INVESTOR SERVICES OF INDIA LTD, NAVI MUMBAI V. ACIT 10 (3), MUMBAI

ITA 4386/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55074 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 25-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ANIL CHATURVEDI
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Rule 8D; Set aside
• Section: 14A; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER. ITA NO.4386/MUM/10 (ASSESSMENT YEAR : 2007-08) M/S. INVESTOR SERVICES OF INDIA LTD., IDBI BLDG., A WING, 2 ND FLOOR, RAJIV GANDHI MARG, SECTOR 11, CBD BELAPUR, NAVI MUMBAI-400 614 PAN AABCI4040E VS. ASST. COMMISSIONER OF INCOME TAX 10(3), R.NO.451, 4 TH FLOOR, AYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. APPELLANT. RESPONDENT. ASSESSEE BY : SHRI ANIL CHATURVEDI. REVENUE BY : SHRI SUNIL KUMAR SINGH. DATE OF HEARING : 25.08.2011. DATE OF PRONOUNCEMENT : 30-08-2011. O R D E R PER SHRI N.V. VASUDEVAN : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DT.19.3.2010 OF COMMISSIONER OF INCOME TAX (APPEALS)-22, MUMBAI RELATING ASSESSMENT YEAR 2007-08. 2. THE GROUND NOS.1.1 AND 1.2 RAISED BY THE ASSESSE E READS AS FOLLOWS : 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ACIT 10 (3) OF MAKING DISALLOWANCE UNDER SECTION 14A AND THEREBY DISALLOWING EXPENDITU RE AMOUNTING TO RS.7,48,244 ON THE ALLEGED GROUND THAT THE SAID EXP ENDITURE IS INCURRED FOR EARNING TAX FREE DIVIDEND INCOME. 1.2 HE FAILED TO APPRECIATE AND OUGHT TO HAVE HEL D THAT WHERE NO EXPENDITURE HAS BEEN ACTUALLY INCURRED, NO ESTIMATI ON CAN BE MADE TO DISALLOW EXPENDITURE FOR EARNING THE EXEMPT INCOME. ITA NO.4386/MUM//10 - 2 - 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVI DING SERVICES AS REGISTRAR & SHARE TRANSFER AGENTS DULY APPROVED BY SEBI. THE ASSESSE E HAS EARNED DIVIDEND OF RS2,08,343 WHICH WAS CLAIMED AS EXEMPT FROM TAX. THE ASSESSIN G OFFICER CALLED UPON THE ASSESSEE TO FURNISH DETAILS OF EXPENSES ATTRIBUTABLE TO EARNING OF INCOME WHICH WAS EXEMPT FROM TAX WITH A VIEW TO MAKE DISALLOWANCE OF SUCH EXPENSES UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE DI D NOT FILE ANY DETAILS AND THEREFORE THE ASSESSING OFFICER PROCEEDED TO INVOKE RULE 8D OF TH E INCOME TAX RULE AND MADE DISALLOWANCE OF EXPENSES ON THE BASIS OF THE FORMUL A SET OUT IN RULE 8D OF THE INCOME TAX RULES, 1962. THUS A SUM OF RS.11,48,244 BEING EXPE NSES INCURRED IN EARNING THE EXEMPT INCOME WAS DISALLOWED UNDER SECTION 14A OF THE ACT. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT IT DID NOT INCUR ANY EXPENDITURE FOR EARNING THE INCOME. THE ASSESSEE POINTED OUT THAT INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NO INTEREST BEARING FUNDS WERE USED FOR MAKING THE INVESTMENT WHICH YIELDED THE TAX FREE IN COME. THE CIT(A), HOWEVER, WAS OF THE VIEW THAT THE ASSESSEE COULD NOT FILE ANY SUPPORTIN G EVIDENCE AND THEREFORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS JUSTIFIED. THE C IT(A) ALSO REFERRED TO THE DECISION OF HON'BLE SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE O F DAGA CAPITAL MANAGEMENT PVT. LTD. 117 ITD 169 (MUM) WHEREIN IT WAS HELD THAT RULE 8D WAS RETROSPECTIVE AND DIRECT AND INDIRECT EXPENSES IN RELATION TO INCOME WHICH IS EX EMPT HAD TO BE DISALLOWED. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE PREFERRED THE AFORESAID GROUNDS OF APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE HONBL E BOMBAY HIGH COURT IN ITA NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX, RANGE 10(2), MUMBAI & A NR. AND W.P. 758/10 GODREJ & ITA NO.4386/MUM//10 - 3 - BOYCE MFG. CO. LTD. MUMBAI. VS.DY. COMMISSIONER OF INCOME TAX RANGE 10(2), MUMBAI & ORS. BY JUDGMENT DATED 12-8-2010 HAS DEALT WITH THE DISALLOWANCE THAT CAN BE MADE U/S.14-A OF THE ACT. THE HONBLE COURT ALSO DEALT WITH THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. 11 7 ITD 169 (MUM) (SB) AND HAS LAID DOWN THE FOLLOWING PROPOSITION: I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961, AS WAS APPLICABLE FOR A SSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CON SEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIR TUE OF THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE O N A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDE ND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVI SIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; ITA NO.4386/MUM//10 - 4 - V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASS ESSMENT YEAR 2008-09; VI)EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTIO N (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EX PENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETERMINE AS T O WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIV IDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CON TEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. IN THE PRESENT CASE WHICH RELATE TO ASSESSMENT YEAR 2007-08, PROVISIONS OF RULE 8D WILL NOT BE APPLICABLE AS HELD BY HON'BLE BOMBAY HIGH COURT IN THE AFORESAID DECISION. IN SUCH CIRCUMSTANCES, AS DIRECTED BY THE HON'BLE HIGH COUR T IN THE DECISION REFERRED ABOVE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EX PENDITURE INCURRED IN RELATION TO INCOME WHICH IS NOT FORM PART OF THE INCOME UNDER THE ACT. ON A REASONABLE BASIS AND METHOD SUSTAINED WITH ALL THE RELEVANT FACTS AND CIRCUMSTA NCES THE ORDER OF THE CIT(A) IS SET ASIDE AND ITA NO.4386/MUM//10 - 5 - THE ISSUE REGARDING DISALLOWANCE TO BE MADE UNDER S ECTION 14A OF THE ACT IS DIRECTED TO BE CONSIDERED AFRESH BY THE ASSESSING OFFICER KEEPING IN MIND THE GUIDELINES LAID DOWN BY THE HON'BLE HIGH COURT OF BOMBAY REFERRED ABOVE. 5. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN NOT ADJUDICATING THE IS SUE OF ALLOWING OF DEPRECIATION ON COMPUTERS AND REMITTING THE MATTER TO THE ASSESSING OFFICER FOR DISPOSAL. 6. THE ASSESSEE HAS BLOCK OF ASSET I.E. COMPUTER AT RS.13,13,030 WHICH IS ELIGIBLE FOR 60% DEPRECIATION. FURTHER, MORE DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS WRITTEN OFF ITS COMPUTER SYSTEMS TO THE TUNE OF RS.21,14,840. THUS THE ASSESSEES CLAIM OF EXCESS DEPRECIATION ON WRITTEN OFF ASSETS I.E. RS.8,01,810 (2114840 1313030) IS NOT ADMISSIBLE. THEREFORE, IN THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY SUCH EXCESS DEPRECIATION ON WRITTEN OFF ASSETS SHOULD NOT BE DISALLOWED. IN RESPONSE, THE ASSESSEE FAILED TO FILE ANY EXPLANATION. IN THE AB SENCE OF ANY EXPLANATION, THE DEPRECIATION CLAIMED ON EXCESS COMPUTER VALUE IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THUS, AN ADDITION OF RS.4,81,086 (60% OF 801810) IS MADE TO THE TOTAL INCOME OF THE ASSESSEE. 7. BEFORE THE CIT(A), THE ASSESSEE SUBMIT TED AS FOLLOWS : DURING THE COURSE OF APPELLATE PROCEEDINGS THE AP PELLANT HAS FURNISHED WRITTEN SUBMISSIONS WHEREIN IT HAS BEEN SUBMITTED T HAT ON RECONCILIATION, IN CASE OF COMPUTERS, THE APPELLANT HAD WRITTEN OFF COMPUTER S YSTEMS TO THE TUNE OF RS.21,14,840 IN THE FINANCIAL BOOKS. APPELLANT FUR THER SUBMITTED THAT IT HAD MADE AGGREGATE ADDITIONS OF RS.75,100 TO THE COMPUTERS A ND REDUCED COMPUTERS OF RS.22,70,587 TO ARRIVE AT THE CLOSING OF ASSETS. AP PELLANT ALSO SUBMITTED THAT RS.22,70,587 REPRESENTS THE AGGREGATE BOOK VALUE OF THE ASSETS AS PER THE FINANCIAL BOOKS AND IS NOT THE MONEYS PAYABLE IN RESPECT OF T HE ASSETS DISCARDED. THE APPELLANT FURTHER STATED THAT THE REDUCTION OF RS.2 2,70,587 WAS ERRONEOUS AND NOT AS PER THE PROVISIONS OF THE ACT. IT HAS ALSO BEEN SUBMITTED THAT UNLESS AND UNTIL ITA NO.4386/MUM//10 - 6 - SCRAP VALUE OF THE MACHINERY WHICH HAS BEEN DISCARD ED, DEMOLISHED OR DESTROYED DURING THE PREVIOUS YEAR IS ASCERTAINED, THE SAME C ANNOT BE REDUCED FOR THE PURPOSE OF COMPUTING DEPRECIATION. APPELLANT ALSO SUBMITTED THAT AN APPLICATION UNDER SECTIONS.154 FILED BEFORE ASSESSING OFFICER W HICH IS PENDING AND ASSESSING OFFICER MAY BE DIRECTED TO DISPOSE OFF THE PETITION OF THE APPELLANT. I HAVE GONE THROUGH THE ASSESSMENT ORDER, PERUSED THE SUBMISSIONS MADE BY THE APPELLANT AND ALSO DISCUSSED THE CASE WITH T HE A/R OF THE APPELLANT. A.O. HAS DISALLOWED DEPRECIATION OF RS.4,81,086 ON THE C OMPUTERS WRITTEN OFF DURING THE YEAR SINCE ASSESSEE FAILED TO FILE ANY EXPLANATION THEREOF. BEFORE ME IT WAS SUBMITTED THAT IT HAD UNDERTAKEN THE EXERCISE OF RE CONCILIATION OF FIXED ASSETS AS PER BOOKS OF ACCOUNTS WITH THE PHYSICAL ASSETS DURI NG WHICH IN CASE OF COMPUTERS IT HAS WRITTEN OFF COMPUTER SYSTEMS TO THE TUNE OF RS. 21,14,840 IN FINANCIAL BOOKS. IT WAS FURTHER STATED THAT IT HAS NOT CLAIMED DEPRECIA TION ON COMPUTERS AS PER DEPRECIATION SCHEDULE OF COMPUTERS AND THUS THE ASS ESSING OFFICER HAS WITHOUT APPRECIATING AND LOOKING INTO ACCOUNTS DISALLOWED T HE DEPRECIATION. IT WAS ALSO STATED THAT AN APPLICATION UNDER SECTIONS.154 HAS A LREADY BEEN MADE BEFORE ASSESSING OFFICER AND THE ASSESSING OFFICER MAY BE DIRECTED TO DISPOSE OFF APPLICATION DATED 15.03.2010. THE REQUEST OF THE A PPELLANT APPEARS TO BE GENUINE, ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO DISPO SE OFF THE PETITION OF THE APPELLANT EXPEDITIOUSLY. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 8. THE CIT(A) HAD DIRECTED THE ASSESSING OFFICER TO CONSIDER THE APPLICATION OF THE ASSESSEE UNDER SECTION 154 OF THE ACT WITHOUT CONSI DERING THE ISSUE HIMSELF. THE CIT(A) HAS NO POWER TO REMAND ANY ISSUE TO THE ASSESSING OFFIC ER. IT HAS ALSO BEEN BROUGHT TO OUR NOTICE THAT THE ASSESSING OFFICER HAS NOT PASSED ANY ORDER S ON THE APPLICATION FILED BY THE ASSESSEE UNDER SECTION 154 OF THE ACT. IN THE CIRCUMSTANCES , WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE REQUIRES EXAMINATION BY THE ASSESSING OFFI CER. ACCORDINGLY, THE ORDER OF THE CIT(A) IS SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE CLAIM OF THE ASSESSING OFFICER AS MADE BEFORE THE CIT(A) AND DECIDE THE ISSUE AFRE SH. THE ASSESSING OFFICER SHALL AFFORD AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND THE ASSESSEE IS AT LIBERTY TO FILE OTHER EVIDENCE ITA NO.4386/MUM//10 - 7 - TO SUBSTANTIATE ITS CASE. THE ASSESSING OFFICER WI LL CONSIDER THE SAME AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT THE APPEAL OF ASSESSEE IS ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH AUGUST, 2011. SD/- SD/- (T.R. SOOD) (N.V. VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT.30-08-2011. *GPR TRUE COPY COPY TO : 1. THE ASSESSEE. 2. THE ASSESSING OFFICER. 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE, ITAT, MUMBAI. 6. GUARD FILE. BY ORDER DY./ASST.REGISTRAR, ITAT, MUMBAI