Goyal Ishwarchand Kishorilal, Pune V. Jt. CIT, Range-4, Pune

ITA 422/PUN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79924 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Question of law
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.422/PN/2013 (ASSESSMENT YEAR 2009-10) SHIR GOYAL ISHWARCHAND KISHORILAL 100, EAST STREET GALLERIA, 2421, EAST STREET, CAMP PUNE -411004, MAHARASHTRA PAN NO.ADTPG5614N .. APPELLANT VS. JCIT, RANGE-4, PUNE .. RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI SANTOSH KUMAR DATE OF HEARING : 25-06-2014 DATE OF PRONOUNCEMENT : 26-06-2014 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 10-09-2012 OF THE CIT(A)-II, PUNE RELATING TO ASSES SMENT YEAR 2009-10. 2. AT THE TIME OF THE HEARING, THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS GROUND OF APPEAL NO.2 RELATING TO DISALLOWANC E OF RS.1,50,000/- BEING VEHICLE EXPENSES FOR PERSONAL USE. THE LD. DEPARTM ENTAL REPRESENTATIVE HAS NO OBJECTION FOR THE SAME. ACCORDINGLY, GROUND NO.2 IS DISMISSED AS NOT PRESSED. 3. GROUND OF APPEAL NO.1 RELATES TO THE ORDER OF TH E CIT(A) SUSTAINING THE DISALLOWANCE OF RS.5,86,962/- U/S.14A OUT OF DI SALLOWANCE OF RS.25,10,262/- BY THE ASSESSING OFFICER. 2 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS AN INDIVIDUAL AND IS ENGAGED IN THE BUSINESS OF PROMOTERS AND BUILDERS, TRADING IN FUTURES AND OPTIONS AND SHARES. HE FILED HIS RETURN OF INCOME ON 27-09-2009 DECLARING TAXABLE INCOME OF RS.12,27,86,500/-. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER ASKED THE ASSESSE E TO EXPLAIN AS TO WHY DISALLOWANCE U/S.14A SHOULD NOT BE MADE AS PER RULE 8D. THE ASSESSEE SUBMITTED THAT NO EXPENDITURE HAS BEEN INCURRED TO EARN TAX FREE INCOME. IT WAS EXPLAINED THAT ALL THE INTEREST BEARING FUNDS H AVE BEEN USED TO EARN INTEREST AND ULTIMATELY THERE IS NET INCOME FROM IN TEREST. 4.1 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THA T THE ASSESSEE HAS MADE SUBSTANTIAL EQUITY INVESTMENT IN A LARGE NUMBER OF COMPANIES. THE ASSESSEE IS HAVING A LARGE SUM OF BORROWED FUNDS AN D INTEREST EXPENDITURE IS TO THE TUNE OF RS.79,46,884/-. THE ASSESSEE HAS NOT MAINTAINED SEPARATE FUNDS FOR INVESTMENTS YIELDING TAX FREE INCOME. TH EREFORE, IT CANNOT BE SAID THAT NO BORROWED FUNDS WERE USED FOR THE PURPO SE OF MAKING INVESTMENT WHICH YIELD TAX FREE INCOME. FURTHER, T HE ASSESSEE MUST HAVE INCURRED ADMINISTRATIVE EXPENSES SUCH AS BROKERAGE, DOCUMENTATION CHARGES, DEMAT CHARGES, MANPOWER COST ETC. INVOLVED IN HANDLING THESE INVESTMENTS. ACCORDING TO THE ASSESSING OFFICER, A LL THESE EXPENSES GET MERGED WITH THE EXPENSES CLAIMED BY THE ASSESSEE. IN VIEW OF THE ABOVE AND APPLYING THE PROVISIONS OF SECTION 14A R.W. RUL E 8D, THE ASSESSING OFFICER WORKED OUT THE DISALLOWANCE OF RS.25,10,262 /- U/S.14A WHICH IS AS UNDER : DISALLOWANCE U/S.14A ON ACCOUNT OF INTEREST EXPENSES - 19,23,300 +0.5% OF THE AVERAGE VALUE OF INVESTMENT - 5,86, 962/- ----------------- TOTAL 25,10,262 3 5. IN APPEAL THE LD.CIT(A) DELETED THE ADDITION OF RS.19,23,300/- U/S.14A BEING INTEREST EXPENSES FOR WHICH THE REVEN UE IS NO IN APPEAL. THEREFORE, WE ARE NOT CONCERNED WITH THE SAME. HE H OWEVER UPHELD THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING RS.5, 86,962/- BY OBSERVING AS UNDER : 38. SO FAR AS THE DISALLOWANCE UNDER SUB-RULE 2(2)(I I) OF RS.5,86,962/- IS CONCERNED, THE APPELLANT IS SEEN TO BE IN RECEIPT OF SOME EXEMPT INCOME AND THE INVESTMENT MADE HAS BEEN HELD BY THE APPELLANT, W HICH ALSO IS LIKELY TO YIELD TAX FREE INCOME TO THE APPELLANT. THE NOTING S OF THE A.O. THAT EXPENSES INCURRED ON ADMINISTRATION, BROKERAGE, DOCUMENTATION CHARGES, DEMAT CHARGES, MANPOWER COST, HANDLING AND SO ON WERE EMBEDD ED IN THE EXPENSES CLAIMED APPEAR TO BE IN ORDER. THE APPELLAN T HAS ALSO NOT BEEN ABLE TO BRING ON RECORD ANY SUCH MATERIAL CONTRARY T O THE FINDINGS OF THE A.O. IN THIS REGARD. THEREFORE, THE DISALLOWANCE UNDER RU LE8D(2)(III) OF RS.5,86,962/- IS LIABLE TO BE UPHELD. 6. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS 5, 86,962 UNDER S ECTION 14A OF THE ACT WHICH HAS BEEN WORKED OUT BY THE LEARNED ASSESSING OFFICE R [AO] AT THE RATE OF 0.5% OF AVERAGE VALUE OF INVESTMENTS OF UNLISTED SHARES, AS PER THE MECHANISM PROVIDED UNDER RULE 8 D SUB RULE 2(III) OF INCOME T AX RULES. 1.1 THE LEARNED CIT (A) ERRED IN HOLDING THAT OTHE R EXPENDITURE DISALLOWED BY THE LEARNED AO UNDER RULE 8D SUB RULE 2 (III) AT THE RATE OF 0.5% IS CORRECT, WITHOUT APPRECIATING THE FACT AND SUBMISSION MADE B Y THE APPELLANT, THAT THERE IS NO MOVEMENT IN THE INVESTMENTS OF UNLISTED SHARE S OF THE APPELLANT, AND HENCE OTHER EXPENDITURE LIKE ADMINISTRATION CHARGES , BROKERAGE, DE-MAT CHARGES HAVE NOT BEEN INCURRED AT ALL. IN VIEW OF T HIS DISALLOWANCE CANNOT BE SUSTAINED. 1.2 THE LEARNED CIT (A) SHOULD HAVE APPRECIATED TH E FACT THAT DURING THE CURRENT YEAR THERE IS NO DIVIDEND INCOME FROM UNLIS TED SHARES WHICH DOES NOT FORM PART OF TOTAL INCOME; THEREFORE, THE DISALLOWA NCE MADE BY THE LEARNED AO CANNOT BE SUSTAINED. 7. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PA GE 23 OF THE PAPER BOOK DREW THE ATTENTION OF THE BENCH TO THE SHARE T RADING ACCOUNT AND SUBMITTED THAT THE ASSESSEE HAS EARNED DIVIDEND INC OME OF RS.12,49,008.74 IN SHARE TRADING ACCOUNT. REFERRING TO PAGE 25 & 2 6 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE DETAILS OF I NVESTMENT IN SHARES AS ON 4 31-03-2009 AND SUBMITTED THAT OUT OF THE TOTAL AMOU NT OF RS.9.47 CRORES AN AMOUNT OF RS.8,32,69,490/- IS INVESTED IN COROLLA R EALTY EQUITY SHARES. REFERRING TO THE BALANCE SHEET FOR THE YEAR ENDING 31-03-2008 HE SUBMITTED THAT THE INVESTMENT IN COROLLA REALTY EQUITY SHARES WAS SHOWN AT RS.8,32,69,490/-. HE SUBMITTED THAT THE MAJORITY O F THE INVESTMENT IN SHARES ARE OF PRIVATE COMPANIES AND THE ASSESSEE HA S NOT RECEIVED ANY DIVIDEND OUT OF THOSE SHARES. FURTHER, ALL THE SHA RES ARE ALSO HELD IN PHYSICAL FORM AND NOT IN THE DEMAT ACCOUNT. 7.1 REFERRING TO THE DECISION OF THE HONBLE ALLAHA BAD HIGH COURT IN THE CASE OF CIT VS. SHIVAM MOTORS PVT. LTD. VIDE ITA NO .88/2014 ORDER DATED 05-05-2014 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD THAT IN ABSENCE OF ANY TAX FREE INCOME THE CORRESPONDING EXPENDITURE SHOULD NOT BE WORKED OUT FOR DISALLOWAN CE. ACCORDINGLY, THE ORDER OF THE TRIBUNAL DELETING THE DISALLOWANCE MAD E U/S.14A WAS UPHELD. REFERRING TO THE DECISION OF THE HONBLE PUNJAB & H ARYANA HIGH COURT IN THE CASE OF CIT VS. LAKHANI MARKETING VIDE ITA NO.9 70/2008 ORDER DATED 02-09-2014 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS UPHELD THE DECISION OF THE DELHI BENCH OF THE T RIBUNAL IN DELETING THE DISALLOWANCE U/S.14A. IT WAS HELD IN THE SAID DECI SION OF THE TRIBUNAL THAT UNTIL AND UNLESS THERE IS RECEIPT OF EXEMPTED INCOM E FOR THE CONCERNED ASSESSMENT YEARS PROVISIONS OF SECTION 14A CANNOT B E INVOKED. REFERRING TO THE DECISION OF THE HONBLE GUJARAT HIGH COURT I N THE CASE OF CIT VS. CORRTECH ENERGY PVT. LTD. VIDE TAX APPEAL NO.239/20 14 ORDER DATED 24- 03-2014 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS UPHELD THE DECISION OF THE TRIBUNAL IN DELETING THE DISALLOWANCE U/S.14A SINCE NO CLAIM WAS MADE BY THE ASSESSEE FOR EXEMPTI ON OF ANY INCOME FROM 5 PAYMENT OF TAX. HE SUBMITTED THAT DURING THE PRECE DING AS WELL AS SUCCEEDING ASSESSMENT YEARS THERE IS ALSO NO DISALL OWANCE U/S.14A. HE ACCORDINGLY SUBMITTED THAT SINCE THE ASSESSEE HAS N OT RECEIVED ANY DIVIDEND INCOME OUT OF THE SHARE HELD AS INVESTMENT AND SINC E NO DISALLOWANCE HAS BEEN MADE IN THE PRECEDING AS WELL AS SUCCEEDING AS SESSMENT YEARS, THEREFORE, DISALLOWANCE OF RS.5,86,962/- SUSTAINED BY THE CIT(A) SHOULD BE DELETED. HE ALSO RELIED ON THE FOLLOWING DECISION FOR THE PROPOSITION THAT NO DISALLOWANCE U/S.14A CAN BE MADE IN ABSENCE OF RECE IPT OF ANY TAX FREE INCOME : I. KALYANI STEELS LTD. VS. ACIT ITA NO.1733/PN/201 2 II. ACIT VS. M/S. MAGARPATTA TOWNSHIP DEVELOPMENT & CONSTRUCTION CO. LTD. IT A NO.2114/PN/2012 8. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSING O FFICER DISALLOWED AN AMOUNT OF RS.25,10,262/- U/S.14A ON THE GROUND THAT BORROWED FUNDS ARE DIVERTED FOR INVESTMENT IN SHARES, THE DIVIDEND INC OME OF WHICH IS EXEMPT FROM TAX. THEREFORE, THE ASSESSING OFFICER DISALLO WED AN AMOUNT OF RS.19,23,300/- OUT OF THE INTEREST EXPENSES U/S.14A . THE ASSESSING OFFICER FURTHER DISALLOWED AN AMOUNT OF RS.5,86,962/- OUT O F THE ADMINISTRATIVE EXPENSES ON THE GROUND THAT THE ASSESSEE MIGHT HAVE INCURRED EXPENSES LIKE BROKERAGE, DOCUMENTATION CHARGES, DEMAT CHARGES, MA NPOWER COST ETC. WE FIND THE CIT(A) DELETED THE DISALLOWANCE OUT OF THE INTEREST EXPENSES FOR WHICH THE REVENUE IS NOT IN APPEAL BEFORE US. SO F AR AS THE DISALLOWANCE OF 6 RS.5,86,962/- BY THE ASSESSING OFFICER BEING 0.5% O F THE AVERAGE VALUE OF INVESTMENT TOWARDS ADMINISTRATIVE EXPENSES ETC. IS CONCERNED WE FIND THE CIT(A) SUSTAINED THE SAME. 9.1 IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT ALL THE SHARES ARE HELD IN PHYSICAL FORM AND NOT IN DEMAT A CCOUNT AND NO DIVIDEND INCOME HAS BEEN RECEIVED ON ACCOUNT OF SHARES HELD UNDER THE HEAD INVESTMENT. WHATEVER DIVIDEND WAS RECEIVED WAS I N THE SHARE TRADING ACCOUNT. THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESE NTATIVE. WE FIND VARIOUS COURTS HAVE HELD THAT DISALLOWANCE U/S.14A CANNOT BE MADE WHEN THERE IS NO TAX FREE INCOME. 9.2 WE FIND THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF SHIVAM MOTORS PVT. LTD.(SUPRA) HAS OBSERVED AS UNDER : AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAP TER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCO ME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE W HICH IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FO R THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CO RRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW O F THE C1T(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE R ISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOW ANCE OF RS.2,03,752/- MADE BY THE ASSESSING OFFICER WAS IN ORDER. 9.3 WE FIND THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LAKHANI MARKETING (SUPRA) HAS ALSO TAKEN SIMILAR VI EW. THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSE SSEE ALSO SUPPORTS THE ABOVE CONTENTION. IT IS ALSO AN UNDISPUTED FACT TH AT THE ASSESSING OFFICER IN THE ORDERS PASSED U/S.143(3) FOR A.Y. 2008-09 AND 2 010-11 (COPIES OF 7 WHICH ARE PLACED AT PAPER BOOK PAGES 1 TO 4) HAS NO T MADE ANY DISALLOWANCE U/S.14A OF THE INCOME TAX ACT. 9.4 SINCE IN THE INSTANT CASE THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME OUT OF THE SHARES HELD AS INVESTMENT AND SIN CE NO DISALLOWANCE U/S.14A HAS BEEN MADE IN THE PRECEDING AS WELL AS S UCCEEDING ASSESSMENT YEARS, THEREFORE, WE AGREE WITH THE CONTENTION OF T HE LD. COUNSEL FOR THE ASSESSEE THAT NO DISALLOWANCE U/S.14A CAN BE MADE U NDER THE FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, THE ORDER OF THE CIT(A) IS SET- ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELE TE THE DISALLOWANCE OF RS.5,86,962/- MADE U/S.14A. GROUND RAISED BY THE A SSESSEE IS ACCORDINGLY ALLOWED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26-06-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. P ANDA) JUDICIAL MEMBER ACCOUNT ANT MEMBER PUNE DATED: 26 TH JUNE, 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-II, PUNE 4. THE CIT-II, PUNE 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE