NBZ PHARMA LTD CO., MUMBAI V. DCIT 6(1), MUMBAI

ITA 368/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2983 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 14-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MAHUA SARKAR
• Keywords: Earning of tax free income
• Section: 142(1); 14A; 115JB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SHAILENDRA KUMAR YADAV , JM AND SHRI RAJESH KUMAR, AM ./ I.T.A. NO. 368 / MUM/ 201 5 ( / ASSESSMENT YEAR : 20 1 1 - 12 ) NBZ PHARMA LIMITED CO. 902B. GODRE J COLISEUM BEHIND EVERAD NAG AR , OFF EASTERN EXPRESS HIGHWAY , SION (E), MUMBAI - 400022. / VS. DY. COMMISSIONER OF INCOME TAX - 6(1), ROOM NO.506, 5 TH FLOOR, AAYAK A R BHAVAN, M K ROAD, MUMBAI - 400020 ./ PAN : AAACN7796H / ASSESSEE BY S HRI K GOPAL / ASSESSEE BY MS.MAHUA SARKAR / DATE OF HEARING : 26.8. 2016 / DATE OF PRONO UNCEMENT : 14. 09. 2016 / O R D E R PER RAJESH KUMAR, A. M: THIS IS AN APPEAL FILED BY THE ASSESSEE CHALLENGING THE ORDER OF THE LD.CIT(A) DATED 5.11.2014 FOR THE ASSESSMENT YEAR 201 1 - 12 . 2. ONLY ISSUE RAISED IN THE VARIOUS GROUNDS OF APPE AL BY T HE ASSESSEE IS A GAINST T HE CONFIRMATION OF DISALLOWANCE OF RS.40 , 43 , 307/ - BY LD.CIT(A) MADE BY THE AO U/S 14A READ WITH RULE 8D . 3. FACTS IN BRIEF ARE THAT THE ASSESSEE HA S FILED I T S RETURN OF INCOME ON 16.9.2011 DECLARING TOTAL INCOME OF RS.1,71 ,17,350/ - WHICH WAS REVISED ON 2 368 /MUM/201 4 29.11.2012 DECLARING THE SAME INCOME WHICH WAS DULY PROCESSED U/S 143(1) OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY AND THE PROCEEDINGS U/S 143(2) AND 142(1) WERE FOLLOWED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE AO NOTICED THAT THE ASSESSEE HAS EARNED TAX FREE INCOME AMOUNTING TO R S . 60,13,150/ - AND ASKED THE ASSESSEE VIDE LETTER DATED 26.8.2013 TO FURNISH THE WORKING OF DISALLOWANCES U/S 14A OF T HE ACT READ WITH RULE 8D AND ALSO ASKED AS TO WHY THE SAME SHOULD NOT BE DISALLOWED WHILE COMPUTING THE INCOME OF THE ASSESSEE. THE ASSESSEE REPLIED THAT DISALLOWANCE U/S 14A R.W.R 8D WAS NOT APPLICABLE . THE REPLY OF THE ASSESSEE WAS NOT CONVINCING TO THE AO , T HEREFORE, T HE PROVISIONS OF SECTION 14A R.W.R.8D WERE INVOKED AND DISALLOWANCE WAS MADE OF RS.40,43,307/ - COMPRISING THE EXPENDITURE OF RS.25,78,291/ - U. R. 8D(2) AND RS.14,65,016/ - U/R 8D(2)(III) AS DETAILED AT PAGE 3 OF THE ASSESSMENT ORDER AND ACCORDINGLY DISALLOWED THE SAME BY PASSING ASSESSMENT ORDER DATED 16.2.2014 BY ASSESSING THE TOTAL INCOME AT RS.2,11,60,670/ - UNDER THE NORMAL PROVISIONS OF ACT AND AT RS.2,69,11,700/ - UNDER SECTION 115JB OF THE ACT. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) W HO ALSO DISMISSED THE APPEAL OF THE ASSESSEE FOR THE REASONS AS HAS BEEN INCORPORATED IN THE APPELLATE ORDER VIDE PARA 3.5 TO 3.8 OF THE ORDER AS REPRODUCED BELOW : 3.5 IN THE JUDGMENT OF THE CHENNAI BENCH OF ITAT IN M/S. LAKSHMI RING TRAVELLERS (TS - 210 - I TAT - 2012(CHNY.) HELD THAT SEC.14A IS A DEEMING PROVISION FOR PRESUMPTIVE DISALLOWANCE. THUS, SEC.14A 3 368 /MUM/201 4 DISALLOWANCE WOULD BE ATTRACTED BY THE FACE OF STATUTE EVEN WHEN THE ASSESSEE, CLAIMS THAT NO EXPENDITURE INCURRED I N RELATION TO EXEMPT INCOME. IN A DISTA NT MANNER, LITERALLY SPEAKING, IT MAY EVEN BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEMING PROVISION. WHEN SUCH DEEMING PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL EVIDENCE IS REPLACED BY STATUTORY PRESUMPT ION AND THE AO HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. 3.6 CB D T VIDE CIRCULAR DATED 11/02/2014 HAS CLARIFIED THAT SUCH EXPENSES WILL BE DISALLOWED U/S 14A EVEN IF THERE IS NO CORRESPONDING EXEMPT INCOME. 3.6.1 REFERENCE IS INVITED TO THE DECISION OF HON'BLE MUMBAI ITAT IN TH E CASE OF MLS.J.K.INDUSTRIES LTD. FOR AY.2008 - 09 ITA NO.7088/MUM/2011 DATE D 21.11.2012. IN THE SAID CASE THE ASSESSEE WAS HAVING INVESTMENT OF RS.' 19.43 CR. ON WHICH HE HAS EARNED EXEMPT - INCOME AND ASSESSEE HAD CLAIMED THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING THAT INCOME ON THESE FACTS THE HON'BLE IT AT INTERALIA HELD, 'WE HAVE HEARD THE RIVAL CONTENTIONS AND WE ARE OF THE VIEW THAT ON BOTH THE COUNTS, I.E. THE' APPLICATION OF THE RATIO LAID DOWN BY THE BOM BAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFT. CO.LTD REPORTED IN 328 ITR 81(BOM) WHERE THE HON'BLE JURISDI C TIONAL HIGH COURT HAS HELD THAT RULE 8 D SHALL BE APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONWARDS AND ALSO THE RATIO LAID DOWN BY THE SP ECIAL BENCH OF THE HON'BLE ITAT DELHI IN THE CASE OF CHEMINVEST UD. VS ITO 317 ITR AT 86 (DEL - SB ), RELIED ON BY THE CIT(A), THE CASE IS AGAINST THE ASSESSEE . RESPECTFULLY FOLLOWING THE DECISIONS AS CITED BY THE CIT(A), WE HAVE NO REASON TO DISTURB THE FIND INGS OF THE C I T(A),WHICH WE UPHOLD.' 3.6.2 THE HON'BLE SPECIAL BENCH OF ITAT MUMBAI IN M/S.OAGA CAPITAL MANAGEMENT (P) LTD. 26 SOT 603 (MUM) HAS HELD AS UNDER: SECTION 14A IS WIDE ENOUGH TO COVER ALL TYPES OF EXPENSE DIRECT AS WELL AS INDIRECT THE WORD 'IN RELATION TO' USED IN SECTION 14A ARE VERY BROAD EXPRESSION SECTION 14 A APPLIES TO EVEN INCIDENTAL EXEMPT INCOME 4 368 /MUM/201 4 SECTION 14A WOULD BE APPLICABLE EVEN IF THERE IS NO DIRECT AND PROXIMATE CONNECTION BETWEEN THE EXEMPT INCOME AND EXPENDITUR E 3.6.3 THE HON'BLE DELHI HIGH COURT IN M/S.MAXOPP INVESTMENT HAS HELD THAT SECTION 14A WILL APPLY EVEN IN CASE WHERE THE MAIN OBJECT OF INCURRING EXPENDITURE IS NOT TO EARN EXEMPT INCOME. 3.7 THE AR WAS SPECIFICALLY ASKED AT THE TIME OF APPELLATE PROC EEDINGS TO POINT OUT ANY ERROR IN THE WORKING OF DISALLOWANCE OF AO.U/S 14A R.W.R 8D . THE AR. COULD NOT BRING OUT ANY ERROR IN THE COMPUTATION MADE' BY THE AO., NOR HAS BEEN ABLE TO DEMONSTRATE THAT THE..., INTEREST PAID IS FOR THE PURPOSE OF BUSINESS. 3 . 8 IN VIEW OF THE AFORESAID DISCUSSION AND RELEVANT JUDICIAL PRONOUNCEMENT, THE CLAIM OF THE APPELLANT, THAT, NO EXPENSES ARE INCURRED TO EARN EXEMPT INCOME, SO NO DISALLOWANCE U/S 14A R.W. RULE 8D CAN BE MADE, IS REJECTED. AGGRIEVED BY THE ORDER OF .LD. CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US, THE LD. AR VEHEMENTLY SUBMITTED THAT THE DISALLOWANCE AS WORKED OUT BY THE AO U/S 14A R.W. 8D AMOUNTING TO RS.40,43,307/ - WAS TOTALLY WRONG AND WAS ALSO CONFIRMED BY THE LD.CIT(A). THE LD . AR FILED DURING THE COURSE OF HEARING THE COMPLETE WORKING OF DISALLOWANCE . THE LD. AR SUBMITTED THAT NO DISALLOWANCE UNDER RULE 8D WAS CALLED FOR AS THE ASSESSEE HAS NOT MADE ANY INVESTMENT S OUT OF INTEREST BEARING FUNDS. BY DRAWING OUT ATTENTION TO P AGE 3 OF THE PAPER BOOK WHICH IS AUDITED BALANCE SHEET GIVING DETAILS AS TO ASSESSEES OWN FUNDS, BORROWED FUNDS AND INVESTMENT S . THE LD. AR SUBM ITTED THAT TOTAL INVESTMENT AS ON 31.3.2011 WERE RS.28 , 60 , 88 , 643/ - AS PER DETAILED GIVEN IN SCHEDULE - 5 TO THE BALANCE - SHEET WHICH IS AT PAGE 5 OF THE PAPER BOOK WHICH IN CLUDED RS.2,85,00,000/ - 5 368 /MUM/201 4 COMING FROM THE EARLIER YEARS AS INVESTMENT IN KILITCH DRUGS (INDIA) LTD WHICH IS A GROUP COMPANY AND THEREFORE THE REMAINING INVESTMENT WERE ONLY RS.10,19,595/ - . THE LD. COUNSEL SUBMITTED THAT THE DISALLOWANCE U/S 14A R.W.R 8D WAS NOT APPLICABLE TO THE STRATEGIC INVESTMENT S WHICH WERE MADE WITH THE MOTIVE OF GAINING CONTROL OVER THE SUBSIDIARY AN D NOT W I TH THE MOTIVE OF EARNING DIVIDEND INCOME BY MAKING SUCH INVE STMENT. THE LD. COUNSEL ARGUED THAT THE LOANS OF RS.16,43,55,635/ - AS ON 31.3.2011 WAS FOR SPECIFIC PURPOSE AND WERE USED ACCORDINGLY AND NOT FOR THE PURPOSES OF PURCHASE OF SHARES IN THE ASSESSEE - COMPANY. THE LD. AR DREW OU R ATTENTION TO THE STATEMENT OF WORKING OF DIS ALLOWANCE U/S 14A R.W.R8D WHICH CALCULATED DISALLOWANCE AT RS.77 , 311/ - AND PRAYED THAT THE REMAINING AMOUNT OF DISALLOWANCE BE DELETED TO THE EXTENT OF RS.39,42,996/ - . 5. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF AUTHORITIES B ELOW . 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT THE ASSESSEE HAS MADE TOTAL INVESTMENT OF RS.2,86,08,864/ - OUT OF WHICH RS.2,85,00,000/ - WA S INVESTED IN THE SHARES OF GROUP COMPANY M/S KILITCH DRUGS (INDIA) LTD IN THE EARLIER YEAR S . WE ALSO FIND MERIT IN THE ARGUMENT OF THE LD. AR THAT THE INTEREST DISALLOWANCE AS CONFIRMED BY THE 6 368 /MUM/201 4 LD. CI T (A) WAS WRONG AS NO BORROWED FUNDS WERE USED FOR T HE INVESTMENT S IN SHARES AS AMOUNT RAISED WERE FOR SPECIFIC PURPOSES AND LOANS WERE USED ACCORDINGLY. WE ALSO FIND FROM PAGE 3 OF THE PAPER BOOK THAT THE ASSESSEES OWN FUNDS WERE RS.23,99,53 , 274/ - W HEREAS THE INVESTMENT S IN THE SHARES WERE ONLY RS.10 ,88 , 643/ - . FROM THE SAID FACTS IT IS CLEAR THAT THESE INVESTMENT S IN THE SHARES WAS MADE OUT OF OWN FUNDS AND NOT FROM THE BORROWED FUNDS. WE ALSO FIND MERIT IN THE SUBMISSIONS OF THE LD AR THAT THE INVESTMENT S IN GROUP COMPANY WERE MADE FOR STRATEGIC PU RPOSE S AND TO WHICH PROVISIONS OF S . 14A R.W.8D CANNOT BE APPLIED. IN VIEW OF FACTS DISCUSSED ABOVE WE ARE OF THE CONSIDERED VIEW THAT ORDER OF CIT(A) IS WRONG TO THAT EXTENT AND ACCORDINGLY WE SET ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE AO TO DEL ETE THE ADDITION TO THE EXTENT OF RS. 39,42,996/ - , THUS SUSTAINING DISALLOWANCE TO THE EXTANT OF RS. 77,311/ - . ACCORDINGLY, T HE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 7 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED ) . O RDER PRON OUNCED IN THE OPEN COURT ON 14. 9. 2016. S D SD ( SHAILENDRA KUMAR YADAV ) (RAJESH KUMAR) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 14 . 9. .2016 SR.PS:SRL: 7 368 /MUM/201 4 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT( A) 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, T RUE COPY / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI