SARWANKUMAR D. SARAF, MUMBAI V. ADDL CIT 14(3), MUMBAI

ITA 4891/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92600 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 26-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N V NADKARNI
• Assessee Lawyers: DR K SHIVRAM; RAHUL R SARDA
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ./ I.T.A. NO. 4891 /MUM/2013 ( / ASSESSMENT YEAR : 2010-2011 SHRI SAWAN KUMAR D. SARAF, 418, KALBADEVI ROAD, MUMBAI 400 002. / VS. ADDL. COMMISSIONER OF INCOME TAX 14(3), EARNEST HOUSE, 6 TH FLLOR, NARIMAN POINT, MUMBAI 400 021. ./ PAN : AALPS7121H ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : DR. K. SHIVRAM & SHRI RAHUL R. SARDA / RESPONDENT BY : S MT. N.V. NADKARNI / DATE OF HEARING : 27-04-2015 ! / DATE OF PRONOUNCEMENT : 29.05.2015 [ '# / O R D E R PER G.S. PANNU, A.M . $.%. & , ' THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) - 25, MUMBAI DATED 22-05-2013 FOR THE A. Y. 2010-11 IN THE MATTER OF ORDER PASSED BY THE ASSESSING OFFICER DATED 01.0 1.2013 U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) 2. IN THIS APPEAL, ALTHOUGH THE ASSESSEE HAS RAISED MULTIPLE GROUNDS OF APPEAL BUT THE SOLITARY GRIEVANCE OF THE ASSESSEE I S AGAINST THE ACTION OF THE INCOME TAX AUTHORITIES IN DETERMINING THE DISALLOWA NCE OF RS. 7,91,184/- OUT OF INTEREST EXPENDITURE BY APPLYING RULE 8D(2)(II) OF THE INCOME TAX RULES, ITA 4891/M/13 2 1962 (IN SHORT THE RULES) R.W.S. 14A OF THE ACT. NOTABLY, BY APPLICATION OF RULE 8D(2)(III) READ WITH SECTION 14A OF THE ACT A DISALLOWANCE OF RS.67,879/- HAS ALSO BEEN MADE, WHICH IS NOT IN DISPUTE AS THE SAME WAS SUO MOTO MADE BY THE ASSESSEE IN THE RETURN OF INCOME. 3. BRIEFLY STATED, RELEVANT FACTS OF THE CASE ARE T HAT THE ASSESSEE IS AN INDIVIDUAL WHO IS ENGAGED IN THE BUSINESS OF TRADIN G IN PAPER. THE ASSESSEE FILED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.91,46,063/-, WHICH INTER- ALIA INCLUDED INCOMES BY WAY OF DIVIDEND OF RS. 23, 857/- AS WELL AS LONG TERM CAPITAL GAIN OF RS. 1,18,140/- EXEMPT U/S 10(34) AN D 10(38) OF THE ACT RESPECTIVELY. THE A.O. SHOW CAUSED THE ASSESSEE AS TO WHY THE DISALLOWANCE U/S 14A OF THE ACT SHOULD NOT BE MADE WITH RESPECT TO THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE APART FROM THE DISALLOWANCE ALREADY MADE BY THE ASSESSEE WITH RESPECT TO THE ADMINISTRA TIVE EXPENDITURE, IN THE RETURN OF INCOME. 4. THE PLEA OF THE ASSESSEE WAS THAT NO SEPARATE BO OKS/RECORDS WERE MAINTAINED FOR ACTIVITY OF INVESTMENT IN SHARES AND THE SAME IS INDEPENDENTLY HANDLED BY THE ASSESSEE HIMSELF AND THE EXPENSES IN CURRED ON D-MAT CHARGES, INTEREST TO BROKERS FOR LATE PAYMENT ETC. AMOUNTING TO RS. 11,677/- WERE DEBITED TO CAPITAL ACCOUNT AND NOT CLAIMED AGA INST BUSINESS INCOME. AS REGARDS THE PAYMENT OF INTEREST, ASSESSEE POINTED O UT THAT HE HAD OWN FUNDS IN THE CAPITAL ACCOUNT AND INTEREST-FREE UN-SECURED LOANS WHICH WERE ENOUGH TO COVER THE TOTAL INVESTMENTS WHICH HAD GIVEN RISE TO THE EXEMPT INCOME. THEREFORE, ASSESSEE CONTENDED THAT NO PORTION OF I NTEREST EXPENDITURE WAS DISALLOWABLE U/S 14A OF THE ACT AND THAT THE INTERE ST BEARING FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF BUSINESS OF TRADING IN PAPER. FOR THIS PROPOSITION, ASSESSEE RELIED UPON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LIMITED, 31 3 ITR 340 (BOM). ITA 4891/M/13 3 5. THE A.O. NOTED THAT THE ACCOUNTS OF THE ASSESSEE ARE MIXED AND NO SEPARATE BALANCE SHEET IS PREPARED FOR THE ACTIVITY OF INVESTMENT IN SHARES. THEREFORE, HE APPLIED THE FORMULA LAID DOWN IN RULE 8D(2)(II) OF THE RULES AND CONSIDERED THE ENTIRE INTEREST EXPENDITURE OF RS. 7 2,44,664/- AS INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME, AND ACCORDINGLY COMPUTED A DISALLOWANCE OF RS. 7,91,184 /- UNDER SECTION 14A OF THE ACT, WHICH WAS ADDED BACK TO THE RETURNED INCOM E. THE ASSESSEE CARRIED THE MATTER AFORESAID IN APPEAL BEFORE THE LD. CIT(A ), BUT WITHOUT SUCCESS. AGAINST THE AFORESAID, ASSESSEE IS IN FURTHER APPEA L BEFORE US. 6. BEFORE US, THE LD. REPRESENTATIVE OF THE ASSESSE E HAS REITERATED THAT THE AGGREGATE OF OWN FUNDS PLUS AND INTEREST-FREE UN-SE CURED LOANS WAS ENOUGH TO COVER THE IMPUGNED INVESTMENTS, WHICH HAVE GIVEN RISE TO THE TAX-FREE INCOMES, AND, THEREFORE NO EXPENDITURE BY WAY OF IN TEREST CAN BE ATTRIBUTABLE TO SUCH INVESTMENTS FOLLOWING THE RATIO OF THE JUDG MENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA). IT WAS SUBMITTED THAT A SIMILAR SITUATION HAS BEEN CON SIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN ITA NO. 5861/MUM/2011 FOR A.Y. 2008-09 DATED 20-08-2014 IN THE CASE OF SHAREKHAN FINANCIAL SERVI CES (P) LTD. VS. ACIT. ON THE STRENGTH OF THE SAID PRECEDENT, IT WAS CONTEND ED THAT IF THE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE ARE SUFFICIENT TO MEET THE EXEMPT-INCOME GENERATING INVESTMENTS AND AT THE SAME TIME ASSESSE E HAS RAISED INTEREST BEARING LOAN, IT CAN BE PRESUMED THAT SUCH INVESTME NTS WERE MADE FROM THE INTEREST-FREE FUNDS AVAILABLE AND THEREFORE NO INTE REST EXPENDITURE COULD BE SUBJECT TO DISALLOWANCE IN TERMS OF SECTION 14A OF THE ACT. RELIANCE HAS ALSO BEEN PLACED ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LTD. [2014] 366 ITR 505 (BOM) AND DIT VS. BNP PARIBAS SA [2013] 214 TAXMANN 548 (BOM). ITA 4891/M/13 4 7. ON THE OTHER HAND, THE LD. D.R. APPEARING FOR TH E REVENUE SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND POINTED OUT THA T IT WAS DIFFICULT FOR THE ASSESSEE TO JUSTIFY THAT ENTIRE INTEREST-BEARING FU NDS WERE USED FOR BUSINESS, AND NO INTEREST EXPENDITURE WAS ATTRIBUTABLE TO THE INVESTMENT IN SHARES BECAUSE NO SEPARATE ACCOUNT BOOKS/RECORDS HAVE BEEN MAINTAINED FOR SUCH PURPOSE. IT WAS POINTED OUT THAT THE ACCOUNTS OF TH E ASSESSEE IN PERSONAL CAPACITY AND IN RESPECT OF THE BUSINESS ACTIVITY AR E MIXED, THEREFORE, THE DISALLOWANCE MADE BY APPLYING RULE 8D(2)(II) OF THE INCOME TAX RULES, 1962 WITH RESPECT TO THE INTEREST EXPENDITURE WAS JUSTIF IED. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. SECTION 14A OF THE ACT POSTULATES THAT FOR THE PURPOSE OF COMPUTING TO TAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. SUB SECTION (2) OF SECTION 14A FURTHER PRESCRIBES T HAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. T HE METHOD SO PRESCRIBED CAN BE FOUND IN TERMS OF RULE 8D OF THE INCOME TAX RULES, 1962. SO, HOWEVER, SUB-SECTION (2) OF SECTION 14A ITSELF CONTAINS A CAVEAT THAT THE AFORESAID METHOD CAN BE APPLIED ONLY IF THE ASSESSI NG OFFICER HAVING REGARD TO ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. SUB-SECTION (3) OF SECTION 14A OF THE ACT PRESCRIBES THAT SUB-SECTION (2) SHALL ALSO BE APPLICABLE IN A SITUATION WHERE AN ASSESSEE CLAIMS THAT NO EXP ENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THE ACT. ITA 4891/M/13 5 9. IN FACT, THE HONBLE DELHI HIGH COURT IN THE CAS E OF JOINT INVESTMENTS PVT. LTD. VS. CIT IN ITA NO. 117/2015 DECIDED ON 25 -02-2015 REITERATED THAT HAVING REGARD TO THE PECULIAR WORDINGS OF SECTION 1 4A(2) OF THE ACT, THE COMPUTATION OR DISALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMINED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSE SSEES EXPLANATION IS NOT FOUND SATISFACTORY, CAN THE ASSESSING OFFICER PROCE ED FURTHER. IN OTHER WORDS, AS PER THE HONBLE HIGH COURT, THE COMPUTATION UNDE R RULE 8D(2) OF THE RULES CAN BE RESORTED TO ONLY WHEN THE COMPUTATION OR DIS ALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME HAS NOT BEEN FOUND SATISFACTORY BY THE ASSESSING OF FICER, HAVE REGARD TO THE ACCOUNTS. 10. IN THE PRESENT CASE, THE ASSERTION OF ASSESSEE IS THAT INSOFAR AS THE INTEREST EXPENDITURE OF RS.72,44,664/- CONSIDERED B Y THE ASSESSING OFFICER IS CONCERNED, IT HAS BEEN INCURRED ON LOAN FUNDS USED IN THE BUSINESS OF TRADING IN PAPER, AND NO EXPENDITURE WAS INCURRED IN RELATI ON TO EARNING OF EXEMPT INCOME AND THEREFORE NO DISALLOWANCE WAS MAINTAINAB LE BY THE APPLICATION OF RULE 8D(2)(II) OF THE RULES. THE AFORESAID ASSERTIO N IS SOUGHT TO BE SUPPORTED BY THE PROPOSITION LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA). IN TERM S THEREOF, IT IS CONTENDED THAT OWN FUNDS IN CAPITAL ACCOUNT WAS RS. 1,95,68,2 61/- AS ON 31-3-2010, AND THAT UNSECURED LOANS OF RS. 38,33,021/- WERE IN TEREST-FREE, THUS TOTAL INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE WER E RS. 2,34,01,282/-, WHICH WAS MORE THAN THE TOTAL INVESTMENT IN SHARES OF RS. 1,56,20,586/-, WHICH HAS GIVEN RISE TO THE TAX-FREE INCOMES. AT THE TIME OF HEARING THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ALSO FURNISHED D ETAILS SHOWING AVAILABILITY OF FUNDS AND INVESTMENTS DURING THE PREVIOUS YEAR R ELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IN ORDER TO POINT OUT THAT THE INTEREST BEARING FUNDS WERE NOT UTILIZED FOR THE INVESTMENTS WHICH HAVE GI VEN RISE TO TAX FREE INCOME. THE HONBLE BOMBAY HIGH COURT HAS UPHELD THE PROPOS ITION THAT IF THERE BE ITA 4891/M/13 6 INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFIC IENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME ASSESSEE HAS RAISED INTEREST-B EARING LOANS, IT CAN BE PRESUMED THAT THE INVESTMENTS HAVE BEEN MADE FROM I NTEREST FREE FUNDS AVAILABLE. IN THE COURSE OF HEARING THE LD. REPRESE NTATIVE REFERRED TO A CHART WHICH CHRONOLOGICALLY ENUMERATES THE AVAILABILITY O F INTEREST FREE FUNDS WITH THE ASSESSEE PRIOR TO THE PURCHASE OF SHARES DURING THE YEAR UNDER CONSIDERATION. IN TERMS OF THE SAID TABULATION, ASS ESSEE HAS PURCHASED SHARES AMOUNTING TO RS.50,68,494/- DURING THE YEAR UNDER C ONSIDERATION ON VARIOUS DATES, AND THE AVAILABILITY OF INTEREST-FREE FUNDS PRIOR TO EACH PURCHASE IS DETAILED AS UNDER:- FUND AND INVESTMENT PERIOD 01.04.09 TO 31.03.10 DATE PARTICULARS AMOUNT CREDIT AMOUNT DEBIT BALANCE 01.04.2009 CAPITAL AS ON 01.04.09 5808219 5808219 01.04.2009 INTERESE FREE LOAN 258951 6067170 17.07.2009 SHARES SOLD 1013677 7080847 14.08.2009 SHARES PURCHASE 36800 7044047 28.08.2009 SHARES PURCHASE 25668 7018379 28.08.2009 SHARES PURCHASE 479956 6538423 29.08.2009 INTERST FREE LOAN 40500 6578923 15.10.2009 SHARES PURCHASE 4240759 2338164 15.01.2010 INTEREST FREE LOAN 1516570 3854734 11.02.2010 INTEREST FREE 97000 3951734 ITA 4891/M/13 7 LOAN 26.03.2010 SHARES PURCHASE 285311 3666423 31.03.2010 INTEREST FREE LOAN 1920000 5586423 THUS, ON THE ABOVE BASIS CLAIM OF THE ASSESSEE WAS THAT NO INTEREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENT IN S HARES. 11. IN OUR CONSIDERED OPINION, A PERUSAL OF THE ASS ESSMENT ORDER DOES NOT REVEAL ANY CREDIBLE REASONING TO SHOW AS TO HOW THE AFORESAID ASSERTION OF THE ASSESSEE WAS FOUND UN-SATISFACTORY BY THE ASSESSING OFFICER. THEREFORE, IN THE CONTEXT OF THE ABOVE FACT-SITUATION THE LEGAL POSI TION LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS P . LTD. (SUPRA), IS FULLY ATTRACTED, AND ASSESSING OFFICER WAS PRECLUDED FROM PROCEEDING TO COMPUTE THE DISALLOWANCE BY APPLYING RULE 8D(2)(II) OF THE RULES WITH RESPECT TO THE INTEREST EXPENDITURE. 12. IN VIEW OF THE AFORESAID DISCUSSION, WE SET-ASI DE THE ORDER OF THE LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE T HE ADDITION OF RS. 7,91,184/- MADE BY APPLYING RULE 8D(2)(II) OF THE RULES R.W.S. 14A OF THE ACT. THUS, ON THIS ASPECT ASSESSEE SUCCEEDS. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 29.05.2015. '# ! & () *' + 29.05.2015 , - SD/- SD/- (AMIT SHUKLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER ( 9 MUMBAI ; *' DATED 29.05.2015 .:../ RK RKRK RK , SR. PS ITA 4891/M/13 8 ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ; ( ) / THE CIT(A), 13, MUMBAI 4. ; / CIT, - 7,MUMBAI 5. >?, ::@A , @A! , ( 9 / DR, ITAT, MUMBAI E BENCH 6. ,BC D / GUARD FILE. ' / BY ORDER, > : //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , ( 9 / ITAT, MUMBAI