PHULCHAND EXPORTS PVT. LTD., MUMBAI V. ACIT- 3(2)(2), MUMBAI

ITA 3184/MUM/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5349 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 14-05-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILLIP
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA NO. 3184/MUM./2018 ( ASSESSMENT YEAR : 2014 15 ) PHULCHAND EXPORTS PVT. LTD. ELECTRIC MANSION, 2 ND FLOOR APPASAHEB MARATHE MARG WORLI, MUMBAI 400 025 PAN AAACP2529C . APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 3(2)(2), MUMBAI . RESPONDENT ASSESSEE BY : SHRI S.L. JAIN REVENUE BY : SHRI NEIL PHILLIP DATE OF HEARING 15.05.2019 DATE OF ORDER 24.05.2019 O R D E R PER SAKTIJIT DEY. J.M. THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 17 TH APRIL 2018 , PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 8 , MUMBAI, PERTAINING TO THE ASSESSMENT YEAR 201 4 15 . 2 . IN GROUNDS NO.1 TO 4 , THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT') R/W RULE 8D OF THE INCOME TAX RULE S, 1962 . 2 PHULCHAND EXPORTS PVT. LTD. 3 . BRIEF FACTS ARE, THE ASSESSEE , A COMPANY , IS ENGAGED IN THE BUSINESS OF TRADING IN IRON ORE, METALS AND C OMMODITIES. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCOME ON 21 ST NOVEMBER 2014, DECLARING TOTAL INCOME OF ` 1,55,60,400. IN THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ON VERIFYING THE MATERIALS ON RECORD , NOTICED THAT THE ASSESSEE HAD INVESTED ` 66,07,87,447, IN NON CURRENT INVESTMENT AND EARNED DIVIDEND INCOME OF ` 38,900, WHICH WAS CLAIMED AS EXEMPT. WHEREAS, THE ASSE SSEE HAS MADE A DISALLOWANCE OF ` 6,165, TOWARDS EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THEREFORE, THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO JUSTIFY THAT THE DISALLOWANCE MADE BY IT IS IN ACCORDANCE WITH RULE 8D. THOUGH THE ASSESSEE SUBMITTED ITS EXPLANATION STATING THAT THE VOLUNTARY DISALLOWANCE MADE BY IT IS THE AMOUNT WHICH COULD BE DISALLOWED UNDER SECTION 14A OF THE ACT, HOWEVER, THE ASSESSING OFFICER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND PROCEEDED TO COMPUTE THE DISALLOWANCE UNDER RULE 8D(2) , WHICH, ULTIMATELY WAS WORKED OUT TO ` 20,61,307, COMPRISING OF DISALLOWANCE OF INTEREST EXPENDITURE AMOUNTING TO ` 5,87,980, UNDER RULE 8D(2)(II) AND ADMINISTRATIVE EXPENDITURE OF ` 14,73,327, UNDER RULE 8D(2)(III). THE ASSESSEE CHALLENGED THE AFORESAID DISALLOWANCE BEFORE THE FIRST APPELLATE AUTHORITY. 3 PHULCHAND EXPORTS PVT. LTD. 4 . L EARNED COMMISSIONER (APPEALS), HOWEVER, RESTORED THE ISSUE TO THE ASSESSING OFFICER WITH A DIRECTION TO COMPUTE THE DISALLOWANCE KEEPING IN VIEW THE DEC ISION OF THE HON'BLE SUPREME COURT IN MAXOPP INVESTMENT LTD. V/S CIT, 91 TAXMANN.COM 154. 5 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE FIRST APPELLATE AUTHORITY HAS NO POWER UNDER THE ACT TO RESTORE THE ISSUE TO THE ASSESSING OFFICER. AS REGARDS T HE MERITS OF THE DISALLOWANCE MADE, LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , NO DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) CAN BE MADE AS THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT TO MAKE THE INVESTMENT. DRAWING O UR ATTENTION TO THE BALANCE SHEET OF THE COMPANY, HE SUBMITTED , AS AGAINST THE SURPLUS FUND AVAILABLE WITH THE ASSESSEE BY WAY OF CAPITAL AND RESERVE AMOUNTING TO ` 92.30 CRORE, THE INVESTMENT AMOUNTED TO ` 66.07 CRORE. THUS, HE SUBMITTED , THE DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) IS UNSUSTAINABLE. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: I ) CIT V/S HDFC BANK LTD., [2014] 366 ITR 505 (BOM.); II ) HDFC BANK LTD. V/S D CIT, [2016] 383 ITR 529 (BOM.); AND III ) CIT V/S SBI D HFL LTD., [2015] 376 ITR 296 (BOM.). 6 . AS REGARDS DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE UNDER RULE 8D(2)(III), THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , ONLY 4 PHULCHAND EXPORTS PVT. LTD. THOSE INVESTMENTS YIELDING EXEMPT INCOME DURING THE YEAR CAN BE INCLUDED IN THE AVERAGE VALUE OF INVESTMENT FOR COMPUTING DISALLOWANCE UNDER RULE 8D(2)(III). HE SUBMITTED , THE INVESTMENT ON WHICH THE ASSESSEE HAS EARNED DIVIDEND INCOME OF ` 38,900, DURING THE YEAR AMOUNTED TO ` 5,3 9,000, ONLY. THEREFORE, DISALLOWANCE UNDER RULE 8D(2)(III) HAS TO BE COMPUTED ON THE INVESTMENT OF ` 5,39,000. IN SUPPORT OF SUCH CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: I ) ACB INDIA LTD. V/S ACIT , [2015] 374 ITR 108 (DEL.); II ) CHEMINVEST L T D . V/S CIT 2015, 378 ITR 33 (DEL.); AND III ) CIT V/S VIREET INVESTMENT PVT. LTD., 165 ITD (SB) 27 (DEL.). 7 . WITHOUT PREJUDICE TO THE AFORESAID SUBMISSIONS, LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , UNDER NO CIRCUMSTANCES, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN EXCEED EXEMPT INCOME EARNED DURING THE YEAR. FOR SUCH PROPOSITION, HE RELIED UPON THE FOLLOWING DECISIONS: I ) JOINT INVESTMENTS ( P .) LTD . V. CIT (2015) 372 ITR 694 (DEL . ) ; AND II ) PCIT V /S EMPIRE PACKAGE PVT. LTD., [2016] 286 CTR 457 (P&H). 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , AFTER ASSESSMENT YEAR 2008 09, DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS TO BE MADE IN ACCORDANCE WITH RULE 8D. 5 PHULCHAND EXPORTS PVT. LTD. 9 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. INSOFAR AS THE DISALLOWANCE OF INTEREST EXPENDITURE OF ` 5,87,980 UNDER RULE 8D(2)(II) IS CONCERNED, IT IS SEEN FROM THE BALANCE S HEET OF THE ASSESSEE THAT AS AGAINST SURPLUS FUND AVA ILABLE WITH THE ASSESSEE AMOUNTING TO ` 92.30 CRORE , THE INVESTMENT MADE IN EXEMPT INCOME YIELDING ASSET AMOUNTED TO ` 66.07 CRORE. THUS, IT IS EVIDENT , THE ASSESSEE HAD SUFFICIENT SURPLUS FUNDS AVAILABLE WITH IT TO MAKE THE INVESTMENT IN SHARES, MUTUAL FU NDS, ETC. THAT BEING THE CASE, NO DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) COULD HAVE BEEN MADE. AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE, UNDER RULE 8D(2)((II I ), IT IS THE CONTENTION OF THE ASSESSEE FROM THE ASSESSMENT ST AGE ITSELF THAT THE INVESTMENT ON WHICH THE ASSESSEE HAD EARNED DIVIDEND INCOME OF ` 38,900, IS ` 5,39,000. THE AFORESAID FACT HAS NOT BEEN CONTROVERTED BY TH E DEPARTMENTAL AUTHORITIES. NOW IT IS WELL SETTLED THAT WHILE COMPUTING DISALLOWANCE UNDER RULE 8D (2)(II I ), THE ASSESSING OFFICER CAN CONSIDER ONLY THOSE INVESTMENTS WHICH HAVE YIELDED DIVIDEND INCOME DURING THE YEAR UNDER CONSIDERATION. THEREFORE, THE DISALLOWANCE OF EXPENDITURE UNDER RULE 8D(2)(II I ) HAS TO BE MADE WITH REFERENCE TO THE INVESTMENT OF ` 5,39,000, WHICH YIELDED DIVIDEND INCOME OF ` 3 8 ,900 . THIS VIEW OF OURS IS AS PER THE RATIO LAID DOWN IN THE DECISION OF THE HON'BLE DELHI HIGH COURT IN CHEMINVEST LTD. (SUPRA) AND THE SPECIAL BENCH DECISION OF THE TRIBUNAL, DELHI 6 PHULCHAND EXPORTS PVT. LTD. BENCH, IN VIREET INVESTM ENT PVT. LTD. (SUPRA) AS WELL AS THE OTHER DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE. 10 . BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT IF THE DISALLOWANCE UNDER RULE 8D(2)(III) IS COMPUTED WITH REFERENCE TO THE INVESTMENT OF ` 5,39,000, IT WILL WORK OUT TO ` 2,696. IN VIEW OF THE AFORESAID FACTUAL POSITION, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE U /S 14A OF THE ACT TO ` 6,161, THE AMOUNT ALREADY D ISALLOWED BY THE ASSESSEE. THE GROUNDS ARE ALLOWED. 11 . IN GROUND NO.5, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF INTEREST EXPENDITURE OF ` 12,03,782, UNDER SECTION 36(1)(III) OF THE ACT. 12 . BRIEF FACTS ARE, DU RING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD MADE INVESTMENTS IN JEWELLERY AMOUNTING TO ` 3,65,47,393, AND IN SHARES OF M/S. ANJANI COMMERCIAL CORPORATION AMOUNTING TO ` 4,857. BEING OF THE VIEW THAT THE ASSESSEE HAS DIVERTED INT EREST BEARING FUNDS FOR NON BUSINESS PURPOSE BY INVESTING IN JEWELLERY AND SHARES, THE ASSESSING OFFICER DISALLOWED INTEREST EXPENDITURE OF ` 12,03,782, UNDER SECTION 36(1)(III) OF THE ACT. THOUGH, THE ASSESSEE CHALLENGED THE AFORESAID DISALLOWANCE BEFORE LEARNED COMMISSIONER (APPEALS), HOWEVER, HE SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 7 PHULCHAND EXPORTS PVT. LTD. 13 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , SINCE THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT , PRESUMPTION WOULD BE THAT THE I NVESTMENT S MADE IN JEWELLERY AND SHARES WERE OUT OF SUCH FUNDS. THEREFORE, NO DISALLOWANCE UNDER SECTION 36(1)(III) COULD BE MADE. IN SUPPORT OF SUCH CONTENTION, HE RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S RELIANCE UTILI TY AND POWER LTD., [2005] 313 ITR 340 (BOM.) AND T HE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S RELIANCE INDUSTRIES LTD., [2005] 410 ITR 466 (SC). BESIDES THE ABOVE, LEARNED AUTHORISED REPRESENTATIVE ALSO RELIED UPON THE DECISION OF THE HONBL E P&H H IGH COURT IN CIT V/S HOLY FAITH INTERNATIONAL PVT. LTD., [2018] 407 ITR 445 (P&H). 14 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS) AND THE ASSESSING OFFICER. 15 . WE HAVE CONSIDERED RIVAL SUBMISSIONS A ND PERUSED THE MATERIAL ON RECORD. FROM THE FACTS AND MATERIAL AVAILABLE ON RECORD, IT IS EVIDENT THAT THE ASSESSEE HAD SURPLUS FUND OF ` 92.30 CRORE AVAILABLE WITH IT. THEREFORE , AS PER THE RATIO LAID DOWN IN THE DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE, THE PRESUMPTION WOULD BE , THE INVESTMENT S IN JEWELLERY AND SHARES MUST HAVE BEEN MADE OUT OF THE 8 PHULCHAND EXPORTS PVT. LTD. SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE. THAT BEING THE CASE, NO DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT CAN BE MADE. ACCORDINGLY, W E DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THIS GROUND IS ALLOWED. 16 . GROUNDS NO.6 AND 7 BEING GENERAL IN NATURE DO NOT REQUIRE ADJUDICATION. 17 . IN THE RESULT, APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN C OURT ON 24.05.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 24.05.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY ASSISTANT REGISTRAR ITAT, MUMBAI