DCIT, New Delhi V. M/s. R.P. Electronics, New Delhi

ITA 2069/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91334 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 01-07-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 03-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKRAM SAHAY
• Assessee Lawyers: P N MEHTA
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F, NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER I.T.A .NO. 2069/DEL/2012 (ASSESSMENT YEAR- 2006-07) DCIT, CIRCLE 30(1), ROOM NO. 106, NEW DELHI. VS R.P. ELECTRONICS, B-7/2, OKHLA INDS. ESTATE, PHASE-II, NEW DELHI. AAAFR4909H & CROSS OBJECTION NOS. 354/ DEL/2012 (ASSESSMENT YEAR- 2006-0 7) R.P. ELECTRONICS, B-7/2, OKHLA INDS. ESTATE, PHASE-II, NEW DELHI. AAAFR4909H VS DCIT, CIRCLE 30(1), ROOM NO. 106, NEW DELHI. APPELLANT BY SH. VIKRAM SAHAY, SR. DR RESPONDENT BY SH. P.N. MEHTA, FCA DATE OF HEARING: 01/07/2015 DATE OF PRONOUNCEMENT: 07/07/2 015 O R D E R PER C.M. GARG, J.M. THE APPEALS OF THE REVENUE AS WELL AS CROSS OBJECT ION OF THE ASSESSEE HAVE BEEN DIRECTED AGAINST THE ORDER OF TH E COMMISSIONER OF ITA NO. 2069/D/2012 & CO NO. 354/D/2012 2 INCOME TAX (APPEALS)-XXV, NEW DELHI DATED 21/02/201 2 IN APPEAL NO. 175/2008-09 FOR A.Y. 2006-07. 2. THE SOLE GROUND RAISED BY THE REVENUE IN ITA NO. 2069/DEL/2012 READS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A)-XXV, NEW DELHI HAS ERRED IN DELETING THE ADDITION OF RS. 14,35,233/- OUT OF TOTAL ADDITION OF RS. 15,35,233/- MADE BY AO U/S 14 A READ WITH RULE 8D OF I.T. RULES. 3. CROSS OBJECTIONS RAISED BY THE ASSESSEE IN CO NO . 354/DEL/2012 READ AS UNDER: 1. THAT THE CIT(APPEAL) XXV NEW DELHI ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPE NDITURE AMOUNTING TO RS. 1,00,000/- U/S 14A INCOME-TAX ACT, 1961 (THE ACT), ALLEGED TO HAVE BEEN INCURRED FOR EARNIN G TAX FREE DIVIDEND INCOME. 2. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT HO LDING THAT DISALLOWANCE U/S 14A OF THE ACT, COULD NOT HAVE BEE N WORKED OUT AS PER THE METHOD PROVIDED IN RULE 8D OF THE IN COME-TAX RULES, 1962 (THE RULES) SINCE THE SAME WAS PROSPE CTIVE IN OPERATION AND WAS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. 4. BRIEFLY STATED THE FACTS GIVING RISE TO THESE CA SES ARE THAT THE AO SELECTED THE CASE FOR SCRUTINY AND NOTICED THAT THE ASSESSEE HAD CLAIMED EXEMPTION U/S 10(34) OF THE INCOME TAX ACT, 1961 (F OR SHORT THE ACT) OF RS. 20,83,618/- ON DIVIDEND INCOME. THE AO VIDE QUESTI ONNAIRE DATED 17/10/2008 ASKED THE ASSESSEE TO SHOW CAUSE WHY NOT PROPORTIONATE ITA NO. 2069/D/2012 & CO NO. 354/D/2012 3 EXPENSES BE DISALLOWED U/S 14A OF THE ACT FOR EARNI NG DIVIDEND INCOME BEING EXEMPTED INCOME. AFTER CONSIDERING REPLIES O F THE ASSESSEE DATED 11/12/2008 AND 17/12/2008 THE AO INVOKED RULE 8D AN D CALCULATED DISALLOWANCE U/S 14A OF THE ACT TO RS. 15,35,233/- AND ADDED THE SAME TO THE TAXABLE INCOME OF THE ASSESSEE. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHICH WAS PARTLY ALLOWED C ONFIRMING AND RESTRICTING THE ALLOWANCE TO THE EXTENT OF RS. 1 LA KH AND REMAINING BALANCE OF RS. 14,35,233/- WAS DIRECTED TO BE DELETED. 5. NOW THE AGGRIEVED REVENUE BEFORE THIS TRIBUNAL I N THE SECOND APPEAL WITH THE SOLE GROUND AS REPRODUCED HEREINABOVE AND THE ASSESSEE HAS ALSO FILED ITS CROSS OBJECTIONS SUPPORTING THE PART RELIEF AND CHALLENGING THE CONFIRMED DISALLOWANCE OF RS. 1 LAKH. WE HAVE HEAR D ARGUMENT OF BOTH THE SIDES AND CAREFULLY PERUSED THE RELEVANT MATERIAL P LACED ON RECORD, INTER- ALIA, THE ASSESSMENT ORDER, IMPUGNED ORDER AND WRIT TEN SUBMISSIONS AND CASE LAWS RELIED BY BOTH THE SIDES. 6. UNDISPUTEDLY RULE 8D OF THE I.T. RULES, 1962 (FO R SHORT THE RULES) IS NOT APPLICABLE IN THE PRESENT CASE OF THE ASSESSEE AS THE CASES RELATED TO A.Y. 2006-07 AND THE SAME IS APPLICABLE FROM A.Y. 2 008-09 ONWARDS. THE AUTHORITIES BELOW HAVE NOT DISPUTED THAT THE ASSESS EE DECLARED TAX FREE DIVIDEND INCOME OF RS. 20,83,618/- WHICH WAS CLAIME D AS EXEMPT U/S 10(34) OF THE ACT IN THE RETURN OF INCOME. FROM OP ERATIVE PART OF THE ITA NO. 2069/D/2012 & CO NO. 354/D/2012 4 IMPUGNED ORDER WE NOTE THAT THE CIT(A) GRANTED RELI EF FOR THE ASSESSEE WITH FOLLOWING OBSERVATIONS AND CONCLUSIONS: 3. THE ASSESSEE HAS TAKEN AS MANY AS 2 GROUNDS OF APP EAL BUT THE MAIN GRIEVANCE OF THE ASSESSEE IS AGAINST THE D ISALLOWANCE OF INTEREST OF RS. 15,35,233/- U/S 14A WITH RESPECT TO DIVIDEND INCOME WHICH IS ADJUDICATED ACCORDINGLY. 3.1 THE FACTS EMANATING FROM THE ORDER OF THE AO AND TH E SUBMISSIONS OF THE ASSESSEE IS THAT THE ASSESSEE IS A PARTNERSHIP FIRM AND IS A DISTRIBUTOR OF DRY CELL BATTERIES. T HE ASSESSEE HAS RECEIVED THE DIVIDEND INCOME OF RS. 20,83,618/- AND CLAIMED THE SAME AS EXEMPT U/S 10(34). THE TOTAL INVESTMEN T OF THE ASSESSEE IN THE STOCK/MUTUAL FUND IS RS. 1,40,04,08 4/-. THE ASSESSEE HAS DECLARED THE INTEREST INCOME OF RS. 21 ,03,300/- AND HAS CLAIMED THE NET INTEREST PAYMENT OF RS. 80, 33,914/- AND THE ASSESSEE HAS ALSO CLAIMED THE INTEREST PAYM ENT OF RS. 88,94,929/- TO PARTNERS CAPITAL. THE AO HAS APPLIE D THE PROVISIONS OF SECTION 14A R.W. RULE 8D FOR MAKING DISALLOWANCE OF THE INTEREST PAYMENT OF RS. 15,33,233/- WITH RESPECT TO THE EXEMPTED DIVIDEND INCOME OF RS. 20,83,618/- . 3.2 THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE AO AND IT IS SUBMITTED THAT THE AO IS NOT JUSTIFIED TO MAKE THE DISALLOWANCE WITHOUT ANY VALID REASONS. THE MAIN ARGUMENT OF TH E ASSESSEE IS THAT THE PROVISIONS OF RULE 8D HAS BEEN NOTIFIED WITH EFFECT FROM 24/03/2008 AND THE SAME IS AS APPLICABLE ONLY WITH EFFECT FROM AY 2008-09 AND THE ASSESSEE ALSO RELIED ON THE CASE OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (2010) 328, ITR 0081 (BOM.) DATED 12/08/2010, WHICH SUPPORTS THE CASE OF THE ASSESSEE . THE ASSESSEE ALSO ARGUED THAT THE AO HAS COMPUTED THE ITA NO. 2069/D/2012 & CO NO. 354/D/2012 5 DISALLOWANCE WITHOUT CONSIDERING THE FACTS THAT THE ASSESSEE HAS THE PARTNERS CAPITAL OF RS. 15,37,14,803/- WHIC H HAS BEEN UTILIZED FOR THE PURPOSE OF BUSINESS AND AS SUCH TH E AO IS NOT JUSTIFIED TO MAKE ANY DISALLOWANCE OF THE INTEREST PAYMENTS WHICH HAS BEEN PAID FOR THE PURPOSE OF BUSINESS. I T IS ALSO SUBMITTED THAT THE AO HAS NOT GIVEN ANY FINDING FOR INVOKING THE PROVISIONS OF RULE 8D WHICH IN ANY CASE IS NOT APPLICABLE IN THE CURRENT YEAR. IT IS ALSO SUBMITTED THAT THE ASSESSEE HAS NOT PROVED ANY NEXUS BETWEEN THE EARNING OF TAX FRE E DIVIDEND AND IN INVESTMENT OF BORROWED FUND ON WHICH THE INT EREST PAYMENT IS BEING DISALLOWED BY THE AO BY INVOKING T HE PROVISIONS OF RULE 8D. THE ASSESSEE ALSO ARGUED TH AT SINCE THE PROVISIONS OF RULE 8D IS APPLICABLE WITH EFFECT FRO M AY 2008- 09 ONLY AND THE SAME IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE AS THE CASE OF THE ASSESSEE RELATES TO AY 2006-07, IT WAS ARGUED THAT AT THE BEST A NOMINAL LUMP SUM DISA LLOWANCE OF THE INTEREST MAY BE MADE. 3.3 I HAVE CONSIDERED THE ADDITION OF THE AO AND THE SU BMISSIONS OF THE ASSESSEE AND I FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE REGARDING THE PROVISIONS OF RULE 8D TO THE EXTENT THAT THE PROVISIONS OF RULE 8D IS EFFECTIVE ONLY W.E.F. AY 2008-09 AS THE SAME WAS NOTIFIED ON 24/03/2008 AND THE SAME VI EW HAS ALSO BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (SUPRA). 3.4 EVEN IF IT IS PRESUMED THAT THE PROVISIONS OF RULE 8D IS NOT APPLICABLE IN THE RELEVANT AY OF THE ASSESSEE, THE AO IS VERY MUCH ENTITLED TO MAKE PROPORTIONATE DISALLOWANCE OF INTEREST PAYMENT ATTRIBUTABLE TO THE EARNING OF THE EXEMPTED DIVIDEND INCOME OF RS. 20,83,618/- AND THE CASE OF GODREJ AND BOYCE ITA NO. 2069/D/2012 & CO NO. 354/D/2012 6 MFG. CO. LTD. VS. DCIT (SUPRA) RELIED ON BY THE ASSESSEE ALSO VERY MUCH SUPPORTS THE CASE OF DISALLOWANCE MADE BY THE AO WHICH HELD AS UNDER: THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED W.E.F. 24/03/2008 WOULD APPLY WITH EFFECT FROM AY 2008-09. EVEN PRIOR TO A.Y. 2008-09 WHEN RULE 8D W AS NOT APPLICABLE THE AO HAD TO ENFORCE THE PROVISIONS OF SUB- SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN I NCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT. 3.5 AFTER CONSIDERING ALL THE FACTS AND CIRCUMSTANCES O F THE CASE, I FIND SOME MERITS IN THE SUBMISSION OF THE ASSESSEE THAT THE PROVISIONS OF RULE 8D IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE BUT AT THE SAME TIME IT CANNOT BE DENIED T HAT THE ASSESSEE HAS EARNED TAX FREE DIVIDEND INCOME ON WHI CH SOME PART OF THE EXPENSES WOULD HAVE BEEN INCURRED AND W HICH IS EVEN OTHERWISE DISALLOWABLE U/S 14A AND ACCORDINGLY , IT WILL BE IN THE INTEREST OF JUSTICE TO MAKE A NOMINAL ESTIMA TED DISALLOWANCE OF RS. 1,00,000/- AND AS SUCH THE DISA LLOWANCE OF RS. 1,00,000/- IS CONFIRMED AND THE BALANCE AMOUNT OF RS. 14,35,233/- (RS. 15,35,233/- (-) RS. 1,00,000/-) IS DELETED . 7. IN VIEW OF ABOVE, AT THE OUTSET, WE ARE IN AGREE MENT WITH THE CONCLUSION OF THE CIT(A) THAT AS PER DECISION OF HO NBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C OMPANY LTD. VS. DCIT (SUPRA) THE RULE 8D OF THE RULES IS APPLICABLE FROM A.Y. 2008-09 ONWARDS AND THE AO WAS NOT JUSTIFIED IN INVOKING RULE 8D FO R MAKING IMPUGNED DISALLOWANCE. WE ARE ALSO IN AGREEMENT WITH THE CO NCLUSION OF CIT(A) THAT ITA NO. 2069/D/2012 & CO NO. 354/D/2012 7 EVEN WHEN RULE 8D OF THE RULES IS NOT APPLICABLE IN THE PRESENT CASE OF THE ASSESSEE PERTAINING TO A.Y. 2006-07 BUT AT THE SAM E TIME IT CANNOT BE DENIED THAT THE ASSESSEE HAS A TAX FREE DIVIDEND IN COME ON WHICH SOME PART OF THE EXPENSES WOULD HAVE BEEN INCURRED AND W HICH IS OTHERWISE DISALLOWABLE U/S 14A OF THE ACT. WITH THESE OBSERV ATIONS THE CIT(A) CONCLUDED AND RESTRICTED THE DISALLOWANCE TO THE EX TENT OF RS. 1 LAKH. 8. WHILE WE ANALYZE THE CHART GIVEN IN REGARD TO IN TEREST PAID BY THE ASSESSEE WE NOTE THAT THE INTEREST PAID TO THE PART NERS ON THEIR CAPITAL IS RS. 88,94,929/- AND INTEREST PAID TOWARDS SECURITY DEPOSITS OVERDRAFT FACILITY LOAN ON VEHICLES LATE PAYMENTS AND BANK CHARGES COM ES TO RS. 1,01,37,215/- AND AFTER DEDUCTING INTEREST RECEIVED BY THE ASSESSEE ON FIXED DEPOSIT OF RS. 21,03,300/- THE NET INTEREST D EBITED IN THE PROFIT AND LOSS ACCOUNT COMES TO RS. 80,33,915/- AND THESE FIG URES HAVE NOT BEEN DISPUTED BY THE LD. DR. IN THIS SITUATION, WHILE T HE ASSESSEE HAS EARNED DIVIDEND INCOME ON EQUITY SHARES AMOUNTING TO RS. 1 1,32,575/- AND ON MUTUAL FUNDS OF RS. 9,51,042/- THEN INTEREST PAID T O BANK ON OVERDRAFT FACILITY AMOUNTING TO RS. 3,38,505/- AND BANK CHARG ES OF RS. 2,46,968/- MAY BE RELATED EXPENSES OF BUSINESS ACTIVITIES OF T HE ASSESSEE WHICH ALSO INCLUDES INVESTMENTS WHICH BRINGS TAX FREE DIVIDEND INCOME TO THE ASSESSEE. 9. THEREFORE, IN TOTALITY OF THE FACTS AND CIRCUMST ANCES, WE ARE OF THE CONSIDERED VIEW THAT THE INVOCATION OF RULE 8D OF T HE RULES BY THE AO WAS ITA NO. 2069/D/2012 & CO NO. 354/D/2012 8 AN INCORRECT ACTION WHICH WAS RIGHTLY CORRECTED BY THE CIT(A) RESTRICTING THE DISALLOWANCE U/S 14A OF THE ACT TO THE EXTENT OF RS . 1 LAKH. WE ARE UNABLE TO SEE ANY INFIRMITY OR ANY OTHER VALID REASON TO I NTERFERE WITH THE IMPUGNED ORDER AND WE UPHELD THE SAME IN TOTO. ACCORDINGLY SOLE GROUNDS OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE BEING D EVOID OF MERITS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 07/07/2015 SD/- SD/- ( J.S. REDDY ) ACCOUNTANT MEMBER ( C.M. GARG ) JUDICIAL MEMBER DATED: 07/07/2015 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITA NO. 2069/D/2012 & CO NO. 354/D/2012 9 SL. NO. DESCRIPTION DATE 1. DATE OF DICTATION BY THE AUTHOR 03/07/2015 2. DRAFT PLACED BEFORE THE DICTATING MEMBER 07/07/ 2015 3. DRAFT PLACED BEFORE THE SECOND MEMBER 07/07/2015 4. DRAFT APPROVED BY THE SECOND MEMBER 07/07/2015 5. DATE OF APPROVED ORDER COMES TO THE SR. PS 07/07 /2015 6. DATE OF PRONOUNCEMENT OF ORDER 07/07/2015 7. DATE OF FILE SENT TO THE BENCH CLERK 07/07/2015 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER