DCIT circle 15 (1), V. R.K. Mouldings PVt. LTd,

ITA 4635/DEL/2007

• Counselvise Citation: 463520114 RSA 2007
• Duration Of Justice: 6 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 16-01-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 27-11-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Proportionate interest; Tangible material; Difference of opinion; Notional interest; Reason to believe; Change of opinion
• Section: 14A; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO. 4635/DEL/2007 & 711/DEL/2009 ASSTT. YR: 2004-05 & 2005-06 DCIT CIR. 15(1) VS M/S R.K. MOULDINGS PVT. LTD. , NEW DELHI. GF-4, 87, ZAMRUDPURM G.K. PART-1, NEW DELHI. PAN: AAACR 3260 L ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : MS. MEENAKSHI VOHRA SR. DR RESPONDENT BY : SHRI AJAY WADHWA ADV. O R D E R PER R.P. TOLANI, J.M: : THESE ARE TWO REVENUES APPEALS AGAINST SEPARATE ORDERS OF CIT(A1)- XVIII, NEW DELHI PERTAINING TO A.Y. 2004-05 & 2005 -06. RESPECTIVE GROUNDS RAISED ARE AS UNDER: A.Y. 2004-05: 1. THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AN D CIRCUMSTANCES OF THE CASE IN HOLDING THAT REOPENING THE ASSESSMENT U/S 148 WAS BAD IN LAW. 2. THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OF RS. 36,86,479/- MADE BY THE AO BY APPLICATION OF THE P ROVISIONS OF SECTION 14A OF THE I.T. ACT AND CONSIDERING, INTER ALIA, THAT THE INTEREST BEARING LOAN HAS ALSO BEEN DIVERTED TO FUR THER INTEREST FREE LOAN. 3. THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE CASE IN NOT PROPERLY CONSIDERI NG AS TO ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 2 WHETHER THE LOAN TAKEN BY THE ASSESSEE WAS FOR THE PURPOSE OF BUSINESS AS OTHERWISE THE SAME CANNOT BE ALLOWED. A.Y. 2005-06: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 15,27,031/- BY FOLLOWING THE DECISION OF DELHI ITAT IN THE CASE OF ACIT VS. JINDAL SAW PIPES LTD. (DELHI) (2008) 11 8 TTJ 218 WITHOUT APPRECIATING THAT THE SAID AMOUNT WAS ADDED U/S 14A BEING PROPORTIONATE INTEREST EXPENDITURE TOWARDS IN VESTMENT YIELDING EXEMPT DIVIDEND INCOME. (II) THE CIT(A) FAILED TO TAKE COGNIZANCE OF: (A) THE RULE 8D OF I.T. RULES INSERT4D BY THE IT (F IFTH AMENDMENT) RULE, 2008 W.E.F. 24-03-2008 PRESCRIBED THE METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN REL ATION TO INCOME NOT INCLUDED IN TOTAL INCOME. 2. APROPOS A.Y. 2004-05, ASSESSEES ORIGINAL INCOME WAS PROCESSED U/S 143(1) ON 6-12-2005. THEREAFTER IT WAS REOPENE D U/S 147 ON THE REASONS RECORDED AS UNDER: AS PER THE PROFIT & LOSS ACCOUNT, THE COMPANY HAS SHOWN INCOME FROM COMMISSION/ SERVICE RECEIPTS, RENT AND DIVIDEND AMOUNTING TO RS. 27,490/-, RS. 63,02,700/- AND RS. 5,33,000/- RESPECTIVELY. ON PERUSAL OF RETURN OF INCOME IT IS FOUND THAT THE ASSESSEE COMPANY HAS CLAIMED BENEFIT OF HOUSE TAX P AYMENT OF RS. 4,19,983/- (1/2 SHARE OF THE PROPERTY, 50% OF R S. 7,51,559/- AND RS. 88,407/-). THE HOUSE TAX RECEIPTS ARE ISSU ED BY THE MUNICIPAL CORPORATION LUDHIANA IN THE NAME OF M/S P SEB FINANCE & INVESTMENT B-XX, 2841. THIS ISSUE NEEDS VERIFICATION. THUS THE HOUSE TAX PAYMENT HAS BEEN I NCORRECTLY CLAIMED. THEREFORE, I HAVE REASON TO BELIEVE THAT INCOME WH ICH SHOULD HAVE BEEN CHARGEABLE TO TAX IN THE HANDS OF M/S R.K . MOULDING ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 3 PVT. LTD. FOR A.Y. 2004-05 HAS ESCAPED ASSESSMENT. IT IS A FIT CASE FOR INITIATING ACTION U/S 148 OF THE I.T. ACT, 1961. 2.1. ASSESSING OFFICER HOWEVER WHILE COMPLETING THE ASSESSMENT U/S 147/148 NOT ONLY DISALLOWED THE HOUSE TAX EXPENDITU RE BUT ALSO MADE FURTHER ADDITION BY DISALLOWING NOTIONAL INTEREST OF RS. 36 ,46,879/- FOR DIVERSION OF FUNDS TO EXEMPT INCOME GENERATING ASSETS. AGGRIEVED , ASSESSEE PREFERRED FIRST APPEAL CHALLENGING THE ACTION OF ASSESSING OF FICER I.E. IN REOPENING AND MAKING THE ADDITION ON MERITS. 2.2. LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE ON BOTH THE COUNTS BY HOLDING AS UNDER: VALIDITY OF 147 PROCEEDINGS : (I) THE ASSESSEES ARGUMENT WAS CORRECT THAT THE REASON S FOR REOPENING WERE DONE ONLY FOR THE PURPOSE OF VERIFICATION OF H OUSE-TAX RECEIPTS. SECTION 147 DOES NOT ENVISAGE THE REOPENI NG FOR VERIFICATION OR FURTHER ENQUIRIES. BESIDES, ASSESSI NG OFFICERS ACTION MERELY AMOUNTED TO CHANGE OF OPINION. (II) ASSESSING OFFICER HAD NO TANGIBLE MATERIAL BEFORE HIM AS THE HOUSE PROPERTY INCOME ON THIS PROPERTY WAS TAXED AND TAX RECEIPTS WERE ALSO FILED. THE FINDING ON ESCAPEMENT OF INCOME HAS BEEN GIVEN ON A FLIMSY GROUND THAT THE RECEIPT WAS IN THE NAME OF THE PREVIOUS OWNER WITHOUT REALIZING THAT UNLESS MUTATION IS DON E THE HOUSE-TAX RECEIPTS IS ALWAYS ISSUED IN THE NAME OF THE ORIGIN AL OWNER ON RECORD. (III) WHEN THE FINALITY OF ASSESSMENT REMAINS UNDISTURBED ASSESSING OFFICER WAS NOT COMPETENT TO REOPEN THE ASSESSMENT MERELY FOR FURTHER INQUIRIES OR FOR VERIFICATION. RELIANCE WAS PLACED ON ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 4 HONBLE PUNJAB & HARYANA HIGH COURT JUDGMENT IN THE CASE OF VIPIN KHANNA VS. CIT 255 ITR 220 (P&H); AND THE HON BLE SUPREME COURT JUDGMENT IN THE CASE OF CIT VS. SUN ENGG. WORKS (P) LTD. 107 CTR (SC) 209. THUS THE REOPENING CANNO T BE MADE FOR VERIFICATION OR ROVING INQUIRIES. ON MERITS THE ASSESSEES CONTENTIONS WERE ACCEPTED ON THE GROUND THAT THE IN TEREST BEARING LOANS IN QUESTION WERE TAKEN MUCH EARLIER AND HAVE BEEN REPAID DURING THE YEAR ONLY. (IV) THE INTEREST BEARING LOANS HAVE NOT BEEN UTILIZED F OR THE PURPOSES OF EARNING ANY SHARE INCOME OR DIVERTING IT TO EXE MPT ASSETS. SECTION 14A WAS NOT APPLICABLE IN THIS YEAR. CIT(A) THUS DELETED THE ADDITION ON BOTH THE COUNTS RELATING TO 147 PRO CEEDINGS AND MERITS.. 3. APROPOS A.Y. 2005-06, THE ASSESSMENT WAS FRAMED U/S 143(3). THE ASSESSING OFFICER MADE DISALLOWANCE OF RS. 15,27,03 1/- AS INTEREST ATTRIBUTABLE TO INVESTMENTS YIELDING EXEMPT DIVIDEN D INCOME U/S 14A. 3.1. AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL. CI T(A) RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF RA JASTHAN STATE WAREHOUSING CORPN. VS. CIT 242 ITR 450 FOR THE PRO POSITION THAT IF BUSINESS OF THE ASSESSEE IS ONE AND INDIVISIBLE, EX PENDITURE CANNOT BE APPORTIONED AND PART RELATING TO INCOME WHICH IS EX EMPT CANNOT BE DISALLOWED. THUS IN EFFECT THE EARLIER YEARS DECISI ON WAS FOLLOWED. 3.2. FURTHER RELIANCE WAS PLACED BY CIT(A) ON COCHI N BENCH OF THE ITAT IN THE CASE OF DHAN LAXMI BANK 12 SOT 625 WHICH IN TURN HAS RELIED ON ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 5 RAJASTHAN STATE WAREHOUSING CORPN. (SUPRA). DELHI I TAT IN THE CASES OF MARUTI UDYOG LTD. VS. DCIT 92 TTJ (DEL) 987; AND A CIT VS. JINDAL SAW PIPES LTD. 118 TTJ 228, HOLDING AS UNDER: FROM A PLAIN READING OF S. 14A AND THE EXPLANATORY MEMORANDUM THERETO, IT WOULD BE CLEAR THAT ONLY THE DIRECT EXPENSES INCURRED FOR EARNING ON INCOME WHICH IS EX EMPT FROM TAX WILL BE COVERED BY THE NEW SECTION. INTEREST FR EE FUND AVAILABLE WITH THE ASSESSEE COMPANY AT THE BEGINNIN G OF THE FINANCIAL YEAR AS ALSO AT THE CLOSE OF THE RELEVANT ASSESSMENT YEAR EXCEEDED THE FUNDS INVESTED IN SHARES/ INTERES T FREE LOANS AND ADVANCES GIVEN TO THE GROUP COMPANIES. THE A.O. APPLIED THE RATIO OF FUNDS I.E. INTEREST-FREE FUNDS AND BOR ROWED FUNDS TO THE TOTAL FUNDS AVAILABLE AND WORKED OUT THE INTERE ST ON THIS PRESUMPTION THAT INTEREST BEARING FUNDS MIGHT HAVE ALSO BEEN USED FOR SUCH INVESTMENT AND LOANS TO GROUP COMPANI ES. THE REVENUE FAILED TO SUBSTANTIATE SUCH CONTENTION BY W AY OF CORROBORATIVE FACTUAL FINDINGS. IT IS FURTHER ADDED THAT INTEREST- FREE ADVANCES TO SUBSIDIARY AND OTHER COMPANIES AND INVESTMENT IN SHARES OF GROUP/SUBSIDIARY COMPANIES HAVE BEEN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE, HAS BEEN ACCEPTED IN THE PAST AND NO DISALLOWANCE WAS M ADE OUT OF INTEREST EXPENSES. THE A.O. FAILED TO ESTABLISH NEX US BETWEEN THE INTEREST BEARING FUNDS AND THE INVESTMENT ON L OANS AND ADVANCES TO THE GROUP COMPANIES. FURTHER, THE A.O. HAS FAILED TO QUANTIFY THE EXPENDITURE INCURRED BY THE ASSES SEE WITHIN THE MEANING OF S. 14A. IT IS IMPORTANT TO KNOW THAT EXPLANATORY MEMORANDUM CLEARLY STATES THAT THE NEW PROVISION WA S ONLY CLARIFICATORY IN NATURE. 3.3. AGGRIEVED, REVENUE IS BEFORE US FOR BOTH THE Y EARS. 4. LD. DR APROPOS A.Y. 2004-05 CONTENDS THAT LD. CI T(A) ERRED WHILE ADJUDICATING THE SUFFICIENCY OF THE REASONS RECORDE D FOR REOPENING THE ASSESSMENT. RELIANCE IS PLACED ON THE RATIO OF DECI SION IN THE CASE OF PHOOL ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 6 CHAND BAJRANG LAL 203 ITR 456 FOR THE PROPOSITION T HAT SUFFICIENCY OF REASONS OF REOPENING CANNOT BE EXAMINED. FURTHER RE LIANCE IS PLACED ON HONBLE SUPREME COURT JUDGMENT IN THE CASE OF ACIT VS. RAJESH JHAVERI STOCK BROKERS (P) LTD. 291 ITR 500 FOR THE PROPOSIT ION THAT 143(1) ASSESSMENT IS NOT AN ASSESSMENT. FURTHER RELIANCE I S PLACED ON THE JUDGMENT IN THE CASE OF RAYMOND WOOLLEN MILLS 236 ITR 34. 5. LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND R ELIED ON HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF DELHI TAX MLA INDIA 283 ITR 212 FOR THE PROPOSITION THAT ASSESSING OFFICER CANN OT REOPEN THE ASSESSMENT ONLY FOR VERIFICATION ROVING INQUIRIES AND FOR CHAN GE OF OPINION. ASSESSEES HOUSE PROPERTY INCOME WAS TAXED FROM SAME PROPERTY AND AS A RULE THE HOUSE PROPERTY TAX PAID THEREON IS TO BE ALLOWED TO THE A SSESSEE. THE FACT THAT RECEIPTS OF PAYMENT WAS ALSO ENCLOSED, IS NOT DIS PUTED. THE ONLY REASON FOR ASSESSING OFFICER FOR REOPENING THE ASSESSMENT TO V ERIFY AS TO WHY THE HOUSE PROPERTY RECEIPTS WERE IN THE NAME OF THE ORIGINAL S OWNER AND NOT THE ASSESSEE. THESE REASONS ARE FOR FURTHER VERIFICATIO N AND MAKING ROVING INQUIRIES. THIS IS MORE CLEAR FROM THE FACT THAT IN STEAD OF RESTRICTING THE DISALLOWANCE TO HOUSE PROPERTY INCOME ASSESSING OFF ICER WENT ALSO BEYOND THE ISSUE OF PROPERTY TAX AND DISALLOWED THE EXPEND ITURE U/S 14A BY A PROPOSITION WHICH IS APPLICABLE FROM A.Y. 2008-09. THUS IT IS EXPLICITLY CLEAR THAT THE REASONS RECORDED DO NOT HAVE ANY LIV E NEXUS WITH THE ISSUES. THE CLAIM OF HOUSE PROPERTY INCOME WAS STATUTORILY ALLOWABLE AND THE REASONS CLEARLY SHOW THAT THE ASSESSMENT IS BEING R EOPENED FOR VERIFICATION WHICH IS NOT PERMISSIBLE. LD. COUNSEL FURTHER CONTE NDS THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE AND HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. (ITA NO. 687/200 9 DATED 18-11-2011) ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 7 15 TAXMAN.COM 390 HAS CLEARLY HELD THAT PROVISIONS OF SEC. 14A READ WITH RULE 8D ARE APPLICABLE PROSPECTIVELY I.E. FROM A.Y. 2008-09 AND NOT RETROSPECTIVELY. THUS, THE REOPENING IS EX FACIE BA D IN LAW. ORDER OF CIT(A) IS RELIED ON. 5.1. ON MERITS IT IS PLEADED THAT THERE IS NO INFIR MITY IN THE ORDER OF CIT(A) AS ON VERIFICATION NO INTEREST BEARING FUNDS ARE HE LD TO HAVE NEXUS WITH EXEMPT INCOME IN BOTH THE YEARS. 6. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND MERIT IN THE ARGUMENTS OF LD. COUNS EL. FROM THE REASONS RECORDED AS REPRODUCED ABOVE IT CLEARLY EMERGES THA T THE ASSESSING OFFICER REOPENED THE ASSESSMENT IN THE NAME OF VERIFYING TH E HOUSE PROPERTY PAYMENT/ RECEIPTS. PAYMENT OF HOUSE PROPERTY TAX AR E OTHERWISE ALLOWABLE AS STATUTORY DEDUCTION, MORE SO WHEN THE INCOME QUA TH E SAME PROPERTY IS TAXED. IN THESE CIRCUMSTANCES THE REASONS MEANT FOR FURTHER VERIFICATION AND FOR ROVING INQUIRIES ARE NOT SUSTAINABLE IN LAW IN VIEW OF THE AFOREMENTIONED JUDGMENTS. 7. ON MERITS ALSO WE SEE NO INFIRMITY IN THE ORDER OF CIT(A), WHICH IS UPHELD AS IN BOTH THE YEARS THE ISSUE IS ALMOST IDE NTICAL. SECTION 14A READ WITH RULE 8D HAS BEEN HELD TO BE APPLICABLE ONLY PR OSPECTIVELY FROM A.Y. 2008-09. NO NEXUS HAS BEEN FOUND BETWEEN INTEREST B EARING BORROWINGS AND EXEMPT INCOME. BESIDES, THE LOANS IN QUESTION WHICH WERE EARLIER RAISED HAVE BEEN ONLY REPAID IN THIS YEAR. IN VIEW OF THES E FACTS AND CIRCUMSTANCES WE UPHOLD THE ORDER OF CIT(A). ITA NOS. 4635/DEL/07 & 711/DEL/09 R.K. MOULDINGS PVT. LTD. 8 8. IN THE RESULT, BOTH THE APPEALS FILED BY THE REV ENUE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 27-2-2014. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27-02-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR