Devarsons Industries Pvt.Ltd., Ahmedabad V. The ACIT.,(OSD),Range-1, Ahmedabad

ITA 2485/AHD/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9903 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-11-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 22-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: B T THAKKAR
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD , , BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ./ I.T.A. NO.2485/AHD/2014 ( / ASSESSMENT YEAR : 2009-10) DEVARSONS INDUSTRIES LTD. 441, GIDC ESTATE ODHAV AHMEDABAD-382 445 / VS. THE ACIT (ODS) RANGE-1 AHMEDABAD # ./ ./ PAN/GIR NO. : AAACD 9671 M ( #% / APPELLANT ) .. ( &#% / RESPONDENT ) #%' / APPELLANT BY : SHRI B.T.THAKKAR, AR &#%(' / RESPONDENT BY : SHRI JAMES KURIAN, SR.DR )*(+ / DATE OF HEARING 09/11/2016 ,-./(+ / DATE OF PRONOUNCEMENT 25/11/2016 / O R D E R PER PRADIP KUMAR KEDIA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-III, AHMEDABAD [CIT(A) IN SHORT] DATED 30/09/2013 FOR ASSESSMENT YEAR (AY)200 9-10. 2. IN THE PRESENT APPEAL THE ASSESSEE IS AGGRIEVED BY THE ADDITION OF RS.9,75,698/- ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 14A OF THE ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 2 - INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'T HE ACT') BY APPLYING RULE 8D OF THE INCOME TAX RULES, 1962. 3. THE FACTS APROPOS TO THE ISSUE ARE THAT THE ASS ESSEE IS AN INDUSTRIAL PVT.LTD. COMPANY ENGAGED IN MANUFACTURING, SALES AN D EXPORTS OF DYES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER (AO) OBSERVED THAT ASSESSEE-COMPANY HAS EARNED DIVIDEND INCOME OF RS.41,21,853/- WHICH IS CLAIMED TO BE EXEMPT UNDER SECTION 10(34) OF THE ACT. IT WAS NOTED BY THE AO THAT THE ASSESSEE HOLD S INVESTMENT TO THE TUNE OF RS.23,62,86,676/- AS ON 31/03/2009. THE A SSESSEE HAS CLAIMED INTEREST OF RS.24,691/-. IN ADDITION TO THIS, SOME ADMINISTRATIVE/OTHER EXPENSES ARE ATTRIBUTABLE TO EARN THE TAX-FREE INCO ME BY WAY OF DIVIDEND WHICH WARRANTS DISALLOWANCE UNDER SECTION 14A OF T HE ACT. IN REPLY TO THE SHOW-CAUSE NOTICE, THE ASSESSEE SUBMITTED BEFOR E THE AO THAT INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE-COMPANY OUT OF ITS OWN FUNDS. THE ASSESSEE-COMPANY HAS NO BORROWED FUNDS AND THEREFORE, QUESTION OF INVESTMENT OUT OF BORROWED FUNDS DOES N OT ARISE. THE ASSESSEE HAS NOT MADE ANY SUO MOTU DISALLOWANCE TOWARDS EXPENDITURE ATTRIBUTABLE TO TAX-FREE INCOME. THE AO INVOKED T HE FORMULA LAID DOWN UNDER RULE 8D OF THE IT RULES AND COMPUTED THE DISA LLOWANCE OF RS.12,343/- UNDER RULE 8D(2)(II) OUT OF INTEREST EX PENSES AND RS.9,63,355/- TOWARDS ADMINISTRATIVE AND OTHER EXPE NSES UNDER RULE 8D(2)(III) OF THE ACT. ACCORDINGLY, AGGREGATE DISA LLOWANCE OF ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 3 - RS.9,75,698/- WAS FASTENED ON THE ASSESSEE WHILE FR AMING THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT. 4. FIRST APPEAL OF THE ASSESSEE ON THE ISSUE OF DIS ALLOWANCE UNDER SECTION 14A OF THE ACT WAS DISMISSED BY THE CIT(A). 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE THE TRIBUNAL. 6. THE LD.AR FOR THE ASSESSEE MR.B.T. THAKKAR REITE RATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND S UBMITTED THAT NO INVESTMENT WAS MADE BY THE ASSESSEE-COMPANY OUT OF BORROWED FUNDS. THE ASSESSEE-COMPANYS SHARE CAPITAL AND RESERVES A RE MUCH HIGHER THAN THE TOTAL AMOUNT OF INVESTMENT AT ANY POINT OF TIME . SURPLUS MONEY HAS BEEN INVESTMENT IN THE MUTUAL FUNDS AND OTHER LONG TERM INVESTMENTS AND OTHER INVESTMENTS ARE HELD AS LONG TERM INVESTMENTS SINCE NUMBER OF YEARS. NO STAFF IS ENGAGED AND NO EXPENSES HAVE B EEN INCURRED FOR THE ADMINISTRATION OF THE INVESTMENTS. FOR THIS REASON , SECTION 14A OF THE ACT HAS NO APPLICATION IN THE PRESENT FACTS OF THE CASE. THE LD.AR URGED THAT THE AO HAS INDULGED IN MAKING DISALLOWANCE WIT HOUT POINTING OUT A SINGLE INSTANCE OF ANY DIRECT OR INDIRECT EXPENDITU RE INCURRED BY THE ASSESSEE FOR EARNING THE DIVIDEND INCOME WHICH IS E XEMPT FROM INCOME TAX ACT. THERE IS NO FINDING BY THE AO AS TO HOW M UCH EXPENDITURE HAVE BEEN INCURRED BY THE ASSESSEE FOR EARNING THE DIVIDEND INCOME. ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 4 - UNDER THE CIRCUMSTANCES, THE ORDER OF THE CIT(A) RE QUIRES TO BE SET ASIDE AND DISALLOWANCE MADE UNDER SECTION 14A REQUIRES TO BE CANCELLED. 7. THE LD.DR, ON THE OTHER HAND, RELIED UPON THE OR DER OF THE CIT(A) AND SUBMITTED THAT IN FURTHERANCE THAT THE ADMINIST RATION OF SUCH INVESTMENTS HELD BY THE JUDICIAL ENTITY CONTINUOUS MONITORING AND ENGAGEMENT OF THE MANAGEMENT AND SENIOR EMPLOYEES O F THE ASSESSEE- COMPANY. THE ASSESSEE-COMPANY HAS NOT SHOWN ANY E XPENDITURE WHATSOEVER ATTRIBUTABLE TO THE TAX-FREE INCOME. TH EREFORE, THE ONUS CONTINUES TO LIE ON THE ASSESSEE THAT NO EXPENDITUR E WHATSOEVER HAS BEEN INCURRED OR ATTRIBUTABLE IN RELATION TO TAX-FREE IN COME AS CONTEMPLATED UNDER SECTION 14A OF THE ACT. THE ASSESSEE HAVING FAILED TO DISCHARGE THE ONUS, THE COMPUTATION OF DISALLOWANCE AS PER ST ATUTORY FORMULA PRESCRIBED UNDER SECTION RULE 8D IS JUSTIFIED AND N O INTERFERENCE IS CALLED FOR. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE S OLITARY ISSUE FOR ADJUDICATION IS CORRECTNESS OF THE DISALLOWANCE UND ER SECTION 14A OF THE ACT. WE NOTE THAT THE ASSESSEE HOLDS SUBSTANTIAL I NVESTMENTS WHICH IS PEGGED AT RS.41.92 CRORES AS ON 31/03/2009 AND RS.3 5.16 CRORES AS ON 31/03/2008. WE SIMULTANEOUSLY NOTE FROM THE STATE MENT OF FACTS FILED BEFORE THE CIT(A) THAT ASSESSEE IN ITS OWN ADMISSIO N HAS ADMITTED THAT ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 5 - ONE OF THE DIRECTORS USED SO DEVOTE ONE HOUR PER WE EK FOR THE ADMINISTRATION OF THE INVESTMENT. NONETHELESS, THE ASSESSEE HAS NOT RECORDED ANY AMOUNT ATTRIBUTABLE TO THE EARNING OF TAX-FREE INCOME BY WAY OF DIVIDEND. 9. WE DO NOT FIND ANY RATIONALE IN THE ARGUMENT PUT FORTH ON BEHALF OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT I S AN COMMON KNOWLEDGE THAT HOLDING OF SUCH INVESTMENTS WOULD EN TAIL ORDINARY EXPENSES LIKE DEMAT CHARGES AND ENGAGEMENT OF SENI OR MANAGEMENT. WE ALSO NOTICE THAT THERE ARE SEVERAL INSTANCES OF CHANGE IN THE INVESTMENT DURING THE YEAR QUA THE INVESTMENTS HELD IN THE PREVIOUS YEAR. NATURALLY, THE BOARD AND SENIOR MANAGEMENT HAS DEVO TED TIME AND ATTENTION IN THE DECISION MAKING PROCESS. THEREF ORE, THE CONTENTION OF THE ASSESSEE ABOUT NIL ADMINISTRATIVE EXPENDITURE F OR HOLDING THE INVESTMENT STANDS BELIED IN THE FACTS OF THE CASE. IN THE EVENT, THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED BY HIM IN RELATION TO EXEMPT INCOME, THE CASE GETS COVERED BY SECTION 14A(3) OF THE ACT. SECTION 14A(3) OF THE ACT SPECIFICALLY EXCLUDES AP PLICABILITY OF SECTION 14A(2) AND SHIFTS THE BURDEN ENTIRELY ON ASSESSEE T O ESTABLISH ABSENCE, IF ANY, OF EXPENDITURE DISALLOWABLE UNDER SECTION 14A OF THE ACT. BESIDES, RULE 8D(2)(III) OF THE IT RULES, 1962 HAS BEEN ENAC TED FOR SUCH EVENTUALITIES WHERE IT IS NOT POSSIBLE TO ALLOCATE THE INDIRECT EXPENDITURE ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 6 - TOWARDS ADMINISTRATION, ETC. WITH ANY SCIENTIFIC AC CURACY. IN THE CIRCUMSTANCES, WE DO NOT SEE ANY LOGIC IN THE ARGUM ENTS OF THE ASSESSEE IN SO FAR AS DISALLOWANCE UNDER RULE 8D(2)(III) IS CONCERNED. HOWEVER, IN SO FAR AS DISALLOWANCE OF INTEREST TOWARDS INTER EST IS CONCERNED, WE FIND THAT THE AVERMENT MADE ON BEHALF OF THE ASSESSEE TH AT THE OWN CAPITAL TOGETHER WITH ACCUMULATED RESERVES ARE IN EXCESS OF CORRESPONDING INVESTMENT REMAINS UNREBUTTED. THEREFORE, IN VIEW OF THE LONG LINE OF THE JUDICIAL PRECEDENT ON THE ISSUE, THE DISALLOWANCE T OWARDS PROPORTIONATE INTEREST UNDER RULE 8D(2)(II) IS NOT SUSTAINABLE IN THE FACTS. AS A RESULT, ORDER OF THE CIT(A) IS PARTIALLY ALLOWED IN TERMS O F OUR OBSERVATIONS NOTED ABOVE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTY ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 25 / 1 1 /2016 SD/- SD/- () ( ) (RAJPAL YADAV) ( PRADIP KUMAR KEDIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 25/ 11 /2016 3..),.)../ T.C. NAIR, SR. PS ITA NO.2485/AHD /2013 DEVARSONS INDUSTRIES P LTD. VS. ACIT ASST.YEAR 2009-10 - 7 - !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. #% / THE APPELLANT 2. &#% / THE RESPONDENT. 3. 456+ 7+ / CONCERNED CIT 4. 7+ ( ) / THE CIT(A)-III, AHMEDABAD 5. 89:+)56 , 56/ , 4 / DR, ITAT, AHMEDABAD 6. :<* / GUARD FILE. / BY ORDER, &8++ //TRUE COPY // / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 22.11.16 (DICTATION-PAD 14- PAGES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 23.11.16 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 25.11.16 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 25.11.16 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER