M/s Soyuz Trading Co. Ltd., Kolkata V. Income Tax Officer, Ward - 8(4), Kolkata, Kolkata

ITA 2530/KOL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4541 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 06-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 04-11-2013
• Court: TRIBUNAL
• Department Lawyers: TANUJ KR NEOGI
• Assessee Lawyers: G SUGLA
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B, KO LKATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI M.B ALAGANESH, AM] ITA.2530/KOL/2013 ASSESSMENT YEAR : 2010-11 M/S.SOYUZ TRADING CO.LTD. -VERSUS- I.T.O., WARD-8 (4), KOLKATA KOLKATA (PAN:AAGCS 3371 K) (APPELLANT ) (RESPONDENT) FOR THE APPELLANT : SHRI G.SUGLA, ADVOCATE FOR THE RESPONDENT : SHRI TANUJ KR.NEOGI, JCIT SR .DR DATE OF HEARING : 06.06.2016. DATE OF PRONOUNCEMENT : 08.07.2016. ORDER PER SHRI M.BALAGANESH, AM 1. THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE OR DER OF THE LEARNED CITA IN APPEAL NO. 96/CIT(A)-VIII/KOL/12013 DATED 29.08.2013 AGAIN ST THE ORDER OF ASSESSMENT FRAMED FOR THE ASST YEAR 2010-11 U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE DISALLOWANCE U/S 14A OF THE ACT COULD BE MADE IN THE FACTS AND CIRCU MSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEEE IS ENGAGED IN THE BUSINESS OF MANAGEMENT CONSULTANCY, TRADING AND INVESTMENT ACTI VITIES. DURING THE PREVIOUS YEAR 2009-10 RELEVANT TO THE ASSESSMENT YEAR UNDER APPEA L, IT DERIVED INCOME FROM MANAGEMENT CONSULTANCY SERVICES TO THE TUNE OF RS. 2,40,00,000/- AND DEBITED VARIOUS EXPENSES INCURRED FOR THE PURPOSE OF SUCH BUSINESS. THE LEARNED AO FROM THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE ASSESSEE AND THE INCOME COMPUTATION OBSERVED THAT OUT OF THE TOTAL ASSETS OF THE ASSESS EE, IT HAS SUBSTANTIAL AMOUNT OF INVESTMENT IN SHARES FROM WHICH IT HAD EARNED CONSI DERABLE DIVIDEND INCOME AND ACCORDINGLY SOUGHT TO INVOKE THE PROVISIONS OF SECT ION 14A OF THE ACT. THE LEARNED AO OBSERVED THAT THE ASSESSEE HAD VOLUNTARILY MADE DISALLOWANCE U/S 14A OF THE ACT ITA NO.2530/KOL/2013 M/S. SOYUZ TRADING CO.LTD. A.YR.2010-11 2 TO THE TUNE OF RS. 5,92,667/- . HE HELD THAT THE AS SESSEE OUGHT TO HAVE INVOKED THE PROVISONS OF RULE 8D FOR THE PURPOSE OF MAKING DISA LLOWANCE U/S 14A OF THE ACT AND ACCORDINGLY ARRIVED AT THE DISALLOWANCE U/S 14A FIG URE AT RS. 58,77,703/- AS AGAINST RS. 5,92,667/- . BEFORE THE LEARNED CITA, THE ASS ESSEE STATED THAT IT HAD DERIVED DIVIDEND INCOME OF RS. 2,24,97,711/- FROM FIVE MUTU AL FUNDS AND 4 COMPANIES. IT WAS ARGUED THAT WHILE MAKING DISALLOWANCE IN TERMS OF RULE 8D(2)(III), CONSULTANCY AND PROFESSIONAL FEE EXPENDITURE OF RS. 1,96,48,885 /- IS TO BE EXCLUDED BY THE LEARNED AO AS THE SAME IS DIRECTLY ATTRIBUTABLE TO THE MANA GEMENT CONSULTANCY INCOME DERIVED BY THE ASSESSEE TO THE TUNE OF RS. 2,40,00,000/-. IN THIS REGARD, THE ASSESSEE FILED COPY OF AGREEMENT ENTERED INTO BY IT WITH M/S JINDAL POL YFILMS LTD ALONG WITH THE WRITTEN SUBMISSION. THE ASSESSEE HIGHLIGHTED CLAUSE I OF T HE SAID AGREEMENT WHICH STATED AS UNDER:- CONSULTANT WILL PROVIDE THE MANAGEMENT CONSULTANC Y AND ADVISORY SERVICES TO THE COMPANY IN THE FIELD OF FINANCE, CORPORATE P LANNING, MARKETING (DOMESTIC AND EXPORT) , HUMAN RESOURCES DEVELOPMENT, INFORMAT ION TECHNOLOGY AND OTHER BUSINESS MATTERS AS MAY BE MUTUALLY DISCUSSED FROM TIME TO TIME IN CONSIDERATION OF PAYMENT BY THE COMPANY. 4. THE LEARNED AR STATED THAT THIS CLAUSE IS MANDAT ED ON THE ASSESSEE TO RENDER THE AFORESAID SERVICES IN ORDER TO DERIVE ITS MANAGEMEN T CONSULTANCY INCOME OF RS. 2,40,00,000/-, WHEREAS THE LEARNED CITA ERRONEOUSLY APPLIED THE SAME IN THE REVERSE DIRECTION BY HOLDING THAT THE AFORESAID SERVICES WE RE PROVIDED TO THE ASSESSEE COMPANY FOR ITS INVESTMENT DECISIONS AND ACCORDINGLY HELD T HAT THE CONSULTANCY CHARGES DEBITED IN ITS PROFIT AND LOSS ACCOUNT TO THE TUNE OF RS. 1 ,96,48,885/- IS MEANT ONLY FOR INVESTMENT ACTIVITIES OF THE ASSESSEE. ACCORDINGLY , THE LEARNED CITA DIFFERED FROM THE VIEW TAKEN BY HIS PREDECESSOR ON THIS ISSUE IN ASST YEAR 2009-10 IN FAVOUR OF THE ASSESSEE WHEREIN CONSULTANCY CHARGES PAID WERE MEAN T ONLY FOR CONSULTANCY BUSINESS OF THE ASSESSEE AND NOT FOR INVESTMENT DECISION WIT H CORRESPONDING IMPACT ON DISALLOWANCE U/S 14A OF THE ACT. THE LEARNED AR ARGUED THAT THE LEARNED CITA ON THE MISTAKEN UNDERSTANDING OF THE RELEVANT CLAUSE O F THE AGREEMENT SUPRA HAD HELD THAT THE ASSESSEE HAD FAILED TO PROVE THAT THE CONSULTAN CY FEES INCURRED WAS WHOLLY AND EXCLUSIVELY FOR EARNING MANAGEMENT CONSULTANCY INCO ME. HE FURTHER HELD THAT ITA NO.2530/KOL/2013 M/S. SOYUZ TRADING CO.LTD. A.YR.2010-11 3 ASSESSEE HAS NOT MAINTAINED ANY SEPARATE DETAILS OR ACCOUNTS FOR THE EXPENDITURE INCURRED IN RESPECT OF SUCH HUGE VOLUME OF INVESTME NT ACTIVITY WHICH HAVE YIELDED DIVIDEND INCOME OF RS. 2,24,97,711/- AND ACCORDINGL Y UPHELD THE ADDITION MADE BY THE LEARNED AO U/S 14A OF THE ACT. AGGRIEVED, THE ASSE SSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 1. FOR THAT ON THE FACTS AND UNDER THE CIRCUMSTANC ES OF THE CASE THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) ERRED IN CONFIR MING THE ADDITION OF RS. 58,77,703/- MADE BY THE ASSESSING OFFICER ON ACCOUN T OF DISALLOWANCE OF EXPENSES U/S. 14A OF THE INCOME-TAX ACT. 2. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) ERRED IN NOT ACCEPTING APPEL LANT'S CLAIM THAT OF RS. 2,11,67,771/- WHICH WERE DIRECTLY ATTRIBUTABLE TO C ONSULTANCY BUSINESS SHOULD BE EXCLUDED FROM TOTAL EXPENSES CLAIMED WHILE COMPUTIN G DISALLOWANCE U/S. 14A OF THE INCOME-TAX ACT. 3. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE DISALLOWANCE MADE U/S. 14A READ WITH RULE 80 IS VERY HIGH AND EXCESSIVE. 4. FOR THAT THE APPELLANT CRAVES LEAVE TO TAKE ADDI TIONAL GROUND OR GROUNDS AT OR BEFORE THE TIME OF HEARING. 5. THE LEARNED AR FILED THE DETAILS OF HEAD WISE I NCOME AND RELATED EXPENSES INCURRED FOR EARNING SUCH INCOME IN A TABULAR FORM IN THE PAPER BOOK. HE FILED THE DETAILS OF DIRECT EXPENSES INCURRED FOR EARNING MAN AGEMENT CONSULTANCY INCOME(TAXABLE INCOME) AND COMMON EXPENSES INCURRED FOR BOTH TAXABLE AND NON- TAXABLE INCOME. HE ARGUED THAT AT THE MOST ONLY TH E COMMON EXPENSES COULD BE APPORTIONED BETWEEN TAXABLE AND NON TAXABLE INCOME FOR MAKING DISALLOWANCE U/S 14A OF THE ACT. IN RESPONSE TO THIS, THE LEARNED DR ARGUED THAT THE DISALLOWANCE MADE BY THE ASSESSEE IN THE RETURN IS NOT IN ACCORD ANCE WITH THE STATUTE AND IS ONLY ON AN ADHOC BASIS AND ACCORDINGLY PRAYED FOR NON-INTER FERENCE IN THE ORDER OF THE LEARNED AO. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE. WE FIND THAT THE ASSESSEE HAD DERIVED DIVIDEND INCOME DURING THE YEAR UNDER APPEAL TO THE TUNE OF RS. 2,24,97,711/- FROM FIVE MUTUAL FUNDS AND FROM FOUR DOMESTIC COMPANIES. THE LEARNED AR STATED THAT THE INVESTMENT IN SHARES HAVE BEEN CONTINUING FROM EARL IER YEARS. THE DIVIDEND CHEQUES ITA NO.2530/KOL/2013 M/S. SOYUZ TRADING CO.LTD. A.YR.2010-11 4 WERE RECEIVED THROUGH POST OR WERE DIRECTLY CREDITE D TO THE ASSESSEES BANK ACCOUNT THROUGH ELECTRONIC CLEARING SERVICE (ECS) AND AS SU CH NO MAJOR EXPENSES WERE INCURRED BY THE ASSESSEE FOR EARNING SUCH INCOME AN D COLLECTION OF DIVIDEND CHEQUES. HE ALSO ARGUED THAT NO SEPARATE STAFF WAS EMPLOYED FOR THIS PURPOSE. WE FIND THAT THE TOTAL COMPONENT OF DIVIDEND INCOME TO THE TOTAL REC EIPTS OF THE ASSESSEE WORKS OUT TO 45.5% . WE FIND THAT THE ASSESSEE HAD SUO MOTO MA DE DISALLOWANCE U/S 14A OF THE ACT TO THE TUNE OF RS. 5,92,667/- BY TAKING THE CO MMON ADMINISTRATIVE EXPENSES INCURRED FOR BOTH MANAGEMENT CONSULTANCY BUSINESS A ND ITS INVESTMENT ACTIVITIES BY APPLYING 45.5% THEREON. IN OTHER WORDS, THE DIRECT EXPENDITURE INCURRED FOR EARNING THE TAXABLE CONSULTANCY INCOME WERE REDUCED FROM TH E TOTAL EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT AND BALANCE COMMON EXPENSES OF RS. 13,02,565/- WAS APPORTIONED TOWARDS INVESTMENT ACTIVITY AT 45.5% AN D DISALLOWANCE U/S 14A OF THE ACT TO THE TUNE OF RS. 5,92,667/- WAS MADE. WE FIND TH AT IN THE IMMEDIATELY PRECEDING ASST YEAR 2009-10, THE LEARNED CITA HAD GIVEN A DIR ECTION TO THE LEARNED AO TO RECALCULATE THE DISALLOWANCE OF EXPENSES MADE U/S 1 4A AFTER REDUCING THE DIRECT EXPENDITURE OF CONSULTANCY FEES FROM THE TOTAL EXPE NSES CLAIMED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT AND THEREAFTER RESTRICT THE DISALLOWANCE OF EXPENSES MAXIMUM TO THE EXTENTOF BALANCE EXPENSES CLAIM IN THE PROFI T AND LOSS ACCOUNT BY THE ASSESSEE. ON FURTHER APPEAL BY THE REVENUE BEFORE THIS TRIBUN AL , THE TRIBUNAL IN ITA NO. 635/KOL/2013 DATED 29.10.2015 HAD DISMISSED THE SAM E AND UPHELD THE FINDINGS OF THE LEARNED CITA. 6.1. WE FIND THAT THE TOTAL EXPENSES DEBITED TO PRO FIT AND LOSS ACCOUNT IS RS. 2,28,25,154/- AND OUT OF THIS, DIRECT EXPENSES OF C ONSULTANCY AND PROFESSIONAL CHARGES AMOUNTING TO RS. 1,96,48,885/- FOR EARNING CONSULTA NCY INCOME I.E TAXABLE INCOME WOULD BE AUTOMATICALLY OUT OF THE PURVIEW OF COMPUT ING DISALLOWANCE U/S 14A OF THE ACT. THE REMAINING COMMON EXPENSES OF RS. 31,76,26 9/- HAVE TO BE APPORTIONED BETWEEN TAXABLE AND NON-TAXABLE INCOME. WE FIND TH AT THE RATIO OF APPORTIONMENT ADOPTED BY THE ASSESSEE AT 45.5% IN THE INCOME COMP ONENT IS VERY FAIR AND ACCORDINGLY DIRECT THE LEARNED AO TO DISALLOW RS. 1 4,45,202/- BEING 45.5% OF RS 31,76,269/- U/S 14A OF THE ACT TO MEET THE ENDS OF JUSTICE. WE DIRECT THE LEARNED AO ACCORDINGLY. ITA NO.2530/KOL/2013 M/S. SOYUZ TRADING CO.LTD. A.YR.2010-11 5 6.2. WE HOLD THAT THE LEARNED AO CANNOT MECHANICAL LY APPLY THE PROVISIONS OF RULE 8D FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE A CT. IN OUR OPINION, THE SAME COULD BE USED ONLY AS A LAST RESORT ONLY IN THE EVENT OF THE AO NOT ABLE TO MAKE A FAIR SUBSTITUTION OF THE DISALLOWANCE FIGURE AS CONTEMPL ATED U/S 14A(2) OF THE ACT. IN ANY CASE, THE PROVISIONS OF THE ACT WOULD ALWAYS PREVAI L OVER THE RULES AS ADMITTEDLY THE RULES ARE ONLY SUBORDINATE PIECE OF LEGISLATION AND ARE MEANT ONLY TO SUPPORT THE ACT. RULES COULD ACT ONLY AS A GUIDING FORCE TO EFFECTIV ELY IMPLEMENT THE PROVISIONS OF THE ACT. IF THE MANNER SO CONTEMPLATED IN THE ACT FAIL S, THEN AS A LAST RESORT, THE AO SHOULD GO TO RULES FOR MAKING DISALLOWANCE U/S 14A . HENCE WE HOLD THAT THE LEARNED AO HAS GOT SUFFICIENT POWERS TO SUBSTITUTE THE DISALLOWANCE FIGURE AT RS. 14,45,202/- IN TERMS OF SECTION 14A(2) OF THE ACT I TSELF AND HENCE RULE 8D NEED NOT BE FOLLOWED IN THE FACTS OF THE INSTANT CASE. HENCE T HE GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 08.07.2016. SD/- SD/- [N.V.VASUDEVAN] [M.BALAGANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 08.07.2016. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO: 1. M/S. SOYUZ TRADING CO.LTD., 16B, SHAKESPEARE SAR ANI, 2NFD FLOOR, KOLKATA-700071. 2 THE I.T.O., WARD-8(4), KOLKATA. 3. THE CIT-III, KOLKATA. 4. THE CIT(A )-VIII, KOLAKTA 5. DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES ITA NO.2530/KOL/2013 M/S. SOYUZ TRADING CO.LTD. A.YR.2010-11 6