Vaikunth Finvest Pvt.Ltd., Ahmedabad V. The Income tax Officer,Ward-8(4), Ahmedabad

ITA 1955/AHD/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9890 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 07-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K TIWARI SRDR
• Assessee Lawyers: VIJAY RANJAN
• Keywords: Business income; Rule 8D
• Section: 143(3); 14A; 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.1955/AHD/2010 ASSESSMENT YEAR :2007-08 DATE OF HEARING:1.1010 DRAFTED:4.10.10 VAIKUNTH FINVEST LTD. 409, ATMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO.AAACV9644E V/S . INCOME TAX OFFICER, WARD-8(4), AHMEDABAD (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI VIJAY RANJAN, AR RESPONDENT BY:- SHRI A.K. TIWARI, SR-DR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD IN APPEAL NO.CI T(A)XIV/WD.8(4)/ 189/09-10 DATED 16-03-2010. THE ASSESSMENT WAS FRAMED BY ITO, WARD-8(4), AHMEDABAD U/S 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS THE ACT) VIDE HIS ORDER DATED 14-12-2009 FOR ASSESSMENT YEAR 2007-08. 2. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN DELETING THE EXPENSES BY INVOKING THE PROVISION OF SECTION 14A OF THE ACT IN RESPECT OF EXEMPTION INCOME. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE THREE GROUNDS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE DEPARTMENTAL AUTHORITIES HAVE ERRED IN REJECTING THE ASSESSEES CLAIM THAT NO EXPENDITURE WAS INCURRED FOR MAKING INVESTMENT IN THE EQUITY SH ARES OF TWO SUBSIDIARY COMPANIES FOR ALMOST 90% OF THE EQUITY CAPITAL OF E ACH OF THEM. ITA NO1955/AHD/2010 A.Y. 2007-08 VAIKUNTH FINVEST LTD. V. ITO WD-8(4), ABD PAGE 2 2. WITHOUT PREJUDICE, ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, THE DEPARTMENTAL AUTHORITIES HAVE ERRED IN HOLDING THAT IN REGARD TO THE INVESTMENT IN EQUITY SHARES OF TWO SUBSIDIARY COMPANIES THE AS SESSEES CASE WAS CAUGHT BY THE MISCHIEF OF SECTION 14A OF THE IT ACT READ W ITH RULE 8D(2)(III) OF INCOME-TAX RULES AND FURTHER IN QUANTIFYING THE CON SEQUENTIAL DISALLOWANCE IN A SUM OF RS.3,17,275. 3. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ON THE F ACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DEPARTMENTAL AUTHORI TIES HAVE ERRED IN MAKING COMPUTATION OF DISALLOWANCE SU/S.14A WHILE TAKING T HE CLOSING BALANCE OF TOTAL INVESTMENT INSTEAD OF AVERAGE INVESTMENT. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSEE IS BASICALLY A TRADER IN COTTON FABRICS WHOSE SALES DURING THE YEA R WERE MORE THAN RS.5.40 CRORES, THOUGH THERE WAS TRADING IN SHARES ALSO ON A VERY S MALL SCALE AND TOTAL ADMINISTRATIVE AND OTHER EXPENSES INCURRED DURING T HE YEAR UNDER CONSIDERATION AT RS.3,65,509/- ONLY. IN THIS REGARD A COPY OF PAGE O F PROFIT AND LOSS ACCOUNT WAS FILED BY ASSESSEE AND THE ABOVE MENTIONED FIGURES ARE CLE ARLY RECORDED THEREIN. BEFORE US IT WAS SUBMITTED THAT A TOTAL EXPENDITURE OF LES S THAN RS.4 LAKHI IS CLEARLY AND REASONABLY ATTRIBUTABLE TO THE TRADING ACTIVITY INV OLVING SALES OF MORE THAN RS.5 CRORES OF COTTON FABRICS. THIS ASPECT IS FURTHER CL EAR FROM THE DETAILS OF THE AFORESAID FIGURE OF RS.3,65,509/- FOR ADMINISTRATIVE AND OTHE R EXPENSES AS APPEARING IN SCHEDULE-12 OF PROFIT AND LOSS ACCOUNT. WE FIND THA T MORE THAN TWO THIRD OF THAT TOTAL EXPENDITURE OF RS.3,65509/- IS FOR PROFESSIONAL FEE S BEING RS.2,63,370/- SHOWN AT SR. NO.6 OF THAT SCHEDULE-12, A SUM OF RS.20,000/- IS F OR COMPUTER SERVICE CHARGES SHOWN AT SR.NO.11 AND OTHER ITEM IS OF RS.15,997/- FOR TELECOMMUNICATION EXPENSES SHOWN AT SR. NO.2 AND FURTHER ITEMS ARE OBVIOUSLY S MALLER IN VALUE AND MAY BE GENERAL ADMINISTRATIVE EXPENSES ETC. 4. WE FIND THAT IN REGARD TO THE PROFESSIONAL FEES OF RS.2,63,370/- DETAILS ARE CONTAINED IN ASSESSEES LETTER DATED 05-11-2009 GIV EN TO THE ASSESSING OFFICER IN RESPONSE TO HIS SPECIFIC QUERY AS UNDER:- 11. AS REQUIRED IN POINT NO.(XI), THE COPY OF ACCO UNT OF PROFESSIONAL FEES RS.2,63,370/- IS FURNISHED HEREWITH VIDE ANNEXURE H . KINDLY NOTE THAT ASSESSEE COMPANY HAS PAID AN AMOUNT OF RS.3,370/- T O MR. K.J. SHAH & COMPANY FOR SECRETARIAL PRE-CERTIFICATION WORK, RS. 1,40,000/- PAID TO NISHSIT P SHAH FOR SERVICES RENDERED RELATED TO PREPARATION, MAINTENANCE AND FINALIZATION OF OUR BOOKS OF ACCOUNT AND OTHER RECO RDS OF OUR COMPANY FOR THE PERIOD FROM 01-04-2006 TO 31-03-2007 AND RS.1,200,0 00/- PAID TO MR. ITA NO1955/AHD/2010 A.Y. 2007-08 VAIKUNTH FINVEST LTD. V. ITO WD-8(4), ABD PAGE 3 HARSHAD PARIKH FOR ADMINISTRATIVE AND MANAGERIAL SE RVICES RENDERED BY HIM DURING THE YEAR F.Y. 2006-07 THUS ALL THE ADMINISTRATIVE EXPENSES AMOUNTING TO R S.3,65,509/- PERTAINING TO GENERAL ADMINISTRATION IN REGARD TO THE BUSINESS OF TRADE WHICH INVOLVED SALES OF MORE THAN RS.540 LAKH. THE ASSESSEE INVESTED DURING THE YEAR RS.6,34,54,950/- FOR ACQUIRING EQUITY SHARES OF TWO OF THE GROUP COMPANI ES WHICH BECAME ITS SUBSIDIARIES; ON ACCOUNT OF THE FACT THAT THE ASSE SSEES SHAREHOLDING IN THOSE COMPANIES WAS ABOUT 90% FOR EACH, AS PER THE DETAIL S CONTAINED I THE STATEMENT FURNISHED IN PURSUANCE OF SECTION 212 OF THE COMPAN IES ACT. IT WAS CONTENDED BY THE ASSESSEE THAT THOUGH THE INVESTMENT IN EQUITY S HARES LOOKS QUITE SUBSTANTIAL BUT MAKING OF THAT INVESTMENT DID NOT INVOLVE ANY ADMIN ISTRATIVE OR OTHER EXPENDITURE AND HE FILED FOLLOWING TWO REASONS TO JUSTIFY THE EXPEN DITURE:- I) TOTAL EXPENDITURE OF RS.3,65,509 IS REASONABLY A TTRIBUTABLE TO THE TRADING ACTIVITY ETC. WHICH INVOLVE SALES OF MORE THAN RS.5 40 LACS. II) THE ACT OF MAKING INVESTMENT IN THE AFORESAID E QUITY SHARES OF TWO GROUP COMPANIES DID NOT INVOLVE ANY ADMINISTRATIVE EXPEND ITURE ETC. DIRECTLY OR INDIRECTLY. IN OUR VIEW, THE PURCHASE OF THOSE EQUITY SHARES TO THE EXTENT OF 90% OF THE TOTAL EQUITY OF EACH OF THOSE TWO COMPANIES WERE NOT MEAN T FOR EARNING ANY DIVIDEND INCOME BUT IT IS FOR THE EFFECTIVE CONTROL. THIS IN FERENCE GETS SUPPORT BY THE HONBLE JURISDICTIONAL HIGH COURT REGARDING WHICH LD. AUTHO RS CHATURVEDI AND PITISARIA IN THEIR TREATISE ON INCOME-TAX LAW 5 TH EDITION IN VOLUME-2 AT THE BOTTOM OF PAGE 3024 HAV E RECORDED AS FOLLOWS:- IN SARABHAI SONS (P) LTD. V. CIT (1993) 201 ITR 46 4, 471-72 (GUJ.), IT HAS BEEN HELD THAT THE INTEREST RELATING TO THE PURCHAS E OF CERTAIN SHARES WAS NOT DEDUCTIBLE AS SUCH SHARES WERE PURCHASED WITH A CLE AR PURPOSE OR OBJECT OF GETTING 100% CONTROL OVER THE COMPANY AND THE ONLY PURPOSE, OR EVEN THE DOMINANT PURPOSE, WAS NOT TO EARN INCOME. THUS THE FACTUAL MATRIX OF THIS CASE CLEARLY SHOWS THAT NO PART WORTH THE NAME OUT OF TOTAL ADMINISTRATIVE EXPENDITURE OF RS.3,65,509/- C AN BE REGARDED AS INCURRED FOR MAKING INVESTMENT IN THE EQUITY SHARES OF THE TWO S UBSIDIARY COMPANIES FOR ACQUIRING 90% OF EQUITY BASE OF EACH ONE OF THEM. FURTHER, THE ASSESSEES CLAIM IS FULLY SUPPORTED BY THE RATIO DECIDENDI OF THE HONBLE PUNJAB AND HARYANA HIGH COURT DECISION IN THE CASE OF CIT V. HERO CYCLES LTD. ITA NO1955/AHD/2010 A.Y. 2007-08 VAIKUNTH FINVEST LTD. V. ITO WD-8(4), ABD PAGE 4 (2010) 323 ITR 518 (P&H) AS PART OF THE HEADNOTE ON PAGE 518-19 OF THE REPORTS WE HAVE THE FOLLOWING:- THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISAL LOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED COULD NO T BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLI FY THE MANDATE OF SECTION14A , COULD NOT BE ACCEPTED. DISALLOWANCE SU NDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WH ERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INC URRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. (EMPHASIS SUPPLIED) ACTUALLY, THAT DECISION SPECIFICALLY DERIVES SUPPOR TED FROM EARLIER TWO DECISIONS CITED THEREIN WHICH ARE CIT V. WINSOME TEXTILES INDUSTRIES LTD. (2009) 319 ITR 204 (P&H) AND CIT V. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 (P&H). FURTHER WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. MUMBAI V. DCIT IN TAX APPEAL NO.626 OF 2010 DATED 12-08-2010 HAS CLEARLY HELD THAT THE PROVISIONS OF RULE 8D OF IT RULES, 1962 ARE PROSPEC TIVE AND NOT RETROSPECTIVE, AND THE RELEVANT INTERPRETATION OF HONBLE HIGH COURT R EADS AS UNDER:- IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RUL ES AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RUL E 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SH ALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FU NDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SH ALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR ITA NO1955/AHD/2010 A.Y. 2007-08 VAIKUNTH FINVEST LTD. V. ITO WD-8(4), ABD PAGE 5 GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. IN VIEW OF THE ABOVE EVEN OTHERWISE WE FIND THAT THE DIVIDEND EARNED BY THE ASSESSEE WAS TO THE EXTENT OF RS.285 ONLY, WHICH IS CLAIMED TO HAVE BEEN EXEMPT. IN VIEW OF THE REASONING GIVEN IN FOREGOING PARAGRAPHS AND TAKING SUPPORT OF HONBLE PUNJAB & HARYANA DECISION IN THE CASE OF HERO CYCLES LTD. (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE. 6. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 01/10/2010 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 01/10/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-XIV, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD