C. MAHENDRA INTERNATIONAL LTD, MUMBAI V. ACIT 5(1), MUMBAI

ITA 2706/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 3182 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 20-01-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Keywords: Earning of tax free income; Source of fund
• Section: 143(3); 14A

Judgement Text

C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C , MUMBAI , , BEFORE SHRI G S PANNU , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBERITA ITA NO. : 2706 /MUM/20 1 3 ( ASSESSMENT YEAR: 200 9 - 1 0 ) C. MAHENDRA INTERNATIONAL LTD , BHARAT DIAMOND BOURSE, TOWER C, OFFICE NO. CC - 6011, 6 TH FLOOR, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI - 400 051 .: PAN: AAAC C 2954 N VS AC IT - 5 (1), 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI - 400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : KIRAN MEHTA RESPONDENT BY : SHRI AKHILENDRA YADAV /DATE OF HEARING : 01 - 0 7 - 201 5 / DATE OF PRONOUNCEMENT : 28 - 09 - 201 5 ORDER , . . : PER AMIT SHUKLA, AM : THE A FORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DATED 2 2 . 0 1 .201 3 PASSED BY CIT(A) - 9, MUMBAI FOR THE Q UANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEAR 200 9 - 1 0. THE ONLY ISSUE RAISED IN GROUNDS OF APPEAL ARE WITH REGARD TO DISALLOWANCE OF RS. 12,27,788/ - MADE U/S 14A R.W. RULE 8D. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING AND EXPORT OF CUT AND POLISHED DIAMONDS. THE AO NOTED THAT ASSESSEE HAS SHOWN INVEST M E NT TO THE TUN E OF RS. 41,12,41,033/ - IN THE BALANCE SHEET WHICH STOOD AT C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 2 R S. 70,23,56,174/ - IN THE EARLIER AY 2008 - 09. IN RESPONSE TO THE SHO W CAUSE NOTICE BY THE AO AS TO WHY THE PROVISIONS OF SECTION 14A R.W. RULE 8D SH OULD NOT BE INVOKED , T HE ASSESSEE STATED AND SUBMITTED AS UNDER : - THE COMPANY WAS A PARTNER IN C MAHENDRA INFOJEWELS SINCE 2005, THE COMPANY HAD INVESTED CAPITAL OUT OF INTER EST FREE FUNDS RECEIVED FROM DIRECTORS TO WHOM NO INTEREST HAS BEEN IN ANY OF THE YEARS. NO EXPENSES WERE INCURRED BY THE COMPANY TO MAKE SUCH INVESTMENT AND MOST OF THE AMOUNT REPRESENTS ACCUMULATED PROFIT IN THE FIRM OVER THE YEARS. PLEASE FIND COPY OF LEDGER ACCOUNT OF THE ASSESSEE IN THE BOOKS OF C MAHENDRA INFOJEWELS (FIRM) FOR THE YEAR ENDED 31/3/2005, 31/3/2006, 31/3/2007, 31/3/2008 AND 31/3/2009 FROM THE ABOVE ACCOUNT YOU WIL L NOTICE THAT THE COMPANY HAS MADE NO FRESH INVESTMENT IT IS ONLY THE PROF IT THAT HAS BEEN ACCUMULATED OVER THE YEARS AND IN FACT SOME AMOUNT WITHDRAWN, IN RECENT PAST. COPY OF BANK BOOK FOR THE PERIOD 2005 IS ALSO ATTACHED WHERE IN THE SOURCE OF FUNDS AND INVESTMENT IS EVIDENCED. THUS THE PROVISIONS OF SECTION 14A OF THE INCO ME TAX ACT DOES NOT APPLY TO THE COMPANY. 3. HOWEVER, THE LD. AO REJECTED THE ASSESSEES CONTENTION AFTER REFERRING TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF MR. DHARAMSINGH M POPAT, M/S MULLA A ND MULLA & CRAIFIE BLUNT & CRAIFIE BLUNT & CAROE, VS ACIT 11(2) ITA NO. 7534/MUM/2004 W HEREIN IT WAS HEL D THAT EVEN IF THE INVESTMENT HAS BEEN MADE IN THE PARTNERS H IP FIRM WILL NOT MAKE DIFFERENCE AS IT IS SEPARATE ENTITY AND PROFIT DERIVED BY THE PARTNERS IN T H E I R HAND IS EXEMPT AND THEREFORE , PROVISION OF SECTION 14A WOULD BE ATTRACTED . ACCORDINGLY, HE MADE THE DISALLOWANCE ON ACCOUNT OF INDIRECT C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 3 EXPENSES U/S 8D(2)(III), BEING 0 .5% OF THE AVERAGE VALUE OF INVESTMENT AND WORKED OUT THE DISALLOWAN C E AT RS. 12,27,788/ - . 4. THE LD. CIT(A) TOO CONFIRMED THE SAID ADDITION . AS PER THE DISCUSSION APPEARED IN PARA 5.2 TO PARA 5.6. 5. BEFORE US THE LD. COUNSEL, SUBMITTED THAT ASSESSEE HAS MADE INVESTMENT OF RS. 10 CRORES IN I T S SUBSID I ARY COMPANY NAMELY CIEMME JEWELS LTD AND IN A PARTNERSHIP FIRM C. MAHENDRA INFO JEWELLS OF RS. 39,11,15,141/ - IN WHICH THE ASSES S EE IS A PARTNER. BOTH THE INVESTMENTS BEING STRATEGIC INVESTMENTS , THEREFORE NO DISALLOWANCE U/S 14A CAN BE MADE . I N SUPPORT OF HIS CONTENTION, HE RELIED UPON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE O F J M FINANCIAL LTD IN ITA NO. 4521/MUM/2012 AND GARWARE WALL ROPES LTD. IN ITA NO. 5408 /MUM/2012 & OTHER S WAS THAT THE INVESTMENT IN THE PARTNERSHIP FIRM WAS MOSTLY ON ACCOUNT OF ACCRETION O F PROFIT IN SEVERAL YEARS AND HENCE NO DISALLOWANCE U/S 14A CAN B E MADE ON SUCH INVESTMENTS . HE POINTED OUT THAT FROM FINANCIAL YEAR 2004 - 05 TO 2008 - 09 , SHARE PROFIT OF THE PARTNERS AGGREGATED AT RS. 23,50,30,245/ - AND HENCE , SAME CANNOT BE HELD TO BE AMOUNT INVESTED FOR THE PURPOSE OF EARNING EXEMPT INCOME. LASTLY, HE SUBMITTED THAT HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE AND THE NATURE OF ADMINISTRATIVE EXPENSES, IT CAN BE SEEN THAT THAT ALL THE EXPENSES W E RE PURELY FOR THE BUSINESS PURPOSE OF THE ASSESSEE AND NOTHING CAN BE SAID TO BE ATTRIBUTABLE F O R THE EARNIN G OF THE EXEMPT INCOME. A S AN ALTERNATIVE HE SUBMITTED THAT AT THE MOST, OUT OF SALARY EXPENSES AND THAT TOO WHEN THERE IS NO SALARY OF DIRECTORS, S O M E TOKEN DISALLOWANCE COULD BE MADE. 6. ON THE OTHER HAND LD. DR, STRONGLY RELIED UPON THE ORDER OF THE C IT(A) AND AO AND SUBMITTED THAT ONCE ASSESSEE HAS MADE INVESTMENTS, WHICH ARE CAPABLE OF EARNING EXEMPT INCOME THEN PROVISIONS OF SECTION 14A GETS TRIGGERED AND DISALLOWANCE HAS TO BE C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 4 MADE. SINCE THE MATTER PERTAINS TO AY 2009 - 10, THEREFORE, PROVISIONS OF RULE 8D HAS TO BE APPLIED FOR WORKING OF THE DISALLOWANCE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN IMPUGNED ORDER AS WELL AS MATERIAL PLACED ON RECORD. THE ASSES S EE HAD MADE TWO INVESTMENTS, DETAILS OF WHICH A RE AS UNDER : - SR.NO. PARTICULARS OF INVESTMENT AMOUNT (RS) REMARKS SUBSTANTIVE 1 CIEMME JEWELS LTD. 10,00,00,000 100% S UBSIDIARY 2 C MAHENDRA INFOJEWELS 39,11,15,141 APPELLANT IS PARTNER IN T HIS FIRM SO FAR AS THE INVESTMENT MADE IN THE PARTNERSHIP F IRM IS CONCERNED, THE SAME IS MOSTLY ON ACCOUNT OF ACCRETION OF PROFIT FROM THE FIRM WHICH HAS BEEN DEBITED TO CAPITAL ACCOUNT OF THE ASSESSEE. THIS ACCRETED PROFIT IS TO THE EXTENT OF RS. 23,50,30, 245/ - . SUCH AN ACCRETION OF PROFIT IN THE CAPITAL ACCOUNT CANNOT BE RECKONED AS AMOUNT INVESTED FOR THE PURPOSE OF EARNING EXEMPT INCOME AS ASSESSEE COULD NOT HAVE BEEN SAID TO HAVE INCURRED ANY KIND OF AN EXPENDITURE FOR TAKING A DECISION FOR MAKING THE INVESTMENT OR INVESTMENT HAS BEEN MADE FROM THE C OFFERS OF INTEREST BEARING FUNDS. SECONDLY, F ROM THE PERUSAL OF THE ADMINISTRATIVE EXPENSES AGGREGATING TO RS. 27,87,167/ - THE DETAILS OF WHICH ARE AS UNDER : - SCHEDULE N ADMINISTRATIVE EXPENSES BANK CHARGES & COMMISSION 4,19,825 CLEARING AND FORWARDING CHARGE S 15,133 CONVEYANCE & TRAVELLING 6,296 ELECTRICITY CHARGES 74,357 EXPORT AIRFREIGHT CHARGES 13,478 JEWELLE RY BLOCK POLICY INSURANCE 75,121 EXCHANGE RATE DIFFERENCE 3,93,616 LEGAL & PROFESSIONAL FEES 89,459 MEMBERSHIP & SUB SCRIPTION 56,317 OFFICE & GENERAL EXPENSES 68,433 SALARIES 14,59,922 TELEPHONE EXPENSES 30,008 SALES TAX 10 PAYMENT TO AUDITORS AS AUDIT FEES 11,236 TOTAL 27,87,167 C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 5 I T CAN BE SEEN THAT ALL THE EXPENSES ARE DIRECTLY ATTRI BUTABLE FOR ASSESSEES DIAMOND BUSINESS. EVEN THE SALARIES AMOUNT ARE ON THE EMPLOYEES OF THE ASSESSEE AND NOT OF THE DIRECTORS AS PER THE STATEMENT GIVEN BY THE LD. COUNSEL. THUS, HAVING REGARD TO THE NATURE OF ACCOUNTS AND EXPENSES, IT CANNOT BE SAID TH AT ASSES S EE HAS INCURRED ANY EXPENDITURE FOR THE PURPOSE OF MAKING INVESTMENT WHICH IS CAPABLE OF EARNING EXEMPT INCOME. FOR MAKING DISALLOWANCE U/S 14A, THE CONDITION PRECEDENT IS THAT THE CONDITIONS LAID DOWN IN SUB - SECTION (2) AND SUB - SECTION (3) OF SEC TION 14A HAS TO BE MANDATORILY FULFILLED. IF SUCH CONDITIONS ARE NOT SATISFIED, THEN NO DISALLOWANCE U/S 14A CAN BE TRIGGERED. HERE IN THIS CASE, NOT ONLY FROM THE ACCOUNT S OF THE ASSESSEE BUT ALSO LOOKING TO THE NATURE OF EXPENDITURE INCURRED AND NATURE O F INVESTMENTS STANDING IN THE BALANCE SHEET, IT CANNOT BE HELD THAT ANY DISALLOWANCE U/S 14A IS CALLED FOR. NOWHERE THE AO HAS GIVEN HIS SATISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSES S EE ABOUT THE CLAIM OF THE ASSESSE E , THAT NO EXPENDITURE HAS B EEN INCURRED, WHICH CAN BE SAID TO BE ATTRIBUTABLE FOR MAKING INVESTMENT CAPABLE OF EARRING EXEMPT INCOME OR HAS YIELDED THE EXEMPT INCOME IS FALSE OR INCORRECT . ACCORDINGLY, ON THESE FACTS WE HOLD THAT NO DISALLOWANCE U/S 14A IS CALLED FOR. THE OTHER LIMB S OF THE ARGUMENT OF THE LD. COUNSEL HA VE BECOME PURELY ACADEMIC , HENCE NOT ADJUDICATED UPON. 8 . IN THE RESULT, APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH SEPTEMBER , 2015. SD/ - SD/ - ( ) ( ) ( G S PANNU ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 28 TH SEPTEMBER , 2015 C. MAHENDRA INTERNATIONAL LTD . ITA NO. 2706 /MUM/20 1 3 6 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3) THE CIT (A) - 9 , MUMBAI. 4 ) THE CIT 5 , MUMBAI. 5 ) , , / THE D.R. C BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS