DCIT, CHENNAI V. K.H.Arind P. Ltd., CHENNAI

ITA 405/CHNY/2015

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9875 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 25-02-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: S VIDHYA
• Keywords: Earning of tax free income
• Section: 14A; 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.405/MDS/2015 ( )( / ASSESSMENT YEAR : 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4(2), CHENNAI - 600 034. V. M/S K.H. ARIND P. LTD., NO.15/2, COLLEGE ROAD, NUNGAMBAKKAM, CHENNAI - 600 006. PAN : AAACK 1426 B (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI N. MADHAVAN, JCIT -.+, / 0 / RESPONDENT BY : SMT. S. VIDHYA, FCA 1 / 2% / DATE OF HEARING : 19.05.2015 3') / 2% / DATE OF PRONOUNCEMENT : 26.06.2015 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, CHENNA I, DATED 14.11.2014 AND PERTAINS TO ASSESSMENT YEAR 2011-12. 2 I.T.A. NO.405/MDS/15 2. SHRI N. MADHAVAN, THE LD. DEPARTMENTAL REPRESENT ATIVE, SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERAT ION IS WITH REGARD TO DISALLOWANCE OF ` 37,87,806/- UNDER SECTION 14A OF THE INCOME- TAX ACT, 1961 READ WITH RULE 8D OF INCOME-TAX RULES , 1962. THE LD. D.R. FURTHER SUBMITTED THAT THE ASSESSEE-COMPAN Y ENGAGED ITSELF IN THE BUSINESS OF MANUFACTURING AND EXPORTI NG LEATHER GLOVES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C LAIMED INVESTMENTS OF ` 3.43 CRORES IN THE BALANCE SHEET IN THE YEAR ENDED 31.03.2011 IN THE PARTNERSHIP FIRM M/S M.A. KHIZAR HUSSAIN & SONS. THE ASSESSEE-COMPANY CLAIMED THE INCOME RECEIVED FR OM THE SAID PARTNERSHIP FIRM WAS EXEMPTED. THE ASSESSEE CLAIME D THAT THE PROVISIONS OF SECTION 14A READ WITH RULE 8D ARE NOT APPLICABLE IN RESPECT OF INVESTMENTS MADE IN THE CAPITAL ACCOUNT OF THE PARTNERSHIP FIRM. THE ASSESSEE ALSO CLAIMED THAT N O EXPENDITURE WAS INCURRED IN RESPECT OF THE ABOVE INVESTMENTS. HOWEVER, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS RECEI VED INCOME FROM THE PARTNERSHIP FIRM TO THE EXTENT OF ` 56,72,766/- ON THE INVESTMENTS MADE BY THE ASSESSEE TO THE EXTENT OF ` 3.43 CRORES. THE ASSESSEE HAS CLAIMED THE ABOVE INCOME OF ` 56,72,766/- AS EXEMPTED. THE LD. D.R. FURTHER SUBMITTED THAT THE RESERVE OF THE COMPANY AS PER THE BOOKS OF ACCOUNT WAS TO THE EXTE NT OF ` 48.26 3 I.T.A. NO.405/MDS/15 CRORES. HOWEVER, THE ASSESSEE SHOWED ` 6.65 CRORES AS SECURED LOANS AS ON 31.3.2011. INTEREST OUTGO FOR THE YEAR UNDER CONSIDERATION IS ` 1.44 CRORES. 3. THE LD. D.R. FURTHER SUBMITTED THAT EVEN THOUGH THE ASSESSEE SHOWED THAT A PORTION OF ESTABLISHMENT EXP ENSES AND INTEREST EXPENSES IS ATTRIBUTABLE TO THE EARNING OF THE INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSEE HA S NOT DISALLOWED ANY AMOUNT FOR EARNING THAT INCOME. ACCORDING TO T HE LD. D.R., IN VIEW OF SECTION 14A(2) OF THE ACT READ WITH RULE 8D , THE ASSESSING OFFICER IS EXPECTED TO DISALLOW THE EXPENDITURE WHI CH IS RELATING TO EARNING OF THE EXEMPTED INCOME. REFERRING TO SECTI ON 14A OF THE ACT, THE LD. D.R. SUBMITTED THAT SUB-SECTION (2) OF SECTION 14A OF THE ACT MANDATES THE ASSESSING OFFICER TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEM PTED INCOME IN ACCORDANCE WITH THE METHOD PRESCRIBED UNDER RULE 8D . ACCORDING TO THE LD. D.R., THE LEGISLATURE HAS USED THE WORD SHALL DETERMINE, THEREFORE, THE ASSESSING OFFICER HAS NO OTHER WAY E XCEPT TO DETERMINE THE EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. 4. REFERRING TO RULE 8D OF THE INCOME-TAX RULES, 19 62, THE LD. D.R. SUBMITTED THAT WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE EXPEN DITURE OR THE 4 I.T.A. NO.405/MDS/15 CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME, THEN HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATI ON TO SUCH INCOME IN ACCORDANCE WITH SUB-RULE (2) OF RULE 8D. REFERRING TO SUB-RULE (2) OF RULE 8D, THE LD. D.R. SUBMITTED THA T NO EXPENDITURE WAS INCURRED DIRECTLY IN EARNING THE INCOME. THERE FORE, FIRST LIMB OF RULE 8D(2) MAY NOT BE APPLICABLE. REFERRING TO SEC OND LIMB OF RULE 8D(2), THE LD. D.R. SUBMITTED THAT THE ASSESSEE INC URRED INTEREST EXPENDITURE DURING THE YEAR UNDER CONSIDERATION WHI CH IS NOT DIRECTLY ATTRIBUTABLE TO THE PARTICULAR INCOME EARNED BY THE ASSESSEE. THEREFORE, AS PER THE SECOND LIMB OF RULE 8D(2), TH E ASSESSING OFFICER HAS TO COMPUTE THE INTEREST EXPENDITURE WHI CH WAS NOT DIRECTLY ATTRIBUTABLE TO THE PARTICULAR INCOME. TH EREFORE, ACCORDING TO THE LD. D.R., WHEREVER THE INTEREST IS NOT DIREC TLY ATTRIBUTABLE TO EARNING OF EXEMPTED INCOME, THEN THE ASSESSING OFFI CER HAS NO OTHER WAY EXCEPT TO COMPUTE THE EXPENDITURE BY APPL YING THE FORMULA PRESCRIBED IN THE SECOND LIMB OF RULE 8D(2) OF THE INCOME- TAX RULES, 1962. THEREFORE, THE CIT(APPEALS) IS NO T CORRECT IN DISALLOWING 10% OF THE TOTAL INCOME EARNED BY THE A SSESSEE. ACCORDING TO THE LD. D.R., SINCE THE LEGISLATURE HA S USED THE WORD SHALL DETERMINE, IT IS MANDATORY FOR THE ASSESSIN G OFFICER TO 5 I.T.A. NO.405/MDS/15 DETERMINE THE EXPENDITURE AS PER THE METHOD PRESCRI BED IN RULE 8D(2). THEREFORE, DISALLOWANCE OF 10% WOULD NOT BE JUSTIFIED. 5. ON THE CONTRARY, SMT. S. VIDHYA, THE LD. REPRESE NTATIVE FOR THE ASSESSEE, SUBMITTED THAT ADMITTEDLY THE ASSESSE E HAS EARNED ` 56,72,766/- FROM THE PARTNERSHIP FIRM WHICH IS EXE MPTED FROM TAXATION. THE ASSESSEE ITSELF DISALLOWED A SUM OF ` 5,67,277/- BEING 10% OF THE ABOVE INCOME. THEREFORE, THE CIT(APPEAL S) RIGHTLY FOUND THAT THERE IS NO NEED FOR ANY FURTHER DISALLO WANCE UNDER SECTION 14A OF THE ACT. THE LD.COUNSEL FURTHER SUB MITTED THAT THE CIT(APPEALS) BY REFERRING TO HIS OWN ORDER FOR THE ASSESSMENT YEARS 2008-09, 2009-10 AND 2010-11, ALLOWED THE CLAIM OF THE ASSESSEE. THE LD.COUNSEL FURTHER SUBMITTED THAT THIS TRIBUNAL ALSO CONFIRMED THE ORDER OF THE CIT(APPEALS) FOR THE ASSESSMENT YE ARS 2008-09, 2009-10 AND 2010-11. THEREFORE, THE CIT(APPEALS) H AS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE HAVE A LSO CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 14A OF THE A CT. FOR THE PURPOSE OF CONVENIENCE, WE ARE REPRODUCING SECTION 14A HEREUNDER:- 6 I.T.A. NO.405/MDS/15 [ EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLU DIBLE IN TOTAL INCOME. 14A. FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDE R THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.] (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO APP LY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT [ PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UN DER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREAS ING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001.] SECTION 14A SPECIFICALLY SAYS THAT THE ASSESSING OF FICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT, IN ACCORDANCE WITH THE METHOD AS WOULD BE PRESCRIBE D UNDER RULE 8D. IT IS NOT THE CASE OF THE ASSESSEE THAT THE IN COME EARNED ON THE INVESTMENTS MADE IN THE CAPITAL ACCOUNT OF THE PARTNERSHIP WAS 7 I.T.A. NO.405/MDS/15 INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. ADMI TTEDLY, THE INCOME OF ` 56,72,766/- DOES NOT FORM PART OF TOTAL INCOME OF T HE ASSESSEE. THEREFORE, THE ASSESSING OFFICER HAS NO OPTION EXCEPT TO DETERMINE THE EXPENDITURE IN VIEW OF THE MANDATE OF THE PARLIAMENT BY USING THE WORD SHALL DETERMINE. 7. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIO NS OF RULE 8D OF INCOME-TAX RULES, 1962 WHICH READS AS FOLLOWS :- METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF THE PREVIOUS YEAR, IS NOT SATI SFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE M ADE BY THE ASSESSEE ; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITU RE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PRE VIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE I N RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE O F FOLLOWING AMOUNTS, NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING T O INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME ; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR IS NOT DIR ECTLY 8 I.T.A. NO.405/MDS/15 ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, A N AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY :- A X B C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTERES T OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME F ROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEE T OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DA Y AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT. OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSET S' SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET EXCLU DING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT IN CLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. UNDER RULE 8D(1), WHEN THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF THE PREVIOUS YEAR IS NO T SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITU RE WAS INCURRED IN RELATION TO THE TOTAL INCOME, THEN HE S HALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH 9 I.T.A. NO.405/MDS/15 PROVISIONS OF SUB-RULE (2) OF RULE 8D. THEREFORE, FOR THE PURPOSE OF APPLYING RULE 8D, THE SATISFACTION OF THE ASSESSING OFFICER WITH REGARD TO ACCOUNTS OF THE ASSESSEE IS MORE RELEVANT . IN OTHER WORDS, THE ASSESSING OFFICER HAS TO RECORD HIS FIND ING THAT THE ACCOUNTS OF THE ASSESSEE DOES NOT SATISFACTORILY EX PLAIN THE EXPENDITURE INCURRED FOR EARNING THE INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. WE HAVE ALSO CAREFULLY G ONE THROUGH THE ORDER OF THE ASSESSMENT. THE ASSESSEE ITSELF CLAIM ED BEFORE THE ASSESSING OFFICER THAT IT HAD MADE A DISALLOWANCE O F ` 5,67,277/- BEING 10% OF THE INCOME EARNED FROM THE PARTNERSHIP FIRM, UNDER RULE 8D. THEREFORE, IT IS AN ADMITTED POSITION OF THE ASSESSEE THAT A DISALLOWANCE HAS TO BE MADE. NOW THE QUESTION ARIS ES FOR CONSIDERATION IS WHEN THE ASSESSEE ADMITTEDLY INCUR RED EXPENDITURE INDIRECTLY, WHICH IS ATTRIBUTABLE TO EARNING OF THE INCOME, WHETHER SUCH EXPENDITURE HAS TO BE COMPUTED ON AD HOC BASIS BY ESTIMATING THE EXPENDITURE OR AS PER THE METHOD PRESCRIBED UND ER RULE 8D(2) OF THE INCOME-TAX RULES, 1962? THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT WHEN THE ASSESSEE ITSELF ADMITTED THAT A DISALLOWANCE HAS TO BE MADE WITH REGARD TO EARNING OF THE INCOME WHICH IS EXEMPTED FROM TAXATION UNDER THE INCOME-TAX ACT IN VIEW OF THE LANGUAGE EMPLOYED BY THE PARLIAMENT IN SECTION 14A( 2) THAT AN ASSESSING OFFICER SHALL DETERMINE AND THE RULE 8D (1), THIS 10 I.T.A. NO.405/MDS/15 TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE METH OD PRESCRIBED IN SUB-RULE (2) OF RULE 8D HAS TO BE ADOPTED. SINCE T HE PARLIAMENT AND RULE MAKING AUTHORITY EMPLOYED THE LANGUAGE SH ALL DETERMINE, IT IS OBLIGATORY ON THE PART OF THE ASS ESSING OFFICER TO DETERMINE THE EXPENDITURE AS PROVIDED IN SUB-RULE ( 2) OF RULE 8D. THEREFORE, ESTIMATION OF EXPENDITURE AT 10% MAY NOT BE IN ACCORDANCE WITH PROVISIONS OF SUB-RULE (2) OF RULE 8D. 8. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE IN I.T.A. NOS.1 95 TO 197/MDS/2014 DATED 28.03.2014. THIS TRIBUNAL FOUND THAT THE ASSESSEE HAS INTEREST-FREE OWN FUNDS TO THE EXTENT OF ` 42.95 CRORES AND OUT OF THESE, THE INVESTMENTS WERE MADE. THERE FORE, THIS TRIBUNAL FOUND THAT THE INVESTMENTS WERE MADE FROM THE INTEREST- FREE FUNDS, THEREFORE, NO DISALLOWANCE IS REQUIRED. HOWEVER, THE PROVISIONS OF SECTION 14A AND RULE 8D AND THE LANGU AGE EMPLOYED BY THE PARLIAMENT SHALL DETERMINE WERE NOT BROUGH T TO THE NOTICE OF THE EARLIER BENCH. THEREFORE, THIS TRIBUNAL CONFIR MED THE ORDER OF THE ASSESSING OFFICER WHEREIN 10% OF THE INCOME FRO M THE FIRM WAS DISALLOWED. IN VIEW OF THE DISCUSSION MADE EARLIER RELATING TO THE PROVISIONS OF SECTION 14A OF THE ACT, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT IT IS MANDATORY FOR THE ASS ESSING OFFICER TO 11 I.T.A. NO.405/MDS/15 ADOPT THE METHOD PRESCRIBED IN RULE 8D(2) OF THE AC T. THEREFORE, THE CIT(APPEALS) IS NOT JUSTIFIED IN ACCEPTING THE AD HOC EXPENDITURE ON ESTIMATION OF 10% OF THE INCOME. ACCORDINGLY, W E SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND THE ENTIRE ISSU E OF RULE 14A R.W. RULE 8D IS REMITTED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETERMINE THE EXPENDITURE INCURRED BY THE ASSESSEE AS PER THE METHOD PRESCRIBED IN THE SECOND LIMB OF RUL E 8D(2) OF THE INCOME-TAX RULES, 1962, AFTER GIVING REASONABLE OPP ORTUNITY TO THE ASSESSEE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 26 TH JUNE, 2015 AT CHENNAI. SD/- SD/- (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) (. !'# ! ) ( . . . ) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 26 TH JUNE, 2015. KRI. / -267 87)2 /COPY TO: +, /APPELLANT / -.+, /RESPONDENT / 1 92 () / CIT(A)-II, CHENNAI / 1 92 /CIT-II, CHENNAI / 7: -2 /DR / ( ; /GF.