ASIA INVESTMENTS P. LTD, MUMBAI V. ACIT (OSD) 1-CITY 2, MUMBAI

ITA 5382/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84135 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-08-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 01-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PITAMABAR DAS
• Assessee Lawyers: RAJESH HIAVALE
• Keywords: Earning of tax free income; Retrospective amendment; Capital expenditure
• Section: 14A; 28; 10

Judgement Text

A IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. : 5382/MUM/2010 (ASSESSMENT YEAR: 2005-06) ASIA INVESTMENTS PVT LTD, 4 TH FLOOR, MAGNET HOUSE, DOUGALL ROAD, BALLARD ESTATE, MUMBAI -400 038 .: PAN: AAACA 4539 K VS ACIT(OSD) I, CITY -2, AAYAKAR BHAVAN, MUMBAI (APPELLANT-CROSS OBJECTOR) (RESPONDENT) APPELLANT BY : SHRI RAJESH HIAVALE RESPONDENT BY : SHRI PITAMABAR DAS !'#$% /DATE OF HEARING : 14-08-2014 &'( #$%/ DATE OF PRONOUNCEMENT : 12-11-2014 * + * + * + * + O R D E R , , , , -'' -'' -'' -'' '. '. '. '. , . . . . . .. . PER VIVEK VARMA, J.M. : THE APPEAL IS FILED BY THE ASSESSEE AGAINST ORDER O F CIT(A) -4, MUMBAI, DATED 24.04.2010, WHEREIN THE FOLLOWING GRO UNDS HAVE BEEN TAKEN: BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISS IONER OF INCOME TAX (APPEALS)-4 [CIT(A), FOR SHORT], MUMBAI, YOUR A PPELLANT SUBMITS THE FOLLOWING GROUNDS OF APPEAL FOR YOUR SYMPATHETIC CO NSIDERATION. 1. THE LEARNED CIT(A) ERRED IN GIVING DIRECTION TO THE ASSESSING OFFICER TO DISALLOW INTEREST AND ADMINISTRATIVE EXPENDITURE UNDER SEC. 14A READ WITH RULE 8D ALLEGING THAT THE SAME WAS INCURR ED FOR EARNING EXEMPT INCOME. 2. THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE DISALLOWANCE OF ADVANCE WRITTEN OFF AS BAD DEBT AMOUNTING TO RS. 2,0 1,79,541/-. 3. THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER OF TREATING REPAIRS AND MAINTENAN CE EXPENDITURE AS CAPITAL EXPENDITURE AMOUNTING TO RS. 25,400/-. YOUR APPELLANT RESERVES THE RIGHT TO ADD, TO ALTER OR AMEND ANY OF THE ABOVE GROUNDS, IF NECESSARY. ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 2 2. THE ASSESSEE, LATER ON FILED ADDITIONAL GROUNDS OF APPEAL, WHICH ARE AS UNDER: THE APPELLANT CRAVES LEAVE TO RAISE THE FOLLOWING ADDITIONAL GROUND OF APPEAL AS UNDER: 1) WITHOUT PREJUDICE TO THE GROUND NO. 2 RAISED IN THE ORIGINAL GROUNDS OF APPEAL, THE LEARNED CIT(A) ERRED IN NOT DIRECTIN G THE ASSESSING OFFICER TO ALLOW WRITE OFF OF ADVANCE AMOUNTING TO INR 2,01,79,541/- AS TRADING LOSS UNDER SECTION 28 OF THE INCOME TAX ACT. 2) WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO ALLOW WRITE OFF OF ADVANCE AS A CAPITAL LOSS. THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER OR A MEND THE GROUNDS OF APPEAL. 3. THE ASSESSEE IS A COMPANY WHICH IS IN THE BUSINE SS OF MAKING INVESTMENTS IN SHARES OF OTHER COMPANIES TO ACQUIRE CONTROLLING INTEREST THEREIN. THE AO OBSERVED THAT THE ASSESSEE HAD INVESTMENTS PORTFOLIO AT RS. 112,15,37,427/-, ON WHICH IT EARNE D DIVIDEND OF RS. 5,20,67,801/- AND ALSO EARNED INTEREST OF RS. 24,95 ,775/- AND CERTAIN OTHER INCOMES. 4. THE ASSESSEE CLAIMED EXEMPTION UNDER SECTION 10 (33) ON DIVIDEND INCOME. BESIDES THIS, THE AO OBSERVED THAT THE ASSESSEE INCURRED INTEREST EXPENSE AT RS. 3,96,66,350/- AND ADMINISTRATIVE EXPENSE OF RS. 7,00,70,691/-. TAKING INTO CONSIDERA TION THE ABOVE FACTS, THE AO CALLED FOR AN EXPLANATION, AS TO WHY THE INTEREST EXPENDITURE AND ADMINISTRATIVE EXPENDITURE RELATABL E TO EARNING DIVIDEND INCOME BE NOT DISALLOWED UNDER SECTION 14A . 5. THE ASSESSEE RESPONDED TO THE ABOVE QUERY, WHERE IN, IT WAS EXPLAINED THAT THE ASSESSEE, AS PER ITS OBJECT CLAU SE INVESTS ITS FUNDS IN VARIOUS EQUITY SHARES, BOTH QUOTED AND UNQUOTED AND ITS INCOME IS FROM THE SALE OF THESE SHARES HELD AS INVESTMENTS, DIVIDEND AND OTHER INCOMES. THE ASSESSEE, THEREFORE, UTILIZES ITS FUND S FROM ITS BUSINESS ACTIVITY, FOR THE SMOOTH FUNCTIONING OF ITS BUSINES S, IT UTILIZES CERTAIN BORROWED FUNDS, ON WHICH IT PAYS INTEREST. SINCE TH E ACQUIRING OF ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 3 INVESTMENTS AND SALE THEREOF IS THE BUSINESS OF THE ASSESSEE, THEREFORE, ONE TO ONE CORRELATION COULD NOT BE DONE, WHICH IS RELATABLE TOWARDS BORROWED FUNDS, BECAUSE AS SUCH, THE ASSESSEE HAS C OMMON POOL OF FUNDS. IT WAS FURTHER EXPLAINED TO THE AO THAT WHER E BORROWINGS ARE FOR THE PURPOSES OF ACTIVITIES OF BUSINESS, THEN AP PORTIONMENT OF INTEREST EXPENSE FOR DISALLOWANCE, IS NOT CALLED FO R. THE ASSESSEE, PLACED RELIANCE ON A NUMBER OF DECISIONS ON THIS IS SUE, SR.NO. CASE LAW CITATION 1 RECKITT & COLEMAN OF INDIA LTD VS CIT 135 ITR 658 (CAL) 2 INDIAN EXPLOSIVES LTD. VS CIT 147 ITR 392 3 ALKALI & CHEMICAL CORP. LTD. VS CIT 190 ITR 196 (CAL) 4 WOOLCO MBERS OF INDIA LTD. VS CIT 134 ITR 291 (CAL) 6. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISIO NS OF ITAT MUMBAI BENCHES IN THE CASES OF SR.NO. CASE LAW ITA 1 TAJ TRADE & INVESTMENT LTD VS DCIT ITA 3374 TO 3376/M/1984 2 MAFATLAL HOLDINGS LTD. VS ACIT ITA 2935/M/2002 7. IT WAS EXPLAINED THAT IN THE CASE OF MAFATLAL HO LDINGS LTD. ( SUPRA ) THAT IF THE ACTIVITY WAS BUSINESS THEN PROVISIONS OF SECTION 14A WOULD NOT BE APPLICABLE. 8. ON THESE ARGUMENTS, THE ASSESSEE PLEADED BEFORE THE AO THAT NO DISALLOWANCE WAS CALLED FOR, FOR ANY INTEREST OR EX PENDITURE UNDER SECTION 36(1)(III) OR ANY OTHER PROVISIONS OF THE A CT. 9. THE AO CONSIDERED THE REPLIES OF THE ASSESSEE AN D HELD THAT IF THE PROVISIONS OF SECTIONS 14A AND 10 ARE READ TOGE THER THEN, ANY EXPENDITURE RELATABLE TO EARN TAX FREE INCOME HAS T O BE DISALLOWED. TO COME TO THIS CONCLUSIONS, THE AO REFERRED TO A NUMB ER OF CASE LAWS, WHICH WE HAVE TAKEN INTO CONSIDERATION. ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 4 10. THE AO, AFTER COMING TO THE CONCLUSION THAT INT EREST AND EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME HAS TO BE PROPORTIONATELY EXCLUDED AND DISALLOWED. HE, THEREF ORE, TOOK THE PROPORTION OF DIVIDEND AND INTEREST TO TOTAL INCOME , ACCORDING TO HIM, THE PROPORTIONATE EXPENSE CAME TO RS. 3,47,63,119/- , WHICH HE DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSE SSEE UNDER SECTION 14A. 11. BESIDES THE ABOVE, THE AO ALSO DISALLOWED RS. 1 0,41,356/-, BEING EXPENSES RELATABLE TO DIVIDEND INCOME. 12. AGGRIEVED BY THIS ORDER, THE ASSESSEE APPROACHE D THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE REITERATED ITS SUBM ISSIONS ON THE ISSUE MADE BEFORE THE AO. THE CIT(A), AFTER CONSIDERING T HE SUBMISSIONS MADE, OBSERVED, I DO NOT AGREE WITH THE SUBMISSION OF THE AR. THE H ONBLE ITAT, MUMBAI, IN THE CASE OF ITO VS DAGA CAPITAL MAN AGEMENT (P) LTD 26 SOT 603/119 TTJ 289 (MUM) HAS ALREADY DE CIDED THIS ISSUE THAT RULE 8D IS RETROSPECTIVE IN NATURE. HENCE THE AO IS JUSTIFIED IN DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING DIVIDEND INCOME WHICH IS EXEMPT. HOWEVE R, I FIND THAT THE AO HAS NOT APPLIED RULE 8D BUT PROPORTIONAT ELY DISALLOWED CERTAIN EXPENDITURE FOR EARNING THE EXEM PT INCOME. THE AO IS DIRECTED TO APPLY RULE 8D AND MAKE SUITABLE DISALLOWANCE U/S 14A READ WITH RULE 8D. THESE GROUND S OF APPEAL ARE PARTLY ALLOWED. 13. AGGRIEVED WITH THIS DECISION OF THE CIT(A), THE ASSESSEE IS NOW BEFORE THE ITAT. 14. BEFORE US, THE AR SUBMITTED THAT THE ORDERS OF BOTH THE AUTHORITIES ARE INFIRM AND OTHERWISE ALSO THEY WERE INCONSISTENT. 15. THE DR, ON THE OTHER HAND PLACED HEAVY RELIANCE ON THE DECISIONS OF THE REVENUE AUTHORITIES. 16. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE ORDERS AND THE MATERIAL PLACED BEFORE US. WE ARE OF THE VIEW THAT BOTH THE REVENUE ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 5 AUTHORITIES HAVE MADE INCONSISTENT OBSERVATIONS TO COME TO A FINDING THAT THE INTEREST AND EXPENSES HAVE TO BE DISALLOWE D. 17. WE ARE IN ANY CASE NOT IN AGREEMENT THAT THE AP PLICATION OF RULE 8D HAS RETROSPECTIVE EFFECT, AS THE CIT(A) RELIED O N THE S B DECISION OF MUMBAI ITAT IN THE CASE OF ITO VS DAGA CAPITAL MANA GEMENT (P) LTD, REPORTED IN 26 SOT 603. THIS DECISION, IN ANY CASE HAS BEEN RENDERED INCORRECT, BECAUSE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCEE MFG. CO LTD VS JCIT, REPORTED IN 328 ITR 81 HAS CLEARLY LAID DOWN THAT RULE 8D SHALL BE APPLICABLE WITH EFFECT F ROM 2008-09 AND ONWARDS. 18. IN SUCH A CASE, THE EFFECT OF THE RULE 8D AND S ECTION 14A HAVE BEEN THAWED, IN SO FAR AS THE ASSESSMENT YEAR UNDER CONSIDERATION IN THE INSTANT APPEAL, WHICH IS ASSESSMENT YEAR 2005-0 6. 19. NOW THE ONLY ISSUE LEFT BEFORE US, AS TO WHAT S HOULD BE DISALLOWANCE TO BE MADE U/S 14A, AS RULE 8D IS INAP PLICABLE. IN THE INSTANT YEAR, I.E. 2005-06, ONLY THE PROVISIONS OF SECTION 14A EXISTED, WHICH PRESCRIBED EXPENSE NOT TO BE ALLOWABLE IN CAS E OF EARNING TAX FREE INCOME. 20. WE HAVE BEEN CONSISTENTLY HOLDING THAT A REASON ABLE DISALLOWANCE OUT OF TAX FREE INCOME WOULD SUFFICE. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND RES TORE THE ISSUE OF DISALLOWANCE TO BE MADE TO THE AO, WITH THE DIRECTI ON THAT CERTAIN REASONABLE AMOUNT, AS PER THE TRENDS OF MOVEMENTS O F FUNDS THROUGH BANKING CHANNELS, MAY BE MADE ON THE DIVIDEND INCOM E, CLAIMED TO BE EXEMPT. ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 6 21. GROUND NO. 1 IS THEREFORE, ALLOWED FOR STATISTI CAL PURPOSES. 22. GROUND NO. 2 PERTAINS TO DISALLOWANCE OF BAD DE BTS AMOUNTING TO RS. 2,01,79,541/-. THE ASSESSEE COMPANY BEING IN THE BUSINESS OF INVESTMENT IN SHARES AND TAKING CONTROLLING INTERES T THEREON, INVESTED IN DYTEK INDIA LTD., A BANGALORE BASED COMPANY, IN THE BUSINESS OF DESIGN AND MANUFACTURE OF PRESS TOOLS, USED IN AUTO MOTIVE, ELECTRIC MACHINES AND APPLIANCES INDUSTRIES. THIS COMPANY WA S ULTIMATELY BROUGHT UNDER THE ASSESSEE COMPANYS FOLD AND BECAM E A SUBSIDIARY THERE OF. IN THE SUBSEQUENT PERIOD, THE BUSINESS OF DYTEK STOPPED COMPLETELY AND THE COMPANY HAD TO BE DISPOSED OFF. 23. THE ASSESSEE COMPANY HAD INFUSED FUNDS IN THE F ORM OF INTER CORPORATE DEPOSITS (ICDS) TO THE EXTENT OF RS. 1,87 ,30,000/-. THIS AMOUNT BECAME IRRECOVERABLE ALONG WITH INTEREST THE REON, WHICH WAS RS. 14,49,543/- UPTO 31.03.2004, TOTALING TO RS. 2, 01,79,541/-. 24. THE ASSESSEE LOOKING AT THE FATE OF THE COMPANY DECIDED BY WRITE OFF IRRECOVERABLE FUNDS, AS THE ENTIRE SHARE CAPITA L OF DYTEK HAD BEEN ERODED AND THERE WAS NO INDICATION OF ITS REVIVAL O R RECOVERY OF THE DEBT. THE ASSESSEE, THEREFORE, ACTED UNDER SECTION 36(I)(VII) AND WROTE OFF THE FUNDS, WHICH, IN ITS OPINION WAS IRRECOVERA BLE AND HAD BECOME BAD. 25. THE REVENUE AUTHORITIES DID NOT ACCEPT THE SUBM ISSIONS, AS MADE BY THE ASSESSEE AND DISALLOWED THE CLAIM OF WR ITE OFF. THE CIT(A) HELD THAT IT WAS A CASE OF CAPITAL LOSS AND NOT A C ASE OF WRITE OFF. 26. THE REVENUE AUTHORITIES, THEREFORE, DISALLOWED THE CLAIM OF THE ASSESSEE. 27. AGAINST THIS ORDER OF THE CIT(A), THE ASSESSEE IS BEFORE THE ITAT. ALONG WITH ITS PRIMARY GROUND OF APPEAL, RAISED AN ADDITIONAL GROUND ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 7 THAT IF THE WRITE OFF WAS NOT TO BE ALLOWED THEN TH E ASSESSEE BE ALLOWED THE BENEFIT OF CAPITAL LOSS. 28. BEFORE US, THE AR REITERATED THE FACTS AS SUBMI TTED BY IT BEFORE THE REVENUE AUTHORITIES AND THE DR PLACED RELIANCE ON THE ORDERS OF THE REVENUE AUTHORITIES AND PLEADED THAT DISALLOWAN CE IS ENTIRELY BASED ON LEGAL PROVISIONS. 29. WE HAVE HEARD THE RIVAL ARGUMENTS AND HAVE PER USED THE ORDERS AND MATERIAL PLACED BEFORE US. WE NOTICE THAT THE A O HAS DISALLOWED THE CLAIM MAINLY ON THE GROUND THAT THE ASSESSEE DI D NOT COMPLY WITH THE CONDITIONS PRESCRIBED U/S 36(2) OF THE ACT FOR ALLOWING THE DEDUCTION OF BAD DEBT CLAIMED U/S 36(1)(VII), AND F URTHER THE ASSESSEE DID NOT PROVE ITS BONA FIDES IN MAKING THIS CLAIM. HOWEVER, THE CIT(A) HAS TAKEN AN ALTOGETHER DIFFERENT VIEW OF THE MATTE R, I.E., THE CIT(A) HAS HELD THAT 'CONTROLLING OF GROUP COMPANIES' CANNOT B E REGARDED AS BUSINESS OF THE ASSESSEE, SINCE MERE CONTROLLING WI LL NOT GENERATE ANY PROFIT OR LOSS, WHICH IS SINE QUA NON OF ANY BUSINE SS ACTIVITY. ACCORDINGLY, THE CIT(A), HELD THAT THE MONEY LOST B Y THE ASSESSEE BY GIVING ICDS TO ITS SUBSIDIARY IS A CAPITAL LOSS. 30. WE NOTICE THAT M/S DYTEK WAS ALREADY A SUBSIDI ARY OF THE ASSESSEE COMPANY AND IN ORDER TO REVIVE THE OPERATI ONS OF M/S DYTEK, THE ASSESSEE HAD INFUSED FUNDS IN THE FORM OF ICDS. SINCE M/S DYTEK COULD NOT BE REVIVED, THE ASSESSEE WAS FORCED TO AC CEPT THAT THE OF SUM RS. 2.01 CRORES WAS IRRECOVERABLE, AS REFERRED ABOV E. HOWEVER, WE NOTICE THAT THE ASSESSEE HAS PUT IN NEW CLAIM BEFOR E THE CIT(A) THAT IT CATEGORIZED ITSELF AS 'NON BANKING FINANCIAL COMPAN Y' (NBFC), DULY REGISTERED BY THE RESERVE BANK OF INDIA AND ACCORDI NGLY IT IS ENGAGED IN THE BUSINESS OF LENDING AND BORROWING AS WELL AS INVESTMENT. WE NOTICE THAT THE PROVISIONS OF SECTION 36(1)(VII) RE AD WITH SECTION 36(2)(I) ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 8 PROVIDE FOR ALLOWING DEDUCTION OF BAD DEBT, IF THE SAME REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF THE BUSINESS O F BANKING OR MONEY LENDING, WHICH IS CARRIED ON BY THE ASSESSEE. SINCE THE ASSESSEE CLAIMS THAT IT IS A NBFC AND SINCE THE REVENUE AUTHORITIES HAVE NOT EXAMINED THE CLAIM OF THE ASSESSEE FROM THE ANGLE OF NBFC, W E ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION BY THE A O TO DETERMINE WHETHER THE ICD, MADE BY THE ASSESSEE WOULD AT ALL FALL IN THE CATEGORY OF MONEY LENT IN THE ORDINARY COURSE OF BUSINESS. 32. FROM THE ASSESSMENT ORDER, WE NOTICE THAT THE A SSESSEE HAS DECIDED TO WRITE OFF THE AMOUNT AFTER MAKING ONE TI ME SETTLEMENT WITH THE SUBSIDIARY COMPANY, BY WHICH THE SUBSIDIARY COM PANY PAID RS. 50.00 LAKHS TO THE ASSESSEE. HOWEVER, THE ASSESSMEN T ORDER MENTIONS THE SUBSIDIARY COMPANY HAS TO PAY THE AMOUNT OF RS. 50.00 LAKHS AS 31.12.2004 IN THE FIRST PARAGRAPH OF PAGE 10. IN TH E SECOND PARAGRAPH, THE DATE IS MENTIONED AS 31.12.200S. THIS CONTRADIC TION OF DATES, NEEDS TO BE VERIFIED. 33. ACCORDINGLY, WE SET ASIDE THE ORDER OF CIT(A) A ND RESTORE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH, IN THE LIGHT OF DISCUSSIONS MADE ABOVE, WIT HOUT BEING INFLUENCED BY THE DISCUSSION/DECISION OF CIT(A). 34. THIS GROUND, AS FILED BY THE ASSESSEE, IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. 35. SINCE, PRINCIPALLY, WE HAVE ALLOWED THE WRITE O FF OF RS. 2.01 CRORES, SUBJECT TO CERTAIN VERIFICATIONS, ALTERNATE ADDITIONAL GROUND, FOR THE TIME BEING, BECOMES ACADEMIC. ASIA INVESTMENTS PVT LTD ITA 5382/MUM/2010 9 36. IN THE RESULT, THE APPEAL, AS FILED BY THE ASSE SSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH NOVEMBER, 2014. SD/- SD/- (B R BASKARAN) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 12 TH NOVEMBER, 2014 $/ COPY TO:- 1) / THE APPLICANT. 2) / THE RESPONDENT. 3) THE CIT (A)-4, MUMBAI. 4) / 2, MUMBAI / THE CIT- 2 , MUMBAI. 5) -'01$! A , THE D.R. A BENCH, MUMBAI. 6) 12.3 COPY TO GUARD FILE. *+! / BY ORDER / / TRUE COPY / / [ 4/56 , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * CHAVAN, SR. PS