DIRECT INFORMATION P.LTD, MUMBAI V. ITO 9(1)(3), MUMBAI

ITA 4327/MUM/2012

• Counselvise Citation: 432719914 RSA 2012
• Duration Of Justice: 1 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 25-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJEEV JAIN
• Assessee Lawyers: FEROZE ANDHYARUJ INA
• Keywords: Earning of tax free income
• Section: 143(3); 10AA; 14A; 10B

Judgement Text

, MH MHMH MH INCOME TAX APPELLATE TRIBUNAL,MUMBAI - D BENCH. , MK0 ,L VH ,E IKOYU MK0 ,L VH ,E IKOYU MK0 ,L VH ,E IKOYU MK0 ,L VH ,E IKOYU BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & DR. S.T.M . PAVALAN,JUDICIAL MEMBER /. ITA NO.4327/MUM/2012, ! ! ! ! / ASSESSMENT YEAR-2009-10 DIRECT INFORMATION PVT. LTD. 102 OSIA FRIENDSHIP, GAOTHAN LANE NO.4, OFF. J.P. ROAD, OPP. RAM MANDIR, ANDHERI WEST MUMBAI-400058 VS I.T.O. 9 (1)(3) PRATYAKSHKAR BHAVAN, BKC, BANDRA(E), MUMBAI-400020 PAN:AABCD0497L ( '# / APPELLANT) ( $%'# / RESPONDENT) &' ( ) / ASSESSEE BY : SHRI FEROZE ANDHYARUJINA ( ) / REVENUE BY : SHRI SANJEEV JAIN ( (( ( '+ '+ '+ '+ / DATE OF HEARING : 18-02-2014 ,-! ( '+ / DATE OF PRONOUNCEMENT : 21-03-2014 , 1961 ( (( ( 254 )1( '.' '.' '.' '.' / / / / ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM : CHALLENGING THE ORDER DT.22.05.2012 OF THE CIT(A)-1 9,MUMBAI,ASSESSEE-COMPANY HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LEARNED CIT (A)-19 HAS ERRED IN CONFIRMING THE AOS ADDITION ON ACCOUNT OF DISALLOW ANCE OF SET OFF OF BUSINESS LOSS OF STP UNIT AMOUNTING TO RS.7,23,545/- AGAINST THE PROFIT OF NO N-STP UNIT. 2.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE ,THE LEARNED CIT (A) 19 HAS ERRED IN CONFIRMING THE AOS ADDITION ON ACCOUNT OF DISALLOWANCE U/S 14 AOF THE I. TAX ACT 1961. 3.THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER, A MEND, CHANGE, DELETE, MODIFY OMIT,SUBSTITUTE AND VARY ANY ONE OR MORE OR ALL GROUNDS OF APPEAL. 2.ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF PROVI DING VARIOUS WEB-RELATED SERVICES HAD FILED ITS RETURN OF INCOME ON 25.09.2009 DECLARING TOTAL INCOME AT RS 1,86,046/- THE ASSESSMENT IN THIS CASE WAS COMPLETED U/S 143(3) ON 19.12.2011 ASSESSI NG TOTAL INCOME OF THE ASSESSEE AT RS.9,39,867/-. FIRST GROUND OF APPEAL IS AGAINST DI SALLOWANCE OF SET OFF OF BUSINESS LOSS OF STP UNIT (STPU), AMOUNTING TO RS.7,23,545/-,AGAINST THE PROFIT OF NON-STP UNIT. DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S.10A OF THE ACT.HE HELD THAT IT HAD ADJUSTED THE LOSS ARISI NG FROM THE STP UNIT AGAINST THE INCOME DERIVED FROM THE NON-STP UNIT,THAT THE SPECIAL PROVISIONS O F SECTION 10A WERE INTRODUCED TO ENCOURAGE BUSINESS ACTIVITY IN FREE TRADE ZONE TO ESTABLISH A NEW UNDERTAKING BY PROVIDING TAX HOLIDAY FOR SPECIFIC PERIOD OF TIME,THAT THE GAINS/LOSSES DERIV ED FROM SUCH AN UNDERTAKING WERE SEPARATELY PROVIDED DEDUCTION OF 100% UNDER THE ACT ON WHICH N O TAX LIABILITY AROSE,THAT THE PROFIT FROM SUCH AN UNDERTAKING WAS NOT LIABLE TO TAX THE LOSSE S ARISING FROM THE SAME WERE ALSO NOT ALLOWED SO AS TO REDUCE THE TAX LIABILITY OF THE ASSESSEE B Y WAY OF ADJUSTMENT AGAINST PROFIT FROM OTHER NORMAL BUSINESS,THAT WHILE COMPUTING PROFIT OF THE ASSESSEE,THE LOSS ARISING FROM STP UNIT WAS TO BE KEPT SEPARATELY WITHOUT ALLOWING ANY ADJUSTMENT OF THE SAME AGAINST INCOME ARISING FROM NON- STP UNIT,THAT BY VIRTUE OF SECTION 14A OF THE ACT I T WAS CLEAR THAT THE EXPENDITURE INCURRED FOR 2 ITA NOS.4327/MUM/2012 DIRECT INFORMATION PVT. LTD. EARNING THE INCOME ON WHICH NO TAX LIABILITY AROSE WAS NOT ALLOWABLE. 3. ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY(FAA).IT WAS SUBMITTED BEFORE HIM THAT THAT THE LOSS WAS TO BE ALLOWED IN VIEW OF PROVISIONS OF SEC 70(1)OF THE ACT,THAT SECTION 14A WAS ABOUT THE EXPENDITURE INCURRED IN RELATION EARNING OF EXEMPT INCOME AND NOT ABOUT THE STATUTORY DISALLOWANCE.AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER,HE HELD THAT THE DECISION OF GALAXY SURFACTA NTS LTD.(343ITR108),RELIED UPON BY THE ASSESSEE, COULD NOT COME TO THE ITS RESCUE,THAT IN THE CASE OF GALAXY SURFACTANTS LTD. (SUPRA)HONBLE JURISDICTIONAL HIGH COURT HAD DEALT WITH DIFFERENT ISSUES,THAT IN THE MATTER UNDER APPEAL LOSS FROM STP UNIT WAS SET OFF FROM NON STP UNIT WHEREAS IN THE CASE QUOTED, THE ASSESSEE HAD SEVERAL EOU UNITS AND THE SET OFF WAS IN RESPE CT OF ONE EOU TO OTHER EOU UNITS.HE REFERRED TO THE DECISION OF THE CHENNAI TRIBUNAL DELIVERED I N THE CASE OF SCIENTIFIC ATLANTA(129 TTJ 273) AND HELD THAT THE CLAIM MADE BY THE ASSESSEE FOR AL LOWING SETTING OFF OF LOSS FROM STP UNIT TO NON- STP UNIT WAS NOT ACCEPTABLE. 4. BEFORE US,AUTHORISED REPRESENTATIVE(AR) SUBMITTED T HAT THE ASSESSEE HAD RIGHTLY ADJUSTED THE LOSS ARISING FROM THE STP UNIT AGAINST THE INCOME D ERIVED FROM THE NON-STP UNIT,THAT MATTER WAS SQUARELY COVERED BY THE JUDGMENT OF THE HONBLE JUR ISDICTIONAL HIGH COURT DELIVERED IN THE CASE OF GALAXY SURFACTANTS LTD.(SUPRA).HE REFERRED TO T HE CIRCULAR (FILE NO.279/MISC/M-116/2012- ITJDTD.16.07.2013)ISSUED BY THE CBDT.DEPARTMENTAL R EPRESENTATIVE(DR)SUPPORTED THE ORDERS OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT CBDT VIDE ITS CIRCULAR DATED 16.07.2013(SUPRA)HAS TRIED TO REMOVE CONFUSION THAT HAS ARISEN IN GRANTING DEDUCTIONS U/S.10A/10B/10AA/10BA.IN THE SAID CIRCUL AR BOARD HAS HELD AS UNDER: IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THA T THE PROVISIONS OF 10A/10AA/10B/10BA OF THE INCOME-TAX ACT,WITH REGARD TO APPLICABILITY OF CHAP TER TV OF THE ACT AND SET OFF AND CARRY FORWARD OF LOSSES, ARE BEING INTERPRETED DIFFERENTLY BY THE OFFICERS OF THE DEPARTMENT AS WELL AS BY DIFFERENT HIGH COURTS. 2. THE TWO SECTIONS 10A AND L0B OF THE ACT WERE INI TIALLY PLACED ON STATUTE IN 1981 AND 1988 RESPECTIVELY,AND CONTINUED WITH SOME MODIFICATIONS AND AMENDMENTS TILL 31.03.2001. XXXXX 5.FROM THE ABOVE IT IS EVIDENT THAT IRRESPECTIVE OF THEIR CONTINUED PLACEMENT IN CHAPTER III, SECTION 10A AND 10B AS SUBSTITUTED BY FINANCE ACT, 2000 PRO VIDE FOR DEDUCTION OF THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR CO MPUTER SOFTWARE FOR A PERIOD OF 10 CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH A RTICLE OR THING OR COMPUTER SOFTWARE.THE DEDUCTION IS TO BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE.THE TERM TOTAL INCOME HAS BEEN DEFINED IN SECTION 2 (45) OF THE IT ACT AND IT MEAN S THE TOTAL AMOUNT OF INCOME REFERRED TO IN SECTION 5, COMPUTED IN THE MANNER LAID DOWN IN THE INCOME-TAX ACT. X X X X X 5.2.THE INCOME COMPUTED UNDER VARIOUS HEADS OF INCO ME IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER IV OF THE IT ACT SHALL BE AGGREGATED IN ACC ORDANCE WITH THE PROVISIONS OF CHAPTER VI OF THE IT ACT, 1961. THIS MEANS THAT FIRST THE INCOME/ LOSS FROM VARIOUS SOURCES I.E. ELIGIBLE AND INELIGIBLE UNITS, UNDER THE SAME HEAD ARE AGGREGATE D IN ACCORDANCE WITH THE PROVISIONS OF SECTION 70 OF THE ACT. THEREAFTER, THE INCOME FROM ONE AHEA D IS AGGREGATED WITH THE INCOME OR LOSS OF THE OTHER HEAD IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 71 OF THE ACT. IF AFTER GIVING EFFECT TO THE PROVISIONS OF SECTION 70 AND 71 OF THE ACT THERE IS ANY INCOME (WHERE THERE IS NO BROUGHT FORWARD LOSS TO BE SET OFF IN ACCORDANCE WITH THE PROVISION S OF SECTION 72 OF THE ACT) AND THE SAME IS ELIGIBL E FOR DEDUCTION IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER V1-A OR SECTION 10A, 10B ETC. OF THE ACT, THE SAME SHALL BE ALLOWED IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. 5.3.IF AFTER AGGREGATION OF INCOME IN ACCORDANCE WI TH THE PROVISIONS OF SECTION 70 AND 71 OF THE ACT, THE RESULTANT AMOUNT IS A LOSS (PERTAINING TO AY 2001-02 AND ANY SUBSEQUENT YEAR) FROM ELIGIBLE UNIT IT SHALL BE ELIGIBLE FOR CARRY FORWAR D AND SET OFF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 72 OF THE ACT. SIMILARLY, IF THERE IS A LOS S FROM AN INELIGIBLE UNIT, IT SHALL BE CARRIED FORW ARD 3 ITA NOS.4327/MUM/2012 DIRECT INFORMATION PVT. LTD. AND MAY BE SET OFF AGAINST THE PROFITS OF ELIGIBLE UNIT OR INELIGIBLE UNIT AS THE CASE MAY BE, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 72 OF THE ACT. 6.THE PROVISIONS OF CHAPTER IV AND CHAPTER VI SHALL ALSO APPLY IN COMPUTING THE INCOME FOR THE PURPOSE OF DEDUCTION UNDER SECTION 10AA AND 10BA OF THE ACT SUBJECT TO THE CONDITIONS SPECIFIED IN THE SAID SECTIONS. IN OUR OPINION,ABOVE CIRCULAR HAS CLEARLY LAID DOWN THAT THE LOSS FROM ELIGIBLE UNIT WOULD BE ELIGIBLE FOR CARRY FORWARD AND SET OFF IN ACCORDANC E WITH THE PROVISIONS OF SECTION 72 OF THE ACT THAT LOSS FROM AN INELIGIBLE UNIT CAN BE CARRIED F ORWARD AND SET OFF AGAINST THE PROFITS OF ELIGIBLE UNIT OR INELIGIBLE UNIT AS THE CASE MAY BE, IN ACCO RDANCE WITH THE PROVISIONS OF THE ACT.FOLLOWING THE CIRCULAR WE DECIDE GROUND NO.1 IN FAVOUR OF THE ASSESSEE. 6 .NEXT GROUND OF APPEAL IS ABOUT ADDITION ON ACCOUNT OF DISALLOWANCE U/S.14A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESS EE HAD RECEIVED DIVIDEND OF RS.4.03 LAKHS. HE ASKED THE ASSESSEE AS TO WHY DISALLOWANCE U/S.14 A R.W.RULE 8D SHOULD NOT BE MADE IN RESPECT OF THE DIVIDEND INCOME.ASSESSEE VIDE LETTER DATED 1 1.11.2011 SUBMITTED THE WORKING OF DISALLOWANCE U/S.14A OF THE ACT.CALCULATING THE % OF THE AVERAGE VALUE OF INVESTMENT,HE MADE A DISALLOWANCE OF RS.30,276/- U.R.8D(III). 7. IN THE STATEMENTS OF FACTS IT WAS SUBMITTED BY THE ASSESSEE THAT NO INVESTMENT WAS MADE FORM BORROWED FUNDS,THAT THE EXEMPT INCOME WAS SUBJECT M ATTER OF TAXATION,THAT DISALLOWANCE WAS HIGHLY EXCESSIVE,THAT IT SHOULD BE REDUCED TO 1% OF THE DIVIDEND. AS PER THE FAA,NO SUBMISSION WAS MADE BY THE ASSESSEE DURING THE APPELLATE PROCE EDINGS.AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE AND ASSESSMENT ORDER,FAA HELD THAT AO HAD MADE DISALLOWANCE AS PER THE PROVISIONS OF THE ACT,THAT DISALLOWANCE WAS MADE AS PER THE CALCU LATION PROVIDED BY IT,THAT REDUCTION IN ADDITION REQUESTED BY THE ASSESSEE WAS NOT IN CONFORMITY WIT H THE SCHEME OF CALCULATING DISALLOWANCE. 8. BEFORE US,AR SUBMITTED THAT THE ASSESSEE HAD RECEIV ED DIVIDEND ONLY FROM THREE COMPANIES, THAT NO EXPENDITURE WAS INCURRED BY THE ASSESSEE,THAT AO HAD NOT GIVEN ANY FINDING THAT EXPENDITURE WAS INCURRED,THAT THE AO HAD PRESUMED INCURRING OF EXPENDITURE,THAT BURDEN WAS ON THE AO TO PROVE NEXUS BETWEEN THE EXPENDITURE AND EARNING OF NON TAXABLE INCOME.HE RELIED UPON THE CASES OF RELIANCE INDUSTRIES LTD.(339ITR632),METALMAN AUT O P.LTD.(336 ITR 434),WIMCO SEED -LINGS LTD.(293ITR-AT-216),WALFORT SHARE AND STOCK BROKERS P. LTD. (326ITR1).DR SUBMIT -TED THAT RULE 8D WAS APPLICABLE IN THE YEAR UNDER CONSIDERAT ION,THAT ASSESSEE HAD EARNED DIVIDEND INCOME,THAT DISALLOWANCE WAS WORKED OUT AS PER THE PROVISIONS OF THE ACT. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.IN THE CASE OF GODREJ AND BOYCE MFG. CO.LTD.(328ITR1) HONBLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE REGARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART O F THE TOTAL INCOME UNDER THE ACT.WHILE DECIDING THE ISSUE IT HAS CONSIDERED THE JUDGMENT OF WALFORT SHARE AND STOCK BROKERS P. LTD. (SUPRA).IN OUR OPINION SUB-SECTION 3 TO THE SECTION 14A DEALS WITH THE SITUATION WHERE ASSESSEE DOES NOT CLAIM ANY EXPENDITURE RELATABLE TO THE EXEMPT INCOME.AS P ER THE PROVISIONS OF THE ACT, AO IS EMPOWERED TO ESTIMATE THE EXPENDITURE BY FOLLOWING AN ARTIFICIAL METHOD.IN THE CASE UNDER CONSIDERATION AO HAD ISSUED A NOTICE TO THE ASSESSE E FOR MAKING DISALLOWANCE U/S.14A OF THE ACT AND AFTER CONSIDERING THE SUBMISSION OF THE ASSESSE E,HE ADOPTED A METHOD PROVIDED THEREIN.DURING THE APPELLATE PROCEEDINGS NO SUBMISSION WAS MADE BY THE ASSESSEE IN THIS REGARD, AS STATED BY THE FAA.WE FIND THAT A REQUEST WAS MADE BY THE ASSESSEE BEFORE THE FAA TO REDUCE THE ADDITION,AS THE ASSESSEE WAS OF THE OPINION THAT ADDITION WAS O N HIGHER SIDE.BY STATING THAT ADDITION WAS HIGHER SIDE ASSESSEE HAD IMPLIEDLY ACCEPTED THE ADD ITION IN PRINCIPLE.NON SUBMISSION OF ANY ARGUMENT BEFORE THE FAA ALSO INDICATES THE ACCEPTAN CE OF THE ASSESSEE WITH REGARD TO THE ADDITION MADE,THOUGH IT HAD RESERVATION ABOUT THE QUANTUM.WE FIND THAT THE FACTS OF THE CASES RELIED UPON BY THE ASSESSEE ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE UNDER APPEAL. CONSIDERING THE 4 ITA NOS.4327/MUM/2012 DIRECT INFORMATION PVT. LTD. PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE UNDER CONSIDERATION,WE ARE OF THE OPINION THAT ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY .THEREFORE, CONFIRMING HER ORDER,WE DECIDE GROUND NO.2 AGAINST THE ASSESSEE . AS A RESULT,APPEAL FILE D BY THE ASSESSEE STANDS PARTLY ALLOWED. 0'1 &' 2 3 / :IK LS :IK LS :IK LS :IK LS 4' ( ' 56. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH,2014 . / ( ,-! 8 9 21 EKPZ EKPZ EKPZ EKPZ , 201 4 - ( . : SD/- SD/- ( MK MKMK MK0 00 0 ,L VH ,E IKOYU ,L VH ,E IKOYU ,L VH ,E IKOYU ,L VH ,E IKOYU / DR. S.T.M.PAVALAN) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 9 /DATE: 21.03.2014. SK / / / / ( (( ( $'; $'; $'; $'; <;!' <;!' <;!' <;!' / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '# 2. RESPONDENT / $%'# 3. THE CONCERNED CIT(A)/ = > , 4. THE CONCERNED CIT / = > 5. DR D BENCH, ITAT, MUMBAI / ;?. $' M MM MH HH H , . . . 6. GUARD FILE/ . 0 %;' %;' %;' %;' $' $'$' $' //TRUE COPY// / / BY ORDER, @ / 5 DY./ASST. REGISTRAR , /ITAT, MUMBAI