Appeal details
Counselvise Citation
50223314 RSA 2013
Assessee PAN
Bench
Appeal Number
Duration Of Justice
10 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-10-2014
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
DB
Next Hearing Date
10-09-2014
Assessment Year
2010-2011
Appeal Filed On
11-11-2013
Judgement Text
IN THE INCOME TAX APPELALTE TRIBUNAL : JODHPUR BENCH : JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER. ITA NO. 501 & 502 /JODH/2013 (A.Y S . 2009 - 10 & 20 1 0 - 11 ) ACIT, CIRCLE - 1, UDAIPUR. VS. M/S. WOLKEM INDIA LTD. , E - 101, MIA, MADRI, UDAIPUR . (APPELLANT) PAN NO. AAACW 1831 A (RESPONDENT) ASSESSEE BY : SHRI AMIT KOTHARI. DEPARTMENT BY : SHRI MAHESH KUMAR - D.R. DATE OF HEARING : 1 0 / 0 9 /201 4 . DATE OF PRONOUNCEMENT : 09 / 1 0/201 4 . O R D E R PER N.K. SAINI, A.M TH E S E TWO APPEAL S BY THE DEPARTMENT ARE DIRECTED AGAINST THE SEPARATE ORDER S EACH DATED 08 /0 8 /2013 OF L D . CIT(A), UDAIPUR . SINCE THE ISSUE INVOLVED IS COMMON HAVING IDENTICAL FACTS AND THE APPEALS WERE HEARD TOGETHER, SO THESE ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2 2 FIRST WE WILL DEAL WITH I.T.A.NO. 501/JODH/2013 . THE FOLLOWING GROUNDS HAVE BEEN RAISED IN TH IS APPEAL: ON THE FACTS AND IN THE PRESENT CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN: - 1. DELETING THE DISALLOWANCE OF RS. 32,14,818/ - MADE U/S. 14A OF THE I.T. ACT, IGNORING THE FACT THAT THE ASSESSEE HAS UTILIZED INTEREST BEARING UNSECURED LOANS FOR INVESTMENT IN SHARES OF COMPANIES/BANK. 1.1 IGNORING THE FACT THAT AS PER THE PROVISIONS OF SECTION 14A IF THE A.O. IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE IN RESPECT OF EXEMPTED INCOME, THEN H E HAS TO CALCULATE THE DISALLOWANCE AS PER RULES AND IN THIS CASE THE A.O. HAS AMPLY DEMONSTRATED THAT HE IS NOT SAT I SF I ED WITH THE CORRECTNESS OF THE CLAIM THAT NO INTEREST BEARING BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN SHARES OF COMPANIES. 1.2 O BSERVING THAT THE A.O. SHOULD PROVE THE NEXUS BETWEEN INTEREST BEARING FUND AND TAX FREE INVESTMENT BEFORE INVOKING PROVISIONS OF SECTION 14A OF THE IT ACT. THAT THE APPELLANT CRAVES TO ADD, AMEND, ALTER, DELETE OR MODIFY ANY OR ALL THE ABOVE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 3. THE ONLY GRIEVANCE OF THE DEPARTMENT IN T HIS APPEAL RELATES TO THE DELETION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S. 14A OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT IN SHORT) . 4. FACTS RELATING TO THIS ISSUE, IN BRIEF, ARE THAT THE ASSESSEE E - FILED ITS RETURN OF INCOME ON 30/09/2009 DECLARING AN INCOME OF RS. 4,72,26,780/ - THE ASSESSING OFFICER ACCEPTED THE TRADING RESULTS DECLARED BY THE 3 ASSESSEE, HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS , HE NOTICED THAT THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 18,33,158/ - FOR THE YEAR UNDER CONSIDERATION AND CLAIMED THE SAME AS EXEMPT U/S. 10(34) OF THE ACT. THE ASSESSING OFFICER NOTI C ED THAT THE ASSESSEE COMPANY HAD SHOWN INVE STMENT OF RS. 13,41,32,097/ - AND CLAIMED INTEREST EXPENSES OF RS. 1,36,90,5 1 6/ - IN THE YEAR UNDER CONSIDERATION . HE REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY DISALLOWANCE U/S. 14A OF THE ACT R EAD WITH RULE 8 OF THE INCOME - TAX RULES 1962 SHOULD NOT BE MADE IN RESPECT OF THE DIVIDEND INCOME CLAIMED AS EXEMPT U/S. 10(34) OF THE ACT. IN RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAD NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR THE EXPENSES INCURRED FOR EARNING DIVIDEND INCOME CLAIMED AS EXEM PT U/S. 10(34) OF THE ACT AND THAT ALL THE CHEQUES / DD RECEIVED IN RESPECT OF DIVIDEND WERE PAYABLE AT PAR AND THEREFORE, NO EXPENSES WERE INCURRED IN REALIZING THE SAID INCOME. IT WAS ALSO STATED THAT THE ASSESSEE DID NOT INCUR ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME AND HAD ALSO NOT INVOK ED SUB - SECTION (2) OF SECTION 1 4A OF THE ACT R.W.R. 8D TO ESTIMATE THE EXPENSES INCURRED IN REGARD TO THE DIVIDEND INCOME . THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND OBSERVED THAT THE ASSESSEE DEBITED EXPENSES OF RS. 1,36,90,516/ - , FINANCIAL CHARGES OF RS. 13,03,755/ - AND ALSO MADE 4 INVESTMENT IN THE SHARE S OF M/S. A SSOCIATE MINERALS, UDAIPUR AMOUNTING TO RS. 87,07,884/ - AND IN SHARE S OF M/S. FIMAKEM INDIA LTD., UDAIPUR FOR RS. 2,62,30,400/ - . HE ALSO OBSERVED THAT THE UNSECURED LOANS INCREASED FROM RS. 6,62,09,550/ - AS ON 01/04/2008 TO RS. 17,16,21,886/ - AS ON 31/03/2009 AND SIMILARLY THERE WAS INCREASE IN THE INTEREST EXPENSES FROM RS. 36,12,850/ - IN THE A.Y. 2008 - 09 TO RS. 1,36,90, 516/ - IN THE A.Y. 2 009 - 10 . THE ASSESSING OFFICER OPINED THAT THE INTEREST EXPENSES WERE ATTRIBUTABLE TO THE INVESTMENT IN SHARES MADE BY THE ASSESSEE ON WHICH THE ASSESSEE HAD REC E IVED DIVIDEND INCOME WHICH WAS CLAIMED AS EXEMPT U/S. 10(34) OF THE ACT. THE ASSESSING OFFICER MENTIONED THAT THE ASSESSEE APART FROM THE ABOVE SAID INTEREST EXPENSES HAD ALSO CLAI M ED EXPENSES UNDER VARIOUS HEADS LIKE SALARIES, POSTAGE, RENT, TRAVELLING AND CONVEYANCE ETC. THEREFORE, THE ASSESSEE WOULD HAVE INCURRED SOME EXPENSES FOR EARNING OF DIVIDEND INCOME AND CLAIM OF THE ASSESSEE THAT IT DID NOT INCUR ANY EXPENDITURE FOR EARNING DIVIDEND INCOME WAS NOT ACCEPTABLE. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT R.W.R. 8D(2)(II) & (III) OF THE I.T. RULES 1962 AND WORKED OUT THE DISALLOWANCE OF RS. 32 , 14,818/ - IN THE FOLLOWING MANNER: - I) A. AMOUNT OF INTEREST RS. 1,36,90,516/ - B. AVER A GE VALUE OF INVESTMENT INCOME FROM WHICH DOES NOT /SHALL NOT FORM PART OF THE TOTAL INCOME OF RS. 13,81,04,933/ - 5 (INVESTMENT AS ON 01/04/2008 RS. 14,20,77,769/ - AND INVESTMENT AS ON 31/03/2009 OF RS. 13,41,32,097/ - ) . C. AVERAGE OF THE TOTAL ASSET APPEARING IN THE B/S OF RS. 74,90,12,956/ - (TOTAL ASSET AS ON 01/04/2008 OF RS. 69,43,62,932/ - AND TOTAL ASSET AS ON 31/03/2009 OF RS. 80,36,62,980/ - ). DISALLOWANCE U/S. 14A A X B = 13690516 X 138104933 = RS. 2524293/ - C 749012956 II) % OF AVERAGE OF INVESTMENT = % X 138104933 = RS. 690525/ - THE TOTAL AMOUNT OF THE DISALLOWANCE U/S. 14A R.W.R. RULE 8D OF I.T. RULE COMES TO = (I + II) = RS. 2524293 + RS. 690525 = RS. 3214818/ - . 5. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT THE ASSESSEE RECEIVED AN AMOUNT OF RS. 18,33,158/ - BEING DIVIDEND INCOME FROM INVESTMENT IN SHARES AND THE SAID INCOME WAS NOT TAXABLE BY VIRTUE OF THE PROVISIONS OF SECTION 10(34) OF THE ACT. IT WAS FURTHER STATED THAT OUT OF THE AFORESAID AMOUNT , THE ASSESSEE RECEIVED RS. 18,13,000/ - FROM THE GROUP COMPANIES AND BALANCE AMOUNT OF RS. 20,158/ - WAS RECEIVED FROM INVESTMENT THAT EXISTED SINCE LONG. IT WAS SUBMITTED THAT SECTION 14A OF THE ACT WAS INSERTED BY THE FINANCE ACT 2001 WITH RETROSPECTIVE EFFECT FROM 01/04/1962 AND PROVIDES THAT THE PROVISIONS OF THE SAID SECTION WILL APPLY ONLY WHEN A P ARTICULAR 6 EXPENDITURE IS IN RELATION TO SUCH TYPES OF INCOME WHICH HAD NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. IT WAS STATED THAT THE ASSESSEE HAD SUFFICIENT OWN ED FUNDS DURING THE PREVIOUS YEARS FOR MAKING THE INVESTMENT WHICH WAS AT RS. 13,41,32,0 97/ - AS ON 31/03/2009 AGAINST SHAREHOLDERS FUNDS OF RS. 56,36,54,029/ - . THUS, THE INVESTMENTS WERE ADEQUATELY BACKED BY THE SHAREHOLDERS FUNDS WHICH WERE INTEREST FREE. IT WAS FURTHER STATED THAT THE ASSESSING OFFICER HAD FAILED TO PROVE ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS AND THAT NO BORROWINGS WERE UNDERTAKEN TO MAKE THE INVESTMENTS AND CONSEQUENTLY, NO INTEREST EXPENDITURE OR OTHER EXPENDITURE WAS INCURRED TO EARN THE DIVIDEND INCOME , T HEREFORE, DISALLOWANCE WAS NOT JUSTIFIED . RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - 1) RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM.) 2) CIT VS. CATHOLIC SYRIAN BANK LTD. (MANU/KE/2174/2010) (KER.) 3) CIT VS. HERO CYCLES (2010) 323 ITR 518 (P & H) 4) CIT VS. GUJARAT POWER CORP. (GUJ.) MANU/GJ/0333/2011 (APPE A L NO. 1587 OF 2009 DECIDED ON 28/03/2011) 5) CIT VS. M/S. LUBI SUBMERSIBLES LTD. (2011) (GUJ.) APPEAL NO. 868 OF 2010 DECIDED ON 25/07/2011 . 6) CIT VS. K. RAHEJA CORPORATION PVT. LTD. (BOM.) MANU/MH/1020/2011 . 7) ACIT VS. PUNJAB STATE COOP. & MKTG. ITA NO. 548/CHD/ 2011 (ITAT CHANDIGARH) DT. 30/09/2011 MANU/IG/0115/2011 . 8) DCIT VS. MAHARASHTRA SEAMLESS LTD. (ITAT DELHI) MANU/ID/0132/2010 . 9) DCIT VS. JINDAL PHOTO LTD. (ITAT DELHI) MANU/ID/ 0581/2011 . 10) GODREJ AGROVET LTD. VS. ACT (ITAT MUMBAI) MANU/IU/0896/2010. 7 11) GODREJ INDUSTRIES LTD. VS. CIT (ITA NO. 1090/MUM/09) (MUM. TRIB) MANU/INDUSTRIAL UNDERTAKING/0166/2008 . 12) MARUTI UDYOG LTD. VS. DCIT (2005) 92 ITD 119 (DEL.) 13) ACIT VS. CLARIDGES INVESTMENTS & FINANCES (P) LTD. (2007) 18 SOT 390 (MUM) 6 . THE ASSESSEE SUBMITTED TO THE LD. CIT(A) THAT IN THE AFORESAID JUDGMENTS, IT HAD EVIDENTLY BEEN HELD THAT THE ONUS TO PROVE THE NEXUS OF THE BORROWED FUNDS WITH THE INVESTMENT WAS ON THE REVENUE AND T HE ASSESSING OFFICER HAD NOT PROVIDED ANY REASON WHATSOEVER TO PROVE THE NEXUS BETWEEN THE AMOUNT INVESTED AND THE EXEMPTED INCOME. THEREFORE, THE DISALLOWANCE MADE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT WAS NOT JUSTIFIED. IT WAS FURTHER SUBMITTED THAT THE PROVISIONS OF SECTION 14A(2) OF THE ACT CLEARLY STIPULATES THAT THE ASSESSING OFFICER SHALL COMPUTE THE EXPENDITURE TO BE DISALLOWED UNDER THIS SECTION , ONLY IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN THIS RESPECT AND NOT OTHERWISE. IT WAS CONTENDED THAT IN ASSESSEES CASE, THE ASSESSING OFFICER HAD PROVIDED NO REASONS WHATSOEVER TO DISBELIEVE THE ACCOUNTS OF THE ASSESSEE OR ITS CLAIM THAT NO EXPENDITURE WAS INCURRED IN RELATION TO EARNING THE DIVIDEND INCOME AND THAT OWN - FUNDS WERE UTILIZED FOR MAKING THE INVESTMENT AND THE BOOKS OF ACCOUNTS PRODUCED BEFORE THE ASSESSING OFFICER DULY JUSTIFIED THE CONTENTION OF THE ASSESS EE THAT NO EXPENDITURE WAS INCURRED FOR EARNING 8 THE SAID DIVIDEND INCOME. THEREFORE, THE DISALLOWANCE WAS MERELY ON THE BASIS OF ASSUMPTION AND PRESUMPTION. IT WAS STATED THAT THE ASSESSING OFFICER HAD NOT PROVIDED ANY REASON FOR REJECTING THE ASSESSEES CLAIM THAT IT HAD NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDEND INCOME AND THEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT COULD NOT HAVE BEEN INVOKED IN ASSESSEES CASE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - 1) MAXOPP INVESTMENTS LTD. VS. CIT 247 CTR 162 (DEL.) 2) RELAXOFOOTWEARS LTD. VS. ACIT (2012) 18 TAXMANN 333 (DEL. TRIB.) IT WAS CONTENDED THAT AN INCOME COULD BE CONSIDERED AS EXEMPT ONLY IF TAX IS NOT COLLECTED ON IT IN ANY MANNER UNDER ANY OF THE PROVISIONS OF THE ACT AND IF TAX ON INCOME WAS COLLECTED DIRECTLY OR INDIRECTLY AND SUCH TAX WAS NOT REFUNDABLE OR ADJUSTABLE AG AINST ANY OTHER LIABILITY OF TAX ON INCOME , THEN TAX HAD BEEN FINALLY COLLECTED AND THE RELATED INCOME HAD SUFFERED TAX UNDER THE ACT THEN IT WAS NOT AN EXEMPT INCOME AS WAS THE CASE WITH THE DIVIDEND INCOME FOR WHICH THE TAX WAS PAID BY THE SHAREHOLDERS AND THE ADDITIONAL TAX WAS PAYABLE BY THE COMPANIES U/S. 115O OF THE ACT ON THE DISTRIBUTION MADE , ALL DIVIDENDS TAXABLE AND TAX COLLECTED FROM COMPANIES WAS THE FINALLY COLLECTED TAX BY INCOME TAX AUTHORITIES . SO, IT WAS WRONG TO SAY THAT DIVIDEND REFERRED TO IN SECTION 9 115O OF THE ACT WAS NOT PART OF THE TAXABLE INCOME. IT WAS CONTENDED THAT FROM THE PROVISIONS OF SECTION 115O OF THE ACT IT WAS CLEAR THAT THE TAX ES PAID BY THE COMPANY WAS AN ADDITIONAL INCO ME TAX COLLECTED FROM THE PERSON, WHO DISTRIBUTES DIVIDEND . THEREFORE, IN THE OVERALL CONTEXT OF THE ACT, DIVIDEND AS WELL AS LONG TERM CAPITAL GAINS WHICH WERE EXEMPT U/S. 10 OF THE ACT WERE ALREADY TAXED IN SOME OTHER MANNER AND THE TAX IMPOSED AS DIVID END DISTRIBUTION TAX (DDT) IS INCOME TAX LEVIED AND COLLECTED IN AN EASY AND CONVENIENT WAY . A REFERENCE WAS MADE TO THE CBDT CIRCULAR NO. 763 DATED 18/02/1998 AND IT WAS STATED THAT IN THE SAID CIRCULAR , THE EXEMPTION OF DIVIDEND INCOME AND LEVY OF NEW TAX ON DISTRIBUTED PRO FITS OF COMPANIES HAD BEEN EXPLAINED. IT WAS STATED THAT ALTHOUGH DIVIDEND WAS NOT INCLUDED IN THE INCOME OF SHAREHOLDERS BECAUSE OF THE PROVISIONS OF SECTION 10 OF THE ACT, BUT IN FACT THE EXEMPTION WAS ONLY BECAUSE TAX WAS ALREADY PAID ON SUCH DIVIDEND AND SUCH PAYMENT WAS FINAL AND EARLIER WHEN THERE WAS NO EXEMPTION U/S. 10 OF THE ACT TAX WAS DEDUCTED AT SOURCE AT THE TIME OF PAYMENT OF DIVIDEND AND SIMULTANEOUS AMENDM E N T S IN SECTION 115 - O, 115 - R, 80L, 80M AND 10 OF THE ACT CLE A RLY INDICATE S THAT EXEMPTION U/S. 10 OF THE ACT EXISTS ONLY AS A MATTER OF SCHEME OF COLLECTION OF TAX ON ENTIRE DIVIDEND AND NOT AS A 10 SCHEME TO GRANT EXEMPTION . RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - 1) SUDHIR KAPADIA VS. ITO (ITA NO. 7888M03 DATED 26/02/2003, MUM. C TRIB.) 2) HITESH D GAJARIA VS. ACIT 11(2) (ITA NO. 993MUM2007) DECIDED ON 14/11/2008 (MUM. H TRIB.) 7 . IT WAS CONTENDED THAT IF THE PROPO SITION THAT THE TAX ON DISTRIBUTION OF DIVIDEND WAS NOT A TAX ON INCOME EARNED BY WAY OF DIVIDEND BY SHAREHOLDERS OR UNIT HOLDERS WAS ACCEPTED , THEN THE PROVISIONS MAY BE ULTR A VIRES THE PURPOSE OF THE INCOME - TAX ACT AS WELL AS THE CONSTITUTION . IT WAS CONTENDED THAT BY IMPOS ING TAX AT THE STAGE OF DIST RIBUTION ITSELF, IT IS ASSUMED THAT THERE IS ELEMENT OF TAXABLE INCOME IN THE DIVIDEND DISTRIBUTED AND TO KEE P A BALANCED OVERALL TAX RATE F OR COLLECTION RELATIVELY LOWER RATE OF TAX HAD BEEN IMPOSED ON DISTRIBUTED INCOME AND ONCE IT IS SETTLED THAT DIVIDENDS SUFFERS A PAYMENT OF TAX , IT CANNOT BE SAID THAT DIVIDEND IS AN EXEMPT INCOME AND DOES NOT FORM PART OF TOTAL INCOME UNDER THE WHOLE ACT. IT WAS STATED THAT THE PROVISIONS OF SECTION 14A OF THE ACT CAN BE APPLIED IN RELATION TO ONLY SUCH INCOME WHICH DID NOT ATTRACT TAX LIABILITY IN ANY MANNER UNDER THE ACT. FOR EXAMPLE, AGRICULTURAL INCOME WAS ONE OF SUCH INCOME WHICH CANNOT BE TAXED UNDER 11 THE INCOME - TAX ACT OR SOME OTHER INCOME WHICH DOES NOT ATTRACT TAX IN THE HANDS OF ANY PERSON , T HE RECIPIENT OR THE PAYER CAN ONLY BE CONSIDERED TO BE SUBJECT TO SECTION 14A OF THE ACT, BUT MERELY BECAUSE THE DIVIDEND IS EXEMPT U/S. 10 OF THE ACT WHILE COMPUTING INCOME OF SHAREHOLDERS , IT CANNOT BE SAID THAT SECTION 14A OF THE ACT WOULD BE APPLICABLE . ACCORDINGLY, IT WAS SUBMITTED THAT DIVIDEND INCOME WAS NOT INCOME WHICH DID NOT FORM PART OF TOTAL INCOME AND THEREFORE, SUCH INCOME WAS OUTSIDE THE AMBIT OF SECTION 14A OF THE ACT. IT WAS FURTHER STATED THAT WHEN THE SHARES WERE NOT PURCHASED BY THE ASSESSEE MERELY TO EARN DIVIDEND, RATHER, THE OBJECTIVE OF EARNING DIVIDEND THOUGH IMPLICIT CAME MUCH LATER IN PRIORITY. IT WAS ALSO STATED THAT THE SHARES WERE PURCHASED MAINLY TO GAIN CONTROLLING STAKE AND ALSO TO EARN GAINS BY WAY OF APPRECIATI ON AND DIVIDEND WAS MERELY INCIDENTAL , T HEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE IN RESPECT OF DIVIDEND INCOME RECEIVED BY THE ASSESSEE AND THE DISALLOWANCE U/S. 14A OF THE ACT WAS NOT JUSTIFIED. IT WAS CONTENDED THAT THE ASSESSEE COMPANY HAD BEEN CARRIED OUT ITS VARIOUS BUSINESS EITHER ON ITS OWN OR THROUGH ITS SUBSIDIARIES AND ALL THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARIES HAD BEEN FOR THE PURPOSE OF BUSINESS IN COMMER CIAL EXPEDIENCY AND WERE NOT FO R THE PURPOSE OF EARNING DIVIDEND. THEREFORE, 12 ANY EXPENDITURE INCURRED FOR THE PURPOSE OF MAKING INVESTMENT IN SUBSIDIARY COMPANIES WAS BUSINESS EXPENDITURE AND ALLOWABLE U/S. 36 OR 37 OF THE ACT , AS THE CASE MAY BE . RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - 1) CIT VS. PHIL CORPORATION LTD. & ANR. 244 CTR 226 (BOM.) 2) SHREE DIGVIJAY CEMENT CO. LTD. VS. CIT (1982) 138 ITR 45 (GUJ . ) 3) CIT VS. JARDINE HERDERSON LTD. (1994) 210 ITR 981 (CAL.) 8 . FINALLY , IT WAS STATED THAT THE DISALLOWANCE U/S. 14A OF THE ACT COULD NOT HAVE BEEN MADE FOR THE FOLLOWING REASONS : - I) NO BORROWING WAS DONE FOR MAKING THE INVESTMENT ON WHICH DIVIDEND IS RECEIVED. II) THERE IS NO NEXUS WITH THE BORROWING AND INVESTMENT, WHICH IS NOT DENIED BY THE LD. A.O. III) THE LD. A.O. HAS FAILED TO DISCHARGE THE ONUS CAST ON HIM TO PROVIDE COGENT REASONS FOR REJECTING THE CLAIM OF THE APPELLANT . RULE 8D IS, THUS, NOT APPLICABLE SINCE THE LD. A.O. HAS NOT PROVIDED JUSTIFIED REASONS TO DISB ELIEVE THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED IN RELATION TO EARNING THE DIVIDEND INCOME. IV) THE DISALLOWANCE MADE BY THE A.O. IS ENTIRELY BASED ON PRESUMPTIONS AND ESTIMATION. V) DIVIDEN D INCOME IS OUTSIDE THE SCOPE OF SECTION 1 4A AND THEREFORE, SECTION 14A IS NOT APPLICABLE IN THE CASE OF THE APPELLANT. VI) THE INVESTMENT IN SHARES CANNOT BE TERMED TO BE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME SINCE PROFIT/LOSS ON SALE OF SUCH INVESTMENT CON STITUTES PART OF TOTAL INCOME. VII) THE ENTIRE AMOUNT OF INVESTMENT SHOULD NOT BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S. 14A READ WITH RULE 8D SINCE IT ALSO INCLUDES THE INVESTMENTS, THE INCOME OF WHICH IS TAXABLE IN THE HANDS OF THE ASSESSEE. 13 9 . THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, OBSERVED THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE OF RS. 32,14,818/ - U/S. 14A OF THE ACT R.W.R. 8D OF THE I.T. RULES 1962 BY REJECTING THE EXPLAN ATION OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED FOR EARNING DIVIDEND INCOME OF RS. 18,13,158/ - STATING THAT THERE WAS DEFINITE NEXUS BETWEEN SUM INVEST ED TO EARN THE EXEMPTED INCOME AND OTHER EXPENSES RELATED TO EARN THE EXEMPTED INCOME. HE FURTHER OBSERVED THAT THE TOTAL INVESTMENT AS ON 31/03/2009 WAS RS. 13,41,32,097/ - AS AGAINST SHAREHOLDERS FUNDS OF RS. 56,36,54,029/ - OUT OF WHICH RS. 4,76,30 , 250 / - REPRESENT ED RESERVE & SURPLUS . THUS, THE INVESTMENTS WERE ADEQUATELY BACKED BY INTEREST FREE FUNDS AND THERE WERE NO BORROWING UNDERTAKEN TO MAKE THE INVESTMENT. THEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - 1) CIT VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 340 (BOM.) 2) CIT VS. HERO CYCLES LTD. (2010) 323 ITR 518 (P & H) THE LD. CIT(A) ALSO REFERRED THE DECISION OF ITAT CHANDIGARH BENCH IN THE CASE OF ACIT VS. PUNJAB STATE COOP & MARKETING IN I.T.A.NO. 548/CHD/ 2011 WHEREIN IT HAS BEEN HELD THAT WHERE THE INVESTMENT WAS 14 MADE IN EARLIER YEARS OUT OF RESERVE & SURPLUS FUNDS, PROVISIONS OF SECTION 14A COULD NOT BE APPLIED. 10 . LD. CIT(A) CATEGORICALLY STATED THAT THE ASSESSING OFFICER HAD NOT PROVED THAT THE BORROWED FUNDS WERE INVESTED IN SHARES AND OTHER EXPENSES WERE INCURRED BY THE ASSESSEE AND THAT THE ASSESSEE HAD CLEARLY STATED THAT THERE WAS NO EXPENDITURE INCURRED ON THE INVESTMENT IN SHARES AS ASSESSEE HA D NOT USED ANY BORROWING FOR EARNING THE SAID EXEMPTED INCOME AND THE DIVIDEND CHEQUES/DDS WERE PAYABLE AT PAR. ACCORDING TO THE LD. CIT(A) , THE ONUS WAS ON THE ASSESSING OFFICER TO SHOW COGENT REASONS BEFORE REJE CTING THE EXPLANATION OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED. R E LI A NCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. & ORS VS. CIT 247 CTR (DEL) 162 WHEREIN IT HAS BEEN HELD AS UNDER: - SUB - SS (2) AND (3) OF S. 14A AS WELL AS R. 8D ARE PROSPECTIVE AND NOT APPLICABLE RETROSPECTIVELY; HOWEVER , EVEN PRIOR THERETO, S. 14A REQUIRED THE A.O. TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE FOR COGENT REAS ONS AND THEN TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. LD. CIT(A) HELD THAT THE ASSESSING OFFICER HAD NOT GIVEN ANY REASON FOR BEING SATISFIED THAT THE AMOUNT INVEST ED WAS OUT OF INTEREST BEARING 15 FUNDS AND ANY OTHER EXPENSES WERE INCURRED FOR THE SAID SHA RES , S O, THE REASONS FOR SATIS FACTION OF THE ASSESSING OFFICER WERE NOT SUPPORTED BY THE FACTS OF THE CASE, THEREFORE, NO DISALLOWANCE OF EXPENSES COULD HAVE BEEN MADE UNDER RULE 8D . ACCORDINGLY, THE ADDITION OF RS. 32,14,818/ - WAS DELETED. NOW THE DEPARTMENT IS IN APPEAL. 11 . LEARNED D.R. STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND REITERATED THE OBSERVATIONS MADE BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER DATED 15/12/2011 . RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS : - 1) M/S. PAVAK SECURITIES PVT. LTD. VS. ITO , MUMBAI IN I.T.A.NO. 1803/MUM/2012 DAT E D 13/09/2013 (MUM. C TRIB.) 2) M/S. LAKSHMI RINGH TRAVELLERS VS. ACIT IN I.T.A.NO. 2083/MDS/2011 DATED 02/03/2012 (CHENNAI A TRIB.) 12. IN HIS RIVAL SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER STATED THAT THE CASES RELIED BY THE LEARNED D.R. WERE RELATING TO TRADING CONCERNS WHEREIN S OME EXPENSES MIGHT HAVE BEEN INCURRED TO EARN THE DIVIDEND INCOME, BUT IN ASSESSEES CASE N O SUCH EXPENSES WERE INCURRED AND THE INVESTMENT WAS MADE OUT OF INTEREST FREE FUNDS. THEREFORE, THE 16 DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS RIGHTLY DELETED BY THE LD. CIT(A). 13 WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE OF RS. 30,14,818/ - U/S. 14A OF THE ACT R.W.R 8D OF THE I.T. RULES 1962 AGAINST THE DIVIDEND INCOME EARNED BY THE ASSESSEE FOR RS. 18,33,158/ - WHICH CLEARLY SHOWS THAT THE ASSESSING OFFICER DISALLOWED MORE THAN WHAT HAD BEEN EARNED BY THE ASSESSEE. IN SUCH TYPE OF CASES, FOR MAKING THE DISALLOWANCE U/S. 14A OF THE ACT , IT IS REQUIRED THAT THERE MUST BE DEFINITE NEXUS BETWEEN THE EXPENDITURE INCURRED FOR EARNING THE EXEMPTED INCOME. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE WAS HAVING ADEQUA T E INTEREST FREE FUNDS IN THE FORM OF SHAREHOLDERS FUNDS AND RESERVED & SU RPLUS TO BACK UP THE INVESTMENT IN SHARES, THE FUNDS AVAILABLE WERE OF RS. 56,36,54,029/ - AGAINST THE INVESTMENT OF RS. 13,41,32,097/ - . IN THE INSTANT CASE, THE ASSESSING OFFICER DID NO T BRING ANY COGENT MATERIAL ON RECORD TO SUBSTANTIATE THAT THE ASSESSEE INCURRED ANY EXPENDITURE TO EARN THE EXEMPTED INCOME. ON THE CONTRARY, THE EXPLANATION OF THE ASSESSEE WAS THAT ALL THE DDS/CHEQUES FOR THE 17 DIVIDEND RECEIVED WERE PAYABLE AT PAR AND NO OTHER EXPENDITURE WAS INCURRED , T HE SAID EXPLANATION WAS NOT REBUTTED . 14 ON THE SIMILAR ISSUE, THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (SUPRA) HAS HELD AS UNDER: - THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFIC IENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDINGS OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTEREST WAS DEDUCTIBLE. SIMILARLY, THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. (2010) 323 ITR 518 (P & H) (SUPRA) HAS HELD AS UNDER: - THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARES AND FUNDS WERE OU T OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF FACT . THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE I M PACT OF EXPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 1 4A, COULD NOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENT L Y, THE DISALLOWANCE WAS NOT PERMISSIBLE. 18 15 IN THE PRESENT CASE ALSO , THE INVESTMENT IN THE SHARES WAS MADE BY THE ASSESSEE FROM THE INTEREST FREE SHAREHOLDERS FUNDS AND RESERVED & SURPLUS AND NO NEXUS WAS ESTABLISHED BY THE ASSESSING OFFICER TO SUBSTANTIATE THAT THE ASSESSEE INCURRED ANY EXPENDITURE TO EARN DIVIDEND INCOME . O N THE CONTRARY, THE LD. CIT(A) HAS GIVEN CATEGORICAL FINDING THAT THE ASSESSING OFFICER HAD NOT PROVED THAT T HE BORROWED FUNDS WERE INVESTED IN THE SHARES OR BROUGHT THE VALID SATISFACTION SUPPORTED BY THE COGENT REASONS TO DETERMINE THE EXPENSES UNDER RULE 8D. THE SAID CATEGORICAL FINDING GIVEN BY THE LD. CIT(A) HAS NOT BEEN REBUTTED. THEREFORE, WE DO NOT SEE ANY VALID REASON TO INT ERFERE WITH THE FINDINGS OF THE LD. CIT(A). ACCORDINGLY, DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTMENT. 16 IN I.T.A.NO. 502/JODH/201 3 SIMILAR ISSUE IS INVOLVED THE ONLY DIFFERENCE IS IN THE AMOUNT OF DELETION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER , ALL OTHER FACTS ARE IDENTICAL, THEREFORE, OUR FINDING GIVEN IN FORMER PART OF THIS ORDER IN RESPECT OF I.T.A.NO. 501/JODH/2013 FOR THE A.Y. 2009 - 10 SHALL APPLY MUTATIS - MUTANDIS FOR THE A.Y. 2010 - 11 . 19 17 IN THE RESULT, BOTH THE APPEAL S OF THE DEPARTMENT ARE DISMISSED. ( ORDER PRONOUNCED IN THE COURT ON 09 TH OCTOBER , 201 4) . S D/ - SD/ - ( HARI OM MARATHA ) (N.K.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 09 TH OCTOBER , 201 4 . VR/ - COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE LD. CIT 4. THE CIT(A) 5. THE D.R SR. PRIVATE SECRETARY , ITAT, JODHPUR .
