VITHAL V. KAMAT HUF, MUMBAI V. ACIT 12(3), MUMBAI

ITA 5865/MUM/2010

• Counselvise Citation: 586519914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 25-01-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 22-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRY
• Assessee Lawyers: R C JAIN
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA 5865/MUM/10(A.Y.2006-07) VITHAL V. KAMATH HUF, 70-C, NEHRU ROAD, VILE PARLE EAST, MUMBAI 400 099. PAN:AABHV 8882Q (APPELLANT) VS. THE ACIT, RANGE 12(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) APPELLANT BY : SHRI R.C.JAIN RESPONDENT BY : SHRI V.V.SHASTRY DATE OF HEARING : 25/01/2012 DATE OF PRONOUNCEMENT : 31 /01/2012 ORDER PER N.V.VASUDEVAN, J.M: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 21/4/2010 OF CIT(A) 23, MUMBAI RELATING TO ASSESSMENT YEAR 20 06-07. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. DISALLOWANCE OF EXPENSES U/S 57(III) OF I.T ACT : RS 1,20,378/- (A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE FOLLOWI NG EXPENDITURE UNDER SECTION 57 (III) OF THE INCOME TAX ACT: EXPENSES RUPEES AUDIT FEES 5,000 TRAVELING EXPENSES 89,566 BANK CHARGES 15,228 MISC. EXPENSES 10,584 TOTAL 1,20,378 ======= ITA 5865/MUM/2010(A.Y.2006-07) 2 (B) THE LD.CIT(A) ERRED IN FAILING TO APPRECIATE TH AT THESE EXPENSES WERE INCURRED BY THE APPELLANT ON ADMINISTRATION AND OTH ER EXPENSES, WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING T HE INCOME AND THERE WAS NEXUS BETWEEN THE ABOVE EXPENSES INCURRED BY TH E APPELLANT, AND EARNING OF THE INCOME AND AS SUCH ALLOWABLE UNDER S ECTION 57 (III) OF THE ACT. 2. THE ASSESSEE IS A FIRM. IT IS ENGAGED IN HOTEL BUSINESS AND INVESTMENTS IN SECURITIES. THE ASSESSEE FILED THE RETURN OF INCOME FOR A.Y 06- 07 DECLARING A LOSS OF RS. 86,50,464/-. THE ASSESS EE HAD CLAIMED EXPENSES TO THE EXTENT OF RS. 1,13,96,520/- AS PER THE FOLLO WING DETAILS: (I)BANK CHARGES 15,228 (II) INTEREST PAID 1,12,78, 142 (III) AUDIT FEE 5,000 (IV) TRAVELLING EXPENSES 89,566 (V) MISC. EXPENSES 10584 TOTAL 1,13, 96,620 THE AFORESAID EXPENSES WERE ADMITTEDLY CLAIMED WHIL E ARRIVING AT A LOSS UNDER THE HEAD INCOME FROM OTHER SOURCES. THEREFOR E, THE ALLOWABILITY OF THESE EXPENSES IN THE LIGHT OF THE PROVISIONS SECTI ON 57(III) OF THE INCOME TAX ACT1961(THE ACT) WAS EXAMINED BY THE AO, I.E. AS TO WHETHER THESE EXPENSES HAVE BEEN SAID TO HAVE BEEN INCURRED FOR THE PURPOS E OF EARNING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSE SSEE SUBMITTED BEFORE THE AO THE PARTICULARS OF THE INTEREST EXPENSES AND AS TO HOW THESE INTEREST EXPENSES WERE FULLY INCURRED FOR THE PURPOSE OF MAK ING INVESTMENT IN ITA 5865/MUM/2010(A.Y.2006-07) 3 DEBENTURES. THE FOLLOWING DETAILS WERE FURNISHED B Y THE ASSESSEE IN THIS REGARD. THE ASSESSEE POINTED OUT THAT IT WOULD BE EVIDENT F ROM THE ABOVE STATEMENT THAT THE ASSESSEE HAS INVESTED RS 4.27 CRORES, OUT OF TOTAL INTEREST BEARING FUNDS OF RS3.49 CRORES. THEREFORE, INTEREST BEARING FUNDS WERE FULLY UTILIZED FOR ACQUIRING INVESTMENTS WHICH EARNS INCOME. THERE FORE INTEREST EXPENSES ARE TO BE FULLY ALLOWED AS DEDUCTION AGAINST INTERE ST INCOME FROM DEBENTURES WHICH IS ASSESSED AS INCOME FROM OTHER SOURCES. T HE AO ACCEPTED ASSESSEES SUBMISSION AS REGARDS ALLOWABILITY OF INT EREST EXPENSE AS THE AMOUNT INVESTED IN DEBENTURE IS MORE THAN INTEREST BEARING LOANS. WITH REGARD TO THE EXPENDITURE OF BANK CHARGES RS. 15, 2281/- TRAVELLING EXPENSES RS. 89,561, MISC. EXPENSES - RS.10,5841- , AUDIT FEE RS. 5,000/- THE AO HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE NEXUS BETWEEN THE INCOME EARNED ARID THE EXPENDITURE INCURRED. AS CA N BE SEEN FROM THE ABOVE THE AO HAD DISALLOWED THE EXPENSES EXCEPT INTEREST EXPENSES ON THE GROUND THAT THESE EXPENSES CANNOT BE CONSIDERED AS EXPENSE S INCURRED IN EARNING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. TH E CIT(A) CONFIRMED THE ORDER OF THE AO GIVING RISE TO GROUND NO.1 BY THE ASSESSEE BEFORE THE TRIBUNAL. ITA 5865/MUM/2010(A.Y.2006-07) 4 3. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE HAVE PE RUSED THE PROFIT AND LOSS ACCOUNT AND WE FIND THAT THE ASSESSEE HAD EARN ED INTEREST ON DEBENTURES OF RS.51,21,000/-. IN THE CIRCUMSTANCES WE ARE OF THE VIEW THAT AUDIT FEES AND BANK CHARGES CAN BE REASONABLY CONSI DERED AS EXPENSES INCURRED IN EARNING INTEREST INCOME ON DEBENTURES. AS FAR AS TRAVELLING AND MISCELLANEOUS EXPENSES ARE CONCERNED THE SAME CANNO T BE SAID TO BE EXPENSES INCURRED TO EARN INCOME UNDER THE HEAD INC OME FROM OTHER SOURCES. GROUND NO.1 IS ALLOWED TO THE ABOVE EXTEN T. 4. GROUND NO.2 RAISED BY THE ASSESSEE READS A FOLLO WS: 2. DISALLOWANCE U/S 14A: RS 7,28,988/- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD.CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS 7,28,988/- U /S 14A OF THE ACT IN RELATION TO EXEMPT DIVIDEND INCOME OF RS 1,16,80 0/- EARNED BY THE APPELLANT, WHICH IS ERRONEOUS BOTH ON FACTS AND IN LAW. 5. THE ASSESSEE EARNED DIVIDEND INCOME OF RS.1,16,8 00/- WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE A O INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE INCOME TAX RULES , 1962(THE RULES) MADE A DISALLOWANCE OF RS. 7,28,988/- BEING EXPENDITURE IN CURRED IN EARNING THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND MADE AN ADDITION OF THE SAID SUM IN THE TOTAL INCOM E OF THE ASSESSEE. 6. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THERE WAS NO DIRECT EXPENSES INCURRED IN EARNING THE DIVIDEND INCOME AN D IN THIS REGARD POINTED OUT THAT EVEN THE AO HAS ACCEPTED THAT BORROWED FUN DS WERE USED IN MAKING INVESTMENT IN DEBENTURES. THUS THERE WAS NO INTEREST EXPENSES AS FAR AS MAKING INVESTMENT IN SHARES WERE CONCERNED A ND INTEREST FREE FUNDS WERE ONLY USED. THE ASSESSEE FURTHER SUBMITTED THA T THERE WERE NO OTHER ITA 5865/MUM/2010(A.Y.2006-07) 5 INDIRECT EXPENSES INCURRED TO EARN DIVIDEND INCOME. THE CIT(A) HOWEVER DID NOT ACCEPT THE STAND OF THE ASSESSEE FOLLOWING THE DECISION OF THE SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMEN T PVT. LTD. AND CONFIRMED THE ACTION OF THE AO, GIVING RISE TO GROU ND NO.2 BY THE ASSESSEE BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. CO UNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(A). LD. D.R RELIED ON THE ORDER OF THE CIT(A). 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE O F THE VIEW THAT IN THE LIGHT OF THE FINDINGS OF THE AO IN THE ORDER OF ASS ESSMENT THAT INTEREST BEARING FUNDS WERE USED TO MAKE INVESTMENT IN DEBEN TURES THERE CANNOT BE ANY DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF IN TEREST EXPENSES. THE DISALLOWANCE HAD TO BE MADE ONLY FOR INDIRECT EXPEN SES. IN DOING SO THE AO CANNOT APPLY RULE 8D. IT WAS ACCEPTED BY THE PARTI ES THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MA NUFACTURING COMPANY LTD., 328 ITR 81(BOM) HAS HELD THAT RULE 8D WAS AP PLICABLE ONLY FROM A.Y 2008-09 AND ANY DISALLOWANCE UNDER SECTION 14A OF THE ACT PRIOR TO THE SAID ASSESSMENT YEAR HAS TO BE MADE ON A REASONABLE BASI S AND NOT ON THE BASIS OF RULE 8D OF THE INCOME TAX RULES. WE, THEREFORE , SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND RESTORE THE ISSUE TO THE A O FOR FRESH CONSIDERATION IN THE LIGHT OF DIRECTIONS GIVEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LTD.(SUPRA) ON LY WITH REGARD TO INDIRECT EXPENSES INCURRED IN EARNING DIVIDEND INCO ME. 9. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A ) ON THIS ISSUE FOR THE PURPOSE OF MAKING REASONABLE DISALLOWANCE ONLY WIT H REGARD TO INDIRECT ITA 5865/MUM/2010(A.Y.2006-07) 6 EXPENSES IN THE LIGHT OF THE DECISION OF THE HONBL E BOMBAY HIGH COURT REFERRED TO ABOVE. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31 ST DAY OF JAN. 2012. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 31 ST JAN.2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.