DCIT CIR 13(2)(2), MUMBAI V. NENSHI L. SHAH, MUMBAI

ITA 5776/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8534 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 26-09-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Keywords: Business income; Salary income; Earning of tax free income
• Section: 142(1); 14A

Judgement Text

1 ITA NO.5776 /MUM/2016 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.5776/MUM/2016 (ASSESSMENT YEAR: 2012-13) DCIT, CIRE.13(2)(2), MUMBAI VS SHRI NENSHI L SHAH 202, ASHA NIKETAN, BAPTISTA ROAD VILE PARLE (W), MUMBAI 400 056 PAN : AAHPS7789M APPELLANT RESPONDEDNT APPELLANT BY SHRI M.C. OMI NINGSHEN RESPONDENT BY NONE DATE OF HEARING 02-11 -2017 DATE OF PRONOUNCEMENT 08-11-2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-21, MUMBAI DATED 18-07-2016 AND IT PERTAINS TO AY 2012- 13. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN RESTRICTING THE DISAL LOWANCE U/S.14A R.W.RULE 8D FROM RS.38,01,190/- TO RS.3,36,322/-, I N SPITE OF THE FACTS THAT DISALLOWANCE UNDER RULE 8D(2)(II) HAS BE EN RIGHTLY MADE BY THE AO AS WELL AS BY THE ASSESSEE THOUGH THERE I S DIFFERENCE IN QUANTUM BUT NOT IN PRINCIPLE. 2 ITA NO.5776 /MUM/2016 2. WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN RESTRICTING THE DISAL LOWANCE U/S.14A R.W.RULE 8D FROM RS.38,01,190/- TO RS.3,36,322/-, I N SPITE OF THE FACTS THAT THE ASSESSEE FAILED TO PROVE NEXUS BETWE EN THE INVESTMENTS IN SHARES AND ITS SOURCE BEING INTEREST FREE FUNDS. 3. THE APPELLANT PRAYS THAT THE ORDERS OF THE CIT (A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER BE RESTORED. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S AN INDIVIDUAL, FILED HIS RETURN OF INCOME FOR THE AY 2012-13 ON 31-10-2012 D ECLARING TOTAL INCOME OF RS.97,59,530. THE CASE WAS SELECTED FOR SCRUTINY A ND NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTI CES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE ATTENDED FROM TIME T O TIME AND FILED THE DETAILS, AS CALLED FOR. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS HUGE INVESTMENTS IN SHARES AN D ALSO CLAIMED INTEREST EXPENDITURE OF RS.1,26,43,992 IN THE P&L ACCOUNT. THEREFORE, CALLED UPON THE ASSESSEE TO JUSTIFY WHY DISALLOWANCE U/S 14A R.W.R. 8D SHOULD NOT BE MADE. IN RESPONSE, THE ASSESSEE, AS PER ORDER SHEET NOTING D ATED 02-03-2015 SUBMITTED THAT IN THE COMPUTATION OF INCOME, HE HAS DISALLOWE D INTEREST OF RS.13,17,286. HOWEVER, STATED THAT THERE IS A CALCULATION MISTAKE AND THE CORRECT DISALLOWANCE TO BE MADE U/S 14A R.W.R 8D IS RS.24,8 3,903. THE AO, CONSIDERING THE EXPLANATION OF THE ASSESSEE OBSERVED HAT THOUGH THE ASSESSEE CLAIMS TO HAVE INVESTMENT IN SHARES OUT OF ITS OWN FUNDS, FAI LED TO PROVE ONE TO ONE NEXUS BETWEEN INVESTMENT AND ITS OWN FUNDS. IT IS ALSO AN ADMITTED FACT THAT 3 ITA NO.5776 /MUM/2016 THE ASSESSEE HAS PAID HUGE INTEREST. IN THE ABSENC E OF ANY CO-RELATION BETWEEN INVESTMENT AND OWN FUNDS AND ALSO THE FACT THAT THE RE IS NO REQUIREMENT OF EARNING EXEMPT INCOME FOR DISALLOWING EXPENDITURE I NCURRED IN RELATION TO THE EXEMPT INCOME, INVOKED RULE 8D AND WORKED OUT DISAL LOWANCE OF RS.38,01,190. IN THE PROCESS, THE AO HAS TAKEN SUPPORT FROM THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD 234 CTR 1 AND ITAT, DELHI SPECIAL BENCH IN THE CASE OF CHEMIVEST LTD VS ITO 317 ITR 86 (DEL)(SB). AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREFERR ED APPEAL BEFORE CIT(A). 3. BEFORE THE CIT(A), THE ASSESSEE HAS TAKEN A PLEA TH AT ITS INVESTMENTS ARE MAINLY IN THE GROUP COMPANIES, WHICH ARE MADE WITH THE INTENTION OF EXERCISING CONTROL AND NOT WITH THE INTENTION OF EARNING EXEMP T INCOME. THE ASSESSEE FURTHER SUBMITTED THAT DURING THE FINANCIAL YEAR RE LEVANT TO AY 2012-13, IT HAS EARNED DIVIDEND INCOME OF RS.5,000 FROM SHARES. TH OUGH IT HAS PAID INTEREST ON BORROWINGS OF RS.1,26,43,992, HE HAD EARNED INTE REST INCOME OF RS.1,29,66,295 AND ALSO SUO MOTO DISALLOWED INTERES T EXPENDITURE OF RS.13,17,286 THEREBY OFFERED NET INTEREST OF RS.15, 28,223 FOR TAXATION. THE ASSESSEE FURTHER SUBMITTED THAT SINCE INVESTMENTS A RE STRATEGIC INVESTMENTS TO HAVE CONTROL OVER GROUP COMPANIES, NO DISALLOWANCE U/S 14A CAN BE MADE FOR EXPENDITURE INCURRED IN RELATION TO INTEREST INCOME . THE CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE DE LETED ADDITION MADE BY THE 4 ITA NO.5776 /MUM/2016 AO TOWARDS DISALLOWANCE OF INTEREST U/R 8D(2)(II); HOWEVER, CONFIRMED ADDITION MADE BY THE AO TOWARDS EXPENDITURE @0.5% O N AVERAGE VALUE OF INVESTMENTS U/R 8D(2)(III). THE RELEVANT PORTION O F ORDER OF CIT(A) IS EXTRACTED BELOW:_ 6. I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT, CAREFULLY. IT IS SEEN THAT THE APPELLANT HAS SHOWN INCOME UNDE R THE HEAD SALARY INCOME OF RS.23,75,400/-, INCOME FROM HOUSE PROPERTY OF RS.6,26,290/-, BUSINESS INCOME OF RS.12 4727/-, CAPITAL GAINS OF RS.53,43,617/- AND INCOME FROM OTHER SOURC E OF RS.15,28,223/-. BROUGHT FORWARD BUSINESS LOSS OF RS . 124727/- WAS SET OFF AGAINST .THE BUSINESS INCOME. AFTER CLAIMIN G DEDUCTION UNDER CHAPTER VIA OF RS.1,15,000/-, TOTAL TAXABLE INCOME OF RS.97,58,530/- HAS BEEN SHOWN. SHARE OF INCOME FROM LAXMI PLY AGENCY COMPRISING OF LOSS OF RS.18,626/- IS CLAIMED EXEMPT, AND INTEREST ON CAPITAL OF RS.124727/HAS BEEN SHOWN AS BUSINESS INCOME. THE INTEREST EXPENSES HAVE BEEN CLAIMED AGAINST' TH E INCOME FROM OTHER SOURCES. THE ASSESSEE HAS CLAIMED PPF INTERES T OF RS. 10407/- AND DIVIDEND INCOME OF RS. 5000/- AS EXEMPT INCOME. THE DIVIDEND FROM COOP BANKS AT RS 18825/- HAS BEEN OFFERED TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. THERE IS NO MENTION OF ANY DISALLOWANCE U/S 14A. 7. IT IS SEEN THAT THIS IS NOT A CASE WHERE THERE IS N O EXEMPT INCOME. HOWEVER, FROM DETAILS FILED, IT IS SEEN THAT THE IN VESTMENTS IN SHARES HAVE BEEN MADE IN EARLIER YEARS AND NOT IN CURRENT YEAR. FURTHER THERE IS INTEREST INCOME AS WELL AS INTEREST EXPENSES AND NET INTEREST INCOME IS OFFERED TO TAX. THUS, THE ALLOCATION OF INTEREST IN RULE 81)(2)(II) IS NOT WARRANTED IN THIS CASE. THERE IS NOTHING TO INDICAT E THAT THE INVESTMENTS ARE STRATEGIC. THE APPELLANT IS NOT REFLECTING THE INVESTMENTS AS BUSINESS ASSETS WHICH WILL GIVE RISE TO BUSINESS INCOME ON ITS SALES AND NOT LONG T ERM CAPITAL GAINS EXEMPT FROM TAX. IF THESE WERE STRATEGIC INVESTMENT S, THE APPELLANT SHOULD BE WILLING TO ACCEPT THESE AS CURRENT INVEST MENTS AS BUSINESS ASSETS. THE DISALLOWANCE IS THEREFORE REST RICTED TO RS 3,36,322/- AS PER RULE 8D(2) (III). 5 ITA NO.5776 /MUM/2016 4. THE LD.DR SUBMITTED THAT THE LD.CIT(A) WAS ERRED IN DELETING DISALLOWANCES WORKED OUT BY THE AO TOWARDS INTEREST U/R 8D(2) IGNORING THE FACT THAT THE AR OF THE ASSESSEE HIMSELF HAS ADMITT ED BEFORE THE AO THAT THERE IS A CALCULATION ERROR IN INTEREST DISALLOWED BY TH E ASSESSEE IN ITS STATEMENT OF INCOME. THE LD.DR FURTHER SUBMITTED THAT THE ASSES SEE HAS DISALLOWED INTEREST OF RS.13,17,286 WHEREAS STATED BEFORE THE AO THAT A CTUAL DISALLOWANCE TO BE WORKED OUT U/S 14A R.W.R. 8D WAS RSW.24,83,904. TH E CIT(A) IGNORING THE CONFESSION OF THE AR OF THE ASSESSEE BEFORE THE AO, DELETED ADDITIONS MADE BY THE AO, THEREFORE, REQUESTED TO RESTRICT THE DISALL OWANCE WORKED OUT BY THE AO TO THE EXTENT OF ADMISSION MADE BY THE AR OF THE ASSESSEE OF RS.23,83,904. 5. NONE APPEARED FOR THE ASSESSEE. WE HAVE HEARD THE LD.DR, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE O RDERS OF AUTHORITIES BELOW. THE AO DISALLOWED INTEREST EXPENDITURE AND GENERAL ADMI NISTRATIVE AND OTHER EXPENSES BY INVOKING RULE 8D(2)(II) AND (III) OF IT RULES, 1962 . ACCORDING TO THE AO, THE ASSESSEE HAS FAILED TO ESTABLISH NEXUS BETWEEN OWN FUNDS & I NVESTMENTS IN SHARES. THE AO FURTHER OBSERVED THAT THERE IS NO NECESSITY OF EARN ING ANY EXEMPT INCOME DURING THE RELEVANT YEAR. IF THE INVESTMENT IS CAPABLE OF EAR NING EXEMPT INCOME, DISALLOWANCES PROVIDED U/S 14A SHALL BE WORKED OUT AS PER THE FOR MULA PROVIDED U/R 8D(2). THE ASSESSEE CLAIMED BEFORE THE LOWER AUTHORITIES THAT ITS INVESTMENTS ARE STRATEGIC INVESTMENTS IN GROUP COMPANIES TO HAVE CONTROL OVER THE GROUP COMPANIES BUT NOT 6 ITA NO.5776 /MUM/2016 INVESTMENTS TO EARN EXEMPT INCOME. THE ASSESSEE FU RTHER CONTENDED THAT IT HAD SUO MOTO DISALLOWED INTEREST EXPENDITURE OF RS.13,17,28 6. THEREFORE, THERE CANNOT BE ANY FURTHER DISALLOWANCE BY INVOKING RULE 8D. 6. HAVING HEARD THE LD.DR, WE FIND THAT THE ASSESSEE H AS PAID INTEREST OF RS.1,26,43,992. AT THE SAME TIME, THE ASSESSEE HAS EARNED INTEREST INCOME OF RS.1,29,66,95. WE FURTHER NOTICE THAT THE ASSESSEE HAS DISALLOWED RS.13,17,286 IN COMPUTATION OF TOTAL INCOME. THUS, IN TOTAL ASSESS EE HAS OFFERED TO TAX NET INTEREST INCOME OF RS.15,28,223. THEREFORE, WE ARE OF THE V IEW THAT ONCE FACTS ON RECORD CLEARLY INDICATES THAT THE INTEREST EXPENDITURE INC URRED BY THE ASSESSEE IS LESS THAN THE INTEREST INCOME EARNED IN THE RELEVANT FINANCIAL YE AR, THE AO WAS INCORRECT IN COMING TO THE CONCLUSION THAT INTEREST EXPENDITURE INCURRE D BY THE ASSESSEE IS TOWARDS INVESTMENT IN SHARES. HENCE, WE ARE OF THE VIEW TH AT THE AO WAS ERRED IN DISALLOWING INTEREST BY INVOKING RULE 8D(2)(II); HOWEVER, THE F ACTS REMAIN THAT THOUGH THE ASSESSEE HAS SUO MOTO DISALLOWED INTEREST OF RS.13, 17,286, THE AR OF THE ASSESSEE HAS AGREED BEFORE THE AO THAT ACTUAL DISALLOWANCE TO BE MADE U/S 14A R.W.R. 8D(2) IS AT RS.24,83,904. THIS FACT HAS BEEN IGNORED BY THE LD .CIT(A) WHILE DELETING ADDITION MADE BY THE AO TOWARDS INTEREST DISALLOWANCE U/S 14 A R.W.R.8D(2). THEREFORE, WE ARE OF THE VIEW THAT THE ISSUE NEEDS TO BE RE-EXAMINED BY THE AO IN THE LIGHT OF THE FACT THAT THE AR OF THE ASSESSEE HAS ADMITTED FOR DISALL OWANCE OF RS.24,83,904 TOWARDS INTEREST, HENCE, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO AND DIRECT HIM TO CONSIDER 7 ITA NO.5776 /MUM/2016 THE ISSUE AFTER AFFORDING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS ALLOW ED, FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 08 TH NOVEMBER, 2017. SD/- SD/- (SAKTIJIT DEY) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 08 TH NOVEMBER, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI