M/s MPL Enterprises Limited, Manipal V. Addl.C.I.T., Udupi

ITA 622/BANG/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8714 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-02-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 08-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P DHIVAHAR JT
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.622/BANG/2014 ASSESSMENT YEAR : 2011-12 M/S. MPL ENTERPRISES, SYNDICATE HOUSE, MANIPAL 576 104. PAN : AABCM 3221B VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX, UDUPI RANGE, UDUPI 576 103. APPELLANT RESPONDENT APPELLANT BY : SMT. SHEETAL BORKAR, ADVOCATE RESPONDENT BY : SHRI P. DHIVAHAR, JT. CIT (DR) DATE OF HEARING : 12.02.2015 DATE OF PRONOUNCEMENT : 27.02.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 17.3.2014 OF THE CIT(APPEALS), MYSORE RELATING TO ASSESSMENT YEAR 2011-12. 2. THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINE SS OF DEALING IN PROPERTIES, FOREIGN CURRENCY AND INSURANCE AGENCY R ELATED SERVICES. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD SHO WN IN THE BALANCE SHEET AS ON 31.3.2011 INVESTMENT IN SHARES OF RS.92 ,34,050. THE ITA NO.622/BANG/2014 PAGE 2 OF 6 ASSESSEE ALSO EARNED DIVIDEND INCOME OF RS.1,15,584 WHICH WAS CLAIMED AS EXEMPT IN THE COMPUTATION OF INCOME. 3. UNDER THE PROVISIONS OF SECTION 14A OF THE ACT, ANY EXPENDITURE INCURRED IN EARNING INCOME (DIVIDEND INCOME) WHICH DOES NOT FORM PART OF TOTAL INCOME U/S. 10A OF THE ACT, SHOULD BE DISALLO WED. ACCORDING TO ASSESSEE, ONLY A SUM OF RS.2,890 IN THE FORM OF ADM INISTRATIVE EXPENSES HAD TO BE DISALLOWED U/S. 14A OF THE ACT. 4. THE AO WAS OF THE VIEW THAT DISALLOWANCE OF EXPE NSES OF EARNING EXEMPT INCOME HAD TO BE WORKED OUT IN ACCORDANCE WI TH RULE 8D OF THE I.T. RULES. THE ASSESSEE, IN REPLY TO THE QUERY OF AO I N THIS REGARD SUBMITTED AS FOLLOWS:- AS PER OUR OPINION THERE ARE NO AMOUNT DISALLOWABL E U/S 14A. THE REASONS ARE GIVEN BELOW: A. AS ON 31 ST MARCH, 2010, THE TOTAL BORROWED FUNDS OF THE COMPANY WAS RS.9,19,00,000/-, WHEREAS THE INVESTMEN T HELD WAS RS. 1,00,42,530/-. THE BORROWED FUND REPRESENTS , THE AMOUNT RAISED BY WAY OF DEBENTURES, WHICH WAS USED TO MAKE THE PAYMENT TOWARDS DEMERGER DUES OF M/S ICDS LIMIT ED. THE WHOLE OF THE DEMERGER DUES OF M/S ICDS LIMITED WAS INCURRED TO ACQUIRE THE ASSETS AS STOCK IN TRADE AN D NO PORTION OF THE SAME IS ALLOCABLE TO THE INVESTMENTS IN SHAR ES. B. FURTHER, DURING THE YEAR ENDING 31 ST MARCH, 2011, THERE ARE NO NEW INVESTMENTS. THE WHOLE OF THE DEBENTURES RAISED RS. 16,00,00,000/- WAS USED TO MAKE THE REPAYMENT TOWAR DS DEMERGER OF DUES OF M/S ICDS LIMITED. C. THUS NO PORTION OF THE BORROWED FUND IS ALLOCABL E TO THE INVESTMENTS AND ACCORDINGLY THERE IS NO DISALLOWANC E OF INTEREST U/S 14A. ITA NO.622/BANG/2014 PAGE 3 OF 6 D. FURTHER NO PORTION OF THE EXPENSES ALLOCABLE TO EARNING OF DIVIDEND. NONE OF THE EXPENSES WERE INCURRED TO EAR N DIVIDEND. HOWEVER THE COMPANY HAS ON ITS OWN DISALL OWED A SUM OF RS. 2,890/- TOWARDS THE SAME, BEING AMOUNT I NCURRED TOWARDS COLLECTION OF CHEQUES ETC. THUS THERE ARE N O FURTHER DISALLOWANCES OF EXPENSES U/S 14A. 5. THE AO DID NOT VERIFY THE AFORESAID CLAIM OF THE ASSESSEE, BUT OBSERVED THAT DISALLOWANCE U/S. 14A OF THE ACT R.W . RULE 8D OF THE RULES HAD TO BE MADE AND HE WORKED OUT THE DISALLOWANCE A S FOLLOWS:- 4.6 HENCE, IN THE LIGHT OF THE ABOVE JUDGMENTS AND FOR THE REASONS STATED IN PARAS ABOVE, DISALLOWANCE U/S. 14 A HAS TO BE DONE. HENCE, THE DISALLOWANCE IN ACCORDANCE WITH R ULE 8D(2) IS WORKED OUT AS UNDER: RULE 8D(2)(I) : NIL RULE 8D(2)(II) : A X B C A. INTEREST EXPENSES : RS. 1,52,68,865 B. AVERAGE VALUE OF INVESTMENT : RS. 96,38,290 C. AVERAGE OF TOTAL ASSETS :[28,19,40,678+27,24,29 ,698/2] = RS. 27,71,35,188 1,52,68,865 X 96,38,290 = RS. 5,30,929 27,71,85,188 RULE 8D(2)(III) : % OF AVERAGE VALUE OF INVESTMENT RS. 96,38,290 X 0.5% = RS. 48,191 RULE 8D(2)(I) : NIL RULE 8D(2)(II) : RS. 5,30,929 RULE 8D(2)(III) ; RS. 48,191 RS.5,79,120 IN VIEW OF THE ABOVE, AN AMOUNT OF RS. 5,79,120/- AS WORKED OUT ABOVE IS ADDED TO THE TOTAL INCOME OF TH E ASSESSEE U/S 14A R.W. RULE 8D OF THE IT RULES BEING THE EXPENDIT URE FOR ITA NO.622/BANG/2014 PAGE 4 OF 6 EARNING THE EXEMPTED INCOME FOR WHICH THE AR OF THE ASSESSEE VIDE ORDER SHEET NOTING DATED 12.12.2013 HAS AGREED . 6. BEFORE THE CIT(A), THE ASSESSEE REITERATED THE C ONTENTIONS AS WERE PUT FORTH BEFORE THE AO. THE CIT(A), HOWEVER, UPHE LD THE ORDER OF AO. HENCE THE ASSESSEE'S APPEAL BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US A COPY OF THE ANNUAL REPORT FOR 2010-11 AND POINTED OUT THAT THE OWN FUN DS OF THE ASSESSEE AS ON 31ST OF MARCH, 2010 & 2011 WERE MUCH MORE THAN T HE INVESTMENTS IN SHARES. IT WAS POINTED OUT BY HIM THAT SHARE CAPIT AL RESERVES AND SURPLUS WERE RS.2,84,03,000 AND RS.69,45,722 RESPECTIVELY A S ON 31.3.2010 AND RS.2,84,03,000 AND RS.74,75,780 RESPECTIVELY AS ON 31.3.2011. THE VALUE OF INVESTMENTS IN SHARES AS ON 31.3.2010 WAS RS.1,0 0,42,530 AND AS ON 31.3.2011 IT WAS RS.92,34,050. THE LD. COUNSEL FOR THE ASSESSEE ACCORDINGLY SUBMITTED THAT OWN FUNDS WERE MUCH MORE THAN THE INVESTMENT IN SHARES AND THEREFORE NO DISALLOWANCE OUGHT TO HA VE BEEN MADE U/S. 14A OF THE ACT R.W. RULE 8D OF THE RULES. THE OTHER SU BMISSIONS MADE BEFORE THE AO WERE ALSO REITERATED BEFORE US. 8. THE LD. DR RELIED ON THE ORDER OF THE AO. 9. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO TH E RIVAL SUBMISSIONS. IN OUR VIEW, THE DISALLOWANCE U/S. 14A OF THE ACT R .W. RULE 8D OF THE I.T. RULES INSOFAR AS IT RELATES TO APPLICATION OF RULE 8D(2)(II) OF THE RULES CANNOT BE SUSTAINED. AS IS CLEAR FROM THE FINANCIA L STATEMENTS, THE ITA NO.622/BANG/2014 PAGE 5 OF 6 ASSESSEE HAD OWN FUNDS WHICH WERE SUFFICIENT TO MAK E INVESTMENT IN SHARES. IN THE CIRCUMSTANCES, THE CONCLUSION OF AO THAT BORROWED FUNDS WERE USED FOR MAKING INVESTMENTS IN SHARES CANNOT B E SUSTAINED. 10. AS FAR AS DISALLOWANCE UNDER RULE 8D(2)(III) OF THE RULES IS CONCERNED, THE SAME DESERVES TO BE REMANDED BACK TO THE AO FOR FRESH CONSIDERATION. THE ASSESSEE HAD CLAIMED BEFORE THE AO THAT GENERAL EXPENSES INCURRED FOR EARNING TAX FREE DIVIDEND WAS ONLY RS.2,890. THIS EXPLANATION HAS NOT BEEN FOUND TO BE FALSE BY THE A O. WHENEVER AN ASSESSEE MAKES A CLAIM REGARDING EXPENDITURE INCURR ED FOR EARNING EXEMPT INCOME, IT IS INCUMBENT UPON THE AO TO CONSIDER SUC H A CLAIM AND REJECT THE SAME OBJECTIVELY AND ONLY THEREAFTER AO CAN RESORT TO INVOKING RULE 8D(2)(III) OF THE RULES. IN THE SET ASIDE PROCEEDI NGS, THE AO WILL EXAMINE THE CLAIM OF ASSESSEE AND THEREAFTER DECIDE THE ISS UE IN ACCORDANCE WITH LAW. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF FEBRUARY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 27 TH FEBRUARY, 2015. /D S/ ITA NO.622/BANG/2014 PAGE 6 OF 6 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.