CONSTRUCTIVE FINANCE P LTD., Jaipur V. DCIT, Jaipur

ITA 434/JPR/2011

• Counselvise Citation: 43423114 RSA 2011
• Duration Of Justice: 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 09-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Assessee Lawyers: MANISH MEHTA
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO. 434/ JP/2011 ASSESSMENT YEAR 2006-07 PAN: AACCC 9252 D M/S. CONSTRUCTIVE FINANCE (P) LTD. VS. THE DCIT WHITE HOUSE, D-23/A, INDIRAPURI CIRCLE-1 LAL KOTHI, TONK ROAD, JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) ITA NO. 335/ JP/2011 ASSESSMENT YEAR 2006-07 PAN: AACCC 9252 D THE ACIT VS M/S. CONSTRUCTIVE FINANCE (P) LTD CIRCLE-1 WHITE HOUSE, D-23/A, INDIRAPURI JAIPUR LAL KOTHI, TONK ROAD, JAIPUR (APPELLANT ) (RESPONDENT) ASSESSEE BY: SHRI MANISH MEHTA DEPARTMENT BY : SHRI SUBHASH CHANDRA DATE OF HEARING: 20-09-2011 DATE OF PRONOUNCEMENT:30-09-2011 ORDER PER N.L. KALRA, AM:- THE ASSESSEE AS WELL AS REVENUE HAVE FILED APPEA LS AGAINST THE ORDER OF THE LD. CIT(A)-III, JAIPUR DATED 20-01-2011 FO R THE ASSESSMENT YEAR 2006- 07. 2.1 THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AR E AS UNDER:- 2 1. THAT THE ORDER PASSED BY THE LD CIT(A) IS BAD IN LAW 2. THAT THE LD CIT(A) ERRED IN HOLDING THT THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1 961 ARE APPLICABLE TO THE ASSESSEE COMPANY AND THEREBY CONFIRMING DISALLOWANCE U/S 14A TO THE EXTENT OF RS . 2,98,82,690/-. 3. THAT THE LD CIT(A) ERRED IN APPLYING RULE 8D FOR WORKING OUT DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, 1961, SINCE THE PROVISIONS OF RULE 8D ARE NOT APPLI CABLE FOR THE YEAR UNDER ASSESSMENT AND ARE APPLICABLE ON LY W.E.F. ASSESSMENT YEAR 2008-09 IN ACCORDANCE WITH T HE DECISION OF BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG.CO. LTD (2010) 328 ITR 81. 4. THAT THE LD CIT(A) ERRED IN HOLDING THAT DISALLO WING A SUM OF RS. 2,92,783/- OUT OF EXPENSES OF RS. 4,70 ,228/- RELATING TO SALARY AND RENT AS BEING NOT ATTRIBUTAB LE TO TAXABLE INCOME. 5. THAT THE LD CIT(A) ERRED IN HOLDING THAT DISALLO WING A SUM OF RS. 4,280/- OUT OF DEPRECIATION CLAIMED BY THE ASSESSEE COMPANY . 2.2 THE REVENUE IS AGGRIEVED THAT THE LD CIT(A) HAS ERRED IN REDUCING THE DISALLOWANCE TO RS. 2,48,56,491/- AS AGAINST RS. 2, 98,82,690/- MADE BY THE AO BY APPLYING RULE 8D AS THE SAME WAS APPLICABLE W .E.F. 24 TH MARCH, 2008 I.E. ASSESSMENT YEAR 2008-09. 2.3 THE ASSESSEE DERIVES INCOME FROM INVESTMENT AND FINANCE. THE INCOME FROM BUSINESS HAS BEEN SHOWN AT RS. 40,22,588/-. AF TER EXEMPTED INCOME, THE NET LOSS DECLARED WAS AT RS. 2,08,71,351/-. ACCORDI NG TO THE AO, THE ASSESSEE HAS CLAIMED DEDUCTION OF FINANCE CHARGES AGAINST TH E INVESTMENT THOUGH 3 INCOME FROM SUCH INVESTMENT IN THE FORM OF DIVIDEND IS EXEMPT. THIS CLAIM OF THE ASSESSEE WAS NOT ALLOWED IN THE ASSESSMENT Y EAR 2005-06 VIDE ORDER U/S 143(3) DATED 20-12-2007. THE AO WAS OF THE OPINION THAT PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE AND THEREFORE , DISALLOWANCE IS REQUIRED TO BE MADE U/S 14A OF THE ACT. THE ASSESSEE COMPANY STATED THAT THE IT IS MAKING THE INVESTMENT IN THE SHARES FOR EARNING THE DIVIDEND BUT IS ALSO MAKING INVESTMENT FOR EARNING PROFIT ON INCREASE IN THE VALUE OF SHARES. THE ASSESSEE COMPANY DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION HAS SOLD THE INVESTMENTS AND HA S PROCURED THE FUNDS FOR THE PURPOSE OF BUSINESS. RELIANCE WAS PLACED ON THE DECISION OF M/S. DHANALAKSHMI BANK LTD. VS. ACIT, (ITA NO.949/ COCH/ 2004) IN WHICH IT HAS BEEN HELD THAT THE PRINCIPLES LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF RAJASTHAN STATE WAREHOUSING CORPORATION 242 ITR 450 STILL HOLD GOOD AND THEREFORE, NO DISALLOWANCE CAN BE MADE BEC AUSE THE BUSINESS OF THE ASSESSEE IS INDIVISIBLE ONE. 2.4 THE AO CONSIDERED THE SUBMISSIONS OF THE ASSESS EE. THE AO NOTICED FROM THE BALANCE SHEET THAT THE ASSESSEE IS HAVING 18,38,58,411/- AS UNSECURED LOANS AND RS. 28,79,19,398/- AS SECURED LOANS. THE SHARE CAPITAL IS TO THE EXTENT OF RS. 6,35,79,400/-. THE CARRIED FORWARD LO SSES IS TO THE EXTENT OF RS. 4,90,46,744/-. CONSIDERING THE ADVANCE INCOME TAX/ TDS OF RS. 36,72,189 4 AND BANK BALANCE OF RS. 83,49,202, THE AO CONCLUDED THAT THE SHARE CAPITAL IS WIPED OUT IN LOSS, PAYMENT OF TAXES AND CASH BALANC E DEPOSITED IN BANK ETC. THE MAIN SOURCE OF INCOME OF THE ASSESSEE ARE DIVID END INCOME. PARTICULARS AMOUNT DIVIDEND ON SHARE 1,68,48,762 BROKERAGE AND COMMISSION 40,65,000 INTEREST INCOME 57,15,452 SALE OF SHARES 1,84,956 MISC. INCOME 2,42,400 THE AO HAS REFERRED TO THE MAJOR EXPENSES DEBITED U NDER 05 HEADS. THE DETAILS ARE AVAILABLE AT PAGE 5 OF THE ASSESSMENT O RDER. THE MAJOR EXPENSES UNDER THREE DIFFERENT HEADS HAVE BEEN CONSIDERED AS INCURRED FOR GENERATING TAX FREE INCOME. THESE ARE AS UNDER:- PARTICULARS AMOUNT LEGAL AND PROFESSIONAL FEE 7,73,725 INTEREST ON LOAN 2,72,48,940 UP FRONT FEE 18,59,625 THE EXPENSES INCURRED IN RESPECT OF OTHER TWO HEADS HAVE BEEN CONSIDERED AS ATTRIBUTABLE TO BOTH TAXABLE INCOME AND NON-TAXABLE INCOME. PARTICULARS AMOUNT SALARIES AND ALLOWANCES 3,26,222 RENT 1,44,000 TOTAL 4,70,222 THE TAXABLE INCOME IS RS. 1,02,07,808/- WHILE TAX F REE INCOME IS RS. 1,68,48,762/-. THUS THE EXPENSES WHICH ARE ATTRIBUT ABLE TO BOTH TAXABLE AND 5 NON-TAXABLE INCOME WERE PROPORTIONATELY DIVIDED IN THE RATIO OF TAXABLE INCOME AND NON-TAXABLE INCOME AND THE EXPENDITURE R ELATING TO TAX FREE INCOME HAS BEEN DISALLOWED U/S 14A OF THE ACT. 2.5 BEFORE THE LD. CIT(A), THE ASSESSEE DREW THE AT TENTION TOWARDS THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ & BOYACE COMPANY 328 ITR 81 IN WHICH IT HAS BEEN HELD THAT RULE 8D IS APPLICABLE W.E.F. ASSESSMENT YEAR 2008-09. HOWEVER, THE LD. CI T(A) FOLLOWING THE DECISION OF HIS PREDECESSOR IN THE CASE OF THE ASSE SSEE FOR THE EARLIER ASSESSMENT YEAR DIRECTED THE AO TO MAKE DISALLOWANC E OF EXPENSES UNDER RULE 8D. 2.6 WE HAVE HEARD BOTH THE PARTIES. THE HON'BLE BOM BAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. VS. DCIT 32 8 ITR 81 HAS CONSIDERED THE DECISION OF HON'BLE APEX COURT IN THE CASE OF R AJASTHAN STATE WAREHOUSING CORPORATION 242 ITR 450. SECTION 14A HA S BEEN ENACTED TO OVERCOME THE JUDICIAL PRONOUNCEMENT OF THE HON'BLE APEX COURT IN WHICH IT WAS HELD THAT ENTIRE EXPENDITURE INCURRED IN RELATI ON TO THAT BUSINESS WILL HAVE TO BE ALLOWED EVEN IF A PART OF THE INCOME EARNED F ROM THE BUSINESS IS EXEMPT FROM TAX. THE INSERTION OF SECTION 14A IS CURATIVE AND DECLARATORY OF THE INTENT OF PARLIAMENT. THE BASIC OBJECT OF SECTION 1 4A IS TO DISALLOW THE DIRECT 6 AND INDIRECT EXPENDITURE INCURRED IN RELATION TO IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 2.7 SUB-SECTION 2 OF SECTION 14A WAS INSERTED BY TH E FINANCE ACT 2006 W.E.F. 01-04-2007 SO AS TO PROVIDE UNIFORM METHOD A PPLICABLE IN A CASE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE COR RECTNESS OF THE CLAIM OF THE ASSESSEE. THIS UNIFORM METHOD HAS BEEN PROVIDED AS PER RULE 8D AND THIS RULE WAS NOTIFIED ON 24-03-08. THE LAW WHICH WOULD APPLY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRI L AND HENCE THE HON'BLE BOMBAY HIGH COURT HELD THAT RULE 8D WILL APPLY W.E. F. ASSESSMENT YEAR 2008-09. THERE IS NO OTHER CONTRARY DECISION TO THE FACT THAT RULE 8D IS APPLICABLE FOR THE ASSESSMENT YEAR PRIOR TO 2008-09 . OF COURSE THERE ARE HON'BLE HIGH COURTS JUDGEMENTS WHICH HAVE FOLLOWED THE DECISION OF THE HON'BLE BOMBAY HIGH COURT. CONSIDERING THE JUDICIAL DISCIPLINE, WE HOLD THAT RULE 8 D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. 2.8 ONE OF THE CONTENTION OF THE ASSESSEE IS THAT S ECTION 14A WILL NOT BE APPLICABLE IN RESPECT OF THE SHARES PURCHASED AS S TOCK IN TRADE. THE ITAT DELHI SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. VS. ITO , 121 ITD 318 HAD AN OCCASION TO CONSIDER THE DECISION :- (I) WHETHER INTEREST IS DISALLOWABLE U/S 14A IN RES PECT OF SHARES HELD AS STOCK IN TRADE AND INVESTMENT. 7 (II) WHETHER DISALLOWANCE U/S 14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIV ED BY THE ASSESSEE THE SPECIAL BENCH OBSERVED THAT INTEREST PAID ON PU RCHASE OF SHARES HELD AS STOCK IN TRADE IS ALLOWABLE AGAINST DIVIDEND AND T HEREFORE, INTEREST WILL BE ALLOWABLE EVEN IF THE SHARES ARE HELD AS STOCK IN T RADE OR INVESTMENT . IT HAS BEEN FURTHER HELD THAT DISALLOWANCE U/S 14A IS TO B E MADE IRRESPECTIVE OF THE FACT AS TO WHETHER EXEMPTED INCOME HAS BEEN EARNED OR NOT. IN CASE THE INVESTMENT IS MADE FOR MAKING EXEMPTED INCOME, THE DISALLOWANCE IS TO BE MADE. THE HON'BLE BOMBAY BENCH OF ITAT IN THE CASE OF SANCHAYITA MERCANTILES (P) LTD. VS. ACIT, 25 SOT 57 HAS HELD T HAT THE EXPENDITURE DISALLOWED CAN EXCEED INCOME WHICH IS NOT CHARGEAB LE TO TAX. 2.9 AFTER CONSIDERING THE ABOVE LEGAL POSITION, WE NOTICE THAT THE SHARE CAPITAL IS TO THE EXTENT OF RS. 6,35,79,400/- WHILE CARRIED FORWARD LOSSES ARE TO THE EXTENT OF RS. 4,90,46,744/-. THE DIFFERENCE BET WEEN THESE TWO FIGURES IS AVAILABLE FOR MAKING INVESTMENT FROM WHICH EXEMPT I NCOME IS BEING EARNED. MOREOVER, THE ASSESSEE HAS SHOWN THE INTEREST INCOM E. SUCH INTEREST INCOME IS TO BE REDUCED FROM THE CLAIM OF INTEREST WHILE W ORKING OUT THE DISALLOWANCE U/S 14A OF THE ACT. WE ARE NOT HAVING THE BENEFIT O F DETAILS OF LEGAL AND PROFESSIONAL FEE. THE AO AFTER GIVING OPPORTUNITY T O THE ASSESSEE WILL ASCERTAIN AS TO HOW MUCH EXPENDITURE INCURRED UNDER THIS HEAD IS RELATABLE TO 8 THE EXEMPT INCOME. THE AMOUNT DISALLOWABLE FROM UPF RONT FEE IS ALSO TO BE QUANTIFIED AGAIN AFTER ASCERTAINING THE UPFRONT FEE RELATABLE TO EXEMPT INCOME AFTER CONSIDERING THE LOANS ON WHICH UPFRONT FEE HA S BEEN PAID. THE AO HAS DIVIDED THE RESIDUAL EXPENSES IN THE PREPARATION OF TAXABLE AND NON-TAXABLE INCOME. WE FEEL THAT PREPARATION IS TO BE MADE ON T HE BASIS OF THE VOLUME AND NOT ON THE BASIS OF THE INCOME. THE ISSUE OF QUANTI FYING THE DISALLOWABLE EXPENDITURE IS RESTORED BACK ON THE FILE OF THE AO 3 IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTL Y ALLOWED TO THE EXTENT OF THAT RULE 8 D WILL NOT BE APPLICABLE. SIMILARLY THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30-09 -2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 30/09/2011 *MISHRA COPY FORWARDED TO :- 1. M/S. CONSTRUCTIVE FINANCE (P) LTD. , JAIPUR 2. THE ACIT / DCIT CIRCLE- 1, JAIPUR 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.335 & 434/JP /11) A.R, ITAT, JAIPUR 9