Gayari Dairy Products Pvt.Ltd, Ahmedabad V. The Income tax Officer,Ward-4(1), Ahmedabad

ITA 502/AHD/2011

• Counselvise Citation: 50220514 RSA 2011
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 21-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: M G PATEL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI D.K. TYAGI, JM AND A.K. GARODIA, A.M . GAYATRI DAIRY PRODUCTS (P) LTD., BESIDE CENTRAL BANK OF INDIA, KOKHARA, AHMEDABAD. INCOME-TAX OFFICER, WARD -4(1), AHMEDABAD. APPELLANT VS. RESPONDENT APPELLANT BY :- SHRI M. G. PATEL, AR RESPONDENT BY:- SHRI MAHESH KUMAR, DR O R D E R DATE OF HEARING 19.8.2011. DATE OF PRONOUNCEMENT -26.8.2011. PER D.K. TYAGI, JUDICIAL MEMBER . THIS IS APPEAL FILED BY THE ASSESSEE AGAINST THE O RDER OF LD. CIT(A) DATED 26.12.2010 RAISING FOLLOWING GROUND :- (1) THE LD. CIT(A)-VIII, AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE ADDITION TO EXTENT OF RS.1,25,000/- U/S 14A OF THE INCOME-TAX ACT, 1961 MADE BY THE AO. 2. THE A.O. MADE AN ADDITION OF RS.2,22,888/- BY DI SALLOWING PROPORTIONATE EXPENSES RELATABLE TO TAX-FREE INCOME EARNED BY THE ASSESSEE BY APPLYING THE FORMULA GIVEN IN RULE 8D O F THE I.T. RULES. THE ASSESSEE DISALLOWED RS.25,000/- WHICH WAS DETERMINE D BY THE A.O.FOR ITA NO.502/AHD/2011 ASST. YEAR 2006-07 ITA NO.502/AHD/2011 ASST. YEAR 2006-07 2 RS.2,47,888/- AS PER RULE 8D AND THUS AN ADDITION O F RS.2,22,888/- WAS MADE AFTER SET OFF OF RS.25,000/- DISALLOWED BY THE ASSESSEE HIMSELF. 3. ON APPEAL, THE LD. CIT(A) RESTRICTED THIS ADDITI ON TO RS.1,25,000/- BY OBSERVING AS UNDER :- 2.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE LD. COUNSEL AND ALSO GONE THROUGH THE FACTS OF THE CASE BROUGHT ON RECORD IN THE ASSESSMENT ORDER. I HAVE ALSO CONSIDERED THE DECISI ONS AS RELIED UPON BY THE AO AS WELL AS THE LD. COUNSEL. THE AO HAD DISAL LOWED THE EXPENSES BY RESORTING TO RULE 8D OF THE INCOME-TAX RULES, 1962. THE LD. COUNSEL BY RELYING ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE VS. DCIT 328 ITR 81 (BOM) HAS SUBMIT TED THAT THE PROVISIONS OF RULE 8D CANNOT BE APPLIED FOR THE ASS T. YEAR 2006-07. I AGREE WITH THE CONTENTION OF THE LD. COUNSEL IN THI S BEHALF. HOWEVER, I DO NOT AGREE WITH THE CONTENTION OF THE LD. COUNSEL TH AT NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INCOME. IF THAT IS SO, HOW THE APPELLANT ITSELF HAD DISALLOWED THE EXPENSES OF RS.25,000/-. THE FACTS OF THE CASE OF CIT VS. HERO CYCLES LTD. 189 TAXMAN 50 ( P & H) ARE ENTIRELY ON DIFFERENT PERSPECTIVE. HERE IN THIS CASE, THE APPEL LANT ITSELF ADMITTED THE EXPENSES OF RS.25,000/- STATED TO BE INCURRED FOR E ARNING THE EXEMPT INCOME. THE AO APPLIED RULE 8D FOR QUANTIFICATION O F THE DISALLOWABLE EXPENSES RELATABLE TO EXEMPT INCOME. THE HONBLE BO MBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE VS. DCIT 328 ITR 81 (BOM ) HAS HELD THAT RULE 8D, INSERTED W.E.F. 24.3.2008 CANNOT BE REGARD ED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATIN G EXPENDITURE RELATABLE TO TAX-FREE INCOME. IT APPLIES W.E.F. ASST. YEAR 20 07-08. FOR THE ASST. YEARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAV E TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CIRCUMSTANCES. EVEN THOUGH RULE 8D DID NOT APPLY TO ASST. YEAR 2006-07 THE AO HAD TO CONSIDER WHETHE R DISALLOWANCE COULD BE MADE U/S 14A(1). ALSO THE PRINCIPLE OF CONSISTEN CY WOULD NOT APPLY AS S.14A HAD INTRODUCED A MATERIAL CHANGE IN THE LAW. IT IS AN ADMITTED FACT THAT APPELLANT HAS THE CLOSING BALANCE OF TAX FREE SECURITY OF RS.6669221/- . THE OPENING BALANCE OF SUCH SECURITIES WAS ONLY R S.91,600/-. MAJORITY OF TAX FREE SECURITY HAVE BEEN ACQUIRED BY THE APPE LLANT DURING THE YEAR UNDER CONSIDERATION. 2.3 THE AO WAS THUS REQUIRED TO CONSIDER WHETHER DI SALLOWANCE COULD BE MADE U/S 14A91). THE AO IN VIEW OF THE DECISION OF THE HONBLE KOLKATA TRIBUNAL IN THE CASE OF DCIT VS. S.G. INVES TMENTS & INDUSTRIES ITA NO.502/AHD/2011 ASST. YEAR 2006-07 3 LTD., WAS OF THE VIEW THAT PROPORTIONATE ADMINISTRA TIVE AND OTHER EXPENSES ARE TO BE DISALLOWED AS RELATABLE TO TAX F REE/EXEMPT INCOME. SINCE, THE DECISION OF THE HONBLE SPECIAL BENCH IN DAGA CAPITAL 117 ITD 169 (MUM) WAS IN OPERATION, THE AO HAD DISALLOW ED THE ADMINISTRATIVE AND OTHER EXPENSES BY APPLYING RULE 8D. THE LD. COUNSEL COULD NOT JUSTIFY AS TO WHAT WAS THE BASIS OF DISAL LOWANCE OF EXPENSES OF RS.25,000/- SO DISALLOWED BY THE APPELLANT. THE CIT (A) HAS NO POWER TO SET ASIDE THE CASE. IT WILL NOT BE FEASIBLE TO GET THE ISSUE RE-EXAMINED BY THE AO AND CALL FOR A REMAND REPORT AS THE ISSUE IS VERY SMALL. THE APPELLANT HAD CLAIMED ADMINISTRATIVE AND OTHER EXPE NSES OF RS.1,76,99,208/- DURING THE YEAR AS AGAINST RS.1,56 ,96,091/-. THE INCREASE IN SUCH EXPENSES IS ABOUT RS.20,03,117/- A S COMPARED TO PRECEDING YEAR. THUS, THE 10% OF THE INCREASE IN AD MINISTRATIVE AND OTHER EXPENSES IS MORE THAN RS.2,00,000/-. THE APPELLANT HAS ALSO INCURRED EXPENDITURE ON INTEREST AMOUNTING TO RS.38,50,747/- . CONSIDERING THE FACTS OF THE CASE, IT WILL MEET THE END OF JUSTICE IF THE DISALLOWANCE IS RESTRICTED TO RS.1,50,000/-. THE APPELLANT HAS ALRE ADY DISALLOWED THE EXPENSES OF RS.25,000/-, THEREFORE, THE DISALLOWANC E OF EXPENSES ARE CONFIRMED TO THE EXTENT OF RS.1,25,000/-. REST OF T HE DISALLOWANCES ARE DELETED. 4. FURTHER AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US AND AT THE TIME OF HEARING THE LD. COUNSEL OF THE ASSESSEE PLACED RELI ANCE ON THE FOLLOWING WRITTEN SUBMISSIONS :- ASST. YEAR 2006-07 A) DISALLOWANCE OF INTEREST U/S 14A C.Y. P.Y. 1. LOAN FUNDS (PG. 38 OF THE PAPER BOOK) (A.Y .2006-07) (A,Y.20005-06) (WITH INTEREST) RS. R S. SECURED LOANS 1,09,74,969 50,59,376 UNSECURED LOANS 2,96,73,528 3.61,04,823 TOTAL 4,06,48,497 4,11,64,19 9 NOTE; LOAN FUNDS ARE REDUCED HY RS.5J5,702 DURING T HE YEAR UNDER APPEAL. 2. TAX FREE INVESTMENTS (PG. 20 OF THE PAPER BOOK) 66,69,221 91,600 ITA NO.502/AHD/2011 ASST. YEAR 2006-07 4 NOTE: THUS, MAJOR TAX FREE INVESTMENTS ARE MADE DURING TH E YEAR UNDER CONSIDERATION. HOWEVER, AS BORROWED FUNDS HAVE BEEN REDUCED, IT CA NNOT BE SAID THAT BORROWED FUNDS ARC UTILIZED FOR THE PURPOSE OF MAKING INVESTMEN T AND, THEREFORE, QUESTION OF DISALLOWANCE OF INTEREST U/S 14A DOES NOT ARISE. B) DISALLOWANCE OF ADMINISTRATIVE EXPENSES U/S 14A 1. ASSESSING OFFICER HAS WORKED OUT DISALLOWANCE U /S 14A AFTER TAKING TOTAL RECEIPT AND ADMINISTRATIVE EXPENSE IN PROPORTION TO DIVIDEN D INCOME WHICH COMES TO RS,2I,053/- ONLY (PLS. SEE PARA 3.6 ON PG.NO.5 OF A SSESSMENT ORDER). AS AGAINST THIS, ASSESSEE ITSELF HAS DISALLOWED RS.25,000/- IN STATE MENT OF INCOME (PG. NO. 1 OF PAPER BOOK). 2. EVEN IF DISALLOWANCE OF ADMINISTRATIVE EXPENSE S UNDER RULE 8D IS CONSIDERED BEING .5% OF AVERAGE OF INVESTMENT, THEN ALSO DISAL LOWANCE COMES TO RS. 16,900/-ONLY AS MADE BY THE ASSESSING OFFICER (PLS. SEE PARA 3,7 OF PG. NO.5 OF ASSESSMENT ORDER), 5. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF THE CIT(A). 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT THE CONTENTION OF THE ASSESSEE REQUIRES VERIFICATIO N AT THE END OF THE AO AND, THEREFORE, THE MATTER IS RESTORED BACK TO THE FILE OF AO FOR FRESH ADJUDICATION IN THE LIGHT OF ABOVE MENTIONED WRITTE N SUBMISSIONS OF THE ASSESSEE. WHILE DECIDING, THIS FACT SHOULD ALSO BE KEPT IN MIND THAT ALTHOUGH BORROWED FUNDS HAVE GONE DOWN IN THE PRESE NT YEAR BUT INCREASE IN NET OWN FUNDS IN THIS YEAR IS OF ONLY RS.20,04,4 38/- AS AGAINST FRESH INVESTMENT IN THE PRESENT YEAR OF RS.65,77,621/- AN D HENCE BALANCE INVESTMENT MAY BE OUT OF BORROWED FUNDS ONLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 26/8/2011. SD/- SD/- (A. K. GARODIA) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 26/8/2011. ITA NO.502/AHD/2011 ASST. YEAR 2006-07 5 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 23/8/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 25/8/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..