ACIT, Ludhiana V. M/s Vardhman Holding Limited, Ludhiana

ITA 550/CHANDI/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95501 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 20-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGARWAL; VINEET J AIN
• Keywords: Earning of tax free income; Source of fund
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.550/CHD/2015 (ASSESSMENT YEAR : 2008-09) THE A.C.I.T., VS. M/S VARDHMAN HOLDING LIMITED, CIRCLE-1, CHANDIGARH ROAD, LUDHIANA. LUDHIANA. PAN: AABCV8088P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K.MITTAL, DR RESPONDENT BY : S/SHRI SUBHASH AGGARWAL & VINEET JAIN DATE OF HEARING : 31.08.2015 DATE OF PRONOUNCEMENT : 04.09.2015 O R D E R PER RANO JAIN, A.M . : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, LUDHIANA DATED 23.2.2015 FOR ASSESSMEN T YEAR 2008-09. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE FILED RETURN OF INCOME AS ON 11.9.2008 DECLARING INCOME OF RS.2,17,86,920/- AND SUBSEQUENTLY REVISED TO RS.2,17,31,360/-. DURING THE COURSE OF ASSESSMENT 2 PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE A SSESSEE HAS SHOWN DIVIDEND INCOME OF RS.2,96,383/. THE ASSESSE E WAS ASKED TO JUSTIFY WHY THE DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) BE NOT WO RKED OUT. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT DURING THE YEAR UNDER CONSIDERATION, IT HAD EARNED NON- TAXABLE INCOME OF RS.2,96,383/- WHILE THE TAXABLE I NCOME EARNED BY IT WAS RS.2,17,56,363/-. THE ASSESSEE S UBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, NO EXPENS ES WERE INCURRED BY IT TO EARN NON-TAXABLE INCOME. HOWEVER , THE ASSESSEE ITSELF IN PURSUANCE AND IN COMPLIANCE WITH THE PROVISIONS OF SECTION 14A OF THE ACT DISALLOWED AN AMOUNT OF RS.25,007/- BEING EXPENSES INCURRED FOR EARNING DIV IDEND INCOME, IN A PROPORTIONATE MANNER. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE DID NOT INCUR ANY EXPENDITURE BY WAY OF INTEREST AS IT DID NOT BORROW ANY FUNDS TO BE INVES TED IN NON- TAXABLE INCOME. IT HAD MADE INVESTMENTS FROM THE SURPLUS AVAILABLE WITH IT AND AS A RESULT, NO EXPENSES ON A CCOUNT OF INTEREST CAN BE ATTRIBUTED TO HAVE RESULTED IN GENE RATION OF INCOME WHICH IS NOT CHARGEABLE TO TAX. THE ASSESSI NG OFFICER, HOWEVER, REJECTING THE SUBMISSION OF THE ASSESSEE M ADE A CALCULATION AS PER RULE 8D OF THE INCOME TAX RULES AND COMPUTED THE DISALLOWANCE TO BE MADE AT RS.41,80,34 2/-. SINCE THE TOTAL AMOUNT OF EXPENDITURE CLAIMED BY TH E ASSESSEE WAS ONLY RS.20,07,688/-, HE RESTRICTED THE DISALLOW ANCE TO RS.20,07,688/-. 3 3. THE ASSESSEE WENT IN APPEAL BEFORE THE LEARNED CIT (APPEALS) AND REITERATED THE SUBMISSIONS WHICH WERE MADE BEFORE THE ASSESSING OFFICER. IT WAS CLARIFIED TO THE LEARNED CIT (APPEALS) THAT DURING THE YEAR UNDER CONSIDERAT ION, IT HAD EARNED TAXABLE INCOME OF RS.2,17,56,363/- AND TAX-F REE INCOME OF RS.2,96,383/-. THE TOTAL EXPENSES SHOWN BY IT IN PROFIT & LOSS ACCOUNT WERE RS.29,76,408/-, OUT OF W HICH AN AMOUNT OF RS.9,43,713/- NOT ALLOWABLE AS PER INCOME TAX ACT, WERE EXCLUDED FROM THE SAID EXPENSES. THE REMAINI NG EXPENSES OF RS.20,32,695/- (RS.29,76,408 RS.9,43, 713) WAS APPORTIONED IN THE RATIO OF NON-TAXABLE INCOME TO T HE TAXABLE INCOME AND IN THIS WAY, A SUO MOTO DISALLOWANCE OF RS.25,007/- WAS MADE BY THE ASSESSEE UNDER SECTION 14A OF THE ACT. IT WAS SUBMITTED THAT THE SUO MOTO DISALL OWANCE MADE BY THE ASSESSEE WAS ON A VERY REASONABLE BASIS . FURTHER, IT WAS ALSO SUBMITTED THAT IF THE ASSESSIN G OFFICER WAS NOT SATISFIED WITH THE DISALLOWANCE SO MADE BY THE ASSESSEE, HE HAD TO RECORD REASONS FOR THE SAME, WH ICH HE HAD NOT DONE. RELIANCE WAS PLACED ON THE JUDGMENT OF H ON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. D EEPAK MITTAL (2014), 361 ITR 131 (P&H). THE LEARNED CIT (APPEALS) ALLOWED THE APPEAL OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE BY HIM AS P ER RULE 8D R.W.S. 14A OF THE ACT. THE FINDINGS OF THE LEARNED CIT (APPEALS) ARE RECORDED AT PAGE 7 PARA 5 OF HIS ORDE R AS FOLLOWS : 4 5. I HAVE CONSIDERED THE FACTS OF THE CASE, THE BA SIS OF DISALLOWANCE MADE BY THE AO AND THE ARGUMENTS OF THE AR ON THE I SSUE DURING ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. IT IS CLEAR THAT THE ASSESSING OFFICER HAS TO MAKE A SATISFACTION AS PER REQUIREMENT OF SECTION 14A(2) TO THE EFFECT THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THE CORRECTNESS OF THE CLAIM OF THE ASSESS EE IN RESPECT OF THE EXPENDITURE IN RELATION TO THE EXEMPT INCOME COULD NOT BE WORKED OUT. I HAVE EXAMINED THE ASSESSING OFFICER SATISFACTION ON THE ISSUE WHICH ONLY SAYS THAT THERE WAS NO DIRECT NEXUS BETWEEN OW N FUNDS AND INVESTMENTS. THIS SATISFACTION IS OBVIOUSLY CONTRAR Y TO THE FACTS OF THE CASE AS BALANCE SHEET OF THE ASSESSEE COMPANY DOES NOT HAVE ANY INTEREST BEARING FUNDS AND INVESTMENTS INTO ASSETS LEADING TO EXEMPT INCOME HAVE BEEN MADE OUT OF OWN FUNDS ONLY. THE AS SESSEE COMPANY HAS DEPLOYED ITS AVAILABLE FUNDS IN TWO CHANNELS I. E. ONE LEADING TO EXEMPT INCOME AND ANOTHER LEADING TO TAXABLE INCOME . THE TAXABLE INCOME COMES TO RS.6.37 CRORES WHEREAS NON TAXABLE IS RS. 2.96 CRORES AND ASSESSEE HAD DISALLOWED OUT OF TOTAL EXPENSES D EBITED IN P & L ACCOUNT OF RS. 30,52,527/- A PROPORTIONATE AMOUNT OF RS.9,43,713.00. THE DISALLOWANCE MADE BY THE ASSESSEE IN THE RETURN OF INCOME U/S 14A IS BASED UPON THE LOGICAL ANALYSIS OF TWO SOURCES OF INCOME BEING EXEMPT AND NON EXEMPT. THE ASSESSING OFFICER ON THE OTHER HAND HAS WORKED OUT DISALLOWAN CE IN SUCH A MANNER BY APPLYING RULE 8D THAT THE ENTIRE EXPENDIT URE DEBITED TO P & ACCOUNT BECOMES DISALLOWABLE. FURTHER TO PROCEED TO MACHINERY AVAILABLE UNDER RULE 8D THERE HAS TO BE SATISFACTION U/S 14A( 2) WHICH IS NOT RECORDED BY THE ASSESSING OFFICER. HOWEVER THE GIVE N FACTS AND CIRCUMSTANCES OF THE CASE AS HIGHLIGHTED ABOVE DO N OT LEAVE ANY ROOM TO DOUBT THE CORRECTNESS OF ALLOCATION OF EXPENSES PER TAINING TO EXEMPT INCOME AS DONE BY THE ASSESSEE. THIS BEING SO THERE IS NO NECESSITY TO WORK OUT THE DISALLOWANCE AS PER RULE 8D. IT IS ALSO TO BE APPRECIATED THAT, AS THERE ARE REQUIREMENTS TO DISALLOW EXPENSES PERTAIN ING TO EXEMPT INCOME, THERE IS ALSO REQUIREMENT AS PER SECTION 37(I) TO A LLOW THE EXPENSES THAT HAD BEEN INCURRED FOR EARNING THE TAXABLE INCOME. T HE ACTION OF THE ASSESSING OFFICER HAD LED TO A SITUATION WHERE NO E XPENDITURE HAS BEEN WORKED OUT TO BE PERTAINING TO EARNING THE TAXABLE INCOME WHICH IS NOT ACCEPTABLE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. IN THIS 5 BACK GROUND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DIRECTED TO BE DELETED. 4. NOW, THE DEPARTMENT HAS COME UP IN APPEAL BEFOR E US RAISING THE FOLLOWING GROUNDS OF APPEAL : I) WHETHER IN THE LAW AND CIRCUMSTANCES OF THE CASE, WAS LD. CIT(A) JUSTIFIED IN DELETING THE ADDITION O F RS. 20,07,688/- MADE U/S 14A OF INCOME-TAX ACT, 1961 READ WITH RULE 8D? II) 'THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THAT OF THE A.O. BE RESTORED.' III) 'THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND AN Y GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF.' 5. THE LEARNED D.R. WHILE ARGUING BEFORE US RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED TH AT FROM THE ASSESSMENT YEAR 2008-09 APPLICATION OF RULE 8D IS A MUST, WHICH THE ASSESSING OFFICER HAS DULLY DONE. THE DI SALLOWANCE HAS BEEN MADE RIGHTLY CALCULATING AS PER RULE 8D. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAD BEEN REASO NABLE ENOUGH TO COMPUTE THE DISALLOWANCE ONLY TO THE EXTE NT OF EXPENSES CLAIMED BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. IN THIS WAY, IT WAS PRAYED TO SET ASIDE TH E ORDER OF THE LEARNED CIT (APPEALS) AND RESTORE THE ORDER OF THE ASSESSING OFFICER. 6. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPO N THE ORDER OF THE LEARNED CIT (APPEALS) AND REITERATED T HE 6 SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. AS PER HIM, THE LEARNED CIT (APPEALS) HAS GIVEN RELIEF TO THE A SSESSEE BY GIVING VERY REASONABLE FINDINGS AND THERE IS NO FAU LT IN THE ORDER OF THE LEARNED CIT (APPEALS). IT WAS PRAYED THAT THE ORDER OF THE LEARNED CIT (APPEALS) MAY BE SUSTAINED . 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE IN AGREEMENT WITH THE FINDINGS OF THE LEARNED CIT (APPEALS), WHO HAS GIVE N VERY CATEGORICALLY THE FINDINGS TO THE FACTS OF THE CASE THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING W HOLE OF THE EXPENSES CLAIMED BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. THE ASSESSEE HAS EARNED THE TAXABLE INCOME AMOUNTING TO RS.2,17,56,363/- WHILE NON-TAXABLE INC OME EARNED BY HIM IS ONLY RS.2,96,383/-, WHICH IS A VER Y SMALL PORTION OF THE TAXABLE INCOME THE TOTAL EXPENSES C LAIMED BY THE ASSESSEE DURING THE YEAR ARE RS.20,07,688/-. B Y DISALLOWING ALL THESE EXPENSES, IT APPEARS THAT THE ASSESSEE HAS EARNED THIS HUGE TAXABLE INCOME OF MORE THAN RS .2 CRORES WITHOUT INCURRING ANY EXPENSES. THE CONCLUSION DR AWN BY THE ASSESSING OFFICER HAS REACHED TO A VERY WEIRD SITUATION, WHEREBY IT INFERRED AS IF TO EARN A VERY SMALL NON- TAXABLE INCOME AMOUNTING TO RS.2,96,383/-, THE ASSESSEE HAS INCURRED EXPENSES TO THE EXTENT OF RS.20,32,695/-, WHILE FOR EARNING THE TAXABLE INCOME AMOUNTING TO RS.2,17,56, 363/-, NO EXPENSES HAVE BEEN INCURRED AT ALL. BY NO STRETCH OF IMAGINATION, THIS SITUATION CAN BE TRUE. THUS, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT A S PER LAW. 7 FURTHER, THE ASSESSEE ITSELF MAKING DISALLOWANCE OF AN AMOUNT OF RS.25,007/- FOR EARNING NON-TAXABLE INCOME, THE ASSESSING OFFICER HAS NOT COMMENTED UPON THE CORRECTNESS OF T HE SAID CLAIM. IT WAS DEMONSTRATED BEFORE US THAT THIS AM OUNT SUO MOTO DISALLOWED BY THE ASSESSEE HAS SOME SCIENTIFIC BASIS I.E. THESE HAVE BEEN COMPUTED IN PROPORTION TO THE TAX-F REE INCOME TO THE TAXABLE INCOME. FURTHER, THE ASSESSING OFF ICER HAS NOWHERE RECORDED HIS SATISFACTION ON THE ISSUE THAT HOW THE DISALLOWANCE COMPUTED BY THE ASSESSEE IS WRONG. IT IS TRUE THAT RULE 8D HAS BEEN PRESCRIBED BY THE INCOME TAX RULES FOR MAKING COMPUTATION OF DISALLOWANCE UNDER SECTION 14 A OF THE ACT W.E.F. ASSESSMENT YEAR 2008-09 BUT IT CAN NEVER BE ENVISAGED THAT IN COMPLIANCE TO THESE, PROVISIONS C AN BE STRETCHED TO SUCH AN EXTENT AS HAS BEEN DONE BY THE ASSESSING OFFICER IN THE PRESENT CASE. THE INTENTION OF LEG ISLATURE CAN NEVER BE TO DISALLOW THE EXPENSES CLAIMED BY THE AS SESSEE FOR EARNING NON-TAXABLE INCOME IN SUCH A DISPROPORTIONA TE MANNER. THE INCOME TAX ACT PROVIDES TO ALLOW EXP ENSES INCURRED BY THE ASSESSEE FOR EARNING TAXABLE INCOME ALSO. HOWEVER, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS CREATED A SITUATION WHERE NO EXPENDITURE WAS ALLOWE D TO THE ASSESSEE AGAINST THE TAXABLE INCOME IN THE GARB OF COMPUTING DISALLOWANCE TO BE MADE INVOKING PROVISIONS OF SECT ION 14A AS PPRESCRIBED UNDER RULE 8D. IN THIS MANNER, THE DI SALLOWANCE MADE BY THE ASSESSING OFFICER IS TOTALLY BAD IN LAW . IN VIEW 8 OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS). 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (H.L.KARWA) (RANO JAIN) VICE PRESIDENT ACOUNTANT MEMBER DATED : 4 TH SEPTEMBER, 2015 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH