BHAVANANI & SON P. LTD, MUMBAI V. ITO 10(1)(2), MUMBAI

ITA 5598/MUM/2010

• Counselvise Citation: 559819914 RSA 2010
• Duration Of Justice: 1 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 09-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M) ITA NO.5598/MUM/2010(A.Y. 2007-08) M/S. BHAVANANI & SON PVT. LTD., WACO HOUSE, MASRANI LANE, KURLA, MUMBAI 400 070. PAN AAACB 3332K (APPELLANT) VS. INCOME TAX OFFICER 10(1)(2), ROOM NO.453, 4 TH FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI P.C.MAURYA DATE OF HEARING : 27/12/2011 DATE OF PRONOUNCEMENT : 30/12/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST ORDER D ATED 25/5/2010 OF CIT(A)-21, MUMBAI RELATING TO ASSESSMENT YEAR 200 7-08. THE ISSUE INVOLVED IN THIS APPEAL IS WITH REGARD TO DISALLO WANCE OF EXPENSES ALLEGED TO HAVE BEEN INCURRED BY THE ASSESSEE TO EARN INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME AND THEREFORE TO BE DISALLOWED UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT 1961 (THE ACT). 2. NONE APPEARED ON BEHALF THE ASSESSEE ON THE DATE OF HEARING, THEREFORE, WE HAVE HEARD LD. D.R. AND PROCEED TO D ECIDE THE APPEAL ON MERITS. 3. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRAD ING IN GLUE THREADS. THE AO NOTICED THAT THE ASSESSEE EARNED DIVIDEND IN COME OF RS. 32,47,028/- ITA NO.5598/MUM/2010(A.Y. 2007-08) ) 2 WHICH WAS CLAIMED AS EXEMPT. THE AO INTENDED TO MAKE DISALLOWANCE U/S. 14A OF THE ACT READ WITH RULE 8D IN RESPECT OF EXP ENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. THE ASSESSEE SUBMITTED BEFORE THE AO THAT NO DISALLOWANCE WAS CALLED FOR SINCE NO EXPENSES WERE INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME. THE AO DID NOT ACC EPT THE CONTENTIONS OF THE ASSESSEE AND MADE A DISALLOWANCE OF RS. 3,44,00 0/- U/S. 14A READ WITH RULE 8D OF THE ACT. 4. BEFORE CIT(A) THE ASSESSEE ARGUED THAT NO INTERE ST EXPENSES HAD BEEN INCURRED BY THE COMPANY AND THE INVESTMENTS WERE MADE FROM SURPLUS FUNDS EARNED BY THE ASSESSEE WHICH WERE INVESTED F ROM TIME TO TIME FOR WHICH NO EXTRA EXPENSES WERE INCURRED BY THE ASSES SEE. THEREFORE, NO INTEREST EXPENSES WAS INCURRED AND SUBMITTED BEFORE THE CIT(A) THAT THE DISALLOWANCE MADE BY THE AO BE DELETED. THE CIT( A) CONFIRMED THE ORDER OF THE AO FOLLOWING HIS ORDER FOR ASSESSMENT YEAR 20 06-07. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 5. WE HAVE HEARD THE LD. D.R AND PERUSED THE RECORD S CAREFULLY. IT IS NOT IN DISPUTE BEFORE US THAT THE HONBLE BOMBAY HIGH C OURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX,RANGE 10 (2), MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIONER OF INCOME TAX RANGE 10(2), MUMBAI & OR S. BY JUDGMENT DATED 12-8-2010 HAS DEALT WITH THE DISALLOWANCE THA T CAN BE MADE U/S.14-A OF THE ACT. THE HONBLE COURT ALSO DEALT WITH THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA CAPITAL MANAG EMENT PVT. LTD. 117 ITD 169 (MUM) (SB) AND HAS LAID DOWN THE FOLLOWING PROP OSITION: I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961, AS WAS A PPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. ITA NO.5598/MUM/2010(A.Y. 2007-08) ) 3 CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE O F THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPAN Y IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDE ND, INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI)EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICE R IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHA LL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.5598/MUM/2010(A.Y. 2007-08) ) 4 6. IN VIEW OF THE AFORESAID DECISION OF THE HON BLE BOMBAY HIGH COURT THE ISSUE WITH REGARD TO DISALLOWANCE UNDER SECTION 14A HAS TO BE MADE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE HON BLE BOMBAY HIGH COURT. RULE 8D SHOULD NOT BE APPLIED AND THE AO HAS TO ADO PT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CI RCUMSTANCES AND AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. WE, THEREFORE, REMIT THE I SSUE TO THE A.O FOR FRESH CONSIDERATION AS STATED ABOVE. 7. IN THE RESULT, ALL THE APPEALS ARE ALLOWED FOR S TATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 30 TH DAY OF DEC.2011 SD/- SD/- (PRAMOD KUMAR ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 30 TH DEC..2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5598/MUM/2010(A.Y. 2007-08) ) 5 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 27/12/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 27/12/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER