M/s. S. MANSUKHLAL & CO., MUMBAI V. ACIT - 18(3), MUMBAI

ITA 4878/MUM/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 3812 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2012-2013
• Appeal Filed On: 20-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V VINOD KUMAR
• Assessee Lawyers: ANKIT VIRENDRA SUDHA SHAH
• Keywords: Earning of tax free income; Rule 8D; Set aside
• Section: 14A

Judgement Text

P A G E | 1 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI S.RIFAUR REHMAN, ACCOUNTANT MEMBER AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO.4878/MUM/2018 (ASSESSMENT YEAR: 2012 - 13) M/S S. MANSUKHLAL AND CO. 395, RUIA BUILDING, KALBADEVI ROAD, MUMBAI 400 002 VS. ASST. COMMISSIONER OF INCOME TAX - 18(3), 6 TH FLOOR, EARNEST HOUSE, NARIMAN POINT, MUMBAI 400 021 PAN AAHFS9459A (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ANKIT VIRENDRA SUDHA SHAH , A.R RESPONDENT BY: SHRI V. VINOD KUMAR, D.R DATE OF HEARING: 25 .11.2019 DATE OF PRONOUNCEMENT: 2 9 .11.2019 O R D E R PER RAVISH SOOD, JM: THE PRESENT APPEAL FILED BY THE ASSESSEE FIRM IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) - 29, MUMBAI, DATED 04.05.2018, WHICH IN TURN ARISES FROM THE ORDER PASSED BY THE A.O UNDER SEC.143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT ACT). THE ASSESSEE HAS ASSAILED THE IMPUGNED ORDER ON THE FOLLOWIN G GROUNDS OF APPEAL BEFORE US: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ['CIT(A)'] HAS ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER OF ASSESSING TOTAL INCOME AND TAX LIABI LITY THEREOF BY DISALLOWING THE EXPENSES UNDER SECTION 14A OF THE INCOME - TAX ACT, 1961 ('THE ACT') READ WITH RULE 8D(HI) OF THE INCOME - TAX RULES, 1962 ('THE RULES'); 2. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE ORDER OF AO OF DISALLOWING EXPENSES UNDER SECTION 14A READ WITH RULE 8D OF THE 1962 RULES, WITHOUT RECORDING ANY SATISFACTION AS REGARD TO ANY INDIRECT OR ADMINISTRATIVE EXPENSES WERE INCURRED BY THE APPELLANT FOR EARNING EXEMPT INCOME FROM INVESTING IN MU TUAL FUNDS AND SECURITIES; P A G E | 2 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) 3. ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER OF NOT COMPUTING THE CORRECT TAXABLE TOTAL INCOME OF THE APPELLANT AND DETERMINATION OF TAX LIABILITY THE REOF AS OTHERWISE REQUIRED UNDER CIRCULAR NO. 14 (XL - 35) DATED 11 APRIL 1955 AND LEGAL PRECEDENTS ON THE SUBJECT; 4. WITHOUT PREJUDICE TO ABOVE, ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF A . O OF COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES; 5. THE APPELLANT CRAVES, LEAVE, TO ADD, ALTER AMEND ANY GROUND OF APPEAL BEFORE OR AT THE TIME OF HEARING. 2. BRIEFLY STATED, THE ASSESSEE FIRM WHICH IS ENGAGED IN THE BUSINESS OF EXPORT, IMPORT AND LOCAL TRADING HAD E - FILED ITS RETURN OF INCOME FOR A.Y. 2012 - 13 ON 29.09.2012, DECLARING ITS TOTAL INCOME AT RS.2,95,01,970/ - . RETURN OF INCOME FILED BY THE ASSESSEE WAS PROCESSED AS SUCH UNDER SEC.143(1) OF THE ACT. SUBS EQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER SEC.143(2). 3. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE FIRM DURING THE YEAR WAS IN RECEIPT OF EXEMPT DIVIDEND INCOME OF RS.37,79 ,225/ - ON SHARES AND MUTUAL FUNDS. ON A PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE FIRM, IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE WAS MAKING INVESTMENTS IN SHARES YEAR AFTER YEAR O N WHICH IT WAS IN RECEIPT OF EXE MPT DIVIDEND INCOME. ON A QUERY RAISED BY THE A.O AS REGARDS THE CORRESPONDING DISALLOWANCE OF THE EXPENSES INCURRED FOR EARNING OF THE AFORESAID EXEMPT INCOME UNDER SEC. 14A R.W. RULE 8D , IT WAS SUBMITTED BY THE ASSESSEE THAT AS IT HAD UTILISED ITS OWN FUNDS FOR MAKING INVESTMENTS IN S HARES AND MUTUAL FUNDS, THEREFORE, NO PART OF THE INTEREST EXPENDITURE WAS LIABLE TO BE DISALLOWED. APART THEREFROM, TH E ASSESSEE AFTER ATTRIBUTING AN AMOUNT OF RS.1,29,361/ - WHICH AS PER HIM WAS INCURRED ON ACCOUNT OF CUSTODIAN CHARGES, DEMAT CHARGES , STT PAID ETC. FOR EARNING OF THE AFORESAID EXEMPT INCOME, HAD DISALLOWED AN AMOUNT AGGREGATING TO RS.5,52,701/ - UNDER SEC. 14A R.W. RULE 8D WHILE COMPUTING ITS TOTAL TAXABLE INCOME. HOWEVER, THE A.O WAS NOT PERSUADED TO SUBSCRIBE TO THE AFORESAID CLAIM OF THE ASSESSEE. OBSERVING, THAT AS THE ASSESSEE HAD FAILED TO PLACE ON RECORD ANY CORROBORATIVE EVIDENCE TO PROVE THAT IT HAD USED ITS OWN FUNDS FOR MAKING INVESTMENTS IN THE EXEMPT INCOME YIELDING ASSETS , THEREFORE, THE A.O DECLINED TO ACCEPT ITS CLAIM THAT NO DISALLOWANCE OF THE INTEREST EXPENDITURE PERTAINING TO THE BORROWED FUNDS LYING IN THE COMMON KITTY WAS CALLED FOR IN ITS HANDS. ALSO, HOLDING A CONVICTION THAT THE ACTIVITY OF ACQUISITION, HOLDING AND DISPOSAL OF SHARES AND MUTUAL FUNDS UNITS WOULD DEFIN ITELY HAVE REQUIRE D SOME EFFORTS ON THE PART OF THE ASSESSEE, THE A.O WAS OF THE VIEW THAT SOME PART OF THE TIME AND EFFORTS OF THE EMPLOYEES AND P A G E | 3 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) OTHER RESOURCES OF THE ASSESSEE FIRM MUST HAVE BEEN DEVOTED TO THE SAID ACTIVITY. ACCORDINGLY, ON THE BASIS O F HIS AFORESAID OBSERVATIONS THE A.O WORKED OUT THE DISALLOWANCE UNDER SEC.14A R.W. RULE 8D AT AN AMOUNT OF RS.14,37,013/ - , AS UNDER: 1 . DIRECT EXPENDITURE TO EARN EXEMPT INCOME RS.1,29,361 2. EXPENDITURE BY WAY OF INTEREST RS.1666475 B. AVERAGE RATE OF INVESTMENTS: - INVESTMENTS AS ON 31.03.2011 RS.74425771 INVESTMENT AS ON 31.03.2012 RS.94910220 AVERAGE OF INVESTMENT : RS.84667996 C. AVERAGE OF TOTAL ASSETS: - ASSETS AS ON 31.03.2010 RS.149660074 ASSETS AS ON 31.03.2011 RS.169451456 AVERAGE VALUE RS.159555765 A X B 1666475 X 84667996 ------------------- = ------------------- ------------- ---- = RS.8,84,312 C 159555765 3. 0.5% OF AVERAGE VALUE OF INVESTMENT I.E 0.5% OF RS.84667996/ - = RS.4,23,340 4 . TOTAL DISALLOWANCE (1+2+3) RS.14,37,013 AFTER INTER ALIA MAKING THE AFORESAID ADDITION/DISALLOWANCE UNDER SEC.14A R.W.RULE 8D , THE A.O ASSESSED THE INCOME OF THE ASSESSEE FIRM AT RS.3,04,86,280/ - . 4. AGGRIEVED, THE ASSESSEE ASSAILED THE ASSESSMENT ORDER IN APPEA L BEFORE THE CIT(A). AFTER NECESSARY DELIBERAT IONS, THE CIT(A) FINDING FAVOUR WITH THE CLAIM OF THE ASSESSEE THAT IT HAD SUFFICIENT OWN FUNDS FOR MAKING INVESTMENTS IN THE EXEMPT INCOME YIELDING ASSETS , THEREFORE, VACATED THE DISALLOWANCE OF THE INTEREST EXPENDITURE THAT WAS MADE BY THE A.O UNDER SEC. 14A R.W. RULE 8D(2)(II) . HOWEVER, THE CIT(A) WAS NOT INCLINED TO VACATE THE DISALLOWANCE THAT WAS MADE BY THE A.O UNDER SEC.14A R.W. RULE 8D(2)(III) AMOUNTING TO RS.4,23,340/ - . ALSO, THE CIT(A) UPHELD THE VOLUNTARY DISALLOWANCE OF THE DIRECT EXPENDITURE T HAT WAS CLAIMED BY THE ASSESSEE TO HAVE BEEN INCURRED FOR EARNING OF THE EXEMPT DIVIDEND INCOME VIZ. CUSTODIAN CHARGES, DEMAT CHARGES , STT PAID ETC. AMOUNTING TO RS.1,29,361/ - . ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE CIT(A) UPHELD THE DISALLOWANCE U NDER SEC.14A R.W. RULE 8D TO THE EXTENT OF RS.5,52,701/ - . FURTHER , IT WAS OBSERVED BY THE CIT(A) THAT T HE ITAT, MUMBAI, VIDE ITS ORDER PASSED IN THE ASSESSES OWN CASE FOR A.Y. 2010 - 11 HAD THOUGH DELETED THE ADDITION MADE BY THE A.O UNDER SEC.14A R.W. RULE 8 D(2)(II), BUT HAD NOT ALLOWED RELIEF AS REGARDS THE P A G E | 4 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) VOLUNTARY DISALLOWANCE THAT WAS MADE BY THE ASSESSEE UNDER SEC.14 A R.W RULE 8D(2)(III) I.E @ 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. 5. THE ASSESSEE BEING AGGRIEVED WITH THE ORDER OF THE CIT(A) HAS CARRIED THE MATTER IN APPEAL BEFORE US. THE LD. AUTHORIZED REPRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE TOOK US THROUGH THE FACTS OF THE CASE. IT WAS THE CLAIM OF THE LD. A.R , THAT AS THE ASSESSEE HAD VOLUNTARILY DISALLOWED THE EXPENSES AGGREGATING TO RS.1,29,361/ - WHICH WERE ACTUALLY INCURRED FOR EARNING OF T HE EXEMPT INCOME, THEREFORE, NO FU RTHER DISALLOWANCE UNDER SEC.14 A R.W. RULE 8D WAS CALLED FOR IN ITS HANDS. IT WAS AVERRED BY THE LD. A.R , THAT DUE TO OVERSIGHT AND LIMITED UNDERS TANDING OF SEC.1 4A R.W. RULE 8D THE ASSESSEE FIRM HAD IN ADDITION TO THE AFORESAID ACTUAL EXPENSES INADVERTENTLY DISALLOWED A FURTHER AMOUNT OF RS.4,23,340/ - UNDER RULE 8D(2)(III). IT WAS SUBMITTED BY THE LD. A.R THAT IN THE BACKDROP OF THE AFORESAID FACTS OF THE CASE , THE DISALLOWANCE UNDER SEC. 14 A MAY BE RESTRICTED TO THE EXTENT OF RS.1,29,361/ - . ALTERNATIVELY, IT WAS SUBMITTED BY THE LD. A.R THAT FOR THE PURPOSE OF WORKING OUT THE DISALLOWANCE UNDER RULE 14A R.W.RULE 8D(2)(III) THE INVESTMENTS WHICH HAD NOT YIELDED ANY EXEMPT INCOME DURING THE YEAR BE EX CLUDED FOR WORKING OUT THE AVERAGE VALUE OF THE INVESTMENTS. IT WAS THE CLAIM OF THE LD. A.R, THAT THE A.O WHILE WORKING OU T THE DISALLOWANCE UNDER SEC.14 A R.W. RULE 8D(2)(III) HAD WHILE WORKING OUT THE AVERAGE VAL UE OF THE INVEST MENTS INCLUDED EVEN THE INVESTMENTS WHICH HAD NOT YIELDED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION. IN SUPPORT OF HIS AFORESAID ALTERNATIVE CONTENTION, THE LD. A.R HAD RELIED ON THE ORDER OF THE S PECIAL BENCH OF THE ITAT, DE LHI IN THE CASE OF THE ACIT VS. VIREET INVESTMENTS PVT. LTD. (2017) 165 ITD (DEL - TRIB) (SB). 6. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD, AS WELL AS THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THEM. ADMITTEDLY, THE ASSESSEE HAD VOLUNTARILY DISALLOWED UNDER SEC.14A R.W.RULE 8D AN AMOUNT OF RS.5,52,701/ - , VIZ. (I) TOWARDS DIRECT EXPENSES INCURRED FOR EARNING OF THE EXEMPT INCOME: RS.1,29,361/ - ; AND (II) THE DISALLOWANCE UNDER RULE 8D(2)(III): RS.4,23,340/ - . IT IS THE CLAIM OF THE LD. A.R, THAT AS THE ASSESSEE HAD INA DVERTENTLY OFFERED THE DISALLOWANCE UNDER RULE 8D(2)(III) OF RS.4,23,340/ - , WHICH WAS OVER AND ABOVE THE DISALLOWANCE OF THE EXPENSES OF RS.1,29,361/ - THAT WERE INCURRED FOR EARNING OF THE EXEMPT DIVIDEND INCOME, THEREFORE, THE DISALLOWANCE UND ER SEC.14A M AY BE CONFINED TO THE AMOUNT OF P A G E | 5 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) RS.1,29,361/ - . IN SUM AND SUBSTANCE, THE ASSESSEE HAD SOUGHT DELETION OF THE DISALLOWANCE THAT WAS OFFERED BY HIM UNDER SEC.14A R.W. RULE 8D(2)(III) OF RS.4,23,340/ - . 7 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ISSUE BEFORE US AND ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE AFORESAID CLAIM OF THE ASSESSEE. AS OBSERVED BY US HEREINABOVE, THE A.O HAD CONCLUDED THA T AS THE ACTIVITY PERTAINING TO ACQUISITION, HOLDING DISPOSAL OF SHARES A ND MUTUAL FUNDS UNIT S WOULD HAVE DEFINITELY REQUIRED SOME EFFORTS ON THE PART OF THE ASSESSEE, THEREFORE, A DISALLOWANCE UNDER SEC.14A R.W.RULE 8D(2)(III) WAS CALLED FOR IN THE HANDS OF THE ASSESSEE . IN OUR CONSIDERED VIEW, AS THERE IS NO INFIRMITY IN THE AFORESAID OBSERVATION OF TH E CIT(A), THEREFORE, FINDING OURSELVES TO BE IN AGREEMENT WITH THE VIEW THEREIN TAKEN BY HIM, WE FIND NO REASON TO DISLODGE THE SAME. IN FACT, IN OUR CONSIDERED VIEW, NOW WHEN THE A.O HAD WORKED OUT THE DISALLOWANCE UNDER SEC.14A R.W. RULE 8D(2)(III) IN RE SPECT OF THE ADMINISTRATIVE EXPENSES WHICH COULD SAFELY BE ATTRIBUTED TO THE EARNING OF THE EXEMPT DIVIDEND INCOME, AS PER THE MACHINERY PROVISO THEREIN ENVISAGED, THE ASSESSEE COULD NOT HAVE SUMMARILY SOUGHT DELETION OF THE CONSEQUENTIAL DISALLOWANCE EMERGING THEREFROM. ALSO, AS OBSERVED BY US HEREINABOVE, A SIMILAR DISALLOWANCE MADE BY THE A.O UNDER SEC. 14A R.W. RULE 8D(2)(III) IN A.Y. 2010 - 11, HAD THEREAFTER BEEN UPHELD BY THE TRIBUNAL IN THE ASSESS ES OWN CASE. HOWEVER, AT THE SAME TIME , WE FIND SUBSTANTIAL FO RCE IN THE CLAIM OF THE LD. A.R THAT FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE UNDER SEC.14A R.W.RULE 8D(2)(III) ONLY THOSE INVESTMENTS ARE TO BE CONSIDERED FOR COMPUTING THE AVERAGE VALUE OF SUCH INVESTMENTS WHICH HAD YIELDED EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION. IT IS THE CLAIM OF THE LD. A.R, THAT THE A.O WHILE COMPUTING THE DISALLOWANCE UNDER SEC.14A R.W. RULE 8D(2)(III) HAD WORKED OUT THE AVERAGE VALUE OF THE INVESTMENTS AT RS.8,46,67,966/ - , WHICH ALSO INCLUDED CERTAIN INVESTMENTS WHICH HAD NOT YIELDED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION. IN OUR CONSIDERED VIEW , THERE IS SUBSTANTIAL FORCE IN THE AFORESAID CLAIM OF THE LD. A.R THAT THE INVESTMENTS WHICH H AD NOT YIELDED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION OUGHT TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING THE AVERAGE VALUE OF THE INVESTMENTS WHILE COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(III). OUR AFORESAID VIEW IS FORTIFIED BY THE ORD ER OF THE S PECIAL BENCH OF THE ITAT, DELHI IN THE CASE OF ACIT VS. VIREET INVESTMENTS PVT. LTD . (2017) 165 ITD (DEL - TRIB) (SB) . AS THE DETAILS OF SUCH INVESTMENTS WHICH HAD NOT YIELDED ANY EXEMPT INCOME DURING THE YEAR, BUT AS CLAIMED BY THE LD. A.R WERE INCLUDED BY THE A.O WHILE P A G E | 6 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3) WORKING OUT THE AVERAGE VALUE OF INVESTMENTS WHILE WORKING OUT THE QUANTUM OF DISALLOWANCE UNDER SEC.14A R.W. RULE 8D(2)(III), IS NOT THERE BEFORE US, THEREFORE, FOR THE SAID LIMITED PURPOSE WE SET ASIDE THE MATTER TO HIS FIL E, WITH A DIRECTION TO EXCLUDE THE INVESTMENTS WHICH HAD NOT YIELDED AN Y EXEMPT INCOME DURING THE YEAR, IF ANY , WHILE COMPUTING THE DISALLOWANCE UNDER RULE 8D(2)(III). 8 . RESULTANTLY, THE MATTER IS RESTORED TO THE FILE OF THE A.O FOR THE LIMITED PURPOSE OF REWORKING THE CLAIM OF DISALLOWANCE UNDER SEC.14A R.W. RULE 8D(2)(III), IN TERMS OF OUR AFORESAID OBSERVATIONS. 9 . THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 2 9 . 11.2019 S D / - S D / - ( S. RIFAUR REHMAN ) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; 29 .11 .2019 PS. ROHIT / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI P A G E | 7 ITA NO.4878/MUM/2018 A.Y. 2012 - 13 M/S S. MANSUKHLAL AND CO. VS. ASST. COMMISSIONER OF INCOME TAX - 18(3)