E-Infochips Limited, Ahmedabad V. The ACIT.,Circle-4, Ahmedabad

ITA 421/AHD/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68084 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 27-11-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 15-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A; 10B

Judgement Text

, , , , , , , , IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BENCH, AHMEDABAD .., ! ! ! ! ' #$, BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER APPEAL(S)/CO BY APPELLANT VS. RESPONDENT SL. NO(S) ITA NO(S) / CO ASSESSMENT YEAR(S) APPELLANT/APPLICANT RESPONDENT 1. 421/AHD/2012 2006-07 M/S. E-INFOCHIPS LTD. 11-A/B, CHANDRA COLONY CG ROAD NAVRANGPURA AHMEDABAD THE ADDL.CIT RANGE-4 AHMEDABAD 2. 2036/AHD/2012 2007-08 REVENUE ASSESSEE 3. CO NO.215/AHD/12 (IN ITA NO.2036/AHD/12) 2007-08 ASSESSEE REVENUE ASSESSEE BY : SHRI O.P.BATHEJA SR.D.R. REVENUE BY : SHRI S.N. SOPARKAR, A.R. ' % & $' / / / / DATE OF HEARING : 27/11/2013 )*+ & $' / DATE OF PRONOUNCEMENT : 31/12/2013 , / O R D E R PER SHRI KUL BHARAT, JUDICIAL MEMBER : THESE TWO APPEALS FILED BY THE ASSESSEE AND THE R EVENUE FOR ASSESSMENT YEARS 2006-07 & 2007-08 RESPECTIVELY AN D THE CROSS OBJECTION FILED BY THE ASSESSEE FOR AY 2007-08 ARE DIRECTED AGAINST TWO SEPARATE ORDERS OF THE LD.COMMISSIONER OF INCOME TA X(APPEALS)-VIII, AHMEDABAD (CIT(A) FOR SHORT) DATED 30/11/2011 & 29/06/2012. FOR ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 2 - THE SAKE OF CONVENIENCE, THESE APPEALS AND CROSS-OB JECTION ARE BEING DISPOSED OF BY A COMMON ORDER. 2. FIRST, WE TAKE UP THE ASSESSEES APPEAL, I.E. IT A NO.421/AHD/2012 FOR AY 2006-07, WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN REDUCTION OF CLAIM U/S.10B VIS--VIS PROFITS OF PUN E UNDERTAKING BY WRONGLY ALLOCATING CERTAIN EXPENDITURE INCURRED BY OTHER UNDERTAKING BY RS.18,64,471/- AND HONBLE CIT(A) HA S ERRED IN LAW AND ON FACTS IN CONFIRMING THE SAME, DISREGARDING T HE SUBMISSIONS MADE BY THE APPELLANT BEFORE BOTH THE AUTHORITIES. 2. THE LEARNED A.O. HAS ERRED IN LAW AND ON FACTS IN M AKING THE DISALLOWANCE OF RS.8,79,889/- U/S.14A BY WRONGLY RE SORTING TO RULE 8D AND LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN WORKING OUT AN ARBITRARY FIGURE OF ARBITRARILY DETERMINING THE DISALLOWANCE AT RS.2,23,450/- DISREGARDING THE FACTS AND SUBMISSION S MADE BY THE APPELLANT BEFORE BOTH THE AUTHORITIES. 3. THE LEARNED A.O. HAS ERRED IN CHARGING INTEREST U/S .234B. 2.1. GROUND NOS.1 & 2 ARE INTER-CONNECTED. BRIEFL Y STATED FACTS ARE THAT THE CASE OF THE ASSESSEE WAS PICKED UP FOR SCRUTIN Y ASSESSMENT AND THE ASSESSMENT U/S.143(3) OF THE INCOME TAX ACT,1961 (H EREINAFTER REFERRED TO AS THE ACT) WAS FRAMED VIDE ORDER DATED 24/12/ 2009, THEREBY THE ASSESSING OFFICER(AO) MADE DISALLOWANCE OF RS.18,64 ,471/- IN RESPECT OF REDUCTION IN DEDUCTION CLAIMED U/S.10B OF THE AC T AND OF RS.8,79,889/- IN RESPECT OF DISALLOWANCE U/S.14A OF THE ACT. AGA INST THIS ASSESSMENT ORDER, ASSESSEE WENT IN APPEAL BEFORE THE LD.CIT(A) , WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, DISMIS SED THE APPEAL. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 3 - 2.2. FIRST GROUND IS AGAINST CONFIRMATION OF DISALL OWANCE RS.18,64,471/- ON ACCOUNT OF APPORTIONMENT OF EXPEN SES OF PUNE UNIT. THE SR.LD.COUNSEL FOR THE ASSESSEE REITERATED THE S UBMISSIONS AS WERE MADE BEFORE THE LD.CIT(A). HE SUBMITTED THAT THE A UTHORITIES BELOW FAILED TO APPRECIATE THAT THE MANAGING DIRECTOR IS RESPONSIBLE FOR NOT MARKETING ONLY, BUT VARIOUS OTHER BUSINESS ASPECTS AND HAS TO DEVOTE TIME PROPORTIONATELY FOR VARIOUS ASPECTS OF BUSINES S. SINCE SALARY EXPENDITURE IS RECOUPED/PAID ON TIME BASIS, MANAGIN G DIRECTORS SALARY AND TRAVELING EXPENDITURE CANNOT BE APPORTIONED ON THE BASIS OF THE TURNOVER OF THE THREE UNDERTAKINGS AS DONE BY THE L EARNED ASSESSING OFFICER. IT WOULD BE FAIR TO ALLOCATE 50% OF HIS TIME TOWARDS MARKETING AND TRAVELING AND REMAINING 50% TOWARDS OTHER ACTIV ITIES. IT IS SUBMITTED BY THE LD.COUNSEL FOR THE ASSESSEE THAT THE APPORTI ONMENT IF AT ALL IS TO BE MADE IT SHOULD BE MADE ON THE BASIS OF NUMBER OF CL IENTS SERVICED BY THE DIFFERENT UNDERTAKINGS. SALARY IS PAID ON THE MEAS URE OF TIME INPUT BY THE EMPLOYEE. HENCE, IT WOULD BE LOGICAL TO ASSUME THA T THE TIME DEVOTED BY THE MANAGING DIRECTOR WOULD BE ON THE BASIS OF THE NUMBER OF CLIENTS SERVICES BY EACH UNDERTAKING. SIMILARLY, THE DIREC TORS TRAVELING EXPENSES ARE ALSO REQUIRED TO BE ASSUMED TO BE SPEN T IN THE RATIO OF THE NUMBER OF CLIENTS SERVICED BY EACH UNDERTAKING. TH E ALLOCATION OF THE EXPENSES ON THE BASIS OF NUMBER OF CLIENTS IS GIVEN IN ANNEXURE-A AT PAGE NO.18 OF THE PAPER-BOOK. 3. ON THE CONTRARY, LD.SR.DR SUPPORTED THE ORDERS O F THE AUTHORITIES BELOW AND SUBMITTED THAT THE EXPENSES HAVE BEEN RIG HTLY APPORTIONED. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 4 - HE SUBMITTED THAT THE EXPENDITURE CANNOT BE APPORTI ONED ON THE BASIS OF NUMBER OF CLIENTS AND IT SHOULD BE ON THE BASIS OF THE TURNOVER. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE AO IN PARAGRAPH NO.3 OF HIS ORDER HAS RECORDED THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S.10B OF THE ACT AMOUNTING TO R S.3,08,31,680/- ON THE BUSINESS PROFITS OF ITS PUNE UNIT WHICH HAS A T URNOVER OF RS.7,18,33,040/-. THE ACCOUNTS OF THE ASSESSEE HAV E BEEN PERUSED AND THE CASE OF THE ASSESSEE WITH REFERENCE TO SECTION 10B HAS BEEN EXAMINED. THE ASSESSEE IS MAINTAINING DIFFERENT SET OF ACCOUN TS IN RESPECT OF ITS PUNE UNIT, AND PARISHRAM UNIT. WHILE COMPARING THE COSTS ASSOCIATED WITH THE UNITS SEPARATELY, IT WAS NOTICED THAT THE ASSESSEE HAS NOT APPORTIONED THE TOP MANAGEMENT COST TO THE SUBSIDIA RY UNITS, I.E. TO ITS PUNE UNIT AND THE PARISHRAM UNIT. THE ASSESSEE WAS ASKED TO SUBMIT THE APPORTIONMENT OF SUCH COST ON THE BASIS OF TURNOVER OF THE INDIVIDUAL UNIT. THE ASSESSEE SUBMITTED A CHART REGARDING THE ALLOCA TION OF EXPENSES DEBITED WHICH IS REPRODUCED IN THE ASSESSMENT ORDER AT PARAGRAPH NO.3. THE AO FURTHER OBSERVED THAT FROM THE CHART IT IS T RANSPIRED THAT THE ASSESSEE HAS SHOWN THE PUNE UNIT TURNOVER AT RS.6,7 7,70,579/- WHICH THE ACTUAL TURNOVER OF THE PUNE UNIT AS PER THE AUDIT R EPORT (FORM NO.56G) SUBMITTED FOR THE PURPOSE OF DETERMINING ELIGIBLE D EDUCTION U/S.10B IS SHOWN AT RS.7,21,35,896/-. HENCE, THE PERCENTAGE O F TURNOVER RATIO WOULD BE 23.44% AS AGAINST 22% SUBMITTED BY THE ASS ESSEE. THE ASSESSEES CHART IS MODIFIED ACCORDINGLY. HE FURTH ER RECORDED THAT THE ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 5 - EXPENSES ALLOCABLE TO PUNE UNIT COMES TO RS.18,80,4 09/-. IT IS RECORDED BY THE AO THAT NO PROPER EXPLANATION HAS BEEN GIVEN BY THE ASSESSEE EXPLAINING THE RATIONALE FOR NOT ATTRIBUTING ANY T OP MANAGEMENT EXPENSE TO PUNE(EXEMPT) UNIT. AFTER CONSIDERING THE EXPLAN ATION, THE AO MADE DISALLOWANCE OF RS.18,64,471/-. THE LD.CIT(A) CONF IRMED THE DISALLOWANCE IN PARAGRAPH NO.2.7 OF HIS ORDER BY OB SERVING AS UNDER:- 2.7. IN VIEW OF THE ABOVE DISCUSSION AND AFTER GOI NG THROUGH THE ASSESSMENT ORDER AND THE SUBMISSION OF THE ASSESSEE IT APPEARS THAT A.O. HAS TAKEN THE APPROPRIATE AND CORRECT FIGURE O F EXPENDITURE FOR PUNE UNIT ON THE VERY BASIS THE ASSESSEE WAS ADOPTI NG FOR APPORTIONMENT OF THE EXPENDITURE. THE A.O. HAS NOT ADDED ON DELETED ANYTHING ADDITIONAL. THE ASSESSEE HAS NOT SUBMITTE D ANYTHING ON THIS POINT AT THE TIME OF FINALIZATION OF THE ASSESSMENT ORDER. NOW, HE IS COMING WITH NEW HYPOTHESIS (AS SUBMITTED IN THE ABO VE PARA) WHICH HE HAS REQUESTED TO BE TAKEN AS BASE FOR THE APPORTION MENT OF EXPENDITURE ON THE ITEM OF SALARY OF M.D. & TRAVEL EXPENDITURE OF DIRECTOR. THE ABOVE BASIS THAT IT WOULD BE LOGICAL TO ASSUME THA T THE TIME DEVOTED BY THE MANAGING DIRECTOR WOULD BE ON THE BASIS OF THE NUMBER OF CLIENTS SERVICED BY EACH UNDERTAKING AND DIRECTORS TRAVELI NG EXPENSES ARE ALSO REQUIRED TO BE ASSUMED TO BE SPENT IN THE RATI O OF THE NUMBER OF CLIENTS SERVICED BY EACH UNDERTAKING DOES NOT SOUN D LOGICAL AT ALL. ASSESSEE HAS CHANGED HIS STAND ONLY WHEN THE A.O. H AS PINPOINTED THE MISTAKES AND AS RESULT OF THAT, THE DEDUCTION U/S.1 0B OF THE I.T.ACT IS REDUCED BY RS.18,64,471/-. ON THE BASIS OF THE ABO VE FACTS, I AM CONVINCED THAT THE STAND TAKEN BY THE A.O. IS CORRE CT AND PERFECT AND THE PLEA TAKEN BEFORE ME BY THE APPELLANT HAS NO SOUND BASE. IN MY OPINION, THE A.OS STAND IS PERFECT AND SCIENTIFIC AND ALSO ASSESSEE HIMSELF HAD TAKEN THE SAME BASIS OF ASCERTAINING TH E EXPENDITURE IN ALL THE THREE UNITS IN RESPECT OF THE SALARY OF THE MD AND TRAVELING EXPENSES OF THE DIRECTORS IN THE RETURN OF INCOME. THEREFOR E, THE ADDITION MADE OF RS.18,64,471/- BY THE A.O. DESERVES TO BE CONFIRMED . THIS GROUND OF THE ASSESSEE IS DISMISSED. 4.1. AFTER CONSIDERING ALL ASPECTS OF THE MATTER, I N OUR CONSIDERED VIEW, THE AUTHORITIES BELOW HAVE NOT TAKEN INTO THE ACCOU NT THE EXPLANATION OF ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 6 - THE ASSESSEE THAT THE MANAGING DIRECTOR IS RESPONSI BLE FOR NOT MAKETING ONLY, BUT ALSO VARIOUS OTHER BUSINESS ASPECTS AND H AS TO DEVOTE TIME PROPORTIONATELY FOR VARIOUS ASPECTS OF BUSINESS. THEREFORE, THE ORDER OF THE LD.CIT(A) ON THIS ISSUE IS SET ASIDE AND THE IS SUE IS RESTORED BACK TO THE FILE OF LD.CIT(A) FOR FRESH DECISION. THE LD.C IT(A) SHALL DECIDE THIS ISSUE BY WAY OF SPEAKING ORDER ON THE SUBMISSION OF THE ASSESSEE. THUS, GROUND OF ASSESSEES APPEAL IS ALLOWED FOR STATISTI CAL PURPOSES. 5. GROUND NO.2 IS AGAINST THE CONFIRMATION OF DISAL LOWANCE TO THE EXTENT OF RS.2,23,450/- MADE U/S.14A OF THE ACT. 5.1. BRIEFLY STATED FACTS ON THIS ISSUE ARE THAT TH E AO WHILE FRAMING THE ASSESSMENT U/S.143(3) OF THE ACT OBSERVED THAT ON V ERIFICATION OF THE STATEMENT OF TOTAL INCOME, IT SEEN THAT THE ASSESSE E HAS EARNED DIVIDEND INCOME FROM MUTUAL FUNDS AMOUNTING TO RS.25,56,624/ - AND INCOME FROM TAX FREE BONDS AMOUNTING TO RS.30,29,637/- WHICH HA S BEEN CLAIMED EXEMPT. HE FURTHER OBSERVED THAT ALTHOUGH THE FINA NCIAL CHARGES OF THE COMPANY ARE NEGLIGIBLE, THERE IS NO DENYING THE FAC T THAT THE ADMINISTRATIVE RESOURCES ARE UTILIZED FOR THE PURPO SE OF HANDLING THE INVESTMENT WHICH IS TO THE EXTENT OF RS.19.43 CRORE S AT THE END OF THE YEAR. IN THE CASE OF A SITUATION, WHERE THE ASSESS EE HAS CLAIMED THAT NO EXPENDITURE IS INCURRED IN RELATION TO AN INCOME WH ICH DOES NOT FORM PART OF THE TOTAL INCOME AS PER THE PROVISIONS OF THE AC T, RULE 8D PROVIDES A WAY OF COMPUTING EXPENDITURE ATTRIBUTABLE TO THE TA X FREE INCOME EARNED BY THE ASSESSEE. HENCE, THE AO INVOKED THE PROVISI ONS OF RULE 8D OF THE INCOME TAX RULES, 1962 AND MADE ADDITION OF RS. 8,78,899/-. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 7 - HOWEVER, LD.CIT(A) ACCEPTED THE CONTENTION OF THE A SSESSEE THAT RULE 8D IS NOT RETROSPECTIVE AND APPLICABLE FROM THE AY 200 8-09, BUT RESTRICTED THE DISALLOWANCE TO THE EXTENT OF RS.2,23,450/- ON ACCOUNT OF THE ADMINISTRATIVE EXPENSES. 6. THE LD.COUNSEL FOR THE ASSESSEE REITERATED THE S UBMISSIONS AS WERE MADE BEFORE THE LD.CIT(A) AND SUBMITTED THAT THE DI SALLOWANCE IS MADE ON ACCOUNT OF ADMINISTRATIVE EXPENSES PURPORTED TO HAVE BEEN INCURRED FOR EARNING THE EXEMPT INCOME. HE SUBMITTED THAT B EFORE MAKING ANY DISALLOWANCE U/S.14A OF THE ACT, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF THE ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELAT ED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUC H SATISFACTION MUST BE ARRIVED AT AN OBJECTIVE BASIS. HE FURTHER SUBMIT TED THAT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELAT IONSHIP WITH THE TAX EXEMPT INCOME. IN SUPPORT OF HIS CONTENTION, LD. COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES, 323 ITR 158 (P&H) AND DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF WALFORT SH ARES & STOCK BROKERS LTD. VS. ITO, 310 ITR 421 (BOM). HE SUBMIT TED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE COORDIN ATE BENCH (ITAT BENCH A AHMEDABAD) RENDERED IN THE CASE OF ACIT VS. TORRENT PHARMACEUTICALS LTD. IN ITA NOS.1869 & 1881/AHD/200 9 FOR AY 2005- 06, DATED 31/05/2013 REPORTED AT (2012) 23 TAXMANN. COM 55(AHD.). HE SUBMITTED THAT THE COORDINATE BENCH HAS FOLLOWED TH E DECISION OF ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 8 - HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. CA THOLIC SYRIAN BANK LTD. REPORTED AT (2012) 207 TAXMAN 2 :: (2011) 9 TA XMANN.COM 148 (KER.)(MAG). 6.1. ON THE CONTRARY, LD.SR.DR SUPPORTED THE ORDER OF THE AO. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE AO HAS MADE THE DISALLOWANCE BY IN VOKING THE RULE 8D OF THE IT RULES, 1962. THIS ISSUE HAS BEEN SETTLED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO.LTD. VS. DCIT REPORTED AT (2010)43 DTR 177 (BOM.), WHEREIN T HE HONBLE BOMBAY HIGH COURT HAS HELD THAT PROVISIONS OF SUB-S ECTIONS (2) & (3) OF SECTION 14A AND RULE 8D ARE PROSPECTIVE, AND NOT RE TROSPECTIVE, IN NATURE AND THEREFORE, WOULD APPLY FROM ASSESSMENT YEAR 200 8-09. THE CASE IN HAND IS AY 2006-07, THEREFORE, IN OUR CONSIDERED VI EW, THE AO WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF RULE 8D OF THE IT RULES,1962 WHICH HAS BEEN RIGHTLY HELD SO BY THE LD.CIT(A) AND THE FINDING OF THE LD.CIT(A) IS JUSTIFIED AND THE SAME IS HEREBY UPHEL D. HOWEVER, LD.CIT(A) AS WELL AS AO MADE THE DISALLOWANCE ON TH E PRESUMPTION THAT THE MANAGEMENT AND MAINTENANCE OF SUCH INVESTMENT A LWAYS ENTAIL CERTAIN ADMINISTRATIVE EXPENDITURE SUCH AS TELEPHON E EXPENSES, ETC. THE HONBLE COORDINATE BENCH WHILE DECIDING THE SIMILAR ISSUE IN THE CASE OF ACIT VS. TORRENT PHARMACEUTICALS LTD.(SUPRA) FOLLOW ED THE DECISION OF HONBLE KERALA HIGH COURT RENDERED IN THE CASE OF C IT VS. CATHOLIC SYRIAN BANK (SUPRA), WHEREIN THE HONBLE HIGH COURT HAS HELD THAT SO FAR AS DISALLOWANCE OF ADMINISTRATIVE EXPENSE IS CONCER NED, THERE ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 9 - IS NO PRECIOUS FORMULA OR PROPORTIONATE DISALLOWANC E, NO DISALLOWANCE CALLED FOR, FOR PROPORTIONATE ADMINISTRATIVE COST, ATTRIBUTABLE TO EARNING OF TAX FREE INCOME UNTIL RULE 8D CAME INTO FORCE. IT WAS FURTHER HELD BY THE HONBLE HIGH COURT THAT THE PROPORTIONATE DISALLOWA NCE UNDER SECTION 14A SHOULD BE LIMITED TO ONLY INTEREST LIABILITY AN D NOT OVERHEAD OR ADMINISTRATIVE EXPENDITURE, WHICH SHOULD BE CONSIDE RED FOR DISALLOWANCE UNDER RULE 8D FROM AY 2007-08. THE DECISION OF H ONBLE HIGH COURT OF KERALA AND DECISION OF HONBLE COORDINATE BENCH WERE NOT CONSIDERED BY THE LD.CIT(A). THEREFORE, RESPECTFULLY FOLLOWI NG BOTH THE DECISIONS, WE DIRECT THE AO TO DELETE THE DISALLOWANCE MADE ON ACCOUNT OF THE ADMINISTRATIVE EXPENSES. THUS, THIS GROUND OF THE ASSESSEES APPEAL IS PARTLY ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE, I.E. ITA NO.421/AHD/2012 FOR AY 2006-07 IS PARTLY ALLOWED FOR STATISTICAL PU RPOSES. 9. NOW, WE TAKE UP THE REVENUES APPEAL, I.E. ITA NO.2036/AHD/2012 FOR AY 2007-08, WHEREIN THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS RES TRICTED THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES INCURRED TO EARN EXEMPT INCOME TO THE EXTENT OF 4% WITHOUT GIVING AN Y BASIS FOR RESTRICTING THE DISALLOWANCE TO 4%. THERE IS NO DEN YING THE FACT THAT THE ADMINISTRATIVE RESOURCES ARE UTILIZED FOR THE PURPO SE OF HANDLING THE INVESTMENT WHICH IS TO BE EXTENT OF RS.24.31 CRORES AT THE END OF THE YEAR. HOWEVER, WITHOUT ANY PROPER JUSTIFICATION OR ANY BASIS, THE LD.CIT(A) CHOOSE TO RESTRICT THE DISALLOWANCE TO 4% OF THE TOTAL EXEMPT INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 10 - 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD.CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE REST ORED TO THE ABOVE EXTENT. 9.1. THE ONLY EFFECTIVE GROUND IS AGAINST IN RESTRI CTING THE DISALLOWANCE TO THE EXTENT OF 4% AMOUNTING TO RS.1,72,312/- U/S. 14A OF THE ACT. 9.2. BRIEFLY STATED FACTS ARE THAT THE AO HAS OBSER VED THAT ON VERIFICATION OF THE STATEMENT OF TOTAL INCOME, IT I S SEEN THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME FROM MUTUAL FUNDS AT RS. 14,61,182/- AND INCOME FROM TAX FREE BONDS AT RS.28,46,612/- WHICH HAS BEEN CLAIMED EXEMPT. IN VIEW OF SPECIFIC PROVISIONS OF 14A OF T HE IT ACT, 1961, THE ASSESSEE WAS REQUESTED TO JUSTIFY THE CLAIM FOR EXP ENSES VIS--VIS EARNING OF EXEMPT INCOME. THE ASSESSEE HAS SUBMITTED THAT THE DIVIDEND IS REALIZED FROM SHARES OF SUBSIDIARY COMPANY WHERE TH E INVESTMENT HAS BEEN MADE OUT OF THE SURPLUS FUNDS. IN THE CASE OF OTHER INVESTMENTS THERE IS NO BORROWING MADE. THERE IS NO INTEREST P AYMENT. NO ADDITIONAL PERSON IS EMPLOYED FOR MAKING THE INVESTMENT OR DEP OSITING THE CHEQUES. HENCE, THERE IS NO EXPENSE RELATED TO INFRASTRUCTUR E. THE ASSESSEES THIS CONTENTION IS NOT FOUND ACCEPTABLE. ALTHOUGH THE F INANCIAL CHARGES OF THE COMPANY ARE NEGLIGIBLE, THERE IS NO DENYING THE FAC T THAT ADMINISTRATIVE RESOURCES ARE UTILIZED FOR THE PURPOSE OF HANDLING THE INVESTMENT WHICH IS TO BE THE EXTENT OF RS.24.31 CRORES AT THE END OF T HE YEAR. IN CASE OF A SITUATION WHERE THE ASSESSEE HAS CLAIMED THAT NO EX PENDITURE IS INCURRED IN RELATION TO AN INCOME WHICH DOES NOT FORM PART O F THE TOTAL INCOME AS PER THE PROVISIONS OF THIS ACT, RULE 8 D PROVIDES A WAY OF COMPUTING EXPENDITURE ATTRIBUTABLE TO THE TAX FREE INCOME EAR NED BY THE ASSESSEE. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 11 - HENCE, THE AO INVOKED THE PROVISIONS OF RULE 8D, HO WEVER, THE LD.CIT(A) RESTRICTED TO THE DISALLOWANCE OF RS.1,72 ,312/-. 9.3. THE SUBMISSIONS OF THE LD.COUNSEL FOR THE ASSE SSEE WERE SAME AS WERE IN THE ITA NO.421/AHD/2010(SUPRA). THE LD.SR .DR SUBMITTED THAT THE PRESENT AY IS 2007-08, THEREFORE AS PER THE DEC ISION OF HONBLE KERALA HIGH COURT RENDERED IN THE CASE OF CIT VS. C ATHOLIC SYRIAN BANK LTD. (2012) 207 TAXMAN 2, THE PROVISIONS OF SECTION 14A ARE APPLICABLE. HE SUPPORTED THE ORDER OF THE AO. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. SO FAR THE APPLICABILITY OF RULE 8D IS CONCERNED, I T IS SETTLED NOW THAT THE RULE 8D IS APPLICABLE FROM THE AY 2008-09 AS PER TH E JUDGEMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF G ODREJ & BOYCE MFG.LTD. VS. CIT REPORTED IN 328 ITR 81. THE LD.CI T(A) HAS DECIDED THIS ISSUE BY INVOKING THE PROVISIONS OF SECTION 14 A OF THE ACT AND ON THE BASIS OF PRESUMPTION THAT SOME AMOUNT WAS INCURRED IN RELATION TO THE ADMINISTRATIVE AND OTHER EXPENSES FOR EARNING THE E XEMPT INCOME. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE LD.CIT(A), SINCE FOR EARNING OF SUCH EXEMPT INCOME, THE ASSESS EE OUGHT TO HAVE INCURRED ADMINISTRATIVE EXPENDITURE IN THE FORM OF TELEPHONE AND OTHER INFRASTRUCTURE, HENCE, THE DECISION OF THE LD.CIT(A ) IS HEREBY UPHELD. THUS, THIS GROUND OF REVENUES APPEAL IS REJECTED. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 12 - 11. IN THE RESULT, THE APPEAL OF THE REVENUE, I.E. ITA NO.2036/AHD/2012 IS DISMISSED. 12. IN ASSESSEES CROSS-OBJECTION NO.215/AHD/2012 FOR AY 2007-08 (ARISING OUT OF ITA NO.2036/AHSD/2012), THE ASSESSE E HAS RAISED THE FOLLOWING GROUNDS:- 1 (I) THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN C ONFIRMING THE DISALLOWANCE OF RS.1,72,312/- U/S.14A AT 4% OF RS.1 ,72,312/- U/S.14A AT 4% OF RS.28,46,612 + RS.14,61,182/- DISR EGARDING FACTS AND SUBMISSIONS OF THE RESPONDENTS AS AGAINST THE DISALLOWANCE OF RS.12,15,573/- U/S.14A MADE BY THE AO COMPUTING THE SAME UNDER RULE 8D. (II) THE RESPONDENTS SUBMIT THAT ON THE FACTS AND L AW, THERE IS NO QUESTION OF ANY DISALLOWANCE U/S.14A AND HENCE THE DISALLOWANCE OF RS.1,72,312/- BE DELETED. 2(I) THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN REVISING THE CLAIM U/S.10B ON THE BASIS OF TURNOVER VIDE PARA 2.4 AND PARA 2.5 AND 2.6 OF THE APPEAL ORDER AS AGAINST THE DISALLOWANCE OF RS.83,22,258/- MADE BY AO WITHOUT APPRECIATING THE FACTS AND SUBMISSIONS OF THE RESPONDENTS. (II) THE RESPONDENTS SUBMIT THAT THE CLAIM U/S.10B OF TH E RESPONDENTS FOR DEDUCTION OF RS.4,97,73,807/- BE AC CEPTED AS AGAINST THE REVISED AMOUNT OF DEDUCTION U/S.10B ON THE BASIS OF TURNOVER VIDE PARA 2.4 AND PARA 2.5 AND PARA 2.6 OF THE APPEAL ORDER. 3. THE LEARNED CIT(A) HAS ERRED IN CONSIDERING THE CHARGING OF INTEREST 234-B AS CONSEQUENTIAL IN NATURE AND DISMI SSING THIS GROUND OF THE APPEAL THOUGH THE INTEREST CHARGED U/ S.234-B WAS NOT ACCORDING TO LAW. ITA NO.421/AHD/12-AY 2006-07(BY ASSESSEE) & ITA NO.2036/AHD/2012-AY 2007-08(BY REVENUE) CO NO.215/AHD/12-AY 2007-08 (BY ASSESSEE) M/S. E-INFOCHIPS LTD. VS. ADDL.CIT - 13 - 12.1. SINCE WE HAVE TAKEN A VIEW IN REVENUES APPEA L (ITA NO.2036/AHD/2012) THAT THE ACTION OF THE LD.CIT(A) WAS JUSTIFIED, HENCE THE CROSS-OBJECTION AS FILED BY THE ASSESSEE IS REJ ECTED. 13. IN THE COMBINE RESULT, ASSESSEES APPEAL (ITA N O.421/AHD/2012) FOR AY 2006-07 IS PARTLY ALLOWED FOR STATISTICAL PURPOS ES, WHEREAS REVENUES APPEAL AND ASSESSEES CROSS-OBJECTION BOTH ARE DISM ISSED. ORDER PRONOUNCED IN COURT ON THE DATE MENTIONED HER EINABOVE AT CAPTION PAGE SD/- SD/- ( .. ) (' #$) ( N.S. SAINI ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 31/ 12 /2013 /'.., .../ T.C. NAIR, SR. PS , & 0$1 21+$ , & 0$1 21+$ , & 0$1 21+$ , & 0$1 21+$/ COPY OF THE ORDER FORWARDED TO : 1. 34 / THE APPELLANT 2. 0534 / THE RESPONDENT. 3. !! $ '6 / CONCERNED CIT 4. '6() / THE CIT(A)-VIII, AHMEDABAD 5. 1 #7 0$ , , / DR, ITAT, AHMEDABAD 6. 789 :% / GUARD FILE. ,' ,' ,' ,' / BY ORDER, 51$ 0$ //TRUE COPY// ; ;; ;/ // / !< !< !< !< ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD