CAPE TRADING P. LTD, MUMBAI V. ASST CIT CEN CIR 29, MUMBAI

ITA 3772/MUM/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9316 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 03-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 13-05-2013
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI VK;DJ VIHYH; VF/KDJ.K] LH U;K;IHB EQACBZ BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER JH FOT; IKY JKO] U;KF;D LNL; ,OA JH JKTSUNZ] YS[KK LNL; DS LE{K ITA NO. 3772 /MUM/201 3 ASSESSMENT YEAR: - 2010 - 11 CAPE TRADING P. LTD. RAHEJA TOWER PLOT NO. C - 30, G BLOCK, OPP. SIDBI, BANDRA KURLA COMPLEX, BANDRA (EAST) MUMBAI 400 051. VS.` ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 29, MUMBAI. APPELLANT / VIHYKFKHZ RESPONDENT / IZR;FKHZ ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 25.02.2013 OF CIT(A) FOR A.Y. 2010 - 11. THE ASSESSEE HAS RAISED THE SOLITARY GROUND IN THIS APPEAL AS UNDER: - THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES OF RS. 6,94,167/ - OUT OF RS. 7,70,905/ - ASSESSEE BY / FU/KKZFJRH FD VKSJ LS MR. ARVIND SONDE REVENUE BY / JKTLP DH VKSJ LS SHRI PREMANAND J. DATE OF HEARING 03.03.2015 DATE OF PRONOUNCEMENT 11 .03.2015 CAPE TRADING P. LTD. 2 | P A G E MADE BY ASSESSING OFFICER ON INVESTMENT IN SHARES CLAIMING THE ENTIRE ADMINISTRATIVE EXPENSES WAS INCURED BY THE ASSESSEE FOR THE PURPOSE OF INVESTMENT IN SHARES. 2. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD SHOWN INVESTMENT AS ON 31.3.2010 AT RS. 37.49 CRORES AS COMPARED TO RS. 45.95 CRORES IN THE PRECEDING YEAR. THE ASSESSING OFFICER ASKED THE ASSESSEE TO FURNISH THE EXPLANATION WITH REGARD TO DISALLOWANCE AS PER SECTION 14A R.W.RULE 8D(2)(III). IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE COMPANY HAS DISALLOWED RS. 25,000/ - ON ACCOUNT OF ADMINISTRATIVE EXPENSES IN ITS COMPUTATION OF INCOME AS CERTIFIED BY THE TAX AUDIT REPORT. IT WAS FURTHER SUBMITTED THAT THE DIRECT EXPENSES OF RS. 76,738/ - ON ACCOUNT OF DEMANT CHARGES ARE SEPARATELY DISALLOWED AND, THEREFORE, THE TOTAL DISALLOWANCE WORKED OUT TO RS. 1,01,738/ - . WITHOUT PREJUDICE, THE WORKING AS PER RULE 8D(2)(III) ON ACCOUNT OF ADMINISTRATIVE EXPENSES SHOULD BE RESTRICTED ONLY TO THE ACTUAL EXPENSES DEBITED TO THE P&L ACCOUNT. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND WORKED OUT THE DISALLOWANCE AS PER RULE 8D(2)(III) BEING 0. 5% OF THE AVERAGE VALUE OF INVESTMENT AMOUNTING TO RS. 20,86,230/ - . AFTER ALLOWING THE SET OFF SUO MOTU DISALLOWANCE OF RS. 25,000/ - , THE ASSESSING OFFICER MADE AN ADDITIONAL DISALLOWANCE OF RS. 7,70,905/ - BEING THE TOTAL EXPENSES DEBITED TO THE P&L ACCOUNT. 3. THE ASSESSEE CHA LLENGED THE ACTION OF ASSESSING OFFICER BEFORE THE CIT(A)BUT COULD NOT SUCCEED. 4. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSING OFFICER HAS DISALOWED THE TOTAL EXPENSES DEBITED TO THE P&L ACCOUNT BY TREATIN G THE SAME AS EXPENDITURE INCURRED FOR EARNIGN THE EXEMPT INCOME. HE HAS REFERRED THE DETAILS OF THE CAPE TRADING P. LTD. 3 | P A G E EXPENDITURE IN SCHDULE K AND SUBMITTED THAT THE EXPENSES WHICH HAS NO DIRECT OR REMOTE CONNECTION WITH EARNING OF THE EXEMPT INCOME WERE ALSO DISALLOWED BY THE ASSESSING OFFICER U/S 14A. THEREFORE, THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE MECHANICALLY WITHOUT APPLYING THE MIND AND WITHOU T GIVING A FINDING ABOUT THE AC TUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING THE DIVIDEND INCOME. HE HAS FURTHER SUBMITTED THAT THE INVESTMENT IN QUESTION WAS IN THE SISTER CONCERNS AND, THEREFORE, IT WAS A STRATEGIC INVESTMENT AND NOT FOR EARNING THE DIVIDEND INCOME. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF GARWARE WALL ROPES LTD. VS. ACIT DATED 15.01.2014 IN ITA NO. 5408/MUM/2012 AS WELL AS IN THE CASE OF J.M. FINANCIAL LTD. VS. JCIT DATED 26.03.2014 IN ITA NO. 4521/MUM/2012 . THE LD. AUTHORIZED REPRESENTATIVE HAS ALSO PLACED RELIANCE ON THE JUDGMENT OF HO NBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ORIENTAL STRUCTURAL ENGINEERS PVT. LTD. DATED 15.01.2013, WHEREIN THE HON'BLE HIGH COURT HAS UPHELD THE ORDER OF DELHI BENCHES OF THIS TRIBUNAL, WHEREBY, THE DISALLOWACE WAS RESTRICTED TO 2% OF THE DIVIDEND INC OME. 5. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT RULE 8D IS APPLICABLE FOR THE YEAR UNDER CONSIDERATION, THEREFORE, THE DISALLOWANCE HAS TO BE WORKED OUT AS PER RULE 8D. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS DEBITED ADMINISTRATIVE AND OTHER EXPENSES TO THE P&L ACCOUNT OF RS. 7,95,904/ - , THE DETAILS OF THE EXPENSES ARE GIVEN IN SCHEDULE K AS UNDER: - CAPE TRADING P. LTD. 4 | P A G E SCHEDULE K ADMINISTRATIVE AND OTHER EXPENSES AUDITORS REMUNERATION (INCLUDING SERVICEC TAX) FOR THE YEAR ENDED MARCH 31, 2010 RS. - AUDIT FEES 13,236.00 - TAX AUDIT FEES 9,927.00 LEGAL AND PROFESSIONAL FEES 30,142.00 PROFESSION TAX 2,500.00 BUSINESS SUPPORT FEES 661,800.00 PRINTING AND STATIONARY 478.00 BANK CHARGES AND COMMISSION 76,843.00 FILING FEES AND REGISTRATION CHARGES 978.00 TOT A L 795,904.93 7. THE ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE U/S 14A WORKED OUT THE DISALLOWANCE UNDER RULE 8D(2)(III) AT RS. 20,86,230/ - WHICH SHOWS THAT THE WORKING UNDER THE PROVISIONS OF RULE 8D NEGATES THE ACTUAL TOTAL EXPENDITURE DEBITED BY THE ASSESSEE IN TH E P&L ACCOUNT ON ADMINISTRATIVE AND OTHER EXPENSES. IN ANY CASE, DISALLOWANCE CANNOT BE MADE MORE THAN THE TOTAL EXPENSES DEBITED TO THE P&L ACCOUNT. FROM THE DETAILS OF THE EXPENSES, IT IS CLEAR THAT MOST OF THE EXPENSES ARE SPECIFIC IN NATURE AND EXCLUS IVELY INCURRED FOR THE BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE, THE EXPENSES ON ACCOUNT OF AUDITOR FEE, LEGAL AND PROFESSIONAL FEES, PROFESSION TAX, BUSINESS SUPPORT FEES CANNOT BE SAID TO HAVE ANY DIRECT OR PROXIMATE NEXUS WITH THE ACTIVITY OF INVEST MENT O R EARNING THE EXEMP T INCOME . THUS THE DISALLOWANCE U/S 14A CAN BE MADE ONLY TO THE EXTENT OF ALLOCATION OF THESE EXPENSES WHICH HAS DIRECT OR PROXIMATE NEXUS WITH EARNING OF EXEMPT INCOME. F ROM THE DETAILS OF THE EXPENSES, WE FIND THAT THE PRINING A ND STATIONARY EXPENSES AND BANK CHARGES & COMMISION ARE ONLY TWO ITEMS WHICH COULD HAVE DIRECT OR PROXIMATE NEXUS WITH THE INVESTMENT AND EXEMPT INCOME. THEREFORE, THE DISALLWOANCE U/S 14A R.W. RULE 8D(2)(III) CANNOT EXCEED TO THE ALLOCABLE EXPENSES INCURR ED BY THE ASSESSEE FOR A COMPOSITE ACTIVITY RESULTING CAPE TRADING P. LTD. 5 | P A G E TAXABLE AND EXEMPT INCOME. THE WORKING OF DISALLOWANCE UNDER RULE 8D(2)(III) BY THE ASSESSING OFFICER CLEARLY SHOWS THAT IT EXCEEDS NOT ONLY THE EXPENSES DEBITED AND CLAIMED BY THE ASSESSEE WHICH COULD HAVE A PROXIMATE NEXUS WITH THE EARNING OF EXEMPT INCOME BUT ALSO TO THE TOTAL EXPENDITURE DEBITED BY THE ASSESSEE IN THE P&L ACCOUNT UNDER THE HEAD ADMINISTRATIVE AND OTHER EXPENSES. THEREFORE, IT TURNS OUT TO BE CONTRADICTORY TO THE ACTUAL FACTS AND GIVE S ABSURED RESULTS IN COMPLETE DISREGARD TO THE SCHEME OF DISALLOWANCE U/S 14A. THEREFORE, THE PROVISIONS OF RULE 8D(2)(III) CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE AS IT BECOMES UNWORKABLE AND UNREALISTIC. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT WHEN THE PROVISIONS OF RULE 8D(2)(III) BECOMES UNWORKABLE THEN IN THE ABSENCE OF ANY FINDING AS WELL AS ANY SPECIFIC EXPENSES DEBITED TO THE P&L ACCOUNT WHICH COULD HAVE A DIRECT OR PROXIMATE NEXUS FOR EARNING THE DIVIDENT INCOME THE DISALLOWA NCE MADE BY THE ASSESSEE SUO MOTU IS JUST AND PROPER. ACCORDINGLY, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 8 IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUCNED IN THE OPEN COURT ON THIS 11 TH DAY OF MARCH 2015 VKNS'K DH ?KKS'K.KK [KQYS U;K;KY; ES FNUKAD 11 EKPZ 2015 DKS DH XBZA SD/ - SD/ - ( RAJENDRA ) (VIJAY PAL RAO) ( ACCOUNTANT MEMBER / YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; ) MUMBAI DATED 11 .03.2015 SKS SR. P.S, CAPE TRADING P. LTD. 6 | P A G E COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI