JAYANT R. PARDIWALA, MUMBAI V. ACIT 31(2), MUMBAI

ITA 270/MUM/2018

• Counselvise Citation: [2019] 111 COUNSELVISE.COM (IT) 9989 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2013-2014
• Appeal Filed On: 11-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS KAVITA KAUSHAL
• Assessee Lawyers: AJAY R SINGH; RAVINDRA POOJARY S
• Keywords: Capital asset; Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI PAWAN SINGH (JM) & SHRI S RIFAUR RAHMAN (AM) ITA NO. 270/MUM/2018(ASSESSMENT YEAR: 2013-14) SHRI JAYANT R PARDIWALA 218, HIGH TECH INDUSTRIAL CENTRE, CAVES ROAD, JOGESHWARI (E), MUMBAI-400 060 PAN : AAAPP4718N VS ACIT-24(1), PRATYAKSH KAR BHAVAN, BANDRA, MUMBAI-400050 APPELLANT RESPONDEDNT APPELLANT BY SHRI AJAY R SINGH & RAVINDRA POOJARY ADVOCATES RESPONDENT BY MRS KAVITA KAUSHAL SR DR DATE OF HEARING 05-12-2019 DATE OF PRONOUNCEMENT 11-12-2019 O R D E R PER PAWAN SINGH, JM : 1. THIS IS AN APPEAL FILED BY THE ASSESSEE WHICH ARISE S OUT OF THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-42, HE REINAFTER REFERRED AS LD CIT(A) , MUMBAI DATED 18-08-2017, WHICH IN TURN ARISES FROM ASSESSMENT ORDER DATED 31-12-2015 PASSED UNDER SECT ION (U/S) 143(3) OF INCOME-TAX ACT (ACT) FOR THE ASSESSMENT YEAR 201 3-14. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- I: DISALLOWANCE U/S. 14A ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) HAS ERRED BY CONFIRMING DISALLOWANCE U/S 14A READ WITH RULE 8D OF RS. 9,05,5087- OVER ABOVE APPELLANT'S SUO MOTTO DIS ALLOWANCES OF RS. 442,6147- IN RETURN OF INCOME ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) HAS ERRED BY CONSIDERING INTEREST RECEIVED F ROM PSU TAX FREE BOND, WHILE DETERMINING DISALLOWANCE U/S 14A READ WITH RU LE 8D OF RS. 1,50,24,2897-; WHICH ACTUALLY SHOULD BE OUTSIDE THE PURVIEW OF SECTION 14A. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) HAS IGNORED THE FACT THAT HON. ITAT IN APPEL LANT CASE HAS RESTRICTED DISALLOWANCE AT 2% OF TAX FREE INCOME FOR ASSESSMEN T YEAR 2010-11. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE IS AN INDIVIDU AL, ENGAGED IN THE BUSINESS OF DEALING IN HIGH-TECH PRINTING MACHINERY , COMPUTER SOFTWARE AND OTHER ANNUAL MAINTENANCE CONTRACT. THE ASSESSEE IS PARTNER IN PARTNERSHIP FIRMS M/S GRAPHIC FIRM. THE ASSESSEE FI LED HIS RETURN OF INCOME FOR AY 2013-14 DECLARING TOTAL INCOME AT RS. 2.48 CRORES. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS SHOWN F OLLOWING EXEMPT INCOME; SR NO. PARTICULARS EXEMPT INCOME (RS.) 1 DIVIDENDS FROM COMPANIES 54,74,290/- 2 INTEREST FROM TAX FREE PSU BONDS 1,50,24,289/- 3 SHARE IN PROFIT FROM A PARTNERSHIP FIRM 1,32,123/ - TOTAL 2,60,30,702/- 3. DURING THE ASSESSMENT, THE ASSESSING OFFICER (AO) N OTED THAT THE ASSESSEE HAS MADE SUO MOTO DISALLOWANCE OF RS.4,12,614/-. THE AO FURTHER RECORDED THAT BASIS OF WORKING OF THE DISAL LOWANCE IS NOT FURNISHED BY ASSESSEE. THEREFORE, THE AO ISSUED SH OW CAUSE NOTICE TO EXPLAIN AND CO-RELATE WITH THE EVIDENCE OF EACH OF THE INVESTMENT. THE ASSESSEE FILED ITS REPLY DATED 20-10-2015. IN THE REPLY, THE ASSESSEE ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 3 STATED THAT PROVISIONS OF SECTION 14A IS NOT APPLIC ABLE TO THE ASSESSEE FOR THE REASON THAT ASSESSEE HAS MADE SUO MOTO DISA LLOWANCE OF 2% OF TAX FREE INCOME AS PER CIT(A)S ORDER FOR AY 2009-1 0. THE ASSESSEE ALSO FURNISHED THE BREAKUP OF EXEMPT INCOME EARNED DURING THE YEAR. THE ASSESSEE ALSO STATED THAT HE HAS NOT BORROWED A NY AMOUNT FOR MAKING INVESTMENT AND NO INTEREST IS PAID. DISALLO WANCE AS PER RULE 8D WAS NOT MADE AS THE FORMULA WAS GIVING ABSURD RE SULTS. THE ASSESSEE WAS AVAILING SERVICES OF FUND MANAGER AND STOCK BROKER ON FREE OF COST BASIS FOR THE PURPOSE OF INVESTMENT OF EARNING TAX FREE INCOME. THE BROKER AND AGENT GET HEFTY COMMISSION FROM MUTUAL FUNDS BECAUSE OF HUGE INVESTMENTS MADE BY ASSESSEE. THE ASSESSEE STATED THAT SUO MOTO DISALLOWANCE WAS QUITE ENOUGH. THE CONTENTS OF THE REPLY FURNISHED BY THE ASSESSEE IS RECORDED AT PARA 4.2 OF THE ASSESSMENT ORDER. 4. THE SUBMISSION OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO. THE AO INVOKED THE PROVISIONS OF RULE 8D AND MADE DISALLOW ANCE UNDER (I) RS.2,022 BEING DEMAT CHARGES; (II) NO DISALLOWANCE U/R 8D(2)(II) AND (III) RS.13,16,100 BEING 0.5% OF AVERAGE VALUE OF I NVESTMENT. 5. ON APPEAL BEFORE LD. CIT(A), THE ACTION OF AO WAS C ONFIRMED. THE LD. CIT(A) WHILE CONFIRMING THE ORDER OF AO RELIED UPON THE ORDER FOR ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 4 AY 2012-13 PASSED BY CIT(A)-42 DATED 30-03-2014. T HE LD. CIT(A) FURTHER HELD THAT THERE IS NO CHANGE IN THE FACTS F OR THE CURRENT YEAR; ACCORDINGLY, THERE WAS NO REASON TO DEVIATE FROM TH E FINDING OF HIS PREDECESSORS DECISION. FURTHER AGGRIEVED BY THE O RDER OF LD. CIT(A), THE ASSESSEE HAS FILED PRESENT APPEAL BEFORE US. 6. WE HAVE HEARD THE SUBMISSIONS OF LEARNED AUTHORISED REPRESENTATIVES (LD.AR) FOR THE ASSESSEE AND THE LEARNED DEPARTMENT AL REPRESENTATIVE (LD. DR) FOR THE REVENUE AND PERUSED THE MATERIAL A VAILABLE ON RECORD. THE LD.AR FOR THE ASSESSEE SUBMITS THAT THE ASSESSE S IS AVAILING FREE SERVICES OF THE FUND MANAGERS & STOCK BROKER FOR TH E PURPOSE OF INVESTMENT & EARNING TAX FREE INCOME. THE BROKERS, THE AGENTS GET HEFTY COMMISSION FROM THE MUTUAL FUNDS BECAUSE OF H UGE SIZE OF THE INVESTMENT MADE BY THE ASSESSEE. THEREFORE, THE ASS ESSEE IS NOT REQUIRED TO MAKE ANY EXPENDITURE BY WAY OF TRAVELLI NG OR DEPLOYING STAFF ETC. THE ASSESSEE HAS NOT INCURRED ANY DIREC T OR INDIRECT EXPENDITURE OF ANY NATURE FOR THE PURPOSE OF EARRIN G TAX FREE INCOME. CONSIDERING THE STATUS OF THE ASSESSEE, THE ASSESSE E IS GETTING FREE 'HOME DELIVERY' SERVICES FROM THE MUTUAL FUNDS/ AGE NTS/ BROKERS AND FUND MANAGERS. . THE ASSESSEE DOESN'T HAVE ANY DE DICATED STAFF FOR HANDLING PORTFOLIO. THE PORTFOLIO ANALYSIS IS MADE BY THE FUND MANAGER ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 5 IN ORDER TO GET MORE BUSINESS FROM THE ASSESSEE. D EMAT CHARGES OF RS.2022/- ARE DEBITED TO CAPITAL ACCOUNT AND NOT CL AIMED AS DEDUCTIBLE EXPENSES. THE LD AR FOR THE ASSESSEE SUBMITS THAT S IMILAR DISALLOWANCE WAS RESTRICTED AT 2% OF TAX FREE INCOME BY THE TRIB UNAL IN APPEAL FOR ASSESSMENT YEAR 2010-11, VIDE ITA NO. 3033/MUM/2016 DATED 15.03.2017. THE FACTS OF THE PRESENT YEAR UNDER CO NSIDERATION ARE SIMILAR AND THE ORDER FOR AY 2010-11 MAY BE FOLLOWE D. 7. THE LD. AR FOR THE ASSESSEE SUBMITS THAT THE LD CIT (A) CONFIRMED THE ORDER OF AO BY TAKING VIEW THAT SIMILAR DISALLOWANC E WAS MADE FOR ASSESSMENT YEAR 2012-13 WHEREIN HIS PREDECESSOR DIS MISSED THE APPEAL OF ASSESSEE VIDE ORDER DATED 30.03.2015. THE LD AR FOR THE ASSESSEE SUBMITS THAT AGAINST THE ORDER OF LD CIT(A) FOR AY 2012-13 THE ASSESSEE FILED APPEAL BEFORE TRIBUNAL, HOWEVER, THE SAID APPEAL WAS DISMISSED BY TRIBUNAL VIDE ITA NO. 5231/MUM/2017 IN ORDER DATED 30/01/2019. THE LD. AR FOR THE ASSESSEE FURTHER SUB MITS THAT THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE QUITE DIFFEREN T WITH AY 2012-13. IN AY 2012-13, THE ASSESSEE HAS NOT OFFERED SUO MOT O DISALLOWANCE; HOWEVER, FOR THE YEAR UNDER CONSIDERATION, THE ASSE SSEE HAS OFFERED SUO MOTO DISALLOWANCE @ 2% OF EXEMPT INCOME, WHICH IS Q UITE REASONABLE. THE CIT(A) FOR AY 2009-10 RESTRICTED THE DISALLOWAN CE @ 2% OF THE ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 6 EXEMPT INCOME, FURTHER THE TRIBUNAL ALSO RESTRICTED SIMILAR DISALLOWANCES FOR AY 2010-11 @2% OF THE EXEMPT INCO ME AND THE REVENUE HAS NOT FILED FURTHER APPEAL TO HIGHER FORU MS/ COURTS. 8. WITHOUT PREJUDICE TO ABOVE, THE LD.AR SUBMITTED THA T IN PRESENT CASE THERE IS SUO-MOTO DISALLOWANCE OF RS. 4,12,614/-. T HEREFORE, THE AO WAS REQUIRED TO RECORD HIS SATISFACTION BEFORE REJE CTION OF SUO MOTO DISALLOWANCE OFFERED BY THE ASSESSEE UNDER SECTION 14A. THE AO HAS NOT RECORDED HIS DISSATISFACTION BEFORE INVOKING TH E PROVISIONS OF RULE8D, WHICH IS MANDATORY. IN SUPPORT OF HIS SUBMI SSIONS THE LD AR RELIED UPON THE DECISIONS OF HONBLE BOMBAY HIGH CO URT IN CASE OF CIT VS M/S. ASIAN PAINTS LTD, ITA NO. 1564 OF 2016, DATED: 06/02/2019 WHEREIN FOLLOWING THE APEX COURT IN GODR EJ & BOYCE MFG. CO. LTD. VS. DY. CIT, (394 ITR 449) HELD THAT IN ABSENCE OF RECORDING THE AFORESAID FACT OF NON-SATISFACTION IN TERMS OF SECTION 14(2) OF THE ACT, INVOCATION OF RULE8D IS NOT PERMI SSIBLE. FURTHER RELIANCE WAS PLACED ON THE FOLLOWING JUDGMENTS:- PCIT V. RELIANCE CAPITAL ASSET MANAGEMENT LTD 400 I TR 217 (BOM)(HC), PR CIT V/S. RADHA MADHAV INVST LTD ITA NO. 934/2016 DT 21/1/19, DY_CIT V/S. ANIL PRINTERS LTD ITA NO 645/M/2017 DT 30/11/2018 ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 7 9. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDERS OF AUTHORITIES BELOW. THE LD. DR FURTHER SUBMITTED TH AT THE ASSESSEE HAS NOT MADE ANY SUO MOTO DISALLOWANCE. THE DISALLOWAN CE WAS MADE WHEN AO ISSUED SHOW CAUSE NOTICE. THE LD. DR FURTH ER SUBMITTED THAT NO FORMAT OF REJECTION OF SUO MOTO DISALLOWANCE IS PRESCRIBED IN THE ACT OR UNDER RULE 8D. THE AO, AFTER CONSIDERING TH E SUBMISSION OF ASSESSEE WAS NOT AGREEING WITH THE SUO MOTO DISALLO WANCE. ACCORDINGLY, SUO MOTO DISALLOWANCE WAS NOT ACCEPTED . THE AO AT PARA 4.3 OF THE ASSESSMENT ORDER HAS RECORDED HIS D ISSATISFACTION ABOUT THE CORRECTNESS OF SUO MOTO DISALLOWANCE. THE LD. DR PRAYED FOR UPHOLDING THE ORDER OF LD. CIT(A). THE LD .DR FURT HER SUBMITS THAT THE LD.CIT(A) RELIED UPON THE ORDER OF HIS PREDECES SOR FOR AY 2012-13 WHICH HAS BEEN UPHELD BY THE TRIBUNAL IN ITA NO.645 /MUM/2017 DATED 30-11-2018. 10. IN THE REJOINDER SUBMISSION, THE LD.AR FOR THE ASSE SSEE SUBMITS THAT FOR AY 2012-13, THE ASSESSEE HAD NOT MADE ANY SUO MOTO DISALLOWANCE. ACCORDINGLY, THE FACTS FOR THE ASSESSMENT YEAR 2012 -13 ARE DIFFERENT FOR THE YEAR UNDER CONSIDERATION. FOR THE YEAR UNDER CO NSIDERATION, THE ASSESSEE HAS MADE SUO MOTO DISALLOWANCE ON THE BASI S OF DECISION OF LD. CIT (A) FOR AY 2009-10 WHICH HAS NOT BEEN CHALL ENGED BY ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 8 REVENUE. THE LD.AR FURTHER SUBMITS THAT IN APPEAL FOR AY 2010-11 IN ITA NO.3033/MUM/2016, THE TRIBUNAL HAS ACCEPTED THE 2% SUO MOTO DISALLOWANCE IN ORDER DATED 15-03-2017. THE LD AR FOR THE ASSESSEE SUBMITS THAT SUO MOTO DISALLOWANCE UNDER SECTION 14 A WAS DEBITED BY ASSESSEE IN THE COMPUTATION OF INCOME. THE LD.AR P LACED ON RECORD THE ORDERS OF CIT(A) FOR AY 2010-11 AND ORDER OF TR IBUNAL FOR AY 2010-11. 11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE NO TED THAT DURING THE ASSESSMENT, THE ASSESSING OFFICER (AO) ON VERIFICAT ION OF THE RETURN OF ASSESSEE NOTED THAT THE ASSESSEE HAS MADE SUO MOTO DISALLOWANCE OF RS.4,12,614/-. THE AO RECORDED THAT BASIS OF WORKI NG SUO MOTO DISALLOWANCE UNDER SECTION 14A, IS NOT FURNISHED BY ASSESSEE. ON SHOW THE ASSESSEE EXPLAINED THAT PROVISIONS OF SECT ION 14A IS NOT APPLICABLE TO THE ASSESSEE FOR THE REASON THAT ASSE SSEE HAS MADE SUO MOTO DISALLOWANCE OF 2% OF TAX FREE INCOME AS PER C IT(A)S ORDER FOR AY 2009-10. THE ASSESSEE ALSO EXPLAINED THAT HE HA S NOT DEPLOYED ANY BORROWED FUNDS FOR EARNING TAX FREE INCOME AND THAT DISALLOWANCE AS PER RULE 8D WAS NOT MADE AS THE FORMULA WAS GIVING ABSURD RESULTS. IT WAS EXPLAINED THAT THE ASSESSEE WAS AVAILING SERVIC ES OF FUND ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 9 MANAGER, WHO ARE GETTING HEFTY COMMISSION FROM MUTU AL FUNDS BECAUSE OF HUGE INVESTMENTS MADE BY ASSESSEE. AS P ER ASSESSEE THE SUO MOTO DISALLOWANCE WAS QUITE ENOUGH. THE AO WITHOUT EXP RESSLY RECORDING HIS DIS-SATISFACTION ABOUT THE CORRECTNES S OF THE SUO MOTO DISALLOWANCE INVOKED THE PROVISIONS OF RULE 8D AND IN ADDITION TO DIRECT EXPENSES OF RS. 2022/- UNDER RULE 8D(2)(I) A LSO DISALLOWED RS. 13,16,100/- UNDER RULE 8D(2)(III) BEING AVERAGE VAL UE OF INVESTMENT. 12. TO SUPPORT THE DISALLOWANCE MADE BY AO AND CONFIRME D BY LD CIT(A), THE LD DR FOR THE REVENUE STRONGLY RELIED ON THE DE CISION OF TRIBUNAL FOR AY 2012-13 DATED 30.01.2019. ON THE CONTRARY TH E LD AR FOR THE ASSESSEE VEHEMENTLY SUBMITTED THAT THE FACTS FOR AY 2012-13 ARE AT VARIANCE AS NO SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS OFFERED BY THE ASSESSEE IN THAT YEAR. WE HAVE CAREFULLY GON E THROUGH THE ORDER OF THE TRIBUNAL DATED 30.01.2019 OF AY 2012-13 AND FIND THAT NO SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS OFFERED BY THE ASSESSEE. THE COORDINATE BENCH AFTER CONSIDERING THE SUBMISSIONS OF THE PARTIES HAVE CONCLUDED THAT THE QUESTION OF RECORDING OF SATISFA CTION WOULD ARISE ONLY WHEN THE ASSESSEE MADE SUO MOTO DISALLOWANCE, SINCE NO SUO MOTO DISALLOWANCE WAS MADE IN RELATION TO EARNING O F EXEMPT INCOME, THEN QUESTION OF RECORDING SATISFACTION UNDER SECTI ON 14(2) DOES NOT ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 10 ARISE. THUS, IN OUR CONSIDERED VIEW THE FACTS FOR T HE YEAR UNDER CONSIDERATION ARE AT VARIANCE. 13. NOW, TURNING THE FACTS OF THE YEAR UNDER CONSIDERAT ION, WE HAVE SEEN THAT THE ASSESSEE HAS SUO MOTO OFFERED 2% OF THE EX EMPT INCOME AS EXPENDITURE INCOME FOR EARNING SUCH INCOME. PERUSAL OF BIFURCATION OF EXEMPT INCOME SHOWS THAT THE ASSESSEE EARNED DIVIDE ND OF RS. 54,74,290/-, RS. 1.50,24,289/- BEING INTEREST ON TA X FREE PUBLIC SECTOR UNITS (PSU) BONDS AND RS.1,32,123/- AS A SHARE OF P ARTNERSHIP FIRM. WE HAVE NOTED THAT IN APPEAL FOR AY 2009-10, THE LD CIT(A) RESTRICTED THE DISALLOWANCE OF 14A @ 2% OF THE EXEMPT INCOME. SIMILAR DISALLOWANCE UNDER SECTION 14A WAS AGAIN MADE IN AY 2010-11, AND ON APPEAL BEFORE TRIBUNAL VIDE ITA NO. 3033/MUM/201 6, THE DISALLOWANCES WAS RESTRICTED AT 2% OF THE EXEMPT INCOME. 14. THE HONBLE BOMBAY HIGH COURT IN CIT VS M/S. ASIAN PAINTS LTD, (SUPRA) BY FOLLOWING THE JUDGMENT OF HONBLE APEX C OURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) HELD THAT IN ABSENCE OF RECORDING THE AFORESAID FACT OF NON-SATISFACTION IN TERMS OF SECT ION 14(2) OF THE ACT, INVOCATION OF RULE 8 D IS NOT PERMISSIBLE. THEREFOR E, CONSIDERING THE FACTS THAT IN ABSENCE OF RECORDING NON-SATISFACTION ABOUT THE CORRECTNESS OF ASSESSEES SUO MOTO DISALLOWANCES UNDER SECTION 14A, THE FURTHER ITA 270/MUM/2018 JAYANT R PARDIWALA (AY 2013-14) 11 DISALLOWANCE CALCULATED BY INVOKING THE PROVISIONS OF RULE 8D IS NOT JUSTIFIED. HENCE, WE DIRECT THE ASSESSING OFFICER T O ACCEPT THE DISALLOWANCE OFFERED BY THE ASSESSEE. IN THE RESU LT THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE ALLOWED. 15. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 11-12-2019. SD/- SD/- (S RIFAUR RAHMAN) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIALMEMBER MUMBAI, DT : 11 TH DECEMBER, 2019 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI