BHOLANATH DEVELOPERS LTD, MUMBAI V. ACIT 14(1)(1),

ITA 4257/MUM/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0300 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2012-2013
• Appeal Filed On: 21-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -FBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMB ER AND C. N. PRASAD,JUDICIAL MEMBER ./I.T.A./4257/MUM/2016, /ASSESSMENT YEAR: 2012-13 M/S. BHOLENATH DEVELOPERS LTD. 501, 5 TH FLOOR, SHIV ASHISH PLOT NO.10, 19 TH ROAD, CHEMBUR, MUMBAI-400 071. PAN:AAACB 2050 Q VS. ACIT-14(1)(1) MUMBAI. ( /APPELLANT) ( / RESPONDENT) / REVENUE BY: SMT. POOJA SWAROOP /ASSESSEE BY: SHRI DEVENDRA JAIN / DATE OF HEARING: 21/06/2017 / DATE OF PRONOUNCEMENT: 16/08/2017 , / PER RAJENDRA A.M. - CHALLENGING THE ORDER, DATED 29/03/2016 OF THE CIT( A)-22,MUMBAI,THE ASSESSEE HAS FILED PRESENT APPEAL.THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF CONSTRUCTION ACTIVITY. IT FILED ITS RETURN OF INCOME, ON 27/09/2012,DECLARING INCOME AT RS.79.98 LAKHS.THE ASSESSING OFFICER (AO)COMPLETED ASSESSMENT U/S.143(3) OF THE ACT,DETE RMINING ITS INCOME AT RS.88.53 LAKHS. 2. SOLITARY GROUND OF APPEAL IS ABOUT ADDITION MADE U /S. 14A OF THE ACT R.W.R.8D OF THE INCOME TAX RULES,1962(RULES),AMOUNTING TO RS.8.54 L AKHS.DURING THE ASSESSMENT PROCEED - INGS THE AO FOUND THAT THE ASSESSEE HAD SHOWN DIVID END INCOME OF RS.1.46 LAKHS AND HAD CLAIMED THE SAME AS EXEMPT,THAT IT HAD DISALLOWED A N AMOUNT OF RS.21,569/- ON ITS OWN.THE AO OBSERVED THAT WHILE COMPUTING THE DISALLOWANCE U /S. 14A,IT HAD NOT CONSIDERED THE INVESTMENT MADE IN THE PARTNERSHIP FIRM FROM WHICH IT HAD EARNED SHARE OF PROFIT THAT WAS CLAIMED AS EXEMPT.HE DIRECTED IT TO EXPLAIN AS TO W HY THE DISALLOWANCE U/S. 14A R.W.R.8D OF THE RULES SHOULD NOT BE MADE WITH REGARD TO EXEMPT INCOME FROM PARTNERSHIP FIRM. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE,THE AO W ORKED OUT DISALLOWANCE AT RS.8,76,456/- HOLDING IT AS BEING ATTRIBUTABLE IT TO EXEMPT INCO ME. AS THE ASSESSEE HAD ALREADY DISALLOWED AN AMOUNT OF RS.21,569/-,HE MADE A DISALLOWANCE OF RS.8.54 LAKHS. 3. AGGRIEVED BY ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA)AND MADE ELABORATE SUBMISSIONS.IT ALS O RELIED UPON CERTAIN CASE LAWS.AFTER CONSIDERING THE AVAILABLE MATERIAL,HE HELD THAT THE ASSESSEE HAD CLAIMED EXEMPTION WITH REGARD TO DIVIDEND INCOME(RS.1.46 LAKHS)AND SHARE O F PROFIT FROM PARTNERSHIP FIRM(RS.3.50 LAKHS),THAT IT HAD CONSIDERED ONLY INVESTMENT IN SH ARES FROM WHICH DIVIDEND INCOME HAD BEEN EARNED,THAT EXPENSES ATTRIBUTABLE FROM EARNING SHAR E OF PROFIT FROM PARTNERSHIP FIRM WAS NOT 4257/M/16 M/S. BHOLENATH DEVELOPERS LTD. 2 CONSIDERED FOR DISALLOWANCE, THAT THE AO HAD CONSID ERED THE DISALLOWANCE ON ACCOUNT OF DIVIDEND INCOME,THAT IT HAD NOT CONSIDERED THE INC OME FROM PARTNERSHIP FIRM. REFERRING TO THE CASE OF HITESH D. GAJARIA (ITA/993/MUM/2007 AY- 03-04) DATED 14.11.2008), RELIED UPON BY THE ASSESSEE,THE FAA HELD THAT IN THE CASE OF DH ARAM SINGH M. POPPAT (2ITR-TRIB-586) THE TRIBUNAL HAD HELD THAT FIRM AND THE PARTNER WER E SEPARATE ENTITIES, THAT THE SHARE OF PROFIT OF PARTNER WAS EXEMPT IN THE HANDS OF THE PARTNERS, THAT THE PROVISIONS OF SECTION 14A WOULD APPLY IN COMPUTING THE PARTNERS TOTAL INCOME, THAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF VISHNU ANANT MAHAJAN(147TTJ142) HAD HELD TH AT THE SHARE OF PROFIT FROM PARTNERSHIP FIRM WOULD ATTRACT THE PROVISIONS OF SECTION 14A.FI NALLY, HE HELD THAT DISALLOWANCE MADE BY AO U/S. 14A WAS SUSTAINABLE. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)STATED T HAT THE AO DID NOT RECORD SATISFACTION WHILE CALCULATING THE DISALLOWANCE, THAT THE ASSESS EE HAD NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME, THAT THE ASSESSEE HAD MADE STRATEGIC INVESTMENT, THAT IT HAD INCURRED THE EXPENSES FOR RUNNING ITS REGULAR BUSINESS, THAT THE DISALLOWANCE SHOULD NOT EXCEED THE EXEMPT INCOME.HE REFERRED TO THE CASES OF GODREJ & BOYCE MFG. CO. LTD.(81TAXMANN.COM 111)AND IQBAL M. CHAGLA (67SOT123).THE DEPARTMENTAL REPRESENTATIVE(DR) STATED THAT AO HAD RECORDED SATISFACTION BEFORE ALLOWING DISALLOWA NCE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD CLAIMED EXEMPT DIVIDEND INCOME OF RS. 1.46 LAKHS IN ADDITION NOT THE SHARE OF PROFIT FROM THE INVESTMENT MADE IN PARTNERSHIP FIRM AMOUNTING TO RS.3.50LAKHS, THAT IT HAD MADE A DISALLOWANCE OF RS.21,569/- UNDER THE HEAD E XPENSES INCURRED TOWARDS EARNING EXEMPT INCOME, THAT THE AO MADE AN ADDITIONAL DISAL LOWANCE OF RS.8.54 LAKHS, THAT THE FAA CONFIRMED THE ORDER OF THE AO,THAT THE AO HAS NOT M ADE ANY REFERENCE OF THE EXPENSES THAT WERE INCURRED FOR EARNING EXEMPT SHARE OF PROFIT FR OM INVESTMENT MADE BY IT,THAT THE ASSESSEE HAD MADE INVESTMENT IN THE PARTNERSHIP FIRM WHICH W AS ALSO ENGAGED IN CONSTRUCTION ACTIVITY LIKE THE ASSESSEE.THUS,IT WAS A STRATEGIC INVESTMEN T.THE AO/FAA HAD NOT CONSIDERED THIS VITAL ARGUMENT THAT WAS RELEVANT FOR DECIDING THE I SSUE.HERE,WE WOULD LIKE TO REFER TO THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF GODREJ & BOYCE (SUPRA). THE HONBLE COURT AT PARA 36 AND 37 HAS HELD AS UNDER:- 36. SECTION 14A AS ORIGINALLY ENACTED BY THE FINAN CE ACT OF 2001 WITH EFFECT FROM 1.4.1962 IS IN THE SAME FORM AND LANGUAGE AS CURREN TLY APPEARING IN SUB-SECTION (1) OF SECTION 14A OF THE ACT. SECTIONS 14A (2) AND (3) OF THE ACT WERE INTRODUCED BY THE FINANCE ACT OF 2006 WITH EFFECT FROM 1.4.2007. THE FINDING OF THE BOMBAY HIGH COURT IN THE IMPUGNED ORDER THAT SUB-SECTIONS (2) AND (3) OF SECTION 14A IS RETROSPECTIVE HAS BEEN CHALLENGED BY THE REVENUE IN ANOTHER APPEA L WHICH IS PRESENTLY PENDING 4257/M/16 M/S. BHOLENATH DEVELOPERS LTD. 3 BEFORE THIS COURT. THE SAID QUESTION, THEREFORE, NE ED NOT AND CANNOT BE GONE INTO. NEVERTHELESS, IRRESPECTIVE OF THE AFORESAID QUESTIO N, WHAT CANNOT BE DENIED IS THAT THE REQUIREMENT FOR ATTRACTING THE PROVISIONS OF SECTIO N 14A(1) OF THE ACT IS PROOF OF THE FACT THAT THE EXPENDITURE SOUGHT TO BE DISALLOWED/D EDUCTED HAD ACTUALLY BEEN INCURRED IN EARNING THE DIVIDEND INCOME. INSOFAR AS THE APPE LLANT-ASSESSEE IS CONCERNED, THE ISSUES STAND CONCLUDED IN ITS FAVOUR IN RESPECT OF THE ASSESSMENT YEARS 1998-1999, 1999-2000 AND 2001-2002. EARLIER TO THE INTRODUCTIO N OF SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT, SUCH A DETERMINATION WAS RE QUIRED TO BE MADE BY THE ASSESSING OFFICER IN HIS BEST JUDGMENT. IN ALL THE AFORESAID ASSESSMENT YEARS REFERRED TO ABOVE IT WAS HELD THAT THE REVENUE HAD FAILED TO ESTABLISH ANY NEXUS BETWEEN THE EXPENDITURE DISALLOWED AND THE EARNING OF THE DIVID END INCOME IN QUESTION. IN THE APPEALS ARISING OUT OF THE ASSESSMENTS MADE FOR SOM E OF THE ASSESSMENT YEARS THE AFORESAID QUESTION WAS SPECIFICALLY LOOKED INTO FRO M THE STANDPOINT OF THE REQUIREMENTS OF THE PROVISIONS OF SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT WHICH HAD BY THEN BEEN BROUGHT INTO FORCE. IT IS ON SUCH CONSIDERATION THAT FINDINGS HAVE BEEN RECORDED THAT THE EXPENDITURE IN QUESTION BORE NO RELATION TO THE EARNING OF THE DIVIDEND INCOME AND HENCE THE ASSESSEE WAS ENTI TLED TO THE BENEFIT OF FULL EXEMPTION CLAIMED ON ACCOUNT OF DIVIDEND INCOME. 37. WE DO NOT SEE HOW IN THE AFORESAID FACT SITUATI ON A DIFFERENT VIEW COULD HAVE BEEN TAKEN FOR THE ASSESSMENT YEAR 2002-2003. SUB-SECTIO NS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESC RIBE A FORMULA FOR DETERMINATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATION WHERE THE ASSES SING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. WHETHER SUCH DETERMINATI ON IS TO BE MADE ON APPLICATION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUDGMENT OF THE ASSESSING OFFICER, WHAT THE LAW POSTULATES IS THE REQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFICER THAT HAVING REGARD TO THE ACCOUNTS OF THE A SSESSEE, AS PLACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IT IS ONLY THEREAFTER THAT T HE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGME NT DETERMINATION, AS EARLIER PREVAILING, WOULD BECOME APPLICABLE. CONSIDERING THE ABOVE,WE HOLD THAT THE AO HAD MADE THE DISALLOWANCE WITHOUT GIVING ANY JUSTIFICATION.THE FIRST PRE-REQUISITE FOR MAKING DI SALLOWANCE U/S. 14A IS TO IDENTIFY EXPENDI - TURE INCURRED FOR EARNING INCOME THAT IS NOT PART O F TAXABLE INCOME.THE ASSESSEE ITSELF HAD DISALLOWED EXPENDITURE RELATABLE TO EXEMPT INCOME.T HEREFORE, THE AO , FOR MAKING ADDITIONAL DISALLOWANCE,HAD TO BRING ON RECORD SOME EVIDENCE T O PROVE THAT THERE WERE SOME ITEMS OF EXPENDITURE IN THE P&L ACCOUNT OF THE ASSESSEE THAT WERE DIRECTLY RELATED TO EXEMPT INCOME. REVERSING THE ORDER OF THE FAA,WE DECIDE THE EFFECT IVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE AND HOLD THAT CONFIRMATION OF THE ORDER OF THE AO BY THE FAA WAS NOT JUSTIFIABLE. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COUR T ON 16 TH AUGUST, 2017. 16 , 2017 SD/- SD/- ( . . / C.N.PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 16.08.2017. JV.SR.PS. 4257/M/16 M/S. BHOLENATH DEVELOPERS LTD. 4 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.