The Income Tax Office, Ward-1, GANDHIDHAM V. M/s. Krishna Auto Centre, GANDHIDHAM

ITA 6/RJT/2013

• Counselvise Citation: 624914 RSA 2013
• Duration Of Justice: 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 23-04-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 07-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K SINGH DR TIS
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 2

Judgement Text

G, IN THE INCOME TAX APPELLATE TRIBU N AL; RAJKOT BENCH, RAJKOT. BEFORE SHRI D . K. TYAGI , JM AND SHRI A. M OHAN ALANKAMONY , AM IT A NO . 6 /RJT/ 2013 TI I / ASSESSMENT YEAR 200 8 - 09 ITO, WARD NO.1, GANDHIDHAM ( Y / APPELLANT) VS. M/S. KRISHNA AUTO CENTRE, PLOT NO.325, WARD - 12B, GANDHIDHAM PAN : AACFK 6512 B RY / RESPONDENT 0 S / REVENUE BY SHRI M K SINGH, DR TIS /ASSESSEE BY SHRI VIMAL DESAI, CA S / DATE OF HEARING 2 3 .04.2013 S / DATE OF PRONOUNCEMENT 26 .04.2013 / ORDER PER BENCH: - THIS A PPEAL OF THE REVENUE IS FILED AGAINST THE ORDER OF THE L D. CIT(A) - II , RAJKOT IN APPEAL NO.CIT(A) - II / RJT/69/10 - 11 DATED 12 .10.201 2 FOR THE ASSESSMENT YEAR 2008 - 09 PASSED U/S. 250 R.W.S 143(3) OF THE ACT. 2. THOUGH THE REVENUE HAS RAISED FOUR GROUNDS IN ITS APPEAL, GROUND NO. 4 IS GENERAL IN NATURE AND DO ES NOT SURVIVE FOR ADJUDICATION. THE OTHER THREE GROUNDS ARE EXTRACTED HEREIN BELOW F OR OUR CONSIDERATION: - (I) LD. CIT (A) HAS ERRED IN DELETING THE ADDITION U/S 14A MADE BY THE AO, DESPITE THE FACT THAT ALL THE FUNDS OF ASSESSEE EXCEPT SUNDRY CREDITORS WERE BORROWED FUNDS, THUS IT WAS NOT POSSIBLE FOR ASSESSEE TO MAKE INVESTMENT OUT O F INTEREST FREE FUNDS, THUS THERE WAS CLEAR NEXUS BETWEEN BORROWED FUNDS & INVESTMENTS AS STATED BY AO. (II) LD. CIT(A) HAS ERRED IN NOT GRANTING AN OPPORTUNITY TO THE AO FOR DISAPPROVING THE CLAIM OF THE ASSESSEE THAT THERE WAS NO NEXUS BETWEEN BORROWED FUNDS AND INVESTMENTS, IF LD CIT(A) WAS NOT SATISFIED WITH THE DIRECT NEXUS AS STATED BY THE AO. (III) WITHOUT PREJUDICE TO THE ABOVE GROUNDS, LD. CIT(A) HAS ERRED IN NOT DIRECTING THE AO TO MAKE DISALLOWANCE AS PER RULE 8D OF THE 6 /RJT/201 3 2 ACT/RULES. IF LD. CIT(A ) WAS NOT SATISFIED WITH THE DIRECT NEXUS AS STATED BY THE AO. 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A FIRM AND DEALER OF BAJAJ TWO WHEELERS AND THREE WHEELERS , DERIV ING INCOME FROM SALES OF THE VEHICLES SUPPLIED BY THE DEALER & ALSO ENGAGED I N THE SERVICE OF TRANSPORTATION , FILED ITS RETURN OF INCOME ON 31.03.2009 FOR THE ASSESSMENT YEAR 2008 - 09. INITIALLY THE RETURN WAS PROCESSED U/S 143(1) OF THE ACT, SUBSEQUENTLY THE CASE WAS TAKEN UP FOR SCRUTINY AND ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 30.11.2010 , WHEREIN THE LD. AO MADE ADDITION BY DISALLOWING INTEREST OF RS.11,34,000/ - U/S 14A OF THE ACT FOR INVESTING IN SHARES OF INDO BRINE INDUSTRIES LTD FOR RS.94,50,000/ - . THE LD AO OPINIONED THAT THE ASSESSEE HAD UTILIZED ITS INTEREST BEARING FUNDS OF RS.94,50 ,000/ - FOR INVESTMENT IN THESE SHARES , AND THE INCOME EARNED ON THESE SHARES BY WAY OF DIVIDEND ARE EXEMPTED FROM TAX ATTRACTING THE PROVISIONS OF SECTION 14A OF THE ACT. . 3. ON APPEAL BEFORE THE LD CIT(A), THE LD. CIT(A) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER: - 7. I HAVE DULY CONSIDERED THE ABOVE SUBMISSION OF THE APPELLANT AND CONTENTION OF THE AO. IT IS SEEN THAT THE AO HAS STRAIGHTAWAY PROCEEDED ON THE ASSUMPTION THAT INVESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS AND HENCE HE MADE THE IMPUGNED DISALLOWANCE. HOWEVER, THIS ASSUMPTION IS NOT BACKED BY ANY MATERIAL OR FINDING. HE SIMPLY STATED IN PARA 6 OF THE ASSESSMENT ORDER THAT IT IS A FACT THAT ASSESSEE HAS INCURRED EXPENDITURE TO PURCHASE SHA RES OF RS.94,50,000/ - . THEREFORE THE SAME IS ACTUALLY AN INVESTMENT MADE TO EARN TAX FREE INCOME AND HENCE SQUARELY COVERED UNDER PROVISIONS OF SECTION 14A. HOWEVER, I FIND THAT FOR ARRIVING AT SUCH A CONCLUSION, NEITHER ANY REASONING IS GIVEN NOR ANY M ATERIAL IN THE FORM OF ANY LEDGER ACCOUNT OR BANK STATEMENT IS REFERRED TO. IT APPEARS TO BE JUST A GUESS WORK. FROM PERUSAL OF THE PAPER BOOK OF THE APPELLANT, IT IS FOUND THAT THE SAID INVESTMENT WAS MADE IN AY 2006 - 07 AND IN THAT YEAR ALSO, DISALLOWAN CE U/S 14A WAS MADE. THE SAME WAS DELETED IN FIRST APPEAL BY OBSERVING THAT THE SAID INVESTMENT WAS NOT DIRECTLY MADE FROM ANY BORROWED FUNDS AND THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE AND THEREFORE THE PRESUMPTION WAS THAT THE SAID INVESTMEN T WAS MADE OUT OF INTEREST FREE FUNDS. IN THE YEAR UNDER APPEAL, THE SAID INVESTMENT WAS SIMPLY BROUGHT FORWARD FROM THE PRECEDING YEAR AND IT WAS NOT A CASE OF ANY NEW INVESTMENT. UNDER THE CIRCUMSTANCES, THERE DOES NOT APPEAR TO BE ANY JUSTIFICATION ON THE PART OF THE A.O. TO ASSUME THAT THE SAME WAS DIRECTLY MADE FROM BORROWED FUNDS SO AS TO DISALLOW INTEREST IN A MANNER IN WHICH HE DID. IN THE JUDGMENTS CITED BY THE APPELLANT, THE COURTS HAVE CLEARLY HELD THAT DISALLOWANCE U/S 14A REQUIRES A FINDING THAT SOME EXPENDITURE 6 /RJT/201 3 3 WAS INCURRED FOR EARNING EXEMPT INCOME AND SUCH EXPENDITURE SHOULD HAVE PROXIMATE LINK WITH SUCH EXEMPT INCOME. IN THE PRESENT CASE, THE A.O. HAS NOT RECORDED ANY SUCH FINDING. MERE PRESUMPTION THAT SOME EXPENDITURE WOULD HAVE BEEN INCURRED TO EARN TAX FREE INCOME WOULD NOT BE SUFFICIENT IN ANY MANNER. FURTHER, THERE IS ONE MORE ANGLE FROM WHICH THE DISALLOWANCE LOOKS UNSUSTAINABLE. RULE 8D WAS APPLICABLE FROM THE YEAR UNDER APPEAL. HENCE, IF THE A.O. DESIRED TO MAKE ANY DISALLOWAN CE, HE WAS SUPPOSED TO FOLLOW THE FORMULA PRESCRIBED IN RULE 8D AND NOT ANY AH - HOC METHOD. THERE IS A RESTRICTION IMPOSED THROUGH SECTION 14A(2) IN APPLYING RULE 8D WHICH IS THAT THE A.O. SHOULD RECORD A FINDING AS WELL AS SATISFACTION AS TO HOW THE CLAIM OF THE ASSESSEE REGARDING PARTICULAR EXPENDITURE INCURRED OR NO EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME IS ERRONEOUS HAVING REGARD TO HIS ACCOUNTS. IN THE PRESENT CASE, NO SUCH FINDING OR SATISFACTION IS OBJECTIVELY RECORDED BY THE A.O. IN FACT, IT APPEARS THAT THE A.O. HAS NEITHER EXAMINED THE ACCOUNTS NOR THE SUBMISSION OF THE APPELLANT DATED 25.11.2010 AS REPRODUCED IN THE ASSESSMENT ORDER AS IN OPERATIVE PARA 6 OF THE ASSESSMENT ORDER, THERE IS NO DISCUSSION THEREOF AND DISALLOWANCE IS MADE ST RAIGHTAWAY ON AN ERRONEOUS PRESUMPTION. THEREFORE, IT IS APPARENT THAT THE MANDATE OF SECTION 14A(2) HAS NOT BEEN COMPLIED WITH. THE VARIOUS DECISIONS RELIED UPON BY THE APPELLANT CLEARLY AND UNAMBIGUOUSLY LAY DOWN THAT IN ABSENCE OF ANY FINDING RECORDED FOR EXPENDITURE HAVING BEEN INCURRED FOR EARNING EXEMPT INCOME OR THAT THE CLAIM OF THE ASSESSEE WAS ERRONEOUS, NO DISALLOWANCE CAN BE MADE EVEN UNDER RULE 8D. RESPECTFULLY FOLLOWING THE SAME, I HOLD THAT THE DISALLOWANCE MADE BY THE A.O. IS UNSUSTAINABL E FOR WANT OF COMPLIANCE WITH MANDATORY CONDITIONS. 4. AGGRIEVED BY THE AFORESAID ORDER OF LD.CIT(A ) THE REVENUE IS IN APPEAL BEFORE US. 5. LD. DR VEHEMENTLY ARGUED IN SUPPORT OF THE ORDER OF THE LD AO AND SUBMITTED THE SAME MAY BE RESTORED, WHILE AS T HE LD. DR RELIED ON THE ORDER OF THE LD. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIAL S ON RECORD INCLUDING THE PAPER BOOK RUNNING 1 TO 102 PAGES. ON PERUSING THE ORDER OF THE LD CIT(A), WE FIND THAT THE LD CIT(A) HAD DELETED THE ADDITION FOR VARIOUS REASONS AND SOME OF SUCH RELEVANT REASONS ARE BRIEFLY STATED HEREUNDER FOR REFERENCE : - A. LD AO , WITHOUT ANY REASONING AND EXAMINING THE LEDGER ACCOUNTS, BANK STATEMENTS ETC., ARRIVED AT A CONCLUSION THAT THE ASSESSEE HA D INCURRED EXPENDITURE TO PURCHASE SHARES OF RS.94,50,000/ - . THEREFORE, THE SAME 6 /RJT/201 3 4 IS ACTUALLY AN INVESTMENT MADE TO EARN TAX FREE INCOME AND HENCE SQUARELY COVERED UNDER PROVISION OF SECTION 14A ; B. FROM THE PERUSAL OF PAPER BOOK IT WAS FOUND THAT THE ASSE SSEE HAD MADE INVESTMENT OF RS.94 ,50,000/ - DURING THE AY 2006 - 07; C. FOR AY 2006 - 07 ALSO DISALLOWANCE U/S 14A W AS MADE FOR THE SAME INVESTMENT; D. T HE ABOVE ADDITION MADE FOR THE AY 2006 - 07 WAS DELETED BY THE LD CIT(A) BY OBSERVING THAT THE SAID INVESTME NT WAS NOT DIRECTLY MADE FROM ANY BORROWED FUNDS AND THERE WERE SUFFICIENT INTEREST FREE FUNDS AVAILABLE FOR THE PURCHA SE OF SHARES FOR RS.94,50,000/ - ; 7. FURTHER ON EXAMINING THE ORDER OF THE L D CIT(A) DATED 18.08.2011 IN APPEAL NO.CIT(A) - XX/367/10 - 11 FOR THE AY 2006 - 07 , WE FIND THAT THE LD CIT(A) HAS HELD UNDER : - 5.3 THE CONTENTIONS OF THE LEARNED AR ARE TENABLE. APPELLANT HAD SUFFICIENT SURPLUS FUNDS TO COVER THE INVESTMENT IN SHARES. AO DID NOT ESTABLISH ANY NEXUS BETWEEN INTEREST - BEARING FUNDS AND INVESTMENT IN SHARES. 7.1 BEFORE US THE LD AR HAS SUBMITTED THAT THE REVENUE DID NOT PURSUE THE ORDER OF THE LD CIT(A) IN APPEAL AND THEREFORE THE FINDING OF THE LD CIT(A) HAS BECOME OBSOLETE. LD. DR DID NOT OBJECT TO THIS SUBMISSION OF LD AR. THER EFORE, WE ARE OF THE CONSIDERED VIEW THAT WHEN ONCE IT IS ESTABLISHED THAT THE INVESTMENT OF RS.94,50,000/ - HAS BEEN MADE OUT OF INTEREST FREE FUNDS OF THE ASSESSEE, THEN PROVISION S OF SECTION 14A WILL NOT PREVAIL. IN THE INSTANT CASE , THE INVESTMENT OF R S.94,50,000/ - IS MADE DURING THE AY 2006 - 07 WHICH IS NOT DISPUTED BY THE REVENUE. FURTHER THE FINDING OF THE LD CIT(A) THAT THE INVESTMENT OF RS.94,50,000/ - MADE DURING THE AY 2006 - 07 ARE FROM THE ASSESSEE S INTEREST FREE FUNDS HAS BECOME OBSOLETE SINCE T HE REVENUE HAS NOT PREFERRED FURTHER APPEAL. 6 /RJT/201 3 5 THEREFORE , WE ARE OF THE CONSIDERED VIEW THAT THE LD AO IS NOT JUSTIFIED IN INVOKING THE PROVISION S OF SECTION 14A FOR THE INVESTMENT MADE BY THE ASSESSEE FOR RS.94, 50,00 0/ - TOWARDS PURCHASE OF SHARES DURING THE AY 2006 - 07. SINCE WE HAVE ADJUDICATED GROUND NO.1 IN FAVOUR OF THE ASSESSEE, GROUND NOS.2 & 3 HAVE BECOME REDUNDANT AND THEREFORE DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. T HIS O RDER IS PRONOUNCED IN THE O PEN COURT ON THE DATE MENTIONED HEREINABOVE. SD/ - SD/ - (D .K. TYAGI) ( A. M OHAN ALANKAMONY ) T 0 / JUDICIAL MEMBER OHAN / ACCOUNTANT MEMBER N/ ORDER DATE 26 .04.2013 /RAJKOT BT T RJO O / COPY OF ORDER FORWARDED TO: - 1. Y / APPELLANT - ITO, WARD - 1, GANDHIDHAM 2. RY / RESPONDENT - M/S. KRISHNA AUTO CENTRE, PLOT NO.325, WARD - 12B, GANDHIDHAM . G A / CIT - I, RAJKOT 4. A - / CIT (A) - I I, RAJKOT 5. TTG, G, / DR, ITAT, RAJKOT 6. I / GUARD FILE. / BY ORDER , TRUE COPY SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, RAJKOT.