METROPOLITIAN EIMCHEM LTD, MUMBAI V. ACIT CIR 6(3), MUMBAI

ITA 3347/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49327 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 21-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Earning of tax free income; Additional evidence; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD (A. M) ITA NO.3347/MUM/2010(A.Y. 2006-07) ITA NO.3348/MUM/2010(A.Y. 2007-8) M/S. METROPOLITAN EXIMCHEM LTD. NO.5, MEGHDOOT BLDG., 283, FLANK ROAD, SION(W), MUMBAI 400 022 PAN:AAACM 9514C (APPELLANT) VS. THE ACIT, CIR. 6(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020. (RESPONDENT) APPELLANT BY : SHRI SATISH MODY RESPONDENT BY : SHRI JITENDRA YADAV ORDER PER N.V.VASUDEVAN, J.M, THESE ARE APPEAL BY THE ASSESSEE AGAINST COMMON O RDER DATED 29/1/2010 OF CIT(A)XII, MUMBAI RELATING TO ASSESSME NT YEAR 2006-07 AND 2007-08. THE ONLY ISSUE RAISED IN ITA NO.3347/M/20 10 AND THE ISSUE RAISED IN ITA NO.3348/M/2010 IN GROUNDS 1 TO 3 IS WITH REGARD TO THE DISALLOWANCE MADE BY THE AO OF RS. 12,74,073/- AND RS. 17,35,188/- FOR A.Y. 2006-07 AND 2007-08 RESPECTIVELY UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURE AND EXPORT OF DYES AND CHEMICALS. IN A.Y 2006-07 T HE ASSESSEE EARNED DIVIDEND INCOME OF RS.1,15,226/- AND LONG TERM CAPI TAL GAIN OF RS. 35,97,509/-. SIMILARLY IN A.Y 2007-08 THE ASSESSE E EARNED DIVIDEND INCOME OF RS.26.160/- AND PROFIT(CAPITAL GAIN) ON SALE OF MUTUAL FUND OF RS. 3,83,359/-. THE DIVIDEND WAS CLAIMED AS EXEMPT UND ER SECTION 10(34) OF THE ITA NO.3347&3348/MUM/2010 2 ACT AND THE LONG TERM CAPITAL GAIN (LTCG)WAS CLAIME D AS EXEMPT UNDER SECTION 10(38) OF THE ACT. THE AO WITH A VIEW TO DISALLOW THE EXPENDITURE INCURRED IN EARNING THE DIVIDEND INCOME AND EXEMPT LTCG UNDER SECTION 14A OF THE ACT CALLED UPON THE ASSESSEE TO FURNISH DETAILS WITH REGARD TO THE EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING TH E EXEMPT INCOMES. ACCORDING TO THE ASSESSEE NO EXPENDITURE WHATSOEVER WAS INCURRED BY THE ASSESSEE TO EARN THE INCOME THAT WAS EXEMPT UNDER T HE ACT. THE AO HOWEVER, HELD THAT ASSESSEE MUST HAVE INCURRED ADMI NISTRATIVE AND OTHER EXPENSES FOR EARNING EXEMPT INCOME. ACCORDING TO H IM THE EXPENDITURE INCURRED UNDER THE AFORESAID HEADS HAVE TO BE DISAL LOWED UNDER SECTION 14A OF THE ACT. THE AO, THEREAFTER REFERRED TO THE PRO VISIONS OF RULE 8D INSERTED TO THE INCOME TAX RULES 1962 (RULES) W.E.F. FROM 24 /3/2008. THE AO THEREAFTER REFERRED TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT, MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT & OTHERS (20 08) TOIL 509 (ITAT() (MUM) (SB), WHEREIN IT WAS HELD THAT RULE 8D OF THE RULES WAS RETROSPECTIVE IN ITS OPERATION. THEREAFTER APPLYING THE PROVISIO NS OF RULE 8D OF THE RULES, THE AO DISALLOWED A SUM OF RS. 12,74,073/- AND A SU M OF RS. 17,35,188/- FOR A.Y 2006-07 AND 2007-08 RESPECTIVELY AS EXPENDI TURE DISALLOWABLE UNDER SECTION 14A OF THE ACT. THE SAID AMOUNT WAS ACCORD INGLY ADDED TO THE TOTAL INCOME OF THE ASSESSEE IN BOTH THE ASSESSMENT YEARS . 3. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE AO IN BOTH THE ASSESSMENT YEARS GIVING RISE TO THE AFO RESAID GROUND OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE HON BLE 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. ITA NO.3347&3348/MUM/2010 3 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: 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 DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDE ND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS 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 ITA NO.3347&3348/MUM/2010 4 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 CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. IN VIEW OF THE AFORESAID DECISION OF THE HO NBLE 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. THE ONLY OTHER SURVIVING GROUND OF APPEAL IN ITA NO.3348/M/2010 IS REGARDING DISALLOWANCE OF FOREIGN TRAVELING EXPENSE S OF RS. 4,00,526/- MADE BY THE AO. THE AO NOTICED THAT THE ASSESSEE HAD CL AIMED FOREIGN TRAVELING EXPENSES OF RS. 4,00,526/-. ACCORDING TO THE AO TH E ASSESSEE FAILED TO GIVE ITA NO.3347&3348/MUM/2010 5 DETAILS OF EXPENSES, PLACES VISITED, NAMES OF THE P ERSONS WHO WERE MET FOR ESTABLISHING THE CLAIM OF THE ASSESSEE THAT FOREIGN TRAVEL EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE AO ALSO OBSERVED THAT DETAILS FILED BY THE ASSE SSEE DID NOT ESTABLISH THAT THE FOREIGN TRAVEL EXPENSES SHOULD ALLOWED AS BUSIN ESS EXPENSES. THE A.O ACCORDINGLY DISALLOWED THE FOREIGN TRAVEL EXPENSES CLAIMED BY THE ASSESSEE. 7. THOUGH SPECIFIC GROUND WAS RAISED BY THE ASSESS EE BEFORE THE CIT(A) NAMELY GROUND NO.2 THE SAME WAS NOT ADJUDICATED UPO N BY THE CIT(A)/ 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT WAS SUB MITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT ALL REQUIRED DETAILS WERE FILED BEFORE THE AO AND WITHOUT DISCUSSION ON THE EVIDENCE FILED BY THE ASS ESSEE, THE AO HAS MERELY HELD THAT FOREIGN TRAVEL EXPENSES WERE NOT CONNECTE D WITH THE BUSINESS OF THE ASSESSEE. WE HAVE CONSIDERED HIS SUBMISSIONS AND W E FIND THAT THE AO HAS NOT DISCUSSED THE NATURE OF EVIDENCE FILED BY THE A SSESSEE IN THIS REGARD. IN THE CIRCUMSTANCES WE FEEL THAT IT WOULD BE FIT AND PROPER TO DIRECT THE AO TO CONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE EVIDE NCE FILED BY THE ASSESSEE BEFORE THE AO. WE ALSO PERMIT THE ASSESSEE TO FILE ADDITIONAL EVIDENCE THAT MAY BE NECESSARY TO ESTABLISH THE FACT THAT THE EX PENDITURE IN QUESTION WAS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THUS BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED F OR STATISTICAL PURPOSES. ITA NO.3347&3348/MUM/2010 6 9. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 24 TH DAY OF JUNE, 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 24 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3347&3348/MUM/2010 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 21/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 21/6/11 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