Relaxo Footwears Ltd., Delhi V. Addl. CIT, New Delhi

ITA 4645/DEL/2011

• Counselvise Citation: 464520114 RSA 2011
• Duration Of Justice: 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 22-12-2011
• Assessment Year: 2008-2009
• Appeal Filed On: 21-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS PRATIMA KAUSHIK
• Assessee Lawyers: P N BHATIA S; O P DUA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI. BEFORE SHRI R.P. TOLANI AND SHRI K.G. BANSAL I.T.A. NO. 4645(DEL)/2011 ASSESSMENT YEAR: 2008-09 RELAXO FOOTWEARS LIMITED, ADDITIO NAL COMMISSIONER OF INCOME 316-319, ALLIED HOUSE, VS. TAX, RANGE-15, NEW DELHI. INDERLOK, DELHI-110035. PAN: AAACR0259D (APPLICANT) (RESPONDENT) APPLICANT BY : SHRI O.P. DUA & SHRI P.N. BHATIA, ADVOCATES RESPONDENT BY: MRS . PRATIMA KAUSHIK, SR. D.R. DATE OF HEARIN G: 22.12.2011 DATE OF PRONOUN CEMENT: 06 .01.2012. ORDER PER K.G. BANSAL : A.M THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COM PANY FILED ITS RETURN ON 30.09.2008 DECLARING TOTAL INCOME OF RS. 20,28 ,20,185/-. THE ASSESSMENT PROCEEDINGS WERE TAKEN UP BY ISSUING A NOTICE U/S 143(2) ON 11.08.2009. IT WAS FOUND THAT THE ASSESSEE IS EN GAGED IN THE BUSINESS OF MANUFACTURING OF AND TRADING IN FOOTWEAR. COMIN G TO THE SPECIFICS, IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSE SSEE HAD MADE INVESTMENT THE INCOME FROM WHICH IS NOT INCLUDIBLE IN THE TOT AL INCOME. THEREFORE, EXPENDITURE HAS TO BE DISALLOWED U/S 14A OF THE INCOME-TAX ACT READ WITH ITA NO. 4645(DEL)/2011 2 RULE 8D OF THE INCOME-TAX RULES. SUCH DISALLOWA NCE WAS WORKED OUT AT RS. 33,337/-. ANOTHER AMOUNT OF RS. 4,84,422/- WA S DISALLOWED AS EXCESS PROVISION MADE IN RESPECT OF QUALITY DISCOUNT. THIS ISSUE, HOWEVER, IS NOT RELEVANT FOR OUR PURPOSE. THUS, THE TOTAL INCOME WAS COMPUTED AT RS. 20,33,37,944/-. 1.1 THE MATTER REGARDING DISALLOWANCE U/S 14A WAS AGITATED IN GROUND NO. 3 BEFORE THE CIT(APPEALS). IT WAS SUBMITTED THAT THE ASSESSEE HAD MADE INVESTMENT IN SHARES, UNITS OF MUTUAL FUNDS AND NATIONAL SAVING CERTIFICATES (NSCS). HOWEVER, THESE INVESTMENTS WERE OLD AND NO FURTHER INVESTMENT WAS MADE IN THIS YEAR. NO INCOME HAS BEEN EARNED ON THE INVESTMENT IN THIS YEAR. THEREFORE, IT WAS ARG UED THAT NO DISALLOWANCE CAN BE MADE BY INVOKING THE PROVISION CONTAINED IN SECTION 14A OF THE ACT. THE LD. CIT(APPEALS) EXAMINED THE MATTER. HE CAM E TO THE CONCLUSION THAT SOME EXPENDITURE WILL HAVE TO BE INCURRED ON EARNING ANY KIND OF INCOME, INCLUDIBLE OR NOT INCLUDIBLE IN THE TOTAL I NCOME. SUCH EXPENDITURE IS GENERALLY NOT SEGREGATED IN THE ACCOUNT BOOKS AND IT GETS MIXED UP WITH OTHER EXPENSES OF THE BUSINESS. IN SUCH A S ITUATION, THE AO IS DUTY BOUND TO REASONABLY ALLOCATE EXPENDITURE RELATAB LE TO INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME. SECTION 14A DEALS WITH DISALLOWANCE OF ITA NO. 4645(DEL)/2011 3 THE EXPENDITURE INCURRED IN RELATION TO INCOME WH ICH DOES NOT FORM PART OF THE TOTAL INCOME. SUCH EXPENDITURE HAS TO BE WOR KED OUT AS PER RULE 8D, WHICH IS APPLICABLE TO THE PROCEEDINGS OF ASSESS MENT YEAR 2008-09. THE MATTER HAD COME UP FOR DECISION BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, (2010) 194 TAXMAN 203 AND ALSO BEFORE SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD . (2009) 117 ITD 169. THE HONBLE BOMBAY HIGH COURT HAS UPHELD THE VAL IDITY OF RULE 8D. FURTHER, IT HAS BEEN HELD THAT THE RULE APPLIES IN RELATION TO ASSESSMENT YEAR 2008-09 AND ONWARDS. IN VIEW OF THIS DIS CUSSION, THE DISALLOWANCE OF RS. 33,337/- MADE BY THE AO HAS BEEN UPHELD. 1.2 AGGRIEVED BY THIS ORDER, THE ASSESSEE IS IN AP PEAL BEFORE US. IT HAS TAKEN UP FOUR GROUNDS IN THE APPEAL. IT IS EXPLA INED TO US BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE GIST OF THE GROUNDS IS THAT THE LD. CIT(APPEALS) ERRED UPHOLDING THE DISALLOWANCE OF RS. 33,337/- O N THE BASIS OF PRESUMPTION THAT NO INCOME CAN BE EARNED WITHOU T INCURRING SOME EXPENDITURE. OTHER GROUNDS DEAL WITH THE FACTS OR THE STATE OF LAW, WHICH SHALL BE DISCUSSED TO THE EXTENT ARGUED BY THE L D. COUNSEL. ITA NO. 4645(DEL)/2011 4 2. BEFORE US, THE LD. COUNSEL REFERRED TO THE FAC T THAT INVESTMENTS WERE OLD ON WHICH NO INCOME WAS EARNED IN THIS YEAR. IT IS ALSO HIS CASE THAT APART FROM SHARES AND UNITS OF THE MUTUAL FUNDS, THERE WAS INVESTMENT IN NSCS. HOWEVER, THE CERTIFICATES WERE LOST AND NO INTEREST WAS EARNED ON THE CERTIFICATES. THE CERTIFICATES WERE PURCHAS ED IN FINANCIAL YEAR 2003-04 AND THE SHARES OF RELAXO RUBBERS PVT. LTD. WERE P URCHASED IN FINANCIAL YEAR 1996-97 FROM OWN FUNDS. IT MAY BE ADDED HERE THAT THERE IS NO EVIDENCE REGARDING LOSS OF NSCS ON RECORD. THE CASE OF THE LD. COUNSEL IS TWO-FOLD- (I) NO INCOME HAS BEEN EARNED AND, THE REFORE, NO EXPENDITURE CAN BE DISALLOWED; AND (II) THE ASSESSING OFFICER HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SHOW THAT ANY EXPENDITURE W AS INCURRED IN RELATION TO EARNING THE INCOME WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME. 2.1 IN REPLY, THE LD. SENIOR DR SUBMITTED THAT T HERE IS NO DISPUTE THAT INVESTMENT HAS BEEN MADE IN SHARES, UNITS AND NS CS. THERE IS NO PLEA BEFORE ANY OF THE LOWER AUTHORITIES THAT NO EXP ENDITURE HAS BEEN INCURRED IN RESPECT OF INCOME FROM THE INVESTMENTS. AS A M ATTER OF FACT SOME AMOUNT OF ATTENTION HAS TO BE PAID TOWARDS INVESTM ENTS TO SAFEGUARD THE INTEREST OF THE COMPANY AND, THEREFORE, THE EXPEN DITURE IS IN-BUILT ONCE AN INVESTMENT IS MADE. IT IS THE ACCEPTED PROPOSITI ON OF LAW THAT THE ITA NO. 4645(DEL)/2011 5 EXPENDITURE TO BE DISALLOWED HAS TO BE WORKED OUT U NDER RULE 8D. THIS IS WHAT HAS BEEN DONE BY THE LOWER AUTHORITIES. TH EREFORE, IT IS STRONGLY AGITATED THAT THE EXPENDITURE DISALLOWED BY THE LOWER AUTHORITIES MAY BE UPHELD. 3. WE HAVE CONSIDERED THE FACTS OF THE CASE AND S UBMISSIONS MADE BEFORE US. THE ADMITTED FACTS ARE THAT THE AS SESSEE HAD MADE INVESTMENT IN SHARES, UNITS AND NSCS. ALTHOUGH IT IS MADE OUT THAT THE CERTIFICATES HAVE BEEN LOST AND NO INTEREST THEREON HAS BEEN PAID, THERE IS NO EVIDENCE TO THIS EFFECT. THE ASSESSEE CAN VERY WELL CLAIM THE PRINCIPAL AMOUNT AND INTEREST ON THE CERTIFICATES ON OR AFTER THE DAT E OF MATURITY. NO INCOME HAS BEEN EARNED ON SHARES AND UNITS. 3.1 THE FIRST QUESTION IS-WHETHER IN ABSENCE OF IN COME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, THE PROVISION CON TAINED IN SECTION 14A CAN BE INVOKED. NONE OF THE PARTIES HAS CITED ANY C ASE BEFORE US. THEREFORE, THE ISSUE IS TO BE DECIDED ON THE BASIS OF STAT UTORY LANGUAGE AND GENERAL PRINCIPLES OF INTERPRETATION OF LAW. SUB-SECTION ( 1) OF SECTION 14A CONTAINS A PROVISION TO THE EFFECT THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ITA NO. 4645(DEL)/2011 6 EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. TH E FACTUAL POSITION IN THIS CASE IS THAT NO SUCH INCOME IS STATEDLY EARNED IN THIS YEAR ALTHOUGH INTEREST ON NSCS HAS ACCRUED AS PER THE TERMS AND CONDITIONS. OTHER INVESTMENTS MAY NOT HAVE YIELDED INCOME IN THIS YEAR BUT ARE CAPABLE OF YIELDING THE INCOME. THE QUESTION IS WHETHER THE WORD INCOME SHOULD BE INTERPRETED NARROWLY OR WIDELY? THE NARROW INTERPRETATION WOULD BE THAT ONLY WHEN SUCH INCOME IS ACTUALLY EARNED, THE EXPENDITURE CAN BE DISALLOWED. THE WIDER MEANING WOULD BE THAT EVE N IF NO INCOME IS EARNED IN A PARTICULAR YEAR BUT THE INVESTMENT S ARE CAPABLE OF EARNING THE INCOME, THE EXPENDITURE RELATABLE TO HOLDING OF THE INVESTMENTS BECOMES DISALLOWABLE. IN THIS CONNECTION, WE M AY EXAMINE A REVERSE PROVISION CONTAINED IN SECTION 57(III), WHICH ALL OWS THE DEDUCTION OF ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPI TAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE O F MAKING OR EARNING SUCH INCOME FROM INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. THERE ARE A NUMBER OF DECISIONS WHICH HOLD THAT THE EARNING OF THE INCOME IN A PARTICULAR YEAR IS NOT SINE QUA NON OF ALLOWING EXPENDITURE. THUS, THE INCOME MAY BE NIL, YET THE EXPENDITUR E INCURRED IN PURSUIT OF EARNING SUCH INCOME IS DEDUCTIBLE. WE ARE OF THE VIEW THAT SIMILAR ITA NO. 4645(DEL)/2011 7 PROPOSITION WILL APPLY WHILE INTERPRETING THE AFORESAID PROVISION CONTAINED IN SECTION 14A(1). THEREFORE, WE ARE NOT IN AGREEMENT WITH THE LD. COUNSEL IN RESPECT OF FIRST LINE OF ARGUMENT . 3.2 THE SECOND QUESTION IS-WHETHER, THERE IS AN A SSUMPTION OF EXPENDITURE AS SOME KIND OF IN-BUILT EXPENDITU RE OR SOME FACTS MUST EXIST ON RECORD TO SHOW THAT THE EXPENDITURE WAS ACTUALLY INCURRED IN RELATION TO EARNING THE INCOME. IN THIS CONNECTI ON, THE WORDS USED IN THE PROVISION EXPENDITURE INCURRED BY THE ASSESSEE I N RELATION TO INCOME ASSUME IMPORTANCE. IN THE CASE OF DCIT VS. JINDA L PHOTO LTD. IN ITA NO. 814(DEL)/2011 FOR ASSESSMENT YEAR 2008-09 DATED 23.09.2011, DECIDED BY D BENCH OF DELHI TRIBUNAL, A COPY OF WHICH HAS B EEN PLACED IN THE PAPER BOOK, IT HAS BEEN OBSERVED IN PARAGRAPH NO. 14 TH AT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS B EEN RECORDED BY THE AO REGARDING THE ASSESSEES CALCULATION BEING INCOR RECT. EVEN SO, RULE 8D HAS BEEN APPLIED. IT HAS BEEN OPINED THAT IT IS NOT CORRECT. THE SATISFACTION OF THE AO IS A PRE-REQUISITE TO INVOKE THE PROVIS ION OF RULE 8D. FINALLY, IT HAS BEEN HELD THAT THE LD. CIT(APPEALS) ERRED IN PARTIALLY APPROVING THE ACTION OF THE AO. ITA NO. 4645(DEL)/2011 8 3.3 IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT IN ITA NO. 687 OF 2009 DATED 18.11.2011, A COPY OF WHICH HAS BEEN PLACED BEFORE US BY THE LD. COUNSEL, THE HONBLE DELHI HIGH COURT HAS MENT IONED THAT WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESS ING OFFICER, HE HAS TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSE SSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. WHERE THE ASSESSEE CLAIMS THAT NO SUCH EXPENDITURE HAS BEEN INCURRED THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IF HE IS SATISFIED WITH THE CLAI M, THERE WILL BE NO QUESTION OF ANY DISPUTE. IN SUCH AN EVENTUALITY, THE AO CANNO T EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE TO BE DISALLOWED FOR THE PURPOSE OF SECTION 14A(1). HOWEVER, WHERE HE I S NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, HE WILL HAVE TO HEAR THE ASSESSEE AND THEREAFTER RECORD THE REASONS FOR NOT ACCEPTING THE CLAIM. 3.4 WE ALSO FIND THAT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA), THE DECISION IS THAT PRIOR TO ASSESSMENT YEAR 2008-09, THE AO CAN MAKE REASONABLE DISALLOWANCE AFTER CONSID ERING ALL THE FACTS OF THE CASE. OBVIOUSLY THE CONSIDERATION HAS TO BE I N RESPECT OF EXPENDITURE INCURRED IN RELATION TO EARNING THE INCOME. ITA NO. 4645(DEL)/2011 9 3.5 HAVING CONSIDERED THESE CASES, WE ARE OF TH E VIEW THAT THE AO SHOULD HAVE CONSIDERED THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EARNING THE EXEMPT INCOME. IF THE CLAIM WAS NOT FOUND TO BE IN CONSONANCE WITH THE FACTS ON R ECORD, IT COULD HAVE BEEN REJECTED AND DISALLOWANCE COULD HAVE BEEN MADE AS PER RULE 8D. HOWEVER, WE FIND THAT THE AO HAS NOT CONSIDERED T HE CLAIM OF THE ASSESSEE AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMP UTING DISALLOWANCE UNDER RULE 8D. THE LD. CIT(APPEALS) MADE AN ASSU MPTION THAT WHENEVER EXEMPT INCOME IS EARNED THERE WILL BE SOME EXPEN DITURE INCURRED IN RELATION THERETO. SUCH PRESUMPTION CANNOT FORM T HE BASIS FOR MAKING DISALLOWANCE UNDER RULE 8D. AS MENTIONED IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA), A REASONABLE DI SALLOWANCE CAN BE MADE ONLY AFTER CONSIDERING ALL THE FACTS. THE DEC ISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. (SUPR A) ALSO SAYS THE SAME THING WHEN IT IS MENTIONED THAT THE CLAIM OF THE ASSESSEE HAS TO BE EXAMINED IN THE FIRST PLACE IN TERMS OF ITS CORR ECTNESS. THIS HAS NOT BEEN DONE BY ANY OF THE LOWER AUTHORITIES. WE MAY ALS O MENTION THAT THE DECISION IN THE CASE OF JINDAL PHOTO LTD. ALSO AR RIVED AT THE SAME CONCLUSION WHEN IT IS HELD THAT THE AO HAS TO RE CORD HIS SATISFACTION ABOUT CORRECTNESS OR OTHERWISE OF THE COMPUTATION MADE BY THE AO, WHICH MUTATIS ITA NO. 4645(DEL)/2011 10 MUTANDIS MEANS THAT IF THE CONTENTION IS THAT NO EXPENDITURE HAS BEEN INCURRED, IT HAS TO BE REBUTTED. 3.6 AS MENTIONED EARLIER, THE LOWER AUTHORITIES HAVE NOT EXAMINED THE CLAIM OF THE ASSESSEE AT ALL. IN SUCH A SITUA TION, WE DO NOT THINK IT FIT TO RESTORE THE MATTER TO THE FILE OF THE AO FOR FRE SH ADJUDICATION FOR THE REASON THAT THE AMOUNT INVOLVED IS VERY SMALL. TH E LOWER AUTHORITIES HAVE NOT FOLLOWED THE PROVISION CONTAINED IN SECTION 1 4A(1) OF THE ACT. THEREFORE, THE DISALLOWANCE CANNOT BE UPHELD. IT IS ORDERED ACCORDINGLY. 4. IN THE RESULT, THE APPEAL IS ALLOWED. SD/- SD/- (R.P. TOLANI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA COPY OF THE ORDER FORWARDED TO:- RELAXO FOOTWEARS LTD., DELHI. ADDITIONAL CIT, RANGE-15, NEW DELHI. CIT(A) CIT THE D.R., ITAT, NEW DELHI. ASSISTANT REGISTRAR.