M/s Mercantile Capital & Financial Services Pvt. Ltd., New Delhi V. CIT, New Delhi

ITA 2571/DEL/2011

• Counselvise Citation: 257120114 RSA 2011
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 13-12-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RA J TANDON
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 143(3); 14A; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI B.C. MEENA ITA NO. 2571/DEL/2011 ASSESSMENT YEAR: 2006-07 M/S. MERCANTILE CAPITAL & FINANCE, VS. LEARNED COMM ISSIONER OF I.T. SERVICES PVT. LTD., DELHI-II, G-71, WORLD TRADE CENTRE, NEW DELHI. BARAKHAMBA LANE, NEW DELHI (PAN: AAACM5551D) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SALIL AGGA RWAL, ADV. RESPONDENT BY: SHRI RAJ TANDON, CIT(DR) DATE OF HEARING : 13.12.2011 DATE OF PRONOUNCEMENT : 16.12.2011 ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE OR DER OF LEARNED COMMISSIONER DATED 28.03.2011 PASSED UNDER SECTION 263 OF THE INCOME-TAX ACT, 1961 FOR ASSESSMENT YEAR 2006-07. THE GRIEVANC E OF ASSESSEE IS THAT LEARNED COMMISSIONER HAS ERRED IN TAKING COGNIZANCE UNDER SEC. 263 AND SETTING ASIDE THE ASSESSMENT ORDER AND DIRECTING TH E ASSESSING OFFICER TO MAKE NECESSARY DISALLOWANCE UNDER SEC. 14A READ WIT H RULES 8D OF THE INCOME-TAX RULES, 1962. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAS FILED ITS RETURN OF INCOME ON 22.11.2006 DECLARING A LOSS OF RS.8,08,10 0. THE CASE OF THE 2 ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE ACT WAS ISSUED ON 10.10.2007 WHICH WAS DULY SERVED UPON THE ASSESSEE. LEARNED ASSESSING OFFICER HAS PASSED A VE RY BRIEF ORDER ON 17.12.2008 WHEREBY HE OBSERVED THAT AFTER CONSIDERI NG THE DETAILS FILED BY THE ASSESSEE AND DISCUSSING THE ISSUE WITH SHRI RL GARG, CA, THE RETURN FILED BY THE ASSESSEE IS ACCEPTED. 3. LEARNED COMMISSIONER ON PERUSAL OF THE RECORD FO UND THAT ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS.31,93,178 WHICH WAS CLAIMED AS EXEMPTION UNDER SEC. 10(34) IN THE RETURN OF INCOME . ASSESSING OFFICER HAS NOT EXAMINED THE ISSUE WITH REGARD TO DISALLOWANCE OF EXPENSES REQUIRED TO BE MADE UNDER SEC. 14A READ WITH RULES 8D OF THE IN COME-TAX RULES. HE ISSUED A SHOW-CAUSE NOTICE BY MENTIONING THE FOLLOW ING REASONS: IT IS NOTICED THAT NO DISALLOWANCE U/S. 14A OF THE I.T. ACT IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF I.T. R ULES HAS BEEN MADE BY THE A.O. AND DISALLOWANCE MADE IN THE COMPU TATION OF INCOME HAS BEEN RESTRICTED TO THE EXTENT OF INTERES T PAID ONLY. 4. IN RESPONSE TO THE SHOW-CAUSE NOTICE, ASSESSEE H AS FILED WRITTEN SUBMISSIONS WHEREIN IT HAS CONTENDED THAT DIVIDEND INCOME OF RS.31,93,178 WAS CLAIMED AS EXEMPT UNDER SEC. 10(34) OF THE ACT. ASSESSEE HAS SUO-MOTO 3 MADE A DISALLOWANCE UNDER SEC.14A TO THE EXTENT OF RS.31,93,178 ON REASONABLE BASIS. IT WAS DISALLOWED ON THE GROUND O F UTILIZATION OF INTEREST BEARING FUNDS FOR INVESTMENT. ACCORDING TO THE ASSE SSEE, THE NET EFFECT OF DISALLOWANCE WAS THAT NO DIVIDEND INCOME WAS CLAIME D AS EXEMPT IN THE RETURN OF INCOME. THE ASSESSEE FURTHER SUBMITTED TH AT RULE 8D WAS BROUGHT ON THE STATUTE BOOK W.E.F. 24.3.2008, THE HON'BLE B OMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE VS. CIT REPORTED IN 328 ITR 81 HAS HELD THAT THIS RULE CANNOT BE APPLIED WITH RETROSPECTIVE EFFECT. IT IS APPLICABLE W.E.F. ASSESSMENT YEAR 2008-09. THE ASSESSEE HAS POINTED OUT THAT IN VIEW OF THE HON'BLE BOMBAY HIGH COURTS DECISION, RULE 8D CANNOT BE APP LIED IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2006-07. LEARNED COMMI SSIONER DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE AND SET ASIDE THE A SSESSMENT ORDER. THE OBSERVATIONS MADE BY THE LEARNED COMMISSIONER READ AS UNDER: THE CONTENTION OF THE ASSESSEE IS CONSIDERED AND H AS NOT BEEN ACCEPTED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN VIEW OF THE CBDT LETTER IN F.NO.173/172/2008-ITA-I DATED 04.02. 2009 WHICH STATES THAT THE REQUISITE DISALLOWANCE U/S.14A READ WITH RULES 8D IN CASE ASSESSEE HAS EARNED EXEMPT INCOME I.E. DIVIDEN D INCOME AND IN THE LIGHT OF THE FOLLOWING COURT PRONOUNCEMENTS: 1. HONBLE ITAT MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT (P) LTD. 26 SOT 603 (MUM)(S.B); 4 2. HONBLE ITAT, DELHI IN THE CASE OF CHEMINVEST LTD. VS. ITO IN ITA NO.87/DEL/2008(2009) 124 TTJ (DEL)(S.B) 577. I AM, THEREFORE OF THE VIEW THAT THE ASSESSMENT ORD ER PASSED BY THE A.O. IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST O F REVENUE AND A.O. IS THEREFORE DIRECTED TO MAKE NECESSARY DISALLOWANCE U /S.14A READ WITH RULE 8B OF I.T. RULES, 1962. THE ASSESSMENT ORDER IS CANCELLED TO BE FRAMED AFRE SH WITH THE DIRECTION TO THE A.O. TO CONSIDER THE ABOVE ISSUES AFTER PROVIDING A REASONABLE OPPORTUNITY TO THE ASSESSEE IN TERMS OF SEC. 142A(3) OF THE I.T. RULES. THE ASSESSMENT ORDER IS SET ASIDE TO TH E LIMITED EXTENT ONLY. 5. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE IMPUG NING THE ORDER OF LEARNED COMMISSIONER SUBMITTED THAT LEARNED COMMISS IONER HAS GIVEN PREFERENCE TO THE ORDER OF THE SPECIAL BENCH OF THE ITAT THEN THAT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOY CE (SUPRA). HON'BLE BOMBAY HIGH COURT HAS CATEGORICALLY HELD THAT RULE 8D WILL BE APPLICABLE FROM ASSESSMENT YEAR 2008-09, THUS DISALLOWANCE IN THE PRESENT YEAR CANNOT BE COMPUTED ON THE BASIS OF RULE 8D. THE NON-CONSID ERATION OF APPLICABILITY OF THIS RULE BY THE ASSESSING OFFICER WILL NOT MAKE THE ORDER AS ERRONEOUS. AS FAR AS THE REASONABLE DISALLOWANCE OF EXPENSES F OR THE PURPOSE OF SEC. 14A IS CONCERNED, THE ASSESSEE ITSELF DISALLOWED A SUM OF RS.31,93,178 WHICH IS EQUIVALENT TO THE DIVIDEND INCOME RECEIVED BY IT, MEANING THEREBY, 5 THAT NO DIVIDEND INCOME WAS CLAIMED TO BE EXEMPT IN THIS YEAR. IN SUCH SITUATION, LEARNED ASSESSING OFFICER HAS RIGHTLY AC CEPTED THE CASE OF THE ASSESSEE AND HIS ORDER CANNOT BE TERMED AS ERRONEOU S AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE. HE FURTHER POINTED OUT THAT IN THE CASE OF CIT VS. HONDA SIEL POWER PRODUCT REPORTED IN 333 ITR 54 7, HON'BLE DELHI HIGH COURT HAS OBSERVED THAT ONCE A REGULAR ASSESSMENT I S MADE UNDER SEC. 143(3) THEN A PRESUMPTION CAN BE RAISED THAT ORDER HAS BEE N PASSED UPON APPLICATION OF MIND, THOUGH THIS PRESUMPTION IS REPUTABLE BUT T HERE MUST BE SOME MATERIAL TO INDICATE THAT ASSESSING OFFICER HAD NOT APPLIED HIS MIND. IF HE HAS TAKEN ONE OF THE PLAUSIBLE VIEWS THEN LEARNED C OMMISSIONER CANNOT SUBSTITUTE HIS VIEW BY EXERCISING THE POWERS UNDER SEC. 263 OF THE ACT. LEARNED DR ON THE OTHER HAND SUBMITTED THAT ASSESSI NG OFFICER HAS NOT EXAMINED THE ISSUE WITH REGARD TO APPLICABILITY OF SEC. 14A, THUS, THE DIRECTION ISSUED BY THE LEARNED COMMISSIONER CAN BE MODIFIED BY HOLDING THAT DISALLOWANCE UNDER SEC. 14A IS TO BE MADE AFTE R TAKING INTO CONSIDERATION THE SURROUNDING FACTS AND CIRCUMSTANC ES, DE HORSE RULE 8D. HE RELIED UPON THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF MAHESH G. SHETTY VS. CIT REPORTED IN 198 TAXMAN 224 AND 238 CTR 440. HE ALSO RELIED UPON THE ORDER OF THE ITAT, AMRITSAR BENCH IN THE CASE OF JAMMU & KASHMIR BANK VS. ACIT REPORTED IN 118 ITD 1 46. 6 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D GONE THROUGH THE RECORD CAREFULLY. THE ITAT IN THE CASE OF MRS. KHA TIZA S. OOMERBHOY VS. ITO,MUMBAI, 101 TTJ 1095, ANALYZED IN DETAIL VARI OUS AUTHORITATIVE PRONOUNCEMENTS INCLUDING THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF MALABAR INDUSTRIES 243 ITR 83 AND HAS PRO POUNDED THE FOLLOWING BROADER PRINCIPLE TO JUDGE THE ACTION OF CIT TAKEN UNDER SECTION 263. THE FUNDAMENTAL PRINCIPLE WHICH EMERGE FROM THE A BOVE CASES MAY BE SUMMARIZED BELOW (I) THE CIT MUST RECORD SATISFACTION THAT THE ORDE R OF THE A.O IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. BO TH THE CONDITIONS MUST BE FULFILLED. (II) SEC. 263 CANNOT BE INVOKED TO CORRECT EACH AN D EVERY TYPE OF MISTAKE OR ERROR COMMITTED BY THE A,O AND IT WAS ONLY WHEN AN ORDER IS ERRONEOUS THAT THE SECTION WILL BE ATTRACTED. (III) AN INCORRECT ASSUMPTION OF FACTS OR AN INCOR RECT APPLICATION OF LAW WILL SUFFICE THE REQUIREMENT OF ORDER BEING ERRONEOUS. (IV) IF THE ORDER IS PASSED WITHOUT APPLICATION O F MIND, SUCH ORDER WILL FALL UNDER THE CATEGORY OF ERRONEOUS ORDER. (V) EVERY LOSS OF REVENUE CANNOT BE TREATED AS PRE JUDICIAL TO THE INTERESTS OF THE REVENUE AND IF THE A.O HAS ADOPTED ONE OF TH E COURSES PERMISSIBLE UNDER LAW OR WHERE TWO VIEWS ARE POSSIBLE AND THE A.O HAS TAKEN ONE VIEW WITH WHICH THE CIT DOES NOT AGREE, IT CANNOT B E TREATED AS AN ERRONEOUS ORDER, UNLESS THE VIEW TAKEN BY THE A.O I S UNSUSTAINABLE UNDER LAW. (VI) IF WHILE MAKING THE ASSESSMENT, THE A.O EXAMI NES THE ACCOUNTS, MAKES ENQUIRIES, APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINE THE INCOME, THE CIT, WHILE EXERC ISING HIS POWER UNDER S. 263 IS NOT PERMITTED TO SUBSTITUTE HIS ESTIMATE OF INCOME IN PLACE OF THE INCOME ESTIMATED BY THE A.O. 7 (VII) THE A.O EXERCISES QUASI-JUDICIAL POWER VEST ED IN HIS AND IF HE EXERCISES SUCH POWER IN ACCORDANCE WITH LAW AND ARR IVES AT A CONCLUSION, SUCH CONCLUSION CANNOT BE TERMED TO BE ERRONEOUS SI MPLY BECAUSE THE CIT DOES NOT FEEL SATISFIED WITH THE CONCLUSION. (VIII) THE CIT, BEFORE EXERCISING HIS JURISDICTION UNDER S. 263 MUST HAVE MATERIAL ON RECORD TO ARRIVE AT A SATISFACTION. (IX) IF THE A.O HAS MADE ENQUIRIES DURING THE COU RSE OF ASSESSMENT PROCEEDINGS ON THE RELEVANT ISSUES AND THE ASSESSEE HAS GIVEN DETAILED EXPLANATION BY A LETTER IN WRITING AND THE A.O ALLO WS THE CLAIM ON BEING SATISFIED WITH THE EXPLANATION OF THE ASSESSEE, THE DECISION OF THE A.O CANNOT BE HELD TO BE ERRONEOUS SIMPLY BECAUSE IN HI S ORDER HE DOES NOT MAKE AN ELABORATE DISCUSSION IN THAT REGARD. 7 ADVERTING TO THE FACTS OF THE PRESENT CASE, IT WO ULD REVEAL THAT VERY FOUNDATION OF THE SHOW-CAUSE NOTICE IS THAT APPLICA BILITY OF RULE 8D WAS NOT CONSIDERED BY THE ASSESSING OFFICER. RULE 8D HAS BE EN HELD NOT TO BE APPLICABLE IN THIS YEAR BECAUSE IT WAS INTRODUCED O N 24.3.2008. IN SUCH SITUATION, THE VERY FOUNDATION WOULD EXTINGUISH TO ISSUE A SHOW-CAUSE NOTICE UNDER SEC. 263 OF THE ACT. APART FROM THIS, LEARNED COMMISSIONER HAS GIVEN PREFERENCE TO THE ORDER OF THE ITAT IN THE CASE OF DAGA CAPITAL INSTEAD OF THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE O F GODREJ BOYCE (SUPRA) WHICH WAS BROUGHT TO HIS NOTICE AT THE TIME OF HEAR ING AND WHICH HAS DULY BEEN NOTICED BY THE LEARNED COMMISSIONER IN THE WRI TTEN SUBMISSIONS OF THE ASSESSEE EXTRACTED IN THE IMPUGNED ORDER. IT WOULD ONLY INDICATE THAT LEARNED COMMISSIONER FAILED TO APPRECIATE THE FACTS IN RIGHT PERSPECTIVE. HE INSISTED THAT DISALLOWANCE UNDER SEC.14A HAS TO BE MADE AS PER RULE 8D. WE 8 FURTHER FIND THAT IN THE ABSENCE OF RULE 8D, THE DI SALLOWANCE OUGHT TO BE MADE ON A REASONABLE BASIS. ASSESSEE HAS POINTED OU T THAT IT HAS DISALLOWED A SUM OF RS.31,93,178 AT ITS OWN AND THE NET EFFECT O F THE DISALLOWANCE IS THAT NO DIVIDEND INCOME WAS CLAIMED EXEMPT. SINCE ASSESS MENT ORDER HAS BEEN PASSED UNDER SEC. 143(3) ON A LOSS RETURN, THOUGH S PECIFIC DISCUSSION IS NOT DISCERNIBLE ON THIS ISSUE BUT LEARNED ASSESSING OFF ICER MUST HAVE GONE THROUGH THE DETAILS. LEARNED COMMISSIONER HAS NOT H IGHLIGHTED THOSE ISSUES EXHIBITING THE NON-APPLICATION OF MIND BY THE ASSES SING OFFICER. HE SHOULD HAVE MADE A REFERENCE TO THE RECORD OR DETAILS OF I NVESTMENTS ETC. HIS EMPHASIS IS TOWARDS THE APPLICABILITY OF RULE 8D. W E COULD HAVE APPRECIATED THE STAND OF REVENUE, IF THE FACTS EXHIBITING THE N ON-APPLICATION OF MIND, REBUTTING THE ALLEGED PRESUMPTION WHICH WOULD ARISE IN FAVOUR OF ASSESSEE BECAUSE ORDER WAS PASSED UNDER SEC. 143(3) OF THE A CT, WAS BROUGHT ON RECORD. THEREFORE, THE ORDER OF LEARNED COMMISSIONE R IS NOT SUSTAINABLE. 8 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. DECISION PRONOUNCED IN THE OPEN COURT ON 16.12.2011 SD/- SD/- ( B.C. MEENA ) ( RAJ PAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 16/12/2011 MOHAN LAL 9 COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR