CHANDRAKANT M. SHAH, MUMBAI V. ACIT RG 13(2), MUMBAI

ITA 4781/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3867 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 03-11-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 18-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P PRASAD
• Assessee Lawyers: RANGESH BANKA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A.NO. 4781/MUM/2009 ASSESSMENT YEAR : 2006-07 SHRI CHANDRAKANT M. SHAH, PROP. MULTILINE CORPORATION, 20, GUNDECHA CHAMBERS, NAGINDAS MASTER ROAD, MUMBAI 400 023. PAN: AAGPS 1059 K VS. ASST. COMMISSIONER OF INCOME-TAX, RANGE 13(2), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RANGESH BANKA RESPONDENT BY : SHRI S.P. PRASAD O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 29.06.2009 OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-XIII, M UMBAI, FOR THE ASSESSMENT YEAR 2006-07. 2. THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE I NCOME-TAX ACT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD SHOWN INCOME OF RS. 19,90,464/- FROM VARIOUS INVESTMENTS SUCH AS BONDS, PPF, MUTUAL FUNDS, DIVIDEND ETC., WHICH WERE EXEMPT FROM TAX. THE ASSESSING O FFICER ALSO NOTED THAT THE ASSESSEE HAD PAID INTEREST OF RS. 37,55,420/- ON UN SECURED LOANS. THE ASSESSING OFFICER OBSERVED THAT THOUGH THE ASSESSEE CLAIMED T HAT INVESTMENTS HAD NOT BEEN MADE OUT OF BORROWED FUNDS BUT WAS UNABLE TO ESTABL ISH THE CLAIM WITH ANY MATERIAL. THE ASSESSING OFFICER, THEREFORE, MADE PR OPORTIONATE DISALLOWANCE OF INTEREST IN THE RATIO OF EXEMPT INCOME TO THE TOTAL INCOME. HE, THUS MADE DISALLOWANCE OF RS. 17,92,500/-. ITA NO.4781/M/2009 SHRI CHANDRAKANT M. SHAH. 2 4. IN APPEAL THE ASSESSEE SUBMITTED THAT INVESTMEN TS HAD BEEN MADE FROM HIS PERSONAL ACCOUNT FOR WHICH SEPARATE ACCOUNTS HA D BEEN MAINTAINED. THE ASSESSEE WAS TRADING IN SHARES IN THE PROPRIETORSHI P CONCERN FOR WHICH SEPARATE ACCOUNTS HAD BEEN MAINTAINED AND THE LOANS HAD BEE N TAKEN ONLY IN THE PROPRIETARY CONCERN. NO DISALLOWANCE OF INTEREST CO ULD, THEREFORE, BE MADE. IT WAS ALSO SUBMITTED THAT INTEREST PAID IN THE PROPRIETAR Y CONCERN WAS FOR THE PURPOSE OF BUSINESS OF TRADING IN SHARES AND, THEREFORE, THE I NTEREST HAD TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. IT WAS ALSO POINTED OUT THAT DIVIDEND INCOME EARNED IN THE PROPRIETARY CONCERN WAS ONLY RS. 66,687/- AN D, THEREFORE, DISALLOWANCE, IF ANY, HAD TO BE LIMITED TO THAT EXTENT ONLY. THE CIT (A), HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED AND FOLLOWING THE DECISION OF TH E SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. ( 117 ITD 169) HELD THAT SECTION 14A APPLIED EVEN IN RESPECT OF TRADING IN SHARES AN D THAT DISALLOWANCE HAD TO BE MADE AS PER RULE 8D OF THE INCOME-TAX RULES WHICH H AD RETROSPECTIVE APPLICATION. HE, ACCORDINGLY, UPHELD THE DISALLOWANCE UNDER RULE 8D WHICH CAME TO RS. 6,85,761/-. AGGRIEVED BY THE SAID DECISION, THE AS SESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RE CORDS AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE DISPUTE IS REGARD ING THE DISALLOWANCE OF INTEREST IN RELATION TO EXEMPT INCOME U/S.14A OF THE INCOME- TAX ACT. THERE IS NO DISPUTE THAT THE ASSESSEE HAD RECEIVED INCOME OF RS.19,90,4 64/-FROM DIVIDEND ETC. WHICH WAS EXEMPT FROM TAX. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF INTEREST OF RS. 37,55,420/-ON THE BORR OWINGS MADE. THE ASSESSEE AS PER THE ASSESSING OFFICER COULD NOT PROVE ANY NEXUS BETWEEN THE INVESTMENT AND THE INTEREST FREE BONDS. THE A.O. THEREFORE, MADE P ROPORTIONATE DISALLOWANCE OF INTEREST IN THE RATIO OF EXEMPT INCOME TO TOTAL INC OME WHICH CAME TO RS.17,92,500/-. IN APPEAL, THE CIT(A) FOLLOWING TH E DECISION OF THE SPECIAL BENCH ITA NO.4781/M/2009 SHRI CHANDRAKANT M. SHAH. 3 IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (S UPRA) HELD THAT DISALLOWANCE HAD TO BE MADE AS PER RULE 8D AND ACCORDINGLY HE CO NFIRMED THE DISALLOWANCE TO THE EXTENT OF RS.6,85,761/-. HOWEVER, THE DECISION OF THE SPECIAL BENCH THAT RULE 8D WOULD APPLY RETROSPECTIVELY HAD NOT BEEN UPHELD BY THE HONBLE HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT, IN INCOME-TAX APPEAL NO. 626 OF 2010, IN WHICH IT HAS BEEN HELD T HAT RULE 8D WOULD APPLY ONLY FROM ASSESSMENT YEAR 2008-09. IN RELATION TO THE PR IOR PERIOD, THE HIGH COURT HAS HELD THAT THE ASSESSING OFFICER WAS DUTY BOUND TO D ETERMINE THE EXPENDITURE WHETHER DIRECT OR INDIRECT INCURRED IN RELATION TO EXEMPT INCOME AFTER ADOPTING A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE AND AFTER ALLOWING OPPORT UNITY OF HEARING TO THE ASSESSEE. WE, THEREFORE, SET ASIDE THE ORDER OF TH E CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSING AFRESH ORDER AFTER NECESSAR Y EXAMINATION IN THE LIGHT OF THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY (SUPRA ) AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF NOVEMBER, 2010. SD. SD. (V. DURGA RAO) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED THE 12 TH NOVEMBER, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT-XIII, MUMBAI 4. THE CIT(A)-XIII, MUMBAI 5. THE DR C BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI