The Alidhara Textool Engineers Pvt.Ltd., Surat V. The Dy.CIT, Circle-1, Surat

ITA 2738/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1784 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 11-02-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAMES KUREIN
• Assessee Lawyers: MEHUL R SHAH
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 80IB; 147; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI RAJPAL YADAV, JM, & SHRI MANISH BORA D, AM. ITA NO. 2738/AHD/2011 ASST. YEAR:2008-09 ALIDHARA TEXTOOL ENGINEERS P. LTD., PLOT NO.B-168, ROAD NO.6, UDYOGNAGAR UDHNA. VS. DCIT, CIRCLE-1, SURAT. APPELLANT RESPONDENT PAN AAACD 8469M APPELLANT BY SHRI MEHUL R. SHAH, AR RESPONDENT BY MR. JAMES KUREIN, SR.DR DATE OF HEARING: 11/2/2016 DATE OF PRONOUNCEMENT: 04 /04 /2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF LD. CIT(A)-1, SURAT IN APPEAL NO.CAS-1/91/2010-11, DATE D 15.9.2011. ASSESSMENT WAS FRAMED BY DCIT CIRCLE-1, SURAT FOR A SST. YEAR 2008- 09 ON 31.3.2010 U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT). ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL :- 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER B Y SUSTAINING DISALLOWANCE OF RS. 8,84, 5421- U/S 14A OF THE IT. ACT, 1961 AS ALLEGED EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCO ME. ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 2 2. IT IS THEREFORE PRAYED THAT ABOVE DISALLOWANCE MADE BY THE ASSESSING OFFICER MAY PLEASE BE DELETED. 3. APPELLANT CRAVES LEAVE TO ADD, ALTER OR DELETE ANY GROUND(S) EITHER BEFORE OR IN THE COURSE OF HEARING OF THE APPEAL. 2. BRIEFLY STATED FACTS AS CULLED OUT FROM THE ASS ESSMENT RECORDS ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE B USINESS OF MANUFACTURING OF TEXTILE MACHINERIES AND THEIR SPAR E PARTS ON JOB WORK BASIS. IT HAS FILED E-RETURN ON 30.09.2008 SHOWING TOTAL INCOME OF RS.35,37,28,110/-. CASE WAS SELECTED FOR SCRUTINY A SSESSMENT AND NOTICE U/S 143(2) OF THE ACT WAS ISSUED ON 27.8.200 9 AND DULY SERVED ON THE ASSESSEE. ASSESSMENT WAS COMPLETED AFTER MAK ING FOLLOWING TWO ADDITIONS : I) EXCESS CLAIM OF DEDUCTION U/S 80IB RS.28,548 II) DISALLOWANCE U/S 14A OF THE IT ACT RS.8,84,54 2/- ------------------------ RS.9,13,090/- AND INCOME WAS ASSESSED AT RS.35,46,41,200/-. 3. ON APPEAL BEFORE LD. CIT(A) ASSESSEE COULD NOT S UCCEED AND ADDITION OF RS.9,13,090/- WAS CONFIRMED. 4. ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL AG AINST THE ORDER OF LD. CIT(A) CONFIRMING THE ACTION OF ASSESSING OF FICER FOR SUSTAINING DISALLOWANCE OF RS.8,84,542/- MADE U/S 14A OF THE A CT. ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 3 5. LD. AR SUBMITTED THAT DURING THE YEAR UNDER CONS IDERATION, ASSESSEE HAS DERIVED EXEMPT INCOME OF RS. 5,83,57,2 53/- I.E. DIVIDEND ON MUTUAL FUND OF RS. 4,29,10,983/- + DIVI DEND ON SHARES OF RS. 1,54,015/- AND SHARE OF PROFIT FROM PARTNERSHIP FIRM OF RS. 1,52,92,255/-. DURING THE COURSE OF ASSESSMENT PROC EEDINGS ASSESSING OFFICER OBSERVED THAT NO EXPENDITURE WAS SHOWN IN RELATION TO SUCH INCOME. THEREFORE, ASSESSING OFFICER ASKED ASSESSEE TO FURNISH THE DETAILS OF EXPENDITURE INCURRED IN RELA TION TO SUCH EXEMPT INCOME. IN RESPONSE TO THE SAME ASSESSEE EXPLAINED THAT ENTIRE INVESTMENT IS MADE IN THE YEAR UNDER CONSIDERATION OUT OF ITS OWN FUNDS AND HENCE NO COST CAN BE ASSOCIATED IN MAKING THE SAID INVESTMENT. IT IS TO BE NOTED THAT ASSESEE HAS ALRE ADY DISALLOWED MANAGEMENT FEES OF RS. 11,01,973/- WHICH COMPRISES OF PORTFOLIO MANAGEMENT SERVICES FEES AND CUSTODIAN CHARGES IN I TS COMPUTATION OF INCOME AND STT CHARGES OF RS. 69,482/- AS EXPENS ES IN RELATION TO EXEMPT INCOME. HOWEVER, ASSESSING OFFICER WAS NOT S ATISFIED WITH THE EXPLANATION OF THE ASSESSEE NOR DID THE ASSESSI NG OFFICER CONSIDER THE EXPENSES ALREADY DISALLOWED IN THE COM PUTATION OF INCOME AND AS PER HIS FINDINGS GIVEN AT PARA NO. 5 OF ASSESSMENT ORDER HE CALCULATED RS. 8,84,542/- AS EXPENDITURE I N RELATION TO EXEMPT INCOME UNDER RULE 8D(III) AND ADDED THE SAME TO THE TOTAL INCOME OF ASSESSEE. LD. AR ALSO SUBMITTED THAT ASSESSING OFFICER HAS ER RED IN MAKING DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSI NG OFFICER HAS FAILED TO PROPERLY APPRECIATE THE EXPLANATION GIVEN DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE DIVIDEND AMOUNTING T O RS. ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 4 4,30,64,998/- IS CREDITED BY ASSESSEE WHICH IS MOST LY RECEIVED THROUGH ECS OR AUTOMATICALLY REINVESTED UNDER DIVID END RE- INVESTMENT OPTION AND BOTH OF WHICH POSSIBLY DO NOT REQUIRE ANY HUMAN EFFORTS. IT IS PERTINENT TO MENTION HERE THAT THE INVESTMENT IN SHARES AND MUTUAL FUND HAS BEEN MADE BY ASSESSEE OU T OF ITS OWN FUNDS AND THUS, NO COST IS ASSOCIATED IN MAKING THE SAID INVESTMENTS. IT IS FURTHER RELEVANT TO MENTION HERE THAT THE ENT IRE INVESTMENT IN SHARES HAS BEEN MADE DURING THE YEAR UNDER CONSIDER ATION AND IT CAN BE SEEN ON PERUSAL OF AUDITED BALANCE SHEET THAT IT HAS NOT MADE ANY BORROWINGS DURING THE YEAR FOR MAKING SAID INVESTME NT, IN FACT, IT CAN BE SEEN ON PERUSAL OF AUDITED PROFIT & LOSS A/C THA T ASSESSEE HAS NOT CLAIMED ANY INTEREST OR FINANCIAL CHARGES AND THUS, THE CONTENTION OF ASSESSEE THAT NO COST HAS BEEN INCURRED FOR MAKING ABOVE INVESTMENT STANDS PROVED BEYOND ANY SHADOW OF DOUBT . THE ABOVE FACTS WERE CLEARLY EXPLAINED BY ASSESSEE IN HIS AFO RESAID LETTER. NOW WHEN ASSESSEE IN FACT DID NOT INCUR ANY FURTHER EXP ENDITURE FOR EARNING DIVIDEND INCOME, IT IS IMPERATIVE ON THE PA RT OF ASSESSING OFFICER TO RECORD HIS SATISFACTION AS TO WHY THE CO NTENTION OF ASSESSEE IS NOT ACCEPTABLE. IT IS TO BE NOTED THAT ASSESEE H AS ALREADY DISALLOWED MANAGEMENT FEES OF RS. 11,01,973/- WHICH COMPRISES OF PORTFOLIO MANAGEMENT SERVICES FEES AND CUSTODIAN CH ARGES IN ITS COMPUTATION OF INCOME AND STT CHARGES OF RS. 69,482 /- AS EXPENSES IN RELATION TO EXEMPT INCOME. THE COMPUTATION OF IN COME ALONG WITH ACKNOWLEDGEMENT IS FILED IN THE PAPER BOOK AT PG NO . 2. THE FIGURE OF MANAGEMENT FEES AND STT ALSO GETS TALLIED WITH T HE AUDITED FINANCIAL STATEMENTS IN SCHEDULE 17 - SALES AND ADM INISTRATIVE EXPENSES AT PG. NO. 15 OF THE PAPER BOOK. HOWEVER, ASSESSING ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 5 OFFICER DID NOT RECORD ANY SUCH SATISFACTION NOR DI D HE CONSIDER THE DISALLOWANCES ALREADY MADE BY ASSESSEE IN THE COMPU TATION BUT HAS MECHANICALLY PROCEEDED TO MAKE DISALLOWANCE ON THE BASIS OF FORMULA GIVEN U/S 14A OF THE ACT. THE ASSESSING OFF ICER HAS NOT EVEN CITED ANY EXPENDITURE WHICH COULD POSSIBLY BE LINKE D WITH THE EARNING OF EXEMPT INCOME. 6. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS O F LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY ISSUE IN THIS APPEAL IS AGAINST DISALLOWANCE OF RS.8,84,542/- U/S 14A OF THE ACT CONFIRMED BY LD. C IT(A). WE OBSERVE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS LD . ASSESSING OFFICER NOTICED THAT ASSESSEE HAS DERIVED EXEMPT IN COME OF RS.5.84 CRORES ON ACCOUNT OF DIVIDEND ON MUTUAL FUNDS AT RS .4,29,10,983 + DIVIDEND ON SHARES AT RS.1,54,015/- + SHARE OF PROF IT FROM PARTNERSHIP FIRM AT RS.1,52,92,255/-. HOWEVER, HE COULD NOT TRA CE OUT FROM THE RECORDS THAT ANY EXPENDITURE IN RELATION TO SUCH IN COME HAS BEEN ADDED BACK BY ASSESSEE TO ITS TOTAL INCOME AND ACCO RDINGLY HE WENT AHEAD TO DETERMINE THE AMOUNT OF EXPENDITURE IN REL ATION TO DIVIDEND INCOME WHICH DOES NOT FORM PART OF ANY METHOD UNDER RULE 8D OF IT RULES, 1962 AND CALCULATED RS. 8,84,542/- AS DISALL OWANCE U/S 14A OF THE ACT. SECTION 14A OF THE ACT & RULE 8D OF IT RUL ES READ AS UNDER :- ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 6 SEC. 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NOT INC LUDIBLE IN TOTAL INCOME.(1)FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFIC ER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOW ER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCI NG THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2. NEW RULE 8D : 2.1 IN EXERCISE OF THE POWERS GIVEN IN S. 14A(2) C. B.D.T. HAS ISSUED A NOTIFICATION NO. S.O. 547(E) ON 24-3-2008 (299 ITR (ST) 88). THIS NOTIFIC ATION AMENDS THE INCOME-TAX RULES BY INSERTION OF A NEW RULE 8D PROVIDING FOR A 'METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME'. READING THIS RULE IT IS EVIDENT THAT THE RULE PROVIDES FOR DISALLOWANCE OF NOT ONLY DIRECT EXPEND ITURE INCURRED FOR EARNING THE EXEMPT INCOME BUT ALSO FOR DISALLOWANCE OF PROPORTIONATE INDIRECT EXPENDITURE. THIS IS CLEARLY CONTRARY TO THE MAIN OBJECTIVE WITH WHICH S. 14A WAS ENACTED. 2.2 BROADLY STATED, THE NEW RULE 8D PROVIDES AS UND ER : (I) THE METHOD PRESCRIBED IN THE RULE IS TO BE APPL IED ONLY IF THE AO IS NOT SATISFIED WITH : (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE INC URRED FOR EARNING THE EXEMPT INCOME MADE BY THE ASSESSEE OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. (II) THE METHOD PRESCRIBED IN THE RULE STATES THAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF THE FOLLOWING AMOUNTS : (A) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (B) IN THE CASE OF INTEREST ON BORROWED FUNDS WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AMOUNT COMPUTED IN ACCORDANC E WITH THIS FOLLOWING FORMULA : A X B C A = AMOUNT OF INTEREST, OTHER THAN THE AMOUNT OF IN TEREST WHICH IS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME STATED IN (A) ABOVE. ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 7 B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE S HEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEA R. THE TERM TOTAL ASSETS MEANS TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INC REASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. (C) AN AMOUNT EQUAL TO % OF THE AVERAGE OF THE VA LUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SH EET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. IN OUR VIEW, RULE 8D COMES INTO OPERATION WHERE THE ASSESSING OFFICER IS NOT SATISFIED IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT AND THEREAFTER I F THE ASSESSING OFFICER IS UNABLE TO DETERMINE THE AMOUNT OF SUCH E XPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME THEN HE MAY RESORT TO THE METHOD WITH PRESCR IBED IN RULE 8D OF THE IT RULES, 1962. IN THE CASE OF ASSESSEE NO S UCH SATISFACTION HAS BEEN RECORDED BY THE ASSESSING OFFICER ABOUT TH E INCORRECTNESS OF THE CLAIM OF ASSESSEE TOWARDS EXPENDITURE INCURR ED FOR EARNING EXEMPT INCOME. IN THE CASE OF ASSESSEE THE EXEMPT I NCOME ARE OF THREE TYPES OUT OF WHICH TWO RELATE TO DIVIDEND INC OME FROM MUTUAL FUNDS AND EQUITY SHARES AND ANOTHER IN RELATION THE REOF PROFIT IN RELATION TO PARTNERSHIP FIRM AND ASSESSING OFFICER HAS CALCULATED A SUM OF RS.8,84,542/- AS THE AMOUNT OF DISALLOWANCE U/S 14A OF THE ACT BY FOLLOWING THE METHOD PRESCRIBED UNDER RULE 8 D OF THE IT RULES. 8. WE FIND THAT LD. ASSESSING OFFICER COMPLETELY IG NORED THE FACTS APPEARING IN THE COMPUTATION OF TOTAL INCOME WHEREI N ASSESSEE HAS ADDED BACK SECURITY TRANSACTIONS TAX OF RS.69,482/- AND MANAGEMENT ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 8 FEES OF RS.11,09,173/- TO THE NET PROFIT AS PER PRO FIT AND LOSS ACCOUNT. AS PER SUBMISSIONS MADE BY LD. AR IT HAS BEEN MENTI ONED THAT DIVIDEND INCOME OF RS.4.29 CRORES IS DERIVED FROM M UTUAL FUNDS AND ASSESSEE HAS PAID A MANAGEMENT FEES OF RS.11,01,973 /- AS A PORTFOLIO MANAGEMENT FEES TO THE PORTFOLIO MANAGER WHO HAS TAKEN CARE OF THE DEALINGS OF THE ASSESSEE IN REGARD TO I NVESTMENT FOR VARIOUS MUTUAL FUNDS INCLUDING SWITCHING BUT NOT SW ITCHING OUT FROM ONE FUND TO ANOTHER IN ORDER TO OPTIMUM BENEFIT TO THE ASSESSEE. IN THE GIVEN SITUATION WHERE THE ASSESSEE HAS HIMSELF ADDED A SUM OF RS.11,71,455/- TO ITS TOTAL INCOME IN RELATION TO E XPENDITURE INCURRED FOR EARNING EXEMPT INCOME THEN THERE REMAINS NO REA SON TO SUSTAIN THE ADDITION OF RS.8,84,542/- AS MADE BY LD. ASSESS ING OFFICER UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. WE THEREF ORE, DELETE THE SAME AND ALLOW THE APPEAL OF ASSESSEE. 9. OTHER GROUNDS OF GENERAL NATURE, WHICH NEED NO A DJUDICATION. 10. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH APRIL, 2016 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 4 /4 /2016 MAHATA/- ITA NO.2738/AHD/2011 ASST. YEAR 2008-09 9 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. R EGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 28/3/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 4/04/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 4/4/16 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: