S.R. Sabapathy, CHENNAI V. ACIT, CHENNAI

ITA 2071/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8230 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 08-07-2016
• Court: TRIBUNAL
• Department Lawyers: B SAHADEVAN
• Assessee Lawyers: G SEETHARAMAN
• Keywords: Salary income; Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . . . , . . ' #$ , % &' ( [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D. S. SUNDER SINGH, ACCOUNTANT MEMBER ] ./ I.T.A.NO.2071/MDS/2016 / ASSESSMENT YEAR : 2009-10 S.R. SABAPATHY 3/135, V.V.V SALAI UTHANDI CHENNAI 600 119 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE V(2) CHENNAI [PAN ABKPS 6985 R] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI G. SEETHARAMAN, ADVOCATE /RESPONDENT BY : SHRI B. SAHADEVAN, JCIT / DATE OF HEARING : 27 - 0 9 - 2016 ! / DATE OF PRONOUNCEMENT : 17 - 10 - 2016 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-3, CHENNAI , DATED 21.3.2016 FOR ASSESSMENT YEAR 2009-10. 2. ALL THE GROUNDS OF APPEAL ARE RELATED TO ADDITION MADE BY THE AO RELATING TO THE DISALLOWANCE U/S14A R.W.R 8 D AMOUNTING TO RS.18,73,250/-. ITA NO.2071/16 :- 2 -: 3. THE ASSESSEE FILED THE RETURN OF INCOME FOR THE F.Y 2009- 10 DECLARING THE TOTAL INCOME OF RS.77,29,050/-. T HE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSING OFFICER F OUND THAT THE ASSESSEE HAD RECEIVED THE AMOUNT OF RS.99,43,100/- AS DIVIDEND AND CLAIMED THE SAME AS EXEMPT U/S 14A. THE ASSESSE E HAS NOT ATTRIBUTED ANY EXPENDITURE TOWARDS EARNING THE DIVI DEND INCOME. THEREFORE THE AO MADE THE ADDITION OF RS.17,60,172/ - U/R 8D(2)(I) AND RS.1,13,078/- U/R 8D(2)(III). THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) CONFIRMED THE A DDITION MADE BY THE AO AS PER THE FOLLOWING DISCUSSION IN PAGE N O.4 OF THE ORDER: I HAVE CAREFULLY GONE THROUGH FINDINGS OF THE AO AN D ALSO RELEVANT PROVISION OF THE INCOME TAX ACT AND RULES. SECTION 14A IS CRYSTAL CLEAR WITHOUT ANY AMBIGUITY THAT EXPENDI TURE INCURRED FOR EARNING EXEMPTED INCOME WHICH IS NOT PART OF TOTAL INCOME SHALL BE DISALLOWED. I AM INCLINED TO AGREE WITH THE FINDINGS OF THE AO. THIS VIEW IS ALSO SUPPORTED BY THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD., (328 ITR 81 )(BOM), WHILE UPHO LDING THE CONSTITUTIONAL VALIDITY OF SECTION 14A READ WITH R ULE 8D ALSO OBSERVED THAT THE ARGUMENT THAT INVESTMENT YIELDING TAX FREE DIVIDEND INCOME HAS BEEN MADE OUT OF THE OWN FUNDS, SO THAT NO INTEREST EXPENDITURE HAS BEEN INCURRED IN RELATI ON TO THE DIVIDEND INCOME, WAS NO LONGER DISPOSITIVE OF THE M ATTER, AND THAT, EVEN SO, A DISALLOWANCE IN RESPECT OF INTEREST WOULD HAVE TO BE MADE. AND NO PRESUMPTION OF INVESTMENT O F OWN FUNDS, ON GROUND OF ITS SUFFICIENCY, COULD BE DRAWN , DISTINGUISHING ITS OWN DECISION IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD [2009] 313 ITR 340/178 TAXMAN 135 (BOM) ITS RELEVANT OBSERVATIONS (AT PLACITUM 5, PR IMARY AGRICULTURAL CREDIT SOCIETY 135 READING AS UNDER: ITA NO.2071/16 :- 3 -: IN ALL THESE DECISIONS, THE TRIBUNAL HELD THAT NO NEXUS HAD BEEN ESTABLISHED BETWEEN BORROWED FUNDS AND INVESTMENTS BY THE ASSESSEE IN DIVIDEND YIELDIN G SHARES/INCOME-YIELDING MUTUAL FUNDS. NOW ASSUMING THAT THIS IS SO, THE ONLY CONCLUSION WHICH EMERGES IS THAT THE ASSESSEE HAD UTILIZED ITS OWN FUNDS FOR THE PUR POSE OF MAKING THE INVESTMENTS. THE FACT THAT THE ASSES SEE HAS UTILIZED ITS OWN FUNDS IN MAKING THE INVESTMENT S WOULD NOT BE DISPOSITIVE OF THE QUESTION AS TO WHET HER THE ASSESSEE HAD INCURRED EXPENDITURE IN RELATION T O THE EARNING OF SUCH INCOME. EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN FUNDS FOR MAKING INVESTMENTS WHICH HAVE RESULTED IN INCOME WHICH DOES NOT FORM PART OF HT TOTAL INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED IN THE EARNING OF THAT INCOME WOULD HAVE T O BE DISALLOWED. THAT IS EXACTLY A MATTER WHICH THE A.O HAS TO DETERMINE. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE CITED SUPRA, I, THEREFORE, SUSTAIN TILE ADDITION MADE BY THE AO AMOUNTING TO RS.18,73,250 U/S. 14A, APPELLANT FAILS ON THIS GROUND. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD A.R APPEARING FOR THE ASESSEE HAS ARGUED TH AT THE ASSESSEE IS AN INDIVIDUAL HAVING INCOME FROM SALAR Y, HOUSE PROPERTY AND OTHER SOURCES. HE HAS NOT CLAIMED ANY EXPENDITURE AGAINST ANY SOURCE OF INCOME HENCE SUBMITTED THAT T HE APPLICATION OF RULE 8D(2)(III) HAS NO APPLICATION. HE FURTHER ARGUED THAT THE QUESTION OF DISALLOWANCE OF EXPENDITURE CO MES IN TO OPERATION ONLY WHEN THE EXPENDITURE ALLOCATION REQU IRED TO BE MADE IN THE CASE OF TAXABLE INCOME AND NON TAXABLE INCOME. WHEN THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE A T ALL THE ITA NO.2071/16 :- 4 -: QUESTION OF ALLOCATION OF EXPENDITURE TOWARDS THE E XEMPT INCOME AND NON-EXEMPT INCOME DOES NOT ARISE. HE FURTHER AR GUED IN RESPECT OF DISALLOWANCE OF INTEREST THE ASSESSEE HA S NOT INVESTED THE ENTIRE BORROWED FUNDS TOWARDS SHARES BUT MADE I NVESTMENTS IN LOANS WHICH ARE EARNING INTEREST. THEREFORE ACCO RDING TO HIM DISALLOWANCE OF INTEREST BY APPLICATION OF RULE 8D( 2)(II) ALSO IS NOT JUDICIOUS. 6. ON THE OTHER HAND THE LD.D.R. ARGUED THAT THE AO H AS GIVEN AN OPPORTUNITY TO THE ASSESSEE AND GIVEN A SH OW CAUSE NOTICE FOR WHICH THE ASSESSEE HAD NOT RESPONDED. FR OM THE ASSESSMENT ORDER IT REVEALS THAT THE ASSESSEE HAD BORROWED THE MONEY AND INVESTED IN SHARES. SINCE THERE WAS NO EX PLANATION FROM THE ASSESSEE THE DR HAS ARGUED THAT THE AT THE STAGE OF ASSESSMENT AND BEFORE THE LD.CIT(A) THE ASSESSEE HA S NOT DEMONSTRATED WITH THE BOOKS OF ACCOUNTS AND THE BAN K ACCOUNT STATEMENTS THAT THE ASSESSEE HAS INVESTED THE INTER EST BEARING FOR EARNING THE INTEREST INCOME ALSO. THEREFORE THE D.R HAS ARGUED THAT THE AO HAS RIGHTLY DISALLOWED THE INTEREST AS PER RULE 8D(2)(II). 7. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL PLACED ON RECORD. THE ASSESSEE IS AN INDIVIDUAL EAR NING INCOME FROM SALARY,HOUSE PROERTY AND INCOME FROM OTHER SOU RCES. THE ITA NO.2071/16 :- 5 -: ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE FROM ANY S OURCE OF INCOME AS PER THE DETAILS FURNISHED BEFORE US. AS P ER SECTION 14A NO DEDUCTION OF EXPENDITURE IS ALLOWED FOR INCOME W HICH DOES NOT FORM PART OF TOTAL INCOME. FOR READY REFERENCE WE R EPRODUCE RELEVANT PART OF SECTION 14A WHICH READS AS UNDER: 23 [ EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME 24 . 25 14A. 26 [(1)] FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN R ESPECT OF EXPENDITURE INCURRED 27 BY THE ASSESSEE IN RELATION TO 27 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME 27 UNDER THIS ACT.] 26 [(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 ACCO RDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED 28 , IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISF IED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT O F SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. FROM THE ABOVE SECTION IT IS CLEAR THAT THE EXPENDI TURE RELATING TO EARNING THE EXEMPT INCOME IS NOT DEDUCTIBLE FROM TH E TAXABLE INCOME. IN THE ASSESSEES CASE AS RIGHTLY POINTED O UT BY THE A.R THERE WAS NO EXPENDITURE CLAIMED BY THE ASSESSEE FR OM ANY SOURCE OF INCOME EXCEPT INTEREST PAID TO VARIOUS BA NKS FOR WHICH SECTION RULE 8D(2)(II) IS APPLICABLE. THEREFORE WE AGREE WITH THE ASSESSEESS ARGUMENT THAT THE RULE 8D(2)(III) HAS NO APPLICATION IN THE ASSESSEES CASE. ACCORDINGLY WE DELETE THE A DDITION MADE BY THE ASSESSING OFFICER AMOUNTING TO RS.113078/- U/R 8D(2)(III) OF THE ACT. ITA NO.2071/16 :- 6 -: 8. THE NEXT ISSUE OF ADDITION IN THIS CASE IS DISALLOW ANCE OF INTEREST U/R 8D(2)(II) AMOUNTING RS. 17,60,172/-. 9. DURING THE ASSESSMENT THE AO NOTED THAT THE ASSESS EE HAS BORROWED THE FUNDS OF RS.1,26,67,199/- DURING T HE YEAR 2007- 08 AND RS.1,37,86,605/- DURING THE YEAR 2008-09 A GGREGATING TO RS.2,64,53,804/- AND OBSERVED THAT THE FUNDS WERE U SED FOR THE PURPOSE OF INVESTMENT IN PURCHASE OF SHARES IN QMAX TEST EQUIPEMENTS. THE ASSESSEE HAS PURCHASED 249900/- SH ARES OF RS.10/- EACH FOR RS.18434225/-. THE A.O HAS GIVEN A SHOW CAUSE NOTICE SEEKING EXPLANATION FROM THE ASSESSEE PROPOS ING TO DISALLOWING THE INTEREST U/S14A R.W.R 8D. BUT THE A SSESSEE HAS NOR RESPONDED TO THE NOTICE AND THE ASSESSING OFFICER D ISALLOWED THE ENTIRE INTEREST CLAIMED BY THE ASSESSEE AMOUNTING T O RS.1760172/-.IN THE FIRST APPEAL THE LD.CIT(A) CONF IRMED THE ADDITION PLACING RELIANCE ON 328 ITR 81 IN THE CASE OF GODREJ BOYCE MFG AND 313 ITR 340 IN THE CASE OF RELIANCE U TILITIES & POWER LTD. THOUGH THE ASSESSEE IN HIS ARGUMENT STA TED THAT THE ENTIRE BORROWED FUNDS WERE NOT UTILIZED FOR THE PUR POSE OF PURCHASING SHARES AND THE PART AMOUNT WAS ALSO UTIL IZED IN LOANS GIVEN TO COMPANIES ON WHICH THE INTEREST WAS EARNED THE ASSESSEE HAS NOT FURNISHED THE DETAILS BEFORE THE A.O AND TH E LD.CIT(A). THE ASSESSEE ALSO DID NOT DEMONSTRATE THE SOURCES O F FUNDS AND ITS UTILIZATION FROM THE BANK ACCOUNTS BEFORE US. A S PER THE ITA NO.2071/16 :- 7 -: INFORMATION FILED BEFORE US IN THE PAPER BOOK THE A .R WORKED OUT THE DISALLOWANCE OF RS.7.34 LACS U/R 8D(2)(II) AS U NDER: INTEREST CLAIMED(A) RS.17.60 LACS AVERAGE INVESTMENT: (I) OPENING INVESTMENT 223.12 (II) CLOSING INVESTMENT 229.18 ------ 452.30 ------ - (III) AVEREAGE INVESTMENT (1+2)/2 (B) 226.15 AVERAGE OF TOTAL ASSETS (I)OPENING TOTAL ASSEST 481.00 (II) CLOSING TOTAL ASSET 603.06 ----------- 1084.06 -------------- (IV) AVERAGE TOTAL ASSETS(1+2)/2 (C) 54 2.03 DISALLOWANCE U/R 8D(2) 17.60X226.15 ---- ----------- 7.34 542.03 10. THE A.R HAS FURNISHED THE ABOVE COMPUTATION OF DISALLOWANCE. THE FACT THAT THE INTEREST BEARING F UNDS HAVE BEEN INVESTED FOR THE PURPOSE OF SHARES HAS NOT BEEN DIS PUTED BY THE ASSESSEE. THEREFORE WE HAVE NO HESITATION IN HOLDIN G THAT THE DISALLOWANCE U/R 8D IS APPLICABLE IN THE AASESSEES CASE AND UPHOLD THE ORDER OF THE LOWER AUTHORITIES. HOWEVER REGARDING THE QUANTUM OF DISALLOWANCE THE ASSESSEE HAS FURNISHED THE ITA NO.2071/16 :- 8 -: COMPUTATION AT RS.7.34 LACS AGAINST THE DISALLOWANC E MADE BY THE AO AMOUNTING TO RS.17.60 LACS WHICH REQUIRE FURTHER VERIFICATION. THEREFORE WE REMIT THE MATTER BACK TO THE AO FOR VE RIFICATION OF THE CORRECT AMOUNT OF DISALLOWANCE AS PER THE INFOR MATION FILED BY THE ASSESSEE IN THE PAPER BOOK. THE ASSESSEE IS DIR ECTED TO FILE THE COMPLETE DETAILS FOR DISALLOWING THE CORRECT AMOUNT OF DISALLOWANCE U/R 8D(2)(II). THE ASSESSEES APPEAL IS ALLOWED ON THIS GROUND FOR STATISTICAL PURPOSES. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 17 TH OCTOBER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( . . ' #$ ) (D.S. SUNDER SINGH) % / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 17 TH OCTOBER, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF