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ITA 2750/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65487 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-07-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 27-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ANUSHA KHURANA
• Keywords: Business expenditure; Earning of tax free income; Proportionate interest
• Section: 143(3); 14A

Judgement Text

ITA NO.2750/DEL/2011 A.Y. 2007-08 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `A NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER I.T.A.NO.2750/DEL/2011 ASSESSMENT YEAR : 2007-08 INCOME TAX OFFICER, VS M/S ARIHANT ADVE RTISING PVT. LTD., WARD 2(1), ROOM NO. 381, 84, DARYAGAN J,NEW DELHI-110002 C.R. BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: MRS. ANUSHA KHURANA, SR.DR RESPONDENT BY : SHRI VED JAIN, MS RANO JAIN,SH.VE BNKATESH MOHAN O R D E R PER CHANDRA MOHAN GARG, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAIN ST THE ORDER OF COMMISSIONER OF INCOME TAX(A)-V, NEW DELHI DATED 4. 3.2011 FOR AY 2007-08. THE ONLY GROUND IN THIS APPEAL READS AS U NDER:- THE LD. COMMISSIONER OF INCOME TAX(A) HAS ERRED ON FACTS AND IN LAW IN RESTRICTING THE DISALL OWANCE U/S 14A READ WITH RULE 8D TO RS.68,385/- AS AGAINST DISALLOWANCE OF RS.33,07,764/-. LD. COMMISSIONER O F INCOME TAX(A) HAS FAILED TO TAKE COGNIZANCE OF SUB- SECTION (3) OF SECTION 14A WHICH SPECIFIES THAT EVE N IF THE ASSESSEE MAKES A CLAIM THAT NO EXPENDITURE HAS BEEN INCURRED IN EARNING THE EXEMPTED INCOME, SUB-SECTIO N (2) OF SECTION 14A SHALL APPLY, MEANING THEREBY, DISALLOWANCE U/S 14A(1) IS CALLED FOR. ITA NO.2750/DEL/2011 A.Y. 2007-08 2 2. BRIEF FACTS OF THE CASE GIVING RISE TO THIS APPE AL ARE THAT THE ASSESSEE COMPANY SUBMITTED ITS RETURN DECLARING TOTAL LOSS O F RS.8,98,920. THE RETURN WAS PROCESSED U/S 143(3) OF THE INCOME TAX ACT, 196 1(HEREINAFTER REFERRED TO AS THE ACT). THE CASE WAS SELECTED FOR SCRUTINY AND A NOTICE U/S 143(2) OF THE ACT WAS ISSUED AND SERVED ON THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNED INCOME FROM SALE, PURC HASE OF SHARES AND SECURITIES AND ALSO DIVIDEND INCOME. ON PERUSAL OF DETAILS, THE ASSESSING OFFICER NOTED THAT WHILE ALLOCATING EXPENSES RELATE D TO EXEMPT INCOME, NOT ONLY THE DIRECT EXPENSES BUT ALSO INDIRECT EXPENSES INCLUDING MANAGERIAL AND CLERICAL WERE ALSO TO BE TAKEN NOTE OF. THE ASSESS ING OFFICER MADE A DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT IN A CCORDANCE WITH RULE 8D OF THE INCOME TAX RULES AMOUNTING TO RS.33,07,764/- . THE ASSESSMENT WAS FINALIZED WITH A TOTAL INCOME ASSESSED AT RS.24,04, 840. 3. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE T HE COMMISSIONER OF INCOME TAX(A)-V. THE APPEAL WAS PARTLY ALLOWED WIT H THE FOLLOWING OBSERVATIONS AND FINDINGS:- 3. GROUND NO.1: DISALLOWANCE U/S 14A R.W.R 80 OF I.T. ACT THE A.D DISALLOWED AN AMOUNT OF RS 33,07,764 UNDER SEE 14A READ WITH RULE 8D AS THE APPELLANT HAD EARN ED TAX FREE DIVIDEND INCOME OF RS 16,54,640 DURING THE YEAR. THE APPELLANT ON ITS OWN CALCULATED AN AMOUNT OF RS.68,385 TO BE THE AMOUNT SAID TO BE INCURRED FOR EARNING THE EXEMPT INCOME. ITA NO.2750/DEL/2011 A.Y. 2007-08 3 3.1 THE A/R PRESENT FOR THE APPELLANT SUBMITTED THAT RULE 8D OF THE IT RULES GIVES ONLY THE METHOD OF DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO IN COME WHICH DO NOT FORM PART OF TOTAL INCOME AND IS A PROCEDURAL PROVISION HENCE IT IS EFFECTIVE FROM 24/03/2008 I.E. FROM A.Y 08-09. DURING THE PREVIOUS YEAR COMPANY HAS EARNED RS.16.55 LACS AS DIVIDEND WHICH INCLUDES DIVIDEND FROM THE SHARES HELD AS INVESTMEN T. THE COMPANY, DURING THE COURSE OF ASSESSMENT PROCEEDING HAS ITSELF DISALLOWED RS.68,385/- U/S 14A OF THE IT ACT BY FILING REVISED COMPUTATION OF TAX. THE EXPENSES INCLUDES DMAT EXPENSES, PROPORTIONATE INTEREST EXPENSES. FURTHER, INTEREST ON LOAN OF RS.114.58 LA CS, WHICH IS DIRECTLY ATTRIBUTABLE TO INVESTMENT, IS CA PITALISED ALONG WITH THE INVESTMENT AND NOT CHARGED TO P&L ACCOUNT. THE PROCEDURE ADOPTED IS VERY LOGICAL AND DEFINED AND THE ASSESSEE HAS NOT CHARGED INTEREST EXPENSES ATTRIBUTABLE TO INVESTMENT TO P&L ACCOUNT. HENCE NO HYPOTHETICAL FIGURE CAN BE WORKED OUT FOR ANY DISALLOWANCES. 3.2 IT WAS ALSO SUBMITTED THAT DISALLOWANCE WITH RESPECT TO RULE 8D OF IT RULES CAN BE INVOKED AFTER SATISFYING UNDER PREVALENT SECTION 14A OF INCOME TA X ACT, 1961. THE RULES CAN NOT OVERRIDE THE SECTION. THE DISALLOWANCE U/S 14A CAN BE INVOKED 'WHERE ASSESSIN G OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF CL AIM OF EXPENDITURE MADE BY THE ASSESSEE OR NO EXPENDITURE HAS BEEN INCURRED'. DISALLOWANCES U/S 14A CANNOT BE MAD E FOR AN AMOUNT MORE THAN INCURRED FOR EARNING THE EXEMPTED INCOME. THEREFORE IT IS NECESSARY TO WORK OUT THE ACTUAL EXPENSES INCURRED IN THIS REGARD. NO HYPOTHETICAL FORMULA FOR CALCULATING THE EXPENSES C AN BE APPLIED. THEREFORE INTEREST PAYMENT WHICH HAS GOT N O RELATION WITH THE INVESTMENT, CANNOT BE DISALLOWED. SIMILARLY ANY ADHOC % ON INVESTMENT CANNOT BE DISALLOWED. MORE SO WHEN NO SUBSTANTIAL EXPENSES HA VE BEEN INCURRED FOR EARNING TAX EXEMPTED INCOME. ITA NO.2750/DEL/2011 A.Y. 2007-08 4 RELIANCE WAS PLACED ON THE FOLLOWING JUDGEMENTS BY THE APPELLANT; 1. GODREJ & BOYCE VS. DCIT (BOMBAY HIGH COURT) RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHO D OF ESTIMATING EXPENDITURE RELATABLE TO TAX-FREE INCOME . IT APPLIES W.E.F. AY 2008-09; 2. DCIT VS. MAHARASHTRA SEAMLESS LTD (ITAT DELHI) 3. MINDA INVESTMENTS LTD VS DCIT NEW DELHI ( DELHI ITAT ) 4. HONOURABLE SUPREME COURT HAS ALSO REITERATED TH E SAME PROPOSITION IN THE GODREG & BOYCE MANUFACTURING CO. LTD ( UN REPORTED) 5. DCIT VS. JINDAL PHOTO LTD (ITAT DELHI) 3.3 IT WAS ALSO SUBMITTED THAT IN THE CASE OF A DE ALER IN SHARES, THE DOMINANT OBJECT OF ACQUIRING SHARES IS NOT TO EARN DIVIDEND AND CONSEQUENTLY SEC. 14A DOES NOT AP PLY. THE AO DID NOT ESTABLISH ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS IN THE TAX FREE BONDS. FURTHER, INTEREST EXPENSES ON LOAN TAKEN FOR INVEST MENT IS ALREADY CAPITALISED WITH THE INVESTMENT AND NOT CLAIMED AS BUSINESS EXPENSES BY THE ASSESSEE THEREF ORE, THE APPORTIONMENT ON A PRO RATA BASIS IS IMPROPER I N THE ABSENCE OF ANYTHING BROUGHT BY THE AO. ALSO SECTION 14A R.W.R. 80 WOULD BE APPLIED FOR AY 2008-09 AND NOT F OR EARLIER YEARS. 3.4 I HAVE GONE THROUGH THE ASSESSMENT ORDER AS WELL AS THE WRITTEN SUBMISSION OF THE APPELLANT AND ALSO THE CASE LAWS RELIED ON BY THE APPELLANT. IT HAS BEEN H ELD IN THE CASE OF GODREJ AND BOYCE THAT RULE 8D IS APPLIC ABLE FROM A.Y 08-09. HOWEVER FOR EARLIER YEARS, DISALLO WANCE HAS TO BE WORKED OUT ON REASONABLE BASIS U/S 14A(1) AND THE A.O WILL HAVE TO DETERMINE THE QUANTUM OF ITA NO.2750/DEL/2011 A.Y. 2007-08 5 DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAV ING REGARD TO THE FACTS AND CIRCUMSTANCES WHICH HAS NOT BEEN DONE IN THIS CASE. AFTER CONSIDERATION OF THE FACTS OF THE CASE AND THE FACT THAT INTEREST EXPENSES ON LOANS T AKEN FOR INVESTMENT IS ALREADY CAPITALIZED, IN MY VIEW THE A MOUNT OF RS.68,385/- COMPUTED BY THE APPELLANT HAS TO BE TAKEN AS REASONABLE DISALLOWANCE IN THE ABSENCE OF ANY OT HER FINDING BY THE AO. THE ADDITION IS THEREFORE LIMITE D TO THIS EXTENT. NOW, THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL. 4. WE HAVE HEARD RIVAL ARGUMENT OF BOTH THE PARTIES IN THE LIGHT OF MATERIAL ON RECORD BEFORE US AND CAREFULLY CONSIDER ED THE SAME. LD. DR SUBMITTED THAT THE ASSESSING OFFICER RIGHTLY RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER O F INCOME TAX VS UNITED GENERAL TRUST 200 ITR 488(SC) FOR MAKING DISALLOWANCE U/S 14A OF THE ACT R/W RULE 8D OF THE INCOME TAX RULES 1962 . HE FURTHER SUBMITTED THAT THE ASSESSEE COMPANY PAID INTEREST OF RS.41,08 ,181 AND THE ASSESSING OFFICER RIGHTLY CONSIDERED THE AVERAGE VALUE OF INV ESTMENT, ASSET AND PROPERLY DISALLOWED THE AMOUNT OF RS.33,07,764. TH E LD. DR ALSO SUBMITTED THAT THE COMMISSIONER OF INCOME TAX(A) DELETED THE DISALLOWANCE IGNORING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE AN D WRONGLY HELD THAT DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BAS IS U/S 14A(1) OF THE ACT. THE DR FINALLY SUBMITTED THAT THE COMMISSIONE R OF INCOME TAX(A) WAS ALSO WRONG IN LIMITING THE DISALLOWANCE TO RS.6 8,385 IN THIS REGARD. ITA NO.2750/DEL/2011 A.Y. 2007-08 6 5. THE ASSESSEES REPRESENTATIVE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. RIGHTLY HELD THAT RULE 8D OF THE INCOME TAX RULES INSERTED W.E.F . 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTI FICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX FREE INCOME AND IT APP LIES W.E.F. AY 2008-09. HE ALSO SUBMITTED A COPY OF THE JUDGMENT OF ITAT DE LHI G BENCH IN THE CASE OF ITA NO. 4539/DEL/2010 DCIT VS JINDAL PHOTO LTD. AND SUPPORTED THE IMPUGNED ORDER. 6. THE ASSESSEES REPRESENTATIVE SUBMITTED THAT HONBL E BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS DCIT (2010) 328 ITR 81 (BOMBAY) HAS HELD THAT THE PROVISIONS OF RULE 8D ARE NOT RETROSPECTIVE IN NATURE AND SHALL APPLY W.E.F. A.Y. 2008-09. HE FURTHER SUBMITTED THAT THIS PROPOSITION HAS BEEN REITERATED BY THE HONBLE SUPREME COURT BY DISMISSING APPEAL OF THE REVENUE AGAINST T HIS ORDER. 7. ON CAREFUL CONSIDERATION AND PERUSAL OF THE RELE VANT CITATIONS SUBMITTED BEFORE US, WE OBSERVE THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA) HAS HELD THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED W.E.F. 24.3.2008 ARE NOT RETROSPECTIVE IN NATURE AND SHALL APPLY W.E.F. AY 2008-09; EVEN PRIOR TO AY 2008-09 WHEN RULE 8D WAS NOT APPLI CABLE, THE ASSESSING ITA NO.2750/DEL/2011 A.Y. 2007-08 7 OFFICER HAD TO ENFORCE PROVISIONS OF SUB-SECTION (1 ) OF SECTION 14A OF THE ACT FOR THE PURPOSE. IT WAS ALSO HELD THAT THE ASS ESSING OFFICER WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAD BEEN INCUR RED IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDE R THE ACT BY ADOPTING REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELE VANT FACTS AND CIRCUMSTANCES. THE CASE IN HAND IS RELATED TO AY 2 007-08. THE LD. COMMISSIONER OF INCOME TAX(A) IN PARA 3.4 OF THE IM PUGNED ORDER RIGHTLY HELD THAT RULE 8D OF THE RULES IS APPLICABLE FROM A Y 2008-09. HOWEVER FOR EARLIER YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BASIS U/S 14A(1) AND THE ASSESSING OFFICER WAS DUTY BOUND TO DETERMINE THE QUANTUM OF DISALLOWANCE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND WHICH HAD N OT BEEN DONE IN THIS CASE. 8. THE ASSESSEES REPRESENTATIVE ALSO SUBMITTED THA T IN THE CASE OF COMMISSIONER OF INCOME TAX VS WALFORT SHARE & STOCK BROKERS (P) LTD.(2010) 192 TAXMAN 211(SC), IT WAS HELD THAT THE WORDS EXPENDITURE INCURRED IN SECTION 14A OF THE ACT REFER TO EXPEND ITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOW ANCES ARE PROVIDED FOR UNDER SECTIONS 30 TO 37; A RETURN OF INVESTMENT OR A PAYB ACK IS NOT UNDER THE AMBIT OF EXPENDITURE INCURRED IN TERMS OF SECTION 14A O F THE ACT. THE AR ALSO ITA NO.2750/DEL/2011 A.Y. 2007-08 8 SUBMITTED THAT IN THIS CASE, THE HONBLE APEX COURT HELD THAT FOR ATTRACTING SECTION 14A, THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH TAX EXEMPT INCOME AND SINCE PAYBA CK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE, SECTION 14A IS NOT APPLICABLE IN SUCH CASES. HE HAS DRAWN OUR ATTENTION TOWARDS THE ASSESSMENT ORDER PARA 4.4 WHEREIN THE ASSESSING OFFICER NOTED THAT THE AS SESSEE COMPANY HAS CAPITALIZED INTEREST AMOUNTING TO RS.1,14,58,536.74 ENHANCING THE COST OF INVESTMENT IN HIS BALANCE SHEET. THEREFORE, DISALL OWANCE MADE BY THE ASSESSING OFFICER ON THE BASIS OF SURMISES AND CONJ ECTURES WAS RIGHTLY DELETED BY THE LD. COMMISSIONER OF INCOME TAX(A). LD. DR DID NOT DISPUTE THE FACT THAT THE ASSESSING OFFICER NOTED THAT SUBS TANTIAL AMOUNT OF INTEREST PAID ON LOAN TAKEN FOR INVESTMENT HAS BEEN CAPITALI ZED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WHICH IS CLEARL Y REFLECTED IN THE BALANCE SHEET AND FINAL ACCOUNTS OF THE ASSESSEE BUT THE DR SUBMITTED THAT APART FROM INTEREST, OTHER EXPENSES HAVE TO BE DISALLOWED U/S 14A(1) OF THE ACT. 9. IN VIEW OF ABOVE SUBMISSIONS, WE OBSERVE THAT IN THE CASE OF COMMISSIONER OF INCOME TAX VS HERO CYCLES LTD.(2010 ) 323 ITR 158 (P&H) , THEIR LORDSHIPS HELD THAT DISALLOWANCE U/S 14A OF THE ACT REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME, NO EXPENDITURE HAS BEEN INCURRED, THEN THE DISALLOWANCE ITA NO.2750/DEL/2011 A.Y. 2007-08 9 U/S 14A OF THE ACT CANNOT STAND. IN THE PRESENT CA SE, THE ASSESSEE HIMSELF SUBMITTED DETAIL OF RS.68,385 AS DIVIDEND EARNING E XPENSES AND ACCEPTING THE SAME, THE LD. COMMISSIONER OF INCOME TAX(A) LIM ITED THE DISALLOWANCE TO THIS EXTENT ONLY BY TAKING NOTICE OF THIS FACT T HAT THE INTEREST EXPENSES ON LOAN TAKEN FOR INVESTMENT HAS ALREADY BEEN CAPITALI ZED BY THE ASSESSEE. 10. IN VIEW OF ABOVE DISCUSSION, WE ARE INCLINED TO HOLD THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS BASE D ON HYPER TECHNICAL APPROACH AND ALSO IGNORING THE ESSENCE OF SECTION 1 4A(1). THE ASSESSING OFFICER ALSO IGNORED THIS FACT THAT THE ASSESSEE HA S CAPITALIZED SUBSTANTIAL AMOUNT OF INTEREST PAID ON LOANS TAKEN FOR INVESTME NT AND THE SAME WAS NOT CLAIMED AS BUSINESS EXPENSES BY THE ASSESSEE. THER EFORE, THE APPORTIONMENT ON A PRO RATA BASIS WAS IMPROPER IN THE ABSENCE OF ANYTHING BROUGHT BY THE ASSESSING OFFICER TO ESTABLISH A NEXUS BETWEEN THE EXPENSES INCURRED AND THE EXEMPTED INCOME EARNED ON THE INVESTMENT WHICH WAS A PARAMOUNT REQUIREMENT FOR MAKING A DISALLOWANCE U/S 14A(1) OF THE ACT. 11. ON THE OTHER HAND, THE LD. COMMISSIONER OF INCO ME TAX(A) RIGHTLY HELD THAT THE DISALLOWANCE MADE BY THE ASSESSING OF FICER WAS NOT PROPER AND JUSTIFIED AND HE LIMITED THE DISALLOWANCE TO THE EX TENT OF RS.68,385/-. WE ARE UNABLE TO SEE ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER. ITA NO.2750/DEL/2011 A.Y. 2007-08 10 ACCORDINGLY, WE HOLD THAT THIS APPEAL BY THE REVENU E IS DEVOID OF MERITS AND DESERVES TO BE DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.9.2012. SD/- SD/- (S.V. MEHROTRA) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 21ST SEPTEMBER 2012 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR