DCIT CIR 3(3), MUMBAI V. RELIANCE POLYOLEFINS (P) LTD, MUMBAI

ITA 594/MUM/2009

• Counselvise Citation: 59419914 RSA 2009
• Duration Of Justice: 3 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 11-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 29-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Assessee Lawyers: ARVIND V SONDE
• Keywords: Earning of tax free income
• Section: 10; 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, D, MUMBAI BEFORE SHRI DINESH KUMAR AGARWAL (JM) AND SHRI RAJE NDRA(AM) ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) DY. COMMISSIONER OF INCOME TAX. CIRCLE 3(3), ROOM NO.609, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 M/S RELIANCE POLYOLEFINS (P) LTD., 3 RD FLOOR, MAKER CHAMBERS-IV, 222, NARIMAN POINT, MUMBAI-400021. PAN: AAACR1881M APPELLANT V/S RESPONDENT DATE OF HEARING : 11.4.2012 DATE OF PRONOUNCEMENT : 27.4.2012 APPELLANT BY : SHRI C.G.K.NAIR RESPONDENT BY : SHRI ARVIND.V.SONDE O R D E R PER DINESH KUMAR AGARWAL (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 19.11.2008 PASSED BY THE LD. CIT( A) FOR THE ASSESSMENT YEAR 2006-07. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT IN SECURITIES. THE ASSESSMENT WAS COMPLETED AT AN INCOME OF RS.54,08,280/- VIDE ORDER DATED 25.4.2008 PASSED U/ S 143(3) ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 2 OF THE INCOME TAX ACT, 1961 (THE ACT). ON APPEAL, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 4. GROUND NO.1 TAKEN BY THE REVENUE READS AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN TREATING THE L ONG TERM CAPITAL GAIN AS EXEMPT AND DIRECTED THE AO NOT TO S ET OFF THE SAME AGAINST EXEMPT INCOME. 5. BRIEF FACTS OF THE ABOVE ISSUE ARE THAT THE ASSE SSEE HAS EARNED LONG TERM CAPITAL GAINS OF RS.10,87,30,91, 921/- WHICH ARE EXEMPT U/S 10(38) OF THE ACT. AT THE SAME TIME ASSESSEE HAS INCURRED LONG CAPITAL LOSS OF RS.12,42,55,833/- WHICH WAS CLAIMED TO BE CARRIED FORWARD FOR SETTING OFF IN SU BSEQUENT YEARS. ACCORDING TO AO, THE LONG TERM CAPITAL GAIN AND THE LONG TERM CAPITAL LOSS ARE REQUIRED TO BE SET OFF AGAINS T EACH OTHER IN ACCORDANCE WITH SECTION 70(3) OF THE ACT. ACCORDIN G TO HIM THIS SECTION HAS MADE SET OFF MANDATORY. CONSEQUENTLY, H E HAS NOT ALLOWED CARRY FORWARD OF THE LOSS. ON APPEAL, THE LD. CIT(A), HOWEVER, ALLOWED THE CLAIM OF THE ASSESSEE. 6. AT THE TIME OF HEARING, THE LD. DR SUPPORTS THE ORDER OF THE AO. ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 3 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE SUBMITS THAT THIS ISSUE IS COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE CASE OF (A) DC IT V/S M/S RELIANCE CHEMICALS P.LTD. IN ITA NO.2198/MUM/2009 ( AY:2006- 07) ORDER DATED 30.4.2010 AND (B) DCIT V/S RELIANC E ENERGY & PROJECT DEVELOPMENT (P) LTD. IN ITA NO.2480/MUM/ 2009 AND DCIT V/S RELIANCE AROMATICS & PETROCHEMICALS P.LTD IN ITA NO.2565/MUM/2009 (AY:2006-07) ORDER DATED 23.3.2010 . HE HAS ALSO PLACED ON RECORD THE COPIES OF THE SAID ORDERS. 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. WE FIND THAT THE FACTS ARE NOT IN DISPUTE. WE FURTHER FIND THAT IN THE CASE RELIANCE ENERGY & PROJECT DEVELOPMENT (P) LT D (SUPRA), THE REVENUE HAS TAKEN FOLLOWING GROUND OF APPEAL: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE LONG TERM CAPITAL LOSS OF RS.12,42,55,833/- NOT SET OFF AGAINST THE LONG TERM CAPITAL GAINS OF THE ASSESSEE. HE HAS FURTHER ERRED IN ALLOWING THIS LONG TERM CAPITAL LO SS TO BE CARRIED FORWARD. THE TRIBUNAL VIDE PARAGRAPH 9 OF ITS ORDER DATED 23.3.2010 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AS UNDER: 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 4 TRIBUNAL IN THE CASE OF G.K. RAMAMURTHY (SUPRA) BY WHICH SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF T HE ASSESSEE. WHILE DECIDING THE ISSUE, THE PROVISIONS OF SEC. 10(38) ALONG WITH THE PROVISIONS OF SEC. 70(3) HAVE BEEN TAKEN INTO CONSIDERATION. THE DECISION IN THE CASE OF RAMJI RAIS (SUPRA) WAS FOUND IN FAVOUR OF THE ASSES SEES AS ON SIMILAR FACTS THE ISSUE HAS BEEN DECIDED IN F AVOUR OF THE ASSESSEE. THE TRIBUNAL IN LAST BUT ONE OPERATIV E PARA OF ITS DECISION HAS OBSERVED THAT IF WE ACCEPT THE CONTENTION OF THE REVENUE TO ADJUST LONG TERM CAPIT AL LOSS AGAINST EXEMPT INCOME (LONG TERM CAPITAL GAIN) THAT WILL BE CONTRARY TO LAW AND CONTRARY TO THE INTENTION, O BJECT AND PURPOSE OF THE LEGISLATURE IN INTRODUCING CLAUS E (38) TO SECTION 10 OF THE ACT. FURTHER, ON ACCEPTANCE OF REVENUES VIEW ON THE ISSUE, THERE IS ABSURD OUTCOM E OF INTERPRETATION IF THE FACTS ARE REVERSED, THEN, LON G TERM CAPITAL LOSS FROM TAXABLE ASSETS WILL HAVE TO BE AD JUSTED AGAINST THE LONG TERM CAPITAL GAINS EXEMPT U/S.10(3 8) OF THE ACT. ACCORDINGLY, THE ISSUE WAS DECIDED IN FAV OUR OF THE ASSESSEE. THE FACTS ARE IDENTICAL IN THE INSTAN T CASES AS IN THESE CASES ALSO THE AO HAS ADJUSTED LONG TER M CAPITAL LOSS AGAINST LONG TERM CAPITAL GAIN EXEMPT U/S.10(38) OF THE ACT. THE CIT(A) HAS ALLOWED THE C LAIM OF THE ASSESSEES FOLLOWING HIS OWN DECISION IN THE CASE OF RELIANCE POLYOLEFINS P.LTD. (SUPRA) WHEREIN SIMILAR ISSUE WAS DECIDED BY HIM IN FAVOUR OF THE ASSESSEE. THE DECISION OF THE HONBLE OF THE HONBLE ALLAHABAD HI GH COURT IN THE CASE OF RAMJILAL RAIS (SUPRA) IS ALSO SQUARELY APPLICABLE BY WHICH SIMILAR ISSUE WAS DECIDED IN FA VOUR OF THE ASSESSEE. IN VIEW OF THESE FACTS AND CIRCUMSTAN CES AND IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF G.K. RAMAMURTHY (SUPRA), WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE LONG-TERM CAPITAL LOS S CANNOT BE ADJUSTED AGAINST THE LONG-TERM CAPITAL GAINS EXE MPT U/S.10(38) OF THE ACT. THE ORDERS OF CIT(A) IN THE CASES OF BOTH THE ASSESSEES ARE CONFIRMED. 9. THE TRIBUNAL IN THE CASE OF RELIANCE CHEMICALS P . LTD. (SUPRA) HAS AGAIN DECIDED THE SIMILAR ISSUE IN FA VOUR OF THE ASSESSEE FOLLOWING THE DECISION IN THE CASE OF G. K . RAMAMURTHY V/S JCIT ((2010) 21 ITR 139 (TRIB) (MU M). ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 5 10. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BR OUGHT ON RECORD BY THE REVENUE, WE RESPECTFULLY FOLLOWING TH E CONSISTENT VIEW OF THE TRIBUNAL HOLD THAT THE LD.CIT(A) WAS FU LLY JUSTIFIED IN HOLDING THAT THE LONG TERM CAPITAL LOSS CANNOT BE ADJUSTED AGAINST THE LONG TERM CAPITAL GAIN EXEMPT U/S 10(38 ) OF THE ACT AND ACCORDINGLY, WE UPHOLD THE ORDER PASSED BY THE LD. CIT(A). THE GROUND TAKEN BY THE REVENUE IS, THER EFORE, REJECTED. 11. GROUND NOS.2 AND 3 TAKEN BY THE REVENUE READ AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN NOT RESTRICTIN G THE DISALLOWANCE OF INTEREST INCOME OF RS.65,96,193/- A ND ADMINISTRATIVE EXPENSES OF RS.8,959/- AS PER RULE 8D. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 12. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT THE AO OBSERVED THAT THE ASSESSEE COMPANY HAS CLAIMED DIVI DEND INCOME OF RS.14,31,81,817/- AS EXEMPT U/S 10(34) O F THE ACT AND LONG TERM CAPITAL GAINS OF RS.10,87,30,91,921 /- AS EXEMPT U/S 10(38) OF THE ACT. HE FURTHER OBSERVE D THAT IN THE PROFIT AND LOSS ACCOUNT THE ASSESSEE COMPANY HAS D EBITED TOTAL EXPENDITURE OF RS.53,39,655/- OUT OF WHICH INTERES T PAID OF ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 6 RS.43,98,193/-. THE ASSESSEE WAS ASKED AS TO WHY INTEREST ON AMOUNT INVESTED IN THE ASSETS AND EXPENDITURE A TTRIBUTABLE TO OPENING TAX FREE INCOME SHOULD NOT BE DISALLOW ED AS PER THE PROVISIONS OF SECTION 14A OF THE ACT. THE ASSE SSEE HAS FILED DETAILS OF INTEREST PAYMENT AND RECEIPT BUT HAS N OT GIVEN ANY SUBMISSIONS FOR THE SHOW CAUSE FOR DISALLOWANCE U/ S 14A OF THE ACT. THE AO WHILE OBSERVING THAT THE ASSESSEE COMP ANY HAS UTILIZED ITS INTEREST BEARING FUNDS FOR INVESTMENT S INTO THE SHARES ON WHICH IT HAS EARNED DIVIDEND INCOME AND CLAIMED AS EXEMPT, WORKED OUT THE DISALLOWANCE OF INTEREST RS.65,96,193/- BEING ATTRIBUTABLE TO EARNING OF EX EMPTED INCOME. HE ALSO MADE DISALLOWANCE OF ADMINISTRATIV E EXPENSES ON PROPORTIONATE BASIS AT RS.8,959/- AND ACCORDINGL Y MADE A TOTAL DISALLOWANCE OF RS.66,05,152/- U/S 14A OF T HE ACT. ON APPEAL, THE LD. CIT(A) WHILE DELETING THE DISALLOWA NCE OF INTEREST RS.65,96,193/- UPHELD THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES RS.8,959/-. 13. AT THE TIME OF HEARING, THE LD. DR SUBMITS THAT IN VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD., V/S. DCIT (2010) 328 ITR 81 (BOM.), THE ISSUE MAY BE SET ASIDE TO THE FILE OF T HE AO. ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 7 14. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE WHILE RELYING ON THE ORDER OF THE LD. CIT(A) SUBMITS THA T SINCE NO BORROWED FUNDS HAS BEEN UTILIZED FOR INVESTMENTS I N SHARES, THEREFORE, THE DISALLOWANCE OF INTEREST MADE BY TH E AO WAS RIGHTLY DELETED BY THE LD. CIT(A) AND IN SUPPORT H E ALSO PLACED ON RECORD A COPY OF ASSESSEES EXPLANATION DATED 20.3.2008, 24.4.2008, DETAILS OF INTEREST PAID AND RECEIVED, D ETAILS OF DIVIDEND RECEIVED AND LONG TERM CAPITAL GAINS AND COPY OF BALANCE SHEET FOR THE YEAR ENDED 31.3.2006 APPEARIN G AT PAGES 6 TO 24 OF THE ASSESSEES PAPER BOOK. HE, TH EREFORE, SUBMITS THAT THE ORDER PASSED BY THE LD. CIT(A) BE UPHELD. 15. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECOR D. WE FIND THAT IN THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) THEIR LORDSHI PS WHILE HOLDING THAT THE PROVISIONS OF SECTION 14A AND RUL E 8D OF THE INCOME TAX RULES, 1962, SHALL APPLY W.E.F. THE ASS ESSMENT YEAR 2008-09, FURTHER HELD THAT THE AO IS DUTY BO UND 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 AO MUST ADOPT THE REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMST ANCES OF THE CASE. IN THE LIGHT OF RATIO OF THE ABOVE DECISION , WE FIND THAT ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 8 THE LD. CIT(A) AFTER EXAMINING THE MATTER OF THE DI SALLOWANCE OF INTEREST U/S 14A HAS HELD VIDE PARAGRAPH 6 OF HIS ORDER AS UNDER : 6. I HAVE PERUSED THE FACTS OF THE CASE AND I FIND THAT IT IS CORRECT THAT IN THE EARLIER YEARS, ALL THE BO RROWED FUNDS THAT APPELLANT HAD WERE NOT CARRYING ANY INTE REST LIABILITY UPON APPELLANT. THAT IS WHY IN THE EARLI ER YEARS, NO INTEREST HAS BEEN PAID BY APPELLANT. THE ASSET S IN THE FORM OF INVESTMENTS WHICH HAVE BEEN SOLD HAVE B EEN WITH APPELLANT SINCE THE EARLIER YEARS. INTERESTS PAYMENT CONSIDERED FOR DISALLOWANCE BY AO IS ON FUNDS WHICH WERE BORROWED DURING THE CURRENT YEAR AND THESE BORRO WED FUNDS HAVE ALSO NOT GONE INTO INVESTMENTS BUT WER E UTILISED ONLY TO BRIDGE THE GAP OF REQUIREMENT OF MARGIN MONEY. THEREFORE, THE INTEREST PAYMENT BY APPELLAN T IS NOT CONNECTED AT ALL WITH EITHER INVESTMENTS MADE OR DIVIDEND EARNED BY APPELLANT. THE INTEREST PAYMENT IS, THEREFORE, OUTSIDE THE SCOPE OF SECTION 14A. THE A DDITION MADE BY THE AO IN RESPECT OF INTEREST IS, THEREFOR E, DELETED. 16. THE LD. CIT(A) ON THE ISSUE OF EXPENDITURE OF ADMINISTRATIVE EXPENSES, HOWEVER, CONFIRMED THE AD DITION MADE BY THE AO. IN THE ABSENCE OF ANY CONTRARY MATERIAL PLACED ON RECORD BY THE REVENUE AGAINST THE FINDIN G OF THE LD. CIT(A) THAT NO BORROWED FUND WAS UTILISED BY THE AS SESSEE TO EARN DIVIDEND INCOME, WE ARE OF THE VIEW THAT THE AO WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF INTEREST I NCOME OF RS.65,96,193/- U/S 14A OF THE ACT. THE ORDER PASSE D BY THE LD. CIT(A) ON THIS ACCOUNT IS UPHELD. THE GROUND TA KEN BY THE REVENUE ARE, THEREFORE, REJECTED. ITA NO.594/MUM/2009 (ASSESSMENT YEAR:2006-07) 9 17. IN THE RESULT, THE REVENUES APPEAL STANDS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27TH APRIL , 2012. SD SD ( RAJENDRA ) ( DINESH KUMAR AGARWAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, 27TH APRIL, 2012 SRL: COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI