M/s. Taurus Home Furnishings Ltd., New Delhi V. ACIT, New Delhi

ITA 6344/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3708 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2012-2013
• Appeal Filed On: 13-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SARAS KUMAR
• Assessee Lawyers: V K GARG
• Keywords: Earning of tax free income; Proportionate interest; Rule 8D
• Section: 14A; 113

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE SH. KULDIP SINGH, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 6344/DEL/2016 : ASSTT. YEAR : 2012-13 TAURUS HOME FURNISHINGS LTD. P-65 SOUTH EXTENSION- II, NEW DELHI-110049 VS ACIT, CIRCLE-25 (1), NEW DELHI (APPELLANTT (RESPONDENT) PAN NO. AACCT3484A ASSESSEE BY : SH. V. K. GARG, ADV. REVENUE BY : SH. SARAS KUMAR, SR. DR DATE OF HEARING:23.01.2020 DATE OF PRONOUNCEMENT: 24.02.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDERS OF THE LD. CIT(A)-10, NEW DELHI DATED 29 .09.2016. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESS EE: 1. THAT ON THE FACTS AND LAW INVOLVED THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [LD. CIT(A)] ERRED IN UPHOLDING THE ADDITIONAL DISALLOWANCE OF A SUM OF RS.5,92,587/- MADE BY THE ASSESSING OFFICER [LD. AO] U/S 14A OF THE ACT READ WITH THE RULE 8D. 2. THAT THE LD. CIT (A) ERRED IN UPHOLDING DISALLOWANCE OF PRORATE INTEREST EXPENSES OF RS. 1,87,028/- UNDER SECTION 14A ESTIMATED TO HAVE BEEN INCURRED TO EARN TAX-FREE DIVIDEND INCOME THOUGH TH E ASSESSES HAS HUGE OWNED FUNDS AND HUGE CASH PROFITS FAR IN EXCESS OF TAX-FREE INVESTMENTS. 3. THE LD. CIT(A) ERRED IN UPHOLDING DISALLOWANCE O F PRORATE ADMINISTRATIVE EXPENSES WORKED OUT AS PER ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 2 RULE 8D AT RS. 5,25,559/- ESTIMATED TO HAVE BEEN INCURRED TO EARN THE TAX-FREE DIVIDEND INCOME. 4. THE LD. CIT(A) ERRED IN NOTE DIRECTING THE LD. A .O. TO EXCLUDE THE AMOUNT OF INVESTMENTS IN SHARES ON WHICH NO DIVIDEND INCOME WAS RECEIVED WHILE COMPUTING THE AVERAGE VALUE OF INVESTMENTS YIELDING EXEMPT INCOME. 5. THE LD. CIT(A) ERRED IN NOTE DIRECTING THE LD. A .O. TO EXCLUDE THE AMOUNT OF INVESTMENT IN CAPITAL ACCOUNT OF THE FIRM WHILE COMPUTING THE AVERAGE VALUE OF INVESTMENTS YIELDING EXEMPT INCOME. LD. CIT(A) FAILED TO APPRECIATE THE FACT THAT AS PER TH E PROVISIONS OF PARTNERSHIPS ACT, 1932 THE PROFIT SHA RE OF A PARTNER IS NOT DEPENDENT ON THE CAPITAL CONTRIBUTION OF THE PARTNER IN THE FIRM AND INTERES T IF ANY RECEIVED ON CAPITAL, IS TAXABLE AS BUSINESS INC OME OF THE PARTNER. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY REGISTERED UNDER INDIAN COMPANIES ACT AND E NGAGED IN THE BUSINESS OF MANUFACTURING, EXPORTER, IMPORTER, TRADERS, REPRESENTATIVES, CONSULTANTS, DISTRIBUTORS, BUYERS AND SELLERS OF HOME FURNISHING ITEMS LIKE CUSHIONS, BED COVERS, QU ILTS ETC. DURING THE YEAR, RS. 58,87,382/- WAS RECEIVED BY TH E ASSESSEE AS DIVIDEND FROM ITS INVESTMENTS. 4. THE ONLY ISSUE IN ALL THESE GROUNDS OF APPEAL RE LATE TO CONFIRMATION OF ADDITIONAL DISALLOWANCE U/S 14A R.W . RULE 8D OF RS.5,92,587/- BY THE COMMISSIONER OF INCOME TAX (AP PEALS) WHICH WAS MADE BY THE ASSESSING OFFICER AS AGAINST DISALLOWANCE U/S 14A OF RS.1,48,140/- COMPUTED BY T HE ASSESSEE, THE ASSESSING OFFICER COMPUTED DISALLOWAN CE OF RS.7,40,727/- BY APPLICATION OF RULE 8D. ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 3 5. THE NET DISALLOWANCE OF RS. 5,92,587/- HAS BEEN WORKED OUT BY THE ASSESSING OFFICER BY APPLYING SUB-RULE ( I), (II) & (III) OF RULE 8D, AFTER ALLOWING CREDIT FOR RS.1,48,140/- DISALLOWED BY THE ASSESSEE AS PER ITS OWN COMPUTATION. 6. THE DISALLOWANCE OF RS. 5,92,587/- U/S 14A AS MA DE BY THE ASSESSING OFFICER IS BIFURCATED AS UNDER: A. DISALLOWANCE OF PROPORTIONATE INTEREST (OUT OF INTE REST ON WORKING CAPITAL LOAN) RS.187,028/-; B. ADDITIONAL DISALLOWANCE OF INDIRECT ADMIN EXPENSES RS.3,38,531/-. 7. REGARDING THE DISALLOWANCE OF INTEREST, IT WAS S UBMITTED THAT INVESTMENTS IN SHARES AND MUTUAL FUNDS WAS MAD E BY THE ASSESSEE OUT OF ITS OWN FUNDS. THERE IS NO INCREASE IN INVESTMENTS YIELDING TAX FREE INCOME. RATHER THERE IS DECREASE IN TOTAL INVESTMENTS IN MUTUAL FUNDS AND SHARES BY RS. 3.47 CRORES AND STANDS AS ON 31.3.2012 OF RS. 6.47 CRORE AS AGAINST RS. 9.94 CRORE AS ON 31.3.2011. IT WAS REITERATED T HAT INVESTMENT WAS MADE OUT OF SURPLUS FUNDS AND NOT BO RROWED FUNDS. THERE IS NO INCREASE IN THE WORKING CAPITAL LOAN THIS YEAR. THE LOAN WAS RAISED IN EARLIER YEARS. TOTAL BALANCE AS ON 31.3.2012 WAS RS. 2.45 CRORE AS AGAINST RS. 3 CRORE ON 31.3.2011. THE PROFIT BEFORE TAX IS RS. 4.96 CRORES AND SHARE CAPITAL PLUS RESERVES & SURPLUS AS ON 31.3.2011 AND 31.3.2012 RESPECTIVELY ARE RS. 30.11 CRORE AND RS 34.13 CRORE , THUS PROVING THAT THE ASSESSEE HAS GOT SUFFICIENT OWN FU NDS. THE FACTS IN BRIEF ARE AS UNDER: ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 4 PARTICULARS AMOUNT AS ON 31/3/2012 (RS.) AMOUNT AS ON 31/3/2011 (RS.) INVESTMENTS INVESTMENT IN MUTUAL FUNDS AND SHARES 6,47,18,125 9,94,30,099 INVESTMENT IN PARTNERSHIP FIRM 1,00,000 4,59,75,568 TOTAL INVESTMENTS 6,48,18,125 14,54,05,667 WORKING CAPITAL LOAN AXIS BANK 2,45,93,933 3,00,78,528 SHAREHOLDER'S FUNDS (SHARE CAPITAL + RESERVES & SURPLUS 34,13,35,788 30,11,43,714 8. FROM THE ABOVE, IT CAN BE OBSERVED THAT THE ASSE SSEE IS ALREADY HAVING ITS OWN SURPLUS FUND MUCH MORE THAN THE INVESTMENT MADE AND IT CAN BE PRESUMED THAT INVESTM ENTS HAVE BEEN MADE OUT OF OWN FUNDS AND THERE IS NO NEED OF MAKING ANY DISALLOWANCE OF EXPENDITURE IN RESPECT OF INTEREST. 9. RELIANCE IS PLACED ON THE FOLLOWING JUDGMENTS: PCIT V SINTEX INDUSTRIES LTD. (2017) 82 TAXMANN.COM 171 (GUJARAT) HT MEDIA LTD. V PCIT (2017) 85 TAXMANN.COM 113 (DELHI) CIT V. HDFC BANK LIMITED (2014) 49 TAXMANN.COM 335 (BOM.) 10. IN VIEW OF ABOVE, THE ALLOCATION OF INTEREST OF RS.1,87,028/- IS NOT WARRANTED AND THE DISALLOWANCE DESERVES TO BE DELETED. ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 5 11. REGARDING THE DISALLOWANCE OF EXPENSES, THE ASS ESSEE HAS DISALLOWED THE SAME AS UNDER: DP CHARGES & STT - RS.28,140 INDIRECT EXPENSES - RS.1,20,000 12. THE TOTAL INVESTMENTS AS CONSIDERED BY AO FOR C ALCULATION OF DISALLOWANCE U/S 14A R.W. RULE 8D INCLUDE INVEST MENTS IN PARTNERSHIP FIRM OF RS 1 LAKH AS ON 31.3.2012 (NOT E NO. 11) ON WHICH NO EXEMPT INCOME WAS RECEIVED DURING THE YEAR . 13. IN THIS REGARD, THE BASIS OF PRINCIPLES LAID DO WN TO DETERMINE THE QUANTUM OF DISALLOWANCE ON ISSUE UNDE R CONSIDERATION BY THE HONBLE HIGH COURT OF BOMBAY I N THE CASE OF GODREJ & BOYEE MFG. CO. LTD. V. DCIT IN ITA NO.6 26 & WP 2010, WHICH FAN BE ENUMERATED AS UNDER: I) THE PROVISIONS OF SECTION 14A AND RULE 8D ARE C ONSTITUTIONALLY VALID. II) THE BASIS OBJECT OF SECTION 14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. III) THE INSERTION OF SECTION 14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIS PRINCIPLE OF TA XATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXABLE. ONCE THE TEST OF PROXIMATE CAUSE, BASED ON THE RELA TIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A. IV) WHAT MERITS EMPHASIS IS THAT THE JURISDICTION O F THE ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCURRED IN RE LATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIM TO HAVE INCURRED IN ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 6 RELATION TO INCOME WHICH DOES NOT FORMING PART OF T HE TOTAL INCOME. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE A RRIVED AS ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE ASSESSING OFFI CER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATUR E DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. V) IN THE EVENT THE ASSESSING OFFICER IS NOT SATISF IED WITH THE CORRECTION OF THE CLAIM MADE BY THE ASSESSEE, HE MU ST RECORD REASONS FOR HIS CONCLUSION. VI) THE EFFECT OF SECTION 14A IS TO WIDEN THE THEOR Y OF THE APPOINTMENT OF EXPENDITURE. VII) SUB SECTION (2) AND (3) OF SECTION 14A ARE INT ENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB SECTION (1). VIII) EVEN IN THE ABSENCE OF SUB-SECTION (2) OF SEC TION 14A, THE ASSESSING OFFICER WOULD HAVE TO APPORTION THE EXPEN DITURE AFTER FOLLOWING A REASONABLE METHOD CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRANT AND HAVING REGARD TO ALL RELEVANT FACTS AND CIRCUMSTANCES TO DISALLOW THE EX PENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THE ACT. IX) THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. X) WHERE THE EXPENDITURE INCURRED CANNOT BE RELATED TO EITHER TAKABLE INCOME OR EXEMPTED INCOME, THE PROVISIONS O F SECTION 14A WOULD BE ATTRACTED AND THEREFORE, AO WOULD BE JUSTI FIED IN MAKING DISALLOWANCE IN ACCORDANCE WITH PROVISIONS OF SUB S ECTION (2) & (3) R/W RULE 8D. 14. FROM THE ABOVE, IT CAN BE DECIPHERED THAT RULE 8D IS NOT MANDATORY, THE ASSESSING OFFICER MUST RECORD HIS SA TISFACTION THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE FOR COGENT REASONS. SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARR IVED AT, HAVING ITA NO. 6344/DEL/2016 TAURUS HOME FURNISHINGS LTD. 7 REGARD TO THE ACCOUNTS OF THE ASSESSED AS ENUNCIATE D IN THE CASE OF MAXOPP INVESTMENT LTD. V CIT 402 ITR 640 (S C) AND GODREJ BOYCE V DCIT (2017) 394 ITR 449 (SC). 15. FROM THE RECORDS OR FROM THE ARGUMENTS OF THE L D. DR, WE FIND THAT THE INVOCATION OF SUB-SECTION (2) OF SECT ION 14A IS CONSPICUOUSLY ABSENT AND HENCE RE-COMPUTATION OF TH E DISALLOWANCE IS NOT LEGALLY VALID. AND CONSIDERING THE INVESTMENTS IN MUTUAL FUNDS AND IN SHARES ARE THROU GH PMS, HARDLY ANY EXPENSE IS INCURRED. AS SUCH THE ESTIMAT ED DISALLOWANCE MADE BY ASSESSEE SUO MOTO IS REASONABLE AS IT MEETS THE EXPENSES ON ACCOUNT OF STT AS WELL AS IN DIRECT EXPENSES. HENCE, WE HEREBY HOLD THAT NO ADDITIONAL DISALLOWANCE IS CALLED FOR BY INVOKING RULE 8D. ALL THE GROUNDS ARE TREATED AS ADJUDICATED AS THE CORE ISSUES HAS B EEN DEALT IN THE ABOVE PARAGRAPHS. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24/02/2020. SD/- SD/- (KULDIP SINGH) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 24/02/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR