ACIT NON CORPORATE CIRCLE 4 , COIMBATORE V. M/S TEXMO INDUSTRIES, COIMBATORE

ITA 619/CHNY/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4332 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 20-02-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R CLEMENT RAMESH KUMAR
• Keywords: Business income; Rule of consistency; Earning of tax free income
• Section: 40(b); 14A

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NOS.618, 619 & 620/CHNY/2018 /ASSESSMENT YEARS: 2009-10, 2011-12 & 2014-15 THE ASSISTANT /DEPUTY COMMISSIONER INCOME TAX, NON CORPORATE CIRCLE 4, COIMBATORE. VS. M/S. TEXMO INDUSTRIES, POST BOX NO. 5303, METTUPALAYAM ROAD, G.N. MILLS POST, COIMBATORE 641 029. [PAN:AABFT1899B] ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI R. CLEMENT RAMESH KUMAR, ADDL. CIT / RESPONDENT BY : NONE / DATE OF HEARING : 05.02.2019 /DATE OF PRONOUNCEMENT : 12.02.2019 / O R D E R PER BENCH: THESE THREE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 3, COIMBATORE ALL DATED 06.12.2017 RELEVANT TO THE ASSESSMENT YEARS 2009-10, 2011-12 AND 2014-15. SINCE ALL THE APPEALS ARE PERTAINING TO SAME ASSESSEE, COMMON GROUNDS RAISED AND HEARD ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF BREVITY. I.T.A. NO.2416/CHNY/18 2 2. THE FIRST COMMON GROUND RAISED IN THE APPEALS OF THE REVENUE IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE INTEREST AS WELL AS REMUNERATION PAID TO THE PARTNERS UNDER SECTION 40(B) OF THE INCOME TAX ACT, 1961 [ACT IN SHORT]. BY INVOKING THE PROVISIONS OF SECTION 40(B) OF THE ACT, THE ASSESSING OFFICER DISALLOWED THE INTEREST AND REMUNERATION PAID TO THE PARTNERS BY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RASHIK LAL & CO. V. CIT 229 ITR 458. ON APPEAL, BY FOLLOWING VARIOUS DECISION INCLUDING THE DECISION OF THE TRIBUNAL IN THE CASE OF DCIT V. AQUA SUB ENGINEERING IN I.T.A. NO. 1958/MDS/2016, THE LD. CIT(A) DELETED THE DISALLOWANCE. 3. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. NONE APPEARED ON BEHALF OF THE ASSESSEE, DESPITE SERVICE OF NOTICE [RPAD ON RECORD]. HENCE, WE PROCEED TO DECIDE THE APPEALS ON MERITS AFTER HEARING TO THE LD. DR. 4. WE HAVE HEARD THE LD. DR, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE LD. DR HAS SUBMITTED THAT AS PER PARTNERSHIP DEED, NOT A SINGLE PARTNER IS A NATURAL PERSON, BUT ALL PARTNERS ARE LEGAL OR ARTIFICIAL ENTITIES. BY STRONGLY RELYING UPON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF RASHIK LAL & CO. V. CIT (SUPRA), WHEREIN, IT WAS HELD THAT THE INDIVIDUAL, THOUGH BEING A KARTA OF A HUF, CAN I.T.A. NO.2416/CHNY/18 3 ONLY BE A PARTNER IN HIS INDIVIDUAL CAPACITY AND CANNOT REPRESENT HIS HUF. BY REFERRING TO THE SAID JUDGEMENT OF THE HONBLE SUPREME COURT, IN THE CASE OF CIT V. GOLDEN TOUCH 263 ITR 261, THE HONBLE JURISDICTIONAL HIGH COURT HAS OBSERVED AND HELD AS UNDER: 4. THE ASSESSEE IS A FIRM WHICH HAD PAID REMUNERATION TO ITS WORKING PARTNERS. THE PAYMENTS SO MADE WERE DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT THOSE PARTNERS REPRESENTED THEIR RESPECTIVE HINDU UNDIVIDED FAMILIES, AND THEREFORE COULD NOT BE TREATED AS 'INDIVIDUALS' FOR THE PURPOSES OF EXPLANATION 4 TO SECTION 40(B). THAT VIEW OF THE ASSESSING OFFICER THOUGH AFFIRMED BY THE COMMISSIONER, HAS BEEN REVERSED BY THE TRIBUNAL. 5. THE SUPREME COURT IN THE CASE OF RASHIK LAL AND CO. V. CIT HAS HELD THAT (PAGE 465): THERE IS NO WAY THAT A HINDU UNDIVIDED FAMILY CAN INTRUDE INTO THE RELATIONSHIP CREATED BY A CONTRACT BETWEEN CERTAIN INDIVIDUALS. THE ONLY RIGHT OF THE HINDU UNDIVIDED FAMILY IS POSSIBLY TO CALL UPON ITS NOMINEE PARTNER TO RENDER ACCOUNTS FOR THE PROFITS THAT HE HAS MADE FROM THE PARTNERSHIP BUSINESS. BUT THAT IS SOMETHING BETWEEN THE NOMINEE AND THE HINDU UNDIVIDED FAMILY WITH WHICH THE PARTNERSHIP IS NOT CONCERNED'. 6. AFTER REFERRING TO SECTION 13 OF THE PARTNERSHIP ACT WHICH PERMITS A SPECIAL CONTRACT FOR PAYMENT OF REMUNERATION TO THE PARTNERS, THE COURT OBSERVED (PAGE 466): SECTION 40(B) OF THE INCOME-TAX ACT, 1961, WILL APPLY, EVEN WHEN THERE IS SUCH A SPECIAL CONTRACT. ANY COMMISSION PAID BY A FIRM TO ITS PARTNER WILL NOT BE PERMITTED AS DEDUCTION FROM THE BUSINESS INCOME OF THE FIRM. IF A CLAIM IS MADE BY A PARTNER THAT HE IS REPRESENTING A HINDU UNDIVIDED FAMILY OR ANY OTHER BODY OF PERSONS, THEN THE POSITION IN LAW WILL NOT BE ANY DIFFERENT. THE HINDU UNDIVIDED FAMILY IS NOT AND CANNOT BE A PARTNER IN A PARTNERSHIP FIRM. THE REMUNERATION OR THE COMMISSION THAT IS PAID TO THE PARTNER CANNOT BE CLAIMED TO BE A REMUNERATION OR COMMISSION PAID TO THE HINDU UNDIVIDED FAMILY. THE PARTNER MAY BE ACCOUNTABLE TO THE FAMILY FOR THE MONIES RECEIVED BY HIM FROM THE PARTNERSHIP. BUT, IN THE ASSESSMENT OF THE FIRM, THE PARTNER CANNOT BE HEARD TO SAY THAT HE HAS NOT RECEIVED THE COMMISSION AS A PARTNER OF THE FIRM, BUT IN A DIFFERENT CAPACITY. I.T.A. NO.2416/CHNY/18 4 7. HAVING REGARD TO THAT POSITION IN LAW, THE REMUNERATION PAID TO THE INDIVIDUAL PARTNERS WHO ARE WORKING PARTNERS IS NOT TO BE DISALLOWED ON THE SOLE GROUND THAT SUCH PARTNERS WERE NOMINEES OF THEIR HINDU UNDIVIDED FAMILIES. EVEN AS THE HINDU UNDIVIDED FAMILY CANNOT CLAIM THAT REMUNERATION PAID TO THE PARTNERS REPRESENTING IT, IS REMUNERATION PAID TO THE HINDU UNDIVIDED FAMILY, SO ALSO THE ASSESSING OFFICER CANNOT REGARD TO THE REMUNERATION PAID TO SUCH PARTNER, WHO IS ALSO A WORKING PARTNER, AS REMUNERATION PAID TO THE HINDU UNDIVIDED FAMILY. 8. THE QUESTION RAISED BEFORE US BY THE REVENUE IS REQUIRED TO BE AND IS ANSWERED IN FAVOUR OF THE ASSESSEE. THE APPEAL IS DISMISSED. 4.1 SIMILAR VIEW WAS ALSO TAKEN BY THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT V. JUGAL KISHOR AND SONS IN 347 ITR 325. 4.2 FURTHER, ON AN IDENTICAL ISSUE, IN THE CASE OF DCIT V. AQUA SUB ENGINEERING (SUPRA), THE COORDINATE BENCHES OF THE TRIBUNAL HAS OBSERVED AS UNDER: 10. WHAT THEIR LORDSHIP HELD IS THAT EVEN IF A PERSON NOMINATED BY A HUF JOINS A PARTNERSHIP, THE PARTNERSHIP COULD BE DEEMED AS ONE BETWEEN SUCH NOMINATED PERSON AND OTHER PARTNERS OF THE FIRM. THE APEX COURT DID NOT HOLD THAT SUCH PARTNERSHIP WOULD ONLY BE AN ASSOCIATION OF PERSONS. IN ANY CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEES WERE GRANTED THE STATUS OF REGISTERED FIRM BY VIRTUE OF PROVISIONS OF SECTION 185(1) OF THE ACT SINCE ASSESSMENT YEAR 1991- 92. THE POSITION CONTINUED FOR A PERIOD OF TWENTY YEARS AND IT WAS AFTER SUCH TWENTY YEARS, THE ASSESSING OFFICER ATTEMPTED TO DISTURB THIS. WHEN A SET OF FACTS WHICH PERMEATES FROM EARLIER YEARS, IS CONSISTENTLY THE SAME, IT WOULD NOT BE APPROPRIATE TO DISTURB THE CONCLUSIONS REACHED BASED ON SUCH FACTS. NO DOUBT, RULE OF RES JUDICATA MAY NOT BE APPLICABLE TO THE INCOME-TAX PROCEEDINGS, BUT THE RULE OF CONSISTENCY DEMANDS THAT A POSITION CONSISTENTLY TAKEN SHALL NOT BE DISTURBED UNLESS THERE WERE SIGNIFICANT CHANGE IN FACTS. INSOFAR AS RELIANCE PLACED ON SECTION 40(B) OF THE ACT BY THE A.O. IS CONCERNED, THERE IS NOTHING IN THAT SECTION TO CONCLUDE THAT A PARTNERSHIP COULD NOT BE FORMED BY A KARTA OF AN HUF IN HIS INDIVIDUAL CAPACITY WITH OTHER PERSONS. THE I.T.A. NO.2416/CHNY/18 5 SAME, IN OUR OPINION, WOULD ALSO APPLY WHERE AN INDIVIDUAL WHO JOINS PARTNERSHIP IN A REPRESENTATIVE CAPACITY. IT CAN ALWAYS BE CONSIDERED THAT HE WAS DOING SO IN HIS INDIVIDUAL CAPACITY. THIS POSITION HAS BEEN REITERATED BY HON'BLE APEX COURT IN THE CASE OF BAGYALAKSHMI & CO. (SUPRA), WHICH HAS ALSO BEEN RELIED ON BY THE LD. CIT(APPEALS). CONSIDERING THE FACTS OF THE CASE, WE ARE INCLINED TO UPHOLD THE ORDERS OF THE CIT(APPEALS). THE APPEALS OF THE REVENUE STAND DISMISSED. 4.3 THE LD. DR COULD NOT CONTROVERT THE ABOVE FINDINGS OF THE HONBLE HIGH COURTS AS WELL AS THE DECISION OF THE TRIBUNAL, WHICH WAS RIGHTLY FOLLOWED BY THE LD. CIT(A) WHILE HOLDING THAT THE EXPENDITURES ARE ALLOWABLE. THUS, WE FIND NO REASON TO INTERFERE WITH THE ORDER PASSED BY THE LD. CIT(A). HENCE, THE GROUND RAISED BY THE REVENUE IS DISMISSED FOR ALL THE ASSESSMENT YEARS. 5. THE NEXT COMMON GROUND RAISED IN THE APPEALS OF THE REVENUE IS THAT THE LD. CIT(A) ERRONEOUSLY DELETED THE DISALLOWANCE MADE UNDER SECTION 14A R.W. RULE 8D. THE ASSESSEE MADE INVESTMENTS IN MUTUAL FUND AND EARNED DIVIDEND INCOME. HOWEVER, THE ASSESSEE HAS NOT ADMITTED ANY EXPENSES FOR EARNING THE EXEMPT INCOME. BEFORE THE ASSESSING OFFICER, IT WAS SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT INTERNAL ACCRUALS TO INVEST IN MUTUAL FUNDS AND THEREFORE, DISALLOWANCE TOWARDS INTEREST IS NOT WARRANTED. SINCE THE ASSESSEE HAS RECEIVED DIVIDEND INCOME, THE ASSESSING OFFICER DETERMINED THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D. THEREAFTER, A NOTICE DATED 09.12.2016 WAS ISSUED REQUIRING THE ASSESSEE TO SHOW CAUSE AS TO WHY THE AMOUNT WORKED OUT AS PER SECTION 14A OF THE ACT SHOULD NOT BE DISALLOWED. THE AR OF THE ASSESSEE VIDE HIS LETTER DATED 21.12.2016 FILED A REPLY TO THE I.T.A. NO.2416/CHNY/18 6 SHOW CAUSE NOTICE. THE REPLY FILED BY THE AR HAS BEEN CONSIDERED AND NOT FOUND TO BE SATISFACTORY AND ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE SAME AND BROUGHT TO TAX. ON APPEAL, THE LD. CIT(A) DELETED THE ADDITION MADE UNDER SECTION 14A OF THE ACT BY HOLDING THAT THE ASSESSMENT ORDER DOES NOT INDICATE ANY SATISFACTION ARRIVED AT BY THE ASSESSING OFFICER. 6. WE HAVE HEARD THE RIVAL CONTENTIONS. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS EARNED EXEMPT INCOME AND NOT ADMITTED ANY EXPENDITURE SUO- MOTU FOR EARNING THE EXEMPT INCOME. IN THE ASSESSMENT YEAR 2009-10, THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE, WHICH WAS TAKEN INTO ACCOUNT WHILE WORKING OUT THE DISALLOWANCE. HOWEVER, IT WAS THE CONTENTION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE SUFFICIENT INTERNAL ACCRUALS TO INVEST IN MUTUAL FUNDS AND THEREFORE DISALLOWANCE TOWARDS INTEREST EXPENSES IS NOT WARRANTED. AFTER DETERMINING THE DISALLOWANCE, A NOTICE DATED 09.12.2016 WAS ISSUED REQUIRING THE ASSESSEE TO SHOW CAUSE AS TO WHY THE AMOUNT WORKED OUT AS PER SECTION 14A OF THE ACT SHOULD NOT BE DISALLOWED. AFTER CONSIDERING THE REPLY TO THE SHOW CAUSE NOTICE FILED BY THE ASSESSEE AND REJECTING THE SAME, THE ASSESSING OFFICER MADE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W. RULE 8D(2)(II) & (III). WHAT REPLY FILED BY THE ASSESSEE WAS NOT AVAILABLE IN THE ASSESSMENT ORDER. MOREOVER, NO FINANCIAL STATEMENTS OF THE ASSESSEE IS ALSO AVAILABLE ON RECORD TO ACCEPT THAT THE ASSESSEE HAD SUFFICIENT INTERNAL ACCRUALS AND NO I.T.A. NO.2416/CHNY/18 7 BORROWED FUNDS ARE UTILIZED FOR MAKING INVESTMENT IN MUTUAL FUNDS. ACCORDINGLY, WE REMIT THE MATTER BACK TO THE FILE OF ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH BY PASSING SPEAKING ORDER KEEPING IN MIND THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT IN CIVIL APPEAL NOS. 104-109 OF 2015 DATED12.02.2018. THUS, THE GROUND OF APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 6.1 WITH REGARD TO THE DISALLOWANCE IN THE ASSESSMENT YEAR 2014-15, THE ASSESSEE HAS NOT ADMITTED ANY EXPENSES TOWARDS EARNING OF EXEMPT INCOME OF .4,82,19,870/-. THE ASSESSING OFFICER DETERMINED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W. RULE 8D(2)(III) AT .27,07,940/- BY COMPUTING THE AVERAGE OF INVESTMENT FROM WHICH DIVIDEND IS RECEIVED, WHICH WAS NOTIFIED TO THE ASSESSEE BEFORE CONCLUDING THE ASSESSMENT. AFTER CONSIDERING THE REPLY OF THE ASSESSEE AND NOT ACCEPTING THE SAME, THE ASSESSING OFFICER MADE THE ADDITION. THE LD. CIT(A) MECHANICALLY HELD THAT THE ASSESSING OFFICER HAS NOT RECORDED SATISFACTION BEFORE MAKING THE DISALLOWANCE. IN THIS CASE, THE ASSESSEE HAS NOT DEDUCTED ANY EXPENDITURE SUO-MOTU, FOR WHICH THE ASSESSING OFFICER IS REQUIRED TO RECORD HIS SATISFACTION TO SAY THAT THE COMPUTATION OF EXPENDITURE IS NOT CORRECT. THE PROVISION OF RULE 8D(2)(III) ENVISAGES THAT AN AMOUNT EQUAL TO 0.5% OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY I.T.A. NO.2416/CHNY/18 8 AND THE LAST DAY OF THE PREVIOUS YEAR. THE RECENT RULINGS OF THE HONBLE SUPREME COURT IN THE ABOVE CITED CASE MANDATED THAT AS LONG AS AN EXEMPT INCOME WAS EARNED, THE EXPENDITURE INCURRED AS ATTRIBUTABLE TO EARNING SUCH EXEMPT INCOME, HAD TO BE DISALLOWED UNDER SECTION 14A OF THE ACT. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. THUS, THE GROUND RAISED BY THE REVENUE STANDS ALLOWED. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IN I.T.A. NO. 618/CHNY/2018 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, I.T.A. NO. 619/CHNY/2018 IS DISMISSED AND I.T.A. NO. 620/CHNY/2018 IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 12 TH FEBRUARY, 2019 AT CHENNAI. SD/ - SD/ - ( INTURI RAMA RAO) ACCOUNTANT MEMBER (DUVVURU RL REDDY) JUDICIAL MEMBER CHENNAI, DATED, THE 12.02.2019 VM/- /COPY TO: 1. / APPELLANT, 2. / RESPONDENT, 3. ( ) /CIT(A), 4. /CIT, 5. /DR & 6. /GF.