The ITO, Ward-5(2), Ahmedabad V. M/s. Osia Enterprises Pvt.Ltd., Ahmedabad

ITA 401/AHD/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50885 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 16-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 14-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y C SURTI
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER, AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.401/AHD/2011 ASSESSMENT YEAR:2005-06 DATE OF HEARING:0.1.11 DRAFTED:20.1.11 INCOME TAX OFFICER, WARD-5(2), 2 ND FLOOR, C.U.SHAH CHAMBERS, ASHRAM ROAD, AHMEDABAD V/S . M/S OSIA ENTERPRISES PVT. LTD., 1 ST FLOOR, AKSHAY, 53, SHRIMALI SOCIETY, NARVRANGPURA, AHMEDABAD PAN NO.AAACO2297A (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI Y.C. SURTI, DR RESPONDENT BY:- SHRI TUSHAR P HEMANI, AR DATE OF HEARING 16-09-2011 DATE OF PRONOUNCEMENT -10-2011 O R D E R PER A.MOHAN ALAKAMONY, ACCOUNTANT MEMBER:- THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER PASSED BY THE LD. CIT(A) IN APPEAL NO.CIT(A)-XI/833/2009-10 DATED 10- 12-2010 FOR THE ASSESSMENT YEAR 2005-06 PASSED U/S.250 R.W.S. 143(3) AND 147 O F THE ACT. 2. THE REVENUE HAS RAISED FOUR GROUNDS IN ITS APPEA L WHEREIN GROUND NO.3 AND 4 ARE GENERAL IN NATURE AND DO NOT SURVIVE FOR ADJU DICATION. GROUND NO.1 AND 2 ARE REPRODUCED HEREIN BELOW. 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING A DISALLOWANCE OF RS.6,81,427/- MADE U/S.14A OF THE ACT. ITA NO.401/AHD/2011 ITO WD-5(2)ABD V. M/S. OSIA ENTERPRISES PVT.LTD PAGE 2 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.94,179/- MADE ON ACCOUNT OF AGRICULTURAL INCOME. 3. THE ASSESSEE IS AN INVESTMENT COMPANY FILED ITS RETURN OF INCOME ON 29-10-2005 SHOWING LOSS AT RS.7,28,476/-. INITIALLY THE RETURN WAS PROCESSED U/S. 143(1) BUT SUBSEQUENTLY REOPENED U/S.147 AND ORDERS WERE PASSE D ON 27-8-2009. THE ASSESSEE IN ITS RETURN OF INCOME HAD DISCLOSED GROS S RECEIPTS OF RS.15,70,325/- WHEREIN AN AMOUNT OF RS.11,00,495/- WAS SHOWN AS DI VIDEND INCOME AND RS.94,179/- AS AGRICULTURAL INCOME BOTH BEING EXEMP T INCOME. FURTHER, THE ASSESSEE HAS CLAIMED OPERATING EXPENDITURE OF RS.6,62,370/- OF WHICH AN AMOUNT OF RS.49,530/- WAS CLAIMED TO BE SPENT FOR AGRICULTURA L ACTIVITIES, EMPLOYEES EMOLUMENTS OF RS.1,45,775/- AND DEPRECIATION AT RS. 2,13,731/-. THE LD. AO IN HIS SHOW CAUSE NOTICE TO THE ASSESSEE QUERIED AS TO HOW THE EXPENSE AGGREGATING TO RS.9,72,346/- (RS.6,62,370/- - 49,530/- + 1,45,775/ - & 2,13,731/-) WERE EXCLUSIVELY INCURRED FOR EARNING TAXABLE INCOME AND WHY PROPORT IONATE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME U/S14A BE DISALLOWED. THE ASS ESSEE REPLIED STATING THAT THE ENTIRE EXPENSE OF RS.9,72,346/- WAS WHOLLY AND EXCL USIVELY INCURRED FOR EARNING TAXABLE INCOME, WHICH WAS NOT FOUND CONVINCING BY T HE REVENUE BECAUSE DURING THE YEAR THE GROSS RECEIPTS OF THE ASSESSEE WAS RS.15,1 7,324/- OUT OF WHICH MAJOR AMOUNT WAS ON ACCOUNT OF DIVIDEND INCOME OF RS.11,0 0,495/- AND AGRICULTURAL INCOME OF RS.94,179/- BOTH BEING EXEMPT INCOME. SIN CE NO CONVINCING REPLY WAS FURNISHED BY THE APPELLANT THE LD. AO CONSIDERED IT PROPER TO DISALLOW THE EXPENDITURE IN PROPORTION TO INCOME ATTRIBUTABLE TO EXEMPT INCOME BY THE FOLLOWING WORKING INVOKING THE PROVISIONS OF SECTION 14A OF T HE ACT:- TOTAL EXPENDITURE TO BE APPORTIONED RS. 9,72,346/- THE GROSS RECEIPTS OF THE ASSESSEE RS.15,17,324/- DIVIDEND INCOME RS.11,00,495/- AMOUNT ATTRIBUTABLE TO EXEMPT INCOME = TOTAL EXPEND ITURE X DIVIDEND INCOME (EXEMPT INCOME) GROSS RECEIPT = 9,72,346 X 11,00495 = 6,81,427/- 15,70,324 ITA NO.401/AHD/2011 ITO WD-5(2)ABD V. M/S. OSIA ENTERPRISES PVT.LTD PAGE 3 THUS THE LD. AO DISALLOWED RS.6,81,527/- BEING EXPE NDITURE ATTRIBUTABLE TO EXEMPT INCOME AS PER THE PROVISIONS OF SEC. 14A OF THE ACT . FURTHER THE LD. AO TREATED THE AGRICULTURAL INCOME OF RS.94,179/- AS INCOME FROM O THER SOURCE SINCE THE ASSESSEE HAD FAILED TO FURNISH ANY INFORMATION WITH REGARD T O AGRICULTURAL ACTIVITIES AS WELL AS THE AGRICULTURAL INCOME EARNED. AGGRIEVED BY THE OR DER OF THE LD. AO THE APPELLANT CARRIED THE MATTER BEFORE THE FIRST APPELLATE AUTHO RITY. 4. THE APPELLANT MADE THE FOLLOWING SUBMISSIONS BE FORE THE LD. CIT(A) (A) IT WAS CONTENDED THAT THE ASSESSEE HAD NOT INCU RRED ANY EXPENDITURE TO EARN ANY EXEMPT INCOME AND THEREFORE, PROVISIONS OF SECTION 14A IS NOT APPLICABLE (B) EVEN IF IT IS HELD THAT PROPORTIONATE EXPENDITU RE INCURRED FOR EARNING EXEMPT INCOME REQUIRES TO BE DISALLOWED THEN RULE 8 D R.W.S. 14A MAY BE APPLIED WHICH WILL WORK OUT A NEGLIGIBLE AMOUNT OF RS.2,192/-. (C) IT WAS SUBMITTED THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES AND ALSO ACT AS AGENT FOR FIN ANCIAL INSTITUTIONS AND MUTUAL FUNDS. MAJORITY OF THE SHARES HELD BY THE AS SESSEE WERE SHOWN AS INVENTORY, AND NOT AS INVESTMENT. THEREFORE, THE IN TENTION OF THE ASSESSEE WAS TO EARN INCOME BY TRADING IN SHARES AND SECURIT IES AND NOT TO EARN DIVIDEND INCOME. THE ASSESSEE HAS EARNED THIS DIVID END INCOME INCIDENTALLY WHICH IS NOT ITS MAIN OBJECTIVE. THEREFORE, EXPENDI TURE INCURRED BY THE ASSESSEE CANNOT BE APPORTIONED TO DIVIDEND INCOME E ARNED. RELIANCE WAS PLACED ON ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. , REPORTED IN 117 ITD 167. (D) IT WAS FURTHER CONTENDED THAT DURING THE YEAR T HERE WERE TOTAL OF 687 VOUCHERS FOR VARIOUS RECEIPTS AND PAYMENTS MADE BY THE ASSESSEE AGAINST WHICH THERE WERE ONLY 13 DIVIDEND WARRANTS. THESE D IVIDEND WARRANTS WERE DEPOSITED IN THE BANK IN THE NORMAL COURSE OF BUSIN ESS. THIS CLEARLY ESTABLISHES THAT THE ADMINISTRATIVE WORK INVOLVED I N ACCOUNTING AND DEPOSITING DIVIDEND WARRANTS IN THE BANK ARE NEGLIGIBLE AND TH EREFORE DOES NOT WARRANT ANY DISALLOWANCE U/S 14A OF THE ACT. 5. LD. CIT(APPEALS) AFTER CONSIDERING THE ISSUE IN DETAIL OBSERVED THAT IN THE ORDER OF THE LD. AO HIS OBSERVATIONS ARE GENERAL AND VAGUE. FURTHER CONSIDERING THE DECISION OF THE CASE GODREJ BOYEE MFG. CO. LTD. V. DCIT MUMBAI HELD THAT IN THIS CASE RULE 8D IS NOT APPLICABLE SINCE RULE 8D IS APPLICABLE PR OSPECTIVELY W.E.F. 24-02-2008. FURTHER HE HELD THAT, IT IS ALSO NOT LOGICAL TO CON CLUDE THAT TO EARN DIVIDEND INCOME OF RS.11,00,495/- AND AGRICULTURAL INCOME OF RS.94,427 /- THE ASSESSEE HAD INCURRED AN ITA NO.401/AHD/2011 ITO WD-5(2)ABD V. M/S. OSIA ENTERPRISES PVT.LTD PAGE 4 EXPENDITURE OF RS.6,81,427/-. HOWEVER, LD. CIT(A) C ONCLUDED IN HIS ORDER THAT KEEPING IN VIEW THE FACTS OF THE CASE AND THE ASSE SSEES INABILITY TO DEMONSTRATE THAT NO EXPENDITURE WAS INCURRED TOWARDS EARNING EX EMPT INCOME, I CONSIDER IT REASONABLE TO RESTRICT THE ALLOWANCE TO 10% OF THE ADMINISTRATIVE AND OTHER EXPENSES TOTALING TO RS.10,21,875/-. THUS, DISALLOWANCE OF R S.1,02,187/- IS CONFIRMED . 6. WITH REGARD TO AGRICULTURAL INCOME THE ASSESSEE SUBMITTED THE FOLLOWING ARGUMENTS BEFORE THE LD. CIT(A) :- (1) IT WAS SUBMITTED THAT THE ASSESSEES GROSS AGR ICULTURAL INCOME WAS RS.94,179/- OUT OF WHICH IT HAD INCURRED EXPENDITUR E OF RS.49,530/- THUS THE ASSESSEES NET AGRICULTURAL INCOME IS RS.44,649/-. HOWEVER, THE AO HAD TREATED THE ENTIRE AGRICULTURAL RECEIPTS OF RS.94,1 79/- AS INCOME FROM OTHER SOURCE. (2) IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD RECEIVED RS.93,790/- FROM SALE PROCEEDS OF MANGO AND RS.389/- FROM THE SALE P ROCEEDS OF COCONUT. FOR THE ASSESSMENT YEAR 2007-08 ALSO THE ASSESSEE HAD D ISCLOSED AGRICULTURAL INCOME WHICH WAS NOT DISPUTED BY THE REVENUE. 7. HAVING CONSIDERED THE ASSESSEES ABOVE SUBMISSIO NS THE LD. CIT(A) BRIEFLY HELD THAT THE ASSESSEES CONTENTIONS ARE TENABLE AN D DELETED THE ADDITIONS WITHOUT SUBSTANTIATING WITH ANY REASONS. 8. LD. DR STRONGLY ARGUED BEFORE US THAT THE LD. AO HAD PASSED A REASONED ORDER BY APPORTIONING THE EXPENDITURE INCURRED IN A SCIENTIFIC MANNER AND THEREFORE ADDITIONS MADE BY INVOKING SECTION 14A OF THE ACT M AY BE UPHELD. HE FURTHER VEHEMENTLY ARGUED THAT THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE FOR EARNING AGRICULTURAL INCOME OR ANY EVIDENCE TO SUPPORT THE CLAIM OF EXPENDITURE INCURRED FOR AGRICULTURAL ACTIVITY. LD. DR PRAYED THAT FROM THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. AO HAD RIGHTLY APPORTIONED THE EXPENDITURE INCURRED TOWARDS EARNINGS EXEMPT INCOME U/S.14A OF THE ACT AND MADE THE ADDIT ION ON ACCOUNT OF INCOME FROM OTHER SOURCE WHICH WAS WRONGLY CLAIMED BY THE ASSES SEE AS AGRICULTURAL INCOME. LD. A.R PRAYED THAT THE LD. CIT(A) HAD ANALYZED THE ISS UES INVOLVED IN DETAIL AND HAS FAIRLY COME TO A CONCLUSION AND THEREFORE HIS ORDER MAY BE UPHELD. ITA NO.401/AHD/2011 ITO WD-5(2)ABD V. M/S. OSIA ENTERPRISES PVT.LTD PAGE 5 9.1 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS BEFORE US. THE LD. A.O WAS RIGHT IN CONCEPT FOR APPORTIONING T HE EXPENSES TOWARDS THE DIVIDEND INCOME HOWEVER HE HAS NOT ARRIVED AT A CONVINCING M ETHOD FOR SUCH APPORTIONMENT. THE ASSESSEE IS AN INVESTMENT COMPANY AND THEREFORE THE MAIN SOURCE OF INCOME WILL BE FROM CAPITAL GAINS. DIVIDEND INCOME, INCOME FROM INTEREST ETC. ARE INCIDENTAL. THE ADMINISTRATION EXPENDITURE INCURRED BY THE APPE LLANT HAS TO BE ATTRIBUTED TO ALL THE INCOME EARNED BY THE ASSESSEE INCLUDING THE EXE MPT INCOME, BECAUSE FOR EVERY DECISION MADE FOR PURCHASE AND SALE OF INVESTMENT W HICH ARE THE ACTIVITIES AND COST CENTERS OF THE ASSESSEE, ALL THE INCOME ARISING FRO M THE INVESTMENT WILL HAVE TO BE APPORTIONED. FROM THE NATURE OF THE ASSESSEES BUSI NESS, IT IS APPARENT THAT THE ASSESSEE WILL BE EARNING/DERIVING DURING VARIOUS KI NDS OF INCOME/BENEFITS FROM THE INVESTMENTS MADE SUCH AS CAPITAL GAINS, DIVIDEND, I NTEREST, AND BONUS SHARES ETC., OVER A PERIOD OF YEARS AND THE INCOME/BENEFIT ACCRU ED IN EVERY YEAR MAY BE DISTINCT AND MAY OR MAY NOT BE IDENTICAL I.E. IN A YEAR THER E COULD BE ONLY DIVIDEND INCOME WHILE AS IN ANOTHER YEAR CAPITAL GAINS AND DIVIDEND OR ONLY CAPITAL GAINS ETC. IN SUCH COMPLEX SITUATIONS FACED BY THE ASSESSEE THE METHOD ADOPTED BY THE LD. A.O IS NOT VERY APPROPRIATE. THIS ERRONEOUS WORKING OF THE LD. A.O HAS LED TO THIS ABSURD RESULT OF ALLOCATING AN ABNORMAL AMOUNT OF RS.6,81,427/- ( OUT OF THE TOTAL EXPENDITURE OF RS.9,72,346/-), TOWARDS THE DIVIDEND INCOME OF RS.1 1,00,495/-. SINCE THE LD. AO HAD NOT ARRIVED AT A CORRECT SCIENTIFIC METHOD FOR ALLO CATION OF EXPENDITURE FOR EARNING DIVIDEND INCOME AND SINCE IT WAS HELD IN THE CASE O F GODREJ & BOYEE MFG. CO. LTD. (SUPRA) THAT RULE 8D IS PROSPECTIVE I.E. W.E.F 24-0 3-2008 THE LD. CIT(A) WAS LEFT OUT WITH NO OTHER OPTION OTHER THAN TO ESTIMATE THE EXP ENDITURE ATTRIBUTABLE TO DIVIDEND TO BE 10% OF THE ADMINISTRATIVE AND OTHER EXPENSES WHI CH WAS WORKED OUT TO RS.1,02,187/-. IN THIS CIRCUMSTANCES, WE DO NOT HAVE ANY HESITATIO N TO CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS COUNT. IT IS OR DERED ACCORDINGLY. 9.2 WITH REGARD TO THE DISALLOWANCE OF AGRICULTURAL INCOME, IT APPEARS THAT THE LD. CIT(A) HAS DELETED THE ADDITIONS BASED ON ONLY ON THE SUBMISSIONS OF THE ASSESSEE THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD RECEIVED SALE PROCEEDS OF MANGO AMOUNTING TO RS.93,790/- AND COCONUT AMOUN TING TO RS.389/- AND THE APPELLANT HAD INCURRED AGRICULTURAL EXPENDITURE AMO UNTING TO RS.49,530/- TO EARN AGRICULTURAL INCOME. IN THE A.Y 2007-08 THE APPELLA NT HAD RECEIVED SALE PROCEEDS OF RS.7,565/- OUT OF SALE OF MANGO AND RS.813/- FROM S ALE OF COCONUT INCURRING ITA NO.401/AHD/2011 ITO WD-5(2)ABD V. M/S. OSIA ENTERPRISES PVT.LTD PAGE 6 AGRICULTURAL EXPENSES OF RS.43,040/- WHICH WAS REFL ECTED IN THE RETURN OF INCOME. IT WAS FURTHER SUBMITTED BY THE APPELLANT THAT THE VER Y SAME A.O FOR THE A.Y 2005-06 WHO HAD COMPLETED THE ASSESSMENT FOR THE A.Y 2007-0 8 HAD ACCEPTED THE FACT THAT THE APPELLANT OWNS AGRICULTURAL LAND AND HAD EARNED AGRICULTURAL INCOME AND NO ADDITIONS WERE MADE. IT APPEARS THAT THE LD. CIT(A) HAS NOT EXAMINED TH E LAND HOLDING OF THE APPELLANT AND THE AGRICULTURAL ACTIV ITIES. LD. CIT(A) HAVE DELETED THE ADDITIONS BASED ONLY ON THE SUBMISSIONS OF THE APPE LLANT WITHOUT VERIFYING THE FACTS AND THEREFORE WE ARE OF THE OPINION THAT THE LD. CI T(A) IS NOT RIGHT IN ARRIVING AT SUCH AN CONCLUSION. EVEN BEFORE US THE LD. A.R HAS NOT P RODUCED ANY EVIDENCE TO ESTABLISH THE APPELLANTS CLAIM. THEREFORE, WE HERE BY CONFIRM THE ORDER OF THE LD. A.O ON THIS ISSUE, HOWEVER, RESTRICTING THE ADDITIO NS MADE ON ACCOUNT OF INCOME FROM OTHER SOURCE TO RS.44,649/-, BEING AGRICULTURAL REC EIPTS CLAIMED OF RS.94,179/- ( LESS ) AGRICULTURAL EXPENSES CLAIMED RS.49,530/- 10. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 31 /10/2011 SD/- SD/- (BHAVNESH SAINI) (A.MOHAN ALANKAM ONY) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, DATED : 31/10/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD