PROVOGUE (I) LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 2155/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88143 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 18-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Assessee Lawyers: SANJEEV LALAN
• Keywords: Earning of tax free income; Revised return
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI SANJAY GARG , J M ITA NO. 2155 / MUM/20 1 3 ( ASSESSMENT YEAR : 2009 - 2010 ) M/S PROVOGUE (INDIA) LTD., 105/106, PROVOGUE HOUSE, OFF. NEW LINK ROAD, ANDHERI (W), MUMBAI - 53 VS. DCIT - 8(2), MUMBAI PAN/GIR NO. : A A B CA 8524 F ( APP ELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI SANJEEV LALAN /REVENUE BY : SHRI PREMANAND J. DATE OF HEARING : 1 0 TH DECEMBER , 201 4 DATE OF PRONOUNCEMENT 21 ST JAN UARY, 2015 O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) , DATED 10 - 12 - 2012 28 - 3 - 2013 FOR THE ASSESSMENT YEAR 1999 - 2000 , IN THE MATTER OF ORDER PASSED U/S. 143 ( 3 ) OF THE I.T. ACT , WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY ASSESSEE : - 1. 1) A) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A )] ERRED IN FACTS AND LAW IN UPHOLDING THE DISALLOWANCE OF SHORT TERM CAPITAL LOSS MADE B Y THE ASSESSING OFFICER (AO) OF RS. 23,49,015/ - U/S. 94(7). B) THE LEARNED AO ERRED IN LAW IN APPRECIATING THAT THE CONCEPT OF RECORD DATE, AS ENVISAGED IN EXPLANATION (AA) TO SECTION 94, IS NOT APPLICABLE IN RESPECT OF DAILY DIVIDEND SCHEMES. 2) A) THE LEARNED CIT(A) ERRED IN FACTS AND LAW IN UPHOLDING THE DISALLOWANCE MADE BY THE AO OF RS. 94,09,045/ - BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE I.T. RULES. ITA NO. 2155 / 1 3 2 B) THE LEARNED AO ERRED IN LAW IN APPLYING RULE 8D WITHOUT GIVING ANY SPECIFIC FINDING AND REASONS AS TO INADEQUACY OF DISALLOWANCE MADE U/S. 14A BY THE APPELLANT IN THE RETURN OF INCOME FILED AND APPRECIATING EXPLANATIONS OFFERED DURING THE COURSE OF ASSESSMENT PROCEEDINGS OR CONTROVERTING THAT THE EXPLANATIONS OF THE APPELLANT WERE NOT SATISFACTORY. 2. RIVAL CONTENTIONS HAVE BEEN HE ARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING/TRADING OF READYMADE GARMENTS AND FASHION ACCESSORIES AND SELLING THE SAME UNDER THE BRAND NAME PROVOGUE. FOR THE YEAR UNDER CONSIDERAT ION, THE RETURN OF INCOME WAS ELECTRONICALLY FILED ON 29 - 9 - 2009 DECLARING INCOME OF RS.35,13,49,130/ - . SUBSEQUENTLY,, THE ASSESSEE FILED REVISED RETURN OF INCOME ON 13.10.2010 DECLARING TOTAL INCOME OF RS. 34,76,85,730/ - , SO AS TO CLAIM THE BONUS & LEAVE SA LARY PAID OF RS. 36,63,396/ - U/S.43B. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE VIDE LETTER 20.01.2011 FURNISHED REVISED COMPUTATION OF TOTAL INCOME WHEREIN THE MISTAKES NOTICED BY THE APPELLANT WERE RECTI FIED AND ACCORDINGLY A SUM OF RS. 29 , 49,067/ - WAS OFFERED TO TAX IN THE REVISED COMPUTATION OF TOTAL INCOME. THE DETAILS OF THE SAME ARE AS UNDER: - DISALLOWANCE OF SHORT TERM LOSS U/S 94(7) 23,49,015/ - PENALTY 71,052/ - DISALLOWANCE OF PROVISION FOR MTM LOSS 5,29,0 00/ - TOTAL 29,49,067/ - 3 . THE FIRST GRIEVANCE OF THE ASSESSEE RELATES TO CONFIRMING DISALLOWANCE OF SHORT TERM LOSS OF RS.23,49,015/ - U/S.94(7) OF THE ACT. 3 .1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WHILE COMPILING THE VARIOUS DETAILS FOR ASSESSMENT, THE ASSESSEE FOUND THAT THE PROVISIONS OF SECTION 94(7) WERE GETTING ATTRACTED IN THE PRESENT FACTS OF THE CASE AND ITA NO. 2155 / 1 3 3 ACCORDINGLY, DISALLOWED THE SHORT TERM CAPITAL LOSS OF RS. 23,49,015/ - U/S. 94(7) BY WAY OF A REVISED COMPUTATION OF TOTAL INCOME FILED BEFORE THE A. O CONSIDERING THE SAME, THE A.O . ALSO ACCEPTED THE DISALLOWANCE OF THE SHORT TERM CAPITAL LOSS OF RS. 23,49,015/ - U/S. 94(7). THE CONTENTION OF LD. AR WAS THAT THE ASSESSING OFFICER HAD ERRONEOUSLY ACCEPTED THE DISALL OWANCE WITHOUT APPRECIATING THE FACT THAT THE DIVIDEND INCOME WAS EARNED FROM THE DAILY DIVIDEND SCHEME OF MUTUAL FUND, WHEREIN THE PROVISIONS OF SECTION 94(7) ARE NOT APPLICABLE AT ALL IN VIEW OF THE ABSENCE OF RECORD DATE OF DIVIDEND AS ENVISAGED IN THE SEC. 94(7). AL L THE FACTS AND DETAILS OF THE DIVIDEND INCOME EARNED FROM THE DAILY DIVIDEND SCHEME OF M UTUAL FUND WAS ALSO ON RECORD. 3.2 WE FOUND THAT EXACTLY SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF INDIAN ACRYLICS LTD., ITA NO.797/CHD/2009(CHANDIGA RH BENCH), DATED 3 - 1 - 2014, WHEREIN THE MATTER WAS RESTORED BACK TO THE FILE OF THE AO AFTER HAVING THE FOLLOWING OBSERVATIONS : - SINCE NEITHER THE ASSESSING OFFICER NOR THE LD. CIT(A) HAS EXAMINED THE DETAILS OF VARIOUS SCHEMES, WHETHER ANY RECORD DATE WA S INVOLVED OR NOT AND HAVE DECIDED THE ISSUE ON ASSUMING THAT THERE IS A RECORD DATE IN THESE SCHEMES. IN OUR OPINION, THE DETAILS OF THE SCHEMES NEED TO BE EXAMINED TO FIND OUT WHETHER ANY RECORD DATE WAS INVOLVED OR NOT AND THEREFORE, IN THE INTEREST OF JUSTICE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMIT THE SAME BACK TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO FIRST FIND OUT WHETHER ANY RECORD DATE IS INVOLVED AND THEN DECIDED THE ISSUE AS PER LAW. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE PARI MATERIA , WHERE THE ASSESSEE HAS EARNED INCOME UNDER VARIOUS SCHEMES BUT NOT RECORDED ANY FINDING AS TO WHETHER ANY RECORD DATE WAS INVOLVED OR NOT AND THE LOWER AUTHORITIES HAS DECIDED THE ISSUE ON ASSUMING THAT THERE IS A RECORD DATE IN THESE SCHEMES. FOLLOWING THE ITA NO. 2155 / 1 3 4 ORDER OF THE TRIBUNAL, AS DISCUSSED ABOVE, WE RESTORE THIS ISSUE BACK TO THE FILE OF THE AO WITH A DIRECTION TO FIRST FIND OUT WHETHER ANY RECORD DATE IS INVOLVED AND THEN DECIDE THE ISSUE AFRESH AS PER LAW . 4. WITH REGARD TO DISALLOWANCE U/S.14A, T HE CONTENTION OF THE LD. AR WAS THAT THE ASSESSEE HAS NOT INCURRED ANY PROXIMATE EXPENSES IN RELATION TO EXEMPT INCOME EARNED. FURTHER, AS REGARDS TO ALL THE INVESTMENTS MADE DURING THE YEAR UNDER REFERENCE, IT WA S SUBMITTED THAT THESE INVESTMENTS ARE MADE OUT OF OWN SURPLUS CAPITAL AND NOT OUT OF BORROWED FUNDS. ALSO, THE BORROWED FUNDS ARE SPECIFICALLY UTILISED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HENCE, NO DISALLOWANCE OF INTEREST EXPENDITURE IS R EQUIRED TO BE MADE AS PER THE PROVISION OF SECTION 14A . F URTHER, IT WAS ALSO SUBMITTED THAT THE INVESTMENTS ARE .EITHER IN SUBSIDIARY COMPANIES IN THE FORM OF STRATEGIC BUSINESS INVESTMENTS OR IN THE DAILY DIVIDEND SCHEMES OF MUTUAL FUNDS, WHEREIN THE INVE STOR DOES NOT HAVE TO APPLY HIS MIND IN ANYWAY. THE ONLY EFFORT INVOLVED IN INVESTMENT IS THAT OF PREPARING THE CHE QUES, RECORDING THE TRANSACTIONS 'IN THE BOOKS, 'P REPARING THE VOUCHER FOR THE SAME, ETC. EVEN THERE A RE NO DIVIDEND COLLECTION COSTS INCURRE D BY THE ASSESSEE AS THE SAME GETS DIRECTLY CREDITED THROUG H ECS. FURTHER, THE MUTUAL FUND ADVI SORS DO ALL THE WORK OF FILLING UP THE FORMS, SUBMISSION TO FUNDS, E TC. HAVING REGARD TO THE QUANTUM OF INVESTMENT MADE IN MUTUAL FUNDS AND UTILIZATION OF OTHER EFFORTS FOR' THE INVESTMENT MAD E , A DISALLOWANCE OF RS. 10,00,000/ - IS MADE U/S. 14A ON SCIENTIFIC BASIS BY THE ASSESSEE WHILE FILLING THE RETURN OF INCOME. ITA NO. 2155 / 1 3 5 4.1 WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT THE AO ACCEPTED THE CONTENTION OF THE APPEL LANT PARTIALLY THAT THE BORROWED FUNDS WERE UTILIZED FOR THE BUSINESS PURPOSE AN D ACCORDINGLY DID NOT MAKE ANY DISALLOWANCE OF INTEREST U/S.14A. T HE AO HAS INVOKED THE PROVISIONS OF SECTION 14A AND APPLIED THE FORMULA AS PRESCRIBED UNDER RULE 8 D OF THE INC OME TAX RULES FOLLOWING THE DECISION IN THE CASE OF GODREJ & BOYCE (BOM. HIGH COURT) AND MADE THE DISALLOWANCE OF RS. 94,09,045/ - U/S.14A BY CALCULATING 0.5% OF THE AVERAGE INVESTMENTS, FROM WHICH INCOME EARNED IS EXEMPT. 4.2 BY THE IMPUGNED ORDER, THE CIT (A) CONFIRMED THE DISALLOWANCE, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4.3 WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT ASSESSEE HAS MADE INVESTMENT IN SUBSIDIARIES AS A STRATEGIC INVESTMENT AND NOT FOR EARNING DIVIDEND INCOME. THE I SSUE WITH REGARD TO COMPUTATION OF DISALLOWANCE U/R.8D WHEN THERE IS ANY INVESTMENT FOR STRATEGIC PURPOSES, HAS BEEN DEALT BY THE ITAT DELHI BENCH IN THE CASE OF INTERGLOBE ENTERPRISES LTD., ITA NO. 1362&1032/DEL/2013, ORDER DATED 4 - 4 - 2014 , WHEREIN THE TRIB UNAL OBSERVED AS UNDER : - HOWEVER, WE FIND THAT THE CALCULATION OF DISALLOWANCE UNDER RULE 8D(III) MADE BY THE ASSESSING OFFICER AND UPHELD BY LD CIT(A) IS NOT CORRECT IN VIEW OF THE FACT THAT ASSESSING OFFICER HAD INCLUDED THE VALUE OF TOTAL INVESTMENTS FOR CALCULATION OF DISALLOWANCE WHEREAS IN OUR OPINION THE VALUE OF THOSE INVESTMENTS SHOULD HAVE BEEN INCLUDED WHICH WERE MADE FOR THE PURPOSE OF EARNING EXEMPT INCOM E. THE ASSESSEE HAD MADE SIGNIFICANT INVESTMENTS IN THE SHARES 'OF SUBSI DIARY COM PANIES W HICH ARE DEFINITELY NOT FOR THE PURPOSE OF EARNING EXEM PT INCOME. THE HON'BLE TRIBUNAL IN I.T.A. NO.3349/0E1L2011 IN THE CASE OF PROMAIN LTD., AFTER RELYING UPON A KOLKATTA JUDGMENT OF TRIBUNAL IN I.T.A. NO.1331 HAS HELD THAT STRATEG IC INVESTM ENT HAS TO BE EXCLUDED FOR THE PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D (III) .THE TRIBUNAL HAD RELIED UPON THE FINDINGS OF KOLKATA TRIBUNAL IN THE CASE OF REI AGRO LTD. V. DCIT IN ITA NO.1331/DEL/2011 DATED 29.7.2011. THE RELEVANT PORTION OF ITA NO. 2155 / 1 3 6 TRIBUNAL FINDINGS AS CONTAINED IN KOLKATA TRIBUNAL ARE REPRODUCED BELOW : - (III) FURTHER IN RULE 8D(2)(II), THE WORDS USED IN NUMERATOR B ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN T HE BALANCE SHEET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. THE ASSESSING OFFICER WAS WRONG IN TAKING INTO CONSIDERATION THE INVESTMENT OF RS.103 CRORES MADE DURING THE YEAR WHICH HAS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VALUE OF THE INVESTMENT FROM WHICH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLING WITHIN THE PART OF THE TOTAL INCOME THAT IS TO BE CONSIDERED. THUS, IT IS NOT THE TOTAL INVESTMENT AT ALL BEGINNING OF THE YEAR AND AT THE END OF THE YEA R, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENTS WHICH HAS GIVEN RISE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS USED TO TAKE CARE OF CASES WHERE THERE IS THE ISSUE OF DIVIDEND STRIPING. IV) UNDER RULE 8D(2)(III), WHAT IS DISALLOWABLE IS AN AMOUNT EQUAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME/. THUS, UN DER SUB CLAUSE (III), WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)(III). THIS HAS TO BE CALCULATED ON THE SAME LINES AS MENTIONED EARLIER IN RESPECT OF NUMERATOR B IN THE RULE 8D(2)(II). THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT M ATTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE U/S 14AREAD WITH RULE 8D. THE DISALLOWANCE U/S 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. (A.Y.) (I.T.A.NO.1331/KOL/2011 DATED 29.7.2011. FOLLOWING THE ABOVE JUDICIAL PRECEDENTS, WE HELD THAT VALUE OF STRATEGIC INVESTMENTS SHOULD BE EXCLUDED FOR T HE PURPOSE OF DISALLOWANCE UNDER RULE 8D(III) . IN VIEW OF THE ABOVE, WE RESTORE THE MATTER BACK TO THE FILE OF AO FOR COMPUTING DISALLOWANCE KEEPING IN VIEW THE JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE. WE DIRECT ACCORDINGLY. 5 . IN THE RESULT, APPEAL O F THE ASSESSEE IS ALLOWED IN PART . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21/01 / 201 5 . 21/01 / 201 5 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMB AI ; DATED 21/01 /201 5 /PKM , PS ITA NO. 2155 / 1 3 7 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CI T 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//