The Asstt. Commissioner of Income Tax, Circle-2(1)(2), Ahmedabad V. M/s. Mas Financial Services Ltd., Ahmedabad

ITA 2565/AHD/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0917 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 20-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Revised return; Rule 8D
• Section: 143(3); 14A; 143(1)

Judgement Text

, A - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER AND SMT. MADHUMITA ROY, JUDICIAL MEMBER . IT NO. 2565/AHD/2017 / ASSTT. YEAR: 2014-15 ACIT CIRCLE-2(1)(2) AHMEDABAD VS. MAS FINANCIAL SERVICES LTD. 6, GROUND FLOOR, NARAYAN CHAMBER, B/H. PATANG HOTEL, ASHRAM ROAD, AHMEDABAD PAN:AAB CM0 640 A / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI JAMES KURIAN, SR. D.R REVENUE BY : NONE ! / DATE OF HEARING : 19/03/2019 '#$ ! / DATE OF PRONOUNCEMENT: 25 /03/2019 %& / O R D E R PER MADHUMITA ROY- JM : THE INSTANT APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER DATED 08/09/2017 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, AHMEDABAD ARISING OUT OF THE ORDER PASSED BY THE DC IT CIR.-2(1)(2) AHMEDABAD UNDER SECTION 143(3) OF THE INCOME TAX AC T 1961(HEREIN AFTER REFERRED AS THE ACT) FOR ASSESSMENT YEAR 20 14-15 DATED 21.11.2016. 2. THE REVENUE HAS CHALLENGED THE ORDER PASSED BY T HE LD. CIT(A) IN RESTRICTING THE DISALLOWANCE OF RS. 91,25,846/- TO RS. 19,311/- MADE U/S. ITA NO. 2565/AHD/2017 A.YR. 2014-15 2 14A OF THE ACT. THE ASSESSEE COMPANY HAS FILED HIS RETURN OF INCOME ON 26.09.2014 DECLARING TOTAL INCOME AT RS. 49,69,50,5 00/- FOLLOWED BY REVISED RETURN OF INCOME FILED ON 31.03.2016 DECLAR ING TOTAL INCOME AT RS. 49,62,23,790/- WHICH WAS PROCESSED U/S. 143(1) OF THE ACT. UNDER SCRUTINY NOTICE U/S. 143(2) OF THE ACT WAS ISSUED O N 31.08.2015 FOLLOWED BY A FURTHER NOTICE DATED 10.06.2016 U/S. 143(2) R. W.S 129 OF THE ACT DUE TO CHANGE IN INCUMBENT. A FURTHER NOTICE U/S. 143( 1) OF THE ACT DATED 26.04.2016 AND 07.07.2016 WERE ISSUED AND SERVED UP ON THE ISSUE ALONG WITH THE QUESTIONNAIRE. 3. DURING THE COURSE OF ASSESSMENT PROCEEDING IT WA S FOUND THAT THE ASSESSEE HAS SHOWN INVESTMENT OF RS. 10,83,31,128/- . THE ASSESSEE EARNED DIVIDEND INCOME DURING THE YEAR WHICH WAS SH OWN AS EXEMPTED U/S. 10(35) OF THE ACT. INTEREST EXPENDITURE WAS A LSO INCURRED BY THE ASSESSEE TO THE TUNE OF RS. 75,41,48,306/- DURING T HE YEAR. THE ASSESSEE WAS NOT BEING ABLE TO JUSTIFY THE INVESTMENT MADE I N SHARES FROM HIS OWN FUND OR FROM THE FUNDS ON WHICH NO INTEREST PAYMENT WAS NOT MADE BY THE ASSESSEE A SHOW-CAUSE, THEREFORE, DATED 21.11.2 016 WAS ISSUED. THE ASSESSEE SUBMITTED THE DETAILS OF FOLLOWING INTERES T FREE FUNDS AND INVESTMENT: SR. NO. PARTICULARS FINANCIAL YEAR 2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2012 - 13 2013 - 14 1 SHARE CAPITAL 16000000 0 994710900 994710900 92971090 0 934770900 5347121 50 5947121 50 2 GENERAL RESERVES 5459344 4215747 4215747 12077747 30404600 5630988 4 8736776 2 3 ACCUMULATED PROFITS 43264920 1 6578450 168 5005 8 34683852 64264328 5626026 4 1747588 10 4 TOTAL INTEREST FREE FUNDS 20872476 4 101550509 7 1015776705 97647249 9 102937982 8 6472822 98 8565387 22 5 BALANCE OF INVESTMENTS 21089635 9093432 7 90934327 90831129 108331128 1083311 28 1083311 28 6 EXCESS FUNDS 18763512 9 924570770 924842378 88564137 0 921 048700 5389511 70 7485075 94 ITA NO. 2565/AHD/2017 A.YR. 2014-15 3 (4 - 5) 7 EXCESS FUNDS IN MULTIPLE OF INVESTMENTS (6-5) 8.90 TIMES 10. 17 TIMES 1 0.1 7 TIMES 9.75 LIMES 8.50 TIMES 4.98 TIMES 6.91 TIMES SR NO. ASSESSMENT YEAR TOTAL INCOME OFFERED FOR TAXATION INCREASE IN INVESTMENTS EXCESS OF TOTAL INCOME OVER INCREASE IN INVESTMENTS 1 2008-09 129940463 20000000 109940463 2 2009- 10 105724893 69844692 35880201 3 2010-11 200946099 0 200946099 4 2011-12 266826770 0* 266826770 5 2012-13 252258200 17500000 234758200 6 2013-14 392183560 0 392183560 7 2014-15 496275794 0 496275794 4. HOWEVER, THE SUBMISSIONS THAT THE ASSESSEE IS IN POSSESSION OF AMPLE INTEREST FREE FUND IN THE FORM OF CAPITAL, FR EE RESERVE AND ACCUMULATED PROFIT WHICH IS SUBSTANTIALLY HIGHER TH AN THE INVESTMENT WAS NOT FOUND ACCEPTABLE BY THE LD. AO. HE, THEREFORE, APPLYING THE PROVISION U/S. 14A READ WITH RULE 8D DISALLOWED RS. 91,25,846/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE BEING EXP ENSES INCURRED FOR EARNING EXEMPT INCOME NOT FORMING THE PART OR TOTAL INCOME OF THE ASSESSEE. 5. IN APPEAL THE LD. CIT(A) RESTRICTED SUCH DISALLO WANCE TO THE TUNE OF RS. 19,311/- TO THE EXTENT OF DIVIDEND INCOME OF THE ASSESSEE. HE HOWEVER MADE DISALLOWANCE WITH REGARD TO THE ADMINI STRATIVE AND EXPENSES BEING 0.5 PER CENT OF THE AVERAGE INVESTME NT INVOKING RULE 8D(2) TO THE EXTENT OF DIVIDEND INCOME OF RS. 19,31 1/- WITH THE FOLLOWING OBSERVATION: 3.3 DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT. THE AO HAS MADE THE DISALLOWANCE U/S. 14A OF ITA NO. 2565/AHD/2017 A.YR. 2014-15 4 THE I. T. ACT, 1961 AMOUNTING RS. 91,25,846/-. IN THE ASSESSMENT ORDER, THE AO HAS WORKED OUT THE DISALLOWANCE UNDER RULE 8D(2) (II) BEING INTEREST OF RS.85,84,190/- AND ADMINISTRATIVE EXPENDITURES @ 0. 5% OF THE AVERAGE INVESTMENTS AT RS.5,41,6567-TOTALLING TO RS.91,25,8 46/-. 3.4. THE AO HAS MADE THE DISALLOWANCE U/S. 14A OF T HE I. T. ACT, 1961 STATING THAT THE INTEREST BEARING BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF INVESTMENT IN THE SHARES. FURTHER, IT WAS MENTIO NED THAT THE APPELLANT NEEDS TO PROVE BY DEMONSTRATING EVIDENCE THAT ON TH E DAY ON WHICH THE INVESTMENTS WERE MADE, THE ASSESSEE HAD INTEREST FR EE FUNDS AND THERE WAS NO DIVERSION OF INTEREST BEARING FUNDS FOR NON BUSINES S PURPOSE. THE APPELLANT COULD NOT PROVE BY WAY OF SUBMITTING FUND FLOW STAT EMENT THAT THERE WAS NO DIVERSION OF INTEREST BEARING FUNDS AND SUBSEQUENTL Y HE RELIED UPON CERTAIN DECISIONS / JUDGMENTS. 3.5. IT HAS BEEN CLAIMED BY THE APPELLANT THAT IT H AS INTEREST FREE FUND OF RS.85,68,38,722/- IN FORM OF SHARE CAPITAL AND RESE RVES AND SURPLUS AGAINST THE INVESTMENT OF RS.10,83,31,128/-. THEREFORE, APP ELLANT HAD SUFFICIENT INTEREST FREE FUND TO MAKE INVESTMENT. THE APPELLAN T HAS FURTHER SUBMITTED THAT INVESTMENT HAS BEEN MADE IN THE SUBSIDIARY COM PANY MAS RURAL MORTGAGE AND HOUSING FINANCE LIMITED AS STRATEGIC I NVESTMENT AND HAS RECEIVED DIVIDEND INCOME AMOUNTING TO RS.19,311/- W HICH WAS EXEMPT. THEREFORE NO DISALLOWANCE U/S. 14A IS CALLED FOR AN D IN ANY CASE, THE DISALLOWANCE CANNOT EXCEED TO THE EXEMPT INCOME OF DIVIDEND AS HAS BEEN HELD BY HON'BLE ITAT, AHMEDABAD IN THE CASE OF CHUD GAR RACNHHODLAL JETHALAL VS. DCIT IN ITA NO. 245/AHD/2013. THE RELE VANT PARA OF THE DECISION IS REPRODUCED AS UNDER:- '12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. ON PERUSING THE BALANCE SHEET, WE FIND THAT THERE IS NO CHANGE IN INVESTMENTS AT THE YEAR UNDER AS ON 31ST MARCH, 200 7 AND AS AT 31ST MARCH, 2008 MEANING THEREBY THAT PRIMA FACIE NO NEW INVEST MENTS HAVE BEEN MADE BY THE ASSESSEE DURING THE YEAR. FURTHER ON PERUSIN G THE BALANCE SHEET AS ON 31ST 8 ITA NO.245/AHD/2013 A. Y. 2008-09 MARCH, 200 8 WE FIND THAT THE SHARES WERE TO THE EXTENT OF RS.1.49 CRORES AND DUR ING THE YEAR ASSESSEE HAS ALSO EARNED PROFIT AFTER TAX AT RS.60.39 LACS MEANI NG THAT THE AVAILABILITY OF INTEREST FREE FUNDS WITH ASSESSEE AT THE YEAR END W ERE IN EXCESS OF INVESTMENTS. FROM THE DETAILS OF OTHER INCOME PLACE D ON RECORD, IT IS SEEN THAT DURING THE YEAR DIVIDEND EARNED BY THE ASSESSE E IS OF RS.20,498/- AND THE DISALLOWANCE MADE BY AO U/S. 14A IS OF RS. 1,02 ,007/- AND THUS THE DISALLOWANCE U/S. 14A WORKED OUT BY THE AO IS MORE THAN THE TAX FREE INCOME. BEFORE US, LD. D.R. HAS NOT BROUGHT ANY DEC ISION OF TRIBUNAL OR HIGH COURT ON RECORD TO CONTROVERT THE SUBMISSIONS MADE BY THE LD. A.R THAT DISALLOWANCE U/S. 14A CANNOT BE MORE THAN TAX FREE INCOME. ON THE OTHER HAND, WHILE DICTATING THE ORDER, WE HAVE COME ACROS S THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PV T. LTD. VS. CIT ITA NO. 117 OF 201 5 DECIDED ON 25/02/2015, WHEREIN THE HON 'BLE HIGH COURT HAS HELD AS UNDER:- '9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DIS CLOSED WHY THE APPELLANT / ASSESSEE'S CLAIM FOR ATTRIBUTING RS.2,9 7,440/- AS A DISALLOWANCE UNDER SECTION 14A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PRODUCED FURTHER AND DETERMINE AMOUNTS IS DERIVED ITA NO. 2565/AHD/2017 A.YR. 2014-15 5 AFTER EXAMINATION 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 AO - A N ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT(A) AND THE ITAT. TH E THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INC OME IS RS.48,90,000/-, THE DISALLOWANCE ULTIMATELY DIRECTE D WORKS OUT TO NEARLY 110% OF THAT SUM I.E. RS. 52,56,197/-. BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8D BE INTERPRET ED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOW ED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A, AND IS ON LY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION TO THE T AX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPP ENED IN THIS CASE.' 13. CONSIDERING THE TOTALITY OF THE FACTS AND IN VI EW OF THE FACT THAT THE PROVISIONS OF RULE 8D ARE APPLICABLE FOR THE YEAR U NDER CONSIDERATION AND IN THE LIGHT OF THE AFORESAID DECISION OF DELHI HIGH C OURT CALLED HEREINABOVE AND IN VIEW OF THE FACT THAT THE DISALLOWANCE WORKE D OUT BY AO U/S. 14A IS MORE THAN THE EXEMPT INCOME AND CONSIDERING THE ALT ERNATE SUBMISSION OF THE LD. AR TO MAKE A REASONABLE DISALLOWANCE U/S. 14A A S DEEMED FIT, WE ARE OF THE VIEW THAT DISALLOWANCE OF RS.5,000/- IF MADE IN THE PRESENT CASE WILL MEET THE ENDS OF JUSTICE. WE THUS DIRECT ACCORDINGLY.' 3.6. THE SUBMISSION OF THE APPELLANT HAS BEEN EXAMI NED AND NOTICED THAT APPELLANT HAS SUFFICIENT INTEREST FREE FUND TO MAKE INVESTMENT IN THE SUBSIDIARY COMPANY FROM WHICH DIVIDEND HAS BEEN REC EIVED. THEREFORE, THE INTEREST DISALLOWANCE UNDER RULE 8D(2)(II) IS NOT C ALLED FOR. AS REGARD TO DISALLOWANCE RELATING TO ADMINISTRATIVE EXPENSES OF RS.5,41,65/7-COMPUTED UNDER RULE 8D(2)(III), IT IS NOTICED THAT APPELLANT HAD ONLY EXEMPT INCOME OF RS. 19,311/-. IT HAS BEEN HELD BY HON'BLE ITAT, AHM EDABAD IN THE CASE OF CHUDGAR RACNHHODLAL JETHALAL VS. DCIT IN ITA NO. 24 5/AHD/2013 (SUPRA), THAT THE DISALLOWANCE CANNOT EXCEED TO THE EXEMPT I NCOME OF DIVIDEND. 3.7. RELIANCE IS ALSO PLACED ON THE DECISIONS OF JU RISDICTIONAL ITAT, AHMEDABAD IN THE FOLLOWING CASES;- (I) M/S. SHREE LAXMI BIDI TRADING CO. VS. DCIT[CO NO.315&316/AHD/2014 DT. 30/03/2015] (II) JIVRAJ TEA LIMITED VS. DCIT CIRCL E - 1, SURAT [ITA NO. 866/AHD/2012 DATED 28/08/2014 (AHMEDABAD TRIBU NAL) (III) WLADHUSUDAN INDUSTRIES LTD. VS. ITO [ITA NO . 1715/AHD/2011 DATED 13/02/2015 (AHMEDABAD TRIBUNAL) (IV) M/S. K. RATANCHAND & CO. VS. INCOME TAX OFF ICER, WARD 11 IN ITA NO. 2660/AHD/2011 DATED 24/09/2015 3.8. IT WAS ALSO ARGUED THAT THE INVESTMENT MADE BY THE APPELLANT WAS IN SUBSIDIARY COMPANIES IS IN THE NATURE OF STRATEGIC INVESTMENT. NO ADMINISTRATIVE EFFORTS HAVE BEEN MADE TOWARDS EARNI NG ANY EXEMPT DIVIDEND INCOME. IN SUPPORT, THE APPELLANT RELIED UPON VARIO US DECISIONS AS NOTED IN ITA NO. 2565/AHD/2017 A.YR. 2014-15 6 THE PRECEDING PARAS OF THIS ORDER. THE APPELLANT'S PLEA THAT THE INVESTMENTS HAVE BEEN MADE NOT FOR THE PURPOSE OF EARNING DIVID END INCOME IS NOT PROVED BY ADDUCING NECESSARY EVIDENCES. ON THE CONTRARY, THE APPELLANT'S PLEA FOR BUSINESS IN TRADING OF SHARES IS ALSO FOUND NOT COR RECT FOR THE REASON THAT THERE WAS NO INCREASE IN THE INVESTMENT HELD DURING THE YEAR UNDER CONSIDERATION. HAD IT BEEN THE BUSINESS OF TRADING OF SHORES, THERE WOULD HAVE BEEN CHANGE OF QUANTUM OF INVESTMENTS IN THE Y EAR UNDER CONSIDERATION. 3.9. FURTHER, THE APPELLANT'S PLEA THAT IT HAD THE MORE INTEREST FREE FUNDS THAN THE INVESTMENT MADE IN SHARES IS ALSO NOT BASE D UPON SOME DETAILS AND DOCUMENTS SAYING THAT ACTUALLY THOSE INTEREST FREE FUNDS WERE AVAILABLE IN LIQUID FORM AT THE TIME OF INVESTMENT IN SUBSIDIARY COMPANIES. 3.10. IN VIEW OF THE AFORESAID DISCUSSION, THE DISA LLOWANCE MADE BY THE AO WITH REGARD TO THE ADMINISTRATIVE AND EXPENDITURES BEING 0.5% OF THE AVERAGE INVESTMENTS INVOKING THE RULE 8D(2)(III) IS CONFIRMED TO THE EXTENT OF DIVIDEND INCOME WHICH IS RS.19,311/-. IN OTHER W ORDS, THE DISALLOWANCE UNDER SECTION 14A AMOUNTING TO RS.91,25,846/- IS RE STRICTED TO RS. 19,311/-. RELIEF IS GRANTED FOR THE BALANCE DISALLOWANCE. 6. AT THE TIME OF HEARING OF THE INSTANT APPEAL THE LD. ADVOCATE APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE DISALLOWANCE U/S. 14A CANNOT BE MADE MORE THAN THE TAX FREE INCOME. IN THIS PARTICULAR CASE SINCE THE APPELLANT HAD ONLY EXEMPT INCOME OF RS. 19,311/- SUCH DISALLOWANCE OF RS. 91,25,846/- EXCEEDING THE EXEMP T INCOME NOT SUSTAINABLE. HE, THEREFORE, RELIED UPON THE ORDER PASSED BY THE LD. CIT(A) IN RESTRICTING THE DISALLOWANCE TO THE DIVID END INCOME OF RS. 19,311/-. HE ALSO RELIED UPON THE JUDGMENT PASSED IN THE CASE OF JIVRAJ TEA LTD. VS. DCIT CIRCLE-1 BY THE SURAT BENCH IN IT A NO. 866/AHD/2012 DATED 28.08.2014 OF THE HONBLE AHMEDABAD TRIBUNAL. ON THE OTHER HAND THE LD. DR RELIED UPON THE ORDER PASSED BY THE LD. AO. 7. WE HAVE HEARD THE RESPECTIVE PARTIES, WE HAVE AL SO PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD AND THE ORDE R PASSED BY THE HONBLE ITAT SURAT BENCH IN ITA NO. 866/AHD/2012 AS RELIED UPON BY THE LD. ADVOCATE APPEARING FOR THE ASSESSEE. WE HA VE ALSO CAREFULLY CONSIDERED THE ORDER PASSED BY THE LD. CIT(A). IT A PPEARS THAT RELYING ITA NO. 2565/AHD/2017 A.YR. 2014-15 7 UPON THE RATIO AS LAID DOWN BY DIFFERENT HIGH COURT FOLLOWED BY THE COORDINATE BENCH IN SEVERAL MATTERS INCLUDING THE O RDER PASSED BY THE SURAT BENCH THE LD. CIT(A) HAS RESTRICTED THE DISAL LOWANCE TO THE EXEMPT DIVIDEND INCOME OF RS. 19,311/- SINCE DISALL OWANCE EXCEEDING SUCH EXEMPT INCOME IS NOT PERMISSIBLE IN LAW WHICH DOES NOT CALL FOR ANY INTERFERENCE. WE, THEREFORE, UPHOLD THE SAME. HENCE, REVENUES APPEAL IS THUS DEVOID OF ANY MERIT AND THUS DISMISS ED. 8. IN THE RESULT, THE REVENUE APPEAL IS DISMISSED. [ORDER PRONOUNCED IN THE COURT ON 25-03-2019. ] SD/- SD/- ( AMARJIT SINGH ) ( MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 25/03/2019 TANMAY TRUE COPY %& '()*%)$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. + / THE RESPONDENT. 3. ,, - / CONCERNED CIT 4. - ( ) / THE CIT(A) 5. )./'' , / DR, ITAT, 6. /012 / GUARD FILE. %& / BY ORDER, 3 / ,4 (DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD