FIRM H AS INVESTMENT OF RS.8,17,47,690/- IN MUTUAL FUNDS AS ON 31-03-2010 AND TH E FIRM HAS A CAPITAL OF RS.16,05,76,880/-. IT WAS CLAIMED BY THE A SSESSEE THAT IT HAS BORROWED FUNDS OF RS.10,45,372/- ONLY THAT TO O FROM THE DAUGHTER AND SON OF THE PARTNERS ON WHICH AN AMOUNT O F RS.1,79,833/- HAS BEEN PAID AND THE INVESTMENT OF RS.8,17 ,47,690/- IN MUTUAL FUNDS HAS BEEN MADE OUT OF ITS OWN SOURCES, I.E. CAPITAL OF THE PARTNERS AMOUNTING TO RS.16,05,76,880/- FOR WHICH THE ASSESSEE CLAIMED THAT DISALLOWANCE OF RS.3,41,024/- U/S.14A OF THE AC T IS INCORRECT. HOWEVER, HE OBSERVED THAT THE ABOVE PLEA O F THE ASSESSEE IS NOT ONLY INCORRECT BUT ALSO MISLEADING. HE OBSERVED THAT THE ASSESSEE FIRM HAS PAID INTEREST OF RS.1,49,38,861/ TO ITS PARTNERS ON THEIR 5 ITA NO.1953/PN/2014 RESPECTIVE CAPITAL. THE FIRM HAS PAID INTEREST OF RS.94,91,072 /- TO SHRI ANIL DHUMAL AND RS.54,57,729/- TO MS. SHAILAJA DHUMAL ON THEIR CAPITAL FUNDS FOR A.Y. 2010-11. THEREFORE, THE CONTENTIO N OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED IN RESPECT O F EXEMPT INCOME FROM INVESTMENT IN MUTUAL FUNDS AND THAT THE SAME WAS MADE OUT OF ITS OWN FUNDS AND NO FUNDS WERE BORROWED FRO M THE BANKS IS FACTUALLY INCORRECT AND MISLEADING. SINCE THE PAR TNERS ARE BEING PAID INTEREST @12% P.A. ON THEIR CAPITAL, THEREFORE, TH E FUNDS INVESTED IN MUTUAL FUNDS ARE OUT OF INTEREST BEARING FUNDS FOR THE PURPOSE OF DISALLOWANCE U/S.14A OF THE ACT. REJECTING THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) HELD T HAT DISALLOWANCE U/S.14A R.W. RULE 8D HAS TO BE MADE. SINCE TH E AO HAS NOT DISALLOWED PROPERLY BY NOT CONSIDERING THE CAPITAL AC COUNTS OF THE PARTNERS ON WHICH INTEREST HAS BEEN PAID, THE CIT(A) ISS UED NOTICE OF ENHANCEMENT U/S.250 OF THE I.T. ACT. SINCE THE ASSESSEE HAS INCURRED AN EXPENDITURE OF RS.60,59,726/- ON EARNING EXEMPT INCOME, HE HELD THE SAME AS DISALLOWANCE U/S.14A R.W. RULE 8D OF THE ACT. 7. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH TH E SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IN THE INSTANT CASE HAS MADE INVESTMENT OF RS.81,7,47,690/- IN MUTUAL FUNDS AS ON 31-03-2010. THE FIRM HAS A CAPITAL OF RS.16,05,76,880/-. IT IS ALSO AN UNDISPUTED FACT TH AT THE ASSESSEE FIRM HAS PAID INTEREST OF RS.1,49,38,801/- TO ITS P ARTNERS ON 6 ITA NO.1953/PN/2014 THEIR RESPECTIVE CAPITAL, I.E. RS.94,91,072/- TO SHRI ANIL DHUM AL AND RS.54,47,729/- TO MS. SHAILAJA DHUMAL. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) HOLDING THAT ASSESSE E HAS USED INTEREST BEARING FUNDS FOR THE PURPOSE OF MAKING INVE STMENT IN THE MUTUAL FUNDS. SINCE THE ASSESSEE HAS INCURRED EXPEN DITURE OF RS.60,59,726/- FOR EARNING EXEMPT INCOME, THEREFORE, THE ORD ER OF THE CIT(A) ENHANCING THE DISALLOWANCE U/S.14A R.W. RULE 8D TO RS.60,59,726/- AS AGAINST RS.3,41,024/- MADE BY THE AO IN O UR OPINION UNDER THE FACTS AND CIRCUMSTANCES IS FULLY JUSTIFIED. THE LD. COUNSEL FOR THE ASSESSEE COULD NOT CONTROVERT THE DETA ILED REASONING GIVEN BY THE CIT(A) ON THIS ISSUE. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) AND THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09-09-2016. SD/- SD/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE; ' DATED : 09 TH SEPTEMBER, 2016. ) *#,! -!/ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . 4. THE CIT(A) - I, NASHIK THE CIT-I, NASHIK 5. $ ''( , ( , / DR, ITAT, B PUNE; 5 . + / GUARD FILE. / BY ORDER, // $ ' // TRUE COPY // -. ' ( / SR. 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