M/s. A.R. Chadha & Co. India (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 3626/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5038 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 18-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R C D AN DE
• Keywords: Principle of natural justice; Rule of consistency; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

1 ITA NO. 36 26/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER ITA NO. 3626/DEL/2 014 (A.Y 2010-11 ) A R CHADHA & CO. INDIA (P) LTD. OFFICE NO. 8, 1 ST FLOOR, ALMA RAM MANSION, SCINDIA HOUSE, CONNAUGHT CIRCUS NEW DELHI AAACA1108L (APPELLANT) VS DCIT CENTRAL 1(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. RANJAN CHOPRA, C.A RESPONDENT BY SH. R. C. DANDE, SR. DR ORDER PER SUCHITRA KAMBLE, JM THE APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORD ER DATED 15/4/2014 PASSED BY CIT(A)-IV, NEW DELHI. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THAT THE ORDER OF LD.CIT( A) PARTLY SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER IS BAD IN LAW AND ON FACTS AND I S LIABLE TO BE SET ASIDE. 2. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACT ION OF LD. ASSESSING OFFICER IN NOT GIVING CREDIT OF MUNICIPAL TAXES PAID OF RS. 13,34,371/- FOR M BLOCK PROPERTY BY THE APPELLANT UNDER THE HAD INCOME FROM HOUSE PROPERTY. DATE OF HEARING 02.08.2017 DATE OF PRONOUNCEMENT 23.08.2017 2 ITA NO. 36 26/DEL/2014 3. THAT HAVING REGARDS TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF R S.17,70,837/- OUT OF ADDITION OF RS.38,68,698/- MADE BY LD. A.O U/S 14A READ WITH RULE 8D. 4. THAT THE ORDER PASSED BY LD.CIT(A) AND LD. ASSESSIN G OFFICER IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALE RSHIP FOR PRODUCTS OF JCB INDIA LTD. (SALES, SERVICES AND SPARES) AND SHA RE TRADING. IT HAS ALSO SHOWN RENTAL INCOME AND INCOME FROM LONG TERM CAPIT AL GAIN DURING THE YEAR UNDER CONSIDERATION. DURING THE YEAR UNDER CONSIDER ATION, THE ASSESSEE CLAIMED EXEMPT DIVIDEND INCOME OF RS. 1,00,84,565/- . THE ASSESSING OFFICER GAVE A FINDING THAT THE ASSESSEE INCURRED INDIRECT EXPENSES TO EARN THE DIVIDEND INCOME AND THEREFORE, MADE DISALLOWANCE U/ S. 14A OF THE ACT FOR RS. 38,68,698/-. FURTHER DURING THE YEAR, THE ASSESSEE DECLARED ALV OF ONE M BLOCK PROPERTY AT RS. 21,063/- WHEREAS FOR THE REAS ONS GIVEN IN DETAILS IN AY 1996-97, THE ALV WAS TAKEN AT RS. 23,00,000/-. THE MATTER WAS DECIDED BY THE CIT(A) AND AS PER DIRECTION OF THE CIT(A), THE ALV WAS WORKED OUT BY ADOPTING THE INTEREST RATE @ 18% AS AGAINST @ 24%. THE DEPARTMENT ACCEPTED THE ORDER OF THE CIT(A), THEREFORE THE ALV OF PROPE RTY WAS TAKEN AT RS. 17,32,500/-. THE ASSESSEE WENT IN APPEAL BEFORE ITA T THE DECISION OF WHICH WAS NOT ACCEPTED BY THE REVENUE AND FILED APPEAL BE FORE THE HONBLE HIGH COURT. THEREFORE, THE ASSESSING OFFICER HELD THAT T O MAINTAIN THE PRINCIPLE OF CONSISTENCY, THE ADDITION HAS TO BE MADE TO THE EFF ECT OF RS. 12,06,604. 4. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). THE CIT(A) HELD AS UNDER: 4.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD AR AND PERUSED THE ORDER PASSED BY THE AO. I FIND THAT THE AO HAS COMPUTED DISALLOWANCE OF RS.38,68,698/- @ 0.5% OF AVERAGE INVESTMENT BY I NCLUDING THE ENTIRE INVESTMENT IN THE MUTUAL FUNDS AS ON 31.3.2009 AND 31.3.2010. HON'BLE 3 ITA NO. 36 26/DEL/2014 HIGH COURT OF MUMBAI IN THE CASE OF GODREJ AND BOYC E MANUFACTURING COMPANY LIMITED VS. DEPUTY COMMISSIONER OF INCOME T AX AND ANOTHER(SUPRA) HAS HELD THAT RULE 8D IS APPLICABLE FROM THE AY 2008-09 AND THE AO IS DUTY BOUND TO MAKE THE DISALLOWANCE U /S 14A WHERE ANY DIRECT AND INDIRECT EXPENSES HAVE BEEN INCURRED TO EARN EXEMPT INCOME. IT IS AN ADMITTED FACT THAT THE APPELLANT COMPANY HAS EARNED DIVIDEND INCOME OF RS. 1,00,84,565/- WHICH IS EXEMPT FROM TA X. TO EARN SUCH KIND OF DIVIDEND, THE INVOLVEMENT OF TOP MANAGEMENT IS R EQUIRED, FINANCIAL RESOURCES AND INFRASTRUCTURE OF THE APPELLANT COMPA NY ARE REQUIRED TO BE USED AND THEREFORE THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED CANNOT BE ACCEPTED. THE AO HAS APPLIED THE FORMULA PRESCRIBED IN RULE 8D FOR COMPUTING THE DISALLOWANCE U/S 14A. HOWEVER, THE AO HAS INCLUDED ENTIRE INVESTMENT IN THE MUTUAL FUNDS WITH OUT LOOKING INTO THE CATEGORIES OF MUTUAL FUNDS WHICH INCLUDES DEBT FUND S AND GROWTH FUNDS INCOME FROM WHICH IS TAXABLE AND THEREFORE, THE SAM E CANNOT BE INCLUDED IN THE AVERAGE INVESTMENT FOR THE PURPOSE OF COMPUT ING DISALLOWANCE UNDER RULE 8D. ONCE WE EXCLUDE THE INVESTMENT MADE IN DEBT FUNDS AND GROWTH FUNDS, THE AVERAGE INVESTMENT IN SHARES, MUT UAL FUNDS AND GROWTH FUNDS COMES TO RS.35,41,67,397/- AND 0.5% OF THIS AVERAGE INVESTMENT COMES TO RS. 17,70,837/-. THEREFORE, THE AO IS DIRECTED TO RESTRICT THE DISALLOWANCE AT RS. 17,70,837/- U/S 14 A. THUS THE APPELLANT GETS RELIEF OF RS.21,50,860/-. THIS GROUND IS PART LY ALLOWED. 6.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. AR AND PERUSED THE ORDER PASSED BY THE A.O. I FIND THAT T HE APPELLANT HAS SUBMITTED A COPY OF RECEIPT SHOWING THE PAYMENTS OF RS.13,34,371/- TO NDMC ON 22/3/2010. ON PERUSAL OF THE RECEIPT, I FI ND THAT THE OWNER OF THE PROPERTY IS SHOWN AS ONE SITARAM BHANDARI. THE APPELLANT HAS NOT GIVEN BY REASON AS TO HOW THE HOUSE TAX HAS BEEN AS SESSED AT RS.13,34,371/- FOR A PROPERTY FROM WHICH RENTAL INC OME IS RS. 17,32,500/- 4 ITA NO. 36 26/DEL/2014 ONLY. THE APPELLANT FAILED TO EXPLAIN AS TO HOW THE HOUSE TAX PAID BY SITARAM BHANDARI CAN BE ALLOWED IN THE HANDS OF THE APPELLANT'S COMPANY. IN VIEW OF THE ABOVE FACTS OF THE CASE, I DO NOT FIND ANY MERIT IN THE SUBMISSIONS OF THE LD. AR. THEREFORE, THIS GROU ND IS REJECTED. 5. THE LD. AR SUBMITS THAT GROUND NO. 1 IS GENERAL IN NATURE. AS RELATES TO GROUND NO. 2, THE LD. AR SUBMITS THAT DURING THE YE AR, THE ASSESSEE COMPANY CLAIMED DEDUCTION OF HOUSE TAX PAID OF RS. 13,34,37 1/- FROM RENTAL INCOME OF M BLOCK PROPERTY UNDER THE HEAD HOUSE PROPERTY. THE A.O DID NOT GIVE CREDIT OF THE SAME WHILE PASSING ORDER U/S 143(3) O F THE INCOME TAX ACT, 1961, INSTEAD THE ASSESSING OFFICER GAVE CREDIT FOR RS.87 80/- ONLY. IN THIS CONNECTION, THE LD. AR SUBMITTED THAT IN RESPECT OF LET OUT PROPERTY, THE RENT RECEIVED IS USUALLY TAKEN AS ANNUAL LETTABLE VALUE (ALV) AND MUNICIPAL TAXES ARE TO BE DEDUCTED FROM THE ALV, IF THE FOLLOWING C ONDITIONS ARE SATISFIED: A) THE PROPERTY IS LET OUT DURING THE WHOLE OR PART OF THE YEAR. B) THE MUNICIPAL TAXES MUST BE BORNE BY THE LANDLOR D. C) THE MUNICIPAL TAXES MUST BE PAID DURING THE YEAR , WHERE THE MUNICIPAL TAXES HAVE BECOME DUE BUT HAVE NOT BEEN ACTUALLY PA ID, THE SAME WILL NOT BE ALLOWED. HENCE, MUNICIPAL TAXES MAY BE CLAIMED ON P AYMENT BASIS I.E. ONLY IN THE YEAR IN WHICH THEY ARE PAID. THE LD. AR SUBMITTED THAT IN THE PRESENT CASE, THE ASSESSEE COMPANY HAD PAID MUNICIPAL TAX OF RS. 13,34,371/- ON 22.03.2010 FOR M-BLOCK PROPERTY AND HAD DULY CLAIMED THE SAME AT THE TIME OF FILING INCOME TAX RETURN, COPY OF TAX RECEIPT WHICH WERE ALREADY SUBMITTED BEFORE THE AO AT THE TIME OF ASSESSMENT PROCEEDINGS. 5 ITA NO. 36 26/DEL/2014 6. AS RELATES TO GROUND NO. 3, T HE LD. AR SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENSES TO EARN THE DIVIDEND INCOME. THE LD. AR SUBMITTED THAT AO HAS COMPUTED THE DISALLOWANCE U/S 14A BY INCLUDING ENTIRE INVESTMENT IN THE MUTUAL FUNDS WITHOUT CONSIDERING THE INVESTMENT MADE IN GROWTH FUNDS, DEBT FUNDS, INCOME FROM WHICH IS TAXA BLE. THE LD. AR SUBMITTED THE BREAK-UP OF THE INVESTMENT IN THE MUTUAL FUNDS. ACCORDING TO THE LD . AR THE CLOSING BALANCE IN THE INVESTMENT IN THE MUTUAL FUNDS WAS RS.24,64,62,038/- AND IN GROWTH FUNDS AT RS.16,28,2 4,730/-. IT WAS SUBMITTED THAT INVESTMENT OF RS. 1,24,48,000/- WAS MADE IN BONDS INCOME FROM WHICH IS TAXABLE. THEREFORE, THIS AMOUNT SHOUL D HAVE BEEN INCLUDED BY THE AO. IT WAS FURTHER SUBMITTED THAT INVESTMENT OF RS.16,28,24,730/- WAS MADE IN THE MUTUAL FUNDS DURING THE YEAR WHICH ASSE SSMENT ARE GROWTH FUNDS AND DO NOT DECLARE ANY DIVIDEND. IT WAS SUBM ITTED THAT THE CAPITAL GAIN FROM THE GROWTH FUNDS IS TAXABLE AND THEREFORE, SEC TION 14A IS NOT APPLICABLE. HOWEVER, THE AO HAS IGNORED THESE FACTS. ACCORDING TO THE LD. AR THE AVERAGE INVESTMENT IN SHARES, MUTUAL FUNDS AND GROWTH FUNDS COMES TO RS.35,41,67,397/- AND 0.5% OF THIS AVERAGE INVESTME NT COMES TO RS.17,70,837/-. IT WAS SUBMITTED THAT EXPENDITURE D IRECTLY RELATED TO EXEMPT INCOME WAS NIL AND 0.5% OF AVERAGE INVESTMENT COMES TO RS.17,70,837/-. THE LD. AR FURTHER SUBMITTED THAT THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. THE LD. AR RELIED UPON THE JUDGMENT IN CAS E OF CIT VS. TAIKISHA ENGINEERING INDIA LTD. 54 TAXMAN.COM 109 PASSED BY THE HONBLE DELHI HIGH COURT. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE LD. AR HAS DEMONSTRATED THROUGH DOCUME NTS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE MUNICIPAL TAX WAS PA ID BY THE ASSESSEE WHICH IS THROUGH THE BANK ACCOUNT OF THE ASSESSEE PAID THROU GH ITS PROPRIETOR FIRM ONLY. THEREFORE, GROUND NO. 2 IS ALLOWED. AS RELA TED TO ADDITION OF RS.17,70,837/-, THE ASSESSING OFFICER HAS NOT MADE ANY EFFORT TO RECORD HIS FINDINGS AS TO WHY THE CLAIM OF THE ASSESSEE THAT N O EXPENDITURE WAS INCURRED WAS NOT CORRECT. THE ASSESSING OFFICER MADE DISALL OWANCE JUST BY HOLDING THAT 6 ITA NO. 36 26/DEL/2014 SOME EXPENDITURE MUST HAVE BEEN INCURRED. THEREFORE , THE JUDGMENT RELIED UPON BY THE LD. AR IN CASE OF CIT VS. TAIKISHA ENGI NEERING INDIA LTD. 54 TAXMAN.COM 109 PASSED BY THE HONBLE DELHI HIGH COU RT IS APPLICABLE AND NO DISALLOWANCE IS WARRANTED. THE HONBLE HIGH COURT H ELD THAT THE ASSESSING OFFICER AT THE FIRST INSTANCE MUST EXAMINE THE DISA LLOWANCE MADE BY THE ASSESSEE OR THE CLAIM OF THE ASSESSEE THAT NO EXPEN DITURE WAS INCURRED TO EARN THE EXEMPT INCOME. IF AND ONLY IF THE ASSESSING OFF ICER IS NOT SATISFIED ON THIS COUNT AFTER MAKING REFERENCE TO THE ACCOUNTS, THAT HE IS ENTITLED TO ADOPT THE METHOD AS PRESCRIBED I.E. RULE 8D OF THE RULES. THU S, RULE 8D IS NOT ATTRACTED AND APPLICABLE TO ALL ASSESSEE WHO HAVE EXEMPT INCO ME AND IT IS NOT COMPULSORY AND NECESSARY THAT AN ASSESSEE MUST VOLU NTARILY COMPUTE DISALLOWANCE AS PER RULE 8D OF THE RULES. MOREOVER, WE FIND THAT THE ASSESSEE WAS HOLDING SHARES AS STOCK IN TRADE AND NOT AS INV ESTMENTS AS IS APPARENT FROM THE BALANCE SHEET OF THE ASSESSEE, THESE FACTS ARE IDENTICAL WITH THE FACTS OF THE DELHI HIGH COURT DECISION IN CASE OF TAIKISH A AND THEREFORE, DISALLOWANCE U/S 14A WAS NOT WARRANTED. GROUND NO . 3 IS ALSO ALLOWED. 8. IN RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD AUGUST, 2017 SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 23/08/2017 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT 7 ITA NO. 36 26/DEL/2014 ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 3/08/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 3/08/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 23.08.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 2 3 .08.2017 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.