Prism International Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2617/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3739 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 07-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 01-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRUJANI MOHANTY
• Assessee Lawyers: A K CHADHA
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH : F NEW DELHI) BEFORE SHRI RAJPAL YADAV , JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER I.T.A. NO. 2617/DEL./2010 (ASSESSMENT YEAR : 2007-08) PRISM INTERNATIONAL PRIVATE LIMITED. VS. ACIT, C IRCLE 14(1), R-215, FIRST FLOOR, GREATER KAILASH-I, NEW DELHI. NEW DELHI. (PAN/GIR NO.AAACP6995N) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI A.K. CHADHA. CA REVENUE BY : SMT. SRUJANI MOHANTY, SR.DR ORDER PER K.D. RAJNAN, AM THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 20 07-08 ARISES OUT OF THE ORDER OF CIT(A)-XVII, NEW DELHI. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO DISA LLOWANCE MADE U/S 14A OF THE I.T. ACT, 1961 BY INVOKING THE PROVISIONS OF SECTION 14( 2) OF THE I.T. ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE FACTS OF THE CAS E STATED IN BRIEF ARE THAT THE ASSESSEE COMPANY HAD ESTIMATED PROPORTIONATE EXPENS ES RELATING TO EXEMPT INCOME AT ` 84,689/- AND WAS DISALLOWED U/S 14A OF THE ACT IN C OMPUTATION OF INCOME. THE ASSESSEE EARNED EXEMPT INCOME OF `5,00,27,143/- AND DISALLOW ED EXPENSES OF ` 84,689/- IN THE COMPUTATION OF INCOME. THE EXEMPT INCOME CONSISTS OF DIVIDEND ON EQUITY SHARES AT ` 4,91,64,124/-; DIVIDEND ON UNITS OF MUTUAL FUND AT `4,93,720/- AND LONG TERM CAPITAL GAINS ON REDEMPTION OF UNIT AT ` 3,69,299. IN RESP ONSE TO QUERY RAISED BY THE ASSESSING OFFICER, IT WAS SUBMITTED THAT AMOUNT OF ` 84,689/- WAS DISALLOWED IN COMPUTATION OF INCOME ON THE BASIS OF DISALLOWANCES MADE BY THE AO IN ASSESSMENT YEAR 2005-06. IN I.T.A. NO.2617/DEL./2010 (A.Y. : 2007-08) 2 ASSESSMENT YEAR 2005-06, THE AO MADE DISALLOWANCE O F `50,000/- U/S 14A OF THE ACT. THE ASSESSEE IN ASSESSMENT YEAR 2006-07, DISALLOWED AN AMOUNT OF ` 78,689/- IN THE RETURN OF INCOME. THE EXPLANATION OFFERED BY THE A SSESSEE WAS NOT ACCEPTED ON THE GROUND THAT AS PER PROVISIONS OF SECTION 14A OF THE ACT, DEDUCTION OF EXPENDITURE RELATING TO EXEMPT INCOME WAS NOT ALLOWABLE. THE ASSESSEE HAS EARNED EXEMPT INCOME OF ` 5,00,27,143/- AND HAS MADE TOTAL INVESTMENT IN SUCH ASSETS, INCOME FROM WHICH DID NOT FORM PART OF THE TOTAL INCOME. THE DISALLOWANCE OF ` 84,689/- WAS NOT SUFFICIENT IN RELATION TO EXEMPT INCOME EARNED BY THE ASSESSEE. THE AO AP PLYING THE PROVISIONS OF RULE 8D OF THE RULES, 1962 COMPUTED THE DISALLOWANCE AT ` 13,9 8,496/-. 3. ON APPEAL, FOLLOWING THE DECISION OF ITAT, SPECI AL BENCH IN THE CASE OF DAGGA CAPITAL MANAGEMENT LTD., 117 ITD 169, THE CIT(A) UP HELD THE DISALLOWANCE MADE BY THE AO. 4. BEFORE US, LD.AR OF THE ASSESSEE SUBMITTED THAT ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS FROM WHICH INVESTMENT WAS MADE. THE ASSESSEE ESTIMATED DISALLOWANCE OF ` 84,689/- BASED ON DISALLOWANCE MADE BY THE ASSESSIN G OFFICER IN EARLIER YEARS. IT WAS ALSO SUBMITTED THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE AT ` 38,04,09,520/- AS AGAINST INVESTMENT OF ` 33,58,26, 423/- SINCE INTEREST FREE FUNDS WITH THE ASSESSEE WERE IN EXCESS OF INVESTMENT AS ON 31. 3.07, NO DISALLOWANCE COULD BE MADE U/S 14A OF THE ACT. LD.AR OF THE ASSESSEE RELIED O N THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. TIN BOX COMPANY, 260 I .T.R. 637 FOR THE PROPOSITION THAT WHERE DEPARTMENT COULD NOT POINT OUT ANY SPECIFIC INTERES T BEARING BORROWED FUNDS WHICH HAD BEEN DIVERTED BY THE ASSESSEE TOWARDS EXEMPT INCOME , INTEREST COULD NOT BE DISALLOWED. HE ALSO PLACED RELIANCE ON THE DECISION OF ITAT, DE LHI BENCH IN THE CASE OF ACIT VS. SUN INVESTMENT P. LTD., 8 ITR (TRIB) 33 (DEL.). 5. ON THE OTHER HAND, LD.DR. SUPPORTED THE ORDER OF THE CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE AO HAD DISALLOWED INTEREST RELATING TO EXEMPT I NCOME BY APPLYING RULE 8D OF THE I.T. I.T.A. NO.2617/DEL./2010 (A.Y. : 2007-08) 3 RULES, 1962. THE DISALLOWANCE MADE BY THE AO HAS B EEN UPHELD BY THE CIT(A) RELYING ON DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF DA GGA CAPITAL MANAGEMENT P. LTD. (SUPRA). THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYACE MANUFACTURING CO. PVT. LTD. VS. DCIT, 43 DTR 177 HAS HELD THAT PR OVISIONS OF SECTION 14A ARE NOT RETROSPECTIVE IN NATURE. THEY ARE APPLICABLE FROM ASSESSMENT YEAR 2008-09. HONBLE BOMBAY HIGH COURT HAS ALSO HELD THAT THE AO HAS TO ENFORCE PROVISIONS OF SECTION 14A(1) OF THE I.T. ACT, 1961 AND FOR THAT PURPOSE, THE AO WA S DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAD BEEN INCURRED IN RELATION TO INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT BY ADOPTING A REASONABLE BASIS OR METHOD SUSTAINED WITH ALL RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE. IN THE CASE BEFORE US, THE ASSESSMENT YEAR INVOLVED IS 2007-08. THE DISALLOWANCE U/S 14A IN R ESPECT OF EXEMPT INCOME CAN BE MADE IN RESPECT OF EXPENDITURE DIRECTLY LINKED WITH THE EXEMPT INCOME. THE AO HAD NOT EXAMINED THE NEXUS BETWEEN THE BORROWED FUNDS AND T HE INVESTMENT RESULTING IN EXEMPT INCOME. ACCORDING TO THE ASSESSEE, AS ON 31.3.07, THE ASSESSEE HAD INTEREST FREE FUNDS OF ` 38,04,09,520. FROM THE BALANCE SHEET, IT IS NOT KN OWN AS ON THE DATE OF INVESTMENT, THE INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSE E IN BANK OR IN CASH. UNLESS, THE ASSESSEE IS ABLE TO ESTABLISH NEXUS BETWEEN THE INTEREST FRE E FUNDS AND INVESTMENT MADE, THIS CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. IN O RDER TO EXAMINE THE NEXUS BETWEEN BORROWED FUNDS AND INVESTMENTS MADE THE ASSESSMENT ORDER IS TO BE SET ASIDE. IN CASE, ASSESSEE IS NOT ABLE TO ESTABLISH THE NEXUS BETWEEN THE INTEREST FREE FUNDS AND THE INVESTMENTS MADE, THE AO WILL ADOPT A REASONABLE BA SIS OR METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DISALLOW TH E EXPENDITURE RELATABLE TO EXEMPT INCOME AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYACE MFG. CO. PVT. LTD. VS. DCIT (SUPRA). THE AO WILL PROVIDE RE ASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 10.06.2011. SD/- SD/- (RAJPAL YADAV) (K.D. RANJAN) I.T.A. NO.2617/DEL./2010 (A.Y. : 2007-08) 4 JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: JUNE 10,2011 SKB COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A)-XVII, NEW DELHI. 5. DR DEPUTY REGISTRAR