HINDI FILTERS LTD, MUMBAI V. DCIT 3(1), MUMBAI

ITA 4663/MUM/2009

• Counselvise Citation: 466319914 RSA 2009
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 06-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 07-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASHI
• Assessee Lawyers: DIVYESH I SHAH
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.4663/MUM/2009(A.Y.2005-06) M/S. HIND FILTERS, 1521/1522,MAKER CHAMBERS V, 221, BACKBAY RECLAMATION, MUMBAI 21. PAN:AAACH 039L (APPELLANT) VS. THE DCIT 3(1), MUMBAI. (RESPONDENT) APPELLANT BY : SHRI DIVYESH I. SHAH RESPONDENT BY : SHRI V.V.SHASHI ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 4/5/2009 OF CIT(A) XXVIII, MUMBAI RELATING TO ASSESSMENT YEAR 2 005-06. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) XXVIII [THE CIT(A)] ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN DISALLOWING A SUM OF RS. 6,82,981/- U/S. 14A OF THE INCOME TAX ACT, 1961 (THE ACT) ON A PROPORTIONATE BASIS. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF CIGARETTE FILTER RODS , POWER GENERATION AND FI NANCE ACTIVITY. THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 87,37,264/- WHICH W AS EXEMPT U/S. 10(34) OF THE INCOME TAX ACT, 1961 (THE ACT). WITH A VIEW TO MAKE DISALLOWANCE OF EXPENSES INCURRED IN EARNING THE DIVIDEND INCOME WH ICH IS EXEMPT, THE AO CALLED FOR THE DETAILS OF EXPENSES INCURRED IN EARN ING DIVIDEND INCOME. THE ASSESSEE SUBMITTED THAT NO EXPENSES WERE INCURRED B Y IT FOR EARNING THE ITA NO.4663/MUM/2009(A.Y.2005-06) 2 DIVIDEND INCOME AND THE INVESTMENTS WERE MADE OUT I TS OWN FUNDS. THE AO HOWEVER, INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND TAKING INTO ACCOUNT THE DISALLOWANCE ON THIS ACCOUNT BY THE CIT (A) IN ASSESSMENT YEAR 2002-03 OF RS. 75,000/-, THE AO DISALLOWED A SUM OF RS. 6,82,988/-. IN DOING SO THE AO WAS OF THE VIEW THAT COMMON BOOKS OF ACCOUNT WERE MAINTAINED BY THE ASSESSEE AND, THEREFORE, THE PRIN CIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF WATERFALL EST ATE LTD., 219 ITR 563 (SC) WOULD BE APPLICABLE. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED TH E AO TO APPLY RULE 8D OF THE I.T. RULES, 1962, AS LAID DOWN BY THE HONBL E SPECIAL BENCH OF ITAT IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD., ITA NO.8057/M/03 ORDER DATED 20/10/2008. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS LAID DO WN BY THE HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSI ONER OF INCOME TAX,RANGE 10(2), MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX RANGE 10(2), MUMBAI & ORS THE PROVISIONS OF RULE 8D WILL NOT BE APPLICABLE FOR ASSESSMENT YEAR 2005-06. THE DISALLOWANCE UNDER SE CTION 14A HAS TO BE MADE ON A REASONABLE BASIS. A PERUSAL OF THE ORDE R OF THE AO SHOWS THAT HE HAS DETERMINED THE DISALLOWANCE BASED ON THE DECISI ON IN THE CASE OF WATERFALL ESTATE (SUPRA). THAT WAS A DECISION REND ERED IN THE CONTEXT OF ALLOWING INTEREST EXPENSES WHERE THE INTEREST EXPEN SES ARE INCURRED IN RELATION TO THE NEW LINE OF BUSINESS. THAT DECISIO N WOULD NOT BE RELEVANT FOR THE PURPOSE OF MAKING DISALLOWANCE UNDER SECTION 14 A OF THE ACT. TAKING INTO CONSIDERATION THE QUANTUM OF DIVIDEND AND CONS IDERING THE FACT THAT THERE ARE NO DIRECT EXPENSES LIKE INTEREST ON BORRO WED FUNDS, WE FEEL THAT 3% ITA NO.4663/MUM/2009(A.Y.2005-06) 3 OF THE DIVIDEND INCOME WOULD BE REASONABLE DISALLOW ANCE TO BE MADE UNDER SECTION 14A OF THE ACT. WE DIRECT ACCORDINGLY. 5. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION O F THE AO OF DISALLOWING THE DIRECTORS TRAVELING EXPENSES AMOUNT ING TO RS. 2,08,269/- ON THE ALLEGED GROUND THAT THE APPELLANT DID NOT FURNISH ANY SUPPORTING DOCUMENT ON FOREIGN TRAVEL AND STAFF TRAVELLING EXPENSES ARE NOT VERIFIABLE FULLY. 6. THE ASSESSEE INCURRED FOREIGN TRAVELING EXPENSES OF RS. 8,54,867/- BY ITS DIRECTORS/EXECUTIVES. THE DETAILS OF THE EXPEN SES AND THE PURPOSE FOR WHICH THE FOREIGN TRAVEL WAS UNDERTAKEN BY THE DIR ECTORS/EXECUTIVES WERE AS FOLLOWS: NAME OF THE PERSON VISITED FARE (RS.LACS) LODING & BOARDING AND OTHER EXPENSES (RS. LACS) TOTAL EXPENSES (RS. LACS) 1. MR. SIDDHARTHA MOHAN (MANAGING DIRECTOR), ZURICH, BARCELONA, SPAIN VISIT. 1.76 1.32 3.08 2. SMT. INDUMATI R. MAHESHWARI (EXECUTIVE DIRECTOR) UK & USA VISIT. 0.96 3.10 4.06 3. MR. M.M.PISAL (PRESIDENT) HONG KONG VISIT 0.38 0.65 1.03 4. MR. AMIT SHAH (AGENT) DUBAI, BAKU, AZARBAIJAN 0.28 0.09 0.37 TOTAL 8.54 S.NO. NAME OF THE PERSON VISITED COMPANY REFERENCE PURPOSE OF VIST. 01 MR. SIDDHARTHA MOHAN, (MANAGING DIRECTOR) MIQUEL Y. COSTAS & MIQUEL SA, BARCELONA, SPAIN TO DISCUSS SUPPLY OF HIGH POROUS PLUGWRAP PPER, ONE OF THE BASIC RAW MATERIAL OF THE COMPANY USED IN MANUFACTURE OF CIGARETTE FILTER RODS, ITS QUALITY AND PRICE NEGOTIATION ETC. 02. SMT. INDUMATI R. MAHESHWARI, (EXECUTIVE DIRECTOR) A) EASTMAN CHEMICAL CO. USA A) DISCUSSIONS FOR LONG TERM UNINTERRUPTED SUPPLIES OF ACETATE TOW THE PRINCIPLE RAW MATERIAL USED IN MANUFACTURE OF CIGARETTE FILTER RODS. B) FOR PRICE NEGOTIATION FOR ITA NO.4663/MUM/2009(A.Y.2005-06) 4 SUPPLIES OF ACETATE TOW B) RUSMET COMMODITY LTD., LONDON UK PERSUADING EXPORT OF CIGARETTE FILTER RODS. C) MOLINS TOBACCO MACHINERY LTD. LONDON UK TO DRAW TECHNICAL SUPPORT FOR MACHINE IMPORTED EARLIER. D) HAUNI LONDON LTD., LONDON UK UPDATING THE MACHINERY INFORMATION. 03. MR. M.M.PISAL (PRESIDENT) NANYANG BROTHERS TABACCO CO. LTD. HONG KONG TO EXPLORE THE POSSIBILITY OF SUPPLY COMPANYS FINISHED PRODUCTS I.E. ACETATE FILTER RODS SPECIALLY ACETATE FILTER RODS MADE OUT WITH USING HIGH POROUS PLUGWRAP PAPER AND MENTHOL ETC. 04. MR. AMIT SHAH (AGENT) A) SKYGATE TRADING, DUBAI , UAE -DO- B) GLOBAL TOBACCO FZ CO. JABEL ALI, FREE ZONE, DUBAI -DO- C) KAANE AMERICAL INTL. TOBACCO CO. LTD., DUBAI -DO- D) LUN FU KAUK, MACAU -DO- E) EUROPEAN TOBACCO, BAKU -DO- F) DOLPHIN DISIGARET LTD. BAKU, AZERBIJAN -DO- THE AO NOTICED THAT THE DURATION OF FOREIGN TRAVEL WAS FOR A LONG PERIOD AND, THEREFORE, HE WAS OF THE VIEW THAT IT CANNOT BE ACC EPTED THAT THE ENTIRE FOREIGN TRAVEL WAS IN CONNECTION WITH BUSINESS OF T HE ASSESSEE. FURTHER THE AO WAS OF THE VIEW THAT NON-BUSINESS PURPOSE OF THE VISITS CANNOT BE RULED OUT. FURTHER THE AO ALSO HELD THAT THE EXPENSES I NCURRED ON AGENT AMIT SHAH CANNOT BE FOR BUSINESS PURPOSES. THE AO ALSO MADE PASSING REMARK THAT PROPER EXPLANATION COULD NOT BE GIVEN BY THE A SSESSEE ON THE PURPOSES OF THE VISITS. FOR ALL THE ABOVE REASONS THE AO DI SALLOWED SUM OF RS. 2,08,269/- OUT OF TRAVELING EXPENSES. THE CIT(A) C ONFIRMED THE ORDER OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASS ESSEE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. ITA NO.4663/MUM/2009(A.Y.2005-06) 5 7. WE HAVE ALREADY SEEN BREAK-UP OF THE EXPENSES AN D ALSO PURPOSE OF THE VISITS BY THE DIRECTORS/EXECUTIVES. THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO DISREGARD THE CLAIM OF THE ASSESSEE. THE ADDITION HAS BEEN MADE PURELY ON ASSUMPTIONS AND SURMISES. WE, THERE FORE, DIRECT THAT THE ADDITION SUSTAINED BY THE CIT(A) SHOULD BE DELETED. GROUND NO.2 IS ACCORDINGLY ALLOWED. 8. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING AN ADDITION OF RS. 55,55,297/- T O THE CLOSING STOCK ON THE ALLEGED GROUND THAT AS PER 145A, THE INVENTO RY HAS TO BE ADJUSTED BY INCLUDING THE DUTIES, TAXES ETC. 9. THE A.O ADDED UNUTILIZED CENVAT CREDIT TO THE EX TENT OF RS.55.55.297/- TO THE VALUE OF THE CLOSING STOCK. ACCORDING TO TH E AO AS PER THE PROVISIONS OF SECTION 145A OF THE ACT, CLOSING STOCK HAS TO BE VALUED AFTER TAKING INTO CONSIDERATION THE CENVAT CREDIT OF RAW MATERIAL UTI LIZED FOR PAYMENT OF DUTY ON FINISHED GOODS. ACCORDING TO THE AO EXCISE DUTY IS PAID ON THE FINISHED GOODS ACQUIRED FROM THE BONDED WAREHOUSE BUT HELD I N STOCK AND SUCH DUTY APPEARS AS ADVANCE IN THE BALANCE SHEET, IT SHOULD BE ADDED TO THE VALUATION OF FINISHED GOODS. THE AO ACCORDINGLY ADDED THE UN UTILIZED CENVAT TO THE VALUE OF THE CLOSING STOCK. ON APPEAL BY THE ASSE SSEE THE CIT(A) DIRECTED THAT SIMILAR ADDITION SHOULD BE MADE TO THE OPENING STOCK ALSO. 10. AT THE TIME OF HEARING BEFORE US IT WAS BROUGHT TO OUR NOTICE THAT PURSUANT TO THE ABOVE DIRECTIONS GIVEN BY THE CIT(A ) THE ADJUSTMENT TO THE OPENING STOCK OF UNUTILIZED MODVAT CREDIT WAS RS. 6 8,34,385/- AND, THEREFORE, THE ADDITION MADE BY THE AO WILL NOT HAV E ANY IMPACT. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE ORDER OF THE AO D ATED 3/12/2010 GIVING EFFECT TO THE ORDER OF THE CIT(A), THE GRIEVANCE PR OJECTED IN GROUND NO.3 BY ITA NO.4663/MUM/2009(A.Y.2005-06) 6 THE ASSESSEE HAS BECOME INFRUCTUOUS. CONSEQUENTLY, THE SAME IS DISMISSED AS INFRUCTUOUS. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 10 TH DAY OF JUNE, 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 10 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4663/MUM/2009(A.Y.2005-06) 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 6/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 7/6/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER