ARNAV GRUH LTD, MUMBAI V. DCIT CEN CIR 36, MUMBAI

ITA 3840/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8082 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 29-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 22-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL
• Keywords: Earning of tax free income; Procedural lapse
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL , ACCOUNTANT MEMBER ITA NO . 3840 /MUM. /2015 ( ASSESSMENT YEAR : 20 09 10 ) ITA NO .3841/MUM./2015 ( ASSESSMENT YEAR : 2010 11 ) ARNAV GRUH LTD. 6 TH FLOOR, AKRULI TRADE CENTRE ROAD NO.7, MAROL MIDC ANDHERI (E), MUMBAI 400 093 PAN AAACA4900E . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 36, MUMBAI . RESPONDENT ASSESSE E BY : SHRI PAWAN VED REVENUE BY : SHRI RAJAT MITTAL DATE OF HEARING 28 .09.2017 DATE OF ORDER 15.12.2017 O R D E R PER SAKTIJIT DEY, J.M. A FORESAID APPEALS BY THE ASSESSEE ARE AGAINST TWO SEPARATE ORDERS , BOTH DATED 20 TH MARCH 2015, PASSED BY THE LEARNED COMMISSIONER (APPEALS) 53, MUMBAI, FOR THE ASSESSMENT YEARS 2009 10 AND 2010 11. 2. THE FIRST COMMON ISSUE RAISED BY THE ASSESSEE IN BOTH THE APPEALS RELATE TO DISALLOWANCE MADE UNDER SECTION 14A R/W RULE 8D. 2 ARNAV GRUH LTD. 3. BRIEF FACTS ARE , THE ASSESSEE A COMPANY IS ENGAGED IN THE BUSINESS OF BUILDER AND PROPERTY DEVELOPER. FOR THE ASSESSMENT YEAR 2010 11, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29 TH SEPTEMBER 2009, DECLARING TOTAL INCOME OF . 60,52,460. DURING THE ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF ` . ( ) 1,54,24,888, AS SHARE FROM JOINT VENTURE WHICH IS NOT TAXABLE , WHEREAS , THE ASSESSEE HAS DEBITED EXPENDITURE TOWARDS INTEREST AND FINANCE CHARGES AMOUNTING TO . 2,56,70,226, CALLED UPON THE ASSESSEE TO EXPLAIN WHY EXPENDITURE ATTRIBUTABLE TO EARNING EXEMPT INCOME SHOULD NOT BE DISALLOWED. IN RESPONSE TO THE QUERY RAISED BY THE ASSESS ING OFFICER, THE ASSESSEE MADE DETAILED SUBMISSIONS BEFORE THE ASSESSING OFFICER STATING THEREIN THAT IT HAS NOT DONE ANY INVESTMENT DURING THE YEAR OTHER THAN THE INVESTMENT IN CAPITAL ACCOUNT OF THE JOINT VENTURE AND ONLY INCOME EARNED BY ASSESSEE DURING THE YEAR IS INTEREST INCOME F ROM THE JOINT VENTURE WHICH HAS BEEN OFFERED TO TAX AND SHARE IN PROFIT / (LOSS) FROM THE JOINT VENTURE. THUS, IT WAS SUBMITTED BY THE ASSESSEE THA T IT HAS NOT EARNED ANY EXEMPT INCOME DURING THE YEAR TO SUFFER DISALLOWANCE UNDER SECTION 14A OF THE ACT. FU RTHER, THE ASSESSEE SUBMITTED, SINCE IT HAS VOLUNTARILY MADE A DISALLOWANCE OF . 1,08,00,000 UNDER SECTION 14A IN THE COMPUTATION OF INCOME , NO FURTHER DISALLOWANCE OUT OF THE INTEREST EXPENDITURE CAN BE MADE. THE ASSESSING OFFICER, HOWEVER, REJECTING 3 ARNAV GRUH LTD. THE CONTENTION OF THE ASSESSEE HELD THAT DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE IN ACCORDANCE WITH THE METHOD PRESCRIBED UNDER RULE 8D AND ACCORDINGLY , PROCEEDED TO QUANTIFY THE DISALLOWANCE UNDER SECTION 14A R/W RULE 8D AT . 1,38,92,625. IN ALMOST IDEN TICAL MANNER, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF . 71,67,830 FOR ASSESSMENT YEAR 2010 11 . BEING AGGRIEVED OF THE DISALLOWANCE S MADE BY THE ASSESSING OFFICER, ASSESSEE PREFERRED APPEAL S BEFORE THE FIRST APPELLATE AUTHORITY. 4. THE LEARNED COMMISSIO NER (APPEALS) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE , THOUGH , AGREED THAT THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION ON THE CORRECTNESS OR OTHERWISE OF THE ASSESSEES CLAIM OF EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME, HO WEVER, AT THE SAME TIME, HE EXPRESSED THE VIEW THAT SUCH LAPSE OR OMISSION ON THE PART OF THE ASSESSING OFFICER IS PROCEDURAL LAPSE AND CAN BE CORRECTED BY THE FIRST APPELLATE AUTHORITY , SINCE , HIS POWERS ARE CO TERMINUS WITH THAT OF THE ASSESSING OFFICER . ACCORDINGLY, HE PROCEEDED TO QUANTIF Y THE DISALLOWANCE U NDER SECTION 14A R/W RULE 8D AT . 1, 08, 29,111 FOR ASSESSMENT YEAR2009 10 AND, THEREBY, ALLOWING PARTIAL RELIEF TO THE ASSESSEE. IN ASSESSMENT YEAR2010 11 THE COMMISSIONER (APPEALS) ENHANCED THE DISALLOWANCE TO .1,22,66,185. BEING AGGRIEVED OF THE AFORESAID DECISION OF THE LEARNED COMMISSIONER (APPEALS), ASSESSEE IS IN APPEAL BEFORE US. 4 ARNAV GRUH LTD. 5. IN GROUNDS NO.1 AND 2 OF THE REVISED FORM N O.36 FILED ON 23 RD FEBRUARY 2017 FOR ASSESSMENT YEAR 2009 10 , THE ASSESSEE HAS CHALLENGED THE DECISION OF THE FIRST APPELLATE AUTHORITY IN NOT ALLOWING NETTING OFF OF INTEREST RECEIVED AGAINST THE INTEREST PAID WHILE COMPUTING DISALLOWANCE UNDER SECTION 14A . THAT BESIDES, THE ASSESSEE HAS ALSO RAISED A N ADDITIONAL GROUND ON THE ISSUE THAT NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE IN RESPECT OF SHARE INCOME RECEIVED FR OM ASSOCIATION OF PERSONS (AOP). THEREFORE , EVEN THE DISALLOWANCE MADE VOLUNTARILY BY T HE ASSESSEE IS SOUGHT TO BE DELETED. 6. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED, APART FROM THE FACT THAT ASSESSING OFFICER FAILED TO RECORD ANY SATISFACTION WHILE MAKING THE DISALLOWANCE, IN THE RELEVANT PREVIOUS YEAR THE ASSESSEE H AS NOT EARNED ANY EXEMPT INCOME. THEREFORE , NO DISALLOWANCE UNDER SECTION 14A R/W RULE 8D CAN BE MADE AT ALL. HE SUBMITTED, EVEN THOUGH THE ASSESSEE IN THE COMPUTATION OF INCOME FILED ALONG WITH RETURN OF INCOME HAS VOLUNTARILY DISALLOWED EXPENDITURE UNDER SECTION 14A, HOWEVER, IF THE PROV ISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE SHARE IN THE PROFIT OF AOP , SINCE , IT CANNOT BE CONSIDERED AS EXEMPT INCOME NO DISALLOWANCE UNDER SECTION 14A CAN AT ALL BE MADE. 7. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIED UPON OBSERVATIONS OF THE FIRST APPELLATE AUTHORITY. 5 ARNAV GRUH LTD. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD IN THE CONTEXT OF RELEVANT STATUTORY PROVISIONS AS CONTAINED UNDER SECTION 14A R/W RULE 8D. AS COULD BE SEEN FROM THE FACTUAL MATRIX OF THE CASE, THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR HAS EARNED INTEREST INCOME FROM THE CAPITAL INVESTED IN THE JOINT VENTURE WHICH HAS BEEN OFFERED TO TAX IN THE RETURN OF INCOME FILED. THAT BESIDES, THE ASSESSEE HAS SHOWN HIS PORTION OF THE S HARE IN THE LOSS SUFFERED BY THE JOINT VENTURE DURING THE YEAR. IT IS ALSO A FACT THAT ASSESSEE HAS SUO MOTU DISALLOWED AN AMOUNT OF . 1,08,00,000 UNDER SECTION 14A OF THE ACT IN ASSESSMENT YEAR2009 10 . IN THE COURSE OF ASSESSMENT PROCEEDINGS, IN RESPONSE TO THE QUERY RAISED BY THE ASSESSING OFFICER, THE ASSESSEE HAS JUSTIFIED THE DIS A LLOWANCE MADE BY IT UNDER SECTION 14A THROUGH DETAIL ED SUBMISSIONS. HOWEVER, THE ASSESSING OFFICER EXCEPT RECORDING A VAGUE AND GENERAL OBSERVATION THAT THE SUBMISSIONS OF THE ASSESSEE WAS NOT FOUND TENABLE HAS NOT RECORDED ANY SATISFACTION AS TO WHY THE CLAIM OF THE ASSESSEE WITH REGARD TO THE DISALLOWANCE MADE BY IT UNDER SECTION 14A IS NOT CORRECT HAVING REGARD TO ITS BOOKS OF ACCOUNT. SECTION 14A(2) OF THE ACT WHICH HAS BEE N INTRODUCED TO THE STATUTE W.E.F. 1 ST APRIL 2007 BY FINANCE ACT, 2006 MANDATES RECORDING OF SATISFACTION BY THE ASSESSING OFFICER ON THE CORRECTNESS OF ASSESSEES CLAIM HAVING REGARD TO ITS ACCOUNTS . EVEN , RULE 8D(1) ALSO POSTULATES SIMILAR RECORDING OF S ATISFACTION BY THE 6 ARNAV GRUH LTD. ASSESSING OFFICER. THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT (328 ITR81) HAS HELD THAT RECORDING OF SATISFACTION UNDER SECTION 14A(2) OF THE ACT IS A SIN QUA NON FOR MAKING DISALLOWANCE OF EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THE HONBLE DELHI HIGH COU RT IN CASE OF MAXOPP INVESTMENT LTD. V/S CIT , ITA NO.687/2009 HAS ALSO EXPRESSED SIMILAR VIEW. UNDISPUTEDLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION AS PER THE MANDATE OF SECTION 14A(2) R/W RULE 8D (1) . IT IS RELEVANT TO OBSERVE THAT THE LEARNED COMMISSIONER (APPEALS) HAS ACCEPTED THE AFORESAID FACTU AL POSITION BY HOLDING THAT THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION WITH REGARD TO THE CORRECTNESS OF ASSESSEES CLAIM. HOWEVER, HE HAS STEPPED INTO THE SHOES OF THE ASSESSING OFFICER FOR CORRECTING THE LAPSE COMMITTED BY THE ASSESSING OFFI CER. AS COULD BE SEEN FROM THE LANGUAGE OF SECTION 14A(2) R/W RULE 8D (1) , IT IS THE ASSESSING OFFICER WHO HAS TO RECORD HIS SATISFACTION WITH REGARD TO THE CORRECTNESS OF ASSESSEES CLAIM BEFORE PROCEEDING TO DISALLOW EXPENDITURE UNDER SECTION 14A. IN T HE FACTS OF THE PRESENT CASE, THE ASSESSING OFFICER HAS FAILED TO DO SO. THE LEARNED COMMISSIONER (APPEALS) HAS GIVEN A CLEAR AND CATEGORICAL FINDING IN THIS REGARD WHICH HAS NOT BEEN CHALLENGED BY THE DEPARTMENT. THEREFORE, WHEN T HE STATUTORY PROVISIONS MAND ATE A PARTICULAR ACT TO BE DONE BY A PARTICULAR AUTHORITY IN A PARTICULAR 7 ARNAV GRUH LTD. MANNER , IT HAS TO BE DONE BY THAT AUTHORITY IN THAT MANNER ONLY OR NOT AT ALL . THE SATISFACTION TO BE RECORDED BY THE ASSESSING OFFICER UNDER SECTION 14A(2) CANNOT BE SUBSTITUTED BY THE SATISFACTION RECORDED BY THE FIRST APPELLATE AUTHORITY , EVEN , ACCEPTING THE FACT THAT HIS POWER IS CO TERMINUS WITH THAT OF THE ASSESSING OFFICER. THAT BEING THE CASE, THE ASSESSING OFFICER COULD NOT HAVE DONE ANY FURTHER DISALLOWANCE UNDER SECTION 14A R/W RULE 8D. 9. HAVING HELD SO, IT IS NOW NECESSARY TO LOOK INTO THE ISSUE WHETHE R THE ASSESSEES CLAIM THAT SUO MOTU DISALLOWANCE MADE BY IT UNDER SECTION 14A ALSO REQUIRES TO BE DELETED. AS COULD BE SEEN , FROM THE FACTS ON RECORD , BEFORE THE ASSESSING OFF ICER AND THE FIRST APPELLATE AUTHORITY THE ASSESSEE HAD CONTENDED THAT IT HAD NOT EARNED TAX FREE INCOME IN THE RELEVANT PREVIOUS YEAR TO ATTRACT THE PROVISIONS OF SECTION 14A IN THE SENSE THAT SHARE OF LOSS FROM JOINT VENTURE CANNOT BE TREATED AS TAX FREE INCOME AT THE HANDS OF THE ASSESSEE , SINCE , THE PROFIT / LOSS IS TAXED AT HIGHEST RATE IN THE HANDS OF THE JOINT VENTURE AND WHAT HAD COME TO THE JOINT VENTURE PARTNER IS SIMPLY POST TAX SHARE OF PROFIT / LOSS. HOWEVER, AS IT APPEARS FROM THE F ACTS ON RE CORD, THE ASSESSEE B EFORE THE DEPARTMENTAL AUTHORITIES HAS PLEADED AGAINST ANY ADDITIONAL DISALLOWANCE TO BE MADE UNDER SECTION 14A R/W RULE 8D OVER AND ABOVE THE DISALLOWANCE ALREADY MADE BY IT. IN OTHER WORDS, THE ASSESSEES SUBMISSIONS BEFORE THE DEPAR TMENTAL AUTHORITIES WAS 8 ARNAV GRUH LTD. RESTRICTED TO THE ADDITIONAL DISALLOWANCE PROPOSED AND MADE BY THE ASSESSING OFFICER UNDER SECTION 14A R/W RULE 8D. THE ISSUE AS RAISED BY THE ASSESSEE BEFORE US TO THE EFFECT THAT THE SUO MOTU DISA LLOWANCE MADE BY THE ASSESSEE EVEN HAS TO BE DELETED IS A COMPLETELY NEW ISSUE RAISED FOR THE FIRST TIME BEFORE US. THEREFORE, FOR THE PURPOSE OF GIVING A FAIR OPPORTUNITY TO THE D EPARTMENT TO HAVE ITS SAY ON ASSESSEES AFORESAID CLAIM, WE RESTORE THE MATTER BACK TO THE FILE OF THE ASSE SSING OFFICER FOR ADJUDICATION AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND KEEPING IN VIEW THE JUDICIAL PRECEDENTS THAT MAY BE CITED BEFORE HIM AND IN ACCORDANCE WITH THE RELEVANT STATUTORY PROVISIONS. IT IS OPEN FOR THE ASSESSEE TO RAISE ALL CON TENTIONS REGARDING APPLICABILITY OF SECTION 14A TO THE SHARE IN THE PROFIT & LOSS DERIVED FROM THE JOINT VENTURE. WITH THE AFORESAID OBSERVATIONS, NO SEPARATE ADJUDICATION OF GROUND NO1 & 2 IS REQUIRED AND GROUND NO.4 IS ALLOWED FOR STATISTICAL PUR POSES. OUR AFORESAID DECISION WILL APPLY MUTATIS MUTANDIS TO SIMILAR ISSUE RAISED IN ITA NO.3841/MUM/2015. 10. THE ONLY OTHER COMMON ISSUE RAISED IN BOTH THE APPEALS RELATES TO PART DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 36(1)(III) / SECTION 57(III) OF THE ACT. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE LEARNED COMMISSIONER (APPEALS) HAS DISALLOWED 6% OUT OF 9 ARNAV GRUH LTD. INTEREST EXPENDITURE INCURRED BY THE ASSESSEE ONLY ON THE REASONING THAT WHILE THE ASSESSEE HAS PAID IN TEREST @ 18% ON THE BORROWED FUND IT HAS RECEIVED INTEREST @ 12% ON INTEREST BEARING ADVANCES MADE TO THE JOINT VENTURE. WE ARE OF THE VIEW THAT THE RATE OF INTEREST AT WHICH THE ASSESSEE HAS BORROWED FUNDS CANNOT BE MADE APPLICABLE TO THE INTEREST BEARING ADVANCES MADE TO THE JOINT VENTURE AS THE JOINT VENTURE IS CONSTITUTED BY THE PARTNERS AND THE ASSESSEE APART FROM RECEIVING THE INTEREST INCOME HAS ALSO A SHARE IN THE DISTRIBUTION OF THE INCOME OF THE JOINT VENTURE. MOREOVER, THE INTEREST BEARING ADVANC E TO JOINT VENTURE BEING MADE ONLY FOR THE PURPOSE OF BUSINESS NO DISALLOWANCE OUT OF INTEREST EXPE NDITURE CAN BE MADE. GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE IN BOTH THE APPEALS ARE ALLOWED. 12. IN THE RESULT, ASSESSEES APPEALS ARE PARTLY ALLOWED. ORD ER PRONOUNCED IN THE OPEN COURT ON 15/12/2017. SD/ - SD/ - SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 15/12/2017 COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; 10 ARNAV GRUH LTD. (5) THE DR, ITAT, MUMBAI; (6) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (DY./ASSTT.REGISTRAR) ITAT, MUMBAI .