ACIT CIR 6(3), MUMBAI V. MAHINDRA INFRASTRUCTURAL PROJECTS P.LTD ( NOW MERGED WITH ANDROMEDA INVESTMENT & FINANCE P. LTD), MUMBAI

ITA 2019/MUM/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2876 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 18-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 14-03-2013
• Court: TRIBUNAL
• Department Lawyers: B SATYANARAYANA RAJU
• Assessee Lawyers: PRASAD M BAPAT
• Keywords: Rule of consistency; Earning of tax free income; Commercial expediency
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER I.T.A. NO.2019/M/2013 (ASSESSMENT YEAR: 2008 - 2009 ) I.T.A. NO.2020/M/2013 (ASSESSMENT YEAR: 2009 - 2010 ) ACIT, CIRCLE 6(3), MUMBAI. / VS. M/S. MAHINDRA INFRASTRUCTURAL PROJECTS PVT LTD., (NOW MERGED WITH ANDROMEDA INVESTMENT & FINANCE PVT LTD) 5 TH FLOOR, MAHINDRA TOWERS, G.M.BHOSALE MARG, P.K. KURNE CHOWK, WORLI, MUMBAI 400 018. ./ PAN : AAACM3575B ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI B. SATYANARAYANA RA JU , DR / RESPONDENT BY : SHRI PRASAD M. BAPAT / DATE OF HEARING : 05 .10.2016 / DATE OF PRONOUNCEMENT : 05 .10.2016 / O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE TWO APPEALS UNDER CONSIDERATION. BOTH THE APPEALS ARE FILED BY THE REVENUE INVOLVING THE ASSESSMENT YEARS 2008 - 09 AND 2009 - 2010. SINCE, THE ISSUES RAISED IN BOTH THE APPEALS ARE IDENTICAL , THEREFORE, FOR THE SAKE OF CONVENIENCE, THEY ARE CLUBBED, HEARD COMBINEDLY AND DISPOSED OF IN THIS CONSOLIDATED ORDER. APPEAL WISE ADJUDICATION IS GIVEN IN THE FOLLOWING PARAS OF THIS ORDER. 2. SINCE, THE GROUNDS RAISED IN BOTH THE APPEALS ARE IDENTICAL, FOR THE SAKE OF REFERENCE AND ADJUDICATION PURPOSE, WE SHALL TAKE UP THE GR OUNDS RAISED IN APPEAL ITA NO.2019/M/2013 (AY 2008 - 09) AND THEY READ AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN APPLYING SECTION 14A R.W. RULE 8D WHEN ISSUE AT HAND IS WHETHER 2 THERE IS DIVERSION OF BORROWED FUNDS TO SUBSIDIARY COMPANY OR NOT AND IF YES, WHETHER ASSESSEE HAS BEEN ABLE TO PROVE COMMERCIAL EXPEDIENCY OR NOT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN APPLYING SECTION 14A R.W. RULE 8D WHEN DISALLOWANCE OUT OF EXPENDITURE ON ACCOUNT OF EXEMPT INCOME WAS NOT THE ISSUE AT HAND. THE CIT (A) MISDIRECTED HERSELF IN APPLYING SECTION 14A R.W. RULE 8D TO FACTS OF THE CASE. 3. BRIEFLY STATED RELEVAN T FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE AND INFRASTRUCTURE DEVELOPMENT. ASSESSEE FILED THE RETURN OF INCOME FOR THE AY 2008 - 09 DECLARING THE TOTAL LOSS OF RS. 2,50,79,391/ - WHICH IS SUBSEQUENTLY REVISED DECLAR ING THE TOTAL LOSS OF RS. 2,60,10,533/ - . ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT AND THE A SSESSED INCOME WAS DETERMINED AT RS. NIL . IN THE ASSESSMENT, AO DISALLOWED INTEREST EXPENDITURE OF RS. 2,50,74,000/ - CLAIMED BY THE ASSESSEE U/S 36(1)(III) O F THE ACT. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4. DURING THE PROCEEDINGS BEFORE THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) APPLIED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D FOR THE PURPOSE OF WORKING OUT OF THE DISALLOWANCE OF EXPENDITURE. HE FURTHER HELD THAT THIS IS THE CASE WHERE THE BORROWED FUNDS ARE USED FOR OTHER THAN THE BUSINESS PURPOSES OF THE ASSESSEE, IN WHICH CASE, THE INTEREST ON SUCH BORROWED FUNDS IS NOT D EDUCTIBLE. PARA 3.3 OF THE CIT (A)S ORDER IS RELEVANT IN THIS REGARD. CIT (A) ALSO RELIED ON THE DECISION OF THE AO IN THE EARLIER AYS AND PARTLY ALLOWED THE APPEAL. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE ABOVE MENTIONED GR OUNDS. 5. DURING THE PROCEEDINGS BEFORE US, AT THE OUTSET, LD COUNSEL FOR THE ASSESSEE BRINGING OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2005 - 06 IN ITA NO.5827/M/2013, DATED 7.4.2016 AND MENTIONED THAT AN IDENTICAL ISSUE CAME UP FOR ADJUDICATION BEFORE THE ITAT AND THE TRIBUNAL GRANTED RELIEF VIDE PARAS 5 AND 6 OF THE SAID TRIBUNALS ORDER (SUPRA). IT IS PRAYED BEFORE US THAT CONSIDERING THE COMMONALITY OF THE ISSUES RAISED BY THE REVENUE IN THE PRESENT APPEALS AS WELL A S IN THE SAID APPEAL DECIDED BY THE TRIBUNAL FOR THE AY 2005 - 06, THE RATIO LAID DOWN IN THE SAID TRIBUNALS ORDER IS REQUIRED TO BE FOLLOWED. 6. ON THE OTHER HAND, LD DR FOR THE REVENUE RELIED ON THE ORDER OF THE AO. 3 7. WE HAVE HEARD BOTH THE PARTIES AND P ERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE CITED DECISION OF THE TRIBUNAL (SUPRA) IN ASSESSEES OWN CASE FOR THE AY 2005 - 06. THE ONLY ISSUE INVOLVED IN THESE APPEAL S RELATE TO IF THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AND OF SECT ION 36(1)(III) OF THE ACT ARE MUTUALLY EXCLUSIVE OR NOT? IN THIS REGARD, O N PERUSAL OF THE SAID DECISION OF THE TRIBUNAL (SUPRA) , WE FIND, VIDE PARAS 5 AND 6 THE TRIBUNAL GRANTED RELIEF ON IDENT ICAL ISSUE . CONSIDERING THE COMMONALITY OF THE ISSUES RAISED IN THE APPEALS, WE FIND IT RELEVANT TO EXTRACT THE SAID PARAS FOR THE SAKE OF COMPLETENESS OF THIS ORDER AND THE SAME READ AS UNDER: - 5. WE HAVE FURTHER NOTICED THAT WHILE DELETING THE ADDITION / DISALLOWANCE U/S 14A, LD CIT (A) ON RELYING THE ORDER OF C IT (A) IN ASSESSEES OWN CASE FOR THE AY 2003 - 2004, 2004 - 05 AND 2006 - 07, RELIED ON THE FOLLOWING OBSERVATION: I HAVE CONSIDERED THE SUBMISSIONS. THE ISSUE OF DISALLOWANCE U/S 36(1)(III) HAS BECOME IRRELEVANT AFTER INTRODUCTION OF SECTION 14A AND A NOTIF ICATION OF RULE 8D U/S 14A EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS NOT ALLOWABLE. IT CANNOT BE SAID THAT NO EXPENDITURE IS ATTRIBUTABLE IN RELATION TO INCOME OR POTENTIAL INCOME BY WAY OF DIVIDENDS. EVEN IF, THERE IS SOME BUSINESS PURPOSE BE HIND THE INVESTMENT MADE IN M/S. CORBEL ESTATE, THE FACT REMAINS THAT INCOME GENERATED OUT OF INVESTMENT IS IN THE FORM OF DIVIDENDS WHICH IS NOT TAXABLE. THE ISSUE THEN IS WHETHER ANY EXPENDITURE HAS BEEN INCURRED IN RELATION TO SUCH EXEMPT INCOME. RULE 8D HAS BEEN NOTIFIED U/S 14A. THIS RULE APPLIES EITHER WHEN THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED OR WHEN THE AO AND THE ASSESSEE DISAGREE ON THE AMOUNT OF EXPENDITURE. THIS RULE PROVIDES A UNIFORM AND STANDARD METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE OPERATION OF THIS RULE HAS BEEN DECLARED AS RETROSPECTIVE BY THE SPECIAL BENCH OF THE ITAT IN DAGA CAPITAL MANAGEMENT (117 ITD 169). IT HAS ALSO BEEN HELD IN THE SAME CASE THAT EXPENDI TURE HAS TO BE DISALLOWED EVEN IF NO INCOME BY WAY OF DIVIDEND IS EARNED DURING THE YEAR. IN VIEW OF THE ABOVE, RULE 8D HAS TO BE APPLIED IN THE CASE OF THE APPELLANT AND THE PROPORTIONATE EXPENDITURE IN RELATION TO EXEMPT INCOME DETERMINED. THE AO HAS FO LLOWED A METHOD WHICH IS NOT FULLY CONSONANT WITH THE METHOD PROVIDED IN RULE 8D. THE AO IS DIRECTED TO DETERMINE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME BY APPLYING THE METHOD PRESCRIBED IN RULE 8D. THE DISALLOWANCE OF PROPORTIONATE E XPENDITURE DETERMINED IN EACH YEAR ACCORDING TO THE ABOVE RULE WOULD BE THE AMOUNT OF DISALLOWANCE THAT IS CONFIRMED. ANY AMOUNT OF DISALLOWANCE WHICH IS HIGHER THAN THE AMOUNT COMPUTED AS PER RULE 8D SHOULD BE TREATED AS DELETED. 6. LD CIT (A) (SIC) P ERUSED THE ORDER, ON THE BASIS OF PRINCIPLE OF CONSISTENCY AND DIRECTED TO THE AO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. HENCE, WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT (A). HENCE, THE APP EAL FILED BY THE REVENUE IS DISMISSED. 8. FROM THE ABOVE, IT IS EVIDENT, WHEN THERE IS A CLAIM OF INTEREST EXPENDITURE, THE DISALLOWANCE OF THE SAME IS REQUIRED TO BE DONE AS PER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AND DISALLOWANCE SHOULD NOT BE DONE U/S 36(1)(III) OF THE ACT. 4 CONSIDE RING THE ABOVE SETTLED NATURE OF THE ISSUE AND RESPECTFULLY FOLLOWING THE SAID DECISION OF THE TRIBUNAL ON IDENTICAL ISSUE AS WELL AS FOLLOWING THE PRINCIPLE OF CONSISTENCY, WE ARE OF THE OPINION, THE DECISION TAKEN BY THE CIT (A) IS FAIR AND REASONABLE AN D IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 9. SINCE, THE ISSUES RAISED IN APPEAL ITA NO.2020/M/2013 FOR THE AY 2009 - 2010 ARE IDENTICAL TO THAT OF THE APPEAL ITA NO.2019/M/2013 FOR THE AY 2008 - 09, WHI CH IS ADJUDICATED BY US IN THE ABOVE PARAS OF THIS ORDER, OUR DECISION GIVEN FOR THE AY 2008 - 09 SQUARELY APPLIES TO THE APPEAL FOR THE AY 2009 - 10 ALSO. CONSIDERING THE SAME, WE UPHELD THE DECISION OF THE CIT (A) AND CONSEQUENTLY, GROUNDS RAISED BY THE REV ENUE IN ITS APPEAL FOR THE AY 2009 - 2010 ARE DISMISSED. 9. IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH OCTOBER, 2016. S D / - S D / - ( AMARJIT SINGH ) (D. KAR UNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 05.10.2016 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI