DBH International Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 5507/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97096 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 01-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Assessee Lawyers: MRS HARSIMRAN GREWAL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

1 ITA NO. 55 07/DEL/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI T.S. KAPOOR, ACCOUNTANT MEMBER & SMT. BEENA PILLAI, JUDICIAL MEMBER I.T.A .NO.-5507/DE L/2012 (ASSESSMENT YEAR-2009- 10) DBH INTERNATIONAL PVT. LTD., N-75, CONNAUGHT PLACE, NEW DELHI. AAACD0085D VS ITO, WARD 10(2), ROOM NO. 19, C.R. BUILDING, NEW DELHI. APPELLANT BY SH. G.S. GREWAL & MRS. HARSIMRAN GREWAL, CA RESPONDENT BY SMT. PARWINDER KAUR, SR. DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESEE AGAINST THE ORDER OF LD. CIT(A)-XIII, NEW DELHI DATED 07.08.2012 ON THE FOLL OWING GROUNDS: 1. ASSESSING OFFICER, WARD 10(2) HAS ERRED IN DISA LLOWING RS. 2,27,77,769/- UNDER SECTION 14A OR THE INCOME T AX AGAINST RS.1,39,39,685/- VOLUNTARILY DISALLOWED BY THE APPELLANT AND LEARNED CIT(A)-XIII, NEW DELHI HAS ER RED IN UPHOLDING THE ORDER OF LD. ASSESSING OFFICER; 2. THE ASSESSEE CRAVES TO ADD OR DELETE ANY GROUND OF APPEAL BEFORE THE APPEAL IS HEARD. DATE OF HEARING 26.08.2015 DATE OF PRONOUNCEMENT 28.08.2015 2 ITA NO. 55 07/DEL/2012 2. BRIEF FACTS AS RECORDED BY THE LD. CIT ARE AS FO LLOWS: THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE REL EVANT ASSESSMENT YEAR ON 25/09/2009 DECLARING A LOSS OF R S. 5,01,052/-. THE ASSESSEE IS ENGAGED IN THE BUSINES S OF MINING ACTIVITIES FOR EXTRACTION OF RAW CLAY MATRIX WHICH IS USED BY PROCESSED CLAY MANUFACTURERS. THE APPELLANT HAS MADE INVESTMENTS IN THAPAR GROUP OF COMPANIES FOR E ARNING EXEMPT INCOME AND ALSO CONTROLLING STAKES. THE APP ELLANT HAS SHOWN AVERAGE INVESTMENTS IN SHARES OF GROUP COMPANIES AMOUNTING TO RS. 1,81,39,59,779/- AND HAS EARNED DIVIDEND INCOME AMOUNTING TO RS. 17,62,49,64 8/- DURING THE YEAR UNDER CONSIDERATION. THE CASE WAS SELECTED FOR SCRUTINY THROUGH CASS AND ACCORDINGLY NOTICE U/S 143(2) WAS ISSUED ON 23/08/2 010. THE ASSESSING OFFICER INVOKED PROVISIONS OF SECTION 14A READ WITH RULE 8D AND HAS DISALLOWED THE EXPENSES RELATI NG TO EARNING EXEMPT INCOME TO RS. 2,27,77,769/- COMPRISI NG OF THE FOLLOWING: I. UNDER RULE 8D(2)(I) : RS. 8,69,481/- II. UNDER RULE 8D(2)(II) : RS. 1,28,38,570/- III. UNDER RULES 8D(2)(III): RS. 90,69,798/- TOTAL RS. 2,27,77,769/- 3. AGGRIEVED BY THE DISALLOWANCE THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE LD. CIT( A) CONFIRMED THE ACTION OF THE AO AND SUSTAINED THE DISALLOWANCE. AG AINST THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS NOW IN APPEAL BE FORE US. 4. THE LD. AR SUBMITTED BEFORE US THAT, THE APPELLANT HAD EARNED EXEMPT INCOME OF RS.17,62,49,648/- AS DIVIDEND INCO ME AND HAD 3 ITA NO. 55 07/DEL/2012 VOLUNTARILY DISALLOWED RS.1,39,39,685/-UNDER SECTIO N 14A OF THE ACT. THE DETAIL OF DISALLOWANCE BEING: I) INTEREST EXPENSES : RS.1,30,70,204/- II) DEPOSITORY EXPENSES : RS. 7,326/- III) LOSS ON SALE OF INVESTMENT :RS. 17,869/- IV) COMMON EXPENSES : RS. 8,44,250/- TOTAL : RS.1,39,39,685/- 5. THE LD. AR SUBMITTED THAT THE EXPENSES THAT CAN BE ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME FOR THE PURPOSES OF DISALLOWANCE U/S 14A ARE CLEARLY IDENTIFIABLE FROM THE BOOKS OF ACCOUNTS. THE DIVISION WISE PROFIT AND LOSS ACCOUN T WAS SUBMITTED BEFORE BOTH LD. AO AS WELL AS THE LD. CIT(A). HE F URTHER SUBMITTED THAT THE LD. AO HAS APPLIED RULE 8D AND HAS FURTHER DISALLOWED RS. 88,38,084/- OVER AND ABOVE THE VOLUNTARY DISALLOWAN CE MADE BY THE APPELLANT U/S 14A AMOUNTING TO RS. 1,39,39,685/- AG AINST THE DIVIDEND EARNED BY THE APPELLANT DURING THE YEAR. 6. THE LD. AR SUBMITTED THAT AO HAS COMPLETELY DISREGA RDED THE COMPUTATION OF TAXABLE INCOME, BOOKS OF ACCOUNTS AN D DIVISION WISE PROFIT AND LOSS ACCOUNT FURNISHED BY THE APPELLANT AND PROCEEDED MECHANICALLY APPLY RULE 8D OF THE INCOME TAX RULES, 1962. THE LD. AR FURTHER SUBMITTED THAT THE AO HAS NEITHER EXPRES SED HIS SATISFACTION NOR GIVEN COGENT REASONS BEFORE PROCEE DING TO DISALLOW EXPENSES U/S 14A OF THE ACT. THE LD. AR SUBMITS TH AT THE LD. CIT(A) HAS NOT FOLLOWED THE PARAMETERS LAID DOWN BY THE DE CISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVE STMENTS 4 ITA NO. 55 07/DEL/2012 LIMITED, REPORTED IN 374 ITR 272 (2012). HE FURTHE R SUBMITS THAT THE ISSUE STANDS COVERED IN THE APPELLANT OWN CASE FOR THE A.Y. 2008-09, VIDE ORDER DATED 13/02/2015 REPORTED IN 68 SOT 332 (DEL.) (TRIB.). 7. ON THE OTHER HAND, THE LD. DR PRESENT SUPPORTED THE STAND OF THE CIT (A) ON THE ISSUE. THE LD. D.R. PLACED RELIA NCE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF T&T MOTORS LTD., IN ITA NO. 6490/DEL/2010 FOR ASSESSMENT YEAR 2009-10. 8. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND AFTER C AREFULLY PERUSING THE RECORDS, WE FIND THAT DURING THE RELEV ANT PREVIOUS YEAR, APART FROM INTEREST EXPENSES, LOSS ON SALE OF INVES TMENTS, DEPOSITORY CHARGES AND COMMON EXPENSES, THE ASSESSEE HAD INCUR RED THE FOLLOWING EXPENSES, AGGREGATING TO RS.6181431/-, UN DER VARIOUS HEADS: MINING AND OTHER RELATED EXPENSES : RS.29,87,176/ - PERSONAL EXPENSES : RS.3 9,72,757/- ADMINISTRATIVE AND OTHER EXPENSES : RS.86,79,544/- SELLING &DISTRIBUTION EXPENSES :RS.10,24,361 /- DEPRECIATION :R S.8,86,137/- IN VIEW OF THE ABOVE DETAILS, WE FIND THAT THERE WA S NO EXPENDITURE HAVING PROXIMATE NEXUS / DIRECT RELATION WITH INVES TMENT IN SHARES OR EARNING OF EXEMPT DIVIDEND INCOME THEREFROM EXCE PT FOR INTEREST INCOME, LOSS ON SALE OF INVESTMENTS, DEPOSITORY CHA RGES AND COMMON EXPENSES (REFER PAGE 6 OF THE STATEMENT OF TOTAL INCOME 5 ITA NO. 55 07/DEL/2012 FOR Y.E.31.03.2009) . IT WAS, THEREFORE, PLEADED THAT PERSONAL EXPENSES, ADMINISTRATIVE AND OTHER EXPENSES AND SEL LING & DISTRIBUTION EXPENSES SHOULD NOT BE CONSIDERED FOR THE PURPOSES OF DISALLOWANCE U/S 14A OF THE ACT. WE FIND FORCE IN T HE ARGUMENT OF THE LD. A.R IN THIS REGARD. 9. WE ALSO FIND THAT THE AO HAS NEITHER RECORDED HIS S ATISFACTION NOR GIVEN REASONS AS TO HOW THE CLAIM OF EXPENDITUR E IN RELATION TO TAX FREE INCOME HAS NOT BEEN CORRECTLY MADE BY THE ASSESSEE AS ENVISAGED UNDER SECTION 14A(2) AND HAS MECHANICALLY INVOKED RULE 8D. SUB-SECTION (2) OF SECTION 14A OF THE ACT PROV IDES THE MANNER IN WHICH THE AO IS TO DETERMINE THE AMOUNT OF EXPENDIT URE INCURRED IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 10. THE REQUIREMENT OF THE AO EMBARKING UPON A DETERMIN ATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME WOULD BE TRIGGERED ONLY IF THE AO RECORDS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE THE CONDITION PRECED ENT FOR THE AO FOR DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS THAT, THE AO MUST RECO RD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. IN OTHER WORDS, SUB-SECTION ( 2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUN T OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT AND THE AO, IF SATISFIED WITH THE COR RECTNESS OF THE CLAIM OF THE ASSESSE IN RESPECT OF SUCH EXPENDITURE CANNOT EMBARK 6 ITA NO. 55 07/DEL/2012 UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE I N ACCORDANCE WITH PRESCRIBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF SEC. 14A OF THE ACT. IT IS ONLY IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THAT THE AO GETS JURISDI CTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO S UCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD STIPULATED IN RULE 8D OF THE RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE W ITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE AO WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. IT IS, THEREFORE, CLEAR THAT DETERMINATI ON OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE AO REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. (MAXOPP INVESTMENT LTD. VS. CIT [2012] 347 ITR 272 /[2011] 203 TAXMAN 364/15 TAXMANN.COM 390 (DELHI) . 11. IT IS SEEN THAT THE APPELLANT COMPANY ITSELF HAS MA DE THE DISALLOWANCE OF EXPENDITURE U/S 14A R.W.R. 8D OF RS . 1,39,39,685/. THE CLAIM OF DISALLOWANCE MADE BY THE APPELLANT COM PANY WAS EXAMINED BY THE AO DURING THE COURSE OF ASSESSMENT. THE APPELLANT PRODUCED THE BOOKS OF ACCOUNTS AND THE EVIDENCES, W HICH THE LD. ASSESSING OFFICER HAD VERIFIED THE LD. AO EXAMINED THE BOOKS OF ACCOUNTS, EVIDENCES AND RECORDS OF THE APPELLANT AN D VERIFIED THE VOLUNTARY DISALLOWANCE BY APPELLANT U/S 14A OF THE ACT. THE AO HAS NOT POINTED OUT ANY DEFICIENCY IN THE BOOKS OF ACCO UNTS NOR IN RESPECT OF CLAIM OF THE APPELLANT U/S 14A OF THE AC T. IN OTHER WORDS, 7 ITA NO. 55 07/DEL/2012 THE AO HAS NOT EXPRESSED SATISFACTION THAT THE APPE LLANTS CLAIM U/S 14A IS INCORRECT, A PREREQUISITE FOR INVOKING THE P ROVISIONS OF SECTION 14A OF THE ACT. THE HONBLE DELHI HIGH COURT IN TH E CASE OF MAXXOP INVESTMENT (SUPRA) HAS HELD THAT: THE CONDITION PRECEDENT FOR THE AO TO HIMSELF DETER MINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DI SSATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MA DE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INELUCTABLE IN TOTAL INCOME IN THE MANNE R INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. 12. THE HONBLE DELHI HIGH COURT ALSO HELD THAT THE AO SHOULD ASSIGN COGENT REASON FOR ARRIVING AT SUCH SATISFACT ION. THE FOLLOWING JUDICIAL PRONOUNCEMENTS SUPPORT THE ABOVE PROPOSITI ONS OF LAW: CIT VS. WALFORT SHARE & STOCK BROKERS: 326 ITR 1 (S C) GODREJ & BOYCE MFG. CS. LTD. V. CIT: 328 FTR 81 (BO M.) CIT VS. HERO CYCLES: 323ITR 518 (P&H) CIT V. METALMAN AUTO P. LTD.: 336 ITR 434 (P&H) CIT V. RELIANCE INDUSTRIES LTD. : 339ITR 632 (BOM) CIT VS MS. SUSHMA KAPOOR: 3I9 ITR 299 (DELHI) 13. THE DECISION RELIED UPON BY THE REVENUE IN THE CAS E OF T&T MOTORS LTD., IN ITA NO. 6490/DEL/2010 FOR ASSESSMEN T YEAR 2009-10 ARE DISTINGUISHABLE ON FACTS. IN THE CASE OF T&T, T HE ASSESSEE HAD ARGUED THAT THERE CANNOT BE ANY EXPENDITURE THAT CO ULD BE DISALLOWED AGAINST THE EXEMPT INCOME RECEIVED BY TH E ASSESSEE 8 ITA NO. 55 07/DEL/2012 THEREIN. THE HONBLE COORDINATE BENCH HAS RECORDED IN PARA 5 THEREIN THAT THE ASSESSEE HAD INCURRED CERTAIN EXPE NSES WHICH WAS ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. HOWEV ER IN THE FACTS OF THE PRESENT CASE BEFORE US, THE ASSESSEE HAS SUO MOTE DISALLOWED EXPENSES UNDER SECTION 14A OF THE ACT. THE LD.D.R, CONTENDED THAT IN THE EVENT THERE ARE ANY DEFICIENCY LEFT BY THE A .O IN RECORDING PROPER SATISFACTION, THE SAME CAN BE MADE GOOD BY T HE LD.CIT(A). IN THE FACTS OF THE PRESENT CASE THE LD. CIT(A) HAS NO T COMPENSATED FOR THE DEFICIENCY BY THE A.O IN RECORDING PROPER SATIS FACTION. 14. IT IS ALSO OBSERVED IN THE FACTS OF THE PRESENT CAS E THAT THE AO HAS NOT FOUND ANY DEFICIENCY IN THE SUO-MOTO DISALLOWANCE OF RS. 1,39,39,685/- OF EXPENDITURE, U/S 14A MADE BY THE A PPELLANT. 15. EVEN ON MERITS IT IS OBSERVED THAT THE DIFFERENCE O F DISALLOWANCE OF RS. 90,69,798/- ARE ON ACCOUNT OF PERSONAL EXPEN SES AND SELLING AND DISTRIBUTION EXPENSES. THESE EXPENSES HAVE MADE FOR THE PURPOSED OF MINING OPERATIONS WHICH CANNOT BE ATTRI BUTABLE BY STRETCH IMAGINATION FOR THE INVESTMENTS. SIMILARLY , DISALLOWANCE OF RS. 86,79,544/- ON ACCOUNT OF ADMINISTRATIVE AND OT HER EXPENSES CANNOT BE ATTRIBUTABLE AS EXPENSES FOR THE INVESTME NT OF THE APPELLANT COMPANY. THE ASSESSEE HAS HIMSELF DISALLO WED EXPENSES AMOUNTING TO RS.8,44,250/- TOWARDS COMMON EXPENSES WHICH ARE MORE PARTICULARLY DEMONSTRATED AT PG 6 OF THE STATEMENT OF TOTAL INCOME FOR Y.E.31.03.2009. NEITHER AO NOR LD. CIT(A) HAS ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENTS MADE AND THE EXPENDITURE INCURRED UNDER THE HEAD ADMINISTRATIVE AND OTHER 9 ITA NO. 55 07/DEL/2012 EXPENSES, PERSONAL EXPENSES, SELLING AND DISTRIBUTI ON EXPENSES. ON THESE FACTS AND CIRCUMSTANCES OF THE CASE THE AO IS DIRECTED TO DELETE THE EXTRA ADDITION OF RS90,69,798/- MADE U/S 14A READ WITH RULE 8D OF THE IT RULES. A COORDINATE BENCH OF THIS TRIBUNAL HAS GIVEN A SIMILAR FINDING IN ASSESSEES OWN CASE IN T HE CASE FOR ASSESSMENT YEAR 2008-09, REPORTED IN 68 SOT 332(DEL -TRI). 16. IN VIEW OF THE AFORESAID REASONING AND FINDINGS WE RESTRICT THE DISALLOWANCE UNDER SEC.14A TO BE RS.1,39,39,685/-. WE, THEREFORE, ALLOW THE GROUND RAISED BY THE APPELLANT. 17. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED . THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 28.08. 2015 SD/- SD/- (T.S. KAPOOR) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 28.08.2015 *KAVITA, P.S. COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 10 ITA NO. 5 507/DEL/2012 DATE 1. DRAFT DICTATED ON 26.08.2015 2. DRAFT PLACED BEFORE AUTHOR 27.08.2015 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 27.08.2015 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 28.08.2015 5. APPROVED DRAFT COMES TO THE SR.PS/PS 28.08.2015 6. KEPT FOR PRONOUNCEMENT ON 28.08.2015 7. FILE SENT TO THE BENCH CLERK 28.08.2015 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.