KDDL Ltd., Chandigarh V. DCIT, Circle- 5(1), New Delhi

ITA 3983/DEL/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 2486 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 16-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR SENIOR
• Keywords: Earning of tax free income; Proportionate interest; Rule 8D
• Section: 14A; 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.3983/DEL./2017 (ASSESSMENT YEAR : 2011-12) M/S. KDDL LIMITED, VS. DCIT, CIRCLE 5 (1), SCIO 88 -89, SECTOR 8 C, NEW DELHI. CHANDIGARH. (PAN : AAACK1929M) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NEERAJ JAIN, CA SHRI ABHISHEK AGARWAL, CA REVENUE BY : SHRI SANJAY KUMAR, SENIOR DR DATE OF HEARING : 21.01.2021 DATE OF ORDER : 17.02.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. KDDL LTD. (HEREINAFTER REFERRED TO AS THE ASSESSEE) BY FILING THE PRESENT APPEAL SOUGHT TO S ET ASIDE THE IMPUGNED ORDER DATED 16.12.2016 PASSED BY THE COMMISSIONER O F INCOME-TAX (APPEALS)-44, NEW DELHI QUA THE ASSESSMENT YEAR 201 1-12 ON THE GROUNDS INTER ALIA THAT :- 1. THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN U PHOLDING DISALLOWANCE OF RS.89,45,826 ALLEGING THE SAME TO B E INCURRED FOR EARNING EXEMPT DIVIDEND INCOME INVOKING PROVISIONS OF SECTION 14A ITA NO.3983/DEL./2017 2 OF THE INCOME TAX ACT, 1961 ('THE ACT') READ WITH R ULE 80 OF THE INCOME TAX RULES 1962 (,THE RULES'). 1.1 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THAT ONLY EXPENDITURE INCURRED HAVING DIRECT RELATION TO THE EARNING OF EXEMPT INCOME COULD BE DISALLOWED UN DER SECTION14A OF THE ACT. 1.2 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THE FACT THAT THE INVESTMENTS MADE BY THE APPELLANT WERE OUT OF OWN FUNDS AND THEREFORE, NO INTEREST EX PENSE WERE INCURRED BY THE APPELLANT FOR MAKING SUCH INVESTMEN TS. 1.3 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN A LLEGEDLY HOLDING THAT THE APPELLANT HAS FAILED TO PROVIDE TH E WORKING OF SUO- MOTA DISALLOWANCE OF RS.40,358 MADE BY IT IN THE RE TURN OF INCOME. 1.4 WITHOUT PREJUDICE, THE CIT(A) ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THAT INVESTMENTS MADE BY THE APPEL LANT WERE STRATEGIC INVESTMENTS IN SUBSIDIARY COMPANIES, FOR THE PURPOSE OF PROMOTING ITS OWN BUSINESS AND THEREFORE, SUCH INVE STMENTS CANNOT BE HELD TO BE MADE FOR THE PURPOSE OF EARNING EXEMP T INCOME. 1.5 WITHOUT PREJUDICE, THE CIT(A) ERRED ON FACTS A ND IN LAW IN MAKING DISALLOWANCE EXCEEDING THE AMOUNT OF EXEMPT INCOME EARNED BY THE APPELLANT DURING THE YEAR. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : ASSESSEE COMPANY IS INTO THE BUSINESS OF MANUFACTURING AND SALE OF HIGH QUALITY WATCH DIALS, WATCH HANDS, PRESS TOOLS AND ORNAMENTAL PACKAGING. DURING THE YEAR UND ER ASSESSMENT, ASSESSING OFFICER (AO) NOTICED AN INVESTMENT OF RS. 12,97,39,195/- AS ON 01.04.2010 AND RS.13,62,24,695/- AS ON 31.03.201 1 AND SHOWN TO HAVE EARNED DIVIDEND INCOME OF RS.2,50,000/-. AO F INDING SUO MOTU DISALLOWANCE OF RS.40,358/- U/S 14A OF THE INCOME-T AX ACT, 1961 (FOR SHORT THE ACT) MADE BY THE ASSESSEE COMPANY PROC EEDED TO INVOKE THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RUL E 8D OF THE INCOME-TAX RULES, 1962 (FOR SHORT THE RULES) AND CALCULATED THE DISALLOWANCE UNDER RULE 8D OF THE RULES AS UNDER :- ITA NO.3983/DEL./2017 3 S. NO. PARTICULARS AMOUNT (I) EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME NIL (II) EXPENDITURE INCURRED BY WAY OF INTEREST (A*B/C) A = AMOUNT OF INTEREST 45214580 B = AVERAGE VALUE OF INVESTMENTS 133081945 C = AVERAGE OF TOTAL ASSETS 723159183 A*B/C SUBJECT TO MAXIMUM OF A 8320774 (III) ONE HALF % OF AVERAGE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME AVERAGE VALUE OF INVESTMENTS 133081945 ONE HALF % OF AVERAGE VALUE OF INVESTMENT 665410 TOTAL DISALLWOACNE AS PER RULE 8D 8986184 3. CONSEQUENTLY, AO MADE DISALLOWANCE OF RS.89,86,1 84/- MINUS RS.40,358/- SUO MOTU DISALLOWANCE EQUAL TO RS.89,45 ,826/- U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES AND MADE ADD ITION THEREOF TOT THE TOTAL INCOME OF THE ASSESSEE. 4. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT ( A) BY WAY OF FILING THE APPEAL WHO HAS CONFIRMED THE DISALLOWANC E BY PARTLY ALLOWING THE APPEAL. FEELING AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT (A), THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NO.3983/DEL./2017 4 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. UNDISPUTEDLY, ASSESSEE COMPANY HAS MADE INVESTME NT OF RS.12,97,39,195/- DURING THE YEAR UNDER ASSESSMENT AND HAS SHOWN DIVIDEND INCOME OF RS.2,50,000/- BY MAKING SUO MOTU DISALLOWANCE U/S 14A OF THE ACT TO THE TUNE OF RS.4 0,358/-. 7. FIRST CONTENTION RAISED BY THE LD. AR FOR THE AS SESSEE THAT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE COMPA NY HAS MERELY MADE INVESTMENT OF RS.10,00,000/- AND DISALLOWANCE U/S 14A R/W RULE 8D (3) OF THE RULES AS PER COMPUTATION GIVEN A T PAGE 2 OF THE PAPER BOOK. LD. AR ALSO DREW ATTENTION TO PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 17 OF THE PAPER BOOK, SHOWING PRO FIT AND DIVIDEND EARNED DURING THE YEAR UNDER ASSESSMENT. HE FURTHE R CONTENDED THAT AO HAS FAILED TO RECORD HIS DISSATISFACTION AS TO THE WORKING GIVEN BY THE ASSESSEE COMPANY LEADING TO THE SUO MO TU DISALLOWANCE U/S 14A OF THE ACT. HOWEVER, ON THE O THER HAND, LD. DR FOR THE REVENUE RELIED UPON THE IMPUGNED ORDER P ASSED BY THE LD. CIT (A). 8. WHEN UNDISPUTEDLY THE ASSESSEE COMPANY HAS MADE INVESTMENT OF RS.10,00,000/- DURING THE YEAR UNDER ASSESSMENT QUA WHICH IT HAS MADE SUO MOTU DISALLOWANCE OF RS.40,35 8/- I.E. 0.5% OF THE AFORESAID INVESTMENT UNDER RULE 8D(3) AND HA S MERELY ITA NO.3983/DEL./2017 5 EARNED RS.2,50,000/- AS DIVIDEND INCOME, THE AO AS WELL AS LD. CIT (A) HAS FAILED TO BRING ON RECORD CONTROVERTING THI S FACTUAL POSITION. IN THE ABSENCE OF DISSATISFACTION RECORDED BY THE A O THAT WORKING U/S 14A R/W RULE 8D BY THE ASSESSEE COMPANY IS NOT CORRECT, RESORTING TO MECHANICAL DISALLOWANCE UNDER RULE 8D IS NOT PERMISSIBLE. 9. EVEN OTHERWISE, ONLY AVERAGE VALUE OF THE INVEST MENT REQUIRES TO BE TAKEN INTO CONSIDERATION FOR THE PUR POSE OF SECTION 14A R/W RULE 8D WHICH EARNS EXEMPT DIVIDEND INCOME. LD. AR FOR THE ASSESSEE BROUGHT ON RECORD COMPUTATION OF D ISALLOWANCE OF EXPENSES TO THE TUNE OF RS.40,358/- WHICH ARE AS UN DER :- AMOUNT(RS.) A DIVIDEND RECEIVED 2,50,000 B DEDUCTION INADMISSIBLE ATTRIBUTABLE TO DIVIDEND INCOME NOT FORMING PART OF TOTAL INCOME SHALL BE AGGREGATE OF FOLLOWING : (I) DIRECT EXPENSES (II) INTEREST EXPENSE PROPORTIONATE INTEREST (INTEREST FINANCE CHARGES ONLY PUBLIC DEPOSIT INTEREST TREATED AS GENERAL PURPOSE) (III) % OF AVERAGE OF VALUE OF THE INVESTMENTS (RS.) - 31,342,607 X 1,000,000 = 886,439,276 1,000,000 X % 35,358 5,000 TOTAL (I+II+III) 40,358 AS AT 31.03.11 (RS.) AS AT 31.03.10 (RS.) INVESTMENTS AS PER BALANCE SHEET (BEFORE DIMINUTION IN VALUE OF INVESTMENTS) LESS : FOREIGN INVESTMENTS 137,424,695 (24,979,145) 143,084,630 (37,324,580) NET INVESTMENTS AS PER BALANCE SHEET 1,000,000 1,00 0,000 TOTAL ASSETS AS PER BALANCE SHEET 942,523,788 830,3 54,763 AVERAGE OF THE VALUE OF INVESTMENTS 1,000,000 + 1,000,000 2 1,000,000 AVERAGE OF TOTAL ASSETS 942,523,7 88 + 886,439,276 2 914,481,532 ITA NO.3983/DEL./2017 6 10. SO, IN VIEW OF THE MATTER, AO IS DIRECTED TO EX AMINE THE COMPUTATION OF DISALLOWANCE GIVEN BY THE ASSESSEE S O AS TO REACH THE CONCLUSION AS PER SETTLED PRINCIPLE OF LAW AND THE FACTS AND CIRCUMSTANCE DISCUSSED HEREINBEFORE. CONSEQUENTLY, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 17 TH DAY OF FEBRUARY , 2021. SD/- SD/- (ANIL CHATURVEDI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 17 TH DAY OF FEBRUARY, 2021 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-44 NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.