ACIT, Gurgaon V. M/s. Crain India Ltd., Gurgaon

ITA 5136/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4073 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 13-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Assessee Lawyers: RAVI SHARMA MS POONAM AHUJA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES C : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.NO.5136/DEL./2015 ASSESSMENT YEAR 2007-2008 THE ACIT, CIRCLE-1(1), GURGAON. VS. M/S. CAIRN INDIA LTD., 4 TH FLOOR, VIPUL PLAZA, SUNCITY, SECTOR-54, GURGAON. PAN AACCC8799D (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI S.R. SENAPATI, SR. D.R. FOR ASSESSEE : SHRI RAVI SHARMA, ADVOCATE. MS. POONAM AHUJA, C.A. DATE OF HEARING : 19.01.2018 DATE OF PRONOUNCEMENT : 22.01.2018 ORDER PER BHAVNESH SAINI, J.M. THIS APPEAL BY REVENUE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-I, GURGAON, DATED 2 ND JUNE, 2015, FOR THE A.Y. 2007-2008, CHALLENGING THE DELETION OF ADDITION OF RS.51,14,636 ON ACCOUNT OF EXPENSES IN RELATION TO EXEMPT OF DIVIDE ND INCOME UNDER SECTION 14A OF THE I.T. ACT, 1961. 2. BRIEFLY, THE FACTS OF THE CASE ARE THAT DURING THE COURSE OF RE-ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THER E WERE NO 2 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF TH E I.T. ACT DESPITE THE FACT THAT THE ASSESSEE HAD SUBSTANTIAL AMOUNT O F TAX EXEMPT INCOME. AFTER CONSIDERING THE RESPONSE OF THE ASSES SEE, A.O. PROCEEDED TO DISALLOW 1% OF THE STAFF COST, OPERATI NG EXPENSES AND FINANCE CHARGES, RESULTING IN AN ADDITION OF RS.51, 14,636 TO THE ASSESSEES INCOME. THE ASSESSEE CHALLENGED THE ADDI TION BEFORE THE LD. CIT(A). THE WRITTEN SUBMISSIONS OF ASSESSEE IS REPRODUCED IN THE APPELLATE ORDER IN WHICH THE ASSESSEE BRIEFLY EXPLA INED THAT A.O. FAILED TO ESTABLISH A DIRECT OR INDIRECT NEXUS BETW EEN THE EXPENDITURE ALLEGED TO HAVE BEEN INCURRED FOR EARNING THE EXEMP T INCOME NOR INVOCATION OF SECTION 14A OF THE I.T. ACT. THE ASSE SSEE ALREADY SUBMITTED BEFORE A.O. THAT IT HAD MADE INVESTMENT O UT OF UNUTILIZED IPO PROCEEDS AND NO INTEREST BEARING FUNDS WERE USE D. THE A.O. IGNORED THE SUBMISSION OF THE ASSESSEE AND MERELY O N PRESUMPTION AND WITHOUT ANY CONCRETE BASIS, MADE THE ADDITION. THE ASSESSEE DID NOT INCUR ANY ACTUAL EXPENDITURE FOR EARNING THE EX EMPT INCOME. 3. THE LD. CIT(A) CONSIDERING THE EXPLANATION OF A SSESSEE, DELETED THE ADDITION. HIS FINDINGS IN PARAS 5.2 AND 5.4 ARE REPRODUCED AS UNDER : 3 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. 5.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND GONE THR OUGH THE SUBMISSIONS OF THE LD. COUNSEL OF THE APPELLANT TOGETHER WITH VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS ISSUE. THE A.O DISALLOWED AN AMOUNT OF RS. 51,14,636/- U/S 14A OF THE INCOME TAX ACT IN VIEW OF THE FACT THAT THE APPELLANT HAD NOT DISALLOW ED EXPENSES INCURRED IN RELATION TO EARNING OF DIVIDEND INCOME EX EMPT FROM TAX. 5.3 DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPELLANT SUBMITTED THAT IT HAD RECEIVED MONEY ON AC COUNT OF A PUBLIC ISSUE DURING THE COURSE OF F.Y 2006-07. THE UNUTILIZED MONEY OUT OF THE SAID IPO WAS INVESTED IN MUTUAL FU NDS FROM WHICH DIVIDEND INCOME WAS EARNED BY THE APPELLANT. FURTHERMORE THE APPELLANT SUBMITTED THAT THE TEN MUT UAL FUNDS IN WHICH THE SAID AMOUNT WAS INVESTED WERE PLAIN VAN ILLA PROJECTS WHICH HAD ALMOST NO RISK AND DID NOT REQUI RE EXPERTISE, RESEARCH AND ANALYSIS. THUS, AS PER THE APPELLANT, N O BORROWED FUNDS WERE USED FOR INVESTMENT IN SECURITIES YIELDING DIVIDEND. WITH THESE FACTS, THE APPELLANT SUBMITTED THAT IN TH E ABSENCE OF ANY ACTUAL EXPENDITURE FOR EARNING THE EXEMPTED INC OME, THERE CANNOT BE ANY DISALLOWANCE U/S 14A OF THE INCOME TA X ACT. WHILE SUBMITTING THAT NO DISALLOWANCE WAS CALLED FOR U/S 14A OF THE INCOME TAX ACT, THE LD. COUNSEL DREW THE ATTENTI ON OF THE UNDERSIGNED TO THE JUDGEMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HERO CYCLE INDIA LTD. 323 ITR 518(P&H), AS PER WHICH DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE IN CONNECTION WITH EARN ING OF EXEMPTED INCOME. SIMILARLY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ &BOYCE MFG. COMPANY LTD. VS. DCIT 194 TAXMANN.COM 203(BOM) HELD THAT IN ORDER TO DETERMINE THE 4 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. QUANTUM OF DISALLOWANCE U/S 14A, THERE MUST BE PROXI MATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME EXEMPT FROM TAX. A SIMILAR VIEW HAS BEEN HELD BY THE HON'BL E APEX COURT IN THE CASE OF CIT MUMBAI VS. M/S WALFORT SHARES AND STOCK BROKERS PVT. LTD. (CIVIL APPEAL NO. 4927 OF 2010). FURTHERMORE, IN THE CASE OF CANTON LABORATORIES PVT. LTD. VS. DCIT (2013) 35 CCH 353 (AHMEDABAD), IT HAS BEEN HELD THAT IF OWN FUNDS ARE MORE THAN INVESTMENT IN SHARES, SUC H INVESTMENT HAS TO BE TREATED TO BE OUT OF OWN FUNDS A ND HENCE INTEREST EXPENDITURE IS NOT REQUIRED TO BE ALLOCATED TO EXEMPT INCOME ON PROPORTIONATE BASIS AS PER RULE 8D OF THE INCOME TAX RULES. FURTHERMORE, IN THE CASE OF RELIANCE UTILITY AND POWERS LTD. 221 CTR 435 (MUMBAI), IT HAS BEEN HELD THAT IF THE APPELLANT HAS BORROWED FUNDS AS WELL AS INTERNAL ACC RUALS AND IT LENDS MONEY, IT SHALL BE PRESUMED THAT FIRST OF ALL INTERNAL ACCRUALS ARE USED AND ONCE THESE ARE EXHAUSTED THEN O NLY THE BORROWED FUNDS ARE USED FOR MAKING ADVANCES. FURTHERMO RE, THE HON'BLE DELHI TRIBUNAL IN THE CASE OF ACIT VS MOHAN EXPORTS PVT. LTD. (2013) 151 TTJ 667 (DELHI) HELD THAT IF THERE IS NO EVIDENCE ON RECORD TO SUGGEST THAT THE ASSESSEE HAS M ADE ANY INVESTMENT T SHARES OUT OF BORROWED FUNDS, ON WHICH INTEREST IS PAYABLE, PROVISIONS OF RULE 8D(2)(II) ARE NOT APPLI CABLE. AFTER A CAREFUL CONSIDERATION OF THE FACTS O' THE CASE PART ICULARLY THE FACT THAT NON-INTEREST BEARING FUNDS WERE USED OY THE APPE LLANT FOR INVESTING IN MUTUAL FUNDS YIELDING DIVIDEND INCOME AND ACK OF PROXIMATE RELATIONSHIP BETWEEN EXEMPT INCOME AND EXP ENDITURE INCURRED BY THE APPELLANT TOGETHER WITH VARIOUS JUD ICIAL PRONOUNCEMENTS, I HOLD THAT THE A.O ERRED IN MAKING THE ADDITION 5 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. U/S 14A OF THE INCOME TAX ACT. ACCORDINGLY, GROUND N O. 3 OF THE APPEAL IS ALLOWED. 5.4 IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 4. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE MATTER. T HE LD. CIT(A) FOUND THAT ASSESSEE HAD RECEIVED MONEY ON ACCOUNT OF PUBL IC ISSUE DURING THE COURSE OF F.Y. 2006-2007. THE UNUTILIZED MONEY OUT OF THE SAID IPO WAS INVESTED IN MUTUAL FUNDS FROM WHICH DIVIDEN D INCOME WAS EARNED BY THE ASSESSEE. IT IS, THEREFORE, CLEAR THA T NO BORROWED FUNDS HAVE BEEN USED BY THE ASSESSEE FOR MAKING THE INVES TMENT IN SECURITIES YIELDING DIVIDEND INCOME. THE ASSESSEE A LSO EXPLAINED THAT NO ACTUAL EXPENDITURE HAVE BEEN INCURRED FOR EARNIN G THE EXEMPT INCOME. THE A.O. DID NOT POINT OUT ANY NEXUS BETWEE N THE BORROWED FUNDS OR FUNDS INVESTED TO EARN EXEMPTED INCOME. TH E A.O. RELIED UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES 156 TAXMAN 257 ON THE PROPO SITION THAT ASSESSEE-COMPANY HAS ENTIRE MONEY IN A COMMON KITTY . THE AFORECITED JUDGMENT HAVE BEEN OVERRULED BY THE HON BLE SUPREME COURT IN THE CASE OF HERO CYCLE PVT. LTD., 379 ITR 347 IN WHICH IT WAS 6 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. HELD THAT WHEN ASSESSEE WAS HAVING CREDIT BALANCE IN THE BANK ACCOUNT AT THE TIME OF ADVANCE, NO DISALLOWANCE OF INTEREST SHOULD BE MADE OF BORROWINGS. THE HONBLE PUNJAB & HARYANA HIGH COURT IN ITS LATER DECISION IN THE CASE OF ABHISHEK INDUSTRIES L TD., 380 ITR 652 HELD THAT ONUS IS ON THE A.O. TO RECORD THE SATISFACTION THAT INTEREST BEARING FUNDS WERE USED FOR INVESTMENT TO EARN TAX FREE INCOME. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF KAPSON ASSOCIATES 381 ITR 204 HELD THAT WHEN ASSESSEE CLAIMED OLD INVESTMENTS OUT OF CAPITAL AND RESERVES, NO SEPARAT E AMOUNT BORROWED FOR MAKING INVESTMENTS, NO DISALLOWANCES SHOULD BE MADE. THE LD. CIT(A), THEREFORE, ON PROPER APPRECIATION OF FACTS AND MATERIAL ON RECORD, CORRECTLY DELETED THE ADDITION. THE DEPARTM ENTAL APPEAL HAS NO MERIT AND THE SAME IS ACCORDINGLY, DISMISSED. 5. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 22 ND JANUARY, 2018 VBP/- 7 ITA.NO.5136/DEL./2015 M/S. CAIRN INDIA LTD., GURGAON. COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT C BENCH, DELHI 6. GUARD FILE. // BY ORDER // ASST. REGISTRAR : ITAT DELHI BENCHES : DELHI.