VISHESH H PAREKH, MUMBAI V. ASST CIT 20(3), MUMBAI

ITA 4818/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3526 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 18-07-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S C TIWARI; RUTEJA PARMAR ARS
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F, BENCH MUM BAI BEFORE SHRI JASON P. BOAZ, AM AND SHRI SANDEEP GOSA IN, JM ITA NO.4818/MUM/2014 (ASSESSMENT YEAR: 2009-10) SHRI VISHESH H. PAREKH, 601-A, LOK DARSHAN MILITARY ROAD, MAROL, ANDHERI (E), MUMBAI 400 059 VS. THE ASST. COMMISSIONER OF INCOME TAX 20(3), MUMBAI PAN: AG V PP 2 722P APPELLANT .. RESPONDENT APPELLANT BY S/SHRI S. C. TIWARI AND RUTEJA PARMAR, ARS RESPONDENT BY SHRI G. M. DOSS (CIT DR) DATE OF HEARING: 13-04-2016 DATE OF PRONOUNCEMENT: 25-05-2016 O R D E R PER SANDEEP GOSAIN,J.M : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A GAINST THE ORDER OF THE LEARNED CIT (A)-31, MUMBAI DATED 07-05 -2014 PASSED IN APPEAL NO.CIT(A)-31/IT-376/ACIT-20(3)/11-12 FOR ASS ESSMENT YEAR 2009- 10 ON THE GROUNDS MENTIONED HEREIN BELOW:- 1. THE LEARNED COMMISSIONER OF INCOME TAX, (APPEAL S)-31 MUMBAI ERRED IN CONFIRMING THE DISALLOWANCE OF RS.2,11,854 /- U/S. 14A R. W. RULE 8-D WITHOUT ASSIGNING ANY COGENT REASON. 1.1 YOUR APPELLANT, FURTHER SUBMITS THAT YOUR APPE LLANT HAS ALREADY SUBMITTED THAT NO EXPENDITURE HAS BEEN INCURRED FO R EARNING THE EXEMPT INCOME. 1.2 YOUR APPELLANT, THEREFORE, SUBMITS THAT THE DI SALLOWANCE OF RS.2,11,854/- U/S. 14-A READ WITH RULE 8D BE DELET ED IN FULL. 2. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND , WITHDRAW OR SUBSTITUTE ALL OR ANY OF THE GROUNDS AS THE CIRCUM STANCES OF THE APPEAL MAY REQUIRE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E ENGAGED IN THE BUSINESS OF EXPORTS OF PHARMACEUTICALS MACHINERY SP ARE PARTS, INSTALLATION ITA NO.4818/MUM/2014 2 AND REPAIRING OF PHARMACEUTICALS MACHINERY FILED HI S RETURN OF INCOME ON 29-09-2009 DECLARING INCOME OF RS.1,51,97,190/-. TH E RETURN WAS PROCESSED U/S 143 (1) OF THE IT ACT AND LATER ON TH E CASE WAS TAKEN UP FOR SCRUTINY ASSESSMENT AFTER STATUTORY NOTICES WERE SE RVED UPON THE ASSESSEE SEEKING CERTAIN DETAILS BY THE AO. DURING THE SCRUTINY ASSESSMENT THE AO NOTED THAT THE ASSESSEE EARNED DI VIDEND INCOME OF RS.5,59,383/- AND THE SAME WAS CLAIMED AS EXEMPT IN COME BY THE ASSESSEE. THE AO AFTER SEEKING REPLY FROM THE ASSES SEE HAD REACHED TO THE CONCLUSION THAT SOME EXPENDITURE WOULD CERTAINL Y HAVE INCURRED BY THE ASSESSEE FOR EARNING SUCH EXEMPT INCOME. THEREFORE, BY APPLYING THE PROVISIONS OF SECTION 14A (2) OF THE ACT READ WITH RULE 8D SUB CLAUSE (2) (III) OF THE IT RULES THE AO CALCULATED THE DISALLO WANCE AT RS.2,11,854/- AND ADDED THE SAME BACK TO THE TOTAL INCOME OF THE ASSESSEE VIDE HIS ORDER DATED 28-12-2011. AGGRIEVED BY THE ORDER OF T HE AO THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT (A) AND THE LEARNED CIT (A) AFTER HEARING BOTH THE PARTIES AND CONSIDER ING THE MATERIALS ON RECORD REJECTED THE GROUNDS RAISED BY THE ASSESSEE AND DISMISS THE ASSESSEES APPEAL BY UPHOLDING THE ACTION OF THE AO . AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE ASSESSEE IS NOW IN APPEAL BEFORE US ON THE AFOREMENTIONED GROUND. 3. GROUNDS NO.1 TO 1.2 OF THE ASSESSEES APPEAL ARE RELATING TO THE ISSUE OF APPLICABILITY OF THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE IT RULES WHILE CALCULATING THE DISALLOWANCE. IN THIS REGARD, THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE FOR ITA NO.4818/MUM/2014 3 EARNING EXEMPT INCOME, THEREFORE, PROVISIONS OF SEC TION 14A READ WITH RULE 8D WAS WRONGLY APPLIED BY THE AO AND THE ADDIT ION MADE BY THE AO ON ACCOUNT OF DISALLOWANCE MADE U/S 14A READ WITH R ULE 8D WAS ALSO WRONGLY UPHELD BY THE LEARNED CIT (A). THEREFORE, T HE LEARNED AR SUBMITTED THAT THE ADDITION SO MADE OF RS.2,11,854/ - TO THE INCOME OF THE ASSESSEE BE DELETED. THE MOOT QUESTION RAISED BY TH E LEARNED AR BEFORE US IS THAT SINCE THERE WAS NO EXPENSES DEBITED TO T HE PERSONAL ACCOUNT SO, QUESTION OF DISALLOWANCE DOES NOR ARISE AT ALL. IT WAS FURTHER ARGUED THAT THE WORD IN RELATION TO IN SECTION 14A MEAN A DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE AND T HE EXEMPT INCOME. IT WAS FURTHER ARGUED THAT THE ONUS IS ON THE AO TO ESTABLISH THAT THERE WAS DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE AND EXEMPT INCOME. SINCE, AS PER THE LEARNED AR THE ASS ESSEE HAS NOT SPENT A SINGLE RUPEE FROM THE PERSONAL ACCOUNT, THEREFORE , QUESTION OF DISALLOWANCE DOES NOT ARISE. IT WAS FURTHER SUBMITT ED BY THE LEARNED AR THAT THE AO DID NOT BRING ANY EVIDENCE ON RECORD TO ESTABLISH THAT THE ASSESSEE HAD INCURRED ANY EXPENDITURE FOR EARNING T HE EXEMPT INCOME AND IN THE ABSENCE OF SUCH EVIDENCE IT WAS WRONG ON THE PART OF THE AO TO PROCEED TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT BY APPLYING RULE 8D (2) (III) OF THE IT RULES. ALTHOUGH, THE LEARNED AR RELIED UPON SEVERAL JUDGMENTS BUT, THE JUDGMENT RENDERED BY THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT-II VS M/S. HERO CYCLE S LTD. DATED 04 TH NOVEMBER, 2009 PASSED IN ITA NO.331 OF 2009 WAS REF ERRED TO BY HIM. WHILE DRAWING OUR ATTENTION TO THE SAID JUDGMENT IT WAS SUBMITTED BY THE ITA NO.4818/MUM/2014 4 LEARNED AR THAT THE HONBLE HIGH COURT HAS GIVEN A CATEGORICAL FINDING THAT WHETHER IN A GIVEN SITUATION ANY EXPENDITURE WAS I NCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPEND ITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE M ANDATE OF SECTION 14A, CANNOT BE ACCEPTED. 3.1 IN ADDITION, THE LEARNED AR FURTHER SUBMITTED T HAT IT IS A SETTLED LAW THAT THE AO MUST RECORD HIS SATISFACTION THAT APPLI CATION OF RULE 8D IS CALLED FOR ON THE FACTS AND CIRCUMSTANCES OF A CASE AND FOR THAT PURPOSE THE AO MUST SATISFY THAT EXPENDITURE HAS ACTUALLY B EEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF EARNING DIVIDEND INCOME AND THE AO CANNOT SIMPLY IGNORE THE PLEA OF THE ASSESSEE THAT THERE I S HARDLY ANY EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING DIV IDEND INCOME. THE LEARNED AR FURTHER RELIED UPON THE DECISION IN THE CASE OF (I) CIT VS WALFORT SHARE & STOCK BROKERS P. LTD. [326 ITR 1 (S C)] RENDERED BY THE HONBLE SUPREME COURT, (II) CIT VS SHAPOORJI PALLON JI REPORTED IN 318 ITR 417 (BOM.) 4. ON THE OTHER HAND, THE LEARNED DR APPEARING ON B EHALF OF THE REVENUE SUBMITTED THAT ALTHOUGH THE REPLY WAS SUBMI TTED BY THE ASSESSEE TO THE EFFECT THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR THE PURPOSE OF EARNING EXEMPT INCOME BUT, THE AO WAS NO T SATISFIED TO THE ITA NO.4818/MUM/2014 5 CORRECTNESS OF THE CLAIM IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. IT WAS FURTHER SUBMITTED BY THE LEAR NED DR THAT IN THE PROFIT & LOSS ACCOUNT, CERTAIN EXPENSES HAVE BEEN C LAIMED BY THE ASSESSEE AND THAT WHENEVER EXEMPT INCOME EARNED BY THE ASSESSEE THEN IN THAT CASE THE PROVISIONS OF SECTION 14A OF THE ACT LAID DOWN THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPEND ITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE LAW. IT WAS FURTHER SUBMITTED BY T HE LEARNED DR THAT IT HAS BEEN LAID DOWN BY SUB-SECTION (2) OF SECTION 14 A OF THE ACT THAT THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURR ED IN RELATION TO EARNING OF EXEMPT INCOME BY USING THE METHOD AS MAY BE PRESCRIBED IN THE CASE. IT WAS FURTHER SUBMITTED THAT AT THE TIME OF INVESTMENT THE ASSESSEE HAS PAID COMMISSION TO THE AGENTS FACILITA TING THE INVESTMENT AND MANAGING PORTFOLIO AND HAS NOT DEBITED ANY EXPE NSES IN RELATION TO THESE ACTIVITIES IN HIS PERSONAL ACCOUNT. ON THAT B ASIS, THE LEARNED DR SUBMITTED THAT THE DISALLOWANCE MADE BY THE AO IS C ORRECT. IN SUPPORT OF HIS CONTENTIONS THE LEARNED DR REPLIED UPON THE DEC ISION OF ITAT CHENNAI D BENCH IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES (INDIA) (P) LTD. VS ACIT [ITA NO.2073 (MAD.) OF 2011 ORDER DATE D 17 TH APRIL, 2012] WHEREIN IT HAS BEEN CATEGORICALLY HELD AS UNDER:- . III. SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 EXPENDITURE INCURRE D IN RELATION TO INCOME NOT INCLUDIBLE TO TOTAL INCOME ASSESSMENT YEAR 2007 -08 ASSESSEE HAD EARNED SUBSTANTIAL AMOUNT OF DIVIDEND INCOME WITHOUT INCURRING ANY DIRECT VISIBLE EXPENDITURE WHETHER NO INCOME IS GRATUITOUS AND EVERY INCOME IS EARNED AFTER INCURRING CERTAIN EXPENSES AND, HENCE, A REASONABLE PORTION OF MANAGEMENT TIME EXPENDITURE SHOULD BE ATTRIBUTED TO EARNING OF DIVIDEND INCOME HELD, YE S WHETHER SINCE ITA NO.4818/MUM/2014 6 QUANTIFICATION OF EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME, WAS NOT PERMISSIBLE UNDER RULE 8D FOR IMPUGNED ASSESSMENT YEAR, DISALLOWANCE HAD TO BE MADE ON BAS IS OF REASONABLENESS AND FAIRNESS HELD, YES [PARTLY IN FAVOUR OF ASSESSEE]. THE LEARNED DR FURTHER RELIED UPON THE DECISION RE NDERED BY ITAT BOMBAY C BENCH IN THE CASE OF ACIT VS CITICORP FI NANCE (INDIA) LTD., 108 ITD 457 WHEREIN IT HAS BEEN HELD AS UNDER:- THE PROHIBITION FOR ALLOWING THE DEDUCTION UNDER S ECTION 14A FOR AND FROM THE ASSESSMENT YEAR 1962-63 IS IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PAR OF THE TOTAL INCOME. THE TERM EXPENDITURE OCC URRING IN SECTION 14A WOULD TAKE IN ITS SWEEP NOT ONLY DIRECT EXPENDI TURE BUT ALSO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER THEY ARE FIXED, VARIABLE, DIRECT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FIN ANCIAL. THE PHRASEOLOGY USED IN SECTION 14A PROHIBITING THE DED UCTION IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME IS WIDE ENOUGH TO COVER ALL FORMS OF EXPENSES PROVIDED THEY HAVE SOME CONNECTION WITH THE EXEMPT INCOME. THIS IS BASED ON THE PRINCIPLE THAT EXPENSES MUST BE ALL OCATED TO THAT INCOME TO WHICH THEY ARE CONNECTED TO AVOID DISTORT IONS IN THE COMPUTATION OF BOTH TAXABLE AS WELL AS EXEMPT INCOM E [PARA 12]. IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE C AN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY EXPENSES WHAT SOEVER INCLUDING MANAGEMENT OR ADMINISTRATIVE EXPENSES. BY SAME LOGIC, IT IS EQUALLY DIFFICULT TO ACCEPT THAT THE ONLY EXPENS ES INVOLVED IN EARNING THE DIVIDEND INCOME ARE THOSE INCURRED ON C OLLECTION OF DIVIDEND OR ON ENCASHING A FEW DIVIDEND WARRANTS. A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANA GEMENT. INVESTMENT DECISIONS ARE VERY COMPLEX IN NATURE. TH EY REQUIRE SUBSTANTIAL MARKET RESEARCH, DAY TO DAY ANALYSIS OF MARKET TRENDS AND DECISIONS WITH REGARD TO ACQUISITION, RETENTION AND SALE OF SHARES AT THE MOST APPROPRIATE TIME. THEY REQUIRE H UGE INVESTMENT IN SHARES AND CONSEQUENTIAL BLOCKING OF FUNDS. IT I S WELL-KNOWN THAT CAPITAL HAS COST AND THAT ELEMENT OF COST IS REPRES ENTED BY INTEREST. BESIDES, INVESTMENT DECISIONS ARE GENERALLY TAKEN I N THE MEETINGS OF THE BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPENSES ARE INCURRED. IT IS, THEREFORE, NOT CORRECT TO SAY THAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITURE [P ARA 13]. THEREFORE, ALL EXPENSES CONNECTED WITH EXEMPT INCOM E HAVE TO BE DISALLOWED UNDER SECTION 14A REGARDLESS OF WHETHER THEY ARE DIRECT OR INDIRECT, FIXED OR VARIABLE AND MANAGERIAL OR FI NANCIAL IN ACCORDANCE WITH LAW. [PARA 14]. ITA NO.4818/MUM/2014 7 5. WE HAVE HEARD BOTH THE PARTIES AND HAVE ALSO PER USED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE AU THORITIES BELOW. AFTER PERUSAL OF THE IMPUGNED ORDER WE HAVE NOTICED THAT THE DISALLOWANCE MADE BY THE AO IS NOT UNDER RULE 8 D (2) (I) OR (II ) BUT, ON THE AVERAGE VALUE OF THE INVESTMENTS AS PER RULE 8D (2) (III), THEREFORE, THE NEXUS BETWEEN THE EXPENSES CLAIMED BY THE ASSESSEE AND TH E TAXABLE INCOME IS NOT RELEVANT IN THE FACTS AND CIRCUMSTANCES OF T HE PRESENT CASE. RULE 8D (2) (III) LAYS DOWN THE PROCEDURE TO BE MADE FOR VALUING THE INVESTMENT HELD BY THE ASSESSEE AND IN THIS SITUATION, THE STA TUTORY DISALLOWANCE @ 0.5% HAS ALREADY BEEN HELD TO BE REASONABLE BY VARI OUS COURTS. THE SAID MECHANISM WAS ALSO DISCUSSED AND WAS FOUND TO BE IN ORDER BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GO DREJ & BOYCE MFG. CO. LTD. VS DCIT, 328 ITR 81 AND IN THE CASE OF CITICOR P FINANCE LTD. CITED SUPRA IT HAS BEEN CATEGORICALLY MENTIONED THAT THE PHRASE USED U/S 14A PROHIBITING THE DEDUCTION IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME IS WIDE ENOUG H TO COVER ALL FORMS OF EXPENSES PROVIDED THEY HAVE SOME CONNECTION WITH THE EXEMPT INCOME. IN THE SAID JUDGMENT IT HAS CATEGORICALLY B EEN MENTIONED THAT IT IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EAR N SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY EXPENSES WHATSOEVER IN CLUDING MANAGEMENT OR ADMINISTRATIVE EXPENSES AND, THEREFOR E, IT WAS LASTLY HELD THAT THE EXPENSES CONNECTED WITH EXEMPT INCOME HAVE TO BE DISALLOWED UNDER SECTION 14A REGARDLESS OF WHETHER THEY ARE DI RECT OR INDIRECT, FIXED OR VARIABLE AND MANAGERIAL OR FINANCIAL IN ACCORDAN CE WITH LAW. ITA NO.4818/MUM/2014 8 6. WHILE CONTROVERTING THE SAID ARGUMENTS OF THE LE ARNED DR, THE LEARNED AR RELIED UPON THE DECISION OF ITAT MUMBAI I BENCH IN THE CASE OF DCIT VS M/S. INDIA ADVANTAGE SECURITIES LTD. WE AFTER ANALYZING THE SAID DECISION FOUND THAT THE FACTS OF THAT CASE ARE DIFFERENT FROM THE PRESENT CASE, AS IN THAT CASE THE SHARES HAVE BEEN SHOWN AS STOCK-IN- TRADE IN THE BOOKS OF ACCOUNT AND, THEREFORE, IT W AS IN PRINCIPLE DECIDED THAT SUCH STOCK-IN-TRADE CANNOT BE TAKEN INTO ACC OUNT WHILE COMPUTING DISALLOWANCE UNDER RULE 8D. 7. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUM STANCES OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE LEARNED C IT (A) HAS PASSED A REASONABLE AND JUDICIOUS ORDER. THEREFORE, WE FIND NO REASON TO DEVIATE FROM OR INTERFERE WITH THE FINDINGS OF THE LEARNED CIT (A). ACCORDINGLY, WE UPHOLD HIS ORDER. THESE GROUNDS OF APPEAL OF THE AS SESSEE STAND REJECTED. 8. GROUND NO.2 OF THE ASSESSEES APPEAL IS GENERAL IN NATURE AND HENCE, REQUIRES NO SPECIFIC ADJUDICATION. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25-05-2016 . SD/- SD/- (JASON P. BOAZ) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI , DATED 25.05.2016 LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS LAKSHMIKANTA DEKA/SR.PS ITA NO.4818/MUM/2014 9 COPY OF THE ORDER FORWARDED TO : BY ORDER, ASSISTANT 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//