HYBRID PROPERTIES P.LTD, MUMBAI V. ACIT CEN CIR 38, MUMBAI

ITA 4740/MUM/2012

• Counselvise Citation: 474019914 RSA 2012
• Duration Of Justice: 2 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: H
• Next Hearing Date: 14-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 17-07-2012
• Court: TRIBUNAL
• Department Lawyers: JEETENDRA KUMAR
• Assessee Lawyers: REEPAL G TRALSHAWALA
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA, AM & SHRI SANJAY GARG , JM ITA NO. 4740 / MUM/20 1 1 ( ASSESSMENT YEAR : 2 009 - 10 ) M/S HYBRID PROPERTIES PVT. LTD., 302, SYLVERTON BUILDING, 102 WODE HOUSE ROAD, COLABA, MUMBAI - 5 VS. ACIT CC - 38, MUMBAI PAN/GIR NO. : A A A C H 8560 G ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI REEPAL G. TRALSHAWALA /REVENUE BY : SHRI JEETENDRA KUMAR DATE OF HEARING : 0 9 / 0 2 /201 5 DATE OF PRONOUNCEM ENT : 04 /0 3 /2015 O R D E R PER R.C.SHARMA ( A .M.) : THE ASSESSEE HAS FILED THIS APPEAL AGAINST THE ORDER OF CIT(A) DATED 9 - 5 - 2012 FOR THE ASSESSMENT YEAR S 20 0 9 - 10 , IN THE MATTER OF ORDER PASSED U/S. 143(3) OF THE I.T.ACT . 2. TH E ONLY GRIEVANCE OF THE ASSESSEE RELATES TO DISALLOWANCE U/S.14A R.W.R.8D. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO MADE DISALLOWANCE U/S.14A BY OBSERVING THAT F ROM THE PERUSAL OF BALANCESHEE T OF THE ASSESSEE, IT IS NOTICED THE ASSESSEE HAS INVESTED FUNDS IN GIVING LOANS AND ADVANCES, FIXED ASSETS AND ALSO IN PARTNERSHIP FIRM IN THE FORM OF CAPITAL AND CURRENT ITA NO. 4740 /20 1 2 2 ACCOUNT. THUS, ASSESSEE HAS INVESTMENTS IN HIS BALANCESHEET, INCOME FROM WHICH IS EX EMPT FROM TAX (I.E. SHARE OF PROFIT FROM FIRM). ALSO, ON PERUSAL OF PROFIT AND LOSS ACCOUNT, IT IS NOTICED THAT ASSESSEE HAS CLAIMED HUGE INTEREST EXPENDITURE, SALARY, GENERAL EXPENSES, STAFF WELFARE ETC. ALSO. BUT THE ASSESSEE HAS CLAIMED ALL SUCH EXPENDI TURE AGAINST TAXABLE INCOME ONLY AND NO EXPENSES WERE DISALLOWED BY HIM AS INCURRED IN RELATION TO THOSE INVESTMENTS INCOME FROM WHICH IS NON - TAXABLE. IT IS' ALSO NOTICED FROM BALANCESHEET THAT A MAJOR AMOUNT IS INVESTED IN PARTNERSHIP FIRM. THE ASSESSEE W AS ASKED TO ESTABLISH NEXUS BETWEEN INTEREST BEARING LOANS AND THE UTILIZATION OF SUCH FUNDS FOR INVESTMENT IN THOSE FUNDS WHICH ARE CAPABLE OF GIVING TAXABLE INCOME. IN ADDITION TO THIS, THE ASSESSEE WAS ALSO ASKED TO SHOW - CAUSE WHY DISALLOWANCE AS PER PR OVISION OF SEC. 14A SHOULD NOT APPLY TO HIM. IN REPLY, HE STATED VIDE LETTER DATED 29.11.2011 THAT PROVISION OF SEC. 14A ARE NOT APPLICABLE TO HIM AND HENCE NO DISALLOWANCE IS CALLED FOR. ALSO, HE STATED THAT ASSESSEE HAS BORROWED LOAN AT LOWER INTEREST RA TE AND LENT THEM AT A HIGHER INTEREST RATE. THE AO OBSERVED THAT SUBMISSION GIVEN BY THE ASSESSEE WAS CONSIDERED. HOWEVER, THE SAME IS NOT APPLICABLE. THE ASSESSEE HAS NOT ESTABLISHED 'DIRECT' NEXUS BETWEEN INTEREST BEARING FUNDS TAKEN AND ITS UTILIZATION. THUS THE AO SATISFIED THAT SOME PART OF EXPENDITURE INCURRED (INCLUDING INTEREST EXPENDITURE) ARE ATTRIBUTABLE TO THOSE INVESTMENTS INCOME FROM WHICH IS NOT TAXABLE. 4. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE DISALLOWANCE, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. ITA NO. 4740 /20 1 2 3 5. IT WAS ARGUED BY LD. AR THAT ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AS PER AUDITED BALANCE SHEET FILED WITH THE RETURN OF INCOME. HE FURTHER INVITED OUR ATTENTION TO THE NET SURPLUS FUNDS (INTEREST FREE) OF RS .3,87,17,671/ - (REFER COLUMN E) AT ITS DISPOSAL AT THE BEGINNING OF THE YEAR EVEN AFTER MAKING INVESTMENT (BEARING INTEREST ) IN THE CAPITAL OF THE PARTNERSHIP' FIRMS FOR MAKING OTHER INTEREST BEARING INVESTMENTS - VIZ. GRANTING LOANS TO THIRD PARTIES. AS PE R LD. AR, THE INTEREST FREE OWNED FUNDS HAD BEEN UTILIZED FOR MAKING INVESTMENTS IN THE PARTNERSHIP FIRMS IN ORDER TO EARN TAXABLE INTEREST INCOME. FURTHER, THE FACT THAT, EVEN THOUGH SOME OF THE BORROWINGS MADE FROM BAPA REAL ESTATE PVT. LTD. HAD BEEN UTI LIZED FOR MAKING INVESTMENTS IN THE PARTNERSHIP FIRM I N THE CURRENT YEAR, THE FACT THAT SUCH INVESTMENTS HAD ALSO EARNED TAXABLE INCOME AND NOT EXEMPT INCOME FOR THE ASSESSEE , CANNOT BE OVERLOOKED. BASED ON THE ABOVE ANALYSIS OF BALANCE SHEET AND IN THE FA CTS THAT, A SSESSEE HAD NOT ADVANCED ANY FUNDS/MADE INVESTMENTS, WHICH ARE OF THE INTEREST FREE NATURE AND FURTHER THE FACT THAT, DURING THE YEAR, NO EXEMPT INCOME IS EAR NED FROM ANY OF THE INVESTMENTS. LD. AR ARGUED THAT NO DISALLOWANCE SHOULD BE MADE U/S. 14A R.W.R.8D. 6. ON THE OTHER HAND, LD. DR RELIEF ON THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT ASSESSEE IS A PRIVATE LIMITED C OMPANY ENGAGED IN THE BUSINESS OF REAL ESTATE AND FINANCING/INVESTMENT IN SHARES, DURING THE RELEVANT ASSESSMENT YEAR. FURTHER, THE COMPANY BORROWS FUNDS AT LOWER RATE OF ITA NO. 4740 /20 1 2 4 INTEREST AND ADVANCES SAME AT HIGHER RATE OF INTEREST AND THE INCOME THERE FROM IS OF FERED FOR TAXATION UNDER THE HEAD OF INCOME FROM BUSINESS & PROFESSION. THE ASSESSEE IS ALSO PARTNER IN PARTNERSHIP FIRMS (I.E. GALAXY ASSOCIATES, SPR INFRASTRUCTURE) AND THE CAPITAL BALANCES THEREIN ARE REFLECTED UNDER THE HEAD OF INVESTMENT IN THE BA LANCE SHEET IN THE RELEVANT ASSESSMENT YEAR. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME FROM PARTNERSHIP FIRM BY WAY OF SHARE OF PROFIT. THE ASSESSEE HAS EARNED INTEREST INCOME DURING THE YEAR AMOUNTING TO RS. 1,71,47,465/ - AND OTHER INCOME OF RS. 5,300/ - . AS AGAINST THIS INCOME, THE ASSESSEE HAS INCURRED OVERALL ADMINISTRATIVE AND OTHER EXPENSES OF RS. 2,50,548/ - AND CLAIMED DEPRECIATION OF RS.65,447/ - . DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO APPLIED RULE 8D AND WORKED OU T DISALLOWANCE AT RS. 57,51,821/ - . WE DO NOT FIND ANY MERIT IN THE DISALLOWANCE SO MADE BY THE AO, INSOFAR AS RULE 8D CAN BE APPLIED ONLY WHEN ASSESSEE HAS CLAIMED CERTAIN EXPENDITURE AGAINST EARNING OF EXEMPT INCOME. IN THE INSTANT CASE, THE AO HAS MADE DI SALLOWANCE UNDER RULE 8D ON THE PLEA THAT THE ASSESSEE HAS MADE INVESTMENT IN PARTNERSHIP FIRM, INCOME OF WHICH IS EXEMPT. WE FOUND THAT ON THE CAPITAL SO INVESTED IN THE PARTNERSHIP FIRM, THE ASSESSEE HAS EARNED SUBSTANTIAL INTEREST INCOME WHICH IS LIABLE TO TAX. AS PER THE AUDITED PROFIT AND LOSS ACCOUNT PLACED IN THE RECORD, WE FOUND THAT ASSESSEE HAS EARNED GROSS INTEREST INCOME OF RS.2,51,65,257/ - AND PAID INTEREST OF RS.80,17,792/ - WHICH RESULTED INTO NET INTEREST INCOME OF RS. 1,71,47,465/ - . MOST OF T HE INVESTMENT WAS OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT AND EVEN IN RESPECT OF THE PART OF THE INVESTMENT MADE OUT OF BORROWINGS, SINCE THE ITA NO. 4740 /20 1 2 5 ASSESSEE HAS EARNED INTEREST INCOME THEREON WHICH WAS MORE THAN WHAT WAS PAID AGAINST THE BORROWING, NO DISAL LOWANCE IS WARRANTED U NDER RULE 8D . THE ITAT KOLKATA BENCH IN THE CASE OF M/S TRADE APARTMENT LTD., ITA NO. 1277/KOL/2011, VIDE ORDER DATED 30 TH MARCH, 2012, HELD THAT WHEN AFTER SETTING OF INTEREST PAID AGAINST THE INTEREST RECEIVED, THERE IS NO NET INTERE ST EXPENDITURE, NO PART OF INTEREST DEBITED CAN BE DISALLOWED AS ATTRIBUTABLE TO TAX FREE INCOME. T HE AO IS EMPOWER TO MAKE DISALLOWANCE U/S.14A R.W.R.8D ONLY IF THE ASSESSEE HAS DEBITED CERTAIN INTEREST EXPENDITURE WHICH ARE ATTRIBUTABLE TO EARNING THE EX EMPT INCOME. IN CASE THE ASSESSEE HAS NOT CLAIMED ANY INTEREST EXPENDITURE ATTRIBUTABLE TO EARNING EXEMPT INCOME, NO DISALLOWANCE IS WARRANTED UNDER RULE 8D. 8. NOW, COMING TO THE ADMINISTRATIVE EXPENSES OF RS. 2,50,548/ - CLAIMED IN THE PROFIT AND LOSS ACCO UNT, WE FOUND THAT ASSESSEE HAS EARNED TAXABLE INCOME OF RS. 1,71,52,765/ - AND AFTER CLAIMING SUCH EXPENSES OFFERED NOT TAXABLE INCOME OF RS. 1,68,36,770/ - . THUS, IT IS CLEAR THAT ENTIRE ADMINISTRATIVE EXPENSES ARE ATTRIBUTABLE TO EARNING OF THE TAXABLE INCO ME. IT IS PERTINENT TO MENTION HERE THAT NO EXEMPT INCOME WAS EARNED BY ASSESSEE DURING THE YEAR UNDER CONSIDERATION, THEREFORE, DISALLOWANCE MERELY ON THE PRESUMPTION THAT IN FUTURE ASSESSEE MAY EARN EXEMPT INCOME IS NOT TAXABLE WHEN ASSESSEE HAS NOT CLAI MED ANY EXPENDITURE IN ITS PROFIT AND LOSS ACCOUNT FOR EARNING OF EXEMPT INCOME. ACCORDINGLY, WE REVERSE THE ORDER OF BOTH THE LOWER AUTHORITIES AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S.14A R.W.R.8D. 9 . IN THE RESULT, APPEAL OF THE ASSESSEE I S ALLOWED . ITA NO. 4740 /20 1 2 6 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 4 TH MARCH . 201 5 . SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 04/03 /201 5 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//