ADDL CIT 10(1), MUMBAI V. GLOBAL TRADE FINANCE LTD, MUMBAI

ITA 2844/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9359 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 03-12-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 11-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJARSHRI DIWEDI
• Keywords: Earning of tax free income; Non-deduction of tax
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 2844/MUM/2011 ASSESSMENT YEAR : 2007-08 ASSTT. COMMISSIONER OF INCOME TAX RANGE-10(1) ROOM NO.455, AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. VS. M/S. GLOBAL TRADE FINANCE LTD. METROPOLITAN BUILDING, 6 TH FLOOR BANDRA-KURLA COMPLEX BANDRA (E) MUMBAI-400 051. PAN NO.AABCG 4119 L (APPELLANT) (RESPONDENT) ITA NO. 3270/MUM/2011 ASSESSMENT YEAR : 2007-08 M/S. GLOBAL TRADE FINANCE LTD. MUMBAI-400 051. VS. ASSTT. COMMISSIONER OF INCOME TAX RANGE-10(1) MUMBAI-400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJARSHRI DIWEDI RESPONDENT BY : SHRI PAVAN VED DATE OF HEARING : 03.12.2012 DATE OF PRONOUNCEMENT : 03.12.2012 O R D E R PER BENCH: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 27.1.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. TH E DISPUTES ITA NO.2844 & 3270/M/11 A.Y. 07-08 2 RAISED IN THESE APPEALS RELATE TO DISALLOWANCE OF EXPEN SES UNDER SECTION 14A OF THE ACT AND DISALLOWANCE OF DISCOUNT EXPENSE S. 2. WE FIRST TAKE UP THE ISSUE RELATING TO DISALLOWANCE O F EXPENSES U/S 14A OF THE ACT. THE AO NOTED THAT THE ASSESSEE HAD EA RNED TAX FREE DIVIDEND INCOME OF RS.1,50,31,052/- BUT NO EXPEN SES RELATING TO EXEMPT INCOME HAD BEEN DISALLOWED. THE AO THEREFORE D ISALLOWED THE EXPENSES UNDER SECTION 14A WHICH WERE COMPUTED AS PER RULE 8D WHICH CAME TO RS.1,80,06,342/- CONSISTING OF INTEREST DISA LLOWANCE OF RS.1,65,84,338/- AND OTHER EXPENSES OF RS.14,22,004/-. THE AO HOWEVER RESTRICTED THE DISALLOWANCE TO THE EXTENT OF DI VIDEND INCOME AT RS.1,50,31,052/-. IN APPEAL THE ASSESSEE SUBMITTED THA T NO EXPENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF EARN ING EXEMPT DIVIDEND INCOME. IT WAS POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF FINANCIAL SERVICES AND IT HAD NOT INCURRED ANY OPERATIONAL EXPENSES FOR MAKING INVESTMENTS, HOLDING INVESTMENTS OR FOR EARNING DIVIDEND INCOME. ALTERNATIVELY, IT HAD B EEN ALSO SUBMITTED THAT THE CASH FROM OPERATING PROFITS OF RS.1,09,72,73,0 00/- SHOWED INCREASE OF 276.64% OVER THE EARLIER YEAR AND THEREFO RE, ASSESSEE WAS HAVING SURPLUS CASH FOR MAKING INVESTMENTS. 2.1 CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE OBSERVED THAT RULE 8D WAS NOT APPLICABLE FOR ASSESSMENT YE AR 2007- ITA NO.2844 & 3270/M/11 A.Y. 07-08 3 08. HE ALSO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE T HAT INVESTMENTS WERE MADE FROM SURPLUS FUNDS AND NO EXPENSES WERE INCURRED. IT WAS OBSERVED BY HIM THAT OWN CAPITAL/RESERV ES WERE ONLY TO THE TUNE OF RS.138.00 CRORES WHEREAS LOAN FUNDS WERE RS.1725.00 CRORES AND INTEREST EXPENDITURE WAS RS.78.00 CRORES. THER EFORE, CIT(A) OBSERVED THAT RESERVES/SURPLUS AND CASH PROFIT GEN ERATED DURING THE YEAR WERE OF NO HELP TO THE ASSESSEE TO EXPL AIN EXPENSES INCURRED FOR EARNING EXEMPT INCOME. CIT(A) FURTHER OB SERVED THAT INVESTMENT IN FDRS WERE RS.110.00 CRORES AND AVERAGE DAI LY INVESTMENT IN MUTUAL FUND WAS RS.56.00 CORES. THEREFORE CIT(A) HELD THAT ALLOCATION OF INTEREST OF RS.1,65,84,338/- TOWARD S INVESTMENT YIELDING EXEMPT INCOME WAS REASONABLE. AS REGARDS OTHER EXPENSES, CIT(A) CONFIRMED THE DISALLOWANCE TO THE TUNE OF RS.10. 00 LACS AGAINST DISALLOWANCE OF RS .14.22 LACS MADE BY THE AO. AGGRIEVED BY THE SAID DECISION, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.2 BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT CIT(A) HAD UPHELD THE DISALLOWANCE OF RS.165.00 CRORES OF INTEREST U NDER SECTION 14A WHICH MEANT ENHANCEMENT OF DISALLOWANCE MADE BY THE AO WITHOUT GIVING ANY OPPORTUNITY OF HEARING TO THE ASSE SSEE. CIT(A) HAD CALCULATED THE DISALLOWANCE ON EXPENSES WITHOUT GIVING AN Y OPPORTUNITY TO THE ASSESSEE. IT WAS THEREFORE REQUESTED T HAT THE ORDER ITA NO.2844 & 3270/M/11 A.Y. 07-08 4 OF CIT(A) BE SET ASIDE AND MATTER BE RESTORED TO AO FO R FRESH EXAMINATION. THE LD. DR HAD NO SERIOUS OBJECTION IN T HE MATTER. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXP ENSES UNDER SECTION 14A IN RELATION TO EXEMPT INCOME. THE ASSESSEE HA D EARNED SUBSTANTIAL DIVIDEND INCOME OF RS.1.50 CRORES BUT NO EXPE NSES HAD BEEN ALLOCATED TO THE EXEMPT INCOME. THE AO COMPUTED D ISALLOWANCE UNDER SECTION 14A AS PER RULE 8D. IT IS NOT IN DISPUTE T HAT RULE 8D WAS NOT APPLICABLE IN ASSESSMENT YEAR 2007-08 IN VIEW OF JUD GMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (328 ITR 81). CIT(A) HAS ALSO HELD THA T RULE 8D WAS NOT APPLICABLE. HOWEVER, IT IS NOTED THAT HE HAS COMPUTED DI SALLOWANCE WHICH IS THE SAME AS PER RULE 8D IN SO FAR AS INTEREST DI SALLOWANCE IS CONCERNED WITHOUT GIVING ANY OBJECTIVE BASIS. MOREOVER, CIT(A) ENHANCED THE DISALLOWANCE OF INTEREST MADE BY AO WITHOU T GIVING ANY SPECIFIC OPPORTUNITY OF HEARING TO THE ASSESSEE WHICH IS NOT CORRECT. THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN OUR VIEW MATTER REQUIRES FRESH EXAMINATION AT THE LEVEL O F AO WHO HAD NOT EXAMINED THE DISALLOWANCE ON MERIT. ACCORDINGLY WE SET A SIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FI LE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION AND AFTER ALL OWING OPPORTUNITY OF HEARING TO THE ASSESSEE. ITA NO.2844 & 3270/M/11 A.Y. 07-08 5 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF DISCOUN T EXPENSES IN RELATION TO COMMERCIAL PAPERS ISSUED BY THE ASSE SSEE. THE ASSESSEE HAD DEBITED A SUM OF RS.3,82,55,367/- ON ACCOU NT OF SUCH EXPENSES. THE ASSESSEE EXPLAINED THAT THE COMMERCIAL PAP ERS (CP) HAD BEEN ISSUED AT A DISCOUNT TO FACE VALUE WHICH WA S PAYABLE ON EXPIRY OF THE SPECIFIED PERIOD. THE DISCOUNT VALUE HAD BEEN AMORTISED OVER THE SPECIFIED PERIOD AND EXPENSES HAD BEEN CLAIMED ON PROPORTIONATE BASIS. THE AO HOWEVER DID NOT ACCEPT THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT DISCOUNT HAD BEEN CL AIMED AS INTEREST UNDER SECTION 36(1)(III) WHICH WAS NOT CORRECT A S DISCOUNT WAS NOT INTEREST. IT WAS ALSO OBSERVED BY HIM THAT EVEN IF NATURE OF DISCOUNT WAS ACCEPTED AS INTEREST, THE NO DEDUCTION WAS ALLO WABLE AS ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE. THE AO THEREFORE, DISALLOWED THE CLAIM. 3.1 IN APPEAL ASSESSEE SUBMITTED THAT DISCOUNT WAS DIFFER ENT FROM INTEREST AND PROVISIONS OF TDS WERE NOT APPLICABLE. ASSESSE E PLACED RELIANCE ON CIRCULAR NO.647 DATED 22.3.1993 ISSUED BY C BDT. CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE OBSERVED THA T DISCOUNT WAS NOT OF THE NATURE OF INTEREST AND, THEREFO RE, ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS. HE, THEREFORE, DELETED TH E DISALLOWANCE MADE BY AO AGGRIEVED BY WHICH REVENUE IS IN APPEAL BE FORE TRIBUNAL. ITA NO.2844 & 3270/M/11 A.Y. 07-08 6 3.2 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED THE MATTER CAREFULLY. THE ASSESSEE HAD ISSUED COMM ERCIAL PAPER (CP) AT A DISCOUNT TO FACE VALUE AND FACE VALUE WAS PAYABLE ON EXPIRY OF THE SPECIFIED PERIOD FOR WHICH CP WAS ISSUED. T HE DISCOUNT VALUE HAD BEEN AMORTISED BY ASSESSEE OVER THE SPECIFIED PE RIOD AND EXPENSES HAD BEEN CLAIMED AS DEDUCTION ON PROPORTIONATE BASIS. THERE IS NO DISPUTE RAISED THAT CP HAD BEEN ISSUED FOR THE PUR POSE OF BUSINESS ONLY. THEREFORE THE PROPORTIONATE AMOUNT CLAIM ED BY ASSESSEE IS ALLOWABLE AS DEDUCTION. AS REGARDS NON-DEDUCTION OF TAX AT SOURCE CBDT IN CIRCULAR NO.647 DATED 22.3.93 HAS CLARIFIE D THAT DIFFERENCE BETWEEN ISSUE PRICE AND FACE VALUE HAS TO BE CO NSIDERED AS DISCOUNT AND NOT INTEREST PAID AND THEREFORE, TDS PROV ISIONS ARE NOT APPLICABLE. IN VIEW OF THIS POSITION WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF CIT(A) IN ALLOWING CLAIM OF THE ASSESSEE AND SA ME IS UPHELD. 4. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED WHER EAS THAT OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 3.12.2012. SD/- SD/- (AMIT SHUKLA ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 3.12.2012. JV. ITA NO.2844 & 3270/M/11 A.Y. 07-08 7 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.