ACIT, Jaipur V. CONSTRUCTIVE FINANCE P LTD., Jaipur

ITA 217/JPR/2011

• Counselvise Citation: 21723114 RSA 2011
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 10-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO. 217 & 218/JP/2011 ASSESSMENT YEAR: 2004-05 & 2005-06 PAN: AAAFC 7766 K THE ACIT VS. M/S. CONSTRUCTIVE FINANCE (P) LTD. CIRCLE- 1 2337, RAM LALJI STREET, JOHRI BAZAR JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SHRI SUBHASH CHANDRA ASSESSEE BY : NONE ORDER PER N.L. KALRA, AM:- THE REVENUE HAS FILED APPEALS AGAINST RESPECTIVE ORDERS OF THE LD. CIT(A)-1, JAIPUR DATED 16-12-2010 FOR THE ASSESSME NT YEARS 2004-05 & 2005-06. 2.1 THE ONLY GRIEVANCE OF THE REVENUE IS THAT THE L D. CIT(A) IS NOT JUSTIFIED IN REDUCING THE DISALLOWANCE U/S 14A ON T HE BASIS OF APPLYING RULE 8D OF INCOME TAX RULES, 1962. 2 2.2 THE ASSESSEE COMPANY IS AN INVESTMENT AND FINAN CE COMPANY. FOR THE ASSESSMENT YEAR 2004-05, THE ASSESSEE HAS SHOWN INC OME UNDER FOLLOWING HEADS. 1. DIVIDEND RS. 1,68,52,637/- 2. COMMISSION RS. 2,13,82,073/- 3. SALES OF SHARES RS. 14,28,965/- 4. OTHER INCOME (SERVICE CHARGES +PROFIT ON SALES OF INVESTMENT+ INTEREST) RS. 13,79,071/- 2.3 IN THE ASSESSMENT ORDER, FOR THE ASSESSMENT YEA R 2004-05, THE AO HAS PREPARED A CHART IN RESPECT OF BORROWED FUNDS WITH THE ASSESSEE AT THE END OF THE ACCOUNTING YEAR RELEVANT TO ASSESSMENT YEARS 19 96-97 TO 2004-05. ACCORDING TO THE AO, SUCH FUNDS HAVE BEEN UTILIZED FOR THE PURCHASE AND SALES OF THE SHARES. THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. THE AO ACCORDINGLY DISALLOWED THE E NTIRE INTEREST. 2.4 THE LD. CIT(A) HAS REFERRED TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT, 15 DTR 68. THE LD. CIT(A) HAS ALSO CONSIDERED THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD., VS. DCIT, 43 DTR 1 77 BUT FINALLY AT PAGE 10 OF THE APPELLATE ORDER, THE LD. CIT(A) HAS HELD THAT RULE 8D IS EQUALLY APPLICABLE . THEREFORE, THE LD. CIT(A) COM PUTED THE DISALLOWANCE AS 3 PER RULE 8D AND ACCORDINGLY GAVE RELIEF IN RESPECT OF PART OF THE DISALLOWANCE FOR BOTH THE ASSESSMENT YEARS. 2.5 WE HAVE HEARD THE LD. DR AND PERUSED THE MATERI ALS AVAILABLE ON RECORD. IT WILL BE USEFUL TO REPRODUCE THE RELEVANT PORTION FROM THE HELD PORTION FROM THE DECISION OF BOMBAY HIGH COURT IN T HE CASE OF GODREJ & BOYCE MFG. CO. LTD., VS. DCIT, 328 ITR 81 THE FOLLOWING PRINCIPLES WOULD EMERGE FROM SECTION 14A AND THE DECISION OF CIT VS. WALFORT SHA RE AND STOCK BROKERS (P) LTD. [2010] 326 ITR 1 (SC) (A) THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSES SEE; (B) SECTION 14A(1) IS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE IN COME ARE ALLOWED; THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS WIDENED BY SECTION 14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N- TAXABLE INCOME OF AN INDIVISIBLE BUSINESS. (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET I NCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSE OF SECT ION 14A AND EXPENSES TOWARDS NON-TAXABLE INCOME MUST BE EXCLUDED 4 (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATIONSHIP OF THE EXPE NDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME A DISALLOWANCE HAS TO BE EFFECTED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DISALLOWED U/S 14A. INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS BRO ADLY ADVERTED TO AS EXEMPT INCOME AS AN ABBREVIATED APPE LLATION. THE PLAIN MEANING OF SECTION 14A IS THAT NO DEDUCTI ON CAN BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE HON'BLE BOMBAY HIGH COURT FURTHER HELD THAT RU LE DD WILL APPLY W.E.F. ASSESSMENT YEAR 2008-09. HENCE, RULE DD WILL NOT BE APPLICABLE IN THIS CASE. THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. IT HAS BEEN HELD BY THE ITAT MUMBAI BENCH IN THE CASE OF GLENN MARK PHARMACEUTICAL LTD. VS. DCIT, 2010 -TIOL-775-ITAT- MUM THAT IF THERE IS A COMMON POOL THEN REASONABLE DISALLOWABLE IS TO BE MADE. WE THEREFORE, FEEL THAT THE MATTER IS REQUIRE D TO BE RESTORED BACK ON THE FILE OF THE AO TO RECOMPUTE THE DISALLOWANCE AS PER REASONABLE BASIS 5 AFTER ALLOWING OPPORTUNITY TO THE ASSESSEE AND MAY CONSIDER THE NEXUS OF BORROWED FUNDS WITH ASSETS YIELDING EXEMPT INCOME. 3. IN THE RESULT, THE APPEALS OF THE REVENUE ARE A LLOWED FOR STATISTICAL PURPOSES THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30-0 6-2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 30/06/2011 *MISHRA COPY FORWARDED TO :- 1. THE ACIT, CIRCLE- 1, JAIPUR 2. M/S. CONSTRUCTIVE FINANCE (P) LTD. JAIPUR BY ORDE R 3. THE LD. CIT 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.217/JP /11) AR ITAT, JAIP UR 6