STERLING MOTORS, MUMBAI V. ADDL CIT RG 12(1), MUMBAI

ITA 3217/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48989 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 25-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 14-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Assessee Lawyers: K K VEDK J PATEL
• Keywords: Capital asset; Depreciation; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RAO , J.M. ITA NO. 3217, 3218, & 3219/MUM/2009 ASSESSMENT YEARS: 2004-05, 2005-06, & 2006-07 STERLING MOTORS, APPELLANT C/O TAJ PRINTING WORKS 46/A, CAWASJI PATEL STREET FORT, MUMBAI 400 001. (PAN AACFS4513L) VS. THE ADDL. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 12(1), MUMBAI AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. APPELLANT BY : MR. K.K. VED/K.J. PATEL RESPONDENT BY : MR. C.G.K. NAIR . ORDER PER V. DURGA RAO, J.M.: THESE THREE APPEALS PERTAIN TO ONE ASSESSEE ARE D IRECTED AGAINST THE ORDERS OF CIT(A)-XII, MUMBAI FOR THE AS SESSMENT YEARS 2004-05, 2005-06 AND 2006-07. SINCE IDENTICAL ISSUE S ARE INVOLVED IN THESE APPEALS, THEY WERE HEARD TOGETHER AND, THEREF ORE, A COMMON ORDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2. GROUND NOS. 1 TO 6 ARE COMMON IN AY 2004-05 AND 2006-07, WHICH ARE PERTAINING TO DISALLOWANCE OF TELEPHONE E XPENSES, MISCELLANEOUS EXPENSES, CONVEYANCE EXPENSES, MOTOR CAR EXPENSES, DEPRECIATION ON MOTOR CAR, AND DISALLOWANCE OF TRAV ELLING EXPENSES. 3. TO DISPOSE OF THESE APPEALS, WE REFER TO THE FAC TS IN AY 2004-05. THE ASSESSEE FIRM IS AN AUTHORIZED DEALER OF TELCO VEHICLES/SPARE PARTS/LUBRICANTS/REPAIRS & SERVICES, ETC. IN DISTRI CT OF NASIK, ITA NO. 3217, 3218 & 3219/M/2009 STERLING MOTORS 2 MUMBAI, SOLAPUR & AHMEDNAGAR. THE ASSESSEE FILED IT S RETURN OF INCOME DECLARING TOTAL INCOME AT RS. 1,37,14,241/- ON 01/11/2004 ALONG WITH AUDIT REPORT IN FORM NO. 3CB & 3CD. DUR ING THE YEAR UNDER CONSIDERATION, THE ASSESSEE FIRM HAD SHOWN TO TAL RECEIPTS ON SALES AND OTHER INCOME AT RS. 77,89,55,040/-. THE N ET PROFIT BEFORE DEDUCTING PROVISION FOR TAXATION IS DECLARED AT RS. 1,87,11,588/- AS COMPARED TO IMMEDIATE PRECEDING YEARS GROSS RECEIP TS OF RECEIPTS OF RS. 54,72,06,343/- ON WHICH NET PROFIT OF RS. 35,39 ,398/-. 4. DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE A O DISALLOWED I) TELEPHONE EXPENSES @ 15% ON THE GROUND OF PERSONAL ELEMENT, II) MISCELLANEOUS EXPENSES @10% ON THE GROUND THAT THES E EXPENSES INCURRED IN CASH AND NOT SUPPORTED BY THIRD PARTIES , III) CONVEYANCE EXPENSES OF RS. 50,000/-ON THE GROUND THAT THESE EX PENSES INCURRED IN CASH AND NOT SUPPORTED BY THIRD PARTIES, IV) MOT OR CAR EXPENSES @25% OF RS. 70,182/- ON THE GROUND THAT NO LOG BOOK HAS BEEN MAINTAINED AND ELEMENT OF PERSONAL USE, V) DEPRECIA TION ON MOTOR CAR @ 25% OF RS. 58,764/-, AND VI) TRAVELING EXPENSES @ 10% OF RS. 1,42,932/- ON THE GROUND THAT THESE EXPENSES INCURR ED IN CASH AND NO THIRD PARTY VOUCHERS FILED. AGGRIEVED THE ASSESS EE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). THE CIT(A) REST RICTED THE TELEPHONE EXPENSES TO 10% INSTEAD OF 15% AND MOTOR CAR EXPENS ES AND DEPRECIATION ON MOTOR CAR TO 10% INSTEAD OF 25% AND CONFIRMED THE DISALLOWANCE OF MISCELLANEOUS EXPENSES, CONVEYANCE EXPENSES AND TRAVELING EXPENSES. STILL AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE THE ITAT. 5. AT THE TIME OF HEARING BEFORE US, THE LEARNED CO UNSEL FOR THE ASSESSEE HAS CANVASSED THAT THE ISSUES IN DISPUTE H AVE BEEN COVERED BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO. 2092/MUM/2008 VIDE ORDER DATED 9 TH DAY OF APRIL, 2010 AND COPY OF WHICH IS FILED ON RECORD. THE LEARNED COUNS EL FOR THE ASESSSEE HAS SUBMITTED THAT IN THE SUBSEQUENT YEARS FOR AY 2 006-07 AND 2008- ITA NO. 3217, 3218 & 3219/M/2009 STERLING MOTORS 3 09, THE AO HAS NOT DISALLOWED ANY EXPENDITURE UNDER THE AFOREMENTIONED HEADS AND COPIES OF THE ASSESSMENT O RDERS OF THE SAID YEARS HAVE BEEN FILED ON RECORD. 6. ON THE OTHER HAND, THE LEARNED DR HAS NOT CONTRO VERTED TO THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASS ESSEE. 7. AFTER HEARING THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES AND PERUSING THE RECORD, WE FIND THAT IN AY 2003-04, TH E ITAT DIRECTED THE AO TO DELETE THE IMPUGNED DISALLOWANCES BY OBSERVIN G AS UNDER:- 4. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD, WE ARE NOT INCLINED TO SUSTAIN ANY OF THE IMPUGNED DISALLOWANCE. WE HAVE NOTED THAT THE DISAL LOWANCE HAVE BEEN MADE ONLY ON THE BASIS OF SURMISES AND CO NJECTURES AND NOT ON THE BASIS OF ANY COGENT MATERIAL. WE HAV E ALSO NOTED IN THE PRECEDING ASSESSMENT YEARS, NO SUCH DISALLOW ANCES HAVE BEEN MADE BY THE AO. IT IS ALSO IMPORTANT TO BEAR I N MIND THAT THE PARTNERS OF THE ASSESSEE FIRM RESIDE IN MUMBAI AND THAT THERE IS NO EVIDENCE WHATSOEVER TO EVEN SUGGEST THAT THERE H AS BEEN PERSONAL USE OF PHONES OR CAR BY THE PARTNERS. SIMI LARLY, SO FAR AS OTHER DISALLOWANCES ARE CONCERNED, THESE DISALLO WANCES ARE ALSO MADE PURELY ON THE BASIS OF SUSPICION THAT NON -BUSINESS EXPENSES CANNOT BE RULED OUT. WE ARE UNABLE TO SEE ANY MERITS IN THE IMPUGNED DISALLOWANCES. WE, THEREFORE, DIRECT T HE AO TO DELETE THE IMPUGNED DISALLOWANCES. THE ASSESSEE GET S THE RELIEF ACCORDINGLY. 8. SINCE THE FACTS OF THE CASE UNDER CONSIDERATION ARE MATERIALLY IDENTICAL TO THAT OF AY 2003-04, WE RESPECTFULLY FO LLOW THE DECISION OF ITAT IN THAT YEAR AND IN THE LIGHT OF THAT WE SET A SIDE THE ORDER OF CIT(A) AND DELETE THE DISALLOWANCES MADE BY THE AO UNDER VARIOUS HEADS AS MENTIONED ABOVE. MOREOVER, THE ASSESSING O FFICER IN THE SUBSEQUENT ASSESSMENT YEARS FOR AY 2006-07 AND 2008 -09 NO DISALLOWANCE HAS BEEN MADE UNDER THE SAID HEADS. AC CORDINGLY, GROUND NOS. 1 TO 6 RAISED IN AY 2004-05 AND 2005-06 ARE ALLOWED. ITA NO. 3217, 3218 & 3219/M/2009 STERLING MOTORS 4 9. GROUND NO. 7 IN AY 2004-05 AND 2005-06 AND GROUN D NO. 1 IN AY 2006-07 ARE IN RESPECT OF DISALLOWANCE OF INTERE ST ON BANK OVERDRAFTS. U/S 14A OF THE ACT. 10. THE AO HAD OBSERVED THAT THE ASSESSEE HAD TAKEN SECURED LOANS AND SHOWN AS INVESTMENTS MADE IN THE FORM OF KONKAN RAILWAY TAX FREE BONDS AND UNITS OF MUTUAL FUNDS AND THE INCOME FROM THESE ASSETS HAD BEEN SHOWN BY THE WAY OF INTEREST AND DI VIDEND AS EXEMPTED INCOME AND INCOME FROM THE DATE OF MUTUAL FUNDS AS CAPITAL GAINS. THE AO WAS OF THE VIEW THAT THE ASSESSEE HAD TREATED THESE INVESTMENTS AS CAPITAL ASSETS AND NOT AS BUSINESS A SSETS. THE CONTENTION OF THE ASESSSEE WAS THAT AS REGARDS INVE STMENT IN TAX FEE BONDS THERE IS NO CHANGE IN THE INVESTMENT MADE DUR ING THE YEAR HAD NOT BEEN ACCEPTED BY THE AO. THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND DISALLOWED THE INTEREST EXPENSE S CLAIMED BY THE ASESSSEE. AGGRIEVED, THE ASESSSEE CARRIED THE MATTE R IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), IT WAS SUBMITTED THA T THE AO HAD NOT GIVEN ANY REASONING WHATSOEVER FOR MAKING THE DISAL LOWANCE. THE CIT(A) HELD THAT DISALLOWANCE OF INTEREST MADE BY T HE AO WAS JUSTIFIED AS THE ASSESSEE WAS EARNING EXEMPT INCOME AND HAD I NCURRED INTEREST EXPENSES THEREON. HOWEVER, THE DISALLOWANCE OF EXPE NSES INCURRED IN EARNING EXEMPT INCOME IS GOVERNED BY THE PROVISIONS OF SECTION 14A R.W. RULE 8D. SINCE THE ASSESSEE FILED THE WORKING OF DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D WHEREBY THE DISALLOWA NCE U/S 14A COMES TO RS. 7,02,879/-, THE CIT(A) DIRECTED THE AO TO VERIFY THE SAME AND WORK OUT THE DISALLOWANCE AS PER THE PROVISIONS OF 14A R.W. R 8D. STILL AGGRIEVED THE ASSESSEE IS IN FURTHER APPEAL B EFORE THE ITAT. 11. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. WE FIND THAT THIS ISSUE IS COVE RED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E OF GODREJ & BOYCE MFG. CO. LTD., [2010] 328 ITR 81 (BOM.) WHEREIN THE HONBLE COURT HELD AS UNDER:- ITA NO. 3217, 3218 & 3219/M/2009 STERLING MOTORS 5 THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH H AVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, WOULD APP LY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSM ENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE AO HA D TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. F OR THAT PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE W HICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE AO MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE AO. THE AO SHOULD DETERMINE AS TO WHETHER TH E ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) I N RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECT ION 14A. THE AO CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE A PPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE AO SHOULD PROV IDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING O N THE FACTS AND CIRCUMSTANCES OF THE CASE. 12. IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. ( SUPRA), WE REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE SAID JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT AFTER PROVIDING REASONABLE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. ACCORDINGLY THIS GROUND OF APPEAL RAI SED IN ALL THE YEARS UNDER CONSIDERATION ARE TREATED AS ALLOWED FOR STAT ISTICAL PURPOSES. 13. IN THE RESULT, APPEALS FOR AY 2004-05 AND 2005- 06 ARE ALLOWED AND THE APPEAL FOR AY 2006-07 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 27 TH MAY, 2011. SD/- SD/- (P.M. JAGTAP) (V. DURG A RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 27 TH MAY, 2011 ITA NO. 3217, 3218 & 3219/M/2009 STERLING MOTORS 6 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, E BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 25/05/11 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 26/05/11 SR.P.S/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.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER