MANILAL DAYALJI & CO, DHAMTARI V. DEPUTY COMMISSIONER OF INCOME TAX ,CIRCLE 2(1), RAIPUR

ITA 290/RPR/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5630 (ITAT-RAIPUR)
• Duration Of Justice: 4 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Assessment Year: 2013-2014
• Appeal Filed On: 28-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A

Judgement Text

आयकर अपीलȣय अͬधकरण Ûयायपीठ रायप ु र मɅ। IN THE INCOME TAX APPELLATE TRIBUNAL, RAIPUR BENCH, RAIPUR (Through Virtual Court) BEFORE SHRI RAVISH SOOD, JUDICIAL MEMBER AND SHRI JAMLAPPA D BATTULL, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.290/RPR/2017 Ǔनधा[रण वष[ / Assessment Year : 2013-14 Manilal Dayalji & Co. Gola Bidi Works, Sadar Bazar, Dhamtari (C.G.) PIN : 493773 PAN : AAGFM4587N .......अपीलाथȸ / Appellant बनाम / V/s. The DCIT-2(1), Central Revenue Building, Civil Lane, Raipur (C.G.) ......Ĥ×यथȸ / Respondent Assessee by : Shri R.B. Doshi, C.A. Revenue by : Shri Sanjay Kumar, Sr. D.R. स ु नवाई कȧ तारȣख / Date of Hearing : 17.03.2022 घोषणा कȧ तारȣख / Date of Pronouncement : 30.03.2022 2 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 आदेश / ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee is directed against the order passed by the CIT(A)-1, Raipur, which in turn arises from the order passed by the A.O. under section 143(3) of the Income Tax Act, 1961 (in short “Act”), dated 30.10.2015 for A.Y. 2013-14. The assessee has assailed the impugned order on the following grounds of appeal before us : “On the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals) was erred and not justified in : 1. Upholding the Disallowance of Rs.4,70,298/- made by the Assessing Officer out of interest A/c. 2. Upholding the Disallowance of Rs.1,73,774/- made by the Assessing Officer out of Management & Development Expenses for Investment. 3. Upholding Lump sum Disallowing of Rs.1,00,000/- made by the Assessing Officer of Telephone & Travelling Expenses. 4. The order of the Learned CIT (A) is erroneous in law as well as in facts.” 2. Briefly stated, the assessee-firm which is engaged in the business of manufacturing and trading of bidis had e-filed its return of income for A.Y 2013-14 on 27.09.2013, declaring an income of Rs.10,67,47,030/-. Subsequently, the case of the 3 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 assessee was selected for scrutiny assessment under section 143(2) of the Act. 2.1. The assessment was framed by the A.O vide his order passed under section 143(3) of the Act, dated 30.10.2015, determining the income of the assessee at Rs.10,67,47,030/- i.e after, inter alia, making the following additions/disallowances : (i) Disallowance of interest expenditure under section 14A read with Rule 8D – Rs.4,70,298/- (ii) Disallowance out of management and development expenses for investments – Rs.1,73,774/-. (iii) Adhoc disallowance out of telephone and travelling expenses of Rs.1 lakh. 2.2. Aggrieved, the assessee assailed the assessment order before the CIT(A), but without any success. 3. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. 4. We have heard the Learned Authorised Representatives of both the parties, perused the orders of the lower authorities and the material available on record. Adverting to the disallowance of interest expenditure made by the A.O. under section 14A of the Act, the Learned Authorised Representative (in short “A.R.”) has 4 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 assailed the same before us on two grounds, viz., (i) that the A.O without recording his satisfaction that the assessee’s claim that no part of its expenditure was relatable to earning of the exempt income could be accepted i.e, after referring to its accounts, had invalidly assumed jurisdiction and mechanically worked out the disallowance u/s 14A of the Act; and (ii) that as the assessee had sufficient interest free funds available with it, therefore, no part of the interest expenditure was liable to be disallowed under section 14A r.w Rule 8D(2)(ii). 5. Per contra, the Learned D.R. relied on the orders of the lower authorities. It was submitted by the Learned D.R. that as the assessee had failed to attribute any part of the expenditure towards earning of the exempt dividend income, therefore, the A.O. had rightly worked out the disallowance under section 14A by triggering the mechanism contemplated in Rule 8D. 6. As is discernible from the assessment order, the A.O. had worked-out the disallowance under section 14A at Rs.4,70,298/- i.e, by triggering the mechanism contemplated in Rule 8D(2), as under : 5 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 S.No. Particulars of Expenses Amount Amount 1. Amount of expenditure directly related to exempt income 0 2. Interest expenditure not directly attributable to any particular income / receipts [A x B]/C : A = Interest other than included in (i). 86,95,454/- B = Average value of investment 1,60,73,352/- C = Average value of total assets as appearing in B/s 35,85,55,099/- 3. ½% of average value of investment 80,367/- Total of (1) + )2) + (3) 4,70,298/- In so far the disallowance of the interest expenditure worked out by the A.O. under section 14A r.w Rule 8D(2)(ii) is concerned, we find substantial force in the claim of the Learned A.R. that as the assessee during the year under consideration had sufficient interest-free funds available with it i.e., in the form of partners capital account on which no interest was being paid, therefore, no part of the interest expenditure could have been disallowed under section 14A of the Act. In order to buttress his aforesaid claim, the Learned A.R. had drawn our attention to the “Schedule-A” i.e., partners capital accounts forming part of the assessee’s “balance sheet” for the year under consideration. On perusal of the financial statement of the assessee firm, we find that it had admittedly an amount of Rs. 27,11,19,684.41 available with it on 31.03.2013, while for the investments in the exempt income yielding shares 6 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 aggregated to an amount of Rs.1,93,77,172/-. Backed by the aforesaid facts, we are of the considered view, that as the assessee firm had sufficient interest-free funds available with it to source the investments made in the exempt income yielding shares, therefore, no part of the interest expenditure was liable to be disallowed under section 14A of the Act. Our aforesaid view is fortified by the Judgment of the Hon’ble High Court of Gujarat in the case of Pr. CIT vs. Syntex Industries Ltd., [2018] 403ITR 418 [Guj.]. In its aforesaid order, it was observed by the Hon’ble High Court that if an assessee had sufficient owned funds to explain the investments made in exempt income yielding assets, then, no part of the interest expenditure could be disallowed under section 14A of the Act. The Special Leave Petition filed by the Revenue against the aforesaid order had thereafter been dismissed by the Hon’ble Supreme Court in Pr. CIT-IV vs. Syntex Industries Ltd. in SLP (Civil) Diary Nos.39602/2017 dated 23.03.2018. As the present assessee before us undeniably has sufficient self-owned funds available with it to explain the investments made in exempt income yielding assets, therefore, in the backdrop of our aforesaid deliberations the disallowance of interest expenditure of 7 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 Rs.3,89,931/- made by the A.O. under section 14A r.w Rule 8D(2)(ii) cannot be sustained and is accordingly vacated. Before parting, we may herein observe, that as the assessee has in his grounds of appeal assailed the disallowance u/s 14A only qua the disallowance of interest expenses, therefore, we are confining our adjudication only to the said extent. Ground of appeal No.1 is partly allowed in terms of aforesaid observations. 7. We shall now take-up the grievance of the assessee that the A.O. had erred in disallowing an amount of Rs.1,73,774/- out of management and development expenses i.e, by attributing the same towards investments made in exempt income yielding assets. 7.1. As is discernible from the assessment order, the A.O. being of the view that part of the management and development expenses incurred by the assessee could safely be attributed to the exempt income yielding investments made by the assessee, therefore, he had on a pro-rata basis worked out a disallowance of Rs.1,73,774/-. 8 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 7.2. Having given a thoughtful consideration to the aforesaid issue, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities. On the one hand the A.O. had worked out the disallowance of the “administrative expenses” to the extent the same were relatable to earning of the exempt income i.e, by triggering the provisions of Section 14A r.w Rule 8D, while for on the other hand he had separately, on a pro-rata basis, disallowed an amount of Rs.1,73,774/- out of the management and development expenses, for the reason, that the same to the said extent could be related to the investments made in exempt income yielding assets. We are unable to comprehend as to on what basis the A.O. had taken recourse to this double edged sword, on the basis of which, he had on the one hand worked out the disallowance under Sec. 14A as per the mechanism contemplated in Rule 8D, and thereafter, on a pro-rata basis made a separate disallowance of the amount debited in the P&L A/c. We are unable to concur with the aforesaid novel disallowance made by the A.O. and set-aside the order of the CIT(A) to the extent he had upheld the same. The Ground of appeal No.2 is allowed in terms of our aforesaid observations. 9 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 8. Adverting to the ad-hoc disallowance of Rs.1 lac made by the A.O out of telephone and travelling expenses, it is the claim of the assessee before us, that as the personal telephone expenses of the assessee firm were separately debited in the respective capital accounts of the partners, therefore, there was no justification in disallowing on an ad-hoc basis an amount of Rs.1 lakh under the aforesaid head of expenditure. 8.1 On a perusal of the assessment order, we find that the disallowance made by the A.O was prompted by the fact that assessee had not maintained any log book. Admittedly, non- maintenance of a log book would raise serious doubts as regards the claim of the assessee of having incurred the entire amount of expenditure in question wholly and exclusively for its business purpose. Considering the fact that personal telephone expenses of the partners of the assessee firm were separately debited in their respective capital accounts, therefore, A.O should have considered the same while working-out the disallowance on account of personal usage/element of the said expenditure. Although, the involvement of the personal element of the aforesaid expenditure 10 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 cannot be ruled out, however, in all fairness the same can safely be estimated at Rs.50,000/-. Ground of appeal No.3 is partly allowed in terms of the aforesaid observations. 9. Ground of appeal No.4 being of general nature has not pressed and the same is accordingly dismissed. 10. In the result, appeal of the assessee is partly allowed. Order pronounced in Open Court on 30 th day of March, 2022. Sd/- Sd/- JAMLAPPA D BATTULL RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायप ु र/ RAIPUR ; Ǒदनांक / Dated : 30 th March, 2022 VBP/- / SB आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of the Order forwarded to : 1. अपीलाथȸ / The Appellant. 2. Ĥ×यथȸ / The Respondent. 3. The CIT(Appeals)-I, Raipur (C.G) 4. The CCIT, Raipur (C.G) 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण,रायप ु र बɅच, रायप ु र / DR, ITAT, Raipur Bench, Raipur. 6. गाड[ फ़ाइल / Guard File. आदेशान ु सार / BY ORDER, // True Copy // Ǔनजी सͬचव / Private Secretary आयकर अपीलȣय अͬधकरण, रायप ु र / ITAT, Raipur. 11 Manilal Dayalji & Co. Dhamtari (C.G.) vs., DCIT ITA.No.290/RPR/2017 Date 1. Draft dictated on 21.03.2022 Sr.PS 2. Draft placed before author 22.03.2022 Sr.PS 3. Draft proposed and placed before the second Member .03.2022 JM 4. Draft discussed/approved by second Member .03.2022 AM 5. Approved draft comes to the Sr. PS/PS .03.2022 Sr.PS 6. Kept for pronouncement on .03.2022 Sr.PS 7. Date of uploading of order .03.2022 Sr.PS 8. File sent to Bench Clerk .03.2022 Sr.PS 9. Date on which the file goes to the Head Clerk 10. Date on which file goes to the A.R 11. Date of dispatch of order