M/s. Ankur Fine Products, Ahmedabad V. The Dy.CIT.,Circle-12, Ahmedabad

ITA 2628/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0094 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 18-08-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 21-07-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI A.N. PAHUJA, ACCOUNTANT MEMBER DATE OF HEARING : 18/08/2010 DRAFTED ON: 19 /08/2010 ITA NO.2628/AHD/2008 ASSESSMENT YEAR : 2004-05 M/S.ANKUR FINE PRODUCTS SHANKAR CHEMICAL WORKS COMPOUND RAKHIAL, AHMEDABAD VS. THE DY.CIT CIRCLE-12 AHMEDABAD PAN/GIR NO. : AADFA 0503 F (APPELLANT) .. (RESPONDENT) APPELLANT BY : MS. URVASHI SHODHAN RESPONDENT BY: SHRI K.M. MAHESH, SR. D.R. O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE WHICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-XX, AHMEDABAD DATED 02/04/2008 PASSED FOR ASSESSMENT YEAR 2004-05 . 2. THE GROUNDS RAISED ARE HEREBY DECIDED AS FOLLOWS . 3. GROUND NO.1 IS GENERAL IN NATURE NEEDS NO INDEPE NDENT ADJUDICATION. 4. GROUND NO.2 IS REPRODUCED BELOW:- (2) THE LEARNED COMMISSIONER(A) ERRED IN CONFIRMIN G THE DISALLOWANCE OF RS.90,000/- BEING PROFESSIONAL CHAR GES PAID TO GATEWAY WEB SYSTEMS FOR WANT OF VERIFICATION OF THE SERVICES RENDERED IN THE ABSENCE OF WRITTEN AGREEME NT. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 2 - 4.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S.143(3) OF THE I.T. ACT, 1961 DATED 13/ 02/2006 WERE THAT THE ASSESSEE-FIRM IS ENGAGED IN THE BUSINESS OF MANUF ACTURING MEDICAL PRODUCTS. ON SCRUTINY OF PROFESSIONAL CHARGES, IT WAS NOTICED THAT A SUM OF RS.2,70,000/- WAS PAID TO GATEWAY WEB SYSTEMS . THE EXPLANATION WAS THAT THOSE EXPENSES WERE PAID TO MAINTAIN AND O PERATE A SOFTWARE ON MONTHLY BASIS. THE ASSESSING OFFICER HAS ASKED TO FURNISH A COPY OF THE AGREEMENT AND THE EXACT DETAILS OF THE SERVICES REN DERED. IN THIS CONTEXT, A REPLY WAS GIVEN AND THE RELEVANT PORTION IS REPRO DUCED BELOW:- .THE PAYMENTS HAVE BEEN MADE ON THE BASIS OF THE MONTHLY BILLS RAISED BY THEM FOR SUPPLY OF THE MAN POWER FOR THE OPERATION, MAINTENANCE AND MODIFICATIONS OF SOFTWARE. BY THIS SOFTWARE THE ASSESSEE CONTROLS AND MONITORS MOVEMENTS OF MORE TH AN 18000 ITEMS IN THE BUSINESS OF THE TRADING OF MEDICINES A ND HEALTH RELATED PRODUCTS. THE SOFTWARE GENERATES VARIOUS REPORTS F OR MIS PURPOSE WHICH HELPS IN TAKING THE DECISIONS LIKE IMPLEMENT PURCHASE POLICY FOR MEDICINES SUCH AS PRODUCT SELECTION, CATEGORY S ELECTION, QUANTITY TO BE STORED, MANNER OF STORAGE, EXPIRY PO LICY OF THE FIRM STOCK LEVELS, SELECTION OF BRANDED PRODUCTS FOR PUR CHASE, SELECTION FOR GENERIC PRODUCTS FOR PURCHASE, SELECTION OF PHA RMA COMPANIES FOR PURCHASE. 4.2. THE ASSESSING OFFICER WAS NOT CONVINCED AND HE LD THAT THE ENTIRE AMOUNT WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPO SE OF THE BUSINESS, THEREFORE, AFTER COMPARING THE EXPENDITURE MADE IN THE PAST YEAR DISALLOWED A SUM OF RS.90,000/- AS AN EXCESSIVE AMO UNT OF EXPENDITURE. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 3 - 4.3. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST A PPELLATE AUTHORITY, THE LEARNED CIT(APPEALS) HAS NOTED THAT ONCE THE AU THORISED REPRESENTATIVE HAD SAID THAT THE PAYMENT HAD BEEN M ADE AT THE RATE OF RS.18,000/- PER MONTH, THEREFORE, THE ASSESSING OFF ICER HAD JUSTIFIED IN DISALLOWING THE EXCESSIVE PAYMENT AS CLAIMED BY THE ASSESSEE. 5. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, WE HAVE NOTICED THAT CERTAIN RELEVANT FACTS HAVE NOT BEEN PROPERLY CONSI DERED BY THE REVENUE AUTHORITIES. THOUGH THE ADMITTED POSITION IS THAT THERE WAS NO WRITTEN AGREEMENT, HOWEVER, THE ASSESSEE HAS PRODUCED THE C OPIES OF THE BILL ISSUED BY GATEWAY WEB SYSTEMS. IT HAS ALSO BEEN INFORMED TO THE REVENUE AUTHORITIES THAT THE ASSESSEE HAS MADE THE IMPUGNED PAYMENT ONLY AFTER DEDUCTION OF TAX U/S.194J OF THE I.T. AC T, 1961. IT HAS ALSO BEEN INFORMED THAT ALL THE PAYMENTS HAVE BEEN MADE THROUGH 'A/C PAYEE CHEQUES'. RECORDS HAVE ALSO REVEALED IN THE PAST ON IDENTICAL FACTS SIMILAR EXPENDITURE HAD ALREADY BEEN ALLOWED. AS FAR AS THE NATURE OF EXPENDITURE IS CONCERNED, IT WAS EXPLAINED THAT THE ASSESSEE WAS DEALING IN AS MANY AS 18000 ITEMS WHILE TRADING IN MEDICINE S AND HEALTH-CARE RELATED PRODUCTS. THE SAID SOFTWARE WAS FOR THE P URPOSE OF GENERATING VARIOUS REPORTS FOR HELPING IN MAKING THE DECISIONS OF PURCHASES OF MEDICINES AND QUANTITY STORE, EXPIRY OF STOCK, SELE CTION OF BRANDS, ETC. RATHER THE ASSESSING OFFICER HAS NOT DOUBTED THE GE NUINENESS OF THE EXPENDITURE BUT IN HIS OPINION, IT WAS EXCESSIVE IF COMPARED WITH THE PAST YEARS AMOUNT OF EXPENDITURE. THE REASONING ASSIG NED BY THE REVENUE AUTHORITIES CANNOT BE SAID TO BE LOGICAL, HENCE, WE HEREBY REVERSE THE SAME AND DIRECT TO ALLOW THE CLAIM TO TOTO. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 4 - 6. GROUND NO.3:- (3) THE LEARNED COMMISSIONER(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.4,16,447/- U/S.14A, CONSIDERING THE SAME AS EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING TAX-FREE DIVIDEND INCOME, OUT OF INTEREST PAID ON PARTNERS CAPITAL. FURTHER, THE INTEREST PAID ON PARTNERS CAPITAL, WHI CH IS OTHERWISE ALLOWABLE U/S.40(B) OF THE I.T.ACT, 1961. 6.1. THE APPELLANT HAD MADE INVESTMENT IN DEBENTURE S AND BONDS, ETC. ADMITTEDLY, THE INCOME THEREFROM WAS NOT FORMING TH E PART OF THE TOTAL INCOME AND CLAIMED AS EXEMPTED INCOME. INVESTMENT TOWARDS THOSE ASSETS WAS AMOUNTED TO RS.57,46,768/-. DIVIDEND D ERIVED ON SUCH INVESTMENT WAS AT RS.8,26,370/- WHICH WAS NOT INCLU DED IN THE COMPUTATION OF INCOME. FURTHER, IT HAS ALSO NOTED BY THE ASSESSING OFFICER THAT THE APPELLANT HAD PAID INTEREST OF RS. 8,50,905/-. INVOKING THE PROVISIONS OF SECTION 14A, THE ASSESSING OFFICE R HAD MADE PRO-RATA DISALLOWANCE OF INTEREST AS PER THE FOLLOWING OBSER VATION:- 6. MOREOVER, ON PERUSAL OF THE ENTIRE REPLY, IT IS FOUND THAT BY REFERRING THE BOARD CIRCULARS, ETC. AN ATTEMPT IS M ADE BY THE ASSESSEE TO GO THROUGH THE LEGISLATIVE HISTORY OF T HE INSERTION OF SECTION 40(B) OF THE I.T. ACT AND THE AMENDMENT OF THE RELATED PROVISIONS OF THE REGISTRATION OF THE FIRM. IT IS HOWEVER FELT THAT THE INSERTION OF PROVISIONS OF SECTION 14A ARE ALTO GETHER SEPARATE PIECE OF LEGISLATION FOR THE DISTINCT PURPOSE AS ME NTIONED ABOVE. THEREFORE, THE ASSESSEES REFERENCE IN THE MANNER A BOVE IS OF LITTLE RELEVANCE IN THE PRESENT CONTEXT AND IS THEREFORE N OT CONSIDERED. THEREFORE VIEWED FROM ANY ANGLE THERE IS NO CASE FO R THE ASSESSEE AND IT IS HELD THAT OUT OF THE TOTAL INTEREST EXPEN SES CLAIMED OF RS.4,16,447/- IS DISALLOWABLE U/S.14A OF THE ACT AN D ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 5 - THE PRO-RATA DISALLOWANCE INTEREST EXPENSES IS TO B E WORKED OUT AS UNDER: 8,465,263 X 5446768 = RS.4,16,447/- 11068390 X 1 7. THE FIRST APPELLATE AUTHORITY HAS DISCUSSED THE FACTS OF THE CASE AND CAME TO THE CONCLUSION THAT THE PROVISIONS OF SECTI ON 14A OF THE I.T. ACT, 1961 WERE RIGHTLY APPLIED BY THE ASSESSING OFFICER AND, THEREAFTER, AFFIRMED THE PROPORTIONATE OF INTEREST. 8. WITH THIS BRIEF FACTUAL BACKGROUND, WE HAVE HEAR D BOTH THE SIDES. NOW THIS ISSUE STOOD SETTLED BY THE LATEST DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD., MUMBAI IN IT APPEAL NO.626 OF 2010 AND WRIT PETITION OF 75 8 OF 2010 ORDER DATED 12/08/2010, WHEREIN THE HON'BLE HIGH COURT HA S UPHELD THE CONSTITUTIONAL VALIDITY OF SECTION 14A OF THE I.T. ACT, 1961 AND HELD THAT THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHE R THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN R ELATION TO DIVIDEND INCOME AND/OR INCOME FROM MUTUAL FUND WHICH DO NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S.14A OF THE I.T. AC T, 1961. IT HAS ALSO BEEN DIRECTED THAT THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. IT HAS ALSO BEEN OBS ERVED BY THE HON'BLE COURT THAT WHILE MAKING THAT DETERMINATION, THE ASS ESSING OFFICER SHOULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF REDUCING ITS ACCOUNTS AND MATERIAL HAVING A BEARING ON THE FACTS AND C IRCUMSTANCES OF THE CASE. IN THIS REGARD, WE ARE ALSO GOVERNED BY A D ECISION OF RESPECTED ITAT MUMBAI BENCH PRONOUNCED IN THE CASE OF DAGA CA PITAL ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 6 - MANAGEMENT PVT.LTD. REPORTED AS 117 ITD 169 (MUM.), WHEREIN ALSO IT WAS PRONOUNCED THAT IN ORDER TO ESCAPE THE APPLICAB ILITY OF SECTION 14A, ONUS IS ON THE ASSESSEE TO PROVE THAT THE EXPENDITU RE WAS INCURRED FOR EARNING TAXABLE INCOME. HOWEVER, IT HAS ALSO BEEN PRESCRIBED THAT AFTER INTRODUCTION OF RULE 8D, IT BECOMES CLEAR THAT NOT ONLY THE EXPENDITURE DIRECTLY RELATING TO EXEMPTED INCOME BUT ALSO THE I NDIRECT EXPENDITURE LIKE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR: INCOME OR RECEIPT ARE TO BE TAKEN INTO FOR THE PURPOSE O F INVOCATION OF THE PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961. BECAUSE OF THESE JUDGEMENTS THE ISSUE IN HAND REQUIRES RE-ADJUDICATI ON AT THE STAGE OF ASSESSING OFFICER, SO THAT THE CORRECT FINDING OF F ACTS AS DESCRIBED IN ABOVE SHOULD BE FIRST DETERMINED SO AS TO APPLY THE IMPUGNED PROVISIONS. WITH THE RESULT, WE RESTORE THIS ISSUE BACK TO THE STAGE OF ASSESSMENT TO BE DECIDED DE NOVO AS PER THE DIRECTIONS. THIS GROUND MAY BE TREATED AS ALLOWED ONLY FOR STATISTICAL PURPOSES. 9. GROUND NO.4:- (4) THE LEARNED COMMISSIONER(A) ERRED IN HOLDING TH AT THE PROVISION OF SECTION 40(B) IS NOT APPLICABLE AS THE FUNDS ARE UTILIZED FOR THE PURPOSE OF INVESTMENT RATHER THAN INVESTMENT AS STATED IN PARTNERSHIP DEED. 9.1. THIS IS AN ALTERNATE PLEA WHICH IS OTHERWISE L INKED WITH GROUND NO.3-SUPRA. SINCE WE HAVE GIVEN CERTAIN DIRECTION S IN RESPECT OF ESTABLISHING THE NEXUS, THEREFORE, THIS GROUND AS W ELL IS REFERRED BACK FOR RE-ADJUDICATION TO ASSESSING OFFICER, HENCE, MAY BE TREATED AS ALLOWED ONLY FOR STATISTICAL PURPOSES. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 7 - 10. GROUND NO.5:- (5) ALTERNATIVELY, WITHOUT PREJUDICE TO THE ABOVE GROUND NO 3, THE LEARNED COMMISSIONER(A) ERRED IN CONFIRMING THE WORKING OF THE DISALLOWANCE OF INTEREST IN PROPORTI ON TO THE AMOUNT OF INVESTMENT AND TOTAL FUNDS APPLIED INSTEA D OF IN PROPORTION TO TAXABLE AND NON-TAXABLE INCOME EARNED FOR PAYMENT OF INTEREST. 10.1. THIS GROUND IS AGAINST AN ALTERNATE PLEA WHIC H HAS A DIRECT BEARING ON THE OUTCOME OF GROUND NO.3-SUPRA, THEREFORE, NEE DS TO BE DECIDED AFRESH, HENCE, MAY BE TREATED AS ALLOWED ONLY FOR S TATISTICAL PURPOSES. 11. GROUND NO.6:- (6) THE LEARNED COMMISSIONER(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.27,549/- ON ACCOUNT OF INFLATED LIABILITIES BEING DIFFERENCE IN CLOSING BALANCE AS PER ASSESSEE S BOOKS OF ACCOUNTS AND CREDITORS BOOKS OF ACCOUNTS, CONSI DERING THAT THE REASONS OF THE DIFFERENCE HAD NOT BEEN PRO PERLY EXPLAINED AND RECONCILED TO THE ASSESSING OFFICER. 11.1. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICE R HAD DISALLOWED THE DIFFERENCE BETWEEN THE BALANCE APPEARING ON THE BAL ANCE-SHEET AND THE BALANCE AS APPEARED IN THE BOOKS OF ACCOUNTS OF THE RESPECTIVE PARTIES. THE WORKING OF THE DIFFERENCE HELD AS INFLATED LIAB ILITIES IS AS FOLLOWS:- SR.NO. NAME OF PARTIES THE CLOSING FIGURE APPEARING IN THE PARTY THE CLOSING FIGURE OF LIABILITY AS APPEARING IN THE BOOKS OF THE ASSESSEE INFLATED LIABILITIES AS SHOWN BY THE ASSESSEE 1. SHAH KOTHARI BROTHERS NIL 24589 24589 2. CHAMUNDA 4223 6927 2704 ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 8 - SURGICAL AGENCY 3. M/S.PRIYA ENTERPRISE 2606 5566 2960 4. VEER CORPORATION 7991 27173 19182 12. ON EXAMINATION OF THE FACTS OF THE CASE, THE AD DITION IN RESPECT OF PARTIES APPEARING AT SL.NOS.2 & 4 HAVE BEEN DELETED . IN RESPECT OF SHAH KOTHARI BROTHERS, IT WAS EXPLAINED THAT THE SAID PA RTY HAD NOT ACCOUNTED FOR THE BILLS ISSUED BY THEM. THE SAID PARTIES HA D CLOSED ITS SALES FROM 26/03/2004 ONWARDS, HOWEVER, THE BILL WAS ISSUED ON 29/03/2004, THEREFORE, IT WAS NOT INFLATED IN THE BOOKS OF ACCO UNT OF THE SAID PARTY. NEVERTHELESS, IT HAS ALSO BEEN POINTED OUT THAT THE RE WAS A PROOF OF DELIVERY OF GOODS BEFORE 31/03/2004 SINCE THE DELIV ERY HAD TAKEN PLACE WITHIN THE FINANCIAL YEAR THOUGH THE INVOICES WERE ISSUED LATER ON, THE LIABILITY WAS CLAIMED AS THE LIABILITY OF THE CURRE NT YEAR. BEFORE US, CERTAIN EVIDENCES IN SUPPORT OF THE CLAIM HAVE BEEN FURNISHED IN THE COMPILATION TO DEMONSTRATE THAT THE SAID DISCREPANC Y HAS OTHERWISE BEEN RECONCILED AFTER COMPARING THE RESPECTIVE ACCOUNTS OF THE PARTIES, THEREFORE, CONSIDERING THE TOTALITY OF THE CIRCUMST ANCES OF THE CASE, WE HEREBY REVERSE THE FINDINGS OF THE AUTHORITIES BELO W AND HOLD IT IS NOT A CASE OF INFLATED LIABILITY, THEREFORE, DESERVES TO BE ALLOWED. IN RESPECT OF THE PARTY AS APPEARING AT SL.NO.3 M/S.PRIYA ENTERPR ISE, THE SHORT SUBMISSION IS THAT THE SAID DISCREPANCY DETECTED WA S SUBSEQUENTLY REVERSED IN THE BOOKS OF ACCOUNT. IN THE COMPILATI ON, THE SAID REVERSAL ENTRY HAVE BEEN PLACED ON RECORD. IN VIEW OF THIS, WE REFER THIS ISSUE BACK TO THE STAGE OF THE ASSESSING OFFICER TO EXAMI NE THE CORRECTNESS OF THE RECTIFICATION, I.E. REVERSAL OF ENTRY AND IF FO UND CORRECT, THEN THERE IS NO NECESSITY TO TAX THE SAME AMOUNT TWICE IN THE HA NDS OF THE ASSESSEE. ITA NO. 2628/AHD/2008 M/S. ANKUR FINE PRODUCTS VS. DY.CIT ASST.YEAR - 2004-05 - 9 - WE ORDER ACCORDINGLY. AS A RESULT, THIS GROUND M AY BE TREATED AS PARTLY ALLOWED. 13. GROUND NO.7:- (7) THE LEARNED COMMISSIONER(A) ERRED IN RESTRICTI NG THE DISALLOWANCE OF RS.7,000/- MADE ON ADHOC BASIS OUT OF CONVEYANCE EXPENSES RS.23,010/-, TELEPHONE EXPENSES OF RS.6808/- AND MISCELLANEOUS EXPENSES RS.47,397/-, CONSIDERING THEM TO BE OF NON-BUSINESS PURPOSE. 13.1. AS IS APPARENT FROM THIS GROUND, CERTAIN ADHO C ADDITIONS HAVE BEEN MADE TOWARDS TELEPHONE EXPENSES, CONVEYANCE EXPENSE S, MISCELLANEOUS EXPENSES, ETC. CONSIDERING THE QUANTUM INVOLVED AS ALSO THE TOTALITY OF THE CIRCUMSTANCES OF THE CASE, THE LEARNED AUTHORIS ED REPRESENTATIVE OF THE ASSESSEE HAS NOT CONTESTED THIS GROUND SERIOUSL Y, HENCE, WE HEREBY DISMISS THE SAME BEING NOT PRESSED BEFORE US. 14. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 27/ 08 /2010. SD/- SD/- ( A.N. PAHUJA ) ( MU KUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED 27/ 08 /2010 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPA RTMENT. 3. THE CIT CONCERNED. 4. THE LD. CIT(A PPEALS)-XX, AHMEDABAD 5. THE DR, AHMEDABAD BENCH. 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD