Baroda Earth Pvt.Ltd., Baroda V. The Income tax Officer,Ward-1(3), Baroda

ITA 2212/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89251 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 27-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 02-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Assessee Lawyers: SUNIL H TALATI
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA KR. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.) I.T. A. NO. 2212/AHD/2011 (ASSESS MENT YEAR: 2007-08) BARODA EARTH PVT. LTD. 43, PARAS, GAUTAM NAGAR SOCIETY. RACE COURSE CIRCLE BARODA -390007 V/S THE I.T.O, WARD 1(3), BARODA (APPELLANT) (RESPONDENT) PAN: AAACB7638J APPELLANT BY : SHRI SUNIL. H. TALATI, A.R . RESPONDENT BY : SHRI ROOP CHAND, SR. D.R. ( )/ ORDER DATE OF HEARING : 27-03-2015 DATE OF PRONOUNCEMENT : 10 -04-2015 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-I, BARODA DATED 01.07.2011 FOR A.Y. 2007-08. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. 3. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE B USINESS OF MANUFACTURING ACTIVATED BLEACHING EARTH AND FULLERS EARTH OF DIF FERENT GRADES. ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2007-08 ON 24.1 0.2007 DECLARING TOTAL LOSS OF RS. 4,82,437/-. THE CASE WAS SELECTED FOR S CRUTINY AND THEREAFTER THE ITA NO 2212/ AHD/2011 . A.Y. 2007-08 2 ASSESSMENT WAS FRAMED UNDER SECTION 143(3) VIDE ORD ER DATED 11.12.2009 AND THE TOTAL INCOME WAS DETERMINED AT RS. 6,13,657 /-. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE L D. CIT(A) WHO VIDE ORDER DATED 01.10.2007 GRANTED PARTIAL RELIEF TO THE ASSE SSEE. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN A PPEAL BEFORE US AND HAS RAISED THE FOLLOWING EFFECTIVE GROUND;- 1.THE HON'BLE COMMISSIONER OF INCOME TAX (A)-L, BAR ODA HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE LEARNED AO BY RS.47863/- A S PER PROVISION OF SECTION 14A READ WITH RULE 8D OF THE ACT. YOUR APPELLANT SUBMITS THA T PROVISION OF SECTION 14A R.W.R 8D IS NOT APPLICABLE IN THE CASE OF YOUR APPELLANT. IT IS THEREFORE SUBMITTED THAT THE DISALLOWANCE CONFIRMED BY HON'BLE CIT(A) IS UNJUST AND UNCALLED FOR. IT BE HELD SO NOW AND THE ADDITION BE DELETED NOW. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O NO TICED THAT ASSESSEE HAD BORROWED SECURED AND UNSECURED LOAN AND HAD CLAIMED INTEREST EXPENDITURE OF RS. 4,15,217/-. HE ALSO NOTICED THAT ASSESSEE HA D ALSO MADE INVESTMENTS AND HAD EARNED DIVIDEND INCOME OF RS. 6,17,337/- WH ICH WAS CLAIMED AS EXEMPT INCOME. HE WAS OF THE VIEW THAT ASSESSEE HAS UTILIZED INTEREST BEARING FUNDS TO MAKING INVESTMENTS ON WHICH IT HAD EARNED TAX FREE DIVIDEND INCOME. HE WAS OF THE VIEW THAT HAD THE AS SESSEE NOT MADE INVESTMENTS FROM WHICH IT EARNED DIVIDEND, ASSESSEE WOULD NOT HAVE HAD TO INCUR INTEREST EXPENDITURE AND ACCORDING TO A.O THE INVESTMENTS WERE BURDEN ON BUSINESS INCOME. HE ACCORDINGLY WORKED OUT THE I NTEREST EXPENDITURE, WHICH WAS NOT ALLOWABLE AS PER PROVISIONS OF SECTIO N 14A READ WITH RULE 8D AT RS. 91,549/-. AGGRIEVED BY THE ORDER OF A.O, ASS ESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO GRANTED PARTIAL RELIEF TO THE ASSESSEE BY HOLDING AS UNDER:- 3.2 I HAVE CONSIDERED THE MATTER. APPELLANT INCURRE D INTEREST EXPENDITURE OF RS.4,15,217/- ON BORROWED FUNDS. EXCEPT FOR MAKING A GENERAL STAT EMENT ABOUT INVESTMENT IN TAX FREE INCOME YIELDING ASSETS BEING OUT OF SURPLUS FUNDS, APPELLANT HAS NOT FILED ANY EVIDENCE IN SUPPORT OF SUCH CONTENTION. BUSINESS FUNDS ARE MIXE D UP AND IT CANNOT BE ACCEPTED THAT ITA NO 2212/ AHD/2011 . A.Y. 2007-08 3 FUNDS DEPLOYED FOR EARNING TAX FREE INCOME WERE ENT IRELY OUT OF INTEREST FREE FUNDS AND THE ENTIRE INTEREST COST IS TO BE LOADED ON TO ACTIVITI ES RESULTING IN TAXABLE INCOME. MERELY BECAUSE APPELLANT HAD POSITIVE NETWORTH OR DURING T HE YEAR, BORROWINGS INCREASED BY A FIGURE LOWER THAN INVESTMENTS MADE DOES NOT MEAN TH AT ENTIRE TAX FREE INCOME YIELDING ACTIVITIES WERE CARRIED OUT BY DEPLOYING OWN OR SUR PLUS FUNDS. WHERE TAX FREE INCOME EARNING ACTIVITIES AND TAXABLE INCOME EARNING ACTIV ITIES ARE BOTH CARRIED OUT USING THE COMMON KITTY OF FUNDS, IT WOULD BE REASONABLE TO AP PORTION THE INTEREST BURDEN BETWEEN THE TWO ACTIVITIES. AS FAR AS DECISIONS RELIED UPON BY THE APPELLANT ARE CONCERNED, IN THE CASE OF HERO CYCLES, TRIBUNAL REACHED A FINDING OF FACT THAT INTEREST INCOME EXCEEDED INTEREST EXPENDITURE AND INVESTMENTS IN TAX FREE IN STRUMENTS WERE ENTIRELY OUT OF DIVIDEND, SALE PROCEEDS OF SHARES, DIVIDEND REDEMPTION ETC. T HE TRIBUNAL, THEREFORE CONCLUDED THAT THERE WAS NO EVIDENCE TO SAY THAT ASSESSEE INCURRED INTEREST EXPENDITURE IN RELATION TO EARNING OF TAX EXEMPT INCOME. THIS DECISION AND OTH ER DECISIONS RELIED UPON BY THE APPELLANT ARE BASED ON FACTS OF THESE CASES AND CAN NOT BE IPSO FACTO EXTENDED TO APPELLANT'S CASE. FROM AY 2008-09 ONWARDS, RULE 8D PROVIDES MECHANISM OF ATTRIBUTING INTEREST FOR THE PURPOSE OF SECTION 14A. APPELLANT' S SUBMISSION TO REDUCE INTEREST INCOME FROM INTEREST BEING APPORTIONED IS NOT ACCEPTABLE, SINCE RULE 8D MECHANISM ITSELF TAKES CARE OF APPORTIONMENT OF INTEREST BETWEEN VARIOUS S OURCES OF INCOME, INTEREST RECEIPT BEING ONE SUCH SOURCE. FURTHER, IT CANNOT BE ACCEPT ED THAT EXPENDITURE OF ADMINISTRATIVE OR MANAGERIAL NATURE WAS NOT AT ALL INCURRED TO EAR N TAX FREE INCOME FROM INVESTMENTS OF RS.55,66,401/-. INVESTMENT DECISIONS ARE STRATEGIC DECISIONS REQUIRING TIME AND EFFORT ON PART OF TOP MANAGEMENT AND OTHER EMPLOYEES. MANAGEM ENT/MAINTENANCE OF INVESTMENT PORTFOLIO ALSO REQUIRES TIME AND EFFORT BESIDES PAP ER WORK ON PART OF EMPLOYEES. ATTRIBUTION OF PART OF EMPLOYEE COSTS TOWARDS INVES TMENT ACTIVITIES IS THEREFORE JUSTIFIED. ONCE INCURRING OF EXPENDITURE TOWARDS MANAGERIAL AN D ADMINISTRATIVE PURPOSES FOR EARNING INVESTMENT INCOME CANNOT BE RULED OUT, IT I S A CASE FALLING UNDER SUB-SECTION (2) OF SECTION 14A, I.E. CORRECTNESS OF APPELLANT'S CLA IM THAT NO EXPENDITURE WAS INCURRED FOR EARNING TAX FREE INCOME IS INCORRECT. THE EXPENDITU RE ATTRIBUTABLE TO EARNING OF TAX FREE INCOME IS THEN TO BE DETERMINED IN A REASONABLE MAN NER AND NOT RULE 8D FOR AY 2007- 08, AS PER DECISIONS BY MUMBAI HIGH COURT IN THE CA SE OF GODREJ & BOYCE MANUFACTURING CO. LTD. EVEN THOUGH RULE 8D IS NOT A PPLICABLE FOR AY 2007-08, WORKING AS PER RULE 8D IS CONSIDERED REASONABLE. DISALLOWAN CE OF RS.47,863/- U/S 14A, THEREFORE IS CONFIRMED. 5. AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS N OW IN APPEAL BEFORE US. 6. BEFORE US, LD. A.R. SUBMITTED THAT THE YEAR UNDER C ONSIDERATION BEING A.Y. 2007-08, THE PROVISIONS OF RULE 8D ARE NOT APPLICAB LE AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (20 10) 328 ITR 81 (BOM) AND THEREFORE NO DISALLOWANCE COULD BE MADE B Y USING THE METHOD PRESCRIBED UNDER RULE 8D. HE FURTHER SUBMITTED THAT ASSESSEE HAD SUFFICIENT ITA NO 2212/ AHD/2011 . A.Y. 2007-08 4 NON INTEREST BEARING FUNDS IN THE FORM OF SHARE CAP ITAL AND RESERVES AND SURPLUS AND THEY WERE FAR IN EXCESS OF THE INVESTME NTS AND TO SUPPORT IT HE FURTHER POINTED TO THE SCHEDULE OF INVESTMENTS WHI CH FORMED PART OF BALANCE SHEET AS ON 31.03.2007 AND WHICH WAS PLACED AT PAGE 6 OF THE PAPER BOOK. APART FROM THE AFORESAID, HE ALSO POINTED OUT THAT THE INVESTMENTS OF RS. 55.66 LACS ALSO INCLUDED FIXED DEPOSITS WITH BANK O F RS. 16.65 LACS AND THE INTEREST EARNED ON FIXED DEPOSITS FROM BANKS ARE NO T TAX FREE INCOME. HE FURTHER PLACED RELIANCE ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. TORRENT POWER LTD. 2014 44 TAXMAN.C OM441 (GUJ) AND THE DECISION IN THE CASE OF CIT VS. UTI BANK LTD. (2013 ) 32 TAXMAN.COM 370 (GUJ.) TO SUPPORT HIS CONTENTION THAT IN A CASE WHE RE INTEREST FREE FUNDS ARE MORE THAN INVESTMENTS, NO DISALLOWANCE U/S. 14A COU LD BE MADE. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O A ND LD. CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS DISALLOWANCE OF EXPENS ES U/S. 14A. IT IS AN UNDISPUTED FACT THAT ASSESSEE HAS EARNED TAX FREE I NCOME IN THE FORM OF DIVIDENDS OF RS. 6,17,337/- AND THE YEAR UNDER CONS IDERATION IS A.Y. 2007- 08. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GO DREJ & BOYCE MANUFACTURING COMPANY LTD. (SUPRA) HAS HELD THAT PR OVISIONS OF RULE 8D WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24.03.200 8 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 08-09 AND THEREFORE IN VIEW OF THE AFORESAID DECISION OF HONBLE BOMBAY HIGH COURT, THE PROVISIONS OF RUL E 8D ARE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. ON PERU SING THE INVESTMENT SCHEDULE WHICH IS PLACED AT PAGE 6 OF THE PAPER BOO K, IT IS SEEN THAT THE INVESTMENTS AFTER EXCLUDING THE FIXED DEPOSITS PLAC ED WITH BANK OF INDIA, (THE INTEREST FROM WHICH IS TAXABLE), THE INVESTMEN T AS AT THE 31 ST MARCH 2007 ITA NO 2212/ AHD/2011 . A.Y. 2007-08 5 WORKS OUT TO RS. 38.92 LACS AS AGAINST THE INTEREST FREE SHAREHOLDERS FUND COMPRISING OF SHARE CAPITAL AND RESERVES AND SURPLU S OF RS. 80.53 LACS WHICH INDICATES THE AVAILABILITY OF INTEREST FREE F UNDS TO BE IN EXCESS OF THE INVESTMENT. WE FIND THAT HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. UTI BANK (SUPRA) HAS HELD THAT IF THERE ARE SUFFICI ENT INTEREST FREE FUNDS TO MEET TAX FREE INVESTMENTS, THEY ARE PRESUMED TO HAV E BEEN MADE FROM INTEREST FREE FUNDS AND NOT LOAN FUNDS AND NO DISAL LOWANCE CAN BE MADE U/S. 14A. A SIMILAR VIEW HAS BEEN TAKEN BY HONBLE GUJA RAT HIGH COURT IN THE CASE OF CIT VS. TORRENT POWER (SUPRA) WHERE THE HON BLE GUJARAT HIGH COURT HAS HELD THAT WHERE IT WAS APPARENT FROM RECO RDS THAT ASSESSEE HAD SUFFICIENT FUNDS FOR MAKING INVESTMENTS IN SHARES A ND IT HAD NOT USED BORROWED FUNDS FOR SUCH PURPOSE, A.O WAS NOT JUSTIF IED IN INVOKING PROVISIONS OF SECTION 14A TO DISALLOW INTEREST EXPE NDITURE. IN VIEW OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT NO DISALLO WANCE ON ACCOUNT OF INTEREST CAN BE MADE IN THE PRESET CASE. AS FAR AS DISALLOWANCE WITH RESPECT TO ADMINISTRATIVE EXPENSES IS CONCERNED, WE FIND TH AT LD. CIT(A) HAS NOTED THAT INCURRING OF NO EXPENDITURE OF ADMINISTRATIVE OR MANAGERIAL NATURE WAS NOT ACCEPTABLE IN VIEW OF THE FACT THAT INVESTMENT DECISIONS ARE STRATEGIC DECISIONS REQUIRING TIME AND EFFORT ON PART OF TOP MANAGEMENT AND OTHER EMPLOYEES AND MAINTENANCE AND MANAGEMENT OF INVESTM ENT PORTFOLIO ALSO REQUIRE TIME AND EFFORT BESIDES PAPER WORK ON PART OF EMPLOYEE. BEFORE US, LD. A.R. APART FROM MAKING ORAL SUBMISSION OF NOT I NCURRING ANY ADMINISTRATIVE EXPENSES FOR EARNING OF TAX FREE INC OME HAS NOT PLACED ANY MATERIAL ON RECORD TO SUPPORT THE CONTENTIONS. WE A LSO FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SU PRA) HAS THOUGH HELD THAT PROVISIONS OF RULE 8D ARE NOT APPLICABLE PRIOR TO A.Y. 2008-09 BUT HAS FURTHER HELD THAT A REASONABLE BASIS HAS TO BE ADOP TED BY A.O TO DETERMINE ITA NO 2212/ AHD/2011 . A.Y. 2007-08 6 THE DISALLOWANCE OF EXPENDITURE. CONSIDERING THE AF ORESAID FACTS, AND IN VIEW OF THE OBSERVATIONS MADE BY LD. CIT(A), WE ARE OF T HE VIEW THAT THE ENDS OF JUSTICE SHALL BE MET IN THE PRESENT CASE IF DISALLO WANCE U/S. 14A IS ESTIMATED AND RESTRICTED TO RS. 15,000/-. WE THUS DIRECT ACCO RDINGLY. 8. IN THE RESULT, THE GROUND OF APPEAL IS PARTLY ALLO WED. 9. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN OPEN COURT ON 10 - 04 - 2015. SD/- SD/- (SHAILENDRA KR. YADAV) (ANI L CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD