M/s. Hema Engineering Industries Limited, New Delhi V. DCIT, New Delhi

ITA 2326/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6697 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-07-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 16-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K SAROHA
• Keywords: Earning of tax free income; Question of law
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER ITA NO. 2326/DEL/2014 ASSTT. YRS: 2010-11 HEMA ENGINEERING INDUSTRIES LTD., VS. DCIT, CIRCLE 12(1), C/O M/S WAHI & CO., NEW DELHI. K-1, KAILASH COLONY, NEW DELHI. PAN: AAACH 0118 F ( APPELLANT ) (RESPONDENT) APPELLANT BY : SHRI ANIL KUMAR MALHOTRA CA RESPONDENT BY : SHRI A. K. SAROHA CIT(DR) DATE OF HEARING : 26/07/2016. DATE OF ORDER : 29/07/2016. O R D E R PER S.V. MEHROTRA, A.M: THIS IS ASSESSEES APPEAL AGAINST THE ORDER DATE D 20.02.2014 PASSED BY THE LD. CIT(A)-XV, NEW DELHI, RELATING TO A.Y. 2010-11. 2. SOLE EFFECTIVE GROUND RAISED BY THE ASSESSEE IN ITS APPEAL IS AS UNDER: DISALLOWANCE U/S 14A READ WITH RULE 80 THE HON'BLE CIT(A) HAS DIRECTED LD. DCIT TO RECOMPU TE THE DISALLOWANCE U/S 14A WITHOUT ACCEPTING THE CONTENTION THAT THE ASSESSEE HAD SUFFICIENT FUNDS AVAILABLE VIZ GENERAL RESERVE/ OWN FUNDS TO MAKE INVESTMENTS THAN USING THE BORROWED FUNDS AS ASSUME D 2 BY THE LD. DCIT. ALSO THE ASSESSEE OFFERED CALCULAT IONS U/S 14A READ WITH RULE 80 WHERE THE ASSESSEE NETTED THE INTEREST PAID AGAINST INTEREST RECEIVED ON FUNDS GI VEN TO PARTIES OTHER THAN INTEREST ON FOR, THE DISALLOWANC E U/S 14A STOOD AT RS. 41,64,746/- WHICH WAS ALSO TURNED DOWN AND DIRECTED THE LD. A.O. TO RECOMPUTE THE DISALLOW ANCE ACCORDINGLY. THE DISALLOWANCE BY THE CIT(A) IS ARBITRARY, UNJUST IFIED AND PRAYED TO BE EITHER RESTORED TO NIL OR BE MAINT AINED AT RS. 41,64,746/- AS SUBMITTED BY THE ASSESSEE . 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF MAN UFACTURE OF AUTO PARTS FOR TWO WHEELERS AND TO SOME EXTENT OF FOUR WHEELER S AND OTHER ENGINEERING ITEMS AT ITS VARIOUS MANUFACTURING UNITS. IT HAD FI LED ITS RETURN OF INCOME DECLARING INCOME OF RS. 53,430/- AND RS. 5,46,28,80 8/- UNDER THE PROVISIONS OF SECTION 115JB. THE AO NOTICED THAT THE ASSESSEE HAD SHOWN TAX FREE INCOME OF RS. 3,93,701/- BEING DIVIDEND INCOME FROM SBI MUTUAL FUND. HOWEVER, ASSESSEE HAD NOT OFFERED TO TAX ANY DISALL OWANCE ON ACCOUNT OF EXPENSES INCURRED IN ORDER TO EARN TAX FREE INCOME. AFTER CONSIDERING THE ASSESSEES REPLY THE AO DETERMINED THE DISALLOWANCE UNDER RULE 8D AT RS. 77,22,196/- AS PER THE COMPUTATION GIVEN IN THE ASS ESSMENT ORDER. 4. LD. CIT(A) PARTLY ALLOWED THE ASSESSEES APPEAL AND RESTORED THE MATTER TO AO FOR RECOMPUTING THE DISALLOWANCE UNDE R RULE 8D, INTER ALIA, OBSERVING AS UNDER: 3 ON CAREFUL CONSIDERATION, I AM OF THE VIEW THAT SIN CE THE INTEREST INCOME IS ALREADY INCLUDED IN 'TAXABLE INC OME', THEREFORE, THE SCHEME OF RULE 8D WOULD AUTOMATICALL Y, BY DISALLOWING EXPENSES AGAINST EXEMPT INCOME, WILL HA VE THE EFFECT OF LEAVING THE BALANCE EXPENSES (INCLUDI NG INTEREST EXPENSES) AS ALLOWABLE AGAINST TAXABLE INC OME (INCLUDING INTEREST INCOME) AND HENCE THEREFORE, TH ERE IS NO GROUND FOR NETTING OFF OF INTEREST INCOME AGAINS T INTEREST EXPENSES. ACCORDINGLY, THIS PLEA OF APPELL ANT IS DISMISSED. HOWEVER, REGARDING (B), SINCE INTEREST O N TERM LOANS IS SPECIFICALLY FOR BUSINESS PURPOSES INCLUDI NG FOR ACQUISITION OF FIXED ASSETS, THE SAME CANNOT BE TAK EN FOR APPORTIONMENT AGAINST THE EXEMPT INCOME UNDER RULE 80D. THE ID. A.O. IS THEREFORE DIRECTED TO RE-COMPUTE DISALLOWANCE UNDER RULE 80 TO THAT EXTENT. THE APP ELLANT GETS PARTIAL RELIEF ACCORDINGLY . 5. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISA LLOWANCE CANNOT EXCEED THE EXEMPT INCOME RETURNED BY THE ASSESSEE. IN THIS REGARD HE RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF DCM LTD. VS. DCIT (ITA NO. 4467 & 5176/DEL/2012 DATED 1.9.2015, WHEREIN IN PAR A 24 THE TRIBUNAL HAS NOTICED AS UNDER: 24. THE HONBLE DELHI HIGH COURT IN THE CASE OF JO INT INVESTMENT PVT. LTD. VS. CIT, VIDE ITS ORDER DATED 25-2-2015, HAS HELD THAT DISALLOWANCE UNDER SECTION14A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. THE DELHI HIGH COURT IN TH E CASE OF HOLCIM INDIA PVT. LTD., REPORTED IN (2014) 272 CTR 282(DEL), HAS HELD THAT THERE CAN BE NO DISALLOWANCE UNDER SE CTION 14A IN THE ABSENCE OF ANY EXEMPT INCOME. THE RATIONALES BE HIND THESE JUDGMENTS ARE THAT THE AMOUNT OF DISALLOWANCE SHOU LD NOT EXCEED THE EXEMPT INCOME . 4 6. LD. CIT(DR) SUBMITTED THAT BEFORE HONBLE DEL HI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. (SUPRA), RELIED UPON BY LD. COUNSEL, THERE WAS NO QUESTION OF LAW ON THIS COUNT. HE SUBMITTED THAT THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IS BINDING ONLY I F IT DECIDES ON A PARTICULAR QUESTION OF LAW AND NOT OTHERWISE. HE S UBMITTED THAT THERE CANNOT BE ANY CEILING FOR INCOME BUT CEILING CAN BE ONLY F OR EXPENDITURE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E PERUSED THE RECORD OF THE CASE. WE FIND THAT IN THE CASE OF JOINT INV ESTMENT PVT. LTD. (SUPRA), IN PARA 3 THE HONBLE DELHI HIGH COURT HAS OBSERVED AS UNDER: THE ASSESSEES GRIEVANCE WAS THAT THE ENTIRE TAX EX EMPT INCOME (RS. 48,90,000) WAS LOWER THAN THE DISALLOWA NCE. IT, THEREFORE, APPEALED TO THE COMMISSIONER (APPEALS) B UT MET WITH NO SUCCESS. ITS FURTHER APPEAL TO THE TRIBUNAL LIKE WISE MET THE SAME FATE . 8. FURTHER, IN PARA 9 THE HONBLE HIGH COURT HAS OB SERVED AS UNDER: IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT FIRSTLY DISCLOSED WHY APPELLANT/ASSESSEE'S CLAIM FOR ATTRIB UTING RS. 2,97,440 AS A DISALLOWANCE UNDER SECTION '14A HAD T O BE REJECTED. TAIKISHA (SUPRA) SAYS THAT THE JURISDICTI ON TO PROCEED FURTHER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAM INATION OF THE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE ASSESSING OFFIC ER-VAN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE COMMISSIONER ( APPEALS) AND THE TRIBUNAL. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS T HAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,0 00, THE 5 DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARL Y 110 PER CENT OF THAT SUM, I.E., RS. 52,56,197. BY NO STRETC H OF IMAGINATION CAN SECTION 14A OR RULE 80 BE INTERPRET ED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DIS ALLOWED, THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A , AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCU RRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME'. THI S PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT S WALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE . 9. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE D ELHI HIGH COURT, WE DIRECT THE DISALLOWANCE TO BE RESTRICTED TO THE EXT ENT OF DIVIDEND INCOME VIZ. RS. 3,93,701/-. 10. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCEMENT IN OPEN COURT ON 29/07/2016. SD/- SD/- ( C.M. GARG ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 29/07/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.