UNIVERSAL CHEMICALS & INDUSTRIES P.LTD, MUMBAI V. ITO 3(3)(3), MUMBAI

ITA 4159/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0006 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 25-01-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 23-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Assessee Lawyers: KIRIT S SANGHVI; MANISH RESHAMWALA
• Keywords: Earning of tax free income
• Section: 142(1); 14A

Judgement Text

1 ITA 2796/MUM/2015 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) ITA NO.4159/MUM/2013 (ASSESSMENT YEAR: 2008-09) M/S UNIVERSAL CHEMICALS & INDUSTRIES PVT LTD, C/O M/S R.C. RESHAMWALA & CO, CAS 323, VARMA CHAMBERS, 11, HOMJI STREET, FORT, MUMBAI- 400 001 PAN : AAACU0974C VS ITO 3(3)(3), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI KIRIT S SANGHVI & SHRI MANISH RESHAMWALA RESPONDENT BY MS POOJA SWAROOP DATE OF HEARING 14-06-2017 DATE OF PRONOUNCEMENT 30- 06-2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE CIT(A)-7, MUMBAI DATED 15-01-2013 AND IT PERTAINS T O AY 2008-09. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL: - 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE, TH E LEARNED COMMISSIONER OF INCOME TAX ERRED IN UPHOLDI NG THE 2 ITA 2796/MUM/2015 CONTENTION OF THE LEARNED INCOME-TAX OFFICER IN DIS ALLOWING A SUM OF RS. 5,32,585 BY APPLYING THE PROVISIONS OF S ECTION 14 A READ WITH RULE 8 D, AS EXPENDITURE INCURRED TO EARN EXEMPT DIVIDEND INCOME U/S. 10(34). 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY ENG AGED IN THE BUSINESS OF MANUFACTURING POTASSIUM PERMANGANATE & PARA ANISIC ALDEHYDE CHEMICALS AN TRADING OF CHEMICALS, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 ON 30-09-2008 DECLARING TOTAL INCOME O F RS.39,68,480. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AN D 142(1) WERE ISSUED CALLING FOR VARIOUS DETAILS. IN RESPONSE TO NOTICES, AUTHO RIZED REPRESENTATIVE OF THE ASSESSEE ATTENDED AND FILED THE DETAILS, AS CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE HAS EARNED DIVIDEND INCOME OF RS.24,15,335 WHICH IS CLAIMED AS EXEMPT U / 10(34) OF THE ACT. THE AO FURTHER OBSERVED THAT IN THE COMPUTATION OF INCO ME, THE ASSESSEE DID NOT MAKE ANY DISALLOWANCE OF EXPENDITURE INCURRED TO EA RN EXEMPT INCOME AS ENVISAGED IN SECTION 14A OF THE ACT, THEREFORE, ISS UED A SHOW CAUSE NOTICE AND ASKED THE ASSESSEE TO FILE EXPLANATION, ESPECIALLY KEEPING IN VIEW THE AMENDED PROVISIONS OF SECTION 14A R.W.R. 8D OF INCOME-TAX R ULES, 1962. IN RESPONSE TO NOTICE, THE ASSESSEE, VIDE LETTER DATED 26-11-2010 SUBMITTED THAT THE ASSESSEE HAS RECEIVED DIVIDEND ON ITS INVESTMENT. BUT, NO S PECIFIC EXPENDITURE HAS BEEN INCURRED TO EARN THIS DIVIDEND INCOME. THE DIVIDEN D INCOME IS EARNED IN THE REGULAR COURSE OF INVESTMENTS MADE BY THE ASSESSEE AND THE ASSESSEE HAS NOT 3 ITA 2796/MUM/2015 DEVOTED ANY SPECIFIC TIME AND EFFORTS TO EARN THE S AID DIVIDEND INCOME. IT WAS FURTHER SUBMITTED THAT AS REGARDS PROPOSED DISALLOW ANCE OF INTEREST, IT HAD INTEREST FREE FUNDS AVAILABLE TO MAKE INVESTMENTS I N MUTUAL FUNDS. IT WAS FURTHER SUBMITTED THAT IT HAS TREATED THE SALE AND PURCHASE OF SHARES AS IT BUSINESS ACTIVITY AND ONCE THE ACTIVITIES TREATED A S BUSINESS ACTIVITY, ANY DIVIDEND INCOME EARNED FROM THE SHARES HELD AS STOC K-IN-TRADE, NO DISALLOWANCE CAN BE MADE TOWARDS EXPENDITURE UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. IN SUPPORT OF ITS ARGUMENTS, ASSES SEE RELIED UPON CERTAIN JUDICIAL PRECEDENTS INCLUDING THE DECISION OF HONB LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS HERO CYCLES (ITA NO. 33 1 OF 2009 (O&M) DATED NOVEMBER 4, 2009. 3. THE AO, AFTER CONSIDERING THE EXPLANATIONS OF THE A SSESSEE OBSERVED THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE C LEAR AND THERE IS NO SCOPE FOR ANY QUANTIFICATION OR OTHERWISE, FOR INVOKING PROVI SIONS OF SECTION 14A OF THE ACT. THE AO FURTHER OBSERVED THAT AS PER SUB SECTI ON (2) OF SECTION 14A, DISALLOWANCE HAS TO BE COMPUTED IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED AND ACCORDINGLY, RULE 8D PROVIDES A MECH ANISM FOR COMPUTING DISALLOWANCE OF SPECIFIC EXPENDITURE INCURRED IN RE LATION TO EXEMPT INCOME; INTEREST, IF ANY, PAID ON BORROWED FUNDS USED FOR I NVESTMENTS AS ALSO TOWARDS OTHER EXPENSES. SINCE THE ASSESSEE HAS FAILED TO D ISALLOW ANY EXPENDITURE IN 4 ITA 2796/MUM/2015 RELATION TO EXEMPT INCOME, HE INVOKED THE PROVISION S OF SECTION 14A R.W.R. 8D AND DISALLOWED INTEREST PAID ON LOANS AND EXPENSES INCURRED TOWARDS EARNING EXEMPT INCOME @0.5% OF AVERAGE VALUE OF INVESTMENT, WHICH WORKED OUT TO RS.5,32,585. WHILE DOING SO, THE AO HAS TAKEN SUPP ORT FROM THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS CIT 378 ITR 81(BOM). 4. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT DIVIDEND INCOME EARNED FROM SHARES ARE HELD AS STOCK IN TRAD E IN HIS BUSINESS. THEREFORE, THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED TO DISALLOW INTEREST AND OTHER EXPENSES. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS UTILISED ITS OWN INTEREST FREE FUNDS FOR INVESTMENTS IN MUTUAL FUNDS AND AS SUCH, THE AO WAS INCORRECT IN DISALLOWING INTEREST PAID ON LOANS WHI CH WERE UTILISED FOR OTHER BUSINESS PURPOSES. IN SUPPORT OF ITS ARGUMENTS, AS SESSEE RELIED UPON THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS HERO CYCLES (SUPRA) AND ALSO THE DECISION OF ITAT, MUMB AI IN THE CASE OF YATISH TRADING CO VS ACIT. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE CLAIMS TO HAVE INVESTED INTEREST FREE FUNDS IN MUTUAL FUNDS AND HAS NOT PAID ANY INTEREST THEREON. THEREFORE, THE ASSESSEES CLAIM THAT NO INTEREST EXPENDITURE HAS T O BE DISALLOWED NEEDS TO BE EXAMINED BY THE AO WITH REGARD TO AVAILABILITY OF I NTEREST FREE FUNDS FOR 5 ITA 2796/MUM/2015 INVESTMENT IN MUTUAL FUNDS. THEREFORE, HE SET ASID E THE ISSUE TO THE FILE OF THE AO AND DIRECTED THE AO TO VERIFY WHETHER ON THE DAT E OF INVESTMENT THE ASSESSEE WAS HAVING INTEREST FREE FUNDS OR NOT. IN CASE IT IS FOUND CORRECT THEN, THE ADDITION MADE AS PER SECTION 14A(2) TOWARDS INT EREST STOOD DELETED. HOWEVER, IF IT IS NOT SO, THEN THE ADDITION MADE BY THE AO WOULD STAND CONFIRMED IN VIEW OF THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD (SUPRA). THE CIT(A) FURT HER OBSERVED THAT AS REGARDS DISALLOWANCE OF 0.5% OF AVERAGE VALUE OF IN VESTMENT , THE AO WAS JUSTIFIED IN INVOKING RULE 8D(2)(III) AS THE ASSESSEE HAS FAI LED TO PROVE ITS CLAIM THAT IT HAS EARNED DIVIDEND INCOME FROM SHARES HELD AS STOC K IN TRADE. ACCORDINGLY, HE CONFIRMED THE ADDITIONS MADE BY THE AO TOWARDS D ISALLOWANCE OF EXPENDITURE. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE LD.CI T(A) ERRED IN UPHOLDING THE ADDITION MADE BY THE AO TOWARDS DISAL LOWANCE U/S 14A R.W.R. 8D TOWARDS INTEREST AND OTHER EXPENDITURE INCURRED TO EARN EXEMPT INCOME, DESPITE THE FACT THAT THE ASSESSEE HAS FILED NECESS ARY EVIDENCE TO PROVE THAT IT HAS NOT USED INTEREST BEARING FUNDS FOR INVESTMENT IN MUTUAL FUNDS AND ALSO NO SPECIFIC EXPENDITURE HAS BEEN INCURRED TO EARN DIVI DEND INCOME. THE AR FURTHER SUBMITTED THAT WHEN THE SHARES ARE HELD AS STOCK IN TRADE, NO 6 ITA 2796/MUM/2015 DISALLOWANCE CAN BE MADE TOWARDS EXPENDITURE U/S 14 A TOWARDS DIVIDEND INCOME . IN THIS REGARD, HE RELIED UPON THE DECISI ON OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CCI LTD VS JCIT (2012) 250 CTR 291 (KAR) AND ALSO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF DCIT V S INDIA ADVANTAGE FUND IN ITA NO.6711/MUM/2011. 6. ON THE OTHER HAND, LD.DR SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT IN VIEW OF THE DECISION OF THE JURIS DICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD (SUPRA), THE PROV ISIONS OF SECTION 14A R.W.R 8D IS MANDATORY FROM THE ASSESSMENT YEAR 2008-09 ON WARDS AND THE AO HAS RIGHTLY DISALLOWED THE INTEREST AND OTHER EXPENDITU RE AS PER THE PROVISIONS OF SECTION 14A. THE DR FURTHER SUBMITTED THAT ALTHOUG H THE ASSESSEE CLAIMS TO HAVE EARNED DIVIDEND INCOME FROM THE SHARES HELD AS STOCK IN TRADE, FAILED TO FURNISH ANY EVIDENCE TO PROVE THAT THE ASSESSEE IS INVOLVED IN THE BUSINESS OF TRADING IN SHARES AND STOCKS. THE ASSESSEES MAIN ACTIVITY IS MANUFACTURING AND TRADING IN CHEMICALS. THEREFORE, THERE IS NO MERIT IN THE CONTENTION OF THE ASSESSEE THAT ITS MAIN ACTIVITY IS TRADING IN SHAR ES AND SECURITIES. THE AO HAS CONSIDERED NECESSARY FACTS AND ALSO ANALAYSED THE P ROVISIONS OF SECTION 14A BEFORE DISALLOWING INTEREST AND OTHER EXPENDITURE A ND HIS ORDER SHOULD BE UPHELD. 7 ITA 2796/MUM/2015 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE WITH REGARD TO THE EAR NING OF EXEMPT INCOME. THE ASSESSEE HAS EARNED DIVIDEND INCOME FROM MUTUAL FUN DS AND CLAIMED IT AS EXEMPT U/S 10(34) OF THE ACT; HOWEVER, FAILED TO DI SALLOW RELATED EXPENDITURE INCURRED IN CONNECTION WITH EARNING OF EXEMPT INCOM E. THE AO INVOKED THE PROVISIONS OF SECTION 14A R.W.R. 8D AND COMPUTED DI SALLOWANCE OF INTEREST AND OTHER EXPENSES. THE ASSESSEE CLAIMS THAT IT HAS EA RNED DIVIDEND INCOME ON ITS INVESTMENTS HELD AS STOCK IN TRADE. THEREFORE, NO DISALLOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE ACT. 8. HAVING HEARD BOTH THE SIDES AND HAVING CONSIDERED T HE MATERIAL ON RECORD WE FIND THAT THE AO HAS INVOKED PROVISIONS O F SECTION 14A WHICH IS SUPPORTED BY THE DECISION OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MFG CO LTD (SUPRA), WHEREIN THE COUR T OBSERVED THAT THE PROVISIONS OF RULE 8D WHICH HAS BEEN NOTIFIED WITH EFFECT FROM 24 TH MARCH, 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2 008-09. THEREFORE, THERE IS NO INFIRMITY IN THE ACTION OF THE AO IN INVOKING TH E PROVISIONS OF SECTION 14A R.W.R. 8D OF THE INCOME-TAX RULES, 1962. HOWEVER, THE ASSESSEE CLAIMS THAT IT HAS UTILISED ITS INTEREST FREE FUNDS FOR INVESTMENT IN MUTUAL FUNDS, THEREFORE, NO DISALLOWANCE CAN BE MADE FOR INTEREST EXPENDITURE. THE ASSESSEE FURTHER CLAIMS THAT IT HAS NOT INCURRED ANY SPECIFIC EXPEND ITURE FOR EARNING DIVIDEND 8 ITA 2796/MUM/2015 INCOME AND ALSO THE DIVIDEND INCOME HAS BEEN EARNED FROM THE SHARES HELD AS STOCK IN TRADE. WE DO NOT FIND ANY MERITS IN THE A RGUMENTS OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE FAILS TO SUBSTANTIATE ITS CLAIM OF SHARES HELD AS STOCK IN TRADE WITH ANY EVIDENCE. WE OBSERVE THAT THE ASSESSEE HAS FILED ITS FINANCIAL STATEMENTS FOR THE ASSESSMENT YEAR 2008-0 9. ON PERUSAL OF THE FINANCIAL STATEMENT WE FIND THAT THE ASSESSEES MAI N ACTIVITY IS TO MANUFACTURE AND TRADING IN CHEMICALS. WE FURTHER OBSERVE THAT THE ASSESSEE HAS MADE SUBSTANTIAL INVESTMENTS IN MUTUAL FUNDS. WE FURTHE R NOTICE THAT THE TOTAL DIVIDEND INCOME EARNED DURING THE YEAR IS OUT OF MU TUAL FUNDS. THEREFORE, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THE CLAIM OF THE ASSESSEE THAT IT HAS EARNED DIVIDEND INCOME FROM THE SHARES HELD AS STOC K IN TRADE. WE FURTHER NOTICE THAT THE ASSESSEE HAS MADE A TURNOVER OF RS. 1.75 CRORES FROM SHARE TRADING; HOWEVER, THERE IS NO CORRESPONDING PURCHAS ES APPEARED IN THE SCHEDULE OF PURCHASES. WE FURTHER OBSERVE THAT THE ASSESSEE HAS DISCLOSED INVENTORY OF CLOSING STOCK HELD AT THE END OF THE F INANCIAL YEAR WHICH MAINLY CONSISTS OF STOCK HELD FROM ITS MANUFACTURING ACTIV ITY, BUT THERE IS NO STOCK OF SHARES AND SECURITIES, THEREFORE, WE ARE OF THE VIE W THAT THE ASSESSEE HAS FAILED TO PROVE THAT IT IS INVOLVED IN THE ACTIVITY OF PUR CHASE AND SALE OF SHARES AND ACCORDINGLY, THE CLAIM OF THE ASSESSEE THAT THE PRO VISIONS OF SECTION 14A R.W.R. 8D CANNOT BE APPLIED, IS REJECTED. 9 ITA 2796/MUM/2015 9. HAVING SAID SO, LET US EXAMINE THE CLAIM OF THE ASS ESSEE THAT IT HAS UTILISED ITS OWN INTEREST FREE FUNDS IN INVESTMENT IN MUTUAL FUNDS. THE ASSESSEE CLAIMS TO HAVE UTILISED ITS OWN INTEREST F REE FUNDS IN THE FORM OF UNSECURED LOANS FROM PROMOTER AND DIRECTORS ON WHIC H NO INTEREST HAS BEEN PAID. THOUGH ASSESSEE CLAIMS TO HAVE USED INTEREST FREE FUNDS, IT FAILED TO FILE NECESSARY INFORMATION TO JUSTIFY ITS CLAIM. WE FUR THER OBSERVE THAT THE CIT(A) HAS ALREADY CONSIDERED THE CLAIM OF THE ASSESSEE AN D SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FURTHER VERIFICATION TO ASCERTAI N WHETHER THE ASSESSEE IS HAVING INTEREST FREE FUNDS AS ON THE DATE OF INVEST MENT. THEREFORE, WE UPHOLD THE FINDING OF THE CIT(A) AND RESTORE THE ISSUE TO THE FILE OF THE AO AND DIRECT THE AO TO EXAMINE THE AVAILABILITY OF INTEREST FREE FUNDS, IF ANY, AS ON THE DATE OF INVESTMENT. IF THE CLAIM OF THE ASSESSEE IS FOU ND CORRECT, THEN NO INTEREST CAN BE DISALLOWED U/S 14A OF THE INCOME-TAX ACT, 19 61. INSOFAR AS DISALLOWANCE OF 0.50% OF AVERAGE OF INVESTMENTS, IN VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG CO LTD (SUPRA), THE PROVISIONS OF SECTION 14A R.W.R. 8D SHALL APPLY FOR THE AY 2008-09 ONWARDS AND THE AO HAS RIGHTLY COMPUTED DISALLOWANCE OF EXPENDI TURE BY APPLYING THE FORMULA PROVIDED U/R 8D(2)(III) OF INCOME-TAX RULES , 1962. THEREFORE, ADDITION MADE BY THE AO IS UPHELD. 10 ITA 2796/MUM/2015 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE, 2017. SD/- SD/- (D.T. GARASIA) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 30 TH JUNE, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI