GARWARE WALL ROPES LTD, MUMBAI V. ADDL CIT RG 5(1), MUMBAI

ITA 5408/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75381 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 01-01-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 28-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A; 115JB

Judgement Text

GARWARE WALL ROPES LIMITED , PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 5408/MUM/2012 ASSESSMENT YEAR 2009-10 ITA NO. 4957/MUM/2012 ASSESSMENT YEAR 2009-10 O R D E R PER VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 9.5.2012 OF CIT(A) FOR THE ASSESSMENT YEAR 2009-10. THE ASSESSEE IN THIS APPEA L HAS RAISED FOLLOWING GROUNDS;- 1. ADDITIONAL DISALLOWANCE U/S 14A. R.W. RULE 8D BY RS. 7,79,654/- GARWARE WALL ROPES LIMITED, CHOWPATTY CHAMBERS, SANDHURST BRIDGE MUMBAI - 400 007. PAN:- AAACG1377P ADDL CIT, RG.5 (1) AAYAKAR BHAVAN, MUMBAI 400 020. APPELLANT RESPONDENT ADDL CIT, RG.5 (1) AAYAKAR BHAVAN, MUMBAI 400 020.PAN:- GARWARE WAL L ROPES LIMITED, CHOWPATTY CHAMBERS, SANDHURST BRIDGE MUMBAI - 400 007. PAN:- AAACG1377P APPELLANT RESPONDENT DATE OF HEARING: 01 / 01/2014 DATE OF PRONOUNCEMENT: 15 / 01/2014 DEPARTMENT BY. SHRI SANJIV JAIN . ASSESSEE BY: SHRI DALPAT SHAH. GARWARE WALL ROPES LIMITED , PAGE 2 OF 8 1.1 THE LD. CIT (APPEALS) 9, MUMBAI, ERRED IN CON FIRMING AN ADDITIONAL DISALLOWANCE OF RS. 7,79,654/- U/S 14A R .W. RULE 8D, IGNORING THE FACT THAT THE APPELLANT HAS VOLUNTARIL Y DISALLOWED A SUM OF RS. 1,03,915/- AS WORKED OUT U/R 8D AT % OF THE A VERAGE VALUE OF INVESTMENT ON WHICH DIVIDEND IS RECEIVED. 1.2 THE LD. CIT (A) ERRED IN NOT CONSIDERING THE FA CT THAT DISALLOWANCE U/R 8D CANE BE MADE ON VALUE OF INVEST MENTS FROM WHERE TAX-FREE DIVIDEND INCOME IS RECEIVED AND NOT ON THE TOTAL VALUE OF INVESTMENTS. THEREFORE THE FURTHER ADDITION OF RS. 7,79,654/- IS NOT WARRANTED FOR. 2. ADDITION U/S 14A OF RS. 8,83,569/- TO THE BOOK P ROFIT U/S 115JB : 2.1 THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION U/S 14A OF RS. 8,83,569/- TO THE BOOK PROFIT U/S 115JB IGNORING TH E EXPLANATION 1 TO SECTION 115JB(2) WHICH PROVIDES TO INCREASE THE BOO K PROFIT BY EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT AS REFERRED TO IN CLAUSE (A) TO (I) AND THEREFORE, NO NOTIONAL DISALL OWANCE U/R 8D CAN BE MADE @ % OF THE AVERAGE VALUE OF INVESTMENTS. 2.2 THE SAID CIT(A) ERRED IN NOT FOLLOWING THE DECI SION OF ITA TRIBUNAL IN THE CASES OF GEETZ INDIA LTD. VS. DCIT SOT 101(DEL) AND QUIPPO TELECOM INFRASTRUCTURE LTD. V/S ACIT ( ITA N O. 4931/DEL/2010) (DEL). 2.3 WITHOUT PREJUDICE, THE ADDITION CANNOT EXCEED D ISALLOWANCE U/S. 14A FOR RS. 1,03,915/- FOR THE REASON STATED ABOVE. 3. THE APPELLANT CRAVES LEAVE TO ADD, ANY NEW GROUN DS OR TO AMEND, ALTER, MODIFY, DELETE/OR CHANGE ALL OR ANY OF THE A BOVE GROUNDS ON OR BEFORE THE DATE OF HEARING. 2. THE FIRST GROUND RAISED IS REGARDING DISALLOWANC E U/S 14A R.W. RULE 8D OF THE INCOME TAX ACT. THE ASSESSEE RECEIVED DIVIDEND INCO ME OF RS. 36,90,456/- WHICH IS EXEMPT FROM THE INCOME TAX. THE ASSESSEE WORKED OUT THE DISALLOWANCE U/S 14A AT RS. 103915/- AND ADDED BACK THE SAME IN THE STATEME NT OF THE TOTAL INCOME. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE EXPENDI TURE BE NOT DISALLOWED AS PER PROVISIONS OF SECTION 14A. R.W. RULE 8D. THE ASSESS EE IN REPLY HAS SUBMITTED THAT IT HAS NOT INCURRED ANY EXPENDITURE TO EARN THIS DIVID END INCOME AND, THEREFORE, NO EXPENDITURE BE DISALLOWED U/S 14A. SINCE NO BORROWE D FUNDS WAS USED AND THE INTEREST EXPENDITURE IS ON THE BANK TERM LOANS, T HEREFORE, THERE IS NO NEXUS BETWEEN THE INTEREST EXPENDITURE AND THE INVESTMENT IN SHAR ES. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND DISALLOWED THE ADMIN ISTRATIVE EXPENSES BY APPLYING GARWARE WALL ROPES LIMITED , PAGE 3 OF 8 RULE 8D. THE AO ACCORDINGLY WORKED OUT THE DISALLOW ANCE AT RS. 8,83,569/- ON ADMINISTRATIVE EXPENSES. 2.1 ON APPEAL, CIT(A) HAS CONFIRMED THE DISALLOWANC E MADE BY THE AO. 2.2 BEFORE US AT THE VERY OUTSET THE LD. AR OF THE ASSESSEE POINTED OUT THAT THOUGH THE ISSUE OF DISALLOWANCE U/S 14A HAS BEEN DECIDED BY THIS TRIBUNAL AGAINST THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 VIDE ORDER DATED 21.12.2012 IN ITA NO. 7599/MUM/2011. HOWEVER THE LD. AR OF THE ASSESSEE H AS SUBMITTED THAT THE CRUCIAL FACT THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDI TURE IN RESPECT OF THE INVESTMENT IN QUESTION AND FOR EARNING TAX FREE INCOME HAS NOT B EEN CONSIDERED IN THE EARLIER YEARS. HE FURTHER SUBMITTED THAT THE ASSESSEE DID NOT RAIS E THIS ISSUE IN THE EARLIER YEARS AND THE DECISION OF THE TRIBUNAL IS ONLY ON THE POINT W HETHER THE DISALLOWANCE U/S14A CAN BE MADE WHEN THERE IS NO DIVIDEND INCOME. THUS THE LEARNED AR HAS SUBMITTED THAT IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSE SSEE HAS NOT INCURRED ANY EXPENDITURE IN RESPECT OF THE INVESTMENT AND DIVIDE ND INCOME IN QUESTION. HE HAS REFERRED TO THE DETAILS AT PAGE 20 OF THE PAPER BOO K AND SUBMITTED THAT NO FRESH INVESTMENT WAS MADE IN THE YEAR UNDER CONSIDERATION AND ALL THE INVESTMENT WERE MADE IN THE EARLIER YEARS THAT TOO LONG BACK. THE L D. AR HAS FURTHER POINTED OUT THAT THESE INVESTMENTS ARE IN THE GROUP CONCERNED OF THE ASSESSEE, THEREFORE, THESE ARE ONLY PASSIVE INVESTMENT MADE FOR THE PURPOSE OF HOLDING CONTROLLING STAKE IN THE GROUP CONCERN AND NOT FOR THE PURPOSE OF EARNING ANY DIVI DEND OR ACTIVE INVESTMENT, THEREFORE, THE ASSESSEE WAS NOT REQUIRED TO INCUR A NY EXPENDITURE IN KEEPING THESE INVESTMENTS. HE HAS FURTHER CONTENDED THAT SHARES A RE HELD IN DMAT ACCOUNT OF THE ASSESSEE AND THE DIVIDEND IS RECEIVED DIRECTLY IN T HE ACCOUNT OF THE ASSESSEE. THEREFORE, THERE IS NO DIRECT OR INDIRECT EXPENDITU RE INCURRED FOR EARNING EXEMPT INCOME IN QUESTION. THE LD AR HAS VEHEMENTLY ARGUED THAT WHEN THERE IS NO EXPENDITURE DIRECT OR INDIRECT INCURRED FOR THE PUR POSE OF EARNING THE EXEMPT INCOME THEN NO DISALLOWANCE CAN BE MADE UNDER THE PROVISIO NS OF SECTION 14A. RULE 8D CANNOT EXPAND THE SCOPE OF SECTION 14A IN WHICH DIS ALLOWANCE CAN BE MADE ONLY WITH RESPECT TO THE EXPENDITURE WHICH HAS BEEN INCU RRED FOR EARNING THE EXEMPT INCOME AND CLAIMED BY THE ASSESSEE. GARWARE WALL ROPES LIMITED , PAGE 4 OF 8 2.3 LD. DR ON THE OTHER HAND HAS SUBMITTED THAT THE ISSUE IS NOW COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008-09. 2.4. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND CA REFULLY PERUSED THE RELEVANT RECORDS. SO FAR AS THE ISSUE REGARDING DISALLOWANCE U/S 14A IN THE CASE WHERE NO DIVIDEND HAS BEEN RECEIVED, THE SAME IS COVERED AGA INST THE ASSESSEE BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, WHEREIN THE TRIBUNAL HAS FOLLOWED THE DECISION OF SPECIAL BENCH OF TRIBUNAL WHILE DECIDING THE ISSUE. THEREFORE, WE DO AGREE WITH THE FINDING OF T HE TRIBUNAL ON THIS POINT. FURTHER SINCE THE ASSESSEE HAS RAISED THE NEW PLEA IN THE Y EAR UNDER CONSIDERATION THAT NO EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR E ARNING THE EXEMPT INCOME OR FOR THE INVESTMENT IN QUESTION. WE FIND MERIT AND SUBST ANCE IN THE CONTENTION OF THE ASSESSEE ON THIS POINT BECAUSE THE INVESTMENT HAS B EEN MADE BY THE ASSESSEE IN THE GROUP CONCERN AND NOT IN THE SHARES OF ANY UN-RELAT ED PARTY. THEREFORE, THE PRIMARY OBJECT OF INVESTMENT IS HOLDING CONTROLLING STAKE I N THE GROUP CONCERN AND NOT EARNING ANY INCOME OUT OF INVESTMENT. FURTHER THE INVESTMEN T WERE MADE LONG BACK AND NOT IN THE YEAR UNDER CONSIDERATION. THEREFORE, IN VIEW OF THE FACT THAT THE INVESTMENT ARE IN THE GROUP CONCERN WE DO NOT FIND ANY REASON TO B ELIEVE THAT THE ASSESSEE WOULD HAVE INCURRED ANY ADMINISTRATIVE EXPENSES IN HOLDIN G THESE INVESTMENTS. THE AO HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SHOW THAT THE ASSESSEE HAS INCURRED ANY EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME. SECTION 14A HAS WITHIN IT IMPLICIT THE NOTION OF AP PORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR COMPOSITE/INDIVISIBLE A CTIVITIES IN WHICH TAXABLE AND NON TAXABLE INCOME IS RECEIVED BUT WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME THEN PRINCIPLE OF APPORTIONMENT E MBEDDED IN SECTION 14A HAS NO APPLICATION. THE OBJECT OF SECTION 14A IS NOT ALLOW ING TO REDUCE TAX PAYABLE ON THE NON EXEMPT INCOME BY DEDUCTING THE EXPENDITURE INCU RRED TO EARN THE EXEMPT INCOME. IN THE CASE IN HAND IT IS NOT THE CASE OF T HE REVENUE THAT THE ASSESSEE HAS INCURRED ANY DIRECT EXPENDITURE OR ANY INTEREST EXP ENDITURE FOR EARNING THE EXEMPT INCOME OR KEEPING THE INVESTMENT IN QUESTION. IF TH ERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO EXEMPT INCOME TH E SAME CANNOT BE CLAIMED AGAINST THE INCOME WHICH IS TAXABLE. FOR ATTRACTING THE PRO VISIONS OF SECTION 14A- THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HA S RELATIONSHIP WITH THE TAX GARWARE WALL ROPES LIMITED , PAGE 5 OF 8 EXEMPT INCOME AS HELD BY THE HONBLE SUPREME COURT IN CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. ( 326 ITR 1) . THEREFORE, THERE SHOULD BE A PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN THE CASE IN HAND THE ASSESSEE HAS CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, THEREF ORE, IT WAS INCUMBENT ON THE AO TO FIND OUT AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND IF SO TO QUANTIFY THE EXPENDITURE OF DISALLOWANCE. THE AO HAS NOT BROUGHT ON RECORD ANY FACT OR MATERIAL TO SHOW THAT ANY EXPENDITURE HAS BEEN INCURRED ON T HE ACTIVITY WHICH HAS RESULTED INTO BOTH TAXABLE AND NON TAXABLE INCOME. THEREFORE, IN OUR VIEW WHEN THE ASSESSEE HAS PRIMA FACIE BROUGHT OUT A CASE THAT NO EXPENDITURE HAS BEEN INC URRED FOR EARNING THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME THEN IN THE ABSENCE OF ANY FINDING THAT EXPENDITURE HAS BEEN INCURRED FOR EAR NING THE EXEMPT INCOME THE PROVISIONS OF SECTION 14A CANNOT BE APPLIED. ACCORD INGLY WE DELETE THE ADDITION/DISALLOWANCE MADE BY AO U/S 14A R.W. RULE 8D. 3. THE SECOND GROUND IS REGARDING DISALLOWANCE/ADJU STMENT MADE WHILE COMPUTING THE BOOK PROFIT U/S 115JB IN RESPECT OF D ISALLOWANCE MADE U/S 14A. 3.1 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THE MATERIAL ON RECORD. THE LD. AR HAS SUBMITTED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THIS TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008-09. 3.2 THE LD. DR ON THE OTHER HAND RELIED UPON THE DE CISION OF THIS TRIBUNAL IN CASE OF ITO VS. RBK SHARE BROKING (P). LTD. (37 TAXMAN N.COM 128) AND SUBMITTED TAT THE TRIBUNAL HELD THAT THE ADJUSTMENT/DISALLOWANCE CAN BE MADE WHILE COMPUTING THE BOOK PROFIT U/S 115JB IN RESPECT OF THE AMOUNT DISA LLOWED U/S 14A. 3.3. HAVING CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND GONE THROUGH THE VARIOUS DECISIONS RELIED UPON BY BOTH THE PARTIES W E NOTE THAT THERE ARE DIVERGENT VIEWS OF THE TRIBUNAL ON THIS POINT. WITHOUT GOING INTO THE CONTROVERSY OF THE QUANTUM OF ADJUSTMENT, WE FIND THAT IN VIEW OF OUR FINDING IN RESPECT OF DISALLOWANCE U/S 14A IN GROUND NO. 1, THE GROUND NO. 2 OF THE AS SESSEES APPEAL IS ALLOWED BEING GARWARE WALL ROPES LIMITED , PAGE 6 OF 8 CONSEQUENTIAL. ACCORDINGLY WE DELETE THE ADDITION M ADE WHILE COMPUTING THE BOOK PROFIT IN RESPECT OF THE DISALLOWANCE OF RS. 8,83,5 69/- MADE U/S 14A. 4. NOW WE TAKE UP THE REVENUES APPEAL IN ITA NO. 4 957/MUM/2012 THE ONLY GROUND RAISED BY THE REVENUE IN ITS APPEAL IS AS UN DER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO ALLOW THE DEPRECIATION AT RS. 35,22,140/- AFTER WORKING OUT T HE WDV OF THE ASSETS FOR EARLIER YEARS AS DECIDED BY THE APPELLATE AUTHO RITIES WITHOUT APPRECIATING THE FACTS THAT BEFORE ANY ALLOWANCE OF DEDUCTION UNDER CHAPTER VIA OF THE I.T. ACT, 1961, THE DEPRECIATION HAS TO BE ALLOWED FROM THE GROSS TOTAL INCOME. 4.1 WE HAVE HEARD BOTH THE LD. AR AND LD. DR AND HA VE CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THIS ISSUE IS COVERED AGAINST THE REVENUE BY THE DECISION OF THIS TRIBUNAL IN ASSESSE ES OWN CASE IN ASSESSMENT YEAR 2007-08 AS WELL AS IN ASSESSMENT YEAR 2008-09. FOR THE ASSESSMENT YEAR 2008-09 THE TRIBUNAL HAS CONSIDERED AND DECIDED THIS ISSUE IN P ARA 21 AND 22 WHICH IS REPRODUCED AS UNDER;- 21. WE HAVE HEARD THE ARGUMENT FROM EITHER SIDE, FROM T HE FACTS. WE FIND THAT THE ASSESSEE HAD NOT CLAIMED TH E DEPRECIATION TILL ASSESSMENT YEAR 2000-01. IN THESE YEARS, THE AO ALLOWED THE DEPRECIATION. THE MATTER TRAVELED TO THE INCOME-TAX APPELLATE TRIBUNAL, WHEREIN THE COORDINA TE BENCH, IN THE ASSESSEES OWN CASE HELD THAT DEPRECI ATION CANNOT BE THRUST UPON THE ASSESSEE. THIS DECISION O F THE COORDINATE BENCH WAS LATER ON SUSTAINED BY GARWARE WALL ROPES LIMITED , PAGE 7 OF 8 THE HONBLE BOMBAY HIGH COURT AS WELL, DISMISSING R EVENUES APPEAL ON THIS ISSUE. FROM ASSESSMENT YEAR 2001-02 TO 2007-08, THE AO ALLOWED THE DEPRECIATION AS CLAIMED BY THE A SSESSEE, WITHOUT GIVING EFFECT TO THE ORDER OF THE ITAT, WHI CH RESULTED IN THE DIFFERENCE IN THE OPENING WDV, WHICH HAS BEEN ADDED BY THE AO IN THE INSTANT CASE. THIS ADDITION ON ACCOUNT OF DI FFERENCE HAS BEEN DELETED BY THE CIT(A), DIRECTING THE AO TO GIVE EFF ECT TO THE ORDERS OF THE HIGHER AUTHORITIES. SINCE THE ISSUE IS TRAVE LLING FROM THE PRECEDING YEARS, WE CONFIRM THE DIRECTION OF THE CI T(A) TO REWORK THE WDV, AFTER GIVING EFFECT TO THE INCOME-TAX APPE LLATE TRIBUNAL IN THE EARLIER YEAR(S).. 22. WE, THEREFORE, REAFFIRM THE DIRECTION TO THE AO , TO DETERMINE THE WDV, AS PER EARLIER YEARS DIRECTIONS BY THE COORDI NATE BENCH OF THE ITAT. 4.2 WE FURTHER NOTE THAT THE APPEAL FILED BY THE RE VENUE AGAINST THE DECISION OF THIS TRIBUNAL HAS BEEN DISMISSED BY THE HONBLE HIGH COU RT VIDE DECISION DATED 22 ND DECEMBER 2011 FOR THE ASSESSMENT YEAR 2004-05. THUS IT IS CLEAR THAT THE DEPRECIATION HAS TO BE ALLOWED ON WRITTEN DOWN VALUE (WDV) AFTER REDUCING THE ACTUAL DEPRECIATION ALLOWED IN THE EARLIER YEARS. IN VIEW OF THE EARLIE R YEARS ORDER OF THIS TRIBUNAL, WE DO NOT FIND ANY SUBSTANCE IN THE APPEAL OF THE REVENUE. AC CORDINGLY WE DECIDE THIS ISSUE AGAINST THE REVENUE. 5. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 15 TH DAY OF JANUARY 2014. SD/- SD/- (SANJAY ARORA) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 15 TH JANUARY 2014 SKS SR. P.S GARWARE WALL ROPES LIMITED , PAGE 8 OF 8 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, G BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI