Kohinoor Developments Corporation, Pune V. Income-tax Officer, Ward - 3(2), Pune

ITA 2137/PUN/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0283 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 10-12-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 12-09-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M K VERMA
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT . / ITA NO.2137/PUN/2017 / ASSESSMENT YEAR : 2010-11 KOHINOOR DEVELOPMENTS CORPORATION, A-102, ICC TRADE TOWERS, S.B. ROAD, GOKHALENAGAR, PUNE 411 016 PAN : AAIFK3569J VS. ITO, WARD-3(2), PUNE (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-3, PUNE ON 31-05-2017 IN RELATION TO THE ASSESSMENT YEAR 2010-11. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST CONFIRMATION OF DISALLOWANCE OF RS.15,47,743/- MADE BY THE ASSESSING OFFICER (AO) U/S. 14A OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED AS THE ACT). APPELLANT BY SHRI S.N. PURANIK RESPONDENT BY SHRI M.K. VERMA DATE OF HEARING 10-12-2018 DATE OF PRONOUNCEMENT 11-12-2018 ITA NO.2137/PUN/2017 KOHINOOR DEVELOPMENTS CORPORATION 2 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE, THAT THE ASSES SEE EARNED EXEMPT DIVIDEND INCOME OF RS.15,03,090/-. IN TH E ABSENCE OF THE ASSESSEE HAVING SUO MOTU DISALLOWED ANY SUM AS RELATABLE TO THE EXEMPT INCOME, THE AO INVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D TO WORK OUT THE DISALLOWANCE AT RS.15,47,743/-, COMPRISING OF TWO AMOUNTS VIZ., RS.8,64,161/- UNDER RULE 8D(2)(II) AND RS.6,83,5 82/- UNDER RULE 8D(2)(III). THE LD. CIT(A) SUSTAINED THE DISALLOWANCE. 4. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED FROM THE ASSESSEES BALANCE SHEET THAT THE TOTAL AMOUNT OF PARTNERS CAPITAL IS RS.34,06,58,098/- AS AGAINST THE AMOUNT OF INVESTMENTS AT RS.14,41,48,818. CAPITAL OF RS.34.06 CRORES IS HELD BY PARTNERS ON WHICH NO INTEREST WAS PAID. THUS, IT BECOMES APPARENT THAT THE CAPITAL OF THE FIRM, WHICH IS NOT LIABLE FOR ANY INTEREST PAYMENT, IS FAR IN EXCESS OF THE AMOUNT OF INVES TMENTS IN SECURITIES YIELDING EXEMPT INCOME . THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD . 313 ITR 340 , HAS HELD THAT WHERE AN ASSESSEE POSSESSES SUFFICIENT INTEREST FREE FUNDS OF ITS OWN WHICH WERE GENERATE D ITA NO.2137/PUN/2017 KOHINOOR DEVELOPMENTS CORPORATION 3 IN THE COURSE OF RELEVANT FINANCIAL YEARS, APART FROM SUBSTA NTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENT IN SISTER CONCERNS WERE MADE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTEREST ON BORROWING CO ULD BE DISALLOWED. IN HOLDING SO, THE HON'BLE BOMBAY HIGH COURT RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICALS WORKS LTD. VS. CIT 224 ITR 627 (SC). THE HON'BLE KARNATAKA HIGH COURT HAS APPLIED SUCH A PROPOSITION IN THE CONTEXT OF SECTION 14A BY HOLDING IN CIT VS. MICRO LABS 383 ITR 490 (KAR), THAT WHERE INVESTMENTS ARE MADE FROM COMMON POOL, AND NON-INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENTS IN TAX FREE SECURITIES, THEN, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A CAN BE MADE. AS CAPITAL OF THE FIRM IS MUCH MORE THA N THE AMOUNT OF INVESTMENTS, RESPECTFULLY FOLLOWING THE PRECEDENTS, I ORDER TO DELETE THE DISALLOWANCE OF RS.8,64, 161/-. 5. THE SECOND COMPONENT OF THE DISALLOWANCE WHICH HAS BEEN ASSAILED IN THE INSTANT APPEAL IS RS.6,83,582/-, THAT HA S BEEN COMPUTED BY THE AO UNDER RULE 8D(2)(III), BEING, 1/2 PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENTS. IN TH IS REGARD, IT IS RELEVANT TO NOTE THAT THE HONBLE DELHI HIGH COURT ITA NO.2137/PUN/2017 KOHINOOR DEVELOPMENTS CORPORATION 4 IN ACB INDIA LTD. VS. ACIT (2015) 374 ITR 108 (DEL) , HAS HELD THAT VALUE OF TAX EXEMPT INVESTMENTS SHOULD BE CONSIDERED INSTEAD OF TOTAL INVESTMENTS FOR ADOPTING AVERAGE VALUE OF INVESTMENTS OF INCOME WHICH IS NOT PART OF THE TOTA L INCOME. THE EFFECT OF THIS DECISION IS THAT WHILE MAKING DISALLOWANCE UNDER RULE 8D(2)(III), IT IS ONLY THE AVERAGE OF THOSE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME ARE TO BE TAKEN INTO CONSIDERATION AND NOT THE AVERAGE OF ALL INVESTMEN TS AS HAS BEEN DONE BY THE AO IN THIS CASE. IN THE GIVEN CIRCUMSTANCES, I SET-ASIDE THE IMPUGNED ORDER ON THIS SCO RE AND REMIT THE MATTER TO THE FILE OF AO FOR RE-COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(III) IN THE LIGHT OF THE JUDGMENT OF HONBLE DELHI HIGH COURT IN ACB INDIA (SUPRA) AFTER ALLOWING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH DECEMBER, 2018. SD/- (R.S.SYAL) / VICE PRESIDENT PUNE; DATED : 11 TH DECEMBER, 2018 ITA NO.2137/PUN/2017 KOHINOOR DEVELOPMENTS CORPORATION 5 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-3, PUNE 4. / THE PR. CIT-2, PUNE 5. , , SMC / DR SMC, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECR ETARY , / ITAT, PUNE ITA NO.2137/PUN/2017 KOHINOOR DEVELOPMENTS CORPORATION 6 DATE 1. DRAFT DICTATED ON 10-12-18 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 11-12-18 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *