P N WRITER & CO. P. LTD, MUMBAI V. ADDL CIT RG 7(1), MUMBAI

ITA 4390/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55521 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 13-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Section: 43B; 14A; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES I, MUMBAI BEFORE SHRI J.SUDHAKAR REDDY, AM AND SHRI VIJAY PAL RAO, JM ITA NOS.4388 & 4390/MUM/2010 : ASST.YEARS 2006-2007 & 2007-2008 M/S.P.N.WRITER & CO. PVT. LTD. 105, DR.B.AMBEDKAR ROAD NEXT TO VOLTAS, LALBAUG MUMBAI 400 033. PAN : AAACP5966B. THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 7(1) MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI SATISH R.MODY RESPONDENT BY : SHRI SUNIL KUMAR SINGH DATE OF HEARING : 13.09.2011 DATE OF PRONOUNCEMENT : 14.10.2011 O R D E R PER J.SUDHAKAR REDDY, AM : BOTH THESE APPEALS FILED BY THE ASSESSEE AND ARE DI RECTED AGAINST TWO SEPARATE ORDERS OF THE LEARNED COMMISSIONER OF INCO ME-TAX (APPEALS) DATED 26.01.2010 FOR THE ASSESSMENT YEARS 2006-2007 AND 2 007-2008 RESPECTIVELY. AS THE ISSUES ARISING IN BOTH THE APPEALS ARE COMMON, FOR THE SAKE OF CONVENIENCE, THEY ARE HEARD TOGETHER AND DISPOSED OFF BY WAY OF THIS COMMON ORDER. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROFESSIONAL PACKING, MOVING AND RE-LOCATION SERVICES, INFORMATI ON MANAGEMENT AND ALSO IS INTO SOFTWARE SOLUTIONS. THE ISSUES THAT ARISE FOR OUR C ONSIDERATION IN BOTH THESE APPEALS ARE (A) WHETHER PF AND ESI PAID WITHIN THE GRACE PERIOD ALL OWED UNDER THE RESPECTIVE ENACTMENT, ARE ALLOWABLE AS DEDUCTION; (B) WHETHER PF AND ESI, BEING EMPLOYEES CONTRIBUTION, WHICH IS PAID BEFORE THE DUE DATE OF FILING OF THE RETURN U/S 139 IS ALLOWABLE AS A DEDUCTION; AND ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 2 (C) DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE ACT. 3. WE HAVE HEARD SHRI SATISH R.MODY, THE LEARNED CO UNSEL FOR THE ASSESSEE AND SHRI SUNIL KUMAR SINGH, THE LEARNED DEPARTMENTAL RE PRESENTATIVE. 4. GROUND NO.1 FOR BOTH THE ASSESSMENT YEARS IS ON THE ISSUE WHETHER EMPLOYEES CONTRIBUTION OF PF, PAID WITHIN THE GRAC E PERIOD ALLOWED UNDER RESPECTIVE STATUTE IS ALLOWABLE AS A DEDUCTION. THI S ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MODI SPINNING AND WEAVING MILLS CO. LTD. [(2007) 29 2 ITR 479 (DELHI)] AND MADRAS HIGH COURT IN THE CASE OF CIT VS. SALEM CO-OPERATIVE SPINNING MILLS LTD. [(2006) 284 ITR 621 (MAD.)] AND THE HONBLE JURISDICTIONAL HIGH COURT IN THE C ASE OF CIT VS. PAMWI TISSUES LIMITED [(2009) 313 ITR 137 ( BOM.)] . RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THIS GROUND OF THE ASS ESSEE. 5. GROUND NOS. 2 AND 3 FOR THE ASSESSMENT YEAR 2006 -2007 AND GROUND NO.2 FOR THE ASSESSMENT YEAR 2007-2008 IS ON THE ISSUE OF AL LOWABILITY OF EMPLOYEES CONTRIBUTION TO PF AND EMPLOYEES CONTRIBUTION TO E SI, WHICH WAS PAID ON OR BEFORE THE DUE DATE OF FILING OF THE RETURN ALLOWED U/S 139 OF THE ACT. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE BY THE DECISION OF C BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.6636/MUM/2009 ORDER DATED 20 TH AUGUST, 2010, WHEREIN AT PARAS 5 AND 6 IT HAS BEEN HELD AS FOLLOWS:- 5. A CO-ORDINATE BENCH OF THIS TRIBUNAL, IN THE CA SE OF PRANAVADITYA SPINNING MILLS VS. ACIT ( ORDER DATED 22 ND MARCH 2010) AND SPEAKING THROUGH ONE OF US (HONBLE PRESIDENT), HAS, INTER ALIA, OBSERVED AS FOLLOWS: 4. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON SEVERAL ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL IN SUP PORT OF HIS CONTENTION THAT THE EMPLOYEES CONTRIBUTION SHOULD BE ALLOWED ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 3 UNDER SECTION 43B IS DEPOSITED WITHIN THE DUE DATE FOR FILING THE RETURN FOR THE ASSESSMENT YEAR IN QUESTION. IN THE CASE OF SIMPLEX ENGINEERING AND FOUNDRY WORKS P. LTD. VS. J CIT IN ITA NO.5760/MUM/2006 DATED 29 TH NOVEMBER 2007 (ASSESSMENT YEAR 2003-04) AND CONNECTED APPEALS, IT HAS BEEN OP INED BY THE TRIBUNAL IN PARA 16 THAT SINCE THE CONTRIBUTION OF THE EMPLOYEES IS WITHHELD BY THE EMPLOYER BY DEDUCTING THE SAME FROM THE WAGES AND SALARIES, THE DUES OF THE EMPLOY EES MERGED WITH THE FUNDS OF THE EMPLOYER AND THE EMPLOYEES C ONTRIBUTION THUS BECOMES SIMILAR TO THE EMPLOYERS CONTRIBUTION . IT HAS BEEN OBSERVED THAT THE NATURE OF THE SOURCE OF BOTH EMPLOYERS AS WELL AS EMPLOYEES CONTRIBUTION IS THE SAME, NAM ELY, THE FUNDS OF THE EMPLOYER. IN THIS VIEW OF THE MATTER I T HAS BEEN HELD THAT THE CONTRIBUTION OF THE EMPLOYEES PAID WITHIN THE DUE DATE FOR FILING THE RETURN OF INCOME IS ALLOWABLE UNDER SECTION 43B. THIS ORDER OF THE TRIBUNAL HAS NOT BEEN REFERRED TO IN THE SUBSEQUENT ORDER OF THE TRIBUNAL DATED 28 TH JANUARY 2010 IN THE CASE OF THE SAME ASSESSEE, NAMELY, SIMPLEX ENGINEER ING & FOUNDRY WORKS, FOR THE ASSESSMENT YEAR 2004-05 IN I TA NO.378/MUM/2009, AND WITH REFERENCE TO THE EARLIER ORDER, THE DISALLOWANCE OF THE EMPLOYEES CONTRIBUTION WAS UPH ELD BY THE TRIBUNAL. IN ANOTHER ORDER PASSED ON 28 TH JANUARY 2010 IN ITA NO.6847/MUM/2008 (ASSESSMENT YEAR 2005-06) IN THE C ASE OF PINK PEN PRIVATE LTD. VS. ITO, THE TRIBUNAL WAS DEA LING WITH THE EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND E SIC WHICH WAS PAID EVEN BEYOND THE GRACE PERIOD. THE ASSESSIN G OFFICER HAD DISALLOWED THE PAYMENT UNDER SECTION 36(10(VA), HOLDING THAT THE CONTRIBUTION WAS NOT COVERED BY SECTION 43 B. THE TRIBUNAL WAS OF THE OPINION THAT THE CASE WAS COVER ED BY THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF CIT V S. ALOM EXTRUSIONS LTD. MANU/SC/1846/2009 : (2009) 319 ITR 306 (SC) AND ACCORDINGLY HELD THAT THE CONTRIBUTION OF THE EMPLOYEES; IF PAID BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME AS CONTEMPLATED BY THE PROVISO TO SECTION 43 B IS TO BE ALLOWED AS A DEDUCTION. IN THE CASE OF RADHAKRISHNA FOODLAND PVT. LTD. VS. ACIT IN ITA NO.4211/MUM/20 (ASSESSMEN T YEAR 2003-04), THE TRIBUNAL BY ORDER DATED 11 TH FEBRUARY 2008, HELD FOLLOWING THE VIEW TAKEN BY THE SUPREME COURT IN TH E CASE OF VINAY CEMENT LTD. (2007) 213 CTR 268 (SC) THAT THE EMPLOYEES CONTRIBUTION PAID BEFORE THE DUE DATE FO R FILING THE RETURN OF INCOME IS ALLOWABLE AS A DEDUCTION. THERE IS THUS A SERIES OF ORDERS OF THE MUMBAI BENCHES OF THE TRIBU NAL ON THE ISSUE AND RESPECTFULLY FOLLOWING THEM WE DELETE THE ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 4 DISALLOWANCE OF RS.14,02,512/-, OUT OF WHICH RS.5,6 2,450/- WAS PAID AFTER THE DUE DATE BUT BEFORE THE GRACE PERIOD AND RS.8,40,062/- WAS PAID AFTER THE GRACE PERIOD BUT B EFORE THE DUE DATE FOR FILING THE RETURN OF INCOME. THE FIRST GRO UND IS ACCORDINGLY ALLOWED. 6. THE ABOVE OBSERVATIONS, WITH WHICH WE ARE IN RE SPECT AGREEMENT, APPLY TO THE FACT SITUATION BEFORE US AS WELL. IN THIS VIEW OF THE MATTER, AS LONG AS EVEN EMPLOYEES CONTRIBUTION TO PF AND ESIC ARE PAID BY THE ASSESSEE BEFORE THE DUE DATE OF FIL ING THE INCOME TAX RETURN, THE SAME ARE TO BE ALLOWED AS DEDUCTION IN COMPUTATION OF INCOME OF THE ASSESSEE. IT IS AN UNDISPUTED POSITIO N THAT THE ASSESSEE HAS PAID THE EMPLOYEES CONTRIBUTION TO PF AND ESIC WELL BEFORE THE DUE DATE OF FILING OF INCOME TAX RETURN. LEARNED DE PARTMENTAL REPRESENTATIVE DOES NOT DISPUTE THAT ASPECT OF THE MATTER. ON THESE FACTS, AND IN VIEW OF THE LEGAL POSITION SUMMED UP ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE IMPUGNED ADDITION INDE ED DESERVES TO BE DELETED. WE DIRECT SO. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THIS GRO UND OF THE ASSESSEE. 6. GROUND NOS.4 AND 5 FOR THE ASSESSMENT YEAR 2006- 2007 AND GROUND NOS.3 AND 4 FOR THE ASSESSMENT YEAR 2007-2008 ARE ON THE ISSUE OF DISALLOWANCE U/S 14A. THIS CONSISTS OF TWO COMPONENTS - THE FIRST BEING D ISALLOWANCE OF INTEREST INCOME AND THE SECOND BEING DISALLOWANCE OF EXPENSES. WE W ILL FIRST TAKE UP THE ISSUE OF DISALLOWANCE OF INTEREST. WE FIND THAT THE LEARNED CIT(A) HAS APPLIED THE SPECIAL BENCH ORDER OF THE ITAT MUMBAI BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. IN [199 TTJ 289 (SB) (MUM.)] . THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE LTD. MFG. CO. VS. DCIT [(2010) 328 I TR 81 (BOM.)] HAS HELD THAT RULE 8D IS NOT RETROSPECTIVE AND WOULD AP PLY ONLY FROM ASSESSMENT YEAR 2008-2009. THUS, WE REVERSE THE DECISION OF THE LEA RNED CIT(A) AND DIRECT THE ASSESSING OFFICER TO WORK OUT THE DISALLOWANCE ON S OME `REASONABLE BASIS AND NOT UNDER RULE 8D. ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 5 7. NOW WE CONSIDER THE ARGUMENT OF THE ASSESSEE THA T NO DISALLOWANCE CAN BE MADE SUM OUT OF INTEREST EXPENSES, FOR THE REASON T HAT THE ASSESSEE HAS MADE INVESTMENT ONLY OUT OF SURPLUS FUNDS. FOR THE ASSES SMENT YEAR 2006-2007, THE ASSESSING OFFICER AT PAGE 5 PARA 4.2 OBSERVED AS FO LLOWS:- 4.2 THE ABOVE SUBMISSIONS OF THE ASSESSEE COMPANY ARE CAREFULLY PERUSED BUT FOUND TO BE NOT ACCEPTABLE. AS PER THE BALANCE SHEET OF THE ASSESSEE IT HAS MADE INVESTMENTS OF RS.3.87 CR. DURING THE YEAR AND AT THE END OF THE YEAR THE ASSESSEE HAS AN INVE STMENT PORTFOLIO OF RS.18.29 CR. WHICH HAS INCREASED FROM RS.12.49 CR. IN THE BEGINNING OF THE YEAR. EVEN THOUGH THE INVESTMENT HAS BEEN MADE OUT OF SURPLUS FUNDS IT CANNOT BE POSSIBLE TO HANDLE SUCH INVESTME NT WITHOUT ENGAGING CERTAIN AMOUNT OF EXPENDITURE TOWARDS PERS ONAL AND OTHER ADMINISTRATIVE OVERHEADS TO MAINTAIN THE TRANSACTIO NS AND KEEPING THE RECORD THEREOF. IT MAY ALSO BE NOTED HERE THAT THE ASSESSEE HAS ALSO EARNED TAX FREE LONG TERM CAPITAL GAIN OF RS.26,02, 545/- DURING THE YEAR BY SALE OF INVESTMENT SHARES. 8. SIMILARLY FOR THE ASSESSMENT YEAR 2007-2008, THE ASSESSING OFFICER AT PAGE 6 PARA 4.2 OBSERVED AS FOLLOWS:- 4.2 THE ABOVE SUBMISSIONS OF THE ASSESSEE ARE ACCE PTABLE. IT CAN BE SEEN FROM THE BALANCE SHEET SCH E THAT THE INVESTME NTS OF THE COMPANY ARE AT RS.9,35,81,276 AS ON 31.3.07 AS AGAI NST RS.11,33,50,157 AS ON 1.4.06. THESE INVESTMENTS ARE IN EQUITY SHARES OF LISTED COMPANIES TRADED ON THE STOCK EXCHANGES A ND ALSO IN MUTUAL FUND UNITS. IN ADDITION THE ASSESSEE HAS AN INVESTM ENT OF RS.52,50,325 IN EQUITY SHARES OF UNLISTED COMPANIES AND RS.3,50, 000 IN THE EQUITY SHARE CAPITAL OF WRITER SAFEGUARD PVT. LTD. EVEN TH OUGH THE INVESTMENT HAS BEEN MADE OUT OF SURPLUS FUNDS IT CA NNOT BE POSSIBLE TO HANDLE SUCH INVESTMENT WITHOUT INCURRING CERTAIN EX PENDITURE TOWARDS PERSONAL AND OTHER ADMINISTRATIVE OVERHEADS TO MAIN TAIN THE TRANSACTIONS AND KEEPING THE RECORD THEREOF. IT SHO ULD BE NOTED HERE THAT THE ASSESSEE HAS ALSO EARNED RS.55,48,759 AS L ONG TERM CAPITAL GAINS (TAX FREE) FROM TRADING IN SHARES OF LISTED C OMPANIES. 9. THUS, THE UNDISPUTED FACT IS THAT THE ASSESSEE H AS MADE INVESTMENTS ONLY OUT OF SURPLUS FUNDS. THE ASSESSEE FILED COPIES OF THE ANNUAL ACCOUNTS TO DEMONSTRATE ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 6 THE INVESTMENTS IN QUESTION ARE MADE ONLY FROM INTE REST FREE FUNDS AND INCOME ACCRUED DURING THE YEAR. FOR THE FINANCIAL YEAR END ING 31 ST MARCH, 2006, THE CAPITAL RESERVES AND SURPLUS OF THE ASSESSEE-COMPANY ARE RS .144.43 CRORE WHEREAS THE INVESTMENT IN SUBSIDIARIES ARE RS.6.43 CRORE AND I NVESTMENT IN OTHERS ARE RS.11.86 CRORE. THE NET PROFIT BEFORE TAX FOR THE ASSESSMENT YEAR 2006-2007 IS RS.25.49 CRORE AND FOR THE ASSESSMENT YEAR 2007-2008 IS RS.3 5.46 CRORE. FOR THE ASSESSMENT YEAR 2007-08 THE INTEREST FREE FUNDS ARE RS.167.79 CRORES AND INVESTMENTS ARE RS.9.91 CRORES. FROM THE ABOVE FIGURES IT IS CLEAR THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS, FROM WHICH IT HAS MADE THE INV ESTMENTS. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. [(2009) 313 ITR 340 (BOM.)] HAS HELD THAT THE PRESUMPTION OF LAW IS THAT WHEN THERE ARE INTEREST FREE FUNDS, THESE WOULD HAVE BEE N USED FOR MAKING INVESTMENTS. APPLYING THIS PROPOSITION OF LAW TO THE FACTS OF TH E CASE, AND AS THE ASSESSING OFFICER HAS HIMSELF ACKNOWLEDGED THAT IT IS INTERES T FREE SURPLUS FUNDS OUT OF WHICH INVESTMENTS HAVE BEEN MADE, WE HOLD THAT NO PART OF THE INTEREST EXPENDITURE IS TO BE DISALLOWED U/S 14A. 10. IN THE RESULT, WE DELETE THE DISALLOWANCE OF IN TEREST MADE U/S 14A AND ALLOW GROUND NO.4 FOR ASSESSMENT YEAR 2006-2007 AND GROUN D NO.3 FOR ASSESSMENT YEAR 2007-2008. 11. WE NOW TAKE UP GROUND NO.5 FOR THE ASSESSMENT Y EAR 2006-2007 AND GROUND NO.4 FOR THE ASSESSMENT YEAR 2007-2008, WHICH RELAT E TO DISALLOWANCE OF EXPENSES U/S 14A BY APPLYING RULE 8D. 12. AFTER HEARING THE RIVAL CONTENTIONS, WE FIND TH AT % OF THE AVERAGE VALUE OF INVESTMENTS WAS DISALLOWED ON THE GROUND THAT THESE ARE EXPENSES ARE RELATABLE TO THE EARNING OF INCOME. IN OUR CONSIDERED OPINION, T HE ENDS OF JUSTICE WOULD BE MET IF 5% OF THE DIVIDEND INCOME EARNED BY THE ASSESSEE IS DISALLOWED AS EXPENDITURE INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOM E. THUS, WE ALLOW THIS GROUND IN ITA NOS.4388 & 4390/MUM/2010 M/S.P.N.WRITER & CO.PVT.LTD. 7 PART AND DIRECT THE ASSESSING OFFICER TO DISALLOW O NLY 5% OF THE DIVIDEND INCOME EARNED U/S 14A. 13. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED IN PART. ORDER PRONOUNCED ON THIS 14 TH DAY OF OCTOBER, 2011. SD/- SD/- (VIJAY PAL RAO) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 14 TH OCTOBER, 2011. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) -XIII, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.