Commercial Engineers & Body Builders Co. Ltd., Kanpur V. DY. Commissioner of Income Tax-6, Kanpur

ITA 206/LKW/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4391 (ITAT-LUCKNOW)
• Duration Of Justice: 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI P.K. BANSAL, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ITA NO.206/LKW/2016 ASSESSMENT YEAR 2009-10 DY. CIT RANGE-6, KANPUR VS COMMERCIAL ENGINEERS & BODY BUILDERS CO. LTD. 84/105, G.T.ROAD, KANPUR PAN AAACC 5823 F (RESPONDENT) (APPELLANT) SHRI S.N. MISHRA & SHRI SUBHASH BAJPAI APPELLANT BY SHRI AMIT NIGAM, DR RESPONDENT BY 23 /0 5 /2016 DATE OF HEARING 27.06.2016 DATE OF PRONOUNCEMENT O R D E R PER MAHAVIR PRASAD, JM. THIS IS AN ASSESSEES APPEAL DIRECTED AGAINST THE O RDER OF LD. CIT (A)-II, KANPUR DATED 13.01.2016 FOR THE ASSESSMENT YEAR 200 9-10 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 01. BECAUSE THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS. 3,97,436/- BEING DIS ALLOWANCE U/S. 14A OF THE INCOME-TAX ACT READ WITH RULE 8D (2 ) OF INCOME-TAX RULES, PARTICULARLY WHEN THE APPELLANT I S NOT IN RECEIPT OF EXEMPT INCOME DURING THE YEAR. 02. BECAUSE ON A PROPER APPRECIATION OF FACTS AND CIRCUMSTANCES OF THE CASE, THE PROVISIONS OF SECTION 14A OF THE A CT, READ WITH RULE 8D OF THE L.T.RULES IS NOT APPLICABLE TO THE ASSESSEE'S CASE, AND AS SUCH, THE ADDITION OF RS. 3 ,97,436/- BEING BAD IN LAW BE DELETED. 2 03. BECAUSE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE ENTIRE INVESTMENTS MADE IN TAX EXEMPT INSTRUMENTS, ARE ALL OLD AND OUT OF THE INTEREST FREE FUNDS AVAILABLE, THE P ROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE L.T. RULES IS NOT APPLICABLE, AND HAS THEREBY ERRED IN MAKING THE SAI D ADDITION. 04. BECAUSE THE LEARNED CIT (A) HAS ERRED IN LA W AND ON FACTS THAT HON'BLE ITAT HAS NOT DISCUSSED THE CBDT CIRCUL AR NO.5/2014 IN ITS ORDER OF THE APPELLANT FOR ASSESSM ENT YEAR 2008-2009 DATED 25.04.2013 IN AS MUCH AS THE AFORES AID CIRCULAR WAS ISSUED IN 2014 I.E. MUCH AFTER 25.04.2 013 - THE DATE OF PASSING ORDER BY THE HON'BLE ITAT FOR ASSES SMENT YEAR 2008-2009 IN THE APPELLANT'S CASE. 05. BECAUSE THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT THAT ORDERS OF HON'BLE HIGH COURT AND SUPREME COURT HAVE OVERRIDING-EFFECT OVER THE CIRCULARS/INSTRUCTIONS I SSUED BY THE CBDT IRRESPECTIVE OF THE FACT WHETHER THE PARTI CULAR CIRCULAR/INSTRUCTION IS ADJUDICATED UPON OR NOT AND THE APPELLANT CASE IS SQUARELY COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SH IVAM MOTORS PVT. LIMITED IN ITA NO.88/2014 DATED 05.05.2 014. 3. THE BRIEF FACTS OF THE CASE ARE THAT A SUM OF RS.3,97,436/- HAS BEEN DISALLOWED BY THE LEARNED AO BY APPLYING THE PROVIS IONS OF SECTION 14A OF THE INCOME-TAX ACT. THIS ISSUE HAS BEEN DISCUSSED B Y THE ASSESSING OFFICER IN PARA 5 OF THE ASSESSMENT ORDER AT PAGE 4 TO 8. T HE ASSESSING OFFICER HAS OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSES HAD MADE INVESTMENTS IN QUOTED AND UNQUOTED SHARES OF DIFFER ENT COMPANIES AMOUNTING TO RS.67,24,000/. THE ASSESSING OFFICER H AS HELD THAT THE INCOME FROM QUOTED AND UNQUOTED SHARES OF DIFFERENT COMPAN IES, I.E., THE DIVIDEND IS TAX EXEMPT. THE EXPENDITURE INCURRED FOR THE PUR POSES OF MAKING THE INVESTMENT AND EARNING THE DIVIDEND INCOME, IS SUBJ ECT TO TAX TREATMENT U/S. 14A. SO, APPLYING THE PROVISIONS OF SECTION 14A REA D WITH RULE 8D, HE HAS MADE A DISALLOWANCE OF RS.3,97,436/-. 4. LD. AR OF THE ASSESSEE STATED THAT ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME WHICH DOES NOT FORM PART OF TOTAL INC OME DURING THE YEAR 3 UNDER APPEAL. LD. AR OF THE ASSESSEE FURTHER STATED THAT THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.3,97,436/- ON TH E GROUND THAT THE ASSESSEE HAS BORROWED FUNDS AND WAS PAYING INTEREST WHEREAS SUBSTANTIAL INVESTMENT HAVE BEEN MADE BY THE ASSESSEE COMPANY I N SHARES OF OTHER COMPANIES TO EARN THE DIVIDEND. 5. AGAINST THE ORDER OF THE ASSESSING OFFICER, ASS ESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO HAS UPHOLD THE ORDER O F THE ASSESSING OFFICER AND SUSTAIN THE ADDITION MADE U/S 14A OF THE I.T. A CT WITH THE FOLLOWING OBSERVATION: KEEPING IN VIEW THE CIRCULAR NO.5/2014 WHICH WAS I SSUED LATER THAN THE DATE OF THE JUDGMENT OF HON'BLE ITAT IN THE ASSESSEE'S OWN CASE FOR EARLIER YEAR (SUPRA) AND TH E FACT THAT IMPLICATION OF THIS CIRCULAR HAS NOT BEEN ADJUDICAT ED UPON BY THE HON'BIE ITAT IN THEIR ORDER DATED 25-04-2013, H ENCE, I DISAGREE WITH THE SUBMISSION OF THE APPELLANT THAT THIS ISSUE IS COVERED BY THE SAID ORDER OF HON'BLE ITAT, LUCKN OW BENCH AND FOLLOWING THE CIRCULAR NO.5/2014, I UPHOLD THE ORDER OF AO AND SUSTAIN THE ADDITION MADE U/S.14A OF IT. ACT EVEN THOUGH NO TAX FREE INCOME HAS BEEN EARNED BY ASSESS EE DURING THE YEAR. 6. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE TH E TRIBUNAL WITH THE SUBMISSION THAT ON APPEAL BEFORE THE CIT(A ) THE ASSESSEE PRESENTED HIS OWN CASE FOR THE ASSESSMENT YEAR 2008 -09 WHICH WAS DECIDED BY THE ITAT, LUCKNOW IN ITA NO. 371 TO 374/LKW/2012 VIDE ORDER DATED 25.04.2013 IN FAVOUR OF THE ASSESSEE ON T HE GROUND THAT THE ASSESSEE HAD NO EX EMPT INCOME DURING THE YEAR. HOWEVER, THE LD. CIT(A) DID NOT AG REE TO THE DECISION OF THE ITAT ON THE GROUND THAT CBDT CIRCUL AR NO.5/2014 IS TO BE FOLLOWED. 7. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A C AREFUL PERUSAL OF THE RECORD IN THE LIGHT OF THE RELEVANT PROVISIONS OF THE ACT, WE FIND 4 THAT AS PER THE PROVISIONS OF SECTION 14A, NO DEDUC TION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL IN COME UNDER THIS ACT. MEANING THEREBY THE BASIC CONDITION PRECEDENT FOR INVOKING THE PROVISIONS OF SECTION 14A IS THAT THERE SHOULD BE I NCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. T HUS, WHEREVER THE ASSESSEE EARNED THE INTEREST FREE INCOME, THE CORRE SPONDING EXPENDITURE INCURRED IN EARNING THAT INCOME IS TO B E DISALLOWED. IN THE ABSENCE OF ANY INTEREST FREE INCOME, THERE CANNOT B E ANY DISALLOWANCE AS NO CORRESPONDING EXPENDITURES WERE INCURRED TO E ARN A PARTICULAR TAX FREE INCOME. FOR THE SAKE OF REFERENCE, WE EXTR ACT THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOME T AX RULES ARE AS UNDER: 14A. [(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] [(2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED , IF THE ASSESSING OFFICER, HAVIN G REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 5 8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNES S OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATI ON TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). 22 [ (2) THE EXPENDITURE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY: (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; AND (II) AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME : PROVIDED THAT THE AMOUNT REFERRED TO IN CLAUSE (I) AND CLAUSE (II) SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE.] 8. HAVING CAREFULLY EXAMINED VARIOUS JUDICIAL PRONO UNCEMENTS, WE FIND THAT THE CIT(A) HAS CONFIRMED THE ADDITION OF RS.3,97,436/- BEING DISALLOWANCE U/S/ 14A OF THE ACT R.W. RULE 8D(2)(II I)OF THE INCOME TAX RULES, PARTICULARLY WHEN THE ASSESSEE IS NOT IN REC EIPT OF EXEMPT INCOME DURING THE YEAR. KEEPING IN VIEW THE JUDGMEN T OF THE HONBLE HIGH COURT IN THE CASE AS PER CENTRAL BOARD OF DIRE CT TAXES CLARIFIES 6 THAT RULE 8D READ WITH SECTION 14A OF THE ACT PROVI DES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICU LAR YEAR HAS NOT EARNED ANY EXEMPT INCOME IN CIRCULAR NO. 5/2014 DAT ED 11.02.2014. IN VIEW OF THE AFORESAID CIRCULAR, IT IS CLEARED TH AT CBDT CIRCULAR WAS ISSUED IN THE MONTH OF FEBRUARY, 2014 AND ASSESSING OFFICER HAS PASSED THE ORDER ON 28.09.2011 BEFORE ISSUING THE C BDT CIRCULAR BUT THE LD. CIT(A) HAS PASSED THE ORDER ON 13.01.2016 A FTER ISSUING THE CBDT ABOVE CIRCULAR WHICH WAS NOT APPLIED BY THE CI T(A). ACCORDINGLY, WE SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW THE APPEAL OF THE ASSESSEE. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DAT E MENTIONED ON THE CAPTION PAGE) SD/- SD/- (P.K. BANSAL) (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27.06.2016 AKS COPY OF THE ORDER FORWARDED TO : 1.THE APPELLANT 2.THE RESPONDENT. 3.CONCERNED CIT 4.THE CIT(A) 5.D.R., I.T.A.T., LUCKNOW ASSTT. REG ISTRAR