M/s. Dynemic Products Ltd., Ahmedabad V. The Dy.CIT.,(OSD) Range-1, Ahmedabad

ITA 197/AHD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76698 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 15-05-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 25-01-2011
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: RAJESH D SHAH
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO. 197/AHD/2011 ASSESSMENT YEAR 2007-08 M/S. DYNEMIC PRODUCTS LTD. AHMEDABAD. PAN: AAACD4067D VS DCIT, (OSD), RANGE-1, AHMEDABAD. / APPELLANT / RESPONDENT REVENUE BY : SH. P.L. KUREEL, SR. DR ASSESSEE(S) BY : SH. RAJESH D. SHAH, AR !'#/ // / DATE OF HEARING : 15/05/2014 $%& !'# / DATE OF PRONOUNCEMENT : 23/05/2014 '( '( '( '(/ // / O R D E R PER SHRI N.S. SAINI, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A)-VI, AHMEDABAD DATED 29.12.2010. 2. GROUND NO. 1 OF THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER U/S. 14A OF THE ACT OF RS 17,51,239/-. ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 2 - 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER OBSERVED THAT THE ASSESSEE HAS EARNED DIVIDEND INCO ME OF RS 59,12,425/- WHICH IS EXEMPT FROM TAX. HE FURTHER OBSERVED THAT IT IS SEEN THAT AS ON 31.03.2007, THE ASSESSEE HAS MADE INVESTMENT OF RS 10,40,00,445/-. HE FURTHER OBSERVED THAT THE ASSESSEE HAS TAKEN LOAN O F RS 5,29,76,289/- ON WHICH INTEREST EXPENDITURE OF RS 31,84,208/- HAS BE EN CLAIMED BY THE ASSESSEE. HE FURTHER OBSERVED THAT SOME ADMINISTRA TIVE/OTHER EXPENSES MUST HAVE BEEN INCURRED BY THE ASSESSEE FOR EARNING TAX FREE DIVIDEND INCOME. THEREFORE, SOME DISALLOWANCE U/S 14A IS WA RRANTED. THE ASSESSING OFFICER THEREAFTER MADE DISALLOWANCE OF RS 39,37,98 7/- AS AMOUNT OF EXPENDITURE DIRECTLY RELATING TO EARNING OF EXEMPT INCOME WHICH THE ASSESSEE HIMSELF HAS DISALLOWED IN THE RETURN OF IN COME FILED. HE FURTHER MADE DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDI TURE OF RS 11,61,124/- AND DISALLOWANCE OF 0.5% OF THE AVERAGE VALUE OF IN VESTMENT WHICH WORKED OUT TO RS 5,90,015/- AND IN THIS WAY COMPUTED TOTAL DISALLOWANCE OF EXPENDITURE AT RS 56,89,226/-. AS THE ASSESSEE HIM SELF HAS MADE DISALLOWANCE OF EXPENDITURE OF RS 39,37,987/- FOR E ARNING TAX FREE DIVIDEND INCOME, THE ASSESSING OFFICER MADE AN ADDITIONAL DI SALLOWANCE OF RS 17,57,239/- AS EXPENDITURE INCURRED FOR EARNING TAX FREE DIVIDEND INCOME AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 4. ON APPEAL, THE CIT(A) CONFIRMED THE ACTION OF T HE ASSESSING OFFICER BY OBSERVING THAT NOW RULE 8D IS HELD TO BE APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008-09 BY THE HONBLE BOMBAY HIGH COURT. HOWEVER, THE DISALLOWANCE OF EXPENSES RELATING TO E XEMPT INCOME IS TO BE MADE BY APPROPRIATE METHOD. THE ASSESSEE HAS BORRO WED FUNDS ON WHICH INTEREST WAS PAID. WHILE MAKING INVESTMENT, BOTH B ORROWED FUNDS AS WELL AS OWN FUNDS WERE USED, HENCE ONE CANNOT SAY THAT BORR OWED FUNDS WERE USED ONLY FOR BUSINESS PURPOSES AND FRESH CAPITAL RAISED WAS ONLY USED FOR INVESTMENT. THE CIT(A) ALSO OBSERVED THAT EVEN OTH ERWISE, WHEN FRESH ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 3 - CAPITAL WAS RAISED FOR THE PURPOSE OF BUSINESS, THE INVESTMENTS WERE MADE OUT OF BORROWED FUNDS. SINCE FRESH CAPITAL RAISED WAS NOT USED IN PAYING BORROWED FUNDS, INVESTMENTS WERE INDIRECTLY MADE FR OM BORROWED FUNDS. THEREFORE, DISALLOWANCE OF PROPORTIONATE INTEREST U /S. 14A WAS JUSTIFIED. AS REGARDS ADMINISTRATIVE AND OTHER EXPENSES RELATING TO EXEMPT INCOME, CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT GIVEN ANY DETAILS AND THEREFORE, IT IS DIFFICULT TO WORK OUT OTHER EXPENSES RELATABL E TO EXEMPT INCOME. IN ABSENCE OF SUCH DETAILS DISALLOWANCE MADE BY THE AS SESSING OFFICER AS PER RULE 8D FOR ADMINISTRATIVE AND OTHER EXPENSES IS AL SO CONFIRMED. 5. THE AR OF THE ASSESSEE SUBMITTED THAT IT WILL B E OBSERVED FROM PAGE NO. 4 TO 11 OF PAPER BOOK-II FILED BEFORE THE TRIBUNAL THAT ON 02.03.2006, THE ASSESSEE RECEIVED FUNDS FROM PAYABL E ISSUE OF SHARES OF RS 15,24,68,066/- AND THE ASSESSEE MADE INVESTMENT OF RS 5 CRORE ON 03.03.2006 IN BIRLA CASH PLUS INSTITUTIONAL PREMIUM PLAN, RS 5 CRORE IN DSP MERYLL LYNCH REGULAR PLAN GROWTH AND RS 1.6 CRORE I N TATA LIQUIDITY FUND SHIP GROWTH AND RS 2.50 CRORE IN PRUDENTIAL ICICI F LOATING RATE FUND ON 09.03.2006. IT WAS FURTHER THE CONTENTION OF THE A SSESSEE THAT ENTIRE INVESTMENT WAS MADE FROM THE SHARE CAPITAL MONEY RE CEIVED BY THE ASSESSEE AND NOT OUT OF INTEREST BEARING BORROWED F UNDS, AND THEREFORE, NO DISALLOWANCE OF INTEREST EXPENDITURE WAS WARRANTED. HE FURTHER SUBMITTED THAT ENTIRE INVESTMENTS WERE MADE DURING THE FINANC IAL YEAR 2005-06 RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND IN THE ASSESSMENT OF ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER HAS NOT MADE ANY DISALLOWANCE FOR THE INTEREST EXPENDITURE ON ACCOUN T OF INVESTMENT MADE OUT OF BORROWED FUNDS. FOR THIS, HE PLACED RELIANCE ON THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2006-07 FILED BEFORE US. IT WAS HI S SUBMISSION THAT DURING THE YEAR UNDER CONSIDERATION, THE INVESTMENT MADE B Y THE ASSESSEE WAS REDUCED FROM RS 13,20,45,666/- TO RS 10,40,00,445/- AS ON 31.03.2007. THUS, THERE WAS NO FRESH INVESTMENT MADE BY THE ASS ESSEE DURING THE YEAR ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 4 - UNDER CONSIDERATION AND ON THIS GROUND ALSO, NO DIS ALLOWANCE WAS WARRANTED. HE FURTHER SUBMITTED THAT DURING THE CO URSE OF HEARING BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE CIT(A), THE ASSESSEE FILED WRITTEN SUBMISSION WHEREIN COMPUTATION OF EXPENDITURE OF RS 39,37,987/- RELATING TO EARNING OF EXEMPT DIVIDEND INCOME WHICH THE ASSE SSEE HIMSELF HAS DISALLOWED IN THE RETURN OF INCOME AND THE ASSESSIN G OFFICER AS WELL AS CIT(A) HAS NOT POINTED OUT ANY ERROR IN THE SAME. WITHOUT REJECTING THE COMPUTATION OF THE ASSESSEE OF EXPENDITURE RELATING TO EARNING OF EXEMPT DIVIDEND INCOME, THE ASSESSING OFFICER CANNOT PROCE ED TO ESTIMATE THE EXPENDITURE RELATING TO EXEMPT DIVIDEND INCOME AND MAKE DISALLOWANCE OF THE SAME IN THE COMPUTATION OF INCOME OF THE ASSESS EE. 6. ON THE OTHER HAND, THE DR RELIED ON THE ORDER O F THE ASSESSING OFFICER. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E ORDERS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE, THE UNDISPUTED FACTS ARE THAT THE ASSESSEE COMPANY MADE INVESTMENT IN SHARES. THE SAID INVESTMENT YIELDED DIVIDEND INCOME OF RS 5 9,12,425/- DURING THE YEAR UNDER CONSIDERATION WHICH WAS EXEMPT FROM TAX. THE ASSESSEE CLAIMED TO HAVE INCURRED RS 39,37,987/- AS EXPENSES TOWARDS EARNING OF EXEMPT DIVIDEND INCOME AND ACCORDINGLY MADE DISALLOWANCE B Y ITSELF U/S 14A IN COMPUTING ITS TOTAL INCOME. HOWEVER, THE ASSESSING OFFICER, OBSERVING THAT NO DISALLOWANCE WAS MADE IN RESPECT OF INTEREST EXP ENDITURE OF RS 31,84,208/- INCURRED DURING THE YEAR, DISALLOWED PR OPORTIONATE INTEREST EXPENDITURE OF RS 11,61,124/- AND FURTHER HELD THAT SOME ADMINISTRATIVE EXPENSES MUST HAVE BEEN INCURRED FOR EARNING EXEMPT DIVIDEND INCOME AND THEREFORE, FURTHER DISALLOWED 0.5% OF THE AVERAGE I NVESTMENT WHICH WORKED OUT TO RS 5,90,015/-. THEREFORE, THE ASSESSING OFF ICER ESTIMATED TOTAL ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 5 - DISALLOWANCE U/S. 14A AT RS 56,89,226/- AND THEREBY MADE AN ADDITIONAL DISALLOWANCE OF RS 17,57,239/-. 8. THE ASSESSEE DISPUTED THIS DISALLOWANCE OF ADDI TIONAL AMOUNT OF RS 17,57,239/- BEFORE THE CIT(A) UNSUCCESSFULLY. 9. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US. 10. THE MAIN CONTENTIONS OF THE ASSESSEE ARE THAT THE ASSESSEE HAS SHOWN BEFORE THE LOWER AUTHORITIES THAT THE INVESTM ENT IN SHARES WERE MADE OUT OF INTEREST FREE FUND AVAILABLE WITH THE ASSESS EE. THE INVESTMENT IN SHARES WAS MADE OF RS 13,20,45,666/- IN ASSESSMENT YEAR 2006-07 AND BEFORE MAKING SUCH INVESTMENT, THE ASSESSEE RECEIVE D RS 15,24,68,066/- AS SHARE CAPITAL AND OUT OF THE SAME, INVESTMENTS WERE MADE. NO DISALLOWANCE OF INTEREST WAS MADE IN THE ASSESSMENT OF THE ASSES SMENT YEAR 2006-07 AND NO FURTHER INVESTMENT IN THE ASSESSMENT YEAR 20 07-08 WAS MADE. NO ERROR IN THIS SUBMISSION OF THE ASSESSEE COULD BE P OINTED OUT BY THE LOWER AUTHORITIES. NO MATERIAL WAS BROUGHT ON RECORD BY THE LOWER AUTHORITIES TO SHOW THAT ANY INTEREST BEARING BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE FOR MAKING INVESTMENT IN SHARES. FURTHER, THE OTHE R CONTENTION OF THE ASSESSEE WAS THAT NO DEFECT IN THE WORKING OF THE A MOUNT TO BE DISALLOWED U/S 14A AS CALCULATED BY THE ASSESSEE COULD BE POIN TED OUT BY THE ASSESSING OFFICER. IN ABSENCE OF ANY SPECIFIC ERROR BEING PO INTED OUT BY THE ASSESSING OFFICER IN THE COMPUTATION OF THE ASSESSEE U/S 14A, THE ASSESSING OFFICER HAS NO JURISDICTION TO VARY THE AMOUNT CLAIMED AS EXPEN DITURE U/S 14A BY THE ASSESSEE. HE ALSO CONTENDED THAT RULE 8D WAS NOT A PPLICABLE FOR THE ASSESSMENT YEAR IN QUESTION WHICH IS THE ASSESSMENT YEAR 2007-08. IN SUPPORT OF THE ABOVE CONTENTION, THE ASSESSEE RELIE D UPON VARIOUS DECISIONS INCLUDING THAT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 6 - BOYCE MFG. CO. LIMITED VS. DCIT (2010) 328 ITR 81 (BOM.) AND THAT OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LIMITED (2010) 323 ITR 518 (P&H.). 11. ON THE OTHER HAND, THE DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 12. WE FIND THAT NO SPECIFIC MATERIAL WAS BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SHOW THAT THE EXPENDITURE DISA LLOWABLE U/S. 14A AS COMPUTED BY THE ASSESSEE WAS ERRONEOUS. NO MATERIA L WAS BROUGHT ON RECORD TO SHOW THAT ANY INTEREST BEARING FUND WAS A CTUALLY INVESTED IN SHARES. FURTHER, NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT ANY SPECIFIC ADMINISTRATIVE EXPENDITURE WAS INCURRED FO R EARNING DIVIDEND INCOME AND WHICH WAS NOT INCLUDED IN THE AMOUNT OF RS 39,3 7,987/- WHICH WAS DISALLOWED BY THE ASSESSEE ITSELF. IN THE ABOVE CI RCUMSTANCES, IN OUR CONSIDERED VIEW, KEEPING IN MIND THE DECISION OF TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LIMITE D (SUPRA) AND OF THE HONBLE PUNJAB & HARYANA COURT IN THE CASE OF HERO CYCLES (SUPRA), THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ADDIT IONAL DISALLOWANCE OF RS 17,57,239/-. WE, THEREFORE, RESTRICT THE AMOUNT OF DISALLOWANCE U/S 14A AT RS 39,37,987/- AS CLAIMED BY THE ASSESSEE AND DELET E THE ADDITIONAL DISALLOWANCE OF RS 17,57,239/- AS MADE BY THE ASSES SING OFFICER. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 13. GROUND NO. 2 OF THE APPEAL OF ASSESSEE IS DIRE CTED AGAINST THE ORDER OF CIT(A) CONFIRMING THE DISALLOWANCE OF PROP ORTIONATE INTEREST OF RS 32,813/- ON LOANS AND ADVANCES GIVEN TO M/S VAIBHAV I BUILDERS U/S. 36(1)(III) OF THE ACT. ITA NO. 197/AHD/2011 M/S DYNEMIC PRODUCTS LTD. VS. DCIT(OSD) RANGE-1, AHD FOR A.Y. 2007-08 - 7 - 14. AT THE TIME OF HEARING, THE AR OF THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING THIS GROUND OF APPEAL AND ALSO MADE AN ENDORSEMENT TO THIS EFFECT IN THE GROUNDS OF APPEAL APPENDED TO THE APP EAL MEMO FILED IN FORM NO. 36 BEFORE US. THEREFORE, THIS GROUND OF APPEAL IS DISMISSED AS NOT PRESSED. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON FRIDAY, THE 23 RD OF MAY, 2014 AT AHMEDABAD. SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 23/05/2014 GHANSHYAM MAURYA, SR. P.S. TRUE COPY '( !) *')&! '( !) *')&! '( !) *')&! '( !) *')&!/ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ++ ! , / CONCERNED CIT 4. ,() / THE CIT(A)-III, AHMEDABAD 5. )/0 ! , , / DR, ITAT, AHMEDABAD 6. 012 3 / GUARD FILE. '( '( '( '( / BY ORDER, 4 44 4/ // / +5 +5 +5 +5 ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD