SYLVSTER & COMPANY, MUMBAI V. ACIT (12)(1), MUMBAI

ITA 2870/MUM/2013

• Counselvise Citation: 287019914 RSA 2013
• Duration Of Justice: 1 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 12-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PITAMBER DAS
• Keywords: Business expenditure; Earning of tax free income; Proportionate interest
• Section: 14A; 37

Judgement Text

+ E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI .. , . . . . BEFORE SHRI P.M. JAGTAP, AM AND DR. S.T.M. PAVALAN, JM ./ I.T.A. NO.8076 /MUM/2010 ( / ASSESSMENT YEAR : 2007-2008 ./ I.T.A. NO.4881 /MUM/2012 ( / ASSESSMENT YEAR : 2008-2009 ./ I.T.A. NO.2870 /MUM/2013 ( / ASSESSMENT YEAR : 2009-2010 M/ S SYLVESTER & COMPANY, SYLVESTER BUILDING, 20, SHAHID BHAGAT SINGH ROAD, OPP. CUSTOM HOUSE, MUMBAI 400 023. / VS. A .C.I.T. 1 2 ( 1 ), AAYAKAR BHAVAN, MUMBAI. 20. ./ PAN : AAJFS5846F ( % / APPELLANT ) .. ( & '% / RESPONDENT ) A PPELLANT BY SHRI VIJAY MEHTA R E SPONDENT BY : SHRI PITAMBER DAS * / DATE OF HEARING : 08-05-2014 * / DATE OF PRONOUNCEMENT : 0410612014 [ / O R D E R PER P.M. JAGTAP, A.M . : .. , THESE THREE APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST THREE SEPARATE ORDERS OF THE LD. CIT(A) FOR ASSESSMENT YE ARS 2007-08, 2008-09 AND 2009-10 AND SINCE SOME COMMON ISSUES ARE INVOLVED T HEREIN, THE SAME HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 2 2. FIRST, WE SHALL TAKE UP THE APPEAL OF THE ASSESS E FOR A.Y. 2007-08 BEING ITA NO. 8076/MUM/2010 WHICH IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) -23, MUMBAI DATED 3-9-2010. 3. THE ISSUE INVOLVED GROUND NO. 1 OF THIS APPEAL R ELATES TO THE ADDITION MADE BY THE A.O. AND SUSTAINED BY THE LD.CIT(A) TO THE EXTENT OF RS. 3,37,373/- BEING 10% OF THE TOTAL OPERATING EXPENSE S INCURRED BY THE ASSESSEE IN CASH. 4. THE ASSESSEE IN THE PRESENT CASE IS PARTNERSHIP FIRM WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES AS CLEARING A ND FORWARDING AGENT. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION I .E 2007-08 WAS FILED BY IT ON 31-10-2007 DECLARING TOTAL INCOME OF RS. 76,21,2 85/-. IN THE P&L ACCOUNT FILED ALONG WITH THE SAID RETURN, EXPENSES OF RS. 8 5,82,727/- WERE DEBITED BY THE ASSESSEE UNDER THE HEAD OPERATING EXPENSES WH ICH INTER ALIA INCLUDED CLEARING, HANDLING AND OTHER EXPENSES OF RS. 33,89, 268/- INCURRED BY THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS, THE EXPENSES CLAIMED TO BE INCURRED BY THE ASSESSEE ON CLEARING, HANDLING AND OTHERS WERE EXAMINED BY THE A.O. AND ON SUCH EXAMINATION, HE FO UND THAT THE SAID EXPENSES TO THE EXTENT OF RS. 33,73,726/- WERE INCU RRED BY THE ASSESSEE IN CASH. HE ALSO FOUND THAT THE SAID EXPENSES NOT SUPP ORTED BY THIRD PARTY VOUCHERS WERE NOT FULLY VERIFIABLE. IN THIS REGARD , THE CONTENTION RAISED BY THE ASSESSEE BEFORE THE A.O. WAS THAT THE SAID EXPENSES TO THE EXTENT OF RS. 31,40,115/- WERE ACTUALLY REIMBURSED BY THE CLIENTS AND THE DISALLOWANCE ON ACCOUNT OF UN-VERIFIABILITY COULD BE MADE ONLY OUT OF THE DIFFERENCE BETWEEN THE EXPENSES INCURRED BY THE ASSESSEE IN CASH I.E. RS. 33,73,726/- AND THE AMOUNT REIMBURSED BY THE CLIENTS I.E. RS. 31,40,115 /-. THIS STAND OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE A.O. HE NO TED FROM THE RELEVANT CONTRACTS BETWEEN THE ASSESSEE FIRM AND ITS CLIENTS THAT THE EXPENSES WERE RECOVERED BY THE ASSESSEE AT FLAT RATES DISREGARDIN G THE ACTUAL EXPENSES ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 3 INCURRED AND IT WAS THUS NOT A CASE OF REIMBURSEMEN T OF ACTUAL EXPENSES INCURRED AS CLAIMED BY THE ASSESSEE. HE HELD THAT THE AMOUNT OF RS. 31,40,115/- RECOVERED BY THE ASSESSEE FROM ITS CLIE NT WAS IN THE NATURE OF SERVICE CHARGES AND SINCE THE EXPENSES CLAIMED BY T HE ASSESSEE AGAINST THE INCOME FROM SERVICE CHARGES WERE NOT FULLY VERIFIAB LE, HE ALLOWED THE CLAIM OF THE ASSESSEE FOR EXPENSES ON ESTIMATED BASIS AT RS. 23,43,430/- BEING 75% OF THE AMOUNT OF SERVICE CHARGES RECEIVED BY THE ASSES SEE AND MADE AN ADDITION TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF T HE BALANCE AMOUNT OF RS. 10,30,296/- TREATING THE SAME AS PROFIT FROM THE SE RVICE CHARGES RECEIVED. 5. THE ADDITION OF RS. 10,30,296/- MADE BY THE A.O. ON ACCOUNT OF INCOME ESTIMATED FROM SERVICE CHARGES WAS DISPUTED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(A). IT WAS BROUGHT TO THE NOTICE OF THE LD. CIT(A) BY THE ASSESSEE THAT A SIMILAR ISSUE WAS INVOLVED IN ASSES SEES OWN CASE FOR THE EARLIER YEARS AND THE SAME WAS DECIDED BY THE TRIBU NAL IN A.Y. 1999-2000, 2002-03, 2003-04 & 2004-05 HOLDING THAT THE DISALLO WANCE ON ACCOUNT OF UNVERIFIABLE ELEMENT INVOLVED IN OPERATING EXPENSES COULD BE MADE ONLY TO THE EXTENT OF 10% OF THE DIFFERENCE BETWEEN THE AMOUNT SPENT BY THE ASSESSEE AND THE AMOUNT RECOVERED FROM THE CLIENT. AFTER CONSID ERING THE SUBMISSION MADE BY THE ASSESSEE AS WELL AS THE RELEVANT MATERIAL ON RECORD, THE LD. CIT(A) DECIDED THIS ISSUE VIDE PARA NO. 2.3 OF HIS IMPUGNE D ORDER AS UNDER;- 2.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MA DE FOR THE APPELLANT AND THE ASSESSMENT ORDER. I FIND THAT THE HONBLE (TAT MUMBAI IN ITA NO. 162/MUM/2003 VIDE ORDER DATED 25/10/2007 HAD SUSTAI NED A DISALLOWANCE MADE OUT OF SIMILAR EXPENSES TO THE EXTENT OF 10%. IN ITA NO.687/M/06 FOR A.Y.2002-03, THE TRIBUNAL WHILE NOTHING THE DECISIO NS IN RESPECT OF A.Y.1999- 2000, FOUND THAT IN THE PREVIOUS YEAR RELEVANT TO A .Y.2002-03, THE ASSESSEE THE CLIENTS ON ACCOUNT OF EXPENSES IN QUESTION AND KEEPING IN VIEW THE POSITION, IT WAS HELD BY THE TRIBUNAL THAT THERE WA S NO REASON TO MAKE ANY DISALLOWANCE OUT OF SUCH EXPENSES AS THE SAME WERE ENTIRELY RECOVERED BY THE ASSESSEE FROM THE CLIENTS. THE (TAT, IN (TA NO. 138 1 /M/08 AND 1753/M/08 FOR AYS 2003-04 A 2004-05, VIDE ITS ORDER DATED 20/ 07/2007 FOLLOWED ITS OWN ORDER IN THE ASSESSEES OWN CASE FOR Y 2002-03. TH ERE WOULD BE NO GROUND FOR MAKING A DISALLOWANCE IF ALL EXPENSES INCURRED ARE RECOVERED FROM THE APPELLANT, SINCE THESE WOULD BE IN THE NATURE OF RE IMBURSEMENT. HOWEVER, IF ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 4 EXPENSES ARE NOT INCURRED AND RECOVERIES ARE MADE F ROM CLIENTS IN RESPECT EXPENSES CLAIMED BUT NOT ACTUALLY INCURRED, THE REC EIVABLE WOULD BE INCOME OF THE ASSESSEE AND WOULD NOT BE A REIMBURSEMENT .THE ASSESSING OFFICER HAS GIVEN A FINDING THAT THE CLIENTS HAVE PAID ON A PRE AGREED RATE AND NOT BASED ON ACTUAL EXPENSES INCURRED. ONLY RECOVERY OF ACTUA L OPERATIONAL EXPENSES WOULD BE TREATED AS REIMBURSEMENT. IN THE PRESENT C ASE, THE TOTAL OPERATING EXPENSES OF RS. 31,40,115/- RECEIVED FROM THE CLIEN TS HAS ACCRUED AT FLAT RATE AS MENTIONED IN THE VARIOUS CONTRACTS. NO THIRD PAR TY RECEIPTS, AS ALREADY AGREED BY THE ASSESSEE, EXIST FOR THESE OPERATING E XPENSES. THE NON VERIFIABLE EXPENSES IN WHICH ARE NOT BACKED BY CORROBORATIVE P ROOF OF ACTUALLY HAVING BEEN INCURRED, CANNOT BE TREATED A REIMBURSEMENT AN D ACCEPTED AS SUCH IN TOTO. I AGREE WITH THE ASSESSING OFFICER THAT SOME ELEMENT OF PROFIT WOULD BE BUILT IN INTO THE SAID RECEIPTS WHICH HAVE BEEN CLA IMED ON THE BASIS OF UNVERIFIABLE EXPENSES. THE ASSESSING OFFICER HAS TR EATED 75% OF SUCH EXPENSES AS ACTUALLY INCURRED EXPENSES AND ADDED 25 % OF THE SAME AS NOT BEING IN THE NATURE OF REIMBURSEMENTS. I FIND THAT THAT THE I IN A.Y. 1999- 2000 HAS UPHELD DISALLOWANCES MADE OUT OF SIMILAR E XPENSES TO THE EXTENT OF 10%. FOLLOWING THE SAME ANALOGY THE ASSESSING OFFIC ER IS DIRECTED TO RESTRICT ADDITION TO 10% OF THE UNVERIFIABLE EXPENSES WHICH ARE NOT THE NATURE OF REIMBURSEMENT AS DISCUSSED ABOVE. SINCE INQUIRY INT O THE TERMS ON CONTRACTS WAS NOT MADE IN EARLIER YEARS, THE APPELLATE ORDERS OF ITAT IN A.YRS.2002-03 TO 2004-05, FOLLOWED IN APPEAL ORDER OF CIT(A) IN A.Y. 2006-07 ARE NOT APPLICABLE. THUS THE GROUND IS PARTY ALLOWED. 6. THE LD. CIT(A) THUS RESTRICTED THE DISALLOWANCE ON ACCOUNT OF OPERATING EXPENSES TO 10% BUT OF TOTAL OPERATING EXPENSES INC URRED BY THE ASSESSEE AND NOT OF THE DIFFERENCE BETWEEN THE EXPENSES INCURRED AND EXPENSES RECOVERED. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSES SEE HAS RAISED THIS ISSUE IN THE PRESENT APPEAL FOR A.Y. 2007-08. 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSER VED THAT A SIMILAR ISSUE WAS INVOLVED IN ASSESSEES OWN CASE FOR THE EARLIER YEA RS AND THE SAME WAS DECIDED BY THE TRIBUNAL IN A.Y. 1999-2000, 2002-03, 2003-04 & 2004-05 BY TAKING A CONSISTENT STAND THAT THE DISALLOWANCE ON ACCOUNT OF UNVERIFIABLE ELEMENT INVOLVING OPERATING EXPENSES COULD BE MADE AT 10% OF THE DIFFERENCE BETWEEN THE EXPENSES INCURRED BY THE ASSESSEE AND T HE EXPENSES RECOVERED. IT IS ALSO OBSERVED THAT THE SAID DECISION OF THE T RIBUNAL HAS BEEN FOLLOWED BY THE LD. CIT(A) IN A.Y. 2006-07, 2007-08, 2008-09 AN D 2009-10 TO RESTRICT THE ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 5 DISALLOWANCE ON ACCOUNT OF UNVERIFIABLE ELEMENT INV OLVED IN OPERATING EXPENSES TO 10% OF THE DIFFERENCE BETWEEN EXPENDITU RE INCURRED AND EXPENDITURE RECOVERED. IN THE YEAR UNDER CONSIDERA TION I.E 2007-08, THE LD. CIT(A), HOWEVER, HAS TAKEN A DIFFERENT VIEW BY REST RICTING THE DISALLOWANCE TO 10% OF THE TOTAL EXPENSES INCURRED BY THE ASSESSEE AND ALTHOUGH HE HAS GIVEN SOME REASONS FOR DOING SO AND THE LD. D.R. HAS STRO NGLY RELIED ON SUCH REASONS GIVEN BY THE LD. CIT(A), THE UNDISPUTED POS ITION IS THAT THE FACTS INVOLVED IN THE YEAR UNDER CONSIDERATION ARE MATERI ALLY SIMILAR TO THE FACTS INVOLVED IN THE EARLIER YEARS WHICH HAVE ALREADY BE EN DECIDED BY THE TRIBUNAL. IN OUR OPINION, THE JUDICIAL PROPRIETARY AND DISCIP LINE REQUIRED THAT THE DECISION OF THE CO-ORDINATE BENCH RENDERED IN THE E ARLIER YEARS SHOULD BE FOLLOWED ESPECIALLY WHEN THE FACTS INVOLVED ARE UND ISPUTEDLY SIMILAR. WE THEREFORE FOLLOW THE ORDERS OF THE TRIBUNAL PASSED IN ASSESSEES OWN CASE FOR THE EARLIER YEARS AND DIRECT THE A.O. TO RESTRICT T HE DISALLOWANCE ON THIS ISSUE TO 10% OF THE DIFFERENCE BETWEEN THE EXPENDITURE IN CURRED BY THE ASSESSEE AND THE EXPENDITURE RECOVERED. GROUND NO. 1 OF ASS ESSEES APPEAL BEING ITA NO.8076/MUM/2010 FOR A.Y. 2007-08 IS THUS PARTLY AL LOWED. 8. THE ISSUE INVOLVED IN GROUND NO. 2 RELATES TO TH E DISALLOWANCE OF RS. 16,34,137/- MADE BY THE A.O. AND CONFIRMED BY THE L D. CIT(A) ON ACCOUNT OF INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. 9. FROM THE PERUSAL OF THE BALANCE SHEET FILED BY T HE ASSESSEE, IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAS MADE AN I NVESTMENT OF RS. 1.85 CRORES IN MUTUAL FUNDS AND SHARES. HE ALSO FOUND T HAT INTEREST OF RS. 47,01,526/- PAID TO THE PARTNERS AND INTEREST OF RS . 11,49,034/- PAID TO OTHER PARTIES WAS DEBITED BY THE ASSESSEE IN THE P&L ACCO UNT. SINCE THE ASSESSEE WAS NOT IN THE BUSINESS OF TRADING IN SHARES AND MU TUAL FUNDS, THE A.O. REQUIRED THE ASSESSEE TO EXPLAIN WHY THE INTEREST E XPENDITURE ATTRIBUTABLE TO INVESTMENT MADE IN MUTUAL FUNDS AND SHARES SHOULD N OT BE DISALLOWED. IN ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 6 REPLY, IT WAS SUBMITTED BY THE ASSESSEE THAT INTERE ST @ 12% WAS PAID TO THE PARTNERS ON THE CAPITAL BALANCES AS PER THE TERMS O F THE PARTNERSHIP DEED AND SINCE THE SAME WAS WITHIN THE LIMITS SPECIFIED IN S ECTION 40(B)(IV) OF THE ACT, THE SAME COULD NOT BE DISALLOWED. THIS EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE A.O. ACCORDING TO HIM, THE ALLOWABILITY OF INTEREST PAID TO PARTNERS WAS NOT EMANATING FROM SECTION 40( B)(IV) WHICH ACTUALLY DEALT WITH AMOUNTS NOT DEDUCTIBLE. HE HELD THAT THE AL LOWABILITY OF INTEREST EXPENDITURE THUS WAS REQUIRED TO BE CONSIDERED U/S 29 TO 37 AND NOT U/S 40(B)(IV) OF THE ACT. HE NOTED IN THIS CONTEXT THA T THERE WERE NOT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE FIRM TO MAKE INVE STMENT IN SHARES AND MUTUAL FUNDS AND THUS IT WAS A CASE OF UTILIZATION OF INTEREST BEARING BORROWED FUNDS BY THE ASSESSEE FOR MAKING INVESTMEN T IN SHARES AND MUTUAL FUNDS. ACCORDINGLY, INTEREST EXPENDITURE ATTRIBUTA BLE TO THE INVESTMENT MADE IN SHARES AND MUTUAL FUNDS WAS WORKED OUT BY THE A. O. AT RS. 22,20,015/- BEING 12% OF RS. 1.85 CRORES AND DISALLOWANCE TO TH AT EXTENT WAS MADE BY HIM U/S 36(1)(III) OF THE ACT. HE ALSO MADE A FURT HER DISALLOWANCE OF RS. 1,58,916/- U/S 14A OF THE ACT WHICH WAS AGAIN INCLU SIVE OF DISALLOWANCE MADE ON ACCOUNT OF INTEREST. 10. THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF INTEREST EXPENDITURE WAS DISPUTED BY THE ASSESSEE IN AN APPEAL FILED BEF ORE THE LD. CIT(A) AND THE SUBMISSIONS MADE BEFORE THE A.O. ON THIS ISSUE WERE REITERATED ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A). IT WAS ALSO CO NTENDED AS AN ALTERNATIVE BY THE ASSESSEE THAT THE DISALLOWANCE WORKED OUT BY TH E A.O. ON ACCOUNT OF INTEREST EXPENDITURE BY APPLYING FLAT RATE OF 12% F OR THE ENTIRE YEAR TO THE VALUE OF INVESTMENT STATING STANDING AT THE LAST DA TE OF THE PREVIOUS YEAR WAS NOT CORRECT AS THE AMOUNT OF INVESTMENT MADE BY THE ASSESSEE BEING IN THE YEAR UNDER CONSIDERATION AND THE SAME WAS ONLY RS. 20 LACS DURING THE FIRST HALF OF THE SAID YEAR. THE LD. CIT(A) DID NOT FIND MERIT IN MAIN CONTENTION OF THE ASSESSEE BUT ACCEPTING THE ALTERNATIVE CONTENTI ON OF THE ASSESSEE, HE ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 7 SUSTAINED PARTLY THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF INTEREST AFTER RECORDING THE FOLLOWING OBSERVATIONS IN PARA 3.3 OF HIS IMPUGNED ORDER:- 3.3 I HAVE CAREFULLY CONSIDERED THE APPELLANTS SU BMISSIONS AND THE ASSESSMENT ORDER. AS IS EVIDENT FROM THE BALANCE SH EET THAT THERE ARE NO INTEREST FREE FUNDS WITH THE FIRM TO BE INVESTED IN NON-BUSINESS ACTIVITIES. HOWEVER, THE ASSESSEE HAS RAISED FUNDS FROM PARTNER S AND OTHER PARTIES AND DEBITED HUGE INTEREST EXPENDITURE IN ITS P & L A/C. THE APPELLANT HAS NOT BEEN ABLE TO SHOW THAT INVEST MENTS WERE MADE OUT OF INTEREST FREE FUNDS, NO NEXUS BETWEEN THE TWO HAS B EEN ESTABLISHED. SINCE THE FIRM HAS NO INTEREST FREE FUNDS TO FINANCE ITS HUG E INVESTMENT IN MUTUAL FUNDS THE INTEREST PAID ON BORROWAL OF SUCH FUNDS C ANNOT BE SAID TO BE INCURRED FOR BUSINESS PURPOSES. THE CONTENTION THAT INTEREST EXPENSES TO PARTNERS IS ALLOWED U/S.28(1) R.W.S.40(B)(IV) IRRES PECTIVE OF THE USAGE OF THE CAPITAL EMPLOYED IS NOT TENABLE. THUS THE ACTION OF THE ASSESSING OFFICER IS MAKING DISALLOWANCES OF PROPORTIONATE INTEREST ON T HE FUNDS UTILIZED FOR INVESTMENT IN MUTUAL FUNDS IS CONFIRMED. HOWEVER, T HE APPELLANT CONTENDED THAT THE INVESTMENT OF RS. 1,65,00,000 IN MUTUAL FU ND WAS MADE ONLY ON 18.7.2006 AND THE ASSESSING OFFICER COULD NOT HAVE DISALLOWED THE INTEREST FOR THE ENTIRE PERIOD OF 12 MONTHS. THE ASSESSING OFFIC ER IS DIRECTED TO COMPUTE THE DISALLOWANCE ONLY FOR THE PERIOD FROM THE ACTUA L DATE OF INVESTMENT TO THE END OF THE YEAR. THUS THE GROUND IS PARTLY ALLOWED. 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE ON ACCOUNT OF INTEREST WAS WRONGLY MADE BY THE A.O. TW ICE FIRSTLY U/S 36(1)(III) OF THE ACT AND SECONDLY U/S 14A OF THE ACT. HE CONTEN DED THAT SINCE THE ALLEGATION LEVELED BY THE A.O. WAS ABOUT UTILIZATIO N OF BORROWED FUNDS FOR MAKING TAX FREE INVESTMENT, THE DISALLOWANCE ON ACC OUNT OF INTEREST SHOULD HAVE BEEN APPROPRIATELY MADE ONLY U/S 14A AND NOT U /S 36(1)(III) OF THE ACT. HE INVITED OUR ATTENTION TO THE WORKING OF DISALLOW ANCE ON ACCOUNT OF INTEREST MADE BY THE A.O. U/S 14A BY APPLYING RULE 8D OF THE INCOME TAX RULES, 1962 AND POINTED OUT THAT THERE IS A MISTAKE IN THE SAID WORKING INASMUCH AS THE QUANTUM OF INTEREST EXPENDITURE IS WRONGLY TAKEN BY THE A.O. AS RS. 11,49,034/- INSTEAD OF RS. 58,50,560/-. HE SUBMITTE D THAT THE DISALLOWANCE U/S 14A BY APPLYING RULE 8D ACTUALLY COMES TO RS. 5 ,99,451/- AND ALTHOUGH RULE 8D IS NOT APPLICABLE TO THE YEAR UNDER CONSIDE RATION I.E. A.Y. 2007-08, THE SAME CAN BE TAKEN BEING AN APPROPRIATE BASIS TO WORK OUT THE ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 8 DISALLOWANCE ON ACCOUNT OF INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE BY THE ASSESSEE, THE INCOME OF WHICH IS EXEMPT FROM TA X. HE CONTENDED THAT THE DISALLOWANCE ON ACCOUNT OF INTEREST MADE U/S 36(1)( III) OF THE ACT HOWEVER IS NOT JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE ESPECIALLY WHEN SUBSTANTIAL INTEREST EXPENDITURE INCURRED BY THE AS SESSEE IS ON ACCOUNT OF INTEREST PAID ON PARTNERS CAPITAL ACCOUNT WHICH HAS ALREADY SUFFERED TAX IN THE HANDS OF THE PARTNERS. 12. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT INTEREST BEARING BORROWED FUNDS WERE CLEARLY UTILIZED BY THE ASSESSE E FOR MAKING INVESTMENT IN SHARES AND MUTUAL FUNDS AND SINCE THE ASSESSEE IS N OT DEALING IN SHARES AND MUTUAL FUNDS, INTEREST EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT ALLOWABLE AS BUSINESS EXPENDITURE U/S 36(1)(III) OF THE ACT AS RIGHTLY HELD BY THE AUTHORITIES BELOW. HE CONTENDED THAT THE DISAL LOWANCE MADE BY THE A.O. ON ACCOUNT OF INTEREST EXPENDITURE U/S 36(1)(III) O F THE ACT THUS WAS IN ACCORDANCE WITH LAW AND THE LD. CIT(A) WAS FULLY JU STIFIED IN CONFIRMING THE SAME. AS REGARDS THE INTEREST PAID BY THE ASSESSEE FIRM TO ITS PARTNERS ON THEIR CAPITAL ACCOUNT, HE CONTENDED THAT ALTHOUGH T HE SAID INTEREST IS GOVERNED BY THE PROVISIONS OF SECTION 40(B), THE AL LOWABILITY OF INTEREST FIRST HAS TO BE TESTED U/S 36(1)(III) OF THE ACT AND IF T HE INTEREST IS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 36(1)(III), IT CANNOT BE ALLOWED U/S 40(B) OF THE ACT. IN SUPPORT OF THIS CONTENTION, HE RELIED ON T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MUNJAR SALES CORPORATI ON VS. CIT, 68 TAXMANN 43. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE FIND MERIT IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE PROVISIONS OF SEC TION 36(1)(III) AND U/S 14A OF THE ACT OPERATE ON DIFFERENT SPHERES. IF THERE IS A UTILIZATION OF INTEREST BEARING BORROWED FUNDS FOR EARNING EXEMPT INCOME, T HE DISALLOWANCE ON ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 9 ACCOUNT OF INTEREST IS GOVERNED BY SECTION 14A OF T HE ACT. ON THE OTHER HAND, IF INTEREST BEARING BORROWED FUNDS ARE UTILIZED FOR ANY OTHER NON-BUSINESS PURPOSE, THE DISALLOWANCE ON ACCOUNT OF INTEREST IS GOVERNED BY THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THERE MAY BE A S ITUATION WHERE THE INTEREST BEARING BORROWED FUNDS ARE UTILIZED PARTLY FOR EARN ING TAX FREE INCOME AND PARTLY FOR OTHER NON-BUSINESS PURPOSE. IN SUCH A SI TUATION, THE DISALLOWANCE ON ACCOUNT OF INTEREST MAY BE REQUIRED TO BE MADE U /S 36(1)(III) AND SECTION 14A DEPENDING ON THE FACTS OF EACH CASE. THE FACTS INVOLVED IN THE PRESENT CASE, HOWEVER, ARE VERY CLEAR INASMUCH AS THE INTER EST BEARING BORROWED FUNDS ARE UTILIZED BY THE ASSESSEE FOR MAKING INVES TMENT IN SHARES AND MUTUAL FUNDS, THE DIVIDEND INCOME OF WHICH IS EXEMP T FROM TAX. THE PROVISIONS OF SECTION 14A OF THE ACT THUS ARE APPLI CABLE IN THE PRESENT CASE AND NOT THAT OF SECTION 36(1)(III) OF THE ACT. WE T HEREFORE AGREE WITH THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE DISALLOWANCE ON ACCOUNT OF INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE IN SHARES AND MUTUAL FUNDS IS REQUIRED TO BE MADE U/S 14A OF THE ACT AND SINCE THE METHOD GIVEN IN RULE 8D TO WORK OUT OF SUCH INVESTMENT IS QUITE FAIR AND REASONABLE AND THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO AGREED FO R APPLYING THE SAID RULE ALTHOUGH THE SAME IS NOT APPLICABLE TO THE YEAR UND ER CONSIDERATION I.E A.Y. 2007-08, WE DIRECT THE A.O. TO MAKE A DISALLOWANCE ON ACCOUNT OF INTEREST U/S 14A ONLY BY APPLYING RULE 8D. AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD, THERE IS A MISTAKE COMMITT ED BY THE A.O. IN COMPUTING THE DISALLOWANCE AT RS. 1,58,916/- INSTEA D OF RS. 5,99,451/-. THE A.O. IS ACCORDINGLY DIRECTED TO RECOMPUTE THE DISAL LOWANCE U/S 14A READ WITH RULE 8D BY TAKING THE CORRECT FIGURE. THE DISALLOW ANCE MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INTEREST U/S 36(1)(III) IS ACCORDINGLY DELETED AND THE DISALLOWANCE MADE U/S 14A OF THE AC T IS CONFIRMED WITH A DIRECTION TO THE A.O. TO RECOMPUTE THE SAME BY TAKI NG THE CORRECT FIGURES. GROUND NO. 2 OF THE ASSESSEES APPEAL FOR A.Y. 2007 -08 IS THUS PARTLY ALLOWED. ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 10 14. NOW, WE SHALL TAKE UP THE APPEAL OF THE ASSESSE E FOR A.Y. 2008-09 BEING ITA NO. 4881/MUM/2012 WHICH IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) 23, MUMBAI DATED 23-5-2012. 15. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE SOLITAR Y ISSUE INVOLVED IN THIS APPEAL OF THE ASSESSEE RELATING TO THE DISALLOWANCE MADE ON ACCOUNT OF INTEREST IS SIMILAR TO THE ONE INVOLVED IN GROUND N O. 2 OF THE ASSESSEES APPEAL FOR A.Y. 2007-08 WHICH HAS ALREADY BEEN DECIDED BY US. AS THE MATERIAL FACTS RELEVANT TO THIS ISSUE AS INVOLVED IN A.Y. 2008-09 ARE SIMILAR TO A.Y. 2007-08 AND THE LD. REPRESENTATIVES OF BOTH THE SIDES HAVE ALSO ADVANCED THE SAME ARGUMENTS, WE FOLLOW OUR CONCLUSION DRAWN IN A.Y. 2 007-08 AND DIRECT THE A.O. TO MAKE THE DISALLOWANCE ON ACCOUNT OF INTERES T ONLY U/S 14A READ WITH RULE 8D AFTER RECOMPUTING THE QUANTUM THEREOF BY TA KING THE CORRECT FIGURE. THE APPEAL OF THE ASSESSEE FOR A.Y. 2008-09 IS THUS PARTLY ALLOWED. 16. NOW, WE SHALL TAKE UP THE APPEAL OF THE ASSE SSEE FOR A.Y. 2009-10 BEING ITA NO.2870/MUM/203 WHICH IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) 23, MUMBAI DATED 1-2-2013. 17. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE SOLITAR Y ISSUE INVOLVED IN THIS APPEAL OF THE ASSESSEE RELATING TO THE DISALLOWANCE MADE ON ACCOUNT OF INTEREST IS SIMILAR TO THE ONE INVOLVED IN GROUND N O. 2 OF THE ASSESSEES APPEAL FOR A.Y. 2007-08 WHICH HAS ALREADY BEEN DECIDED BY US. AS THE MATERIAL FACTS RELEVANT TO THIS ISSUE AS INVOLVED IN A.Y. 2009-10 ARE SIMILAR TO A.Y. 2007-08 AND THE LD. REPRESENTATIVES OF BOTH THE SIDES HAVE ALSO ADVANCED THE SAME ARGUMENTS, WE FOLLOW OUR CONCLUSION DRAWN IN A.Y. 2 007-08 AND DIRECT THE A.O. TO MAKE THE DISALLOWANCE ON ACCOUNT OF INTERES T ONLY U/S 14A READ WITH RULE 8D AFTER RECOMPUTING THE QUANTUM THEREOF BY TA KING THE CORRECT FIGURE. THE APPEAL OF THE ASSESSEE FOR A.Y. 2009-10 IS THUS PARTLY ALLOWED. ITA 8076/M/10,ITA 4881/M/12 & I TA 2870/M/13 11 18. IN THE RESULT, ALL THE THREE APPEALS OF THE AS SESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JUNE, 2014. * 6 7 04-06-2014 * SD/- SD/- (DR. S.T.M. PAVALAN) (P.M. JAGTAP ) JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 7 DATED 04-06-2014 [ .../ RK , SR. PS # $&' (' / COPY OF THE ORDER FORWARDED TO : 1. % / THE APPELLANT 2. &'% / THE RESPONDENT. 3. : () / THE CIT(A)6 MUMBAI. 4. : / CIT 2 MUMBAI 5. = &? , ? , / DR, ITAT, MUMBAI E BENCH 6. A / GUARD FILE. / BY ORDER, '= & //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI