ACIT, New Delhi V. M/s. H.T. Media Ltd., New Delhi

ITA 3876/DEL/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7060 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 18-10-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 17-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SALIL MISHRA
• Keywords: Earning of tax free income; Revenue expenditure
• Section: 14A; 115JB; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL ITA NO. 3876(DEL)/2011 ASSESSMENT YEAR: 2005-06 ASSTT. COMMISSIONER OF INCOME M/S H.T. MEDIA LTD., TAX, CIRCLE 12(1), NEW DELHI. VS. 18-2 0, K.G. MARG,, NEW DELHI-110001. PAN: AABCH3165P (APPELLANT) (RESPON DENT) APPELLANT BY : SHRI SALIL MISHRA, DR RESPONDENT BY: SH RI V.P. GUPTA & SHRI BASANT KUMAR, ADVOCATES DATE OF HEARING : 18.10.2011 DATE OF PRONOUNCEMENT : 28.10.2011. ORDER PER K.G. BANSAL : AM IN THIS APPEAL, THE REVENUE HAS TAKEN UP THREE GR OUNDS. GROUND NOS. 1 AND 3 RELATE TO THE GRANT OF RELIEF OF RS. 44,5 8,600/- IN RESPECT OF DISALLOWANCE MADE U/S 14-A OF THE INCOME-TAX ACT, 1961 (THE ACT FOR SHORT) WHILE COMPUTING THE TOTAL INCOME AND AD JUSTED BOOK PROFIT U/S 115JB. GROUND NO. 2 RELATES TO THE DELETING OF THE ADDITION OF RS. 17,38,000/- MADE BY THE AO IN RESPECT OF INCOME E ARNED DURING THE CONSTRUCTION PERIOD. ITA NO. 3876(DEL)/2011 2 2. BRIEFLY, THE FACTS ARE THAT THE ASSESSEE FIL ED ITS RETURN ON 31.10.2005 DECLARING LOSS OF RS. 10,01,71,121/-. THE RETURN WAS PROCESSED U/S 143(1) ON 30.03.2007. THEREAFTER, THE CASE WAS PICKED UP FOR SCRUTINY BY ISSUING NOTICE U/S 143(2) ON 13.07. 2006. THE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF PRINTING AND PUBLICATION OF NEWSPAPERS AND PERIODICALS. 2.1 COMING TO THE DISALLOWANCE U/S 14A OF THE ACT, THE AO FOUND THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS. 1,82,3 4,399/-. THIS INCOME IS NOT INCLUDIBLE IN THE TOTAL INCOME U/S 10 OF THE A CT. THEREFORE, THE ASSESSEE WAS REQUIRED TO SUBMIT THE DETAILS OF EXPENSES I NCURRED IN EARNING SUCH INCOME AND TO EXPLAIN WHY THE EXPENDITURE MAY NOT BE DISALLOWED BY INVOKING THE PROVISION CONTAINED IN SECTION 14A. IT WAS SUBMITTED THAT THE MAIN SOURCE OF INCOME WAS BY WAY OF ADVERTISEM ENT REVENUE AND FROM SALE OF NEWSPAPERS AND PERIODICALS. NO SPECIFIC EXPENDITURE WAS INCURRED FOR EARNING DIVIDEND INCOME. THE ONLY THING TO B E DONE IN THIS CONNECTION WAS TO DEPOSIT DIVIDEND WARRANTS IN THE BANK ACCOUN T. THE REPLY WAS CONSIDERED. IN THE ASSESSMENT ORDER, IT IS MENT IONED THAT THE ASSESSEE INCURRED VARIOUS ADMINISTRATIVE EXPENSES FOR MAK ING INVESTMENT DECISION, DEMAT ACCOUNT CHARGES, COLLECTION EXPENSES, TELEPH ONE EXPENSES, PERSONNEL ITA NO. 3876(DEL)/2011 3 EXPENSES ETC. INTEREST COST IS ALSO INVOLVED IN MAINTAINING INVESTMENT PORTFOLIO. THE DETAILS OF EXPENDITURE INCURRED IN RELATION TO EARNING THE DIVIDEND INCOME HAVE NOT BEEN KEPT SEPARATELY IN TH E BOOKS OF ACCOUNT. THEREFORE, SUCH EXPENDITURE HAS BEEN ESTIMATED AT 25% OF THE INCOME, LEADING TO DISALLOWANCE OF RS. 45,58,600/-. 2.2 VARIOUS SUBMISSIONS WERE MADE BEFORE THE FIRST APPELLATE AUTHORITY AGAINST THE AFORESAID DISALLOWANCE. IT IS MENTIO NED BY HIM THAT THE AO HAS REFERRED TO THREE TYPES OF EXPENSES- (I) ADMINIS TRATIVE, (II) INTEREST AND (III) PERSONNEL COST. IT IS FOUND AS A MATTER OF FACT THAT ALL INVESTMENTS IN MUTUAL FUNDS HAVE BEEN MADE OUT OF OWN FUNDS, BEIN G THE SHARE CAPITAL. THIS HAS BEEN VERIFIED FROM THE COPY OF THE BANK ACCOUNT. ALTHOUGH THE ASSESSEE HAS RAISED LOAN OF RS. 131.75 CRORE FR OM VARIOUS BANKS, BUT THIS AMOUNT HAS BEEN USED DIRECTLY FOR PAYING THE TE RM LOAN EARLIER TAKEN FROM CENTRAL BANK. THEREFORE, A FINDING HAS BEEN RECOR DED THAT NO INTEREST EXPENDITURE WAS INVOLVED IN EARNING THE DIVIDEN D INCOME. THEREFORE, THE QUESTION REMAINING IS ABOUT REASONABLE ESTIMATION OF ADMINISTRATIVE AND PERSONNEL EXPENSES, AS PER THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. L TD. VS. DCIT, (2010) 194 TAXMAN 203 (BOM.). ON THE BASIS OF DETAILS FILED, HE WORKED OUT THE ITA NO. 3876(DEL)/2011 4 ADMINISTRATIVE AND PERSONNEL COST AT RS. 2.33 CR ORE CONSISTING OF ADMINISTRATIVE AND PERSONNEL COST OF FINANCE DEPA RTMENT OF RS. 1.28 CRORE, REMUNERATION OF THE CFO- RS. 0.46 CRORE AND DIRE CTORS REMUNERATION OF RS.0.59 CRORE. THEREAFTER, IT IS MENTIONED THAT TH E GROSS RECEIPTS OF THE ASSESSEE WERE ABOUT RS. 634 CRORE IN THIS YEAR. THEREFORE, THE RATIO BETWEEN DIVIDEND INCOME AND GROSS RECEIPTS IS ABO UT 0.3%. ACCORDINGLY, 0.3%OF RS. 2.33 CRORE, AMOUNTING TO RS. 80,000/-, HAS BEEN HELD TO BE DISALLOWABLE. 2.3 BEFORE US, THE LD. DR SUBMITTED THAT THE AS SESSEE HAS EARNED DIVIDEND INCOME OF ABOUT RS. 1.82 CRORE. THE AS SESSEE HAS MADE INVESTMENT INTER-ALIA IN 12 MUTUAL FUNDS. IN THIS YEAR, 12 RECEIPTS WERE MADE. THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF AFORESAID GODREJ & BOYCE IS THAT A REASONABLE DISA LLOWANCE CAN BE MADE EVEN FROM ADMINISTRATIVE AND PERSONNEL COSTS. THE AO HAS MADE OUT A CASE THAT THE MANAGEMENT HAS TO PAY SUFFICIENT AT TENTION TOWARDS PORTFOLIO AND PURCHASE AND SALE DECISIONS. THEREFORE, A RE ASONABLE AMOUNT OF DISALLOWANCE IS REQUIRED TO BE MADE IN THIS CASE. THE FORMULA WORKED OUT BY THE LD. CIT(APPEALS) IS NOT ACCEPTABLE UND ER THE LAW BECAUSE IT COMPARES DIVIDEND, WHICH IS IN THE NATURE OF NET I NCOME WITH GROSS ITA NO. 3876(DEL)/2011 5 RECEIPTS AGAINST WHICH EXPENSES HAVE TO BE EARNE D TO ARRIVE AT THE NET INCOME. THEREFORE, IT IS URGED THAT THE ORDER OF THE AO MAY BE RESTORED AND THAT OF THE LD. CIT(APPEALS) MAY BE SET ASIDE . 2.4 IN REPLY, THE LD. COUNSEL SUBMITTED THAT OWN FUNDS AVAILABLE TO THE ASSESSEE IN THE FORM OF SHARE CAPITAL AND RESERVES AMOUNT TO ABOUT RS. 407 CRORE. THE INVESTMENTS AMOUNT TO ABOUT RS. 101 CRORE. THE ACCOUNTS ARE MIXED AND, THEREFORE, IT CAN BE CONCLUDED THAT INVESTMENTS HAVE BEEN MADE OUT OF OWN FUNDS. IN THE LIGHT OF THESE FA CTS, IT IS AGITATED THAT THE DISALLOWANCE MADE BY THE LD. CIT(APPEALS) IS ON A REASONABLE BASIS. 2.5 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE EARNED DIVIDEND INCOME OF ABOUT RS. 1.82 CRORE IN THIS YEAR. THE CASE OF THE LD. DR IS THAT THE AO CAN MAKE REASONABLE DISALLOWANCE OF EXPENDITURE FROM INTEREST, PERSONNEL COST AND ADMINISTRATIVE COST. THE CAS E OF THE LD. DR IS THAT THE FORMULA ADOPTED BY THE LD. CIT(APPEALS) IS NOT R ATIONAL AS IT COMPARES NET INCOME BY WAY OF DIVIDEND WITH GROSS RECEIPTS AGAINST WHICH SUBSTANTIAL EXPENSES WILL HAVE TO BE INCURRED. ON THE OTHER H AND, THE CASE OF THE LD. COUNSEL IS THAT A NEXUS HAS TO BE ESTABLISHED BETWEEN THE EXPENDITURE ITA NO. 3876(DEL)/2011 6 AND EARNING OF EXEMPT INCOME. IN THE CASE OF ES CORTS LTD. VS. ACIT, (2007) 104 ITD 427 (DEL), IT HAS BEEN HELD THAT WHERE INVESTMENTS ARE MADE IN PAST AND INVESTMENT IN THE CURRENT YEAR IS MADE FROM THE CREDIT BALANCES IN THE BANK ACCOUNTS, NO EXPENDITURE OF I NTEREST COULD BE ATTRIBUTED TO THE DIVIDEND INCOME. IT WAS ALSO HELD THAT W HERE SEPARATE ACCOUNTS ARE NOT MAINTAINED BY WHICH MANAGEMENT AND ADMINISTRA TIVE EXPENDITURE COULD BE SEGREGATED, THE ESTIMATION WAS INEVITAB LE IN REGARD TO ATTRIBUTING COST TO THE EARNING OF THE EXEMPT INCOME. IN THE LIGHT OF THIS DECISION, IT IS ARGUED THAT THE DISALLOWANCE MADE BY THE LD. CIT(A PPEALS) IS ON RATIONAL BASIS. THE ACCEPTED POSITION OF LAW IS THAT BAS IS OF DISALLOWANCE FOR COMPUTING TOTAL INCOME AND ADJUSTED BOOK PROFIT U/S 115JB IS THE SAME. THUS, GROUND NOS. 1 AND 3 ARE IDENTICAL IN NATU RE. THE AO HAS MADE AN AD-HOC DISALLOWANCE OF 25% OF DIVIDEND INCOME, FOR WHICH THERE IS NO BASIS. THE LD. CIT(APPEALS) HAS GIVEN A FINDING THAT NO INTEREST COST IS INVOLVED. THIS FINDING HAS BEEN RECORDED AFTER C ONSIDERING VARIOUS FACTS OF INVESTMENT. THEREFORE, WE DO NOT SEE ANY RE ASON TO INTERFERE WITH THIS PART OF THE DECISION OF THE LD. CIT(APPEALS). NO FAULT HAS BEEN FOUND WITH QUANTIFICATION OF THE EXPENDITURE OF RS. 2.33 CRORE, WHICH HAS TO BE ALLOCATED BETWEEN TAXABLE INCOME AND TAX-FREE INCO ME. THEREFORE, IT IS FURTHER HELD THAT DISALLOWANCE CAN BE MADE ONLY F ROM THIS EXPENDITURE. ITA NO. 3876(DEL)/2011 7 HOWEVER, WE AGREE WITH THE LD. DR THAT DIVID END INCOME AND GROSS RECEIPTS ARE NOT COMPARABLE FOR FINDING OUT DISA LLOWANCE ON THE BASIS OF RATIO THEREOF. AT THE SAME TIME, IT IS ALSO CLEAR THAT A REASONABLE AMOUNT CAN BE DISALLOWED HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. AS NO RATIONAL BASIS HAS BEEN SHOWN TO US BY EITHER OF THE SIDES, WE THINK IT FIT TO RESTORE THE MATTER TO THE FILE OF THE AO FOR RE-ADJUDICATING THE MATTER AFTER HEARING THE ASSESSEE. 3. IN REGARD TO GROUND NO. 2, IT IS MENTIONED IN TH E ASSESSMENT ORDER THAT THE ASSESSEE EARNED INCOME OF RS. 17,38,000/- IN THIS YEAR WHEN ITS PROJECT WAS UNDER INSTALLATION. IT WAS SUBMITT ED THAT THE INCOME EARNED DURING FORMATION OF THE COMPANYS MAIN BUSINESS HAS TO BE ADJUSTED AGAINST THE COST OF THE PROJECT. THE AO DID NOT ACCEPT THE SUBMISSION AND MENTIONED THAT THE BUSINESS OF THE ASSESSEE HAS ALREADY BEEN SET UP AND IT HAS BEEN RUNNING FOR A LONG TIME. THE INCOME HAS BEEN EARNED DURING THE CONSTRUCTION PERIOD OF ONE OF THE PROJECTS. THE SE TTING UP OF THIS PROJECT CANNOT BE SAID TO BE THE SETTING UP OF MAIN BUSI NESS OF THE ASSESSEE. THEREFORE, THIS AMOUNT HAS BEEN ADDED TO THE TOTAL INCOME. ITA NO. 3876(DEL)/2011 8 3.1 VARIOUS ARGUMENTS WERE MADE BEFORE THE LD. CIT(APPEALS). AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBMISS IONS MADE BEFORE HIM, IT IS MENTIONED THAT A NEW PRINTING PRESS WAS UNDER CONSTRUCTION DURING THE YEAR AT GREATER NOIDA. THE COMMERCIAL PRODUCTION I N THIS UNIT STARTED IN MARCH, 2005. THE TOTAL COST CAPITALIZED IN THE BO OKS IN RESPECT OF THIS YEAR AMOUNTS TO RS. 227.78 CRORE, WHICH INTER-ALIA INC LUDES EXPENDITURE OF RS. 3.10 CRORE ON ADMINISTRATIVE, PERSONNEL, FINANCE, R AW-MATERIAL, STORES AND SPARES ETC. UTILIZED IN INSTALLATION AND TRIAL RU N. IN THE COURSE OF SETTING UP OF THE UNIT, SCRAP WAS GENERATED WHICH WAS SOLD FOR A SUM OF RS. 13.35 LAKH. THIS HAS BEEN SET OFF AGAINST THE EXPEND ITURE INCURRED ON RAW- MATERIAL AND STORES AND SPARES OF RS. 67.60 LAK H AND RS. 35.43 LAKH RESPECTIVELY. ACCORDING TO ACCOUNTING PRACTICE, THE INCOME WHICH HAS CLOSE NEXUS WITH EXPENDITURE FOR SETTING UP THE UNIT SHOULD BE CAPITALIZED. THE INCOME IN THE INSTANT CASE IS DIRECTLY RELATE D TO CONSUMPTION OF RAW- MATERIAL, STORES AND SPARES DURING TRIAL RUN. I F THE LOGIC OF THE AO HAD TO BE ACCEPTED, SUCH EXPENDITURE WOULD BE REVENUE EXPENDITURE. THERE IS AN ANOTHER ITEM OF RS. 4.03 LAKH REPRESENTING INCR EASE IN COST OF MACHINERY ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE. THIS AMOUNT HAS ALSO BEEN CAPITALIZED BY THE ASSESSEE. THEREFORE, IT IS HELD THAT THE AO WAS NOT RIGHT IN TREATING THE AMOUNT AS INCOME FRO M OTHER SOURCES. ITA NO. 3876(DEL)/2011 9 3.2 THE ONLY ARGUMENT MADE BY THE LD. DR IS THAT THE INCOME WAS EARNED IN RESPECT OF SCRAP GENERATED DURING TR IAL RUN AND ON ACCOUNT OF FLUCTUATION IN RATE OF FOREIGN EXCHANGE BORROWED FOR THE PURPOSE OF PURCHASE OF MACHINERY. HOWEVER, NO SUBMISSION CO ULD BE MADE AS TO HOW THE INCOME SHOULD BE TAKEN AS TAXABLE WHILE TH E EXPENSES ARE CAPITALIZED TOWARDS THE COST. ON THE OTHER HAND, THE LD. COUNSEL HAS RELIED ON THE DECISION OF THE LD. CIT(APPEALS). 3.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. WE FIND THAT BOTH THE EXPENSES ARE DIR ECTLY RELATABLE TO ITEMS OF EXPENDITURE WHICH HAVE BEEN CAPITALIZED. THEREFORE , WE DO NOT FIND ANY REASON AS TO WHY THE SAME SHOULD BE TAKEN AS INCOME WHILE THE EXPENDITURE IS ON CAPITAL ACCOUNT. THEREFORE, GROUND NO. 2 IS DISMISSED. 4. IN THE RESULT, THE APPEAL IS TREATED AS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA ITA NO. 3876(DEL)/2011 10 COPY OF THE ORDER FORWARDED TO:- H.T. MEDIA LTD., NEW DELHI. ACIT, CIRCLE 12(1)NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.