HEINZ INIDA P. LTD, MUMBAI V. ADDL CIT RG 6(3), MUMBAI

ITA 4473/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55617 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 26-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 01-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M R KUBAL
• Assessee Lawyers: RAJAN VORA
• Keywords: Capital asset; Business expenditure; Opportunity of being heard; Earning of tax free income; Retrospective amendment; Capital expenditure
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER I.T.A. NO.4473/MUM/2010 (ASSESSMENT YEAR : 2005-06) M/S. HEINZ INDIA PRIVATE LIMITED, D-SHIVSAGAR ESTATE, 7 TH FLOOR, DR.ANNIE BESANT ROAD, WORLI, MUMBAI-400 018 PAN AAACH0667B VS. ADDL. COMMISSIONER OF INCOME TAX , RANGE 6(3), AAYKAR BHAVAN, M.K. ROAD, MUMBAI. APPELLANT RESPONDENT. APPELLANT BY : MR. RAJAN VORA. RESPONDENT BY : MR.M.R. KUBAL. DATE OF HEARING : 26.09.2011. DATE OF PRONOUNCEMENT : 19.10.2011. O R D E R. PER RAJENDRA SINGH, A.M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DT.20.11.2009 OF COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESS MENT YEAR 2005-06. IN THIS APPEAL THE ASSESSEE HAS RAISED DISPUTES ON FOUR DIFFERENT GROUNDS. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANC E OF EXPENSES RELATING TO THE EXEMPT INCOME UNDER SECTION 14A OF THE INCOME TAX ACT, 196 1 (THE ACT). THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD EARNED TAX FREE DIVIDEN D INCOME OF RS.2,91,60,214 FROM INVESTMENT IN SHARES. IT WAS ALSO NOTED BY HIM THAT THE ASSESSEE HAD INCURRED INTEREST 2 ITA NO.4473/MUM/2010 EXPENDITURE OF RS.51.64 LAKHS. HE, THEREFORE, COMP UTED THE EXPENDITURE ON ACCOUNT OF INTEREST AND OTHER EXPENSES AT RS.41.48 LAKHS UNDER RULE 8D. IN APPEAL, THE CIT(A) OBSERVED THAT RULE 8D WAS APPLICABLE WITH RETROSPEC TIVE EFFECT IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF IT O VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (MUM) (117 ITD 169) IN WHICH IT WAS HELD THAT RULE 8D HAD RETROSPECTIVE EFFECT. AGGRIEVED BY THE ORDER, THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. 2.1 WE HAVE HEARD BOTH PARTIES AND PERUSED THE RECO RDS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES RELATING TO THE DIVIDEND INCOME OF RS.2,91,60,214 RECEIVED BY THE ASSESSEE DURING THE YEAR WHICH IS E XEMPT. UNDER THE PROVISIONS OF SECTIONS 14(2) AND 14(3) OF THE ACT, THE COMPUTATIO N OF EXPENSES RELATING TO EXEMPT INCOME IS REQUIRED TO BE MADE AS PER METHOD PRESCRI BED BY THE GOVERNMENT. THE GOVERNMENT HAS SINCE PRESCRIBED THE METHOD IN THE F ORM OF RULE 8D. EARLIER THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL M ANAGEMENT PVT. LTD. (SUPRA) HAD HELD THAT RULE 8D HAD RETROSPECTIVE APPLICATION AND WOUL D APPLY TO EARLIER YEARS ALSO. HOWEVER, THE SAID VIEW OF THE TRIBUNAL HAS NOT UPHELD BY THE HON'BLE HIGH COURT OF MUMBAI IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. D CIT (328 ITR 81) (MUM) IN WHICH IT HAS BEEN HELD THAT RULE 8D WOULD APPLY ONLY FROM AS SESSMENT YEAR 2008-09. IN RESPECT OF PRIOR YEARS, THE HON'BLE HIGH COURT OF MUMBAI HE LD THAT EXPENSES RELATING TO EXEMPT INCOME BOTH DIRECT AND INDIRECT HAVE TO BE COMPUTED ON A REASONABLE BASIS AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THIS CASE, BOTH THE ASSESSING OFFICER AND CIT(A) HAVE APPLIED RULE 8D WHICH IS NOT APPLIC ABLE TO THE ASSESSMENT YEAR UNDER 3 ITA NO.4473/MUM/2010 REFERENCE. WE, THEREFORE, SET ASIDE THE ORDER OF T HE CIT(A) AND RESTORE THE MATTER BACK TO THE ASSESSING OFFICER FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF CLUB MEMBERSHIP EXPENSES OF RS.23,12,500. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID A SUM OF RS.15 LAKHS TOWARDS CLUB MEMBERSHIP OF BOMBAY ZIMKHANA CL UB IN THE NAME OF MR.K. DAS AND RS.8,12,500 PAID TOWARDS MEMBERSHIP OF MR. N. THIRU AMBALAM. THE ASSESSING OFFICER OBSERVED THAT CLUB MEMBERSHIP EXPENSES WERE PERSONA L IN NATURE NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT. IN ANY CASE, HE FURTHER HELD THAT THE EXPENSES WERE CAPITAL IN NATURE AND ACCORDINGLY DISALLOWED THE EXPENDITURE O F RS.23,12,500. THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT CLUB MEMBERSHIP EX PENSES HAD BEEN INCURRED ON EMPLOYEES SO THAT THEY COULD DEVELOP VARIOUS BUSINE SS CONTACTS AND RELATIONSHIP WHICH WILL HAVE A POSITIVE IMPACT ON THE ASSESSEES BUSINESS. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. SAMTEL COLOR LTD. (180 TAXMAN 82) (DEL); THE JUDGEMENT OF HON'BLE HIGH COURT OF BOMBA Y IN THE CASE OF OTIS ELEVATOR CO. (INDIA) LTD. VS. CIT (195 ITR 682) (BOM) AND THE JU DGEMENT OF HON'BLE HIGH COURT OF MADRAS IN THE CASE OF CIT VS. SUNDARAM INDUSTRIES L IMITED (240 ITR 335) (MAD). THE CIT(A), HOWEVER, ASKED THE ASSESSEE TO FURNISH THE DETAILS OF CLUB EXPENSES AS WELL AS THE NAME OF THE MEMBERS AND OTHER PERSONS WITH WHOM THE BUSINESS TRANSACTIONS WERE CARRIED ON IN THE CLUB AND THE BENEFIT DERIVED BY THE ASSES SEE, ETC. THE ASSESSEE DID NOT FURNISH 4 ITA NO.4473/MUM/2010 THE SAID INFORMATION AND THEREFORE THE CIT(A) CONFI RMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER, THE ASS ESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIV E FOR THE ASSESSEE PLACING RELIANCE ON THE JUDGMENTS CITED BEFORE THE CIT(A) SUBMITTED THAT ENTRY FEES FOR THE CLUB MEMBERSHIP TAKEN FOR USE OF EMPLOYEES WAS ALLOWABLE AS BUSINESS EXPENDITURE. IT WAS ALSO SUBMITTED BY HIM THAT A SUM OF RS.15,05,560 HAD BEE N INCURRED ON ACCOUNT OF MEMBERSHIP OF BOMBAY ZIMKHANA CLUB AND RS.8,12,500 AS MEMBERSH IP AND SUBSCRIPTION FOR WILLINGDON SPORTS CLUB. IT WAS ALSO SUBMITTED THAT THESE EXPEN SES DID NOT INCLUDE ANY ENTERTAINMENT EXPENSES ETC. IT WAS ACCORDINGLY PRAYED FOR SETTIN G ASIDE THE ORDERS OF AUTHORITIES BELOW AND FOR ALLOWING THE CLAIM OF ASSESSEE. ON THE OT HER HAND, THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 3.2 WE HAVE HEARD BOTH SIDES, PERUSED THE RECORDS A ND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING A LLOWABILITY OF EXPENDITURE INCURRED BY THE ASSESSEE ON CLUB MEMBERSHIPS FOR USE OF EMPLOYE ES. THE CLUB MEMBERSHIP HELPS THE EMPLOYEES TO DEVELOP BUSINESS CONTACTS AND OTHER RE LATIONSHIP WHICH ARE HELPFUL IN THE DEVELOPMENT OF BUSINESS. BY INCURRING SUCH EXPENDI TURE, THE ASSESSEE HAD NOT ACQUIRED ANY CAPITAL ASSET OR ANY NEW SOURCE OF INCOME. IT IS ALSO NOT THE PERSONAL EXPENDITURE OF THE ASSESSEE-COMPANY. THE EXPENDITURE HAD BEEN INC URRED TO HELP THE CONDUCT OF THE BUSINESS MORE EFFECTIVELY AND PROFITABLY. SUCH EX PENDITURE ON ACQUIRING THE CLUB 5 ITA NO.4473/MUM/2010 MEMBERSHIP HAS BEEN HELD AS ALLOWABLE AS REVENUE EX PENDITURE IN SEVERAL JUDGMENTS INCLUDING THE JUDGMENTS RELIED UPON BY THE ASSESSEE WHICH HAVE BEEN MENTIONED IN THE EARLIER PART OF THIS ORDER. THEREFORE, IN OUR VIEW , DISALLOWANCE OF EXPENDITURE EITHER AS CAPITAL EXPENDITURE OR AS NON-BUSINESS EXPENDITURE CANNOT BE UPHELD. WE, ACCORDINGLY, SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW THE CLAIM O F THE ASSESSEE. THIS GROUND OF APPEAL IS ALLOWED. 4. THE THIRD DISPUTE IS REGARDING ADDITION TO THE O PENING STOCK ON ACCOUNT OF UNUTILIZED MODVAT CREDIT WHICH HAD BEEN ADDED TO TH E CLOSING STOCK IN THE LAST YEAR. IN A.Y. 2004-05, THE A.O. HAD ADDED A SUM OF RS.18,70, 892 ON ACCOUNT OF UNUTILIZED MODVAT CREDIT TO THE CLOSING STOCK U/S.145A OF THE INCOME TAX ACT, 1961. THE ASSESSEE, THEREFORE, RAISED AN ADDITIONAL GROUND BE FORE THE CIT(A) REQUESTING THAT THE OPENING STOCK SHALL ALSO BE INCREASED BY THE SAID A MOUNT. THE CIT(A), HOWEVER, DISMISSED THE GROUND AFTER OBSERVING THAT NO ADDITION TO THE CLOSING STOCK HAD BEEN MADE IN THE PRECEDING YEAR. AGGRIEVED BY THE SAID DECISION, TH E ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4.1 BEFORE US, THE LEARNED A.R. FOR THE ASSESSEE SU BMITTED THAT THE A.O. HAD MADE ADDITION OF RS.18,70,892 TO THE CLOSING STOCK IN A. Y. 2004-05 ON ACCOUNT OF UNUTILIZED MODVAT CREDIT WHICH HAD BEEN UPHELD BY THE CIT(A) I N THE ORDER DT.28.3.2008 PLACED AT PAGE 50 OF THE PAPER BOOK. IT WAS ALSO SUBMITTED T HAT SAID ADDITION IN THE A.Y. 2004-05 6 ITA NO.4473/MUM/2010 HAD BECOME FINAL AND THEREFORE OPENING STOCK IS REQ UIRED TO BE INCREASED BY THE SAID AMOUNT. THE LEARNED D.R. PLACED RELIANCE ON THE OR DERS OF THE AUTHORITIES BELOW. 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE GROUND IS REGARDING INCREASE OF OPENING STOCK BY RS .18,70,892 WHICH HAD BEEN ADDED BY THE A.O. IN THE CLOSING STOCK OF IMMEDIATE PRECEDIN G ASSESSMENT YEAR 2004-05. THE ORDER DT.28.3.2008 OF CIT(A) FOR A.Y. 2004-05 PLACED AT P AGE 50 OF THE PAPER BOOK SHOWS THAT ADDITION OF RS.18,70,892 TO THE CLOSING STOCK U/S.1 45A WAS UPHELD BY THE CIT(A). THE LEARNED A.R. SUBMITTED THAT SAID ADDITION HAD BECOM E FINAL. THEREFORE, IN OUR VIEW, THE OPENING STOCK OF THIS YEAR IS REQUIRED TO BE INCREA SED BY RS.18,70,892 AS CLOSING STOCK OF IMMEDIATE PRECEDING ASSESSMENT YEAR HAS TO BE THE S AME AS OPENING STOCK OF THE PRESENT YEAR. WE, THEREFORE, SET ASIDE THE ORDER OF THE CI T(A) AND DIRECT THE A.O. TO ADD A SUM OF RS.18,70,892 TO THE OPENING STOCK OF THIS YEAR B EING THE AMOUNT ADDED TO THE CLOSING STOCK OF IMMEDIATE PRECEDING YEAR AFTER NECESSARY V ERIFICATION. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 5. THE FOURTH GROUND RAISED AN ADDITIONAL GROUND IS REGARDING ADDITION TO THE CLOSING STOCK U/S.145A. THIS GROUND OF APPEAL, HOWEVER, WA S NOT PRESSED. THE GROUND IS ACCORDINGLY DISMISSED AS UNADMITTED. 6. THE GROUND NO.5 IS REGARDING CHARGE OF INTEREST U/S.234B OF THE ACT. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT CHARGE OF INTE REST IS ONLY CONSEQUENTIAL. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO RECOMPUT E THE INTEREST U/S.234B AT THE TIME OF GIVING EFFECT TO THIS ORDER. 7 ITA NO.4473/MUM/2010 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 TH OCT., 2011. SD/- SD/- (B.R. MITTAL) (RAJEND RA SINGH) JUDICIAL MEMBE R ACCOUNTANT MEMBER MUMBAI, DATED:19.10.2011. *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI