Jamnalal Sons Private Limited, Wardha V. Assistant Commissioner of Income Tax,Wardha Circle, Wardha., Wardha

ITA 61/NAG/2012

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3115 (ITAT-NAGPUR)
• Duration Of Justice: 7 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 23-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D P T IWARI
• Assessee Lawyers: M A GOHEL
• Keywords: Business income; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH , ( E - COURT), MUMBAI , BEFORE SHRI R.K.GUPTA , J M & SHRI RAJENDRA , A M ITA NO. 61 / N AG / 20 1 2 ( ASSESSMENT YEAR S : 200 8 - 0 9 ) M/S JAMNALAL SONS PRIVATE LIMITED, BACHHRAJ BHAWAN, GANDHI CHOWK, WARDHA - 442 001 . VS. ACIT, WARDHA CIRCLE, WARDHA - 442 001 . PAN/GIR NO. : A AACJ 3176 H ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. M. A.GOHEL /REVENUE BY : M R. D.P.TIWARI DATE OF HEARING : 2 8 TH JAN ., 201 3 DATE OF PRONOUNCEMENT : 20 TH MARCH ,201 3 O R D E R P ER SHRI R.K.G UPTA, JM : TH IS APPEAL HA S BEEN PREFERRED BY THE ASSESSEE BEFORE THE ITAT NAGPUR BENCH, NAGPUR, AGAINST THE ORDER OF LEANED CIT (A) - I I , NAGPUR (MAHARASHTRA) RELATING TO THE ASSESSMENT YEAR 200 8 - 0 9 , WHICH HA S BEEN HEARD THROUGH E - COURT, MUMBAI . 2 . THE ASSESSEE IS OBJECTING IN CONFIRMING THE DISALLOWANCE OF INTEREST UNDER SECTION 14A R.W.R.8D AT RS.1,40,06,686/ - FOR THE YEAR UNDER CONSIDERATION. ITA NO . 61 /20 1 2 2 3 . DURING THE ASSESSMENT PROCEEDINGS THE AO NOTI CED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 54,81, 69,480/ - AND AT THE SAME TIME, THE ASSESSEE HAS INCURRED TOTAL EXPENDITURE OF RS. 3,27,99,972/ - . THE COUNSEL OF THE ASSESSEE WAS ASKED AS TO WHY THE EXPENSES INCURRED IN RELATION TO EXCESS INCOME SHOULD NOT BE DISALLOWED UNDER SECTION 14A. IT WAS EXPLAINED THAT THE ASSESSEE IS AN INVESTMENT COMPANY REGISTERED WITH THE RESERVE BANK OF INDIA AS A NON - BANKING FINANCIAL COMPANY (NBFC) . THE ASSESSEE COMPANY HAS INCOME FROM HOUSE PROPERTY ; INTEREST ON IN TER CORPORATE DEPOSITS AND LOAN GRANTED; DIVIDEND EARNED ON QUOTED/UNQUOTED SHARE OF COMPANIES HELD AS PART OF INVESTMENT PORT FOLIO. IT WAS ALSO EXPLAINED THAT SHARE OF PROFIT FROM PARTNERSHIP FIRMS WHERE THE ASSESSEE COMPANY IS A PARTNER. IT WAS ALSO EXP LAINED THAT IN ORDER TO APPLY PROVISION OF SECTION 14A OF THE ACT, TWO THINGS HAVE TO BE SEEN IE. THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT HAS TO BE IDENTIFIED AND, SECONDLY, THE EXPENDITURE RELATED TO SUCH EXEMPT INCOME HAS TO BE I DENTIFIED. IT WAS ALSO EXPLAINED THAT ALL THE INVESTMENTS IN SHARES HAVE BEEN MADE BY JSPL FROM TIME TO TIME OUT OF ITS OWN FUNDS AND INTERNAL ACCRUALS. IT WAS EXPLAINED THAT NO PART OF BORROWINGS HAS BEEN UTILIZED TO M A KE INVESTMENTS IN THE SHARES. IT WA S ALSO EXPLAINED THAT INTEREST INCOME (R4,50,46,25 0/ - , IS FAR IN EXCESS OF I N TEREST EXPEN DITURE (RS 51,37, 739 / - ). HENCE, THE INTEREST ON BORROWINGS IS NOT AT ALL REQUIRED TO BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A OF THE IT ACT, 1961 AS IT DOES N OT HAVE ANY NEXUS, EITHER DIRECT OR INDIRECT WITH EARNING OF ITA NO . 61 /20 1 2 3 DIVIDEND INCOME. RE LIANCE WAS PLACED ON THE DECISION OF THE PUNJ AB AND HAR YANA HIGH C OURT IN THE CASE OF C IT VS HERO C YCLES LTD. ( 2010) 323 ITR 518 . VARIOUS EXPENSES DEBITED TO PR OFIT AND LOSS , IT WAS EXPLAINED THAT THEY ARE IN THE NATURE OF ESTABL I SHMENT EXPENSES INCURRED BY THE ASSESSEE FOR CARRYING ON ITS BUSINESS . I N FACT, THE SALARIES AND ALLOWANCES INCLUDE EMOLUMENTS TO SOME OF THE EMPLOYEES WORKING WITH THE ASSESSEE FOR MORE THAN 25 TO 30 Y EARS. ACCORDINGLY, IT WAS SUBMITTED THAT UNLESS IT IS ESTABLISHED THAT SUCH EXPENSES ARE INCURRED IN RELATION TO EARNING OF DIVIDEND, NO DISALLOWANCE CAN BE M A DE IN RESPECT OF SUCH EXPENSES. RELIANCE WAS PLACED ON THE DECISION OF ITAT, DELHI BENCH (TM) IN THE CASE OF WIMCO SEEDLINGS LTD. VS. DY. CIT(2007) 107 ITD 267 . ACCORDINGLY IT WAS EXPLAINED THAT THE EXPENDITURE INCURRED DIRECTLY TO EARN DIVIDEND INCOME IS RS. NIL AS ALL THE EXPENSES ARE INCURRED FOR BUSINESS PURPOSE ONLY. IT WAS ALSO SUBMITTED THAT R ULE 8D IS APPLICABLE , HOWEVER, THE SAME CANNOT BE APPLIED WHERE THERE IS NO NEXUS BETWEEN THE EXPENDITURE INCURRED AND EARNING OF DIVIDEND. THE CONTENTION OF THE ASSESSEE WAS CONSIDERED AND AFTER CONSIDERING THE CONTENTION OF THE ASSESSEE, THE AO FOUND THA T THE ASSESSEE HAS PAID DIVIDEND TO VARIOUS SHAREHOLDERS AND THE DIVIDEND HAS BEEN PAID OUT OF BORROWINGS MADE DURING THE YEAR UNDER CONSIDERATION. THEREFORE, HE HELD THAT PROVISION OF SECTION 14A R.W.RULE 8D IS APPLICABLE AND ACCORDINGLY, HE DISALLOWED TH E EXPENDITURE TO THE EXTENT OF RS. 1,40,06,686/ - . ITA NO . 61 /20 1 2 4 4 . THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A) , BEFORE WHOM THE DETAIL ARGUMENTS WERE ADVANCED. RELIANCE WAS PLACED ON VARIOUS CASE LAWS, HOWEVER, LEARNED CIT(A) WAS ALSO IN AGREEMENT WITH THE FINDING OF THE AO AND ACCORDINGLY, HE CONFIRMED THE ACTION OF THE AO. LEARNED CIT(A) HAS ALSO OBSERVED THAT THE ASSESSEE HIMSELF HAS DISALLOWED A SUM OF RS. 5 LAKHS AND THE ASSESSEE KN E W THAT THERE ARE CERTAIN EXPENDITURE INCURRED BY THE ASSESSEE WHICH RELATES TO E XEMPT INCOME. ACCORDINGLY, HE CONFIRMED THE ORDER OF THE AO. NOW, THE ASSESSEE IS IN APPEAL HERE BEFORE THE TRIBUNAL. 5 . THE CONTENTIONS RAISED BEFORE THE LOWER AUTHORITIES WERE REITERATED HERE BEFORE THE TRIBUNAL . THE ATTENTION OF THE BENCH WAS DRAWN ON VARIOUS DETAILS PLACED IN THE PAPER BOOK ALONG WITH VARIOUS CASE LAWS. THE ATTENTION OF THE BENCH WAS ALSO DRAWN ON COPY OF THE BALANCE SHEET PLACED ON THE RECORD. IT WAS ALSO EXPLAINED TH AT THE ASSESSEE COMPANYS SHARE IN SHARE CAPITAL WAS RS. 4,05,00,000 / - AND THERE WERE RESERVES AND SURPLUS OF RS. 2 54,50,38,924/ - . IT WAS FURTHER EXPLAINED THAT THERE WAS NO LOAN TAKEN DURING THE YEAR. SIMILAR LY , ATTENTION OF THE BENCH WAS DRAWN ON SHARE CAPITAL OF LAST YEAR AS WELL AS RESERVE S & SURPLUS OF LAST YEAR, WHICH WAS TOTALING TO RS. 202, 36, 63, 667/ - . IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS EARNED INTEREST INCOME OF RS. 4,50,46,250/ - WHEREAS ONLY EXPENDITURE OF RS. 51,37,739/ - HAS BEEN INCURRED BY THE ASSESSEE ON ACCOUNT OF INTEREST PAID ON LOANS . ACCORDINGLY, IT WAS EXPLAINED THAT THE ASSESSEE HAS ITS OWN FUNDS WHICH WERE INVESTED IN THE SHARES AND SHARES WERE ITA NO . 61 /20 1 2 5 KEPT UNDER TWO PORTFOLIO I.E. ON ACCOUNT OF INVESTMENT PORTFOLIO AND ON ACCOUNT OF TRADING PORTFOLIO. SINCE THE ASSESSEE HAS ITS OWN FUNDS, NO DISALLOWA NCE CAN BE MADE UNDER SECTION 14A R.W.RULE 8D. IT WAS FURTHER STATED THAT THE ASSESSEE COMPANY WAS FA I R ENOUGH AS A SUM OF RS. 5 LAKHS HAS ALREADY BEEN DISALLOWED UNDER SECTION 14A, WHEREAS NO DISALLOWANCE WAS WARRANTED BECAUSE THE ASSESSEE HAS ITS OWN FUND S ON WHICH NO INTEREST WAS PAID. IN SUPPORT OF HIS CONTENTIONS, RELIANCE WAS PLACED ON VARIOUS CASE LAWS. SOME OF THEM ARE AS UNDER : - I) CIT VS. RELIANCE UTILITIES & POWER LTD. (2009) 18 DTR (BOM) 1 ; II) M/S RELIANCE INDUSTRIES LTD. VS. ACIT, (2012) 79 D TR (MUMBAI) (TRIB) 315; AND III) CIT VS. HERO CYCLES LIMITED, (2010) 323 ITR 518 (PUNJAB & HARYANA HIGH COURT). 6 . ON THE OTHER HAND LEARNED D R HAS PLACED RELIANCE ON THE ORDER OF AO AND LEARNED CIT(A). 7 . AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, WE FOUND THAT THE ASSESSEE DESERVES TO SUCCEED IN ITS APPEAL. WE NOTED THAT THE ASSESSEE HAS ITS OWN SUFFICIENT FUNDS TO MAKE INVESTMENT IN SHARES. IT IS FURTHER SEEN THAT BORROWED MONEY WERE ALSO REPAID IN THIS YEAR OUT OF SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE COMPANY. NOTHING HAS BEEN BROUGHT ON RECORD EITHER BY THE AO OR BY THE CIT(A) THAT THE EXPENDITURE INCURRED BY THE ASSESSEE RELATE TO EARNING OF DIVIDEND WHICH ARE EXEMPT. SECONDLY, THE AO HAS NOT TAKEN ITA NO . 61 /20 1 2 6 INTO CONSIDERATION THE OWN FUNDS AVAILABLE WITH THE ASSESSEE ON WHICH NO INTEREST EXPENDITURE HAS BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNTS. THE ASSESSEE HAS SHOWN RS.4.50 CRORES OF INTEREST INCOME WHEREAS THE ASSESSEE HAS PAID AMOUNT OF INTEREST AT RS. 51 LAKHS OR ODD . F ROM THIS FA CT ALONE, IT ESTABLISHES THAT THE ASSESSEE COMPANY IS HAVING ITS OWN FUNDS WHICH WERE ADVANCED FOR THE PURPOSE OF EARNING INTEREST AND INTEREST INCOME HAS BEEN EARNED WHICH HAS BEEN OFFERED FOR TAXATION. SIMILARLY, OUT OF OWN FUNDS, INVESTMENTS MADE BY THE ASSESSEE COMPANY IN SHARES ON WHICH NO INTEREST HAS BEEN PAID. LIKEWISE OTHER EXPENSES, THE ALLOWANCES AND SALARIES PAID TO VARIOUS EMPLOYEES CANNOT BE TREATED AS THEY WERE INCURRED FOR THE PURPOSE OF EARNING OF DIVIDEND ONLY. 8 . THE HON B LE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LIMITED (SUPRA) HAS HELD THAT TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST - FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST - FREE FUNDS AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE B ASIS OF THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS . SIMILAR FACTS ARE INVOLVED HERE IN THE PRESENT CASE AS IN THIS CASE ALSO THE ASSESSEE HAS ITS OWN FUNDS FROM WHICH THE INVESTMENT HAS ITA NO . 61 /20 1 2 7 BEEN MADE AND VARIOUS EXPENSES HAVE BEEN INCURRED FOR THE PURPOSE OF MAINTAINING ESTABLISHMENT. 9 . SIMILAR VI EW HAS BEEN EXPRESSED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF M/S RELIANCE INDUSTRIES LTD. (SUPRA) . IN THIS CASE ALSO THE TRIBUNAL HAS HELD THAT THE ASSESSEES OWN FUNDS BEING FAR IN EXCESS OF THE INVESTMENTS MADE BY IT WHICH YIELDED EXEMPT INCOME, IT HAS TO BE PRESUMED THAT THE INVESTMENTS HAD COME FROM THE INTEREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE AND, THEREFORE, THE DISALLOWANCE UNDER SECTION 14A MADE BY THE AO IN RESPECT OF I NTEREST ON BORROWINGS CANNOT BE SUSTAINED . WHILE HOLDING SO, THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LIMITED (SUPRA) WAS FOLLOWED BY THE TRIBUNAL. 1 0 . IN THE CASE OF HERO CYCLES LIMITED (SUPRA) , THE HON BLE PUNJAB AND HARYANA HIGH COURT HAS HELD THAT : - HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE ON INTEREST WAS SET OF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FIND ING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE ACCEPTED. DISALLOWANCE UNDER SECT ION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDI TURE HAD BEEN INCURRED, DISALLOW ANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE . ITA NO . 61 /20 1 2 8 1 1 . WE HAV E CONSIDERED OTHER CASES ALSO AND FOUND THAT THEY ARE IN SUPPORT OF THE CASE OF THE ASSESSEE. THEREFORE, WE HOLD THAT DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A R.W. RULE 8D WAS NOT JUSTIFIED BECAUSE THE ASSESSEE HAS ITS OWN SUFFICIENT FUNDS WHICH WERE INVESTED IN THE SHARES AND WERE UTILIZED FOR INCURRING THE VARIOUS OTHER EXPENSES AND NO INTEREST HAS BEEN PAID ON THESE SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE. ACCORDINGLY, WE DELETE THE DISALLOWANCE OF RS. 1,40, 06, 686/ - SUSTAINED BY THE LEARNED CIT(A) . 1 2 . IN THE RESULT , APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE E - COURT ON THIS 2 0 TH DAY OF MAR , 201 3 . - 201 3 SD/ - SD/ - ( ) ( RAJENDRA ) ( ) ( R.K.GUPTA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED : 2 0/03 / 201 3 . /PKM , PS COPY OF THE ORDER FO RWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) , MUMBAI / NAGPUR . 4. / CIT 5. / DR, ITAT, MUMBAI / NAGPUR . 6. GUARD FILE. //TRUE COPY// / BY ORDER, ( DY./ASSTT. REGISTRAR) / ITAT, MUMBAI