The Laxmi Salt Co. Ltd., Kolkata V. Income Tax Officer, Ward - 4(1), Kolkata, Kolkata

ITA 2434/KOL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4456 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 28-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 08-10-2013
• Court: TRIBUNAL
• Department Lawyers: S M DAS
• Assessee Lawyers: N ACHARYA BADURI
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

1 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA [BEFORE SHRI M. BALAGANESH, AM & SHRI K. NARASIMHA CHARY, JM] I.T.A NO. 2434/KOL/2013 ASSESSMENT YEAR: 2009-10 THE LAXMI SALT CO. LTD. VS. INCOME-TAX OFFICER, WD-4(1), KOLKATA (PAN: AAACT9721G) ( APPELLANT ) ( RESPONDENT ) DATE OF HEARING: 28.07.2016 DATE OF PRONOUNCEMENT: 23.09.2016 FOR THE APPELLANT: SHRI N. ACHARYA BADURI, AR FOR THE RESPONDENT: SHRI S.M. DAS, JCIT, SR. D R ORDER PER SHRI K. NARASIMHA CHARY, JM: THIS APPEAL BY ASSESSEE IS ARISING OUT OF ORDER OF CIT(A)-IV, KOLKATA VIDE APPEAL NO. 220/CIT(A)-IV/11-12 DATED 24.06.2013. ASSESSME NT WAS FRAMED BY ITO, WARD-4(1), KOLKATA U/S. 143(3) OF THE INCOME TAX ACT, 1961 (HE REINAFTER REFERRED TO AS THE ACT) FOR AY 2009-10 VIDE HIS ORDER DATED 16.12.2011. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A NON BANKING FINANCIAL COMPANY. ASSESSEE DERIVES INCOME FROM BUSINESS, HOUSE PROPER TY, CAPITAL GAINS AND OTHER SOURCES WHICH INCLUDES INCOME FROM DIVIDENDS WHICH IS EXEMP T FROM INCOME TAX. DURING THIS YEAR, ACCORDING TO ASSESSEE, THE INTEREST DERIVED BY THEM FROM FIXED DEPOSITS WAS RS. 17,19,626/- WHEREAS THE INTEREST PAID BY THEM WAS RS. 2,26,082/ - WHICH WAS ALSO DIRECTLY ATTRIBUTABLE TO THE INCOME WHICH IS NOT EXEMPT. ASSESSEE ON THEIR OWN DISALLOWED A SUM OF RS.49,235 ON ACCOUNT OF ACTUAL DIRECT EXPENSES OF STT AND ON AN ESTIMATE BASIS A FURTHER SUM OF RS.15,000/- WHICH INCLUDES AN AMOUNT OF RS.6,901/- DIRECT EXPENSE PERTAINING TO DEPOSITORY CHARGES. ON 26.09.2009, ASSESSEE FILED THE RETURN OF INCOME FOR THE AY 2009-10. WHILE PROCESSING THE SAME UNDER SECTION 143(3) OF THE ACT , LEARNED AO CALCULATED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I. T. RULES, 1962 (HEREINAFTER REFERRED TO AS THE RULES) AND ADDED A SUM OF RS.8,87,670/- OVER AND ABOVE, WHICH WAS ADDED BY THE ASSESSEE. CHALLENGING THE SA ME, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(A) AND THE LEARNED CI T(A) BY WAY OF IMPUGNED ORDER CONFIRMED THE FINDING OF THE LEARNED AO ON THIS ASP ECT. HENCE, THIS APPEAL ON THE FOLLOWING GROUNDS: 2 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 1. FOR THAT THE LD. CIT(A) GROSSLY ERRED BOTH IN LAW AND IN FACT IN NOT DELETING THE ADDITION OF RS.8,87,670/- MADE BY THE A.O. BY APPLYING RULE 8D THOUGH THE SAID RULE IS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE. 2. FOR THAT THE LD. CIT(A) GROSSLY ERRED IN NOT CO NSIDERING THAT IN THE FACTS OF THE CASE WHEN THE ASSESSEE SUO MOTTO ADDED EXPENDITURE RELATING T O EXEMPT INCOME IN THE COMPUTATION, THERE WAS NO NECESSITY FOR THE ASSESSING OFFICER TO APPLY SECTION 14A READ WITH RULE 8D WITHOUT EVEN DISPUTING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, WITH REASONS. 3. FOR THAT THE LD. CIT(A) GROSSLY ERRED IN NOT CO NSIDERING THAT AO WAS WRONG TO HAVE MADE ADDITION ON ACCOUNT OF INTEREST THOUGH THE SAME WAS NOT PAID IN RESPECT OF DIVIDEND INCOME BUT IN CONNECTION WITH THE ASSESSEES BUSINESS AS NBFC. 3. SUBMISSIONS OF THE LEARNED AR ARE MANY FOLD. FI RSTLY, HE SUBMITS THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS FROM WHICH INVESTME NT COULD HAVE BEEN MADE AND NO PART OF THE LOAN WAS UTILIZED FOR THIS PURPOSE. SECONDL Y, INTEREST RECEIVED DURING THE YEAR IS MUCH MORE THAN THE INTEREST PAID AS SUCH THERE IS N O QUESTION OF INCURRING INTEREST ON THE FUNDS INVESTED TO EARN THE EXEMPT INCOME. THERE IS NO COMMON INTEREST EXPENDITURE WHICH IS NEITHER SPECIFICALLY ATTRIBUTABLE TO TAXABLE INC OME NOR ATTRIBUTABLE TO EXEMPT INCOME. LASTLY, HE SUBMITS THAT IF THE LEARNED AO DOES NOT AGREE WITH THE DISALLOWANCE MADE BY THE ASSESSEE IN THE RETURN OF INCOME, IN THE ASSESSMENT ORDER THE LEARNED AO SHOULD HAVE RECORDED THE REASONS AND, THEREFORE, MECHANICAL APP LICATION OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES IS BAD UNDER LAW. BASING ON THESE ARGUMENTS, HE PRAYED TO ALLOW THE APPEAL AND TO QUASH THE ORDERS OR THE AUTHORITI ES BELOW. 4. LEARNED DR, ON THE OTHER HAND, ARGUED THAT T HE ASSESSEE HAS NOT BEEN MAINTAINING SEPARATE ACCOUNTS FOR DERIVING THE EXEMPT AND NON E XEMPT INCOME, AS SUCH, IN VIEW OF THE EXPENSES IN THIS CASE WHICH ARE SPREADING OVER A LA RGE NUMBER OF VOLUMINOUS ACTIVITIES, IT IS NOT POSSIBLE FOR THE AUTHORITIES BELOW TO CALCULATE THE INTEREST AND ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO THE EXEMPT INCOME WITHOUT RESORTING TO SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. WHILE ARGUING SO, HE HEAVILY RELI ED ON THE ORDERS OF THE AUTHORITIES BELOW. 5. IN THE CONTEXT OF ABOVE ARGUMENTS AND FACTS, THE POINT THAT ARISES FOR OUR CONSIDERATION IS WHETHER THE AUTHORITIES BELOW ARE JUSTIFIED IN DISALLOWING A SUM OF RS. 8,87,670/- OVER AND ABOVE WHICH WAS ADDED BY THE AS SESSEE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES? ISSUE: 3 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 6. NOW DURING THE RELEVANT YEAR THE ASSESSEE DEBITE D TO THE P&L ACCOUNT A TOTAL INTEREST AMOUNT OF RS.2,26,082/-. ASSESSEE OFFERED RS. 49,23 5/- WHICH IS DIRECTLY ATTRIBUTABLE TO THE EARNING OF THE EXEMPT INCOME. HENCE 8D(I) IS SATIS FIED. NOW COMING TO THE INTEREST COMPONENT, WE HAVE CAREFULLY GONE THROUGH THE SUBMI SSIONS OF BOTH THE SIDE, PERUSED THE MATERIAL AVAILABLE IN THE PAPER BOOK SUBMITTED BY T HE ASSESSEE AND THE ORDERS OF THE LOWER AUTHORITIES. ASSESSEE PRODUCED THE DETAILS OF INVES TMENT, RESERVES, BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND EXPENSES DETAILS FOR THE YEAR ENDI NG WITH 31.03.2009 BY WAY OF PAPER BOOK. IT CLEARLY SHOWS THE NET WORTH OF SHARE CAPI TAL AND RESERVES OF THE ASSESSEE AS RS.10,53,11,697/-, RS. 16,89,43,308/- AND RS.16,75, 02,472/- AS ON 1.4.2008, 1.4.2009 AND 1.4.2010 RESPECTIVELY, WHEREAS THE INCREASE IN THE INVESTMENTS WAS RS. 31,74,793/- AND RS. 5,16,58,794/- DURING THE YEARS 2008 AND 2009 RESPEC TIVELY. IN THIS FACTUAL SCENARIO, WE FIND THAT THE DECISION REPORTED IN COMMISSIONER OF INCO ME TAX VS. HDFC BANK LTD (2014) 366 ITR 0505 (BOM) APPLIES ON ALL FOURS. IN THAT DECISION IT WAS HELD THAT WHEN ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CU RRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX-FREE SECURITIES, IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AV AILABLE WITH ASSESSEE, AND THE ADDITIONS MADE BY THE AO UNDER RULE 8D(2)(II) BY DISALLOWING THE EXPENDITURE, HAVE TO BE DELETED. 7. NOW COMING TO RULE 8D(2)(III) OF THE RULES, ACCO RDING TO THE ASSESSEE, TOTAL ADMINISTRATIVE EXPENSES INCURRED BY THEM DURING AY 2009-10 WAS ONLY RS.12,58,755/, OUT OF WHICH THE ASSESSEE THEMSELVES DISALLOWED A SUM O F RS. 9,88,053/- TOWARDS BUILDING EXPENSES AND CORPORATE TAX, AS SUCH WHAT REMAINS TO BE CONSIDERED IS ONLY RS.2,70,702/-, ASSESSEE OFFERED A SUM OF RS. 15,000/- WHICH INCLUD ES A SUM OF RS.6,901/- PERTAINING TO DEPOSITORY COSTS, TOWARDS INDIRECT EXPENSES. THE AO SHOULD HAVE CONSIDERED THIS FACT WHILE COMPUTING THE DISALLOWANCE. HOWEVER, HE DID NOT DO SO. HE MECHANICALLY RECORDED THE FOLLOWING : AS PER THE RETURN FOR THE AY 2009-10, THE ASSESSEE HAD EARNED DIVIDEND INCOME DURING THE RELEVANT AY. THE CALCULATION OF DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT TOWARDS EXPENSES ATTRIBUTABLE TO THE EARNING OF EXEMPT INCO ME IS GIVEN BELOW: 1. 2. EXPENSES DIRECTLY ATTRIBUTABLE TO EARNING OF EXEMPT INCOME A. INTEREST PAID DEBITED TO P&L A/C B. AVERAGE INVESTMENTS C. AVERAGE ASSETS AXB (STT) DEPOSITORY CHARGES RS. 2,26,082/- RS.13,14,73,655/- RS.17,06,63,775/- RS. 49,235/- RS. 6,901/- 4 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 3. C 0.5% AVERAGE INVESTMENT TOTAL OF (1+2+3) RS.1,74,166/- RS.6,57,368/- RS.8,87,670/- 8. NOW TURNING TO THE ARGUMENT OF THE LEARNED AR TH AT IN ORDER TO APPLY RULE 8D, RECORDING OF SATISFACTION BY THE AO UNDER THIS SECT ION IS SINE QUA NON AND THE ABSENCE OF SUCH RECORDING OF SATISFACTION RENDERS THE APPLICAT ION OF RULE 8D VITIATED, IS CONCERNED, SECTION 14A(2) MANDATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MA Y BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. RULE 8D(1) OF THE RULES STIPULATES THAT FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO IN COME NOT INCLUDIBLE IN TOTAL INCOME, WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE A CCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THA T NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXP ENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). 9. THEREFORE, IT IS CLEAR FROM THE ABOVE THAT WHEN THE ASSESSEE HIMSELF DISALLOWED SOME AMOUNTS IN RESPECT OF THE EXPENSES ATTRIBUTABLE TO THE EXEMPT INCOME, THE LEARNED AO ASSUMES JURISDICTION TO INVOKE SECTION 14A OF THE A CT READ WITH RULE 8D OF THE RULES ONLY WHEN HE REACHES A CONCLUSION THAT THE CLAIM OF EXPE NDITURE MADE BY THE ASSESSEE IS NOT CORRECT. HE IS REQUIRED BY LAW TO RECORD HIS NON-SA TISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF THE PREVIOUS YEAR. LD. AR PLACED RE LIANCE ON A DECISION REPORTED IN MAXOPP INVESTMENT LTD. & ORS. VS. COMMISSIONER OF I NCOME TAX (2012) 247 CTR 0162 (DEL) FOR THE PRINCIPLE THAT EVEN PRIO R TO THE INTRODUCTION OF SUB-SS. (2) AND (3), SECTION 14A WOULD REQUIRE THE AO TO FIRST REJE CT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE, SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS AND IT IS ONLY THEN THAT THE QUESTION OF DETERMINATION OF SUC H EXPENDITURE BY THE AO WOULD ARISE. FOR THIS PROPOSITION HE ALSO PLACED RELIANCE ON THE DEC ISIONS REPORTED IN 347 ITR 272 (DEL), 361 ITR 131(P&H), 372 ITR 694(DEL), 376 ITR 390(DEL), A ND 378 ITR 240 (DEL). 5 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 10. IN COMMISSIONER OF INCOME TAX, CENTRAL-I, CALC UTTA VERSUS ASHISH JHUNJHUNWALA G.A. NO. 2990 OF 2013, WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT OF CALCUTTA CONFIRMED THE FOLLOWING OBSE RVATIONS OF THIS TRIBUNAL IN ITA NO 1809/KOL/2012: WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REG ARD TO EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPTED INCOME, THE AO HAS TO INDICATE COGENT REASONS FOR THE SAME. FROM THE FACTS OF THE PRESENT CASE, IT IS NOTICED T HAT THE AO HAS NOT CONSIDERED THE CLAIM OF THE ASSESSEE AND STRAIGHT AWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D OF THE RULES ON PRESUMING THE AVERAGE VALUE OF INVESTMENT AT % OF THE TOTAL VALUE. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N IN THE CASE OF J.K. INVESTORS (BOMBAY) LTD., SUPRA, WE UPHOLD THE ORDER OF CIT (A) 11. FROM THE ABOVE DISCUSSION, WE CONCLUDE THAT OWN FUNDS OF THE ASSESSEE ARE SUFFICIENTLY IN EXCESS OF INVESTMENTS AND THE LEGAL REQUIREMENT OF THE AO TO RECORD THE REASONS FOR RESORTING TO SECTION 14A OF THE ACT REA D WITH RULE 8D OF THE RULES IN THIS MATTER ARE CONSPICUOUSLY ABSENT. VIEWING FROM ANY ANGLE, WE ARE CONVINCED THAT THERE IS NO JUSTIFICATION FOR THE AUTHORITIES BELOW TO SUSTAIN DISALLOWING A SUM OF RS.8,87,670/- OVER AND ABOVE WHICH WAS ADDED BY THE ASSESSEE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. FOR THESE REASONS, WHILE ANSWERING THIS ISSUE IN TH E NEGATIVE, WE HOLD THAT THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN DISALLOWING A SUM OF RS.8,87,670/- OVER AND ABOVE WHICH WAS ADDED BY THE ASSESSEE UNDER SECTION 14A O F THE ACT READ WITH RULE 8D OF THE RULES, AND ANY ADDITION ON SUCH SCORE HAS TO BE DEL ETED. WE ORDER ACCORDINGLY. 12. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWE D. 13. ORDER IS PRONOUNCED IN THE OPEN COURT ON 23.09. 2016 SD/- SD/- (M. BALAGANESH) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 23RD SEPTEMBER, 2016 JD.(SR.P.S.) 6 ITA NO. 2434/KOL/2013 THE LAXMI SALT CO. LTD. AY 2009-10 COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT THE LAXMI SALT CO. LTD., 21, STRAND ROA D, KOLKATA-700 001. 2 RESPONDENT ITO, WARD-4(1), KOLKATA. 3 . THE CIT(A), KOLKATA 4. 5. CIT , KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .