DHADDA DIAMONDS P.LTD, MUMBAI V. ITO 5(1)(3), MUMBAI

ITA 5146/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78780 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2014
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 22-04-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 13-08-2012
• Court: TRIBUNAL
• Assessee Lawyers: YOGESH A THAR
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A; 147

Judgement Text

D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, AM AND VIVEK VARMA, JM ./I.T.A. NO.5146/M/2012 (ASSESSMENT YEAR: 2008 - 2009 ) ./I.T.A. NO.5147/M/2012 (ASSESSMENT YEAR: 2009 - 2010 ) DHADDA DIAMONDS P. LTD., 1208, PANCHRATNA BLDG, OPERA HOUSE, MUMBAI - 400004. / VS. ITO - 5(1)(3), R.NO.569, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI - 20. ./ PAN : AAACD 0539 L ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI YOGESH A THAR / RESPONDENT BY : SHRI SANJEEV JAIN, DR / DATE OF HEARING : 22 .04.2014 / DATE OF PRONOUNCEMENT : 30 .04.2014 / O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE TWO APPEALS UNDER CONSIDERATION. BOTH THE APPEALS ARE FILED BY THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE CIT (A) - 9, MUMBAI DATED 14.5.2012 FOR THE ASSESSMENT YEARS 2008 - 2009 AND 2009 - 2010. SINCE, THE ISSUES ISSUES RAISED IN BOTH THE APPEA LS ARE IDENTICAL, THEREFORE, FOR THE SAKE OF CONVENIENCE, THEY ARE CLUBBED, HEARD COMBINEDLY AND DISPOSED OF IN THIS CONSOLIDATED ORDER. APPEAL WISE AND GROUND WISE ADJUDICATION IS GIVEN IN THE FOLLOWING PARAGRAPHS. 2. AT THE OUTSET, SHRI YOGESH A THAR, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE APPEAL FOR THE ASSESSMENT YEAR 2008 - 2009, AND MENTIONED THAT GROUND NO.1 RAISED IN THAT APPEAL, WHICH IS RELATING TO REOPENING U/S 147 OF THE ACT, IS PRESSED. AFTE R HEARING THE LD DR IN THIS REGARD, THE SAID GROUND NO.1 OF THE APPEAL ITA NO.5146/M/2012 (AY: 2008 - 2009) IS DISMISSED AS NOT PRESSED. GROUND NO.2 IN THE SAID APPEAL , WHICH IS EXACTLY IDENTICAL TO THE SOLITARY GROUND RAISED BY THE ASSESSEE FOR THE AY 2009 - 2010 AND THE ONLY DIFFERENCE IS IN FIGURES, IS RAISED WITHOUT PREJUDICE TO GROUND NO.1, WHICH READS AS UNDER: 2 GROUND NO.2: DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT AMOUNTING TO RS. 3,68,135/ - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN UPHOLDING THE ACTION OF THE AO OF DISALLOWING A SUM OF RS. 3,68,135/ - U/S 14A OF THE ACT READ WITH RULE - 8D. 2. HE FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S 14A COUPLED WITH OTHER DISALLOWANCES MADE BY THE AO (IN RESPECT OF RE PAIRS AND ELECTRICITY) EXCEEDS THE TOTAL EXPENDITURE INCURRED BY THE APPELLANT. 3. HE FAILED TO APPRECIATE THAT THE EXPENSES RELATING TO EXPORT BUSINESS CANNOT BE SUBJECT MATTER OF DISALLOWANCE UNDER SECTION 14A. 3. REFERRING TO THE ABOVE GROUND, LD COUNSEL MENTIONED THAT THE ONLY ISSUE INVOLVED IS THE DISALLOWANCE U/S 14A OF THE ACT. IN THIS REGARD, LD COUNSEL MENTIONED THAT AN IDENTICAL ISSUE CAME UP FOR ADJUDICATION BEFORE THE TRIBUNAL VIDE ITA 7292/M/2011 (AY 2008 - 2009) , DATED 29 TH NOVEMBER, 2013 IN THE CASE OF ACIT VS. M/S. JAYSHREE PETROCHEMICALS PVT. LTD AND READ OUT THE RELEVANT PORTIONS FROM THE SAID ORDER OF THE TRIBUNAL (SUPRA), WHEREIN THE TRIBUNAL HAS DISCUSSED AND ADJUDICATED THE ISSUE AT LENGTH VIDE PARAGRAPHS NO.4 TO 7 . FURTHER, BEFOR E US LD COUNSEL FILED A WORKING SHOWING THE MAXIMUM POSSIBLE DISALLOWANCE SHOULD NOT EXCEED THE SUM OF RS. 66,404/ - (FOR THE AY 2008 - 09) AND RS. 71,773/ - (FOR THE AY 2009 - 2010). 4. ON THE OTHER HAND, LD DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 5 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE CITED DECISION OF THE TRIBUNAL IN THE CASE OF M/S. JAYSHREE PETROCHEMICALS PVT. LTD (SUPRA). ON PERUSAL OF THE SAID ORD ER OF THE TRIBUNAL, WE FIND PARA 4 TO 7 OF THE TRIBUNALS ORDER (SUPRA) ARE RELEVANT AND THE SAME READ AS UNDER: 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS WORKED OUT THE DISALLOWANCE U/S 14A BY CONSIDERING THE DIRECT EXPENDIT URE AS WELL AS INDIRECT EXPENDITURE. THE DIRECT EXPENDITURE HAS BEEN WORKED OUT BY THE A.O AS UNDER: THE ASSESSEE HAS ALSO INCURRED FOLLOWING EXPENSES WHICH ARE DIRECTLY CONNECTED WITH THE EARNING OF EXEMPTED INCOME. A. DELIVERY CHARGES RS. 25,641 B. D MAT CHARGES RS. 2,15,411 C. TRANSACTION CHARGES RS. 4,11,401 RS. 6,52,453 4. THUS, IT IS CLEAR THAT APART FROM THE DIRECT EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME THE A.O HAS ALSO DISALLOWED INDIRECT EXPENDITURE AND 3 WORKED OUT THE SAME @ 0.5% AVERAGE INVESTMENT. THUS, THE TOTAL DISALLOWANCE U/S 14A HAS BEEN MADE BY THE A.O AT RS. 34,21,161/ - . THE ASSESSEE HAS NOT DISPUTED THE DISALLOWANCE OF DIRECT EXPENSES AND THE GRIEVANCES OF THE ASSESSEE WAS ONLY WITH RESPECT TO T HE APPORTIONMENT OF THE INDIRECT EXPENSES WORKED OUT BY THE A.O UNDER RULE 8D OF THE INCOME TAX RULES. AT THE OUTSET WE NOTE THAT THE CIT(A) HAS COMPLETELY IGNORED THE FACT THAT RULE 8D IS APPLICABLE FOR THE YEAR UNDER CONSIDERATION AND THEREFORE, THE FIND ING OF THE CIT(A) IS NOT SUSTAINABLE EVEN IN THE LIGHT OF THE DECISION OF HONBLE JURISDICTION HIGH COURT IN CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT 328 ITR 81. HOWEVER, THE UNDERLINED PRINCIPLE OF SECTION 14A IS TO ENSURE THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTION OF CERTAIN CATEGORIES OF INCOMES SHALL NOT REDUCE THE TAX PAYABLE ON NON - EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST THE TAXABLE INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE ALLOWED AND ONLY THE EXPENSES RELATABLE TO THE EARNING OF TAXABLE INCOME SHALL BE ALLOWED. IF THERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO THE EXEMPT INCOME THE SAME CANNOT BE ALLOWED AGAINST THE INCOME WHICH IS TAXABLE. THUS, FOR AT TRACTING THE PROVISION OF SECTION 14A THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS RELATIONSHIP WITH THE TAX EXEMPT INCOME. THE APPORTIONMENT OF EXPENDITURE IS NEEDED WHEN EXPENDITURE IS INCURRED IN RELATION TO COMPOSITE/INDIVISIBLE BUSINESS WHICH RESULTS THE EARNING OF BOTH TAXABLE AND NON - TAXABLE INCOME. THEREFORE IN ORDER TO DISALLOWED THE EXPENDITURE U/S 14A THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IN THE CASE IN HAND THE DETAILS OF DIRECT AND INDIRECT EXPENSES BOOKED BY THE ASSESSEE TO THE PROFIT AND LOSS ACCOUNT ARE GIVEN IN SCHEDULE 14 AT PAGE NO. 6 OF THE PAPER BOOK AS UNDER: 5. SCHEDULE NO. 14 SELLING & ADMINISTRATIVE CHARGES AUDIT FEES 13260 13224 BANK CHARGE S 25858 2318 CONVEYANCE & TRAVELLING EXPENSES 44285 101054 DELIVERY CHARGES 25641 7306 D MAT CHARGES 215411 99927 FILLING FEES 1500 900 LEGAL & PROFESSIONAL CHARGES 28000 100000 LOADING & UNLOADING EXPENSES 23522 55115 PACKING CHARGES 84530 101326 POSTAGE, TELEGRAMME & TELEPHONE CHARGES 50331 49988 PRINTING & STATIONERY 25214 81011 PROFESSION TAX 2500 2500 REPAIRS & MAINTENANCE EXPENSES 21512 80256 SALARY 873720 811424 STAFF WELFARE EXPENSES 16701 19970 TRANSACTION CHARGES 411401 419769 TRANSPORT CHARGES 35781 91160 RENT, RATES & TAXES 1900 73722 TOTAL 1901068 2110970 6. THE A.O HAS CONSIDERED DELIVERY CHARGES, DMAT CHARGES AND TRANSACTION CHARGES AS DIRECT EXPENSES AND WORKED OUT THE SAME AT ` 6,52,453/ - WHICH THE ASSESSEE HAS NOT DISPUTED. AS REGARDS, THE REMAINING EXPENSES THE A.O HAS WORKED OUT THE SAME AT RS. 27,68,708/ - . THUS, IT IS CLEAR THAT OUT OF RS. 12.48 LACS INDIRECT EXPENSES THE A.O HAS DISALLOWED ` 27.68 LACS. WE FIND FROM THE DET AILS AS GIVEN ABOVE THAT APART FROM THE 4 DIRECT EXPENSES NO OTHER EXPENSES HAS LIVE NEXUS FOR EARNING THE EXEMPT INCOME. ACCORDINGLY, WE HOLD THAT THE DISALLOWANCE OF INDIRECT EXPENSES BY APPLYING RULE 8D IS NOT JUSTIFIED AS THERE IS NO DIRECT NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPT INCOME WHICH IS PREREQUISITE FOR APPLYING SECTION 14A. EVEN OTHERWISE THE RULE 8D CAN BE INVOKED ONLY WHEN SECTION 14A IS ATTRACTED AND NOT OTHERWISE . THE SCHEME AND PURPOSE OF SECTION 14A IS TO DISALLOW THE CLAIM OF THE EXPENSES INCURRED IN RELATION TO EARNING THE INCOME NOT FORMING PART OF THE TOTAL INCOME. THEREFORE, THE DISALLOWANCE OF EXPENDITURE IS ALWAYS IN RELATION TO THE CLAIM OF EXPENDITURE AND IT CANNOT BE MORE THAN THE CLAIM ITSELF. AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE DELHI BENCHES OF THE TRIBUNAL IN CASE OF GILLETTE GROUP INDIA PVT. LTD. VS ACIT AND CONCLUDED IN PARA 6 AS UNDER: 6. FROM THE ABOVE, IT IS EVIDENT THAT AS PER SUB - SECTION (1) OF SECTION 14A, NO DEDUCTION IS TO BE ALLOWED IN RESPECT OF EX PENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. SUB - SECTION (2) OF SECTION 14A PROVIDES THE PROCEDURE FOR DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER. THE BOARD HAS ALSO PRESCRIBED RULE 8D F OR DETERMINING THE EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING OF EXEMPT INCOME. THUS, THE DISALLOWANCE CAN BE MADE UNDER SUB - SECTION (1) FOR THE EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME. IN THE CASE UNDER APPEAL BEFORE US, FROM THE PERUSAL O F THE ASSESSEES PROFIT & LOSS ACCOUNT, IT IS EVIDENT THAT THE TOTAL EXPENDITURE INCURRED WAS 49,04,028/ - ONLY. THUS, THE ASSESSEE CLAIMED THE DEDUCTION FOR THE EXPENDITURE OF 49,04,028/ - WHICH IS DEBITED TO THE PROFIT & LOSS ACCOUNT. THE DISALLOWANCE CANN OT EXCEED THE EXPENDITURE ACTUALLY CLAIMED BY THE ASSESSEE. WE, THEREFORE, ACCEPT THE ASSESSEES CONTENTION THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LEARNED CIT(A) IN EXCESS OF TOTAL EXPENDITURE DEBITED TO PROFIT & LOSS ACCO UNT WAS UNJUSTIFIED. ACCORDINGLY, WE RESTRICT THE DISALLOWANCE TO THE EXTENT OF EXPENDITURE ACTUALLY CLAIMED BY THE ASSESSEE I.E. 49,04,028/ - . 7. IN VIEW OF THE ABOVE DISCUSSION WE DO NOT FIND ANY MERITS IN THE APPEAL OF THE REVENUE. 6. FROM THE ABOVE, IT IS CLEAR THAT THE NEXUS MUST EXIST BETWEEN THE EXPENDITURE AND THE EXEMPT INCOME TO ATTRACT THE PROVISIONS OF SECTION 14A OF THE ACT. THEREFORE, THE DISALLOWANCE OF EXPENDITURE IS ALWAYS IN RELATION TO THE CLAIM OF EXPENDITURE AND IT CA NNOT BE MORE THAN THE CLAIM ITSELF. AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE DELHI BENCHES OF THE TRIBUNAL IN CASE OF GILLETTE GROUP INDIA PVT. LTD. VS ACIT (SUPRA). MOREOVER, IN THE PRESENT CASE, THERE ARE CERTAIN EXPENDITURES DEBITED TO THE P&L ACC OUNT, WHICH ARE PRIMA FACIE UNCONNECTED TO THE EXEMPT INCOME. SUCH EXPENSES SHOULD ALSO NEED TO BE EXEMPTED. CONSIDERING THE ABOVE 5 ORDER OF THE TRIBUNAL, WE ARE OF THE OPINION THAT THE MATTER SHOULD BE REMANDED TO THE FILES OF THE AO TO EXAMINE THE EXPENS ES DEBITED TO THE P&L ACCOUNT AND EXCLUDE THE UNCONNECTED EXPENSES FOR THE PURPOSE OF QUANTIFYING THE DISALLOWANCE U/S 14A OF THE ACT . ACCORDINGLY, WE REMIT THE MATTER TO THE FILE OF THE AO . HE SHALL EXAMINE IF THE LD ARS CLAIM OF DISALLOWANCE OF RS. 66,404/ - (FOR THE AY 2008 - 09) AND RS. 71,773/ - (FOR THE AY 2009 - 2010). AO SHALL ADJUDICATE THE ISSUE AFRESH IN ACCORDANCE WITH THE SET PRINCIPLE OF THE LAW AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUN DS RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONO UNCED IN T HE OPEN COURT ON 3 0 T H APRIL, 2014. S D / - S D / - (VIVEK VARMA) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 3 0 .4.2014 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI