Ragini Finance Limited, Kolkata V. Income Tax Officer, Ward - 4(1), Kolkata, Kolkata

ITA 2435/KOL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4204 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 06-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 08-10-2013
• Court: TRIBUNAL
• Department Lawyers: DINABANDHU NASKAR
• Assessee Lawyers: KALYAN ACHARYA BHADU RI
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL,B BENCH KOLKATA BEFORE : SHRI M.BALAGANESH, ACCOUNTANT MEMBER AND SHRI S.S.VISWANETHRA RAVI, JUDICIAL MEMBER ITA NO. 2435/KOL/2013 A.Y 2009-10 M/S. RAGINI FINANCE LIMITED VS. I.T.O WA RD 4(1), KOLKATA PAN: AABCR 2321R [APPELLANT] [RESPONDENT] APPELLANT BY : SHRI KALYAN ACHARYA BHADU RI, AR RESPONDENT BY : SHRI DINABANDHU NASKAR , ADDL.CIT, DR DATE OF HEARING : 06-10-2016 DATE OF PRONOUNCEMENT : 25-11-2016 ORDER SHRI S.S.VISWANETHRA RAVI, JM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 24-06-2013 PASSED BY THE COMMISSIONER OF INCO ME TAX(APPEALS)-IV, KOLKATA FOR THE ASSESSMENT YEAR 20 09-10. 2. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS TO BE DECIDED IS AS TO WHETHER THE CIT-A JUSTIFIED IN CONFIRMING THE ADDIT ION MADE BY THE AO TO AN EXTENT OF RS.11,94,800/- UNDER RULE 8D OF INCOME TA X RULES,1962 FOR SHORT RULES HEREAFTER R/W SEC 14A OF THE ACT IN THE FACTS AND CIRCUMSTAN CES OF THE CASE. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A NON-BANKING FINANCIAL COMPANY FOR SHORT NBFC HEREAFTER AND ENGAGED IN THE BUSINESS OF CAPITAL GAIN AND DERIVING ITS INCOME FROM OTHER SOURCES. THE ASS ESSEE FILED ITS RETURN OF INCOME ON 26-09-2009. UNDER SCRUTINY, NOTICE U/S. 1 43(2) OF THE ACT WAS ISSUED. IN RESPONSE, THE ASSESSEE PRODUCED RELEVANT BOOKS OF ACCOUNT AND OTHER DOCUMENTS. ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 2 4. DURING SUCH PROCEEDINGS THE AO FOUND THAT THE AS SESSEE EARNED DIVIDEND INCOME TO AN EXTENT OF RS.1.25 CRORES. THE ASSESSEE WHILE CLAIMING SUCH INCOME AS EXEMPT DISALLOWED AN AMOUNT OF RS.1, 00,335/-ON ITS OWN AS EXPENDITURE INCURRED TOWARDS EARNING OF SUCH DIVIDE ND INCOME. THE AO APPLIED RULE 8D(2) OF THE RULES FOR THE PURPOSE OF CALCULATION OF DISALLOWANCE OF EXPENSES U/S. 14A OF THE ACT ATTRIB UTABLE TO IN EARNING OF EXEMPT INCOME AS UNDER:- 1. EXPENSES DIRECTLY ATTRIBUTABLE TO EARNING OF EXEMPT INCOME (STT ALREADY DISALLOWED ) RS.99,335/- DEPOSITORY CHARGES RS. 5,886/- 2. A. INTEREST PAID DEBITED TO P & L A/C RS. 9 ,23,939/- B. AVERAGE INVESTMENTS RS.21,75,97,507/- C. AVERAGE ASSETS RS.24,96,55,542/- AXB C RS. 8,05,297 3. 0.5% AVERAGE INVESTMENT RS.10,87,987 /- TOTAL ( 1+2+3) RS.18,99,170 LIMITED TO THE TOTAL EXPENSES CLAIMED BY THE ASSESS EE RS.11,94,800/- 5. BY THE ABOVE, THE AO DETERMINED THE EXPENSES THA T WOULD HAVE BEEN INCURRED BY THE ASSESSEE BY COMPUTING THE SAME BY A PPLYING THE METHOD AS CONTEMPLATED IN RULE 8D(2)(I),(II)AND (III) TO AN E XTENT OF RS.11,94,800/-. AGGRIEVED BY SUCH ORDER OF THE AO, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE CIT-A. 6. BEFORE THE CIT-A THE ASSESSEE CONTENDED THAT THE AO DID NOT DISPUTE THE CORRECTNESS OF CALCULATION OR DISALLOWANCE OF E XPENDITURE AS MADE BY THE ASSESSEE ON ITS OWN AND WITHOUT RECORDING THE REASO NS, HE REJECTED THE CALCULATION OF EXPENSES AS SUBMITTED BY THE ASSESSE E AND DISALLOWED THE IMPUGNED ADDITION BY APPLYING RULE 8D(2) OF THE RUL ES. THE ASSESSEE FURTHER SUBMITTED THAT THAT THERE WAS NO COMMON INTEREST EX PENSES ATTRIBUTABLE TO EXEMPT AND NON EXEMPT INCOME. THE ASSESSEE FURTHER SUBMITTED THAT WHEN THE ASSESSEE DISALLOWS THE EXPENSES ON ITS OWN THEN PROVISION OF RULE 8D(2) OF THE RULES DOES NOT APPLY AUTOMATICALLY, UNLESS T HE AO RECORDS HIS SATISFACTION UNDER RULE 8D(1) OF THE RULES AND COMP UTATION OF EXPENSES UNDER RULE 8D(2) DOES NOT ARISE. BEFORE HIM THE LD. A/R OF THE ASSESSEE HAS ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 3 RELIED ON THE DECISION OF KOLKATA TRIBUNAL IN THE C ASE OF CHAMPION COMMERCIAL CO. LTD VS. ACIT, KOLKATA IN ITA NO. 644 /KOL/2012 FOR THE AY 2008-09, WHEREIN IT HELD THAT THE DISALLOWANCE MADE BY THE AO BY APPLYING RULE 8D IS LIABLE TO BE SET ASIDE AND ASSESSEES CA LCULATION FOR DISALLOWANCE SHOULD BE UPHELD. 7. THE CIT-A WAS OF THE OPINION THAT THE DECISIONS WITH REGARD TO INVESTMENTS ARE VERY MUCH COMPLEX AND SUCH DECISION S ON THE INVESTMENT CAN ONLY BE TAKEN BY THE BOARD OF DIRECTORS AND SUC H MEETINGS INCURS SOME ADMINISTRATIVE EXPENSES, BESIDES, INVESTMENT REQUIR ES SUBSTANTIAL MARKET RESEARCH, DAY TO DAY ANALYSIS OF MARKET TRENDS IN O RDER TO ACQUIRE RETENTION AND SALE OF SHARES AND MUTUAL FUNDS. THE CIT-A WAS NOT SATISFIED WITH THE DISALLOWANCE MADE TOWARDS ADMINISTRATIVE AND ESTABL ISHMENT EXPENSES TO AN EXTENT OF RS.4114/- AS DISALLOWED BY THE ASSESSEE O N ITS OWN. HE FOUND THAT THE ORDER OF THE AO IS CORRECT IN RESPECT OF INVOKI NG OF PROVISION OF SECTION 14A (2) OF THE ACT AND COMPUTATION THEREON BY APPLY ING THE RULE 8D(2) AND CONFIRMED THE DISALLOWANCE MADE BY THE AO. 8. THE ASSESSEE IS IN CHALLENGE BEFORE US AGAINST T HE IMPUGNED ORDER OF THE CIT-A. 9. BEFORE US THE LD.AR SUBMITS THAT THE ASSESSEE D ERIVES ITS INCOME NOT ONLY FROM INVESTMENT, BUT ALSO FROM OTHER SOURCES A ND FURTHER SUBMITS THAT THE ASSESSEE EARNED INTEREST INCOME OF RS.26,88,674 /- FROM FIXED DEPOSITS AND PAID INTEREST TO AN EXTENT OF RS. 9,23,949/- ON LY AND ARGUED THAT THE SAID PAYMENT OF INTEREST IS ONLY ATTRIBUTABLE TO IN COME, WHICH IS NOT EXEMPT. HE FURTHER SUBMITS THAT THE ASSESSEE MADE INVESTMEN TS FROM OWN FUNDS TO AN EXTENT OF RS.21,54,78,206/- AND ARGUED THAT THE ASSESSEE HAS OWN SURPLUS FUND OF RS.23,29,52,776/- MORE THAN THE INV ESTMENT AND THE MUTUAL FUNDS AND DEBENTURES ARE ALSO COVERED IN SUCH INVES TMENTS ON WHICH NO EXEMPT INCOME WAS EARNED. THE LD. AR ARGUED THAT T HE AO WITHOUT EXAMINING THE ACCOUNTS OF THE ASSESSEE IN RESPECT O F CORRECTNESS OF SUCH ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 4 ACCOUNT AND WITHOUT GIVING ANY COGENT REASONS WHAT SOEVER FOR REJECTION OF SUCH ACCOUNTS AS PRODUCED BY THE ASSESSEE MECHANICA LLY MADE APPLICABLE UNDER RULE 8D(2) OF THE RULES. IN SUPPORT OF HIS CO NTENTION, RELIED ON THE DECISION OF TRIBUNAL IN THE CASE OF THE LAXMI SALT CO.LTD VS. ITO, KOLKATA IN ITA NO. 2435/KOL/2013 FOR THE AY 2009-10 AND URGED TO SET ASIDE THE IMPUGNED ORDER OF THE CIT-A. 10. ON THE CONTRARY, THE LD.DR ARGUED THAT THE AO R ECORDED HIS SATISFACTION AND THE SAME WAS CONSIDERED BY THE CIT -A IN HIS ORDER AND REFERRED TO PARA NO-2 OF PAGE 6 OF THE IMPUGNED ORD ER OF THE CIT-A. 11. HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIA L AVAILABLE ON RECORD. WE FIND THAT THE SUBMISSIONS OF THE LD.AR WAS SAME AS MADE BEFORE THE CIT-A AND BEFORE US IN RESPECT OF RECORDING OF SATI SFACTION OF THE AO OUGHT TO HAVE CONDUCTED UNDER RULE 8D(1). THE SUB SECTION (2 ) OF SECTION 14A EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDI TURE SAID TO HAVE BEEN INCURRED IN EARNING OF EXEMPT INCOME AS PRESCR IBED UNDER RULE 8D RULES. RULE 8D(1) EXPLAINS THAT THE ASSESSING OFFIC ER SHALL HAVE TO EXAMINE THE CONDITIONS AS PROVIDED IN (A) AND (B) OF RULE 8 D(1). THEREFORE, THE OPTION LEFT TO HIM WHETHER TO ACCEPT THE CORRECTNES S OF THE CLAIMS OF THE ASSESSEE OR TO REJECT THE SAME BY GIVING COGENT REA SONS THEREWITH. IN THE PRESENT CASE, THE ASSESSEE DISALLOWED THE EXPENDITU RE CONSISTING OF ADMINISTRATIVE EXPENSES OF RS.1,96,153/- AND RS.10, 000/- TOWARDS DEPOSITORY CHARGES, PRINTING & STATIONERY AND STAFF COST ON ITS OWN ON ACCOUNT OF ACTUAL DIRECT EXPENSES AS PROVIDED AT PA GE NOS 1&2 OF PAPER BOOK. WE FIND THAT THERE WAS NO SATISFACTION AS REC ORDED BY THE AO WITH REGARD TO THE CLAIMS OF ASSESSEE UNDER RULE 8D(1) O F RULES. 12. THE DECISION OF THE CO-ORDINATE BENCH AS RELIED ON BY THE LD.AR IN THE CASE OF THE LAXMI SALT CO.LTD SUPRA AT PARA NO-6 HELD THAT ANY EXPENDITURE DIRECTLY ATTRIBUTABLE TO EARNING EXEMPT INCOME SATI SFIES RULE 8D(I) OF THE RULES. THE TRIBUNAL DELETED THE ADDITION MADE SPECI FICALLY IN RESPECT OF RULE ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 5 8D(2)(II) BY RELYING ON THE DECISION IN THE CASE OF CIT VS. HDFC BANK LTD REPORTED IN (2014) 366 ITR 0505 (BOM), WHEREIN THE HONBLE BOMBAY HIGH COURT HAS HELD THAT NO ADDITION UNDER RULE 8D(2)(II ) IS MAINTAINABLE, IF ASSESSEES CAPITAL, PROFIT RESERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS ARE HIGHER THAN THE INVESTMENT IN TAX FREE SECURITIES A ND IT WOULD HAVE TO BE PRESUMED THAT INVESTMENTS MADE WOULD BE OUT OF INTE REST FREE FUNDS AVAILABLE. FURTHER WITH REGARD TO RULE 8D(III), THE CO-ORDINATE BENCH HELD THAT THE AO APPLIED 0.5% OF AVERAGE INVESTMENT MECH ANICALLY WITHOUT CONSIDERING THE DISALLOWANCES MADE BY THE ASSESSEE ON ITS OWN. THE RELEVANT PORTION OF THE DECISION SUPRA COVERING THE FACTS AND SUBMISSIONS OF THE LD.AR IN PARAS AT 10 AND 11 IS REPRODUCED HERE IN BELOW: 10. IN COMMISSIONER OF INCOME TAX, CENTRAL-1, CALCU TTA VERSUS ASHISH JHUNJHUNWALA G.A NO. 2990 OF 2013, WHEREIN T HE HON'BLE JURISDICTIONAL HIGH COURT OF CALCUTTA CONFIRMED THE FOLLOWING OBSERVATIONS OF THIS TRIBUNAL IN ITA NO. 1809/KOL/2012: 'WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXE MPTED INCOME, THE A0 HAS TO INDICATE COGENT REASONS FOR THE SAME. FROM THE FACTS OF THE PRESENT CASE, IT IS NOTICED THAT THE AO HAS NOT CONSIDERED THE CLAIM OF THE ASSESSEE AND STRAIGHT AWAY EMBARKED UPON COMPUTING DISALLOWA NCE UNDER RULE 8D OF THE RULES ON PRESUMING THE AVERAGE' VALUE OF INVES TMENT AT % OF THE TOTAL VALUE. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISION IN THE CASE OF J.K INVESTORS (BOMBA Y) LTD., SUPRA, WE UPHOLD THE ORDER OF CIT(A) ' 11. FROM THE ABOVE DISCUSSION, WE CONCLUDE THAT OW N FUNDS OF THE ASSESSEE ARE SUFFICIENTLY IN EXCESS OF INVESTMENT AND THE LE GAL REQUIREMENT OF THE AO TO RECORD THE REASONS FOR RESORTING TO SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES IN THIS MATTER ARE CONSPICUOUSLY AB SENT. VIEWING FROM ANY ANGLE, WE ARE CONVINCED THAT THERE IS NO JUSTIFICAT ION 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 DIS ALLOWING 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 RUL ES, AND ANY ADDITION ON SUCH SCORE HAS TO BE DELETED. WE ORDER ACCORDINGLY. 13. FROM THE ASSESSMENT ORDER, IT IS SEEN THAT THER E WAS NO RECORDING OF REASONS FOR APPLYING OF RULE 8D(2) OF THE RULES BY THE AO. THE AO COMPUTED THE EXPENDITURE UNDER RULE 8D(2) TO AN EXTENT OF RS .11,94,800/- BY ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 6 APPLYING THE FORMULA AS PRESCRIBED THEREIN, IN OTHE R WORDS, SO MECHANICALLY WHICH IS NOT PERMISSIBLE. THE SUBMISSION OF ASSESSE E AS RECORDED BY THE CIT-A IN HIS ORDER CLEARLY SHOWS THAT SURPLUS RESER VE FUNDS OF THE ASSESSEE IS MORE THAN INVESTMENT AND ALSO THAT THE ASSESSEE EAR NED INCOME ON INTEREST ON FIXED DEPOSITS IS ALSO MORE THAN THE INTEREST PA ID BY THE ASSESSE, ACCORDING TO LD.AR EVEN THE SAID PAYMENT OF INTERES T DOES NOT INCLUDE THE EXEMPT INCOME. IT IS ALSO BROUGHT TO OUR NOTICE THA T THE HONBLE JURISDICTIONAL HIGH COURT OF CALCUTTA HAS UPHELD T HE DECISION OF KOLKATA TRIBUNAL IN THE CASE OF DCIT VS. ASHISH JHUNJHUNWAL A. THE PRINCIPLE AS LAID DOWN IN THE AFOREMENTIONED CASE IS CLEARLY APPLICAB LE TO THE FACTS OF THE PRESENT CASE, IN VIEW OF THE SAME, WE HOLD THAT THE AO DID NOT RECORD HIS SATISFACTION IN TERMS OF RULE 8D(1) HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE AS TO HOW THE CLAIM OF DISALLOWANCE U/S. 1 4A MADE BY THE AO IS INCORRECT, BUT INSTEAD AUTOMATICALLY RESORTED TO R ULE 8D(2), WHICH IS BAD IN LAW, AND, THEREFORE, THE ORDER OF THE CIT-A IS QUAS HED IN THIS REGARD AND ADDITION MADE THEREON IS DELETED. ACCORDINGLY, THE SOLE GROUND AS RAISED BY THE ASSESSEE IS ALLOWED. 14. IN VIEW OF ABOVE DISCUSSION AND RESPECTFULLY FO LLOWING THE DECISION OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE OF CIT VS ASHISH JHUNJHUNWALA AND AS RELIED BY THE TRIBUNAL IN THE CASE OF THE LA XMI SALT CO.LTD SUPRA , WE ALLOW THE GROUNDS RAISED BY THE ASSESSEE. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH NOVEMBER,2016 SD/- SD/- M. BALAGANESH S.S.VISWANETHRA RAVI ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 25-11-2016 ITA NO. 2435/KOL/2013 M/S . RAGINI FINANCE LTD 7 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT/ASSESSEE: M/S. RAGINI FINANCE LIMITED 21, STRAND ROAD, KOLKATA-700 001. 2 RESPONDENT/DEPARTMENT : INCOME TAX OFFICER W 4(1) AAYKAR, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069. 3. CIT, 4. CIT(A), 5. DR, KOLKATA BENCHES, KOLKATA **PP/SPS [ TRUE COPY] BY ORDER, ASSTT REGISTRAR