ACIT, CHENNAI V. M/s. Best & Crompton Engg. Limited, CHENNAI

ITA 599/CHNY/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68726 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 22-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO. 599/MDS/2012 ASST. YEAR : 2007-08 THE ASST. COMMISSIONER OF INCOME TAX. COMPANY CIRCLE I(3), CHENNAI. (APPELLANT ) V. M/S. BEST & CROMPTON ENGG. LTD, 28/C, INDUSTRIAL ESTATE (NORTH), AMBATTUR, CHENNAI 600 098. PAN : AADCB3450D. (RESPONDENT) DEPARTMENT BY SHRI N. MADHAVA N , JCIT ASSESSEE BY : NONE DATE OF HEARING : 19 SEP 2013 DATE OF PRONOUNCEMENT : 23 SEP 2013 O R D E R PER S.S. GODARA, J.M : THIS APPEAL FILED BY THE REVENUE FOR ASSESSMENT YE AR 2007-08, IS DIRECTED AGAINST THE ORDER OF THE COMMI SSIONER OF INCOME TAX (APPEALS)-III, CHENNAI DATED 26.12.2011, PASSED IN ITA NO.599/MDS/2012. 2 APPEAL NO.617/09-10/A.III, IN PROCEEDINGS UNDER SEC .143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2. IN THE COURSE OF HEARING, THE REVENUE VEHEMENTL Y ARGUES THAT THE COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN RESTRICTING THE DISALLOWANCE IN QUESTION U /S.14A OF ` .16,42,000/- TO ` .2,39,000/-, MADE BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER DATED 18.12.2009. AS PER THE REVENUE, THE ASSESSING OFFICER HAD RIGHTLY MADE THE IMPUGNED ADDITION IN THE FACTS AND CIRCUMSTANCES OF THE CASE WHICH HAS B EEN WRONGLY INTERFERED WITH BY THE COMMISSIONER OF INCOME TAX ( APPEALS). IN THIS MANNER, THE RESTORATION OF THE DISALLOWANCE /ADDITION IN QUESTION HAS BEEN PRAYED FOR. 3. WE NOTICE FROM THE CASE FILE THAT AN ADJOURNMEN T PETITION DATED 17.9.2013 HAS BEEN FILED AT THE BEHE ST OF THE ASSESSEE PRAYING FOR POSTPONEMENT OF HEARING STATIN G IS THAT THE AUTHORIZED REPRESENTATIVE IS UNWELL AND ON BED REST . A PERUSAL OF THE CASE FILE REVEALS THAT FOR NON-APPEARANCE OF THE ASSESSEE, THE CASE HAD BEEN ADJOURNED ON 14.5.2012. FURTHER, ON ITA NO.599/MDS/2012. 3 03.12.2012, 15.4.2013 AND 12.7.2013 ALSO, THE CASE HAD BEEN ADJOURNED AT THE REQUEST OF THE A.R. IN THESE CIRC UMSTANCES, WE REJECT THE ADJOURNMENT PETITION AND PROCEED EX-PART E AGAINST THE ASSESSEE. 4. THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKET ING OF ELECTRICAL AND MECHANICAL ENGINEERING GOODS AS WELL AS ELECTRICAL CONTRACTING AND CONSTRUCTION ENGINEERS. ON 29.10.2 007, IT HAD FILED ITS RETURN DISCLOSING INCOME OF ` .5,68,49,631/- WHICH WAS SUMMARILY PROCESSED. IN THE COURSE OF SCRUTINY , INTER ALIA, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD INVES TED IN TAX FREE INCOME DIVERTING TERRITORY OF ` .23,83,27,000/- WITHOUT RECEIVING ANY DIVIDEND INCOME IN THE IMPUGNED ASSES SMENT YEAR. HE PLACED RELIANCE ON THE ORDER OF SPECIAL BENCH DE LHI ITAT IN THE CASE OF CHEMINVEST LTD. V. ITO IN ITA NO.87/DEL /2008 DATED 05.08.2009 AND HELD THAT IRRESPECTIVE OF THE FACT T HAT NO INCOME HAD BEEN EARNED, SEC.14A OF THE ACT WOULD APPLY. P ROCEEDING ITA NO.599/MDS/2012. 4 ON THIS REASONING, HE INVOKED RULE 8D OF INCOME-TAX RULES AND MADE DISALLOWANCE/ADDITION OF ` .16,42,000/-. 5. IN ASSESSEES APPEAL, COMMISSIONER OF INCOME TA X (APPEALS) HAS RESTRICTED THE DISALLOWANCE TO ` .2,39,000/- AFTER OBSERVING AS FOLLOWS :- 9.1 THE ID. AR SUBMITTED THAT THE COMPANY HAD NOT EARNED ANY EXEMPT INCOME DURING THE YEAR. HENCE APPLYING R ULE 8D, WHEN THE SAID RULE IS EFFECTIVE FROM A.Y. 2008-09, IS NOT JUSTIFIED AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. REPORTED IN 328 ITR 81. HE FURTHER SUBMITTED AS UNDER: 1. THE APPELLANT SUBMITS THAT THE LEARNED ASSISTANT COMMISSIONER ERRED IN DISALLOWING A SUM OF RS.16,42,000/- U/S 14A WHEN THE APPELLANT COMPANY HAD NOT EARNED ANY EXEMPT INCOME DURING THE YEAR APPLYING RULE 80, WHEN THE SAID RULE IS EFFECTIVE FROM ASSESSMENT YEAR 2008-09. AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (ITA NO. 626 OF 2010 DTD. 12.08.2010), RULE 8D OF THE INCOME TAX RULES 1962 IS APPLICABLE ONLY PROSPECTIVELY I.E. FROM A. Y. 2008-09. FURTHER THE APPELLANT DID NOT MAKE ANY NEW INVESTMENTS DURING THE ASSESSMENT YEAR AND NO DIVIDEND INCOME ALSO HAS BEEN RECEIVED DURING THE ASSESSMENT YEAR. RELEVANT EXTRACTS FROM THE ANNUAL AUDITED ACCOUNTS IS ENCLOSED FOR REFERENCE. THE DECISION OF ACIT V. PUNJAB STATE COOP & MKTG (CHANDIGARH)(TRIB)(WWW.ITATONLINE.ORG) IS ALSO APPLICABLE TO THE APPELLANT'S CASE. ITA NO.599/MDS/2012. 5 IN AY 2007-08, THE ASSESSEE RECEIVED DIVIDEND OF IN RESPECT OF INVESTMENT IN SHARES MADE IN EARLIER YEARS. NO INVESTMENTS WERE MADE DURING THE YEAR. IT WAS CLAIMED THAT THE INVESTMENT IN THE EARLIER YEARS WAS MADE OUT OF RESERVES & SURPLUS AND THAT THERE WAS NO EXPENDITURE INCURRED DURING THE YEAR TO EARN THE DIVIDEND. THE AO HELD THAT AS IN THE EARLIER YEARS, THE ASSESSEE HAD BORROWED FUNDS, S. 14A APPLIED. IT WAS HELD THAT IF THERE IS NO NEXUS BETWEEN BORROWED FUNDS AND INVESTMENTS MADE IN PURCHASE OF SHARES, DISALLOWANCE U/S 14A IS NOT WARRANTED. IN THE CASE SIVA INDUSTRIES & HOLDINGS LTD V ASST CIT ( 2011) 59 DTR 182(CHENNAI) (TRIB), IT HAS BEEN HELD THAT FOR THE APPLICABILITY OF SECT ION 14A THERE MUST BE : 1. INCOME WHICH IS TAXABLE UNDER THE ACT, FOR THE RELEVANT ASSESSMENT YEAR. 2. THERE SHOULD ALSO BE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT DURING RELEVANT ASSESSMENT YEAR. IF EITHER ONE IS ABSENT, THEN SECTION 14A HAS NO APPLICABILITY.(A.Y. 2006-07).SIVA INDUSTRIES & HOLDINGS LTD V ASST CIT (2011) 59 DTR 182(CHENNAI) (TRIB). HENCE IT IS SUBMITTED THAT SECTION 14A READ WITH RULE 8 CANNOT BE APPLIED RETROSPECTIVELY AND NO DISALLOWANCE IS CALLED FOR IN THE APPELLANT' CASE.' 9.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSION OF THE LD. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND AR. THE HON'BLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD (SUPRA) HAS CLEARLY HELD THAT RULE 80 IS APPLICABLE ONLY FROM ITA NO.599/MDS/2012. 6 AY. 2008-09 ONWARDS. SINCE THE PRESENT AY. IS 2007- 08, PROVISIONS OF RULE 8D CANNOT BE APPLIED. HOWEVER, I T FURTHER HELD THAT FOR THE PERIOD PRIOR TO AY. 2008-09, DISA LLOWANCE UNDER 14A(1) COULD BE MADE ON A REASONABLE BASIS. I T IS SEEN FROM THE COMPUTATION OF DISALLOWANCE BY THE AO THAT HE HAD NOT ATTRIBUTED ANY DIRECT EXPENDITURE TOWARDS THE E XEMPT INCOME. THE ASSESSEE HAS ALSO NOT RECEIVED ANY DIVI DEND INCOME DURING THE YEAR. HOWEVER, IT HAS INVESTED SU BSTANTIAL AMOUNT IN ITS SUBSIDIARIES. IT IS FURTHER SEEN THAT THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUN T NOT DIRECTLY RELATED TO EXEMPT INCOME WAS RS.25.93 LAKH S. THE PROPORTIONATE INTEREST OF RS.2,39,000/- AS COMPUTED BY THE AO WOULD BE REASONABLE AMOUNT OF DISALLOWANCE U/S 14A. ACCORDINGLY, THE AO IS DIRECTED TO RESTRICT THE DIS ALLOWANCE U/S 14A TO RS.2,39,000/-. THE GROUND IS PARTLY ALLOWED. THEREFORE, THE REVENUE IS IN APPEAL. 6. WE HAVE HEARD THE ARGUMENTS OF THE REVENUE AND PERUSED THE RELEVANT FINDINGS IN THE ASSESSMENT ORD ER AS WELL THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). ADMITTEDLY, NO INCOME HAS BEEN EARNED IN THE IMPUGNED ASSESSMEN T YEAR. FURTHER, THE IMPUGNED ASSESSMENT YEAR IS 2007-08 AN D RULE 8D OF I.T. RULES WHICH HAD BEEN NOTIFIED WITH EFFECT F ROM 24.3.2008 HAS BEEN HELD TO BE PROSPECTIVELY APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008-09. IN SUPPORT WE RELY ON TH E CASE LAW OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA). IN THESE ITA NO.599/MDS/2012. 7 CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF IN COME TAX (APPEALS) HAS REJECTED THE APPLICABILITY OF RULE 8D AND PROCEEDED TO COMPUTE THE DISALLOWANCE BY FOLLOWING REASONABL E METHOD. BEFORE US, THE REVENUE HAS FAILED TO POINT OUT AS T O HOW THE SAID CRITERIA HAS BEEN WRONGLY APPLIED BY THE COMMISSION ER OF INCOME TAX (APPEALS). THEREFORE, WE UPHOLD THE FIN DINGS UNDER CHALLENGE AND REJECT THE CONTENTIONS OF THE REVENUE . 7. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED ON MONDAY, THE 23 RD DAY OF SEPTEMBER 2013. SD/- SD/- ( N.S. SAINI ) ( S.S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED : 23 RD SEPTEMBER 2013 JLS. COPY TO:- APPELLANT/RESPONDENT/CIT(A)/CIT/DR/G.FILE