M/s. Nishu Finlease Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5650/DEL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2756 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 05-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 20-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: F R MEENA
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

1 ITA NO. 5650/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI S. V. MEHROTRA, VICE PR ESIDENT AND SMT SUCHITRA KAMBLE, JUD ICIAL MEMBER I.T.A .NO.-5650/DEL/2014 (A.Y 2010-11) NISHU FINLEASE PVT. LTD. C/O. OSWAL SUNIL & COMPANY, 71, DARYAGANJ NEW DELHI AAACN3613M (APPELLANT) VS DCIT CIRCLE-13(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. AMIT SHARMA, CA RESPONDENT BY SH. F. R. MEENA, SR. DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER DATED 23/07/2014 PASSED BY CIT(A)-XVI, NEW DELHI FOR ASSESSMENT YEAR 2010-11. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THAT HAVING REGARD TO THE FACTS AND THE CIRCUMST ANCES OF THE CASE, THE LD-XVI HAS ERRED IN PARTLY CONFIRMING THE ADDIT ION MADE BY LD. ASSESSING OFFICER AMOUNTING TO RS.1,06,87,059/- BY MAKING DISALLOWANCE U/S 14A AS EXPENSES INCURRED IN RELAT ION TO EARNING THE TAX FREE INCOME DURING THE YEAR AFTER CONSIDERI NG RULE 8D OF THE DATE OF HEARING 08.06.2017 DATE OF PRONOUNCEMENT 14.07.2017 2 ITA NO. 5650/DEL/2014 I.T. RULES. THE HONORABLE CIT(A)-XVI HAS NOT CONSTRUED THE PROV ISIONS OF SECTION 14A OF I.T ACT AND RULE 8D OF I.T. RULES IN THE SPI RIT OF THE ENACTMENT AND BY TAKING A NARROW VIEW OF THE STATUTE, HAS DEN IED JUSTICE TO THE APPELLANT. THAT IN ANY VIEW OF THE MATTER AND IN ANY CASE ADDI TION OF RS.1,06,87,059/- BY MAKING DISALLOWANCE U/S 14A AS EXPENSES INCURRED IN RELATION TO EARNING THE TAX FREE INCOME DURING THE YEAR IS BAD IN LAW AND AGAINST THE FACTS AND CIRCUMSTANCES OF THE CASE. 3 . THE ASSESSEE IS ENGAGED IN THE BUSINESS OF ACTIVITI ES IN SHARES AND SECURITIES DURING THE YEAR UNDER CONSIDERATION AND DRIVING INCOME UNDER THE HEAD BUSINESS INCOME AND CAPITAL GAIN. IN ADDITION, THE ASSESSEE ALSO EARNED DIVIDEND FROM THESE SHARES AND SECURITIES. FOR THE ASSESSMENT YEAR 2010-2011, THE ASSESSEE HAS FILED THE RETURN SHOWING LOSS OF R S. 212.09 LACS BUT THE A.O. HAS COMPLETED ITS ASSESSMENT U/S 143(3) ON A TAXABL E AMOUNT OF RS. 150.31 LACS AFTER MAKING CERTAIN ADJUSTMENTS. THE A.O. HAS MADE AN ADDITION OF RS. 362.40 LACS BY MAKING DISALLOWANCES U/S 14A AS EXPE NSES INCURRED IN RELATION TO EARNING THE TAX FREE INCOME DURING THE YEAR CALC ULATED AS PER RULE 8D. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSE E FILED APPEAL BEFORE THE CIT(A). THE CIT(A) HELD THAT WHILE CALCULATING DISALLOWANCES AS PER RULE 8D, THE AO CONSIDERED INTEREST EXPENSES OF RS. 545.15 LACS, HOWEVER INTEREST INCOME OF RS. 242.96 LACS EARNED ON LOAN & ADVANCES GIVEN WAS NOT CONSIDERED. INTEREST EXPENSES (NET OF INTEREST INCO ME) HAS TO BE CONSIDERED FOR CALCULATION OF DISALLOWANCES AS PER RULE 8D SHOULD BE RS. 302.18 LACS. FURTHER, THE AVERAGE TOTAL ASSETS WAS ERRONEOUSLY CALCULATED AT RS. 2,940.79 LACS INSTEAD OF RS. 5,415.75 LACS AS PER THE AUDITE D BALANCE SHEET OF THE ASSESSEE. AFTER TAKING INTO CONSIDERATION ABOVE ADJ USTMENTS, THE DISALLOWANCES AS PER RULE 8D WORKED OUT TO BE RS. 115.73 LACS INS TEAD AT RS. 362.40 LACS AS 3 ITA NO. 5650/DEL/2014 CALCULATED BY THE ASSESSING OFFICER. THE CIT(A) FUR THER OBSERVED THAT THE A.O WHILE MAKING THE ASSESSMENT, HAS THUS MADE THE ADDI TION OF RS.362.40 LACS ON THE GROUND OF DISALLOWANCES U/S 14A OF THE ACT. AS A RESULT, DEMAND NOTICE U/S 156 FOR RS.65.69 LACS HAS BEEN RAISED. THE A.O HAS ALSO INITIATED PENALTY PROCEEDING U/S 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS REGARDING ABOVE SAID ADDITIONS OF RS.362.40 LACS ON THE GROUND OF DISALLOWANCES U/S 14A OF THE ACT. THE ASSESSEE MADE INVESTMENT IN SHARES AND SECURITIES FOR EARNING CAPITAL APPRECIATION AND EAR NING DIVIDEND INCOME IS INCIDENTAL TO SUCH ACTIVITIES. THE DIVIDEND EARNED DURING THE YEAR IS RS. 65,150/- AND THE INVESTMENTS AS ON 31.03.2010 AND T HE INVESTMENTS AS ON 31.03.2010 IS RS. 1878.48 LACS. THE COMPANY INCURR ED INTEREST EXPENSES TO EARN TAXABLE INCOME SUCH AS TRADING PROFIT AND CAPI TAL GAIN. FURTHER, THE CIT(A) OBSERVED THAT DIVIDEND INCOME WAS NOT ARISIN G ON ALL INVESTMENTS HELD BY THE COMPANY AND EARNING OF DIVIDEND INCOME WAS D UE TO HOLDING OF INVESTMENTS. THE DETAIL OF INVESTMENT HELD AND DIVI DEND INCOME EARNED THEREON IS ENCLOSED (ANNEX-1). DURING THE RELEVANT YEAR, TH E ASSESSEE COMPANY EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND, U/S 10(34) O F RS. 65,150/- ON INVESTMENT IN SCARES. AS PER SECTION 14A, EXPENDITU RE ATTRIBUTABLE TO THE EXEMPT INCOME HAS TO BE WORKED OUT AND DISALLOWED. 5. THE CIT(A) HELD THAT SUFFICIENT INTEREST FREE O WN FUND IS NOT AVAILABLE WITH THE ASSESSEE FOR THE INVESTMENTS, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME UNDER THE IT ACT. THE CIT(A) FURTHER HELD THAT INTEREST BEARING BORROWED FUND ARE UTILIZED FOR THE INVESTMENTS AND INTEREST EXPENDITURES ON BORROWED FUNDS ARE INCURRED IN RELA TION TO INVESTMENTS, INCOME FROM WHICH DOES OR SHALL NOT FORM PART OF TH E TOTAL INCOME. NO SEPARATE ACCOUNT IS MAINTAINED BY THE ASSESSEE IN R ESPECT OF INTEREST EXPENDITURE ON BORROWED FUNDS UTILIZED FOR THE INVE STMENTS. THEREFORE, SUCH INDIRECT INTEREST EXPENDITURES CALLS FOR DISALLOWAN CE UNDER RULE 8D(2)(II). AO DISALLOWED RS. 1,06,29,376/- UNDER RULE 8D(2)(II) B Y APPLYING THE PRESCRIBED FORMULA AND, THEREFORE, NO INTERFERENCE WAS CALLED FOR AS THE AO WAS FULLY JUSTIFIED IN DISALLOWING THE ABOVE INDIRECT INTERES T EXPENDITURE. FURTHER, THE CIT(A) HELD THAT CONSIDERING THE QUANTUM OF THE INV ESTMENTS, INVESTMENT 4 ITA NO. 5650/DEL/2014 ACTIVITY DURING THE YEAR IN THE FORM OF SALE OF INV ESTMENT OF RS. 50.21 LACS DURING THE YEAR IT IS EVIDENT THAT SOME ADMINISTRAT IVE AND MANAGERIAL EXPENDITURES ARE INCURRED IN RELATION TO EXEMPT INC OME. IN THE P&L ACCOUNT THE ASSESSEE HAS SHOWN ADMINISTRATIVE EXPENDITURES OF ONLY RS. 57,683/-. THEREFORE, DISALLOWANCE U/S 14A CANNOT EXCEED THE E XPENDITURES DEBITED IN THE P&L ACCOUNT. AO HAS DISALLOWED RS. 9,51,795/- B Y APPLYING THE FORMULA PRESCRIBED IN RULE 8D. SINCE, THE TOTAL EXPENDITURE INCURRED UNDER THIS HEAD IS ONLY RS.57.683/-, THEREFORE, THE DISALLOWANCE IN EXCESS OF THE EXPENDITURES DEBITED IN THE P & L ACCOUNT CANNOT BE JUSTIFIED. THEREFORE, DISALLOWANCE ON THIS ACCOUNT WAS RESTRICTED TO RS.57,683/-. IN VIE W OF THE ABOVE THE DISALLOWANCE MADE BY THE A.O U/S 14A WAS REDUCED F ROM 1,15,73,171/- TO RS. 1,06,87,059/- BY THE CIT(A). 6. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY V IDE ITS LETTER DATED 01/03/2013 SUBMITTED REPLY, STATING THEREIN THAT - THE COMPANY IS DEALING IN PURCHASE /SALE OF SHARES AND SECURITIES OF VARIOUS COMPANIES AS AN INVESTOR AS WELL AS A TRADER FROM THE PREVIOUS YEAR. DURING THE PREVIOUS YEAR COMPANY HAS EARNED RS 65,150/- AS DIVIDEND INCOME. THERE ARE NO EXPENSES DIRECTLY ATTRIBUTABLE TO EARNING TAX FREE DIVIDEND EARNING A S THE PAYMENT OF DIVIDEND IS RECEIVED DIRECTLY TO THE ACCOUNT OF THE ASSESSEE TH ROUGH ECS BANKING PAYMENT SYSTEM. THE ASSESSEE DID NOT MAKE ANY EFFORT AND EX PENDITURE FOR COLLECTION OF SUCH PAYMENT. THEREFORE NO EXPENSES ARE INCURRED FO R EARNING DIVIDEND. THE COMPANY INCURRED LOSS IN ITS BUSINESS DUE TO LOSS O N SALE OF INVESTMENT IN SHARES. THE AMOUNT OF DIVIDEND EARNED WAS NEGLIGIBL E IN COMPARISON TO INVESTMENT LOSS. HENCE IT COULD BE CONCLUDED THAT T HE LOAN TAKEN I AND INTEREST PAID WAS NOT TO EARN DIVIDEND BUT TO DO INVESTMENTS AND TAKE THE BENEFIT OF APPRECIATION OF INVESTMENT AND TO DO TRADING ACTIVI TIES OF SHARES. THE DIVIDEND WAS EARNED IN THE NORMAL COURSE OF INVESTMENT. HENC E SECTION 14A R.W.R. 8D OF THE IT ACT IS NOT APPLICABLE TO ASSESSEE. FURTHER T HE PROCEDURE ADOPTED IS VERY LOGICALLY AND DEFINED. HENCE NO ANY HYPOTHETICAL FI GURE BAN BE WORKED OUT FOR ANY DISALLOWANCES. FURTHER THERE IS NO NEXUS BETWEE N INTEREST EXPENSES AND TAX FREE DIVIDEND EARNING. THEREFORE, INTEREST PAY MENT, WHICH HAS GOT NO RELATION WITH TAX FREE DIVIDEND EARNING, CANNOT BE DISALLOWED. DISALLOWANCES 5 ITA NO. 5650/DEL/2014 U/S 14A CANNOT BE MADE FOR AN AMOUNT MORE THAN INCU RRED FOR EARNING THE EXEMPTED INCOME. THEREFORE, IT IS NECESSARY TO WOR K OUT THE ACTUAL EXPENSES INCURRED IN THIS REGARD. NO HYPOTHETICAL FORMULA F OR CALCULATING THE EXPENSES CAN BE APPLIED. THEREFORE, INTEREST PAYMENT WHICH HAS GOT NO RELATION WITH THE INVESTMENT CANNOT BE DISALLOWED. SIMILARLY ANY AD- HOC % ON INVESTMENT CANNOT BE DISALLOWED. MORE SO WHEN NO SUBSTANTIAL EXPENSES HAS BEEN INCURRED FOR EARNING TAX EXEMPTED INCOME. DURING T HE YEAR, TOTAL ADDITIONAL FUNDS RECEIVED FROM VARIOUS SOURCES ARE RS.15.32 CR ORES WHICH HAS BEEN UTILIZED FOR ACQUIRING INVENTORIES AND LENDING OF LOANS & ADVANCES. NO LOAN FUND HAS BEEN UTILIZED FOR FURTHER INVESTMENTS IN E QUITY SHARES. HENCE THE INTEREST COST ON SUCH ADDITIONAL FUNDS OF RS.15.32 CRORE CANNOT BE APPORTIONED OVER EQUITY INVESTMENTS MADE. 7. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE MATERIALS AVAILABLE ON RECORD. THE ASSESSEE COMPANY HAD MADE THE INVESTMENT IN THE FINANCIAL YEAR 2008-09 (RELEVANT TO THE A.Y. 2009-1 0) AND IN THE CONCERNED ASSESSMENT YEAR (A.Y. 2010-11), THE ASSESSEE COMPAN Y DID NOT MADE ANY FRESH INVESTMENT FROM THE BORROWED FUND. THE ASSESS EE COMPANY REMAINED INVESTED IN THE INVESTMENT WHICH WERE MADE IN THE F .Y. 2008-09 (2009-10) RATHER IN THE CONCERNED F.Y. 2009-10 (A.Y.2010-11), THE ASSESSEE COMPANY HAD SOLD THE PART OF THE INVESTMENT MADE IN RATANMA NI METAL & TUBES LTD. AND EARNED ON LONG TERM CAPITAL LOSS OF RS. 23,35,9 60/-. THE ADDITIONAL FUNDS AMOUNTING TO RS. 15.20 CRORE WAS BORROWED BY THE ASSESSEE COMPANY ONLY FOR THE PURPOSE OF BUSINESS ACTIVITY WHICH IS TRADING IN SECURITIES OR LOAN PROVIDED TO THE OTHER CONCERNS. FROM THE RECOR DS IT CAN BE SEEN THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENSES TO EARN A DIVIDEND INCOME. THE ASSESSEE MADE THE INVESTMENT TO THE TUNE OF RS. 19, 28,89,872/- IN F.Y. 2008-09 (A.Y. 2009-10) AND THE ASSESSING OFFICER DI D NOT FIND ANY AMBIGUITY REGARDING ANY EXPENDITURE DIRECTLY OR IND IRECTLY ATTRIBUTABLE TO 6 ITA NO. 5650/DEL/2014 THE INVESTMENT MADE BY THE ASSESSEE WHILE SCRUTINIZ ING THE RETURN FOR A.Y. 2009-10. IN FACT, THE AO HELD THAT ASSESSEE DID NOT INCURRED ANY EXPENSES ATTRIBUTABLE TO THE DIVIDEND INCOME OF RS. 1,71,551 /- IN A.Y. 2009-10. WHILE REJECTING THE MAIN CONTENTION OF THE ASSESSE E COMPANY REGARDING THE DISALLOWANCE UNDER RULE 8D(2)(II) OF THE ACT, THE C IT(A) IGNORED THESE FACTS. THE DECISION OF CHEMINVEST LTD. VS. ITO 121 ITD 318 (DEL. SB) RELIED BY BOTH THE AUTHORITIES WAS SET ASIDE BY THE HONBLE D ELHI HIGH COURT IN CASE OF CHEMINVEST LTD. VS. CIT (2014) 61 TAXMANN.COM 11 8(DELHI). THE LD. AR RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF JOINT INVESTMENTS PVT. LTD. VS. CIT WHEREIN IT WAS HELD I N PARA 9 THAT: 9. IN THE PRESENT CASE, THE A.O HAS NOT FIRSTLY DISCLO SED WHY THE APPELLANT/ASSESSEES CLAIM FOR ATTRIBUTING RS.2,97, 440/- AS A DISALLOWANCE U/S 14A HAD TO BE REJECTED. TAIKISHA ENGG. INDIA LTD. (SUPRA) SAYS THAT THE JURISDICTION TO PROCEED FURTH ER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNT AND REJECTION IF ANY OF THE ASSESSEES CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE A.O AN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT(A) AND THE TRIBUNAL. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS.48,90,000, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110 PER CENT OF THAT SUM, I.E, RS.52,56,197. BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR R. 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN S. 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE I N RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT BE SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS. CASE 7 ITA NO. 5650/DEL/2014 EVEN THE HONBLE HIGH COURT IN CASE OF JOINT INVEST MENTS PVT. LTD. ALSO REITERATES THAT BY NO STRETCH OF IMAGINATION CAN SE CTION 14A OR R. 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMP T INCOME IS TO BE DISALLOWED. IN PRESENT ASSESSEES CASE THE ASSESSEE HAS DEMONS TRATED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENSES TO EARN A DIVIDEND INCOME IN THIS PARTICULAR ASSESSMENT YEAR AS THE ASSESSEE MAD E THE INVESTMENT TO THE TUNE OF RS. 19,28,89,872/- IN F.Y. 2008-09 (A.Y. 20 09-10) AND THE ASSESSING OFFICER DID NOT FIND ANY AMBIGUITY REGARD ING ANY EXPENDITURE DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE INVESTME NT MADE BY THE ASSESSEE WHILE SCRUTINIZING THE RETURN FOR A.Y. 2009-10. THU S THE ASSESSING OFFICER AS WELL AS THE CIT(A) BOTH HAVE TOTALLY IGNORED THI S FACT. HENCE THE ORDER OF THE CIT(A) IS SET ASIDE. 9. IN RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH JULY, 2017. (S. V. MEHROTRA) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICI AL MEMBER DATED: 14/07/2017 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT 8 ITA NO. 5650/DEL/2014 ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 08/06/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 08/06/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 14.07.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 14.07.2017 PS 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.