The catholic Syrian Bank Ltd, Trichur V. The ACIT, Trichur

ITA 326/COCH/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81339 (ITAT-COCHIN)
• Duration Of Justice: 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 07-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-07-2014
• Court: TRIBUNAL
• Department Lawyers: M ANIL KUMAR; K K JOHN
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NOS. 326&327/COCH/2014 ASSESSMENT YEARS : 2008-09 & 2009-10 THE CATHOLIC SYRIAN BANK LTD., ST. MARYS COLLEGE ROAD, THRISSUR-680 020. [PAN: AABCT 0024D] VS. THE JOINT COMMISSIONER OF INCOME-TAX, RANGE-1, THRISSUR. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI C. NARESH, CA REVENUE BY SHRI K.K.JOHN, SR. DR & SHRI M. ANIL KUMAR, CIT(DR) DATE OF HEARING 07/10/2014 DATE OF PRONOUNCEMENT 17/10/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECT ED AGAINST THE DIFFERENT ORDERS PASSED BY THE CIT(A)-V KOCHI FOR T HE ASSESSMENT YEARS 2008-09 AND 2009-10. 2. THE FIRST COMMON GROUND IN THESE TWO APPEALS IS WITH REGARD TO DISALLOWANCE MADE U/S. 14A OF THE I.T. ACT. 3. SINCE THE FACTS ARE IDENTICAL IN BOTH THE APPEAL S, WE CONSIDER THE FACTS AS NARRATED IN I.T.A. NO. 327/COCH/2014 FOR T HE ASSESSMENT YEAR I.T.A. NOS.326&327/COCH/2014 2 2009-10. THE ASSESSEE CLAIMED EXEMPTION U/S. 10(33 ) OF THE ACT TO THE EXTENT OF RS.6,03,939/- ON DIVIDEND INCOME RECEIVED . THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC. 14A OF THE I.T. ACT AND DISALLOWED EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE I.T. ACT. 4. ON APPEAL, THE CIT(A) CONFIRMED THE DECISION OF THE ASSESSING OFFICER AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD EARNE D TAX FREE INCOME AGGREGATING TO RS.7,75,634/- FOR THE ASSESSMENT YEA R 2008-09 AND RS.6,03,939/- FOR THE ASSESSMENT YEAR 2009-10. ACC ORDING TO THE LD. AR, IN THE RETURN OF INCOME FILED, THE ASSESSEE HAD NOT DI SALLOWED ANY EXPENDITURE SINCE NO EXPENDITURE WAS INCURRED TO EARN TAX FREE INCOME. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE AND HELD THAT THE PROVISIONS OF RULE 8D ARE TO BE APPLIED. HOWEVER, HE RESTRICTED THE DISALLOWANCE TO THE EXTENT OF THE TAX FREE INCOME. ON APPEAL, THE CIT( A) HELD THAT THE COCHIN BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E ASSESSMENT YEAR 2005- 06 HELD THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS JUSTIFIABLE AND ACCORDINGLY, DISMISSED THE GROUND OF THE ASSESS EE. I.T.A. NOS.326&327/COCH/2014 3 6. THE LD. AR RELIED ON THE JUDGMENT OF THE KERALA HIGH COURT IN THE ASSESSEES OWN CASE REPORTED IN 344 ITR 259 FOR THE ASSESSMENT YEAR 2001- 02 WHEREIN IT WAS HELD THAT SINCE SEPARATE ACCOUNTS IN RESPECT OF EXPENDITURE ON EARNING TAX FREE INCOME BOOKS ARE NO T MAINTAINED, PROPORTIONATE DISALLOWANCE WAS WARRANTED. THE ASSE SSEE SUBMITTED THAT THE SAID DECISION WAS NOT APPLICABLE FOR THE ASSESS MENT YEARS UNDER APPEAL SINCE FOR THESE YEARS RULE 8D WAS IN THE STATUTE. 7. THE LD. AR FURTHER SUBMITTED THAT ALL THE INVEST MENTS HELD BY THE ASSESSEE CONSTITUTE STOCK IN TRADE. THEREFORE THE EARNING OF TAX FREE INCOME THEREFROM IS ONLY INCIDENTAL TO WHICH THE P ROVISIONS OF SC. 14A CANNOT BE APPLIED. FOR THE PROPOSITION, THE LD. A R RELIED ON THE JUDGMENTS OF THE KARNATAKA HIGH COURT IN THE CASE OF CCI LIMI TED VS. CIT (250 CTR 291) AND THE KERALA HIGH COURT IN THE CASE OF CIT V S. LEENA RAMACHANDRAN (339 ITR 296). 8. THE LD. AR SUBMITTED THAT EVEN IF RULE 8D IS TO BE APPLIED, THE AVERAGE VALUE OF INVESTMENTS THE INCOME FROM WHICH SHALL NOT OR DOES NOT FORM PART OF TOTAL INCOME. IS NIL SINCE THE ASSES SEE DOES NOT HOLD ANY INVESTMENTS AND THE INCOME HAS ONLY BEEN RECEIVED F ROM STOCK IN TRADE HELD BY THE ASSESSEE. FOR THIS VIEW, THE LD. AR PL ACED RELIANCE ON THE I.T.A. NOS.326&327/COCH/2014 4 JUDGMENT OF THE KOLKATA HIGH COURT IN THE CASE OF D CIT VS. GULSHAN INVESTMENT COMPANY LIMITED (142 ITD 89). 9. THE LD. AR FURTHER SUBMITTED THAT IF AT ALL IT I S HELD THAT THE DISALLOWANCE UNDER RULE 8D IS PERMISSIBLE, NO DISAL LOWANCE OF INTEREST EXPENDITURE AS PER RULE 8D(2)(II) IS WARRANTED SINC E THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE FAR EXCEED THE INVESTME NTS IN ASSETS THE INCOME FROM WHICH SHALL NOR OR DOES NOT FORM PART O F THE TOTAL INCOME. THE LD. AR TABULATED THE INTEREST FREE FUNDS AVAILABLE AS UNDER: DETAILS A.Y. 2008-09 (RS. CRORE) A.Y. 2009-10 (RS. CRORE) SHARE CAPITAL 12.54 18.88 RESERVES & SURPLUS 292.62 3 69.42 CURRENT DEPOSITS 287.92 313. 92 TOTAL 593.08 702.22 INVESTMENTS IN ASSETS EARNING TAX FREE INCOME 3.95 5.72 10. THE LD. AR SUBMITTED THAT FROM THE ABOVE IT IS CLEAR THAT THE AMOUNT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE FAR EXCEEDS THE INVESTMENTS IN ASSETS THE INCOME FROM WHICH SHALL N OT OR DOES NOT FORM PART OF TOTAL INCOME. THE LD. AR RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. VS. CIT (366 IT R 505), PUNJAB AND HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LTD. VS. CIT (189 TAXMAN 50 I.T.A. NOS.326&327/COCH/2014 5 P&H) AND GUJARAT HIGH COURT IN THE CASE OF SUZLON EN ERGY LTD. VS. CIT (354 ITR 630) WHEREIN IT WAS HELD THAT THE INVESTMENTS I N ASSETS THE INCOME FROM WHICH SHALL NOT OR DOES NOT FORM PART OF TOTAL INCOME ARE FROM INTEREST FREE FUNDS ONLY AND ACCORDINGLY, NO DISALLOWANCE OF INTEREST EXPENDITURE IS WARRANTED AND AT BEST ONLY 0.5% OF AVERAGE INVESTME NTS THE INCOME FROM WHICH SHALL NOT OR DOES NOT FORM PART OF THE TOTAL INCOME CAN BE DISALLOWED. HENCE, THE LD. AR SUBMITTED THAT IN THE FACTS OF TH E ASSESSEES CASE, NO DISALLOWANCE U/S. 14A IS WARRANTED. 11. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH IS ISSUE IS SQUARELY COVERED BY THE ORDER OF THE COCHIN TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 IN I.T.A. NOS. 10&66/CO CH/2009 DATED 11-02- 2011. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. WE FIND THAT AN IDENTICAL ISSUE CAME UP FOR CONSIDERATION B EFORE THE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE REPORTED IN 344 I TR 259 WHEREIN IT WAS HELD AS UNDER: SECTION 14A OF THE INCOME TAX ACT, 1961, WAS INSER TED BY THE FINANCE ACT, 2001, WITH RETROSPECTIVE EFFECT FROM APRIL 1, 1962. THE OBJECT OF SECTION 14A IS TO ENSURE THAT SO MUCH OF THE EXPEND ITURE INCURRED FOR EARNING INCOME THAT DOES NOT CONSTITUTE TOTAL INCOM E OF THE ASSESSEE, SHOULD NOT BE ALLOWED. IN OTHER WORDS, WHEN INCOME IS OUTSIDE THE TAX NET, EXPENDITURE INCURRED FOR EARNING SUCH INCOME S HOULD NOT BE ALLOWED TO BE SET OFF IN THE COMPUTATION OF TAXABLE INCOME. SUB-SECTIONS (2) AND I.T.A. NOS.326&327/COCH/2014 6 (3) WERE INTRODUCED TO THE MAIN SECTION BY THE FINA NCE ACT, 2006 WITH EFFECT FROM APRIL 1, 2007. SUBSEQUENTLY, RULE 8D W AS PRESCRIBED BY THE GOVERNMENT FOR THE PURPOSE OF SUB-SECTION (2) OF SE CTION 14A FROM 2007-08 ONWARDS. BY VIRTUE OF THE SUBSEQUENT LEGIS LATION, NOW THERE IS A PRECISE FORMULA FOR WORKING OUT THE DISALLOWANCE TO BE MADE U/S. 14A EVEN IF ASSESSEES DO NOT HAVE SEPARATE ACCOUNTS SHO WING THE EXPENDITURE INCURRED ON INVESTMENTS MADE FOR EARNIN G TAX-FREE INCOME. BY SUBSEQUENT AMENDMENT THROUGH SUB-SECTION (2) AND BY PRESCRIBING RULE 8D THEREIN SPECIFIC GUIDELINES ARE PRESCRIBED FOR DISALLOWANCE IN CASES WHERE SEPARATE ACCOUNTS ARE NOT AVAILABLE ON THE EXPENDITURE INCURRED FOR EARNING TAX FREE INCOME. THESE ARE, T HEREFORE, ONLY CLARIFICATORY PROVISIONS AND THE MAIN CLAUSE OF SEC TION 14A APPLIED FOR ALL PERIODS AFTER ITS INTRODUCTION IN THE STATUTE WHICH AUTHORIZES THE OFFICER TO MAKE DISALLOWANCE OF THE EXPENDITURE INCURRED FO R EARNING TAX FREE INCOME, IRRESPECTIVE OF WHETHER THE ASSESSEE MAINTA INED SEPARATE ACCOUNTS OR NOT. THE ASSESSEES WERE ALL SCHEDULED BANKS ENGAGED IN T HE BANKING BUSINESS AND IN THE COURSE OF BANKING BUSINESS THEY WERE ALSO ENGAGED IN THE BUSINESS OF INVESTMENT IN BONDS, SECURITIES AND IN SHARES WHICH EARNED THE ASSESSEES INTEREST FROM SUCH SECURITIES AND BONDS AND ALSO DIVIDEND ON INVESTMENTS IN SHARES OF COMPANIES AND FROM UNITS OF THE UTI, ETC. WHICH ARE TAX FREE. THE ASSESSEE-BANKS D ID NOT HAVE SEPARATE ACCOUNTS FOR THE EXPENDITURE INCURRED TOWARDS INTER EST PAID ON FUNDS BORROWED SUCH AS DEPOSITS UTILIZED FOR INVESTMENT I N SECURITIES, BONDS AND SHARES WHICH YIELDED TAX FREE INCOME. IN THE A BSENCE OF SEPARATE ACCOUNTS FOR INVESTMENTS WHICH EARNED TAX FREE INCO ME, THE ASSESSING OFFICER WORKED OUT A FORMULA WHICH WAS THE AVERAGE COST OF DEPOSIT IN THE YEAR UNDER CONSIDERATION AND APPLYING IT HE MAD E PROPORTIONATE DISALLOWANCE OF INTEREST ATTRIBUTABLE TO THE FUNDS INVESTED TO EARN TAX- FREE INCOME. THE TRIBUNAL SET ASIDE THE ORDER. ON APPEAL TO THE HIGH COURT: HELD, ALLOWING THE APPEAL, (I) THAT THE DISALLOWANCE MADE BY THE ASSESSING OF FICER WAS VALID. (II)THAT THE METHOD ADOPTED BY THE ASSESSING OFFIC ER IN ESTIMATING THE AVERAGE COST OF DEPOSIT AND MAKING THE DISALLO WANCE BY WORKING OUT THE AVERAGE INTEREST COST ON THE INVESTMENTS M ADE FOR EARNING THE TAX-FREE INCOME WAS NOT CORRECT. THE MATTER REQUIRED RECONSIDERATION BECAUSE IN THE FIRST PLACE, THE FACTS AND FIGURES WERE NOT AVAILABLE. FURTHER, THE ASSUM PTION OF THE ASSESSING OFFICER THAT THE ENTIRE INVESTMENTS IN BO NDS, SHARES AND I.T.A. NOS.326&327/COCH/2014 7 SECURITIES FOR EARNING THE TAX FREE INCOME WAS FROM THE BORROWED FUNDS (DEPOSITS) WAS ALSO NOT JUSTIFIED. THE MATTER HAD T O BE RESTORED TO THE ASSESSING OFFICER FOR MAKING DISALLOWANCE U/S.14A B Y REASONABLY ESTIMATING AS NEARLY AS POSSIBLE THE EXPENDITURE IN CURRED FOR EARNING TAX FREE INCOME. THIS SHOULD BE DONE AFTER GIVING OPPO RTUNITY TO THE ASSESSEE-BANKS TO SUGGEST THEIR OWN FORMULA WITH RE FERENCE TO ACCOUNTS FOR THE PURPOSE OF ARRIVING AT THE ACTUAL AMOUNT OR NEAR ACTUAL AMOUNT. THE DISALLOWANCE ON ESTIMATED BASIS HAD TO BE DONE AS ABOVE UNTIL RULE 8D WAS FRAMED AND THEREAFTER IT WAS FOR THE ASSESSI NG OFFICER TO MAKE DISALLOWANCE BY FOLLOWING SUB-SECTION (2) OF SECTIO N 14A AND RULE 8D OF THE RULES. SO FAR AS THE DISALLOWANCE OF ADMINISTRA TIVE EXPENDITURE WAS CONCERNED CONSIDERING THE FACT THAT THERE WAS NO PR ECISE FORMULA FOR PROPORTIONATE DISALLOWANCE, NO DISALLOWANCE FOR PRO PORTIONATE ADMINISTRATIVE COST ATTRIBUTABLE TO EARNING OF TAX FREE INCOME WAS CALLED FOR UNTIL RULE 8D CAME INTO FORCE. THE PROPORTIONA TE DISALLOWANCE U/S. 14A SHOULD BE LIMITED TO INTEREST LIABILITY AND NOT OVERHEADS OR ADMINISTRATIVE EXPENDITURE WHICH SHOULD BE CONSIDER ED FOR DISALLOWANCE UNDER RULE 8D FROM 2007-08 ONWARDS. 13. THE JUDICIAL DISCIPLINE REQUIRES CONSISTENCY IN ITS PROCEEDINGS. WE FIND NO DIFFERENCE IN THE FACTS AND CIRCUMSTANCES O F THE PRESENT CASE AS COMPARED TO THE EARLIER CASES DECIDED BY THE JURISD ICTIONAL HIGH COURT. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF THE JU RISDICTIONAL HIGH COURT, WE ARE INCLINED TO DISMISS THIS GROUND OF THE ASSES SEE. 14. THE NEXT GROUND IN I.T.A. NO. 326/COCH/2014 IS WITH REGARD TO TREATMENT OF SURPLUS REALIZED ON SALE OF PLEDGED JE WELLERY AS INCOME OF THE ASSESSEE. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. WE FIND I.T.A. NOS.326&327/COCH/2014 8 THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THE J URISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE IN I.T.A. NO. 101 OF 2011 D ATED THE 20 TH DAY OF MARCH, 2012 WHEREIN PARA 2, IT WAS HELD AS UNDER: 2. SO FAR AS THIRD QUESTION IS CONCERNED, THE ISSU E IS WHETHER THE SURPLUS AMOUNT RECEIVED BY THE ASSESSEE ON THE SAL E OF OLD GOLD ORNAMENTS PLEDGED TO THE BANK KEPT IN THE SUSPENSE ACCOUNT IS INCOME ASSESSABLE AT THE HANDS OF THE ASSESSEE. THE CONTENTION RAISED BY THE SENIOR COUNSEL FOR THE ASSESSEE IS THAT ASSE SSEE HAS NOT TREATED AS THEIR INCOME AND SO LONG AS IT IS KEPT IN THE SU SPENSE ACCOUNT, IT CANNOT BE TREATED AS ASSESSEES INCOME. HOWEVER, O N GOING THROUGH THE TRIBUNALS ORDER WHAT WE NOTICE IS THAT AMOUNTS ARE KEPT IN SUSPENSE ACCOUNT FOR SEVERAL YEARS AND EVEN THE BOR ROWERS WHOSE GOLD ARE SOLD, ARE NOT TRACEABLE. SO MUCH SO, WE D O NOT FIND ANY JUSTIFICATION FOR THE ASSESSEE TO RETAIN THE AMOUNT PERPETUALLY IN SUSPENSE ACCOUNT AND TO CLAIM EXEMPTION. IN VIEW O F THE FIND OF FACT BY THE TRIBUNAL THAT THERE IS NO CLAIMANT TRACEABLE FOR REPAYMENT OF THE AMOUNT AND THE ASSESSEE HAS NOT MADE ANY EFFORT TO TRACE THE CUSTOMER FOR REPAYMENT OF THE AMOUNT, WE DO NOT FIN D ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE TRIBUNAL. CONSE QUENTLY THIS ISSUE IS ANSWERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE AND WE REJECT THE APPEAL ON THIS GROUND. 16. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF TH E HIGH COURT, WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE A ND IN FAVOUR OF THE REVENUE. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISSED. 17. THE NEXT GROUND IN I.T.A. NO. 326/COCH/2014 IS WITH REGARD TO ADDITION MADE ON ACCOUNT OF EXCESS CASH FOUND BY TH E ASSESSEE AS INCOME OF THE ASSESSEE. I.T.A. NOS.326&327/COCH/2014 9 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. WE FIND THAT A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFO RE THE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE REPORTED IN 349 I TR 569 WHEREIN IT WAS HELD AS UNDER: THAT WHEN THERE WAS NO POSSIBILITY OF ANY ONE CLAI MING ANY AMOUNT AGAINST THE SURPLUS IN THE SUSPENSE ACCOUNT MAINTAI NED BY THE ASSESSEE THE AS COULD NOT TREAT IT AS A LIABILITY OR A PROVI SION FOR LIABILITY. FURTHER, AS AND WHEN A CLAIM WAS MADE AND THE ASSESSEE HAD TO M AKE ANY PAYMENT, THE PAYMENT WOULD BE ALLOWABLE AS A DEDUCTION IN TH E YEAR IN WHICH THE CLAIM WAS MADE. THE TRIBUNAL RIGHTLY REJECTED THE C LAIM OF THE ASSESSEE AT LEAST IN RESPECT OF THE ARREARS CARRIED OVER FOR SE VERAL YEARS. HOWEVER, THE EXCESS FOUND DURING THE PREVIOUS YEAR NEED NOT BE TREATED AS INCOME AND COULD BE TREATED AS SURPLUS IN THE SUSPENSE ACC OUNT FOR THREE YEARS TO MEET A LIABILITY IN THE EVENT OF ANY CLAIM BEING MA DE. THE AMOUNT DID NOT REPRESENT LIABILITY AND WAS WRONGLY SHOWN BY THE AS SESSEE AS LIABILITY. THEREFORE, THE FINDING OF THE TRIBUNAL ON THE ISSUE IN RESPECT OF ARREARS BROUGHT FORWARD EXCEPT RS.95,000/- WHICH WAS THE EX CESS FOUND IN THE PREVIOUS YEAR WAS JUSTIFIED. 19. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF TH E HIGH COURT, WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE A ND IN FAVOUR OF THE REVENUE. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISSED. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS D ISMISSED. PRONOUNCED ACCORDINGLY ON 17-10-2014 SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACC OUNTANT MEMBER PLACE: KOCHI DATED: 17TH OCTOBER, 2014 GJ I.T.A. NOS.326&327/COCH/2014 10 COPY TO: 1. THE CATHOLIC SYRIAN BANK LTD.,ST. MARYS COLLEGE ROAD, THRISSUR-680 020. 2. THE JOINT COMMISSIONER OF INCOME-TAX, RANGE-1, T HRISSUR. 3. THE COMMISSIONER OF INCOME-TAX(APEALS)-V, KOCHI, 4. THE COMMISSIONER OF INCOME-TAX, TRICHUR. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COC HIN