M/s Lala Ram Finance & Investment Co. (P) Ltd., Agra V. Dy.C.I.T., Circle-4(1), Agra

ITA 260/AGR/2011

• Counselvise Citation: 26020314 RSA 2011
• Duration Of Justice: 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 30-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ATESHAM ANSARI
• Keywords: Earning of tax free income
• Section: 14A; 147; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NOS.260 & 261/AGR/2011 ASSESSMENT YEARS : 2007-08 & 2006-07 M/S LALA RAM FINANCE & INVESTMENT VS. DY. COM MISSIONER OF INCOME TAX, CO. (P) LTD., CIRCLE 4(1), AGRA 132, INDUSTRIAL ESTATE, NUNHAI, AGRA. (PAN: AAACL 2783 L). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PANKAJ GARGH, ADVOCATE RESPONDENT BY : SHRI ATESHAM ANSARI, JR. D.R. DATE OF HEARING : 30.05.2012 DATE OF PRONOUNCEMENT OF ORDER : 08.06.2012 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THESE ARE TWO APPEALS FILED BY THE ASSESSEE AGAINST TWO DIFFERENT ORDERS DATED 11.05.2011 & 10.05.2011 PASSED BY THE LD. CIT (A)-II, AGRA FOR THE ASSESSMENT YEARS 2007-08 & 2006-07 RESPECTIVELY. ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 2 2. THE COMMON GROUND RAISED IN BOTH THESE APPEALS P ERTAIN TO DISALLOWANCE OF EXPENSES OF RS.15,00,000/- FOR EACH ASSESSMENT YEAR I.E. 2006-07 & 2007-08 UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER). 3. THE BRIEF FACTS OF THE ISSUE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS MAD E INVESTMENT IN SHARES TO THE TUNE OF RS.2,85,98,237/- FOR THE YEAR ENDED ON 31.0 3.2007 AND RS.4,06,39,408/- FOR THE YEAR ENDED ON 31.03.2006. THE ASSESSING OFFICE R FURTHER NOTICED THAT THE EXPENSES ARE REQUIRED TO BE DISALLOWED UNDER SECTIO N 14A OF THE ACT AS THE ASSESSEE DID NOT APPORTION ANY EXPENDITURE. IN RES PECT OF INVESTMENT IN SHARES, THE INCOME/DIVIDEND WHICH IS EXEMPT INCOME. THE ASSESS ING OFFICER CALCULATED THE AMOUNT OF DISALLOWANCE INVOKING RULE-8D OF THE INCO ME TAX RULES. THE AMOUNT OF DISALLOWANCE WAS CALCULATED BY THE ASSESSING OFF ICER FOR ASSESSMENT YEAR 2007-08 AT RS.17,73,457/- AND FOR ASSESSMENT YEAR 2 006-07 AT RS.16,89,229/- AS PER THE PROVISIONS OF RULE 8D OF THE INCOME TAX RUL ES. 4. THE CIT(A) SUSTAINED THE ADDITION TO THE EXTENT OF RS.15,00,000/- EACH FOR BOTH THE ASSESSMENT YEARS. THE CIT(A) FOLLOWING TH E JUDGEMENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LIM ITED, 234 CTR 1 (BOMBAY) HELD THAT THE PROVISIONS OF SECTION 147 OF THE ACT READ WITH RULE ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 3 8D OF THE INCOME TAX RULES IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE. HOWEVER, THE CIT(A) FOLLOWED THE DECISION OF THE I. T.A.T. SPECIAL BENCH IN THE CASE OF CHEMIWEST LIMITED VS. ITO, 124 TTJ 577 (DEL ) AND HELD THAT THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF TOTAL INCOME HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF T HE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT. THE CIT(A) FOUND IT REASONABLE BUT DISALLOWED RS.15,00,000/- FOR EACH YEAR. 5. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER HAS WRONGLY INVOKED RULE 8D RETROSPECTIVELY WHEREAS RUL E 8D HAS BEEN INSERTED W.E.F. 24.03.2008 APPLICABLE W.E.F. ASSESSMENT YEAR 2008-0 9. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT ON MERIT THE ISSUE IS COVERED BY THE ORDER OF I.T.A.T. AGRA BENCH IN THE CASE OF M/S. PEE CEE SOAP & CHEMI CALS (P) LTD. IN ITA NO.236/AGR/2011 ORDER DATED 20 TH APRIL, 2012. LD. AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS OUT OF INTEREST INCOME AS THE ASSESSEE HAS MADE INVESTMENT IN SHARES WHICH INCOME IS EXEMPT. THE LD. AUTHORISED REPRESENTATIVE POINTED OUT THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS BEFORE INVEST MENT IN THE SHARES. THE RELEVANT FACT POINTED OUT BY THE LD. AUTHORISED REPRESENTATI VE FROM THE ORDER OF CIT(A) AT PAGE NO.2 READS AS UNDER :- ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 4 F.Y. 2005-06 F.Y. 2006-07 RESERVE AND SURPLUS 2,75,16,058/- 3,67,27,564/- INTEREST FREE LOANS RECEIVED FROM DIRECTORS 1,66,00,000/- 1,66,00,000/- UNSECURED LOAN INCLUSIVE OF INTEREST FREE LOANS FROM DIRECTORS. 8,70,40,685/- 8,62,86,766/- 6. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT IN THE LIGHT OF VARIOUS JUDGEMENTS INCLUDING THE ORDER OF I.T.A.T., AGRA BE NCH IN THE CASE OF M/S. PEE CEE SOAP & CHEMICALS (P) LTD. IN ITA NO.236/AGR/201 1 ORDER DATED 20 TH APRIL, 2012, THE ADDITION SUSTAINED BY THE CIT(A) HAS BEEN DELETED. THE RELEVANT FINDING OF THE I.T.A.T., AGRA BENCH IS REPRODUCED AS UNDER :- 8. AFTER CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE, THE LIMITED ISSUE TO BE DECIDED BEFORE US IS WHETHER THE INTERE ST CLAIM OF THE ASSESSEE IS DISALLOWABLE ON THE GROUND THAT THE ASS ESSEE HAS USED THE INTEREST BEARING BORROWED FUNDS IN THE INVESTMENT O F SHARES. THE CLAIM OF INTEREST ON BORROWED FUND IS ALLOWABLE UND ER SECTION 36(1)(III) OF THE ACT. ACCORDING TO THE SAID SECTI ON 36(1)(III) THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORRO WED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE EXPENSES SO LONG AS THE AMOUNT BORROWED IS USED IN THE BUSINESS. THE INTEREST PAI D ON SUCH BORROWING IS AN EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FROM BUSINESS. TO EXAMIN E THE PROBLEM IN CASES WHERE FUNDS ARE PUMPED OUT OF THE BUSINESS WH ICH ARE COMPRISED OF BOTH TYPE OF FUNDS I.E. BORROWED AS WE LL AS OWN FUNDS, FOR NON-BUSINESS PURPOSE. IN ALL SUCH CASES WHERE MIXED FUNDS ARE USED FOR BUSINESS AND OTHER THAN BUSINESS PURPOSES IN SUCH CIRCUMSTANCES THE I.T.A.T., MUMBAI BENCH IN THE CAS E OF ACIT VS. H.P. SHAH & CO. ITA NO.3694/M/2006 ORDER DATED 15.0 1.2009 HELD ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 5 THAT THERE IS NO PRESUMPTIONS THAT MONEY USED FOR O THER PURPOSES CAME OUT OF BORROWED FUNDS. IT CAN BE SAID THAT IN TEREST FREE FUNDS GIVEN ON INVESTMENT IF ARE OUT OF OWN FUNDS, I.E. O WN CAPITAL AND RESERVES IS SUFFICIENT TO COVER SUCH INTEREST FREE INVESTMENT. IN THAT CIRCUMSTANCES, IT IS PRESUMED THAT THE INVESTMENT I N INTEREST FREE FUNDS WERE OUT OF OWN CAPITAL AND RESERVES AND UNDER SUCH CIRCUMSTANCES, THE REVENUE CANNOT DISALLOW INTEREST CLAIM OF THE A SSESSEE UNDER SECTION 36(1)(III) OF THE ACT. THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. PREM HEAVY ENGINEERING WORKS PVT. LTD., 285 ITR 554 (ALLD.) WHEREIN IT HAS BEEN HELD THAT IF THE ASSESSEE HAD A DEQUATE INTEREST FREE FUNDS BY WAY OF PROPRIETARY CAPITAL OR BY WAY OF IN TEREST FREE DEPOSITS FROM CUSTOMERS, THERE IS INFERENCE THAT BORROWED FU NDS ARE NOT DIVERTED FOR NON-BUSINESS PURPOSES. THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT(A) 298 ITR 298 WHE REIN LAW LAID DOWN THAT INTEREST FREE FUNDS TO SISTER CONCERN OUT OF OWN FUNDS, THE DISALLOWANCE CANNOT BE MADE UNDER SECTION 36(1)(III ) OF THE ACT. THE LD. AUTHORISED REPRESENTATIVE RELIED UPON VARIOUS D ECISIONS OF WHICH GIST HAS BEEN FILED BUT THESE DECISIONS RELATED TO THE INVOCATION OF SECTION 14A OF THE ACT. THESE CASES HAVE BEEN DECI DED BY THE COURT/BENCH CONSIDERING THE FACTS OF RESPECTIVE CAS ES. IN THE LIGHT OF ABOVE DISCUSSIONS AND JUDICIAL PRONOUNCEMENTS NOTED ABOVE, IF WE CONSIDER THE FACTS, WE FIND THAT THE ASSESSEE WAS H AVING SHARE CAPITAL OF RS.44,50,000/- AND RESERVE AND SURPLUS OF RS.12, 59,74,541/- OUT OF WHICH THE INVESTMENT IN SHARES WAS RS.5,28,01,422/- . THUS, WE FIND THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS I N THE FORM OF SHARE CAPITAL AND RESERVES TO MAKE INVESTMENT IN SHARES. UNDER THE CIRCUMSTANCES, NO DISALLOWANCE IS REQUIRED UNDER SE CTION 36(1)(III) OF THE ACT. IN THE LIGHT OF THE FACT, WE DO NOT AGREE WITH THE FINDING THE CIT(A) WHICH IS ON PRESUMPTION BASIS THAT BORROWED FUNDS HAS BEEN DIVERTED TO INVESTMENT IN SHARES AND THAT PART OF T HE ORDER OF CIT(A) IS SET SIDE AND DELETE THE ADDITION OF RS.8,00,000/- S USTAINED BY HIM. 7. THE LD. DEPARTMENTAL REPRESENTATIVE DID NOT DISP UTE THE FACTS POINTED OUT BY THE LD. AUTHORISED REPRESENTATIVE. HOWEVER, HE RELIED UPON THE ORDER OF CIT(A). ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 6 8. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. WE FIND THAT THE CASE OF ASSESSING OFFICER IS DISAL LOWANCE OF INTEREST. THE INTEREST EXPENSES IS ALLOWABLE UNDER SECTION 36(1)(III) OF T HE ACT. SUCH DISALLOWANCE CANNOT BE MADE IN CASE WHERE THE ASSESSEE IS HAVING SUFFICIENT INTEREST FREE FUNDS AS HELD BY THE I.T.A.T., AGRA BENCH IN THE CASE CIT ED ABOVE. THIS VIEW IS ALSO FORTIFIED BY THE JUDGEMENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. RELIANCE UTILITY AND POER LIMITED, 313 ITR 340 (BOM BAY). IN THE CASE UNDER CONSIDERATION IT IS ADMITTED FACT THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS TO COVER THE INVESTMENT MADE IN SHARES OF WHI CH INCOME IS EXEMPT UNDER SECTION 10 OF THE ACT. IN CASE OF CIT VS. HERO CYC LES LIMITED, 323 ITR 518 (P&H) WHEREIN IT HAS BEEN HELD THAT DISALLOWANCE UN DER SECTION 14A IS NOT PERMISSIBLE WHERE NO NEXUS BETWEEN THE EXPENDITURE INCURRED AND INCOME GENERATED HAS BEEN ESTABLISHED. HONBLE HIGH COUR T OF BOMBAY IN THE CASE OF INCOME TAX APPEAL NO.1260 OF 2009 IN CASE OF CIT VS . K. RAHEJA CORPORATION P. LTD. JUDGEMENT DATED 08.08.2011 WHILE CONFIRMING TH E ORDER OF I.T.A.T. HELD THAT IF THE INVESTMENT IS MADE OUT OF THE ASSESSEES OWN INTEREST FREE FUNDS, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE A CT. SECTION 14A IS NOT A CHARGING SECTION BUT ONLY DISALLOWANCE OF EXPENDITU RE FOR A FAIR ASCERTAINING OF ALLOWING COMMON EXPENSES BETWEEN TAXABLE AND NON-TA XABLE INCOME. RULE 8D CAN BE APPLICABLE ONLY WHERE DISALLOWANCE OF INTERE ST ON BORROWED CAPITAL WARRANT ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 7 FOR EXPENSES OUT OF SUCH BORROWED CAPITAL WITH THE AMOUNT RELATING TO INVESTMENT IN SHARES AND SEARCH AND NOT ASCERTAINABLE. IN THE LIGHT OF THE ABOVE JUDGEMENT OF BOMBAY HIGH COURT AND OTHERS (SUPRA), THE DISALLOWA NCE OF INTEREST IS NOT WARRANTED UNDER THE CIRCUMSTANCES. THEREFORE, THER E IS NO QUESTION OF INVOKING RULE 8D OF THE RULES. IN THE LIGHT OF THE ABOVE DIS CUSSIONS AND AFTER CONSIDERING THE ADMITTED FACT THAT THE ASSESSEE WAS HAVING SUFF ICIENT OWN INTEREST FREE FUND TO COVER THE INVESTMENT MADE IN SHARES, WE, THEREFORE, ARE OF THE VIEW THAT NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE A CT. WE, THEREFORE, DELETE THE ADDITIONS OF RS.15,00,000/- MADE BY THE ASSESSING O FFICER AND SUSTAINED BY THE CIT(A) FOR EACH ASSESSMENT YEAR I.E. 2007-08 & 2006 -07. 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* ITA NOS.260 & 261/AGR/2011 A.YS. 2007-08 & 2006-07 . 8 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, AGRA BENCH, AGRA 6. GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBUNAL, AGRA TRUE COPY