Universal Subscription Agency Private Limited, Kanpur V. Deputy Commissioner of Income-Tax-VI, Kanpur

ITA 61/LKW/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0331 (ITAT-LUCKNOW)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 23-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Earning of tax free income; Rule 8D
• Section: 271(1)(c); 142(1); 14A; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A , LUCKNOW BEFORE SHRI. A. D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 61/LKW/2018 ASSESSMENT YEAR: 2014 - 15 UNIVERSAL SUBSCRIPTION AGENCY (P) LTD. 113/233, SWAROOP NAGAR KANPUR V. DY. CIT - VI KANPUR T AN /PAN : AAACU1756G (APP ELL ANT) (RESPONDENT) APPELLANT BY: SHRI SWARAN SINGH, FCA RESPONDENT BY: SMT. ALKA SINGH, D.R. DATE OF HEARING: 20 0 3 201 9 DATE OF PRONOUNCEMENT: 29 0 3 201 9 O R D E R PER A. D. JAIN, V.P . : THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF THE LD. CIT(A) - II, KANPUR DATED 15/12/2017 FOR ASSESSMENT YEAR 20 14 - 15 , TAKING THE FOLLOWING GROUNDS: 1. THAT THE LD. C.I.T. (A) - II, KANPUR, HAS ERRED IN LAW AND ON FACTS IN ARBITRARILY SUSTAINING THE DISA LLOWANCE/ADDITION OF RS.4,53,308/ - UNDER SECTION 14A OF THE I.T. ACT, 1961 READ WITH RULE 8 D OF THE I.T. RULES, 1962 WITHOUT APPRECIATING THAT RECORDING OF SATISFACTION BY THE LD. A.O. FOR REJECTING THE DISALLOWANCE SUO MOTO MADE BY THE APPELLANT COMPANY I S MANDATORY BEFORE MAKING A N ADDITIONAL DISALLOWANCE UNDER SECTION 14A OF THE I.T. ACT, 1961 READ WITH RULE 8D OF THE I.T. RULES, 1962. 2. THAT THE LD. C.I.T. (A) - II, KANPUR HAS ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THAT NO FRESH INVESTMENTS WERE M ADE BY THE APPELLANT COMPANY DURING THE F.Y. 2013 - 14 RELEVANT TO A.Y. 2014 - 15 WHICH COULD HAVE RESULTED INTO INVESTMENT(S) YIELDING EXEMPT ITA NO.61/LKW/2018 PAGE 2 OF 8 INCOME O R ESTABLISHING NEXUS BETWEEN BORROWED FUNDS AND INVESTMENTS HAVING POTENTIAL OF EXEMPT INCOME. 3 . THAT THE LD C . I . T (A) - LL, KANPUR, HAS ERRED IN LAW AND ON FACTS IN MECHANICALLY TAKING ALL THE INVESTMENTS INCLUDING THE INVESTMENTS YIELDING INCOME CHARGEABLE TO TAX FOR THE PURPOSE OF CALCULATING DISALLOWANCE UNDER SECTION 14A OF THE I .T. ACT, 1961 READ WITH RULE 8 D(II) & (III) OF THE I.T. RULES, 1962, HENCE, THE DISALLOWANCE IS UNSUSTAINABLE IN LAW AND ON FACTS. 4. THAT THE LD. C.I.T. (A) - II , KANPUR, HAS ERRED IN LAW AND ON FACTS IN SUSTAINING THE DISALLOWANCE/ADDITION OF RS.4,53,308 / - UNDER SECTION 14A OF THE I.T. ACT, 1961 READ WITH RULE 8D OF THE I.T. RULES, 1962 WITHOUT APPRECIATING THAT THE TOTAL EXEMPT INCOME WAS RS.1 , 10,587/ - ONLY, HENCE, THE DISALLOWANCE COULD NOT HAVE EXCEEDED THE EXEMPT INCOME. S. THAT THE DISALLOWANCE/A DDITION SUSTAINED BY THE LD. C.I .T.( A) - II, KANPUR, IS UNSUPPORTABLE IN LAW AND ON FACTS AND DESERVES TO BE DELETED. 6. THAT THE DISALLOWANCE/ADDITION SUSTAINED BY THE LD. C.I.T.(A) - LL, KANPUR, IS WAY TOO HIGH AND EXCESSIVE AND ALSO AGAINST THE PRINCIPLES OF NATURAL JUSTICE AND EQUITY. 2 . THE A .O MADE DISALLOWANCE OF RS.4,53,308/ - , UNDER SECTION 14A OF THE ACT. WHILE DOING SO, IT WAS HELD AS UNDER: - FROM PERUSAL OF BALANCE SHEET OF THE ASSESSEE, IT IS SEEN THAT THE ASSESSEE HAS MADE INVESTMENTS OF RS.7,07,59,828/ - IN EQUITY SHARES AND DEBENTURE TO EARN EXEMPT INCOME AND DEBITED INTEREST EXPENSES IN PROFIT & LOSS ACCOUNT O F THE COMPANY . THEREFORE VIDE ORDER SHEET ENTRY DATED 02 . 08.2016 AS WELL AS VIDE PARA - 11 OF NOTICE U/S 142(1) DAT ED 02.08.2016 THE AR OF THE ASSE SSEE COMPANY WAS ASKED TO SHOW C AUSE WHY INTEREST EXPENSE RELATED TO THE EXEMPT INCOME SHOULD NOT BE DISALLOWED U/S 14A OF THE ACT. IN RESPONSE, AR OF THE ASSESSEE COMPANY VIDE ITS REPLY DATED 22.08.2016 SUBMITTED THAT IT HAS ALREADY, DISALLOWED RS. 67,093/ - U/S 14A. THE ASSESSEE VIDE ORD ER SHEET ENTRY DATED WAS REQUIRED TO JUSTIFY DISALLOWANCE U/S 14A READ WITH RULE 8D . SUBMISSION OF ITA NO.61/LKW/2018 PAGE 3 OF 8 THE ASSESSE E COMPANY AS WELL AS DISALLOWANCE U/S 14A READ WITH RULE 8D HAS BEEN CONSIDER AND FOUND THAT CALCULATION OF DISALLOWANCE OF INTEREST HAVE TO BE M ADE IN ACCORDANCE WITH THE SAID RULE. IN RESPECT OF THE INTEREST ON SUCH INVESTMENTS, THE AMOUNT COMPUTED AS PER PROVISIONS OF SECTION 14A RULE 8D(2)(II) IS AS UNDER. - A) THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUD ED IN THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME - A - RS.1,04,833 / - . B) THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF TH E ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR - B - RS.8,38,78,730/ - (RS.7,07,59,828 + RS.9,69,97,631/ 2 ). C) THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YE AR - C - RS.25,92,7 8 ,089 / - ( RS. 25,95,90,278 + RS.25,89,65,899 /2). THE TOTAL AMOUNT OF EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AS PER RULE 8D(2) (II) WOULD BE AS UNDER: - A X B = 1,04.833 X 8,38,78,730 = RS. 33,914/ - C 25,92,78,089 FURTHER, AS PER PROVISIONS OF SECTION 14A READ WITH RULE 8D (2) (III) 0.5% OF THE AVERAGE OF VALUE OF INVESTMENT AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY A ND THE LA ST DAY OF THE PREVIOUS YEAR RS.8,38,78,730/ - (RS. 7,07,59,828 + RS.9, 69,97,631/2) WHICH COMES TO RS. 4,19,394/ - IS ALSO DISALLOWED. THER EFORE, IN TOTALITY A SUM OF RS. 4,53,308/ - IS TO B E DISALLOWED U/S 14A, SINCE THE ASSESSEE COMPANY HAS ALREADY ADD ED RS.67,093/ - U/S 14A THEREFORE RS.3,86,215/ - [4,53,308 - 67,093] IS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. SINCE, THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS ITA NO.61/LKW/2018 PAGE 4 OF 8 OF ITS INCOME, PENALTY PROCEEDINGS U/S 271(1)(C) IS BE ING INITIATED SEPARAT ELY. 3 . THE LD. CIT(A) H AS CONFIRMED THE DISALLOWANCE, OBSERVING AS FOLLOWS: - I HAVE PERUSED THE FACTS - OF THE CASE AND CASE LAWS RELIED UPON BY AO AND APPELLANT. IT IS A FACT THAT A DISALLOWANCE OF RS. 67,093/ - HAS BEEN MADE BY THE APPELLANT. THE AO HAS ALS O FAILED TO ESTABLISH THE NEXUS 'BETWEEN THE EXPENSES CLAIMED BY THE APPELLANT COMPANY IN THE PROFIT AND LOSS A/C AND THE EARNING OF ANY INCOME NOT FORMING PART OF THE TOTAL INCOME, IT IS ALSO A FACT THAT THE APPELLANT HAS INCURRED INTEREST EXPENSES OF RS. 1,04,833/ - TO THE EARNING OF EXEMPT INCOME(S) OF RS, 1,10,587/ - , APPELLANT'S CONTENTION THAT THE AFORESAID INTEREST EXPENSES INCLUDES 'BANK CHARGES' AMOUNTING TO RS. 77,040/ - AND AMOUNT OF RS. 13,750/ - TOWARDS 'INTEREST ON BANK OVER DRAFT LIMIT', WHICH AR E DIRECTLY RELATED TO THE SUBSCRIPTION BUSINESS OF THE APPELLANT COMPANY AND HAVE NO BEARING OR CORRELATION WITH THE EARNING OF ANY INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE APPELLANT COMPANY, GOES TO PROVE THAT THERE IS A MIXED FLOW OF FUNDS. HER E REFERENCE IS MADE TO THE CASE OF M /S DHANUKA AND SONS , 339 ITR 319 (CAL), 244 CTR 511 (CAL) WHERE IT WAS HELD: 'THERE IS NO DISPUTE THAT PART OF THE INCOME OF THE ASSESSEE FROM ITS BUSINESS IS FROM DIVIDEND WHICH IS EXEMPT FROM TAX WHEREAS THE ASSESSEE W AS UNABLE TO PRODUCE ANY MATERIAL BEFORE THE AUTHORITIES BELOW SHOWING THE SOURCE FROM WHICH SUCH SHARES WERE ACQUIRED . THE MERE FACT THAT THOSE SHARES WERE OLD ONES AND NOT ACQUIRED RECENTLY IS IMMATERIAL . IT IS FOR THE ASSESSEE TO SHOW THE SOURCE OF ACQU ISITION OF THOSE SHARES BY PRODUCTION OF MATERIALS THAT THOSE WERE ACQUIRED FROM THE FUNDS AVAILABLE IN THE HANDS OF THE ASSESSEE AT THE RELEVANT POINT OF TIME WITHOUT TAKING BENEFIT OF ANY LOAN . IF THOSE SHARES WERE PURCHASED FROM THE AMOUNT TAKEN IN LOAN , EVEN FOR INSTANCE, FIVE OR TEN YEARS AGO, IT IS FOR THE ASSESSEE TO SHOW BY THE PRODUCT I ON OF DOCUMENTARY EVIDENCE THAT SUCH LOANED AMOUNT HAD ALREADY BEEN PAID BACK ITA NO.61/LKW/2018 PAGE 5 OF 8 AND FOR THE RELEVANT A.Y, NO INTEREST IS PAYABLE BY THE ASSESSEE FOR ACQUIRING THOSE OLD SHARES. IN THE ABSENCE OF ANY SUCH MATERIALS PLACED BY THE ASSESSEE, IN , THE AUTHORITIES BELOW RIGHTLY HELD THAT PROPORTIONATE AMOUNT SHOULD BE DISALLOWED HAVING REGARD TO THE TOTAL INCOME AND THE INCOME FR O M THE EXEMPT SOURCE.' SIMILARLY, THE HON'BLE ITA T CHENNA I BENCH 'D' IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES (INDIA) (P.) LTD. V ASSISTANT COMMISSIONER OF INCOME - TAX, COMPANY CIRCLE - 111(4), CHENNA I IN I . T APPEAL NO. 2073 (MAD.) OF 2011 DATED APRIL 17, 2012 FOR ASSESSMENT YEAR 2007 - 08 REPORTED I N (2012) 148 TTJ 621 (CHENNAI) 52 SOT 172; [2012] 21 TAXMANN.COM 145 (CHENNAI) HELD THAT EVEN IF, THERE MAY NOT BE ANY DIRECT VISIBLE EXPENDITURE TO EARN SUCH DIVIDEND INCOME, A REASONABLE PORTION OF THE TOP MANAGEMENT TIME/EXPENDITURE COULD BE ATTRIBUTED TO EARNING OF THAT INCOME. IT IS BASED ON THE GENERAL PRINCIPLE THAT NO INCOME IS GRATUITOUS AND EVERY INCOME IS EARNED AFTER INCURRING CERTAIN EXPENSES. IT OBSERVED AS FOLLOWS: - 'WE CONSIDERED THE MATTER. AS RIGHTLY POINTED OUT BY THE LEARNED SENIOR COUNS EL, RULE 8 D IS NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR. BUT, THE ASSESSEE HAS EARNED SUBSTANTIAL AMOUNT OF DIVIDEND INCOME. EVEN IF, THERE MAY NOT BE ANY DIRECT VISIBLE EXPENDITURE TO EARN SUCH DIVIDEND INCOME, A REASONABLE PORTION OF THE TOP MANAG EMENT TIME/EXPENDITURE COULD BE ATTRIBUTED TO EARNING OF THAT INCOME. IT IS BASED ON THE GENERAL PRINCIPLE THAT NO INCOME IS GRATUITOUS AND EVERY INCOME IS EARNED AFTER INCURRING CERTAIN EXPENSES. THEREFORE, A REASONABLE DISALLOWANCE IS CALLED FOR . AS QUA NTIFICATION IS NOT PERMISSIBLE UNDER RULE 8 D FOR THE IMPUGNED ASSESSMENT YEAR, THE DISALLOWANCE HAS TO BE MADE ON THE BASIS OF REASONABLENESS AND FAIRNESS . IN THE PRESENT CASE, THE ASSESSING OFFICER HAS MADE A DISALLOWANCE OF RS. 9,81,686 / - . WE MODIFY THE D ISALLOWANCE TO A SUM OF RS. 6 L AKHS ON A FAIR BASIS. THIS ISSUE IS DECIDED PARTLY IN FAVOUR OF THE ASSESSEE,' IN VIEW OF THE ABOVE FACTS THAT THERE IS A MIXED FLOW OF FUNDS AND APPELLANT HAS ALSO DISALLOWED CERTAIN EXPENSES AS COVERED U/S ITA NO.61/LKW/2018 PAGE 6 OF 8 14A . I UPHOLD THE ORDER OF THE A . O WHO HAS SIMPLY CALCULATED THE ADDITION MADE AS PER PRESCRIBED PROCEDURE. 4 . AGGRIEVED, THE ASSESSEE IS IN APPEAL. 5 . THE LD. A.R. OF THE ASSESSEE HAS CONTENDED THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE WITHOUT TAKING INTO CO NSIDERATION THE FACT THAT THE A.O HAS NOWHERE RECORDED HIS SATISFACTION WITH REGARD TO THE IN CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE. IT HAS BEEN SUBMITTED THAT THIS SATISFACTION IS A STATUTORY MANDATE OF THE ACT, WHICH HAS NOT BEEN COMPLIED WITH, RENDERING DISALLOWANCE NOT SUSTAINABLE IN LAW. 6 . THE LD. D.R., ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. 7 . HEARD. SECTIO N 14A(2) READS AS FOLLOWS: - 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. (1) .. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESP ECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 8 . THUS, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14A(2) OF THE ACT, THE A.O SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE TOTAL INCOME UNDER THE INCOME - TAX ACT, IF THE A.O, HAVING REGARD TO THE ACCOUNTS OF THE ITA NO.61/LKW/2018 PAGE 7 OF 8 ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. 9 . A BARE PERUSAL OF THE RELEV ANT PORTION OF THE ASSESSMENT ORDER, AS REPRODUCED HEREINABOVE, EVINCES THAT THE GRIEVANCE OF THE ASSESSEE IN THIS REGARD IS CORRECT. THE A.O HAS NOWHERE RECORDED IN THE ASSESSMENT ORDER , HIS SATISFACTION AS REQUIRED UNDER THE MANDATE OF SECTION 14A(2) OF THE ACT. THE LD. CIT(A) HAS ERRED IN NOT TAKING INTO CONSIDERATION THIS VITAL ASPECT OF THE MATTER. 10 . IN CIT VS. U.P. ELECTRONICS CORPN. LTD. 397 ITR 113 (ALL.) , THE HON'BLE JURISDICTIONAL HIGH COURT HELD AS FOLLOWS : - FOR MAKING DISALLOWANCE UNDER SECTI ON 14A, R ULE 8D(1)(B) WILL COME INTO PICTURE ONLY WHEN A.O RECORDED HIS NON - SATISFACTION WITH REGARD TO CLAIM OF ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED OR WITH REGARD TO CORRECTNESS OF CLAIM OF EXPENDITURE BY ASSESSEE. 11 . IN DY. CIT VS. SHRI LAKSYHM I COTSYN LTD., 81 TAXMANN.COM 142 (LUCKNOW - TRIB.), THIS BENCH OF THE TRIBUNAL OBSERVED AS FOLLOWS: - UNLESS THE ASSESSING OFFICER RECORDS A CLEAR FINDING THAT THE EXPENDITURE SHOWN OR EVEN NOT SHOWN IN THE ASSESSEE'S ACCOUNT HAS BEEN INCURRED, HE CANNOT PROCEED TO COMPUTE THE DISALLOWANCE AS PRESCRIBED BY THE R ULE 8D. THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER TO EMBARK UPON THE FORMULA STIPULATED IN RULE 8D IN ORDER TO COMPUTE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, IS THA T THE ASSESSING OFFICER MUST RECORD A CLEAR FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE TO EARN INCOME NOT INCLUDIBLE IN TOTAL INCOME OF THE ASSESSEE. 12 . IN CIT VS. TAIKISHA ENGINEERING INDIA LTD., 54 TAXMANN.COM 109 (DELHI), THE HON'BLE HIGH COURT OF DELHI HELD THAT SUB - RULE (2) OF R ULE 8D CANNOT BE APPLIED UNTIL AND UNLESS THE A.O HAS FIRST RECORDED ITA NO.61/LKW/2018 PAGE 8 OF 8 SATISFACTION, WHICH IS MANDATED BY SUB - SECTION (2) TO SECTION 14A OF THE I.T. ACT AND S UB - RULE (1) OF R ULE 8D OF THE I.T. RULES . 13 . NO DECISION CONTRARY TO THE ABOVE CASE LAWS HAS BEEN CITED BEFORE US. 14 . CIT VS. U.P. ELECTRONICS CORPN. LTD. (SUPRA) HAS BEEN RENDERED BY THE HON'BLE JURISDICTIONAL HIGH COURT. 15 . IN VIEW OF THE ABOVE, FINDING THE G RIEVANCE OF THE ASSESSEE TO BE JUSTIFIED, THE SAME IS ACCEPTED. THE DISALLOWANCE OF RS. 4,53,308/ - IS DELETED. 16 . IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 / 0 3 /201 9 . SD/ - SD/ - [ T. S. KAPOOR ] [ A. D. JAIN ] ACCOUNTANT ME MBER VICE PRESIDENT DATED: 29 /03/ 201 9 JJ: 2003 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR BY ORDER ASSISTANT REGISTRAR