Sh. Vishal Garg, Ludhiana V. ITO, W-1(3), Ludhiana

ITA 50/CHANDI/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2539 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 15-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANKUR ALYA
• Assessee Lawyers: PANKAJ BHALLA
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH B , CHANDIGARH , !'# , #$ % & ' ( , )*' BEFORE: SMT.DIVA SINGH, JM & SMT.ANNAPURNA GUPTA, A M ./ ITA NO.50/CHD/2018 / ASSESSMENT YEAR : 2012-13 SH.VISHAL GARG, D-74, PHASE-V, FOCAL POINT, LUDHIANA. THE INCOME TAX OFFICER, WARD-1(3), LUDHIANA. ./PAN NO: AAVPG3984A /APPELLANT /RESPONDENT /ASSESSEE BY : SHRI PANKAJ BHALLA, CA ! / REVENUE BY : SHRI ANKUR ALYA, JCIT DR '# $ /DATE OF HEARING : 08.08.2018 %&'(# /DATE OF PRONOUNCEMENT: 31.10.2018 )+ /ORDER PER ANNAPURNA GUPTA, A.M . : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, LUDHIANA (IN SHORT CIT(A) DATED 1.11.2 017 PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN S HORT REFERRED TO AS ACT). 2. THE SOLE ISSUE IN THE PRESENT APPEAL RELATES TO DISALLOWANCE OF EXPENSES MADE, HOLDING THE SAME TO HAVE BEEN INCURRED IN RELATION TO EARNING OF EXEMPT INCO ME, AS PER THE PROVISIONS OF SECTION 14A OF THE ACT. 3. THE BRIEF FACTS RELATING TO THE CASE ARE THAT TH E ASSESSEE IS A PARTNER IN M/S SWATI INDUSTRIES AND HAD DERIVE D INCOME ITA NO.50/CHD/2018 A.Y.2012-13 2 FROM SHARE OF PROFIT AND INTEREST FROM THE PARTNERS HIP FIRM DURING THE IMPUGNED YEAR. THE PROFIT EARNED BY THE ASSESSEE FROM THE PARTNERSHIP FIRM AMOUNTED TO RS.28,56,630/ - WHICH WAS CLAIMED AS EXEMPT UNDER THE PROVISIONS OF SECTI ON 10(2A) OF THE ACT , WHILE THE INTEREST EARNED AMOUN TED TO RS.26,41,618/- WHICH WAS RETURNED TO TAX. AGAINST THE SAID INTEREST EARNED THE ASSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF INTEREST PAID ON UNSECURED LOANS TAKEN AMOUNTING TO RS.12,66,205/-, AS PER THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT ON THE PREMISES THAT THE INTEREST INCOME FROM THE PARTNERSHIP FIRM WAS TAXABLE AS BUS INESS INCOME WITHIN THE MEANING OF SECTION OF SECTION 28( V) OF THE ACT. THE A.O. WHILE FRAMING THE ASSESSMENT INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT R.W.R.8D OF TH E INCOME TAX RULES, 1962 AND DISALLOWED THE INTEREST EXPENSE S OF RS.12,66,205/- HOLDING THE SAME TO HAVE BEEN INCURR ED FOR THE PURPOSE OF EARNING THE EXEMPT INCOME OF SHARE O F PROFIT FROM THE PARTNERSHIP FIRM. 4. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD.C IT(A) WHO UPHELD THE ORDER OF THE A.O. 5. AGGRIEVED BY THE SAME, THE ASSESSEE HAS COME UP IN APPEAL BEFORE US, RAISING THE FOLLOWING EFFECTIVE G ROUNDS OF APPEAL: 2. ' THAT THE LD. CTT(A)-1, LUDHIANA ERRED IN LAW & FACTS IN CONFIRMING DISALLOWANCE U/S 14A READ WIN RULE 8D OF THE INCOME TAX ACT, 1961 TO THE TUNE OF 1% OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGES OF THE OPENING AND CLOSING BALANCES OF THE CAPITAL INVESTMENT IN THE PARTNERSHIP FIRM WITHOUT ANY BASE AND REASONS THEREOF. ITA NO.50/CHD/2018 A.Y.2012-13 3 2.1 THAT THE LD. CIT(A)-1, LUDHIANA ERRED IN LAW AND FAC TS PARTLY CONFIRMING DISALLOWANCE U/S 14A OF THE INCOME TAX A CT, 1961 WITHOUT APPRECIATING THAT A.O. FAILED TO RECORD A S ATISFACTION BASED ON EXAMINATION OF ACCOUNTS WITH REGARD TO CORRECTNE SS OF CLAIM OF THE ASSESSEE WITH RESPECT TO EXPENDITURE IN RELATIO N TO 'EXEMPT INCOME, WITHOUT ANY BASE &. REASONS THEREOF. 2.2 THAT THE LD. CIT(A)-1, LUDHIANA FAILED TO APPRECI ATE THAT PROVISIONS OF SECTION 14A ARE NOT APPLICABLE ON THE INVESTMENT IN A PARTNERSHIP FIRM WITHOUT ANY BASE & REASONS THEREOF . 2.3 THAT THE LD. CIT(A)-1, LUDHIANA FAILED TO APPRECIA TE THAT THE HON'BLE ITAT CHANDIGARH IN A BINDING PRECEDENT HAS H ELD INTEREST PAID ON BORROWER CAPITAL HAS NO CLOSE PROXIMITY WIT H THE EXEMPT PROFIT WHEREAS IT HAS CLOSE PROXIMITY WITH INTEREST EARNED WHICH IS TAXABLE U/S 28. ACCORDINGLY NO DISALLO WANCE U/S 14A IS CALLED FOR WITH RESPECT TO INTEREST INCOME. 2.4 THAT THE LD. CIT(A)-1, LUDHIANA HAS FAILED TO A PPRECIATE THAT THE AMENDMENT IN RULE 8D WITH EFFECT FROM 02.06.201 6 IS PROSPECTIVE AND NOT RETROSPECTIVE. ACCORDINGLY NO DISALLOWANCE CAN BE MADE BASED UPON AMENDED PROVISIONS OF RULE 8 D OF THE INCOME TAX RULES. 2.5 THAT NO DISALLOWANCE CAN BE MADE AS PER PRE-AMEN DED 8D(2)(II) SINCE INTEREST INCOME IS MUCH MORE THAN EXPENDITURE . 2.6 THAT NO DISALLOWANCE OF INTEREST CAN BE MADE UN DER RULE 8D(2)(III) PARTICULARLY WHEN THERE IS A SEPARATE SUB -CLAUSE IN RULE 8D(2). FURTHER THAT DISALLOWANCE UNDER RULE 8D(3) C ANNOT EXCEED THE EXPENDITURE OTHER THAN INTEREST, WHICH IS NIL. 6. TAKING UP FIRST GROUND NO.2.1 RAISED BY THE ASSE SSEE BEFORE US THE LD. COUNSEL FOR ASSESSEE CONTENDED TH AT WHILE MAKING DISALLOWANCE U/S 14A THE A.O. WAS REQUIRED T O RECORD SATISFACTION AS TO WHY HE WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO THE EXEMPT INCOME EARNED. THE LD. CO UNSEL FOR ASSESSEE CONTENDED THAT UNDER SUB-SECTION (2) O F SECTION 14A OF THE ACT THE A.O. WAS REQUIRED TO EXAMINE THE ACCOUNTS OF THE ASSESSEE AND ONLY WHEN HE WAS NOT S ATISFIED WITH THE CORRECTNESS OF THE CLAIM IN RESPECT OF THE EXPENDITURE IN RESPECT OF THE EXEMPT INCOME, HE CO ULD HAVE RESORTED TO THE PRESCRIBED METHOD FOR DETERMIN ING THE ITA NO.50/CHD/2018 A.Y.2012-13 4 AMOUNT OF EXPENDITURE DISALLOWABLE U/S 14A OF THE A CT, WHICH WAS RULE 8D OF THE INCOME TAX RULES. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS OF THE HON'BLE HI GH COURTS AND THE I.T.A.T. IN SUPPORT OF THE CONTENTION OF TH E ASSESSEE: 1) ACIT VS. M/S AVON CYCLES LTD., ITA NO.931/CHD/2013 2) CIT-I, LUDHIANA VS. ABHISHEK INDUSTRIES LTD. (2005) 56 TAXMANN.COM 391 (P&H) 3) M/S ANSHUL GOYAL LAND & HOUSING LTD. VS. DCIT ITA NO.1428/CHD/2017 4) CIT-II VS. HER CYCLES LTD. (2010) 189 TAXMAN 50 (P&H) 5) CIT, JALANDHAR-I VS. DEEPAK MITTAL (2013) 38 TAXMANN.COM 83 (P&H) 7. THE LD. DR CONTENDED THAT THE SAID ISSUE HAD NO T BEEN RAISED BEFORE THE CIT(A) AND, THEREFORE, HAD N OT BEEN DEALT WITH BY HIM ALSO. IT WAS, THEREFORE, PLEADED THAT THE MATTER BE RESTORED BACK TO THE CIT(A) TO ADJUDICATE FIRST ON THE ISSUE OF RECORDING OF SATISFACTION PRIOR TO MAK ING DISALLOWANCE U/S 14A OF THE ACT. 8. THE LD. COUNSEL FOR ASSESSEE AGREED TO THE SAME. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ISSUE IN CHALL ENGE BEFORE US IS THE DISALLOWANCE OF EXPENSES MADE U/S 14A OF THE ACT. UNDOUBTEDLY THE PROPOSITION OF LAW LAID DO WN BY COURTS IN VARIOUS DECISIONS, AS CITED BY THE LD.COU NSEL FOR THE ASSESSEE, IS THAT THE SATISFACTION OF THE A.O. VIS-A-VIS THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE IS A N ITA NO.50/CHD/2018 A.Y.2012-13 5 ESSENTIAL PREREQUISITE FOR INVOKING THE PROVISIONS OF SECTION 14A. THIS ISSUE NEEDS TO BE LOOKED INTO AND ADJUDIC ATED UPON BEFORE DECIDING THE SAME ON MERITS. IN THE PRE SENT CASE, ADMITTEDLY THIS ASPECT /ISSUE HAS BEEN RAISED FOR THE FIRST TIME BEFORE US AND HAS THUS REMAINED UNEXAMIN ED AND UNADJUDICATED BY THE CIT(A). SINCE ADJUDICATING THE SAME WILL REQUIRE EXAMINING THE FACTS OF THE CASE AND CO NSIDERING THE PLEA OF THE PARTIES WE CONSIDER IT FIT TO RESTO RE THE APPEAL DENOVO TO THE CIT(A) TO FIRST ADJUDICATE THE ISSUE OF EXISTENCE OF SATISFACTION OF THE A.O. VIS-A-VIS THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE AND THE REAFTER DECIDE THE APPEAL IN ACCORDANCE WITH LAW. THE CIT(A ) IS DIRECTED TO PASS A SPEAKING ORDER AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE IN THIS REGA RD. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE, THER EFORE, STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- $ %' & ( (DIVA SINGH) (ANNAPURNA GUPTA) ,' / JUDICIAL MEMBER )*' / ACCOUNTANT MEMBER $ /DATED: 31 ST OCTOBER, 2018 * * &) *+,+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. - $ / CIT 4. - $ ( )/ THE CIT(A) 5. +./ 0 , #0 , 123/4 / DR, ITAT, CHANDIGARH 6. /35' / GUARD FILE ITA NO.50/CHD/2018 A.Y.2012-13 6 &) $ / BY ORDER, 6 ! / ASSISTANT REGISTRAR