M/s Khoday India Limited, Bangalore V. ACIT, Bangalore

ITA 211/BANG/2012

• Counselvise Citation: 21121114 RSA 2012
• Duration Of Justice: 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-06-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 10-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Assessee Lawyers: S SUKUMAR
• Keywords: Unexplained expenditure; Business income; Earning of tax free income; Question of law
• Section: 43B; 14A; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI N.BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V.VASUDEVAN, JUDICIAL MEMBER ITA NO.211(B)/2012 (ASSESSMENT YEAR : 2008-09) M/S KHODAY INDIA LTD., THE ASST. COMM ISSIONER INCOME-TAX, BREWERY HOUSE, CIRCLE-11( 5), 7 TH MILE, KANAKAPURA ROAD, BANGALORE BANGALORE PAN NO.AAACK 6734C VS APPELLANT RESPONDENT ASSESSEE BY : SHRI S. SUKUMAR, ADVOCATE REVENUE BY : SHRI S.K.AMBASTHA, CIT-I DATE OF HEARING : 02-07-2012 DATE OF PRONOUNCEMENT : -07-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 30- 11-2011 OF CIT(A)-I, BANGALORE, RELATING TO AY: 200 8-09. 2. GROUND NO.1 RAISED BY THE ASSESSEE IS WITH REGA RD TO DISALLOWANCE TO SALES PROMOTION EXPENSES. THE ASSE SSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFAC TURING OF INDIAN MADE FOREIGN LIQUOR (IMFL). THE ASSESSEE HAD CLAIME D AS DEDUCTION ITA NO.211(B)/2012 2 WHILE COMPUTING THE INCOME FROM BUSINESS A SUM OF RS.2,54,32,000/- AS SALES PROMOTION EXPENSES. OUT O F THE AFORESAID SALES PROMOTION EXPENSES, THE FOLLOWING UNMARKED SA LES PROMOTION EXPENSES WERE ALSO FOUND; SL.NO. PARTICULARS AMOUNT (IN RS.) 1 SALES PROMOTION EXPENSES HO 10,540 2 SALES PROMOTION EXPENSES INCURRED IN THE MARKET 27,53,327 3 SALES PROMOTION EXPENSES INCURRED IN THE MARKET FARIDABAD 68,960 4 SALES PROMOTION EXPENSES INCURRED IN THE MARKET, LUDHIANA 1,86,330 5 SALES PROMOTION EXPENSES INCURRED IN THE MARKET, GOA 10,497 6 SALES PROMOTION EXPENSES INCURRED IN THE MARKET, BANGALORE 14,55,360 TOTAL 44,85,014 THE ASSESSEE EXPLAINED BEFORE THE AO THAT THE AFORE SAID EXPENSES WERE OUT OF POCKET EXPENSES INCURRED FOR SALES PROM OTION. THE AO HOWEVER, FOUND THAT THE BILLS AND VOUCHERS OF UNMAR KED SALES PROMOTION EXPENSES WERE NOT PRODUCED DESPITE REQUES T BY HIM. THEREAFTER, THE AO MADE A DISALLOWANCE OF RS.22,42, 507/- BEING 50% OF THE ABOVE SAID UNMARKED SALES PROMOTION EXPE NSES. THE AO ALSO OBSERVED THAT THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS AGREED FOR THE AFORESAID ADDITION DURING THE COURSE OF HEARING ON 15- 12-2010. ITA NO.211(B)/2012 3 3. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT THE SALES PROMOTION EXPENSES RELATED TO VARIOUS DEPOTS AND H EAD OFFICE. THE EXPENDITURE ALSO INCLUDED COMMISSION PAID DEPENDING UPON NUMBER OF CASES SOLD AND LIFTED AND WAS PAID AS INC ENTIVE TO INCREASE SALES BY THE DEPOTS LOCATED AT VARIOUS PAR TS OF THE COUNTRY. IT WAS SUBMITTED THAT THE AO HAS NOT DOUBTED THE GE NUINENESS OF THE EXPENSES AND THE FACT THAT SUCH EXPENSES WERE N ECESSARY IN THE BUSINESS OF THE ASSESSEE. THE ASSESSEEE ALSO POINT ED OUT THAT THE SALES HAD INCREASED TO RS.120.82 CRORES AS AGAINST RS.103.15 CRORES IN THE EARLIER YEARS, WHICH ACCORDING TO THE ASSESSEE WAS MAINLY ON ACCOUNT OF INCENTIVE OFFERED. THE ASSESS EE ALSO POINTED OUT THE COMPARATIVE FIGURES OF SALES PROMOTION EXPE NSES FOR AY: 2007-08 WHICH WAS RS.1,24,43,438/-. IT WAS SUBMITT ED THAT THE AO WAS NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWAN CE. 4. THE CIT(A) HOWEVER, CONFIRMED THE ORDER OF THE AO HOLDING A FOLLOWS; I HAVE CONSIDERED THE ABOVE. IN VIEW OF THE OBS ERVATIONS MADE BY THE AO IN PARA-2 & 3 OF THE ASSESSMENT ORDE R. I SEE NO REASON TO INTERFERE IN THE DISALLOWANCE. PA RA 2, THE AO POINTS OUT THAT THOUGH THE TURNOVER HAS INCREASE D FROM RS.103 CRORES OF LAST YEAR TO RS.120 CRORES, THE CORRESPONDING NET PROFIT HAS NOT SHOWN SIMILAR INCR EASE RATHER SHOWN DECLINE FROM RS.11.69 CRORES TO RS.10. 26 CRORES. THOUGH, IT HAS NOT BEEN STATED IN CLEAR TE RMS, THE OBVIOUS INTERFERENCE IS THAT IT IS A PROVEN CASE OF INFLATION OF EXPENSES. EVEN THE STATISTICS PROVIDED IN THE WRI TTEN SUBMISSION STRENGTHENS SUCH CONCLUSION. AS PER AR S STATISTICS THE TURNOVER HAS INCREASED IN SALES PROM OTION EXPENSES IS 2.044% (RS.2,54,31,711/RS.124,43,438/-) I.E. ALMOST 0.9 INCREASE. IN SHORT, THE AO HAS RIGHTLY D OUBTED THE GENUINENESS OF THE CLAIM OF SALES PROMOTION EXP ENDITURE SHOWN AT RS.2,54,31,711/-. THEREFORE, HE HAD CALLE D FOR ITA NO.211(B)/2012 4 THE DETAILS AND WITH EXPERIENCE AND HAUNCH ASKED TH E ASSESSEE TO PRODUCE ALL THE BILLS AND VOUCHERS OF T HE UNMARKED SALES PROMOTION EXPENDITURE DETAILS OF WHI CH HAD BEEN NARRATED IN PARA-3 OF THE ASSESSMENT ORDER VIDE SUPRA. ADMITTEDLY, THE ASSESSEE HAD NOT PRODUCED ALL VOUCHERS AND BILL AND ONLY EXPLAINED THAT THE EXPEN SES RELATED TO POCKET EXPENSES. THE AO FOUND THE POCK ET CORRECTLY CONTAINS NON-GENUINE EXPENDITURES INTENDE D TO REDUCE THE PROFIT FOR PAYMENT OF LESS TAX. HE THE REFORE, ESTIMATED SUCH UNEXPLAINED EXPENDITURE @50% AND THU S DETERMINED SUCH DISALLOWANCE AT RS.22,4,507/-. PRO BABLY THAT IS WHY THE AR DURING THE COURSE OF ASSESSMENT PROCEEDING AGREED FOR SUCH ADDITION. HOWEVER, I AM UPHOLDING THE ADDITION NOT BECAUSE OF SUCH AGREEMEN T BUT BECAUSE I FIND THE AOS DETERMINATION LOGICAL COHER ENT, LEGALLY JUSTIFIED AND FACTUALLY REASONABLE, UNEXCES SIVE AND SUSTAINABLE. HENCE, ADDITION IS UPHELD. GROUNDS OF APPEAL IS DISMISSED. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESEEE H AS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 5. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE WHO REITERATED THE STAND OF THE ASSESSEE A S WAS PUT FORTH BY THE CIT(A). THE LEARNED DR RELIED ON THE ORDER OF THE AO. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND THAT HE REVENUE AUTHORITIES HAVE PROCEEDED ON THE ASSUMPTIO N THAT THE ASSESSEE HAS DELIBERATELY INFLATED ITS EXPENSES WIT H A VIEW TO REDUCE ITS TAXABLE INCOME. AS RIGHTLY CONTENDED ON BEHALF OF THE THE ASSESSEE THE FACT THAT SUCH EXPENSES ARE NECESSARY AND PART OF THE BUSINESS OF THE ASSESSEE IS NOT DOUBTED. THE ONLY FACTOR WHICH GOES AGAINST THE ASSESSEE IS THE ABSENCE OF BILLS AND VO UCHERS. IN OUR VIEW, IN THE GIVEN FACTS AND CIRCUMSTANCES, IT WOUL D BE JUST AND FAIR ITA NO.211(B)/2012 5 TO RESTRICT THE DISALLOWANCE OF SALES PROMOTION EXP ENSES TO 25% OF UNMARKED SALES PROMOTION EXPENSES 25% OF RS.44,85,0 14/-. THUS, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 7. THE SECOND GROUND OF APPEAL IS WITH REGARD TO T HE DISALLOWANCE OF THE EMPLOYEES CONTRIBUTION TO ESI AND PF BY THE ASS ESSEE. THE AO NOTICED THAT THE EMPLOYEES CONTRIBUTION TO ESI AND PF HAD BEEN MADE BY THE ASSESSEE BEYOND THE DUE DATE ON WHICH T HESE PAYMENTS HAD TO BE MADE AS PER LAW GOVERNING CONTRI BUTION TO ESI AND PF. THE SUMS SO FOUND TO HAVE BEEN PAID BEYOND THE DUE DATES WERE A SUM OF RS.54,390/- BEING CONTRIBUTION TO ESI AND RS.32,17,465/- TOWARDS PF. THE AO REFERRED TO THE PROVISIONS OF SEC.2(24)(X) OF THE ACT WHICH SAYS ANY SUM RECEIVED BY THE ASSESSEE FROM HIS EMPLOYEE AS CONTRIBUTION TO ANY PF OR SUPE RANNUATION FUND OR ANY FUND SET UP UNDER THE PROVISIONS OF ES I ACT, 1945 AND ANY OTHER FUND FOR THE WELFARE OF THE EMPLOYEES SHA LL BE TREATED AS INCOME OF THE ASSESSEE. THE AO ALSO REFERRED TO TH E FACT THAT U/S 36(1)(VA) OF THE ACT, ANY SUM WHICH IS TREATED AS I NCOME U/S 2(24)(X) OF THE ACT WILL BE ALLOWED AS DEDUCTION ONLY IF TH E SAME IS CREDITED BY THE ASSESSEE TO THE EMPLOYEES ACCOUNT IN THE REL EVANT FUND OF FUNDS ON OR BEFORE THE DUE DATE. THE DUE DATE FOR THE ABOVE PURPOSE IS THE DUE DATE/LAST DATE AS PER LAW GOVER NING PF & ESI WITHIN WHICH EMPLOYEES CONTRIBUTIONS HAVE TO BE PAI D BY THE EMPLOYER TO THE CREDIT OF THE CONCERNED EMPLOYEE. A CCORDING TO THE AO SINCE THE ASSESSEE HAS PAID THE AFORESAID CONTRI BUTION BEYOND THE DUE DATE, THE SAME CANNOT BE ALLOWED AS DEDUCTI ON WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. ON AP PEAL BY THE ASSESSEE, THE CIT(A) CONFIRMED THE ORDER OF THE AO. AGGRIEVED BY ITA NO.211(B)/2012 6 THE ORDER OF THE CIT(A), THE ASSESSEE HAS RAISED GR OUND NO.2 BEFORE THE TRIBUNAL. 8. THE QUESTION WHETHER EMPLOYEES CONTRIBUTION THA T ARE PAID AFTER THE DUE DATE PRESCRIBED UNDER THE RELEVANT LAW RELA TING TO PF OR ESI BUT PAID ON OR BEFORE THE DUE DATE FILING RETURN OF INCOME U/S.139(1) OF THE ACT CAME UP FOR CONSIDERATION BEFORE THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AIMIL LIMITED, ITA NO . 1063 OF 2006 ITA NO.755 OF 2008 ITA NO. 204 OF 2009 ITA NO. 1214 /2008 WITH ITA NO. 1246/2008 ITA NO. 50/2009 ITA NO. 78/2009. THE HONBLE DELHI HIGH COURT BY JUDGMENT DATED DECEMBER 23, 20 09 WHILE DEALING WITH SIMILAR ADDITION MADE BY THE REVENUE U /S.36(1)(VA) OF THE ACT, DISCUSSED THE PROVISIONS OF S. 2 (24) (X ) WHICH PROVIDES THAT AMOUNTS RECEIVED BY AN ASSESSEE FROM EMPLOYEES TOWARDS PF CONTRIBUTIONS ETC SHALL BE INCOME AND S. 36 (1) (VA) WHICH PROVIDES THAT IF SUCH SUMS ARE CONTRIBUTED TO THE E MPLOYEES ACCOUNT IN THE RELEVANT FUND ON OR BEFORE THE DUE DATE SPEC IFIED IN THE PF ETC. LEGISLATION, THE ASSESSEE SHALL BE ENTITLED TO A DEDUCTION. THE COURT ALSO NOTICED THAT THE SECOND PROVISO TO S. 43 B (B) PROVIDED THAT ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO ANY PROVIDENT FUND ETC. SHALL BE AL LOWED AS A DEDUCTION ONLY IF PAID ON OR BEFORE THE DUE DATE SP ECIFIED IN 36(1)(VA). AFTER THE OMISSION OF THE SECOND PROVISO W.E.F 1.4.2004, THE DEDUCTION IS ALLOWABLE UNDER THE FIRST PROVISO IF THE PAYMENT IS MADE ON OR BEFORE THE DUE DATE FOR FURNISHING THE R ETURN OF INCOME. IN ALOM EXTRUSIONS 319 ITR 306 (SC), THE DELETION OF THE SECOND PROVISO HAS BEEN HELD TO BE WITH RETROSPECTIVE EFFE CT. THE HIGH COURT HAD TO CONSIDER WHETHER THE BENEFIT OF S. 43B CAN B E EXTENDED TO ITA NO.211(B)/2012 7 EMPLOYEES CONTRIBUTION AS WELL WHICH ARE PAID AFTE R THE DUE DATE UNDER THE PF LAW BUT BEFORE THE DUE DATE FOR FILING THE RETURN. THE HONBLE COURT HELD THAT: (I) THOUGH THE REVENUE HAS ARGUED THAT A DISTINCTIO N IS TO BE MADE BETWEEN EMPLOYERS CONTRIBUTION AND EMPLOYEES CONTRIBUTION AND THAT EMPLOYEES CONTRIBUTION BEING IN THE NATURE OF TRUST MONEY IN THE HANDS OF THE ASSESSEE CANNOT BE ALLOWED AS A DEDUCT ION IF NOT PAID ON OR BEFORE THE DUE DATE SPECIFIED IN THE PF ETC LAW, THE SCHEME OF THE ACT IS THAT EMPLOYEES CONTR IBUTION IS TREATED AS INCOME U/S 2 (24) (X) ON RECEIPT BY T HE ASSESSEE AND ALLOWED AS A DEDUCTION U/S 36 (1) (VA) ON MAKING DEPOSIT WITH THE CONCERNED AUTHORITIES. S. 4 3B (B) STIPULATES THAT SUCH DEDUCTION WOULD BE PERMISSIBLE ONLY ON ACTUAL PAYMENT; (II) THE QUESTION AS TO WHEN ACTUAL PAYMENT SHOULD BE MADE IS ANSWERED BY VINAY CEMENTS 213 CTR 268 WHERE THE DELETION OF THE SECOND PROVISO TO S. 43B W.E.F 1.4.2004 WAS HELD APPLICABLE TO EARLIER YEARS AS WELL. AS TH E DELETION OF THE 2ND PROVISO IS RETROSPECTIVE, THE CASE HAS T O BE GOVERNED BY THE FIRST PROVISO. DHARMENDRA SHARMA 297 ITR 320 (DEL) & P.M. ELECTRONICS 313 ITR 161 (DELHI) FOLLOWED; ITA NO.211(B)/2012 8 (III) IF THE EMPLOYEES CONTRIBUTION IS NOT DEPOSIT ED BY THE DUE DATE PRESCRIBED UNDER THE RELEVANT ACTS AND IS DEPOSITED LATE, THE EMPLOYER NOT ONLY PAYS INTEREST ON DELAYED PAYMENT BUT CAN INCUR PENALTIES ALSO, FOR W HICH SPECIFIC PROVISIONS ARE MADE IN THE PROVIDENT FUND ACT AS WELL AS THE ESI ACT. THEREFORE, THE ACT PERMITS THE EMPLOYER TO MAKE THE DEPOSIT WITH SOME DELAYS, SUBJ ECT TO THE AFORESAID CONSEQUENCES. INSOFAR AS THE INCOME-TAX ACT IS CONCERNED, THE ASSESSEE CAN GET THE BENEFIT IF T HE ACTUAL PAYMENT IS MADE BEFORE THE RETURN IS FILED, AS PER THE PRINCIPLE LAID DOWN IN VINAY CEMENT . 9. IN THE PRESENT CASE, IT IS NOT IN DISPUTED BEFO RE US THAT THE ASSESSEE HAD MADE PAYMENTS OF THE IMPUGNED PF & ESI CONTRIBUTION ON OR BEFORE THE DUE DATE FOR FILING O F RETURN OF INCOME. IN THE CIRCUMSTANCES, FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT REFERRED TO ABOVE, WE HOLD THAT THE ASSE SSEE IS ENTITLED TO CLAIM FOR DEDUCTION. THE AO IS DIRECTED TO ALLOW THE DEDUCTION. THIS GROUND OF APPEAL IS ALLOWED. 10. THE THIRD GROUND OF APPEAL RAISED BY THE ASSES SEE IS WITH REGARD TO THE DISALLOWANCE OF INTEREST EXPENSES MADE BY TH E AO INVOKING THE PROVISIONS OF SEC.14A OF THE ACT. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD M ADE INVESTMENTS IN QUOTED AND NON-QUOTED EQUITY SHARES OF RS.12,42,000/-. THE ASSESEEE HAD ALSO CONTRIBUTED A SUM OF RS.61,97,20,000/- AS ITS SHARE OF CAPITAL IN THE FI RM BY M/S LASKHMI ESTATES. THE AO FURTHER NOTICED THAT THE A SSESSEE HAD ITA NO.211(B)/2012 9 BORROWED A SUM OF RS.65,65,13,0-00/- AS SECURED LOA NS. THE AO ALSO NOTICED THAT THE ASSESSEE HAD PAID INTEREST ON BANK CHARGES ON ITS BORROWINGS OF RS.11,98,88,000/-. ON THE ABOVE FACTS, THE QUESTION BEFORE THE AO WAS AS TO WHETHER THE INTER EST EXPENDITURE HAD TO BE DISALLOWED U/S 14A OF THE ACT. SEC.14A O F THE ACT PROVIDES THAT ANY EXPENDITURE INCURRED FOR EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T SHALL NOT BE ALLOWED AS DEDUCTION IN COMPUTING TOTAL INCOME OF T HE ASSESSEE. ACCORDING TO THE AO THE AFORESAID INVESMENTS WERE M ADE BY THE ASSESSEE OUT OF BORROWED FUNDS ON WHICH INTEREST WA S PAID. ACCORDING TO THE AO THE INVESTMENTS MADE BY THE ASS ESSEE IN PURCHASE OF QUOTED AND NON-QUOTED EQUITY SHARES WOU LD YIELD DIVIDENDS INCOME WHICH IS EXEMPT FROM TAX. SIMILAR LY, THE PROFITS THAT THE ASSESSEE WILL DERIVE BY REASON OF ITS INVE STMENTS IN THE CAPITAL OF THE FIRM M/S LASKHMI ESTATES WOULD BE SH ARE INCOME RECEIVED BY A PARTNER FROM A FIRM WHICH WOULD BE EX EMPT FROM TAX U/S 10(2A) OF THE ACT. THE AO THEREFORE, CALLED UP ON THE ASSESSEE TO SHOW CAUSE AS TO WHY DISALLOWANCE OF INTEREST SHOUL D NOT BE MADE AS PER SE.14A OF THE ACT READ WITH RULE 8D OF THE IT R ULES. THE ASSESSEE GAVE A WORKING OF DISALLOWANCE U/R 8D OF THE ACT AS FOLLOWS: A TOTAL INVESTMENT ON TERM LOAN 2,35,384 TOTAL INTEREST ON OTHERS 10,98,21,222 TOTAL INTEREST AS PER P & L ACCOUNT 11,00,56,606 LESS: INTEREST ATTRIBUTABLE TO ACQUISITION OF MALT SPIRIT TAKEN TO STOCK 9,89,60,555 BALANCE TO BE CONSIDERED FOR RULE 8D(2)(II) 1,10,96,051 ITA NO.211(B)/2012 10 11. CERTAIN FACTS WITH REGARD TO INVESTMENT BY THE ASSESSEE IN THE CAPITAL OF THE FIRM M/S.LAKSHMI ESTATES NEED TO BE MENTIONE D. THE ASSESSEE IN THE COURSE OF ITS BUSINESS OF MANUFACTURE AND SALE OF ALCOHOLIC DRINKS WAS NEED OF WOOD ON A LARGE SCALE FOR MAKING CASKS, VAT S AND PACKING MATERIAL. M/S.LAKSHMI ESTATES OWNED HUGE EXTENT OF FOREST IN CHICKMAGALUR DISTRICT, KARNATAKA, WHICH HAD STANDIN G TRESS THEREON. TO ENSURE UNINTERRUPTED AND CONSTANT SUPPLY OF TIMBER, THE ASSESSEE HAD ENTERED INTO AGREEMENT WITH LAKSHMI ESTATES. DISPU TES AROSE BETWEEN THE ASSESSEE AND M/S.LAKSHMI ESTATES REGARDING THE SUPPLY OF TIMBER UNDER THE AGREEMENT. THE DISPUTE WAS SETTLED BY AR BITRATION. AN AWARD DATED 12.2.2003 WAS PASSED WHEREBY THE AMOUNTS ADVA NCED BY THE ASSESSEE TO M/S.LAKSHMI ESTATES FOR PURCHASE OF TIM ER/WOOD WAS TREATED AS 75% SHARE OF CAPITAL CONTRIBUTION OF THE FIRM M/ S.LAKSHMI ESTATES. 12. THE AO AFTER CONSIDERING ALL FACTS AND CIRCUMS TANCES AS ABOVE AS WELL AS SUBMISSIONS MADE BY THE ASSESSEE BY A LE TTER DATED 6-11- 10 FOUND THAT THE LOAN PROFILE OF THE ASSESSEE COMP ANY HAS CONTINUED OVER LAST MANY YEARS. THE ASSESSEE HAS BO RROWED MONEY FOR THE PURPOSE OF WORKING CAPITAL REQUIREMENTS. T HE ASSESSEE HAS ALSO MAINTAINED OVERDRAFT ACCOUNT FOR THE LAST MANY YEARS. ALL THE INVESTMENTS STATED ABOVE HAD FLOWN OUT OF THE COMPO SITE BANK ACCOUNT OF THE ASSESSEE. CONSIDERING THE FACTS AS ABOVE, HE HELD THAT THERE WAS CLEAR PROXIMITY BETWEEN THE INTEREST AND OTHER EXPENSES AS WELL AS TAX EXEMPT INVESTMENTS OF THE A SSESSE. THE AO PROCEEDED TO COMPUTE THE DISALLOWANCE U/S 14A OF TH E ACT READ RULE 8D OF THE RULES AS FOLLOWS: DISALLOWANCE ATTRACTED U/S 14A READ WITH RULE 8D ITA NO.211(B)/2012 11 A TOTAL AMOUNT OF DIRECT INTEREST/OTHER EXPENSES PERTAINING TO TAX EXEMPT INVESTMENTS NIL B TOTAL AMOUNT OF INDIRECT INTEREST PERTAINING TO TAX EXEMPT INVESTMENTS 1,10,96,051 AY: 2007-08 AY: 2008-09 AVERAGE C AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 62,28,13,000 62,19,14,000 62,23,63 ,500 D AVERAGE AMOUNT OF TOTAL ASSETS 2,45,91,64,920 2,47,38,73,600 2,46,65,19,26 0 E PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED BXC D 1,10,96,051 X 62,23,6 3,500 2,46,65,19,260 = 27.9 9,806 F 0.5% OF AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 31, 11,818 G TOTAL DISALLOWANCE ATTRACTED U/S 14A READ WITH RULE 8D A+E+F 59,11,624 12. AGGRIEVED BY THE AFORESAID DISALLOWANCE, THE A SSESSEE FILED APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF AO BY QUOTING THE HISTORY O THE PROVISIONS OF SEC.14A OF THE ACT. THE GIST OF THE CONCLUSION OF THE CIT(A) IS THAT EVEN IN A CASE WH ERE THERE IS NO TAX FREE INCOME ACTUALLY RECEIVED, ONCE IT IS SHOWN THA T THE INVESTMENTS HAVE BEEN MADE WHICH WILL YIELD TAX FREE INCOME THA T WOULD BE SUFFICIENT TO MAKE DISALLOWANCE U/S 14A OF THE ACT. ANOTHER REASON GIVEN BY THE CIT(A) IS THAT THE QUANTUM OF DISALLO WANCE U/S 14A CAN BE EVEN MORE THAN THE EXEMPT INCOME ACTUALLY EA RNED BY AN ASSESSEE. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. ITA NO.211(B)/2012 12 13. THE ONLY POINT WHICH WAS CANVASSED BY THE LEAR NED COUNSEL FOR THE ASSESSEE BEFORE US, WAS THAT THE AMOUNT WHICH W AS INVESTED BY THE ASSESSEEE AS CAPITAL IN THE PARTNERSHIP FIRM M/ S LASKHMI ESTATES SHOULD NOT BE CONSIDERED AS AN INVESTMENT F OR THE PURPOSE OF EARNING TAX FREE INCOME. IN THIS REGARD, RELIAN CE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE DECISIO N OF THE HONBLE ITAT OF MUMBAI B BENCH IN THE CASE OF ACIT VS M/ S NOVEL ENTERPRISES IN ITA NO.1328/MUM/2009 AY: 2005-06 WHE REIN THE HONBLE ITAT HELD THAT INTEREST EXPENDITURE ON BORR OWED FUNDS USED FOR INVESTING AS CAPITAL OF A FIRM CANNOT BE DISALL OWED U/S.14-A OF THE ACT. THE LERNED COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD., VS JCIT IN ITA NO.3594/BANG/2011 THE QUESTI ON BEFORE THE HONBLE HIGH COURT WAS WHETHER THE PROVISIONS OF SE C.14A WOULD BE APPLIED, WHERE EXPENSES ARE INCURRED BY AN ASSESSEE IN THE COURSE OF ITS BUSINESS, MERELY BECAUSE, THE ASSESSEE WAS A LSO HAVING DIVIDEND INCOME, ESPECIALLY WHEN THERE IS NO MATERI AL BROUGHT TO SHOW THAT THE ASSESSEE HAD INCURRED EXPENDITURE FOR EARNING DIVIDENDS INCOME WHICH IS EXEMPT FROM TAX. THE HON BLE HIGH COURT HELD AS FOLLOWS; WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE I N EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE DEDUCTED FROM THE SAID INCOME. IT IS NOT THE CASE OF THE ASSESSEE RETAINING ANY SHARES SO AS TO HAVE THE BEN EFIT OF DIVIDEND. 63% OF THE SHARES, WHICH WERE PURCHASED, ARE SOLD AND THE INCOME DERIVED THEREFROM IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 37% OF THE SHARES ARE RETAINE D. IT HAS REMAINED UNSOLD WITH THE ASSESSEE. IT IS THOSE UNSO LD SHARES ITA NO.211(B)/2012 13 HAVE YIELDED DIVIDEND, FOR WHICH THE ASSESSEE HAS N OT INCURRED ANY EXPENDITURE AT ALL. THOUGH, THE DIVIDEND INCO ME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE IS INCURRED IN EARNING THE SAID INCOME, THE SAID EXPENDITURE AL SO CANNOT BE DEDUCTED. BUT IN THIS CASE, WHEN THE ASSESSEE H AS NOT RETAINED SHARES WITH THE INTENTION OF EARNING DIVID END INCOME AND THE DIVIDEND INCOME IS INCIDENTAL TO ITS BUSINE SS OF SALE OF SHARES, WHICH REMAINED UNSOLD BY THE ASSESSEE, IT C ANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING HE SHARES HAS TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROACH OF THE AUTHORITIES IS NOT IN C ONFORMITY WITH THE STATUTORY PROVISIONS CONTAINED UNDER THE A CT. THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE. ACCORDINGLY, WE PASS THE FOLLOWING; 1. APPEAL IS ALLOWED 2. IMPUGNED ORDERS ARE HEREBY SET ASIDE 3. THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE. 14. RELYING ON THE ABOVE OBSERVATIONS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THE LOANS ARE FOR IDENTIFIABLE P URPOSES OF THE BUSINESS, SO THAT NO PART OF SUCH EXPENDITURE CAN R ELATE TO THE INVESTMENTS, WHETHER TRADING OR OTHERWISE. FURTHER IT WAS SUBMITTED THAT THERE WAS NO INCOME IN THE FORM OF S HARE OF PROFITS FROM THE FIRM M/S.LAKSHMI ESTATES AND THEREFORE NO DISALLOWANCE CAN BE MADE U/S.14-A OF THE ACT. IT WAS FURTHER SU BMITTED THAT THE INVESTMENT IN THE FORM CAPITAL IN THE PARTNERSHIP F IRM WAS FOR THE BUSINESS OF THE ASSESSEE AND THEREFORE DISALLOWANCE OF INTEREST EXPENSES U/S.14-A OF THE ACT CANNOT BE MADE. 15. THE LEARNED DR RELIED ON THE ORDERS OF THE REV ENUE AUTHORITIES. IN PARTICULAR IT WAS SUBMITTED THAT SPECIAL BENCH O F ITAT, AHMEDABAD IN THE CASE OF SHRI VISHNU ANANT MAHAJAN VS. ACIT IN ITA NO.211(B)/2012 14 ITA NO.3002/AHD/2009 DATED 25.5.2012 HAS HELD THAT ANY EXPENDITURE INCURRED FOR EARNING INCOME IN THE FORM OF PROFITS OF A PARTNERSHIP FIRM IS LIABLE TO BE DISALLOWED U/S.14- A OF THE ACT. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF MAHESH G.SHETTY & OTHERS VS CIT 238 CTR 440 (KAR) WHEREIN IT WAS HELD THAT DESPITE PROV ISO TO S.14A, S. 14A DISALLOWANCE CAN BE MADE FOR EARLIER YEARS. TH E FACTS WERE THAT FOR AY 1995-96, THE CIT PASSED AN ORDER ON 29.12.99 U/S 263 DIRECTING THE AO TO DISALLOW THE INTEREST ON THE MO NEYS BORROWED BY THE ASSESSEE FOR INVESTING IN THE CAPITAL OF A FIRM . IN APPEAL, THE TRIBUNAL UPHELD THE ORDER OF THE CIT BY RELYING ON S. 14A EVEN THOUGH S. 14A WAS INSERTED LATER BY FA 2001 (W.R.E. F 1.4.62) & THE PROVISO PROVIDED THAT THE AO WAS NOT EMPOWERED TO R EASSESS ETC FOR ANY AYS BEGINNING ON OR BEFORE 1.4.2001. ON APPEAL BY THE ASSESSE, THE COURT HELD THAT THE PROVISO TO S. 14A WHICH GIV ES PROTECTION TO THE ASSESSEE WITH RESPECT TO AY 2001-02 & EARLIER Y EARS WAS INSERTED W.E.F. 11.5.2001. AS THE ORDER OF THE CIT U/S 263 WAS PASSED EARLIER ON 29.12.99, THE PROTECTION UNDER TH E PROVISO WAS NOT AVAILABLE TO THE ASSESSEE AS ON THAT DATE. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. ON T HE ISSUE WHETHER INTEREST EXPENSES RELATABLE TO BORROWED FUN DS WHICH ARE USED FOR MAKING INVESTMENT IN THE SHARE CAPITAL OF A FIRM CAN BE SAID TO BE EXPENDITURE INCURRED FOR EARNING INCOME NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE, WE FIND THAT THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MAHESH G.SHETTY (SUPRA) H AS CLEARLY HELD THAT SUCH EXPENSES HAVE TO BE CONSIDERED AS EXPENDI TURE INCURRED TO EARN TAX FREE INCOME. THE DECISION OF THE SPECIA L BENCH OF ITA NO.211(B)/2012 15 AHMEDABAD IN THE CASE OF SHRI VISHNU ANANT MAHAJAN (SUPRA) ALSO SUPPORTS THE PLEA OF THE REVENUE. WE THEREFORE RE JECT THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE CONTRARY TO THE AFORESAID DECISION. 17. AS THE FACTS GO TO SHOW THAT THE SUM OF RS.62, 20,50,000 WAS ADVANCED BY THE ASSESSEE TO M/S.LAKSHMI ESTATES EVE N PRIOR TO 31.3.2003. THE ADVANCES WERE ADMITTED GIVEN IN CON NECTION WITH THE BUSINESS OF THE ASSESSEE. THE SAID OUTSTANDIN G WAS CONVERTED INTO CAPITAL CONTRIBUTION OF THE ASSESSEE FROM 1.2. 2003 BY THE AWARD OF THE ARBITRATOR DATED 12.2.2003. THUS THE BORROW ED FUNDS ON WHICH INTEREST WAS PAID HAD BEEN USED FOR BUSINESS OF THE ASSESSEE. THE ADVANCES GIVEN TO M/S.LAKSHMI ESTATES WOULD NOT HAVE YIELDED TAX FREE INCOME CALLING FOR INVOKING THE PROVISIONS OF SEC.14-A OF THE ACT. THE SCENARIO HOWEVER CHANGES AFTER THE AWARD OF THE ARBITRATOR BY WHICH THE ADVANCES GIVEN BECAME SHARE OF CAPITAL OF THE ASSSESSEE IN THE FIRM M/S.LAKSHMI ESTATES. THE INCO ME WHICH THE ASSESSEE MIGHT RECEIVE AS SHARE OF PROFITS OF THE F IRM IS EXEMPT FROM TAX IN THE HANDS OF THE ASSESSEE. ON THE FACTS OF THE PRESENT CASE THE APPLICATION OF THE PROVISIONS OF SEC.14-A OF TH E ACT WOULD CAUSE GREAT HARDSHIP TO THE ASSESSEE IN AS MUCH AS THE AS SESSEE HAD TO PROTECT ITS INTEREST AND GET THE ADVANCES CONVERTED AS CAPITAL CONTRIBUTION IN THE FIRM. ON THE OTHER HAND THE AS SESSEE HAS TO PAY INTEREST ON BORROWED CAPITAL WHICH WERE USED TO GIV E ADVANCES TO M/S.LAKSHMI ESTATES AND YET NOT GET DEDUCTION OF TH E EXPENDITURE WHILE COMPUTING TOTAL INCOME. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF M/S.CCI LTD. (S UPRA) IN OUR VIEW WILL STAND ON A DIFFERENT FOOTING BECAUSE DIVI DEND INCOME FROM ITA NO.211(B)/2012 16 SHARES WAS ONLY INCIDENTAL TO THE BUSINESS OF THE A SSESSEE OF PURCHASE AND SALE OF SHARES. IT IS NO DOUBT TRUE THAT ASSESSEE DID NOT MAKE ANY INVESTMENT TO EARN TAX FREE INCOME IN THE FORM OF SHARE OF PROFITS OF A FIRM. AFTER CONVERSION OF TH E ADVANCES GIVEN BY THE ASSESSEE TO THE FIRM FOR SUPPLY OF WOOD, INTO C APITAL CONTRIBUTION OF THE ASSESSEE TO THE FIRM, THE BENEFIT THE ASSESS EE CAN GET IS INCOME IN THE FORM OF SHARE OF PROFITS OF THE FIRM WHICH IS EXEMPT. IN THIS REGARD, WE ALSO NOTE FROM THE AWARD OF THE ARBITRATOR IN THE OPERATIVE PART HAS OBSERVED AS FOLLOWS: THE CLAIMANT HAVING AGREED TO BECOME A PARTNER IN THE PARTNERSHIP FIRM OF THE RESPONDENT WITH 75% SHARE E FFECTIVE FROM 1.2.2003 TO WHICH RESPONDENT AGREED, THE CLAIM ANT WILL NOT ANY MORE DEMAND REPAYMENT OF THE MONEY, AND THE MONEY DUE TO IT WILL HENCEFORTH BE TRETED AS CAPITAL INVE STED BY IT IN THE PARTNERSHIP FIRM OF THE RESPONDENT EXCEPT AS MA Y BE AGREED UPON HEREAFTER DEPENDING UPON THE EXIGENCIES OF BUSINESS. THE RESPONDENT WILL NOT INSIST UPON SUPP LY OF TIMBER IN DISCHARGE OF ITS LIABILITY, EXCEPT AS MAY BE NEEDED BY THE BUSINESS REQUIREMENTS OF THE CLAIMANT, AT MUTUA LLY AGREED RATES ON MUTUALLY DETERMINED TIME SCHEDULE, THE SAL E PROCEEDS OF WHICH WOULD BE TAKEN INTO ACCOUNTS OF THE NEWLY CREATED PARTNERSHIP. IT CAN BE SEEN FROM THE AWARD OF THE ARBITRATOR THA T THE ASSESSEE CAN HOPE TO GET ONLY SHARE INCOME FROM THE PARTNERSHIP AND THERE WAS NO OTHER BUSINESS NECESSITY WHICH CAN JUSTIFY THE I NVESTMENT IN THE CAPITAL OF THE PARTNERSHIP. THEREFORE THE DECISION OF THE HONBE KARNATAKA HIGH COURT IN THE CASE OF M/S.CCI LTD.(SU PRA) WILL NOT SUPPORT THE CASE OF THE ASSESSEE. IT CANNOT THERE FORE BE SAID THAT THE ASSESSEE DID NOT INTEND TO EARN TAX FREE INCOME IN THE FORM OF SHARE OF PROFITS FROM THE FIRM. ONCE IT IS FOUND TH AT THE PROVISIONS OF SEC.14-A OF THE ACT ARE APPLICABLE THEN IRRESPECTIV E OF THE FACT THAT ITA NO.211(B)/2012 17 THERE WAS NO RECEIPT OF SHARE OF PROFITS FROM THE F IRM IN THE PRESENT YEAR OR THE ARGUMENT THAT THE DISALLOWANCE CANNOT E XCEED THE AMOUNT OF SHARE OF PROFITS RECEIVED FROM THE FIRM, CANNOT BE ACCEPTED IN THE LIGHT OF THE VARIOUS DECISIONS REFE RRED BY THE CIT(A) IN HIS ORDER. ON THE FACTS AND CIRCUMSTANCE OF THE CASE, WE ARE OF THE VIEW THAT THE IMPUGNED DISALLOWANCE HAS TO BE S USTAINED. THUS THE THIRD GROUND OF APPEAL OF THE ASSESSEE IS DISMI SSED. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 18 TH JULY. 2012. SD/- SD/- (N.BARATHVAJA SANKAR) (N.V.VASUDEVAN) VICE PRESIDENT JUDICIAL MEMBER BANGALORE: D A T E D : 8-07-2012 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-IV, BANGALORE. 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE (1+1) BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE