RAVI MOHAN GEHI, MUMBAI V. DCIT 20(2), MUMBAI

ITA 5127/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2938 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 07-08-2014
• Court: TRIBUNAL
• Department Lawyers: KAKESH RANGAN DR
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , D, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.5127/MUM/2014 ASSESSMENT YEAR: 2009-10 RAVI MOHAN GEHI, MS. GROWMORE ESTATE CONSULTANTS, B-7, NAVAKAR CHAMBERS, ANDHERI KURLA RD, ANDHERI(E) MUMBAI -400059 / VS. DC IT 20 ( 2 ) 6 TH FLOOR, PIRAMAL CHAMBERS, LALBAUG, MUMBAI-400012 (ASSESSEE ) (REVENUE) P.A. NO. AEPPG1674M !' / ASSESSEE BY NONE / REVENUE BY SHRI KAKESH RANGAN (DR) # $ % & / DATE OF HEARING : 14/06/2016 % & / DATE OF ORDER: 24/06/2016 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS), MUMBAI- 31 {(IN SHORT CIT(A)}, DATED 15.05.2014 PASSED AG AINST RAVI MOHAN GEHI 2 ASSESSMENT ORDER U/S 143(3) OF THE AO FOR THE ASSES SMENT YEAR 2009-10. 2. IN THIS CASE NONE APPEARED ON BEHALF OF THE ASSES SEE, DESPITE THE FACT THAT NOTICE HAS BEEN SERVED UPON T HE ASSESSEE ON THE ADDRESS GIVEN IN THE APPEAL MEMO. 3. LD. DR RELIED UPON THE ORDERS OF THE LOWER AUTHORI TIES. THE ONLY GROUND RAISED IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE MADE U/S 14A FOR RS.2,00,158/-. 3.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WA S NOTED BY THE AO THAT ASSESSEE HAD EARNED EXEMPT INC OME OF RS.17,06,434/- IN THE FORM OF DIVIDEND BUT NO EXPEN SES HAD BEEN ALLOCATED FOR EARNING THE SAME. ACCORDINGLY, T HE AO COMPUTED DISALLOWANCE U/S 14A R.W. RULE 8D(2)(III) @ 0.5% OF AVERAGE VALUE OF INVESTMENTS. 3.2. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) WHEREIN DISALLOWANCE WAS CONFIRMED WITH FOLLOWING OBSERVATIONS: 5. THE ONLY EFFECTIVE GROUND RAISED IN APPEAL IS CHALLENGING THE DISALLOWANCE OF RS.2,00,158/- U/S 14A. I HAVE CAREFULLY CONSIDERED THE FACTS RELATING TO THE SAID GROUND AS THEY EMANATE FROM THE IMPUGNED ORDER AND THE SUBMISSIONS MADE DURING THESE PROCEEDINGS. 5.1 IN THE PRESENT CASE THE APPELLANT IS DERIVING PROFIT FROM REAL ESTATE CONSULTANCY BUSINESS AS WEL L AS 'INCOME FROM OTHER SOURCES.' DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS ALSO DERIVED EXEMPT INCOME OF DIVIDEND ON SHARES AND MUTUAL FUND S. RAVI MOHAN GEHI 3 5.2 THE YEAR UNDER CONSIDERATION IS A.Y. 2009-10 AN D THEREFORE WHERE THE APPELLANT HAS RECEIVED TAX-EXEM PT INCOME AND HAS INCURRED EXPENDITURE, THE DISALLOWAN CE, IF ANY, IS TO BE COMPUTED WITH REFERENCE TO THE PROVISIONS OF RULE 8D. THE SAID RULE ENVISAGES DISALLOWANCE ON ACCOUNTS OF EXPENDITURE DIRECTLY RELATED TO THE TAX FREE INCOME {RULE 8D(2)(I)}; INT EREST EXPENDITURE, NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT {RULE 8D(2)(II)}AND .5 % OF THE AVERAGE VALUE OF INVESTMENT{RULE 8D(2)(III)} . THE MAIN THRUST OF THE ARGUMENTS OF THE APPELLANT IS TH AT NO INTEREST BEARING FUNDS WERE USED FOR THE INVESTMENTS FROM WHICH THE DIVIDEND INCOME HAS BEEN DERIVED. HOWEVER, A PERUSAL OF THE IMPUGNED ORDER REVEALS THAT THE DISALLOWANCE MADE BY THE AO IS NOT UNDER RULE 8D(2)(I) OR (II) BUT ON THE AVERAGE VALUE OF I NVESTMENTS AS PER RULE 8D(2)(III). IN VIEW OF THE FACTS THAT T HE SAID RULE, LAYS DOWN THE SPECIFIC PROCEDURE TO BE ADOPTE D FOR COMPUTATION OF DISALLOWANCE THE ARGUMENT OF THE APPELLANT LACKS FORCE. THE STATUTORY DISALLOWANCE @ 0.5% OF THE VALUE OF AVERAGE INVESTMENTS HAS BEEN HELD TO BE REASONABLE ESPECIALLY CONSIDERING THAT THE PMS PROVIDERS CHARG E BETWEEN 2 AND 2.5%. THE SAID MECHANISM WAS FOUND TO BE IN ORDER BY THE JURISDICTIONAL HIGH COURT IN THE DECISION RENDERED IN THE CASE OF GODRE J AND BOYCE MFG. LTD. V DCIT REPORTED AT 328 ITR 81, REFER PARA 60 OF THE SAID ORDER REPRODUCED BELO W: '60. IN THE AFFIDAVIT IN REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMIS SIONS WHICH HAVE BEEN FILED BY THE ADDITIONAL SOLICITOR G ENERAL IT HAS BEEN STATED, WITH REFERENCE TO RULE 8D(2)(II ) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY TH E INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONE D AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT W ILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPE NDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE T O ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE - ANY ASP ECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC .). RAVI MOHAN GEHI 4 AS REGARDS RULE 8D(2)(III) IT HAS BEEN SUBMITTED TH AT SOME MECHANISM OR FORMULA HAD TO BE ADOPTED FOR ATTRIBUT ING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO T AX EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPENS ES ATTRIBUTABLE TO TAX-FREE INVESTMENT INCOME HAVE A F IXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THAT THE DISALLOWANCE SHOULD ALSO BE LINKED T O THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF E XEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEMES (PMS) TH E FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF TH E PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFI T ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPENSES WERE EXCLUDED, ON THE GROUN D THAT IN THE CASE OF A LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVIT IES, THE VARIABLE EXPENSES WERE COMPUTED AT ONE-HALF PER CEN T OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR RULE 8D CAN NOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY . APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS W RIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSIT Y, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'' 5.3 IN THE DECISION OF DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT REPORTED AT 15 TAXMANN.COM 390 (DELHI), THE HON'BLE COURT HELD AS UNDER: '31. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER R ULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICE R REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. I F ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPO NENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMO UNT RAVI MOHAN GEHI 5 OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)] INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESB77ENT, INCOME FROM WHICH DOES NOT OR SHALL NO T FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOT AL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICI AL FIGURE- ONE HALF PERCENT OF THE AVERAGE VALUE OF TH E INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALAN CE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LA ST DAY OF THE PREVIOUS YEAR (EMPHASIS SUPPLIED). IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT IN COME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS , THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE, TH E AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS - (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY V IRTUE OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D. THE INDIR ECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATE D ABOVE. AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN (EMPHASIS SUPPLIED).' 5.4 AS STATED EARLIER, THE DISALLOWANCE IN THIS CASE IS LIMITED TO CLAUSE (III) OF RULE 8D AND NO EXPENSES OR INTEREST HAVE BEEN ADDED BACK BY THE AO. AS DISCUSSED ABOVE, THE ARTIFICIAL FIGURE COMPUTED IS STATUTORILY DISALLOWABLE. IN VIEW OF THESE REASONS, THE GROUNDS RAISED BY THE APPELLANT ARE REJECTED AND THE DISALLOWANCE MADE BY THE AO IS UPHELD. 3.3. WE HAVE GONE THROUGH THE ORDER OF LD. CIT(A). IT I S NOTED THAT NO DISALLOWANCE HAS BEEN MADE ON ACCOUNT OF IN TEREST. NO EXPENSES WERE ALLOCATED BY THE ASSESSEE SUO MOTTO TOWARDS EARNING OF EXEMPT INCOME. NOTHING HAS BEEN BROUGHT BEFORE RAVI MOHAN GEHI 6 THE LOWER AUTHORITIES OR EVEN BEFORE US TO SHOW THA T NO EXPENSES WERE INCURRED AT ALL TOWARDS EARNING OF EX EMPT INCOME. FURTHER, NOTHING HAS BEEN BROUGHT BEFORE US TO CONTRADICT THE FINDINGS RECORDED BY THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE HAVE NO OTHER OPTION BUT TO UPHOL D THE DETAILED AND WELL REASONED FINDINGS TO LD. CIT(A). THE ORDER PASSED BY LD. CIT(A) IS CONFIRMED AND APPEAL FILED BY THE ASSESSEE IS DISMISSED. 4. IN THE RESULT, THIS APPEAL FILED BY THE ASSESSEE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JUNE, 2016. SD/- (JOGINDER SINGH) SD/- (ASHWANI TANEJA) '# / JUDICIAL MEMBER $# / ACCOUNTANT MEMBER # $ MUMBAI; ( DATED: 24/06/2016 CTX? P.S/. . . %'&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. / / # 0 ( * ) / THE CIT, MUMBAI. 4. / / # 0 / CIT(A)- , MUMBAI 5. 34 - , / *& 5 , # $ / DR, ITAT, MUMBAI 6. 6! 7$ / GUARD FILE. / BY ORDER, .3* - //TRUE COPY// / (DY./ASSTT. REGISTRAR) , # $ / ITAT, MUMBAI