PRAKASH K. SHAH, MUMBAI V. CIT CITY 12/ACIT 12(1), MUMBAI

ITA 2030/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1774 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 08-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRATAP SINGH
• Assessee Lawyers: N R AGRAWAL
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 142(1); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE HONBLE S/SHRI JOGINDER SINGH (JM), AND RAJESH KUMAR, ( AM ) ./ I.T.A. NO . 2030 / MUM/20 1 5 ( / ASSESSMENT YEAR : 20 1 0 - 11 ) SHRI PRAKASH K SHAH, 8 - B, RAJABHADUR MANSION, 11/43, TAMARIND LANE, FORT, MUMBAI - 400023 / VS. COMMISSIONER OF INCOME TAX CITY - 12, ACIT 12(1), MUMBAI ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAAC P8291F / APPELLANT BY: SHRI N R AGRAWAL / RESPONDENT BY SHRI PRATAP SINGH / DATE OF HEARING : 2 9.11 . 201 6 / DATE OF PRONOUNCEMENT : 29. 1 1. 2016 / O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) - 2 8 , MUMBAI D ATED 3.2.2015 PERTAINING TO A.Y. 20 10 - 11 . 2. THE ISSUE TAKEN BY THE ASSESSEE IN T HE SOLE GROUND IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS. 16,29,409/ - BY THE LD. CIT(A) AS MADE BY THE AO UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 . 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSE SSEE FILED HIS RETURN OF INCOME ON 30.9.2010 DECLARING TOTAL INCOME OF RS.37,67,935/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY UNDER THE CASS AND ACCORDINGLY STATUTORY ITA NO .2030/ M/1 5 2 NOTICES UNDER SECTION 143(2) AND 142(1) WERE ISSUED AND SERVED UPON THE ASSE SSEE. THE ASSESSMENT WAS FRAMED BY THE AO VIDE ORDER DATED 1.3.2013 PASSED UNDER SECTION 143(3) OF THE ACT AT RS.54,46,350/ - BY MAKING VARIOUS ADDITION S INCLUDING OF RS.16,29,409/ - UNDER SECTION 14A COMPRISING RS.15,37,367/ - UNDER RULE 8D (2)(II) AN D RS.92,042/ - UNDER RULE 8D(2)(III). DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.2,61,652/ - AND CLAIMED EXEMPTION UNDER THE ACT AND NO CORRESPONDING DISALLOWANCE WAS ATTRIBUTED BY THE AS SESSEE S UO MOTT O TOWARDS EARNING OF EXEMPT INCOME. THE AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE WHICH WAS REPLIED BY THE ASSESSEE VIDE WRITTEN SUBMISSION DATED 16.1.2013. THE AO CONSIDERED AND REJECTED THE SUBMISSIONS OF THE ASSESSEE AND FINALLY I NVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AND WORKED OUT DISALLOWANCE AT RS.16,29,409/ - AS PER SECTION 14A AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRS T APPELLATE AUTHORITY , WHO ALSO CONFIRMED THE ACTION OF THE AO QUA THE ADDITION MADE U/S 14A READ WITH RULE 8D OF THE RULES BY OBSERVING AND HOLDING AS UNDER : 2.5 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BY ASSESSEE. THE ASSE SSEE HAS BASICALLY CONTENDED THAT SINCE HIS CAPITAL AS 31.03.2009 AND AS ON 31.03.2010 WAS MORE THAN THE INVESTMENTS MADE, IT SHO ULD BE PRESUMED THAT THE INVESTMENTS ARE OUT OF THE INTEREST FREE CAPITAL OF THE ASSESSEE IN VIEW OF THE JUDGEMENT OF THE HON' BLE BOMBAY HIGH COURT IN THE C ASE OF HDFC BANK LTD (SUPRA) AND RELIANCE UTILITIES AND POWER LTD. (SUPRA). I FIND THAT THE JUDGMENT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD (SUPRA) IS BASED ON A FINDING THAT IF THERE BE INTEREST - FREE FUNDS AVAILAB LE TO AN ASSESSEE ITA NO .2030/ M/1 5 3 SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST - FREE FUNDS AVAILABLE. THE RELEVANT FINDING HERE IS THAT THERE SHOULD BE AVAILABILITY OF INTEREST - FREE FUNDS TO THE ASSESSEE AND THAT SUCH INTEREST - FREE FUNDS HAS NOT ALREADY BEEN UTILIZED FOR ANY OTHER PURPOSE. HENCE, IN MY OPINION, IT IS INCUMBENT UPON THE ASSESSEE TO SHOW THAT THE INTEREST - FREE FUNDS WERE AVAILABLE WITH HIM FOR MAKING THE I NVESTMENTS IN SHARES/MUTUAL FUNDS, INCOME FROM WHICH IS/WOULD BE EXEMPT FROM TAX. 2.6 PERUSAL OF THE BALANCE SHEET FILED BY THE ASSESSEE AT 31.03.2009 SHOWS THAT THE ASSESSEE HAD BALANCE IN THE CAPITAL ACCOUNT OF RS.3.32 CRORES. THE ASSET SIDE SHOWS FIXE D DEPOSITS WITH BANK OF INDIA OF RS. 2 CRORES, FLAT AND OFFICE PREMISES OF RS.23.22 LAKHS, GOLD AND JEWELLERY OF RS.14.46 LAKHS AND CLOSE TO RS. 2 LAKHS IN BANK ACCOUNT AND AS CASH IN HAND. THE FIRST AND MOST LOGICAL PRESUMPTION' THAT CAN BE MADE IS THAT A LL THE ABOVE HAS BEEN INVESTED OUT OF THE INTEREST - FREE FUNDS OF THE ASSESSEE SINCE NORMALLY NO PERSON WOULD TAKE MONEY ON LOAN FOR INVESTING THE SAME IN FIXED DEPOSIT. HENCE, ONLY AN AMOUNT OF APPROXIMATELY RS.93 LAKHS OF THE OWN FREE FUNDS WOULD BE AVAIL ABLE TO THE ASSESSEE. AS AGAINST THIS, THE ASSESSEE HAS INVESTMENT IN SHARES AND DEBENTURES OF RS.1.76 CRORES AND IN STOCK - IN - TRADE OF R S .1.41 CRORES. THE ASSESSEE HAS SECURED LOANS OF RS.1.55 CRORES AND UNSECURED LOANS OF RS.3.19 CRORES. CLEARLY, PART OF THE INTEREST BEARING LOANS HAS BEEN UTILIZED FOR MAKING INVESTMENTS IN SHARES AND DEBENTURES. ALTHOUGH, AS AT 31.03.2010, THE INTEREST BEARING LOANS HAVE COME DOWN DRASTICALLY, IT IS CLEAR THAT PART OF THE LOANS ON WHICH INTEREST HAS BEEN PAID DURING THE Y EAR ALSO RELATES TO THE INVESTMENTS MADE WHICH IS BEING CARRIED FORWARD FROM THE EARLIER YEAR. HENCE, THE CONTENTION OF THE ASSESSEE THAT ONLY INTEREST - FREE FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF INVESTMENTS IN SHARES AND DEBENTURES CANNOT BE ACCEPTED : THE FUNDS OF THE ASSESSEE, BEING MIXED FUNDS, DISALLOWANCE OF INTEREST U/S 14A AS PER THE METHOD PRESCRIBED IN RULE 8D(2)(II) WOULD BE CALLED FOR. THIS IS WHAT THE ASSESSING OFFICER HAS DONE. HENCE, HIS ACTION OF WORKING OUT THE DISALLOWANCE OF PROPORTIO NATE INTEREST EXPENDITURE AS PER THE METHOD PRESCRIBED IN RULE D(2)(II) IS UPHELD. SUBJECT TO THE VERIFICATION OF THE CONTENTION OF THE ASSESSEE THAT WHILE CALCULATING THE DISALLOWANCE, THE A.O. TOOK WRONG FIGURERS OF AVERAGE OF TOTAL ASSETS. THE A.O. IS D IRECTED TO VERIFY THE CORRECTNESS OF THE WORKING OF THE FIGURES OF AVERAGE OF TOTAL ASSETS AND ADOPT THE CORRECT FIGURE F OR WORKING OUT THE DISALLOWANCE. 2.7 AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE NET INTEREST EXPENDITU RE SHOULD BE CONSIDERE D FOR WORKING OUT OF THE DISALLOWANCE ON ACCOUNT OF PROPORTIONATE INTEREST EXPENSES, I DO NOT FIND THE SAME ITA NO .2030/ M/1 5 4 ACCEPTABLE. THE DECISI ON IN THE CASE OF MORGAN STANLEY RELIED UPON BY THE ASSESSEE RELATES TO THE A. YS. 20 01 - 02 AND 2004 - 05 WHEN RULE 8D WAS NOT ON THE STATUTE. THE PRESENT APPEAL RELATES THE A. Y. 2010 - 11 AND THE DISALLOWANCE HAS TO BE WORKED OUT MANDATORILY A ND STRICTLY BY THE METHOD PRESCRIBED IN RULE 8D (2)(II) OF THE I.T. RULES, 1962. THE S AID RULE TALKS ABOUT AMOUNT OF EXPENDITURE BY WAY OF INTE REST AND NOT NET EXPENDIT URE , BY WAY OF INTEREST. HENCE, IT IS THE TOTAL GROSS INTEREST BY WAY OF INTER EST EXPENDITURE WHICH WILL HAVE TO BE CONSIDERED FOR WORKING OUT THE DISALLOWAN CE UNDER RULE 8D (2)(II). 2. 8 THE DISALLOWANCE WORKED OUT BY THE A.O. AS PER THE METHOD PRESCRIBED IN RULE 8D (2)(III) IS ALSO UPHELD AS THE ASSESSEE HAS NOT SHOWN THAT NO PART OF T HE ADMINISTRATIVE EXPENDITURE CAN BE ATTRIBUTED TO THE ACTIVITY OF EARNING TAX FR EE INCOME AND ALSO FOR THE FACT THAT HE HAS NOT CONTESTED SUCH DISAL LOWANCE MADE THE A.O. IN HIS SUBMISSIONS IN THE APPELLATE PROCEEDING. IN VIEW OF THE AFORES AID REASONS, THE GROUND OF APPEAL FILED BY THE ASSESSEE IS DISMISSED 4. THE LD. AR VEHEMENTLY SUBMITTED BEFORE US THAT THE ASSESSEES OWN FUNDS WERE FOR MORE THAN THE INVESTMENT MADE IN THE SHARES AND SECURITIES INCOME OF WHICH WAS CLAIMED AS EXEMPT INCOME UNDER THE ACT. THE LD. AR SUBMITTED THAT TOTAL CAPITAL BALANCE AS PER THE AUDITED BALANCE SHEET AS ON 31.3.2010 WAS RS.3 , 44 , 28 , 517.31 VIS A VIS INVESTME NT S IN SHARES AND SECURITIES OF RS.1,77,34,233.78 BY REFERRING TO PAGE 3 OF THE ASSESSEES PAPER BOOK AND AS SUCH NO DISALLOWANCE UNDER RULE 8D(2) (II) WAS CALLED FAR . IN DEFENCE OF HIS ARGUMENTS THE LD.AR RELIED ON THE DECISION OF THE HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT V/S HDFC BANK LTD. [2014] 366 ITR 505 (BOM) AND THE DECISION COMMISSIONER OF INCOME - TAX V/S SBI DHFL LTD. 2015. (2015) 93 CCH 0201 ( MUMHC ) AND SUBMITTED THAT SINCE THE ASSESSEES OWN FUNDS ARE MORE THAN THE INVESTME NT MADE IN THE SHARES AND SECURITIES AND THEREFORE NO DISALLOWANCE UNDER RULE 8D(2)(II) OF RS.15,37,367/ - TO BE MADE. THE LD. AR, HOWEVER, DID NOT OBJECT TO THE ADDITION OF RS.92,042/ - MADE UNDER RULE ITA NO .2030/ M/1 5 5 8D(2)(III ). THE LD. AR FINALLY PRAYED THAT THE DI SALLOWANCE OF RS.15,37,366/ - UNDER RULE 8D(2(II) BE DELETED AS THE CASE OF THE ASSESSEE IS FULLY COVERED BY THE DECISION OF T HE JURISDICTIONAL HIGH COURT. ON THE CONTRARY, THE LD.DR STRONGLY OBJECTED TO THE ARGUMENT S OF THE LD.AR AND POINTED OUT THAT T HE LD.CIT(A) IN PARA 2.5 TO 2.8 OF THE APPEAL ORDER HAS CONSIDERED THIS DECISION AND DISTINGUISHED THE SAME AS WAS NOT APPLICABLE TO THE CA S E OF THE AS S ES SEE AND PRAYED THAT THE ORDERS OF LOWER AUTHORITIES BE UPHELD. 5 . WE HAVE CAREFULLY CONSIDERED THE SU BMISSIONS OF THE PARTIES, PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE ORDERS OF AUTHORITIES BELOW AND CASE LAWS RELIED UPON BY THE PARTIES . WE FIND FROM THE BALANCE SHEET ON 31.3.2010 FILED AT PAGE 3 OF THE PAPER BOOK THAT THE ASSESSEES OWN INTERE ST FREE FUNDS WERE RS.3,44,28,517/ - AGAINST THE INVESTMENT IN SHARES AND SECURITIES OF RS.1,77,34,233/ - . WE ARE OF THE CONSIDERED OPINION THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF HDFC BANK LTD (SUPRA), IN WHICH THE HONBLE HIGH COURT HAS HELD THAT IN CASE INTEREST FREE FUND S ARE MORE THAN THE INVESTMENT S MADE IN THE SHARES AND SECURITIES WHICH YIELDED EXEMPT INCOME THEN THE PRESUMPTION WOULD BE THAT INVESTMENT S W ERE MADE IN THE SHARES AND SECURITIES OUT OF INTEREST FREE FUNDS. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT THE CA S E OF THE AS S ESSEE IS SQUARELY COVED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH CO URT AND ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. ITA NO .2030/ M/1 5 6 CIT(A) AND DIRECT THE AO TO DELETE THE ADDITION OF RS.1 5,37,367/ - AS MADE UNDER RULE 8D(2(II) OF THE RULES. 6 . IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THE ABOVE ORDER WAS PRON OUNCED IN THE OPEN COURT ON 30TH NOV , 2016 . 30TH NOV , 2016 SD SD (JOGINDER SINGH ) ( RAJESH KUMAR ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30TH NOV , 2016 . . . ./ SRL , SR. PS / COPY OF THE ORDER FO RWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. 6. , , / DR, ITAT, MUMBAI CONCERNED / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI