MITSUTOR SHIPPING AGENCY P.LTD, MUMBAI V. DCIT OSD 2(2), MUMBAI

ITA 3103/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48441 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 21-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA
• Assessee Lawyers: VINAY U DEVI
• Section: 14A; 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M) ITA NO.3103/MUM/2010(A.Y. 2007-08) MITSUTOR SHIPPING AGENCY PVT. LTD. 205/206 VARMA CHAMBERS, 2 ND FLOOR, 11 HOMJI STREET, FORT, MUMBAI 400 001 PAN:AAACM 3570E (APPELLANT) VS. THE DCIT, CIR. 2(2), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) APPELLANT BY : SHRI VINAY U. DEVI RESPONDENT BY : SMT. ASHIMA GUPTA ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 15/4/10 OF CIT(A)-5, MUMBAI RELATING TO THE ASSESSMENT YEAR 20 07-08. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1.A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE TH E CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS. 4,57,895/- MADE B Y THE AO U/S.14A. B) THE LEARNED CIT(A) FAILED TO APPRECIATE THAT RUL E 8D READ WITH SECTION 14A CAN BE INVOKED ONLY IF THE AO CONSIDERS THAT THE DETERMINATION OF THE EXPENDITURE RELATING TO NON-TA XABLE INCOME AS DONE BY THE ASSESSEE IS NOT PROPER AND THEREAFTER REJECT THE BOOK RESULTS RELATING TO THE SAME AND DETERMINE THE EXPE NDITURE REFERABLE TO THE EARNING OF NON-TAXABLE INCOME AS PER RULE 8D. NO SUCH ATTEMPT HAS BEEN MADE WHILE FRAMING THE ASSESSMENT. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF CLEARING AND FORWARDING SERVICES. THE ASSESSEE EARNED DIVIDEND INCOME OF RS. 35,507/-. THE DIVIDEND INCOME DID NOT FOUND PART OF THE TOTAL INCOME OF THE ASSESSEE. ITA NO.3103/MUM/2010(A.Y. 2007-08) 2 IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE INC OME TAX ACT, 1961 (THE ACT) THE AO WAS OF THE VIEW THAT ANY EXPENDITURE INCURRE D IN EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT SHOULD BE DISALLOWED WHILE COMPUTING THE TOTAL INCOME OF AN A SSESSEE. THE PLEA OF THE ASSESSEE BEFORE THE AO WAS THAT THERE WAS NO EXPEND ITURE INCURRED IN EARNING THE DIVIDEND INCOME. THE ASSESSEE EXPLAIN ED THAT IT HAD INVESTED SURPLUS FUNDS IN MUTUAL FUNDS AND EARNED DIVIDEND I NCOME. FURTHER IT WAS ALSO SUBMITTED THAT THERE WAS NO OTHER DIRECT OR IN DIRECT EXPENSES THAT WAS INCURRED TO EARN THE DIVIDEND INCOME. THE AO HOWEV ER APPLYING THE PROVISIONS OF RULE 8D OF THE IT RULES, 1962 R.W.S. 14A OF THE ACT DISALLOWED A SUM OF RS. 4,57,895/- AND ADDED THE SAME TO THE TOT AL INCOME OF THE ASSESSEE. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO BY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF ITAT , MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT LTD.(2008) 26 SOT 603 (MUM)(SB), WHEREIN IT WAS HELD THAT PROVISIONS OF RULE 8D WHIC H WAS INTRODUCED BY THE INCOME TAX (5 TH AMENDMENT) RULES 2008 W.E.F. 24/3/2008 WERE RETROSPECTIVE IN OPERATION, UPHELD THE ORDER OF THE AO. HENCE, GROUND NO.1 BY THE ASSESSEE BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE HONBL E BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE C ASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF I NCOME TAX,RANGE 10(2), MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIONER OF INCOME TAX RANGE 10( 2), MUMBAI & ORS. BY JUDGMENT DATED 12-8-2010 HAS DEALT WITH THE DISA LLOWANCE THAT CAN BE MADE U/S.14-A OF THE ACT. THE HONBLE COURT ALSO D EALT WITH THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA C APITAL MANAGEMENT PVT.LTD. 117 ITD 169 (MUM) (SB) AND HAS LAID DOWN T HE FOLLOWING PROPOSITION: ITA NO.3103/MUM/2010(A.Y. 2007-08) 3 I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961, AS WAS A PPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE O F THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPAN Y IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHA RGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDER S. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI)EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICE R IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHA LL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER ITA NO.3103/MUM/2010(A.Y. 2007-08) 4 CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEV ANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. IN VIEW OF THE AFORESAID DECISION OF THE HONB LE BOMBAY HIGH COURT THE ISSUE WITH REGARD TO DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE HON BLE BOMBAY HIGH COURT. RULE 8D SHOULD NOT BE APPLIED AND THE AO HAS TO ADO PT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CI RCUMSTANCES AND AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. WE, THEREFORE, REMIT THE I SSUE TO THE A.O FOR FRESH CONSIDERATION AS STATED ABOVE. 6. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS: 2.A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 1,72,45 7/- U/S.40(A)(IA) BY TREATING SOCIETY MAINTENANCE CHARGES AS BEING AKIN TO RENT. B) THE LD. CIT(A) FAILED TO APPRECIATE THAT PAYMENT S TOWARDS COMMON EXPENSES ARE NOT SUBJECT TO TDS HENCE THE QUESTION OF DISALLOWANCE U/S. 40(A)(IA) DOES NOT ARISE. 7. THE ASSESSEE WAS OWNER OF THE PREMISES IN WHICH IT WAS CARRYING ON BUSINESS. THE ASSESSEE PAID MAINTENANCE CHARGES TO THE SOCIETY OF APARTMENT OWNERS. ACCORDING TO THE AO THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE PAYMENT OF MAINTENANC E CHARGES TO THE SOCIETY AS THE PAYMENT BY THE ASSESSEE TO THE SOCI ETY WAS IN THE NATURE OF CONTRACT AND, THEREFORE, THE PROVISIONS OF SECTION 194C WAS APPLICABLE. UNDER SECTION 40(A)(IA) OF THE ACT WHERE ASSESSEE H AS AN OBLIGATION TO DEDUCT TAX AT SOURCE BEFORE MAKING PAYMENT AND WHERE SUCH TAX IS NOT DEDUCTED BY AN ASSESSEE THE PAYMENT MADE WITHOUT DEDUCTION OF T AX AT SOURCE WHICH IS ITA NO.3103/MUM/2010(A.Y. 2007-08) 5 CLAIMED AS EXPENDITURE WHILE COMPUTING TOTAL INCOME IS LIABLE TO BE DISALLOWED. ACCORDING TO THE AO THE PAYMENT OF MAI NTENANCE CHARGES TO THE SOCIETY BY THE ASSESSEE WAS IN THE NATURE OF PAYMEN T TO CONTRACTOR FOR CARRYING OUT ANY WORK ATTRACTING THE PROVISIONS OF SECTION 194C OF THE ACT. SINCE TAX WAS NOT DEDUCTED AT SOURCE WHILE MAKING P AYMENT, THE AO INVOKED THE PROVISIONS SECTION 40(A)(IA) OF THE ACT AND ADD ED A SUM OF RS. 1,72,455/- TO THE TOTAL INCOME OF THE ASSESSEE. 8. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO, HENCE, GROUND NO.2 BY THE ASSESSEE BEFORE THE TRIBU NAL. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE P AYMENT OF MAINTENANCE CHARGES BY THE OWNER OF THE PREMISES TO THE SOCIETY CAN BY NO STRETCH OF IMAGINATION BE SAID TO BE A PAYMENT TO C ONTRACTOR FOR CARRYING OUT WORK ON BEHALF OF THE OWNER OF THE PREMISES. THESE PAYMENTS WERE MADE TO DEFRAY COMMON CAUSE. THERE IS NO CONTRACT FOR MAIN TENANCE BETWEEN THE SOCIETY AND THE OWNER OF THE PREMISES. IT IS A PA YMENT TO COMMON FUND TO BE USED FOR THE BENEFIT OF THE OWNERS OF THE PREMIS ES. THE PAYMENT BY THE MEMBER OF THE SOCIETY IS GOVERNED BY THE PRINCIPLE OF MUTUALITY AND THE SOCIETY DOES NOT DERIVE ANY INCOME. WE ARE THEREFO RE, OF THE VIEW THAT THE IMPUGNED ADDITION CANNOT BE SUSTAINED AND THE SAME IS DIRECTED TO BE DELETED. GROUND NO.2 IS ACCORDINGLY ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 8 TH DAY OF APRIL, 2011. SD/- SD/- (PRAMOD KUMAR ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 8 TH APRIL.2011 ITA NO.3103/MUM/2010(A.Y. 2007-08) 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3103/MUM/2010(A.Y. 2007-08) 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 1/4/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 5/4/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER