ADDL.CIT., RANGE-5(2), MUMBAI V. KARP IMPEX LTD., MUMBAI

ITA 6346/MUM/2011

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2114 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-09-2015
• Assessment Year: misc
• Appeal Filed On: 14-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAGHUVEER MADNAPPA
• Assessee Lawyers: B V JHAVERI
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, ' INCOME TAX APPELLATE TRIBUNAL,MUMBAI- A,BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT ME MBER & SANJAY GARG,JUDICIAL MEMBER /.ITA NO.6346/MUM/2011, /ASSESSMENT YEAR-2007-08 ACIT-CIRCLE -5(2) ROOM NO.571, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. VS KARP IMPEX LTD. 1411, 14 TH FLOOR,PRASAD CHAMBERS TATA ROAD, OPERA HOUSE MUMBAI-400 004. PAN:AABCK 1823 F /.ITA NO.6419/MUM/2011, /ASSESSMENT YEAR-2007-08 KARP IMPEX LTD. MUMBAI-400 004. VS ACIT-CIRCLE -5(2) MUMBAI-400 020 ( / APPELLANT) ( / RESPONDENT) /ASSESSEE BY :SHRI B.V. JHAVERI / REVENUE BY :SHRI RAGHUVEER MADNAPPA / DATE OF HEARING : 10 - 09 -2015 / DATE OF PRONOUNCEMENT : 07 -10-2015 , 1961 1961 1961 1961 254 254 254 254( (( (1 11 1) )) ) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) # $% PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 01.06.2011OF CIT(A)-,MU MBAI,THE ASSESSING OFFICER(AO)AND THE ASSESSEE HAVE FILED CROSS APPEALS,RAISING FOLLOWING GROUNDS OF APPEAL ITA NO.6419/MUM/2011: 1. THE LD. CIT(A) ERRED IN RETAINING ADDITION OFRS. 1,72,09,413/- U/S 14A ON ACCOUNT OF INVESTMENTS AT RS. 448,746,447 / - IN PARTNERSHIP F IRM BY THE NAME OF KARP MFG. CO. 2.THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT SIN CE YOUR APPELLANT'S SHARE CAPITAL AND FREE RESERVES EXCEEDED RS.233 CRS ON 31.3.2007, INVESTME NT AT RS. 44.87 CRORES AS ON 31.3.2007 AND ODD,OUGHT TO HAVE BEEN TAKEN AS INVESTMENT FROM OWN CAPITAL AND DISALLOWANCE U/ S 14A(I) WAS NOT CALLED FOR. 3. YOUR APPELLANT THEREFORE PRAYS TO DELETE THE AD DITION AT RS.1,72,09,413/-. 4. THE LD. CIT(A) ERRED IN RETAINING DISALLOWANCE O F INTEREST AT RS.21,86,897/- U/S. 36(1)(III). 5. YOUR APPELLANT SUBMITS THAT NO AMOUNT WAS BORROW ED TO MAKE THE INVESTMENT IN BHARAT DIAMOND BOURSE AT BANDRA KURLA COMPLEX, MUMBAI AND THAT ALL THE BORROWINGS BEING WORKING CAPITAL, MADE UNDER PACKING CREDIT WERE DULY INVEST ED IN EXPORT BUSINESS. NO DISALLOWANCE U/S 36(1)(III) WAS WARRANTED. NOTHING IS SPECIFICALLY B ORROWED FOR MAKING INVESTMENT IN' BHARAT DIAMOND BOURSE AT BANDRA KURLA COMPLEX, MUMBAI. 6. YOUR APPELLANT, THEREFORE PRAYS TO DELETE THE A DDITION RETAINED U/S 36(I)(III). 7. YOUR APPELLANT PRAYS TO ALLOW SUCH OTHER RELIEF OR RELIEFS AS ARE AVAILABLE UNDER LAW. ITA NO.6346/MUM/2011: WHETHER ON THE FACTS, CIRCUMSTANCES AND IN LAW, TH E LD. COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN DIRECTING THE ASSESSING OFFICER TO RESTRIC T THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.2,54,80,008/-U/S.14A R.W. RULE 8D TO RS.1,72, 09,410/- HOLDING THAT RULE 8D IS NOT APPLICABLE FOR THIS YEAR. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. COMMI SSIONER OF INCOME TAX(APPEALS) NE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 6346/M/11 KARP IMPEX 2 THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD ANY OTHER GROUNDS WHICH MAY BE NECESSARY. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH AND POLISHED DIAMONDS,FILED ITS RETURN OF INCOME ON 26.10.2007,DECLARING TOTAL INCO ME OF RS.16.70CRORES.THE AO COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT ON 30.11.2010,DETE RMINING THE INCOME OF THE ASSESSEE AT RS. 19,46,67,820/-. 2.FIRST GROUND OF APPEAL IS ABOUT RESTRICTING THE D ISALLOWANCE,MADE BY THE AO U/S.14A OF THE ACT R.W.RULE 8D OF THE RULES,TO RS.1,72,09,410/-.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD RECEIVED EXEMPT SHARE OF PROF IT FROM REGISTERED FIRM M/S. KARP MANUFACTURING CO. (KMC) AMOUNTING TO RS.6.93 CRORES , THAT IT HAD INVESTED IN THE FIRM RS.44.87 CRORES, THAT IT HAD PAID INTEREST OF RS.33.23 CRORE S ON THE LOANS TAKEN BY IT DURING THE YEAR, THAT IT HAD NOT SHOWN ANY DIRECT EXPENDITURE AGAINST THE EX EMPT INCOME.HOWEVER, BY ITS LETTER DT.30.8.2010 THE ASSESSEE STATED THAT RETURN OF INC OME WAS SUBMITTED WITHOUT CONSIDERING THE APPLICABILITY OF SECTION 14A IN RESPECT OF EXEMPT I NCOME FROM THE FIRM.THE AO OBSERVED THAT THE ASSESSEE HAD COMPOSITE BOOKS OF ACCOUNT AND COMMON POOL OF FUNDS WHEREFROM IT WAS NOT POSSIBLE TO IDENTIFY EXPENSES INCURRED FOR EARNING INCOME UNDER VARIOUS HEADS.HE DIRECTED THE AO TO EXPLAIN AS TO WHY THE DISALLOWANCE U/S. 14A O F THE ACT SHOULD NOT BE MADE.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE AO HELD THAT THE ARGUMENT OF THE ASSESSEE THAT IT HAD ENOUGH INTEREST FREE FUND TO INVEST IN FIRM WAS NOT ACCEPTABLE. INVOKING THE PROVISIONS OF SECTION 14A R.W.RULE 8D(2) OF THE INCOME TAX RULES, 1962(RULES) HE MADE A DISALLOWANCE OF RS.2.54 CRORES. 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM IT WAS CONTENTED THAT PR OVISIONS OF SUB-SECTION 2 AND 3 OF SECTION 14A WERE PROSPECTIVE IN NATURE AND WERE NOT APPLICA BLE DURING THE YEAR UNDER CONSIDERATION, THAT THE AO HAD NOT CONSIDERED THE CONTENTION OF TH E ASSESSEE, THAT IT HAD SUBMITTED THE WORKING OF DISALLOWANCE ON THE BASIS OF FUNDS INVESTED IN P ARTNERSHIP FIRM ON DAILY BASIS.VIDE ITS LETTER DT.2.5.2011, ASSESSEE RAISED ADDITIONAL GROUND BEFO RE THE FAA STATING THAT IN VIEW OF LARGE NETWORK OF COMPANY, THE INTEREST SHOULD NOT BE DISA LLOWED FOR INVESTMENT IN A PARTNERSHIP FIRM FOR EARNING EXEMPT INCOME U/S. 10.IT REFERRED TO TH E DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., T HAT NO DISALLOWANCE WAS TO BE MADE EITHER UNDER RULE 8D OR SECTION 14A OF THE ACT.AFTER CONSI DERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER,HE HELD THAT DISALLOWANCE U/S. 14A HAD TO BE MADE BUT NOT WITH REFERENCE TO RULE 8D, THAT THE WORKING OF THE DISAL LOWANCE MADE BY THE AO INDICATED THAT IT WAS ON THE SAME LINE AS FOR EARLIER YEARS, THAT HIS PRE DECESSOR HAD WORKED OUT THE DISALLOWANCE ON THAT LINE.HE RESTRICTED THE DISALLOWANCE U/S. 14A TO RS. 1,72,09,413/- AND PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. BEFORE US,AUTHORISED REPRESENTATIVE (AR) STATED THA T THE ASSESSEE HAD CAPITAL PLUS FREE RESERVES AND SURPLUS AGGREGATING TO RS.233.38 CRORE S AND RS.217.63 CRORES AS ON 31.03.2007 AND 31.02.2016 RESPECTIVELY,THAT IT HAD MADE INVESTMENT OF RS.44.87 AND 41.97 CRORES RESPECTIVELY ON 31.03.2007 AND 31.03.2006,THAT THAT THE INTEREST FREE FUNDS AVAILABLE TO IT WERE FIVE TIMES LARGER THAN THE INVESTMENTS MADE IN THE PARTNERSHIP FIRM,THAT IN THE YEAR ENDED 31.03.2007 THE PROFIT OF THE ASSESSEE WAS 18.59 CRORES,THAT IT HAD NOT INVESTED BORROWED FUNDS FOR MAKING 6346/M/11 KARP IMPEX 3 INVESTMENTS,THAT LOANS WERE TAKEN WERE PACKING CRED IT IN FOREIGN CURRENCY(PCFC)AND EXPORT BILL REDISCOUNTING (EBRD),THAT SAME COULD BE USED O NLY FOR BUSINESS PURPOSES,THAT PCFC AND EBRD COULD BE USED ONLY FOR THE SPECIFIC PURPOSE,TH AT NO PORTION OF INTEREST PAID ON SUCH SECURED LOANS COULD BE DISALLOWED.HE REFERRED TO PA GE NO.1,5,6 AND 34 OF THE PAPER BOOK.HE RELIED UPON THE CASES OF HDFC BANK LTD. (366ITR505) AND GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. (42TAXMANN.COM 270)DELIVERED BY THE HONBL E BOMBAY HIGH COURT AND GUJARAT HIGH COURTS RESPECTIVELY.DEPARTMENTAL REPRESENTATIVE(DR) SUPPORTED THE ORDER OF THE FAA . 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD RECEIVED EXEMPT INCOME,FROM KMC,AMOUNT ING TO RS.6.63CRORES,THAT IT HAD AN OPENING BALANCE IN THE PARTNERSHIP FIRM AT RS.41.94 CRORES,THAT THE AMOUNT OF CAPITAL INTRODUCED DURING THE YEAR WAS 10.95 CRORES,THAT IT HAD TAKEN LOAN OF RS. 476.88 CRORES,THAT IT HAD PAID INTEREST OF RS.33.23 CRORES,THAT IT HAD CLAIMED THA T NO DIRECT EXPENSES WERE INCURRED FOR EARNING EXEMPT INCOME,THAT IT HAD SUO MOTU DISALLOWANCE U/S .14A OF THE ACT,THAT LATER ON IT STATED THAT THE RETURN OF INCOME WAS SUBMITTED WITHOUT CONSIDER ING THE APPLICABILITY OF SECTION 14A OF THE ACT,THAT THE AO MADE INQUIRY IN THAT REGARD,THAT IN VOKING THE PROVISIONS OF SECTION 14A R.W.R.8D OF THE RULES,HE MADE AN ADDITION OF RS.2.54 CRORES, THAT THE ASSESSEE HAD RAISED ADDITIONAL GROUND OF APPEAL BEFORE THE FAA AND STATED THAT NO DISALLO WANCE SHOULD BE MADE U/S.14A,THAT FOLLOWING THE JUDGMENT OF GODREJ BOYCE & CO. (SUPRA),THE FAA HELD THAT RULE 8D WAS NOT APPLICABLE,THAT HE REDUCED THE DISALLOWANCE TO RS. 1.72 CRORES(RS.1 .50 CRORES UNDER THE HEAD INTEREST EXPENSES+ RS.21.70 LAKHS ADMINISTRATIVE EXPENSES),THAT THE FA A WHILE DECIDING THE ADDITIONAL GROUND HELD THAT THERE WAS NO MERIT IN THE ARGUMENTS OF THE ASS ESSEE,THAT IT HAD EARNED EXEMPT INCOME,THAT DISALLOWANCE U/S.14A WAS MANDATORY. HE REFERRED TO THE JUDGMENT OF HIS PREDECESSOR AND HELD THAT THE ASSESSEE HAD NOT USED LOANS FOR INVESTMENT IN THE FIRM,THAT THE SHARE OF PROFIT FROM THE FIRM STARTED COMING TO THE FIRM ONLY FROM 31.03.200 6,THAT THE INVESTMENT IN THE FIRM WERE OUT OF THE FUNDS THAT WERE LYING ELSEWHERE,THAT SAME WERE DEEMED TO BE INVESTMENT IN FIRM.FINALLY,HE DISMISSED THE ADDITIONAL GROUND RAISED BY THE ASSES SEE,THAT IN THE EARLIER YEAR,IN THE APPEAL BEFORE THE TRIBUNAL,THE GROUND RAISED BY THE ASSESSEE WITH REGARD TO DISALLOWANCE OF 14A WAS WITH - DRAWN,THAT THE ASSESSEE HAD FILED DETAILS OF AVAILA BILITY OF CAPITAL PLUS FREE RESERVES AND SURPLUS, THAT IT CLAIMED THAT BORROWED FUNDS WERE NOT INVEST ED IN FIRM,THAT IT FURTHER MADE A CLAIM THAT PCFC AND EBRD COULD BE USED ONLY FOR THOSE SPECIFIC PURPOSES.IT IS FOUND THAT THE ASSESSEE HAD NOT CLAIMED ANY ADMINISTRATIVE EXPENDITURE IN THE P &L ACCOUNT THAT COULD BE LINKED TO EXEMPT INCOME,THAT THE FAA HAD NOT CONSIDERED THE AVAILABI LITY OF CAPITAL PLUS FREE RESERVES AND SURPLUS,THAT HE HAD NOT CONSIDERED THE FACT THAT TH E PCFC AND EBRD LOANS COULD BE USED ONLY FOR SPECIFIC PURPOSES. THEREFORE,FOLLOWING THE JUDG MENT OF THE HONBLE JURISDICTIONAL HIGH COURT DELIVERED IN THE CASE OF HDFC BANK LTD. (SUPRA),WE DECIDE THE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE,AS NO NEXUS BETWEEN THE EXEMPTED IN COME AND INTEREST PAID ON BORROWINGS FOR SUCH INVESTMENT WAS ESTABLISHED. 6.NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF IN TEREST AT RS.21,86,897/- U/S. 36(1)(III) OF THE ACT.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD MADE INVESTMENTS IN THE OFFICE PREMISES IN BHARAT DIAMOND BOURSES LTD.( BDB)SITUATED AT BKC,THAT THE ASSESSEE HAD PUT TO USE THE OFFICE PREMISES DURING THE YEAR UNDE R APPEAL.RELYING UPON THE ORDER OF THE FAA FOR THE EARLIER YEAR,HE DISALLOWED INTEREST AMOUNTI NG TO RS.21.86 LAKHS.THE FAA,IN THE APPELLATE PROCEEDINGS,CONFIRMED THE ADDITION. 6346/M/11 KARP IMPEX 4 7.BEFORE US,THE AR CONTENDED THAT THE TRIBUNAL,WHIL E DECIDING THE APPEAL FOR THE AY.2006-07 HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE(ITA /4500/MUM/2010 DATED 21.01.2015).DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH.WE FIND TH AT THE TRIBUNAL HAS DEALT THE ISSUE AS UNDER 7. RELYING ON THE DECISION OF THE BOMBAY HIGH COUR T IN THE CASE OF IT VS. RELIANCE UTILITIES & POWERS LTD. (313 ITR 340), WHEREIN IT WAS HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTIO N WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 8. IN THE PRESENT CASE THE INVESTMENT IN OFFICE PR EMISES IS ONLY 1.18% OF THE OWN FUNDS OF THE ASSESSEE COMPANY IN THE YEAR UNDER CONSIDERATION AN D THEREFORE THE PRESUMPTION WOULD ARISE THAT THE ASSESSEE COMPANY HAS INVESTED ITS OWN FUNDS IN PURCHASING THE OFFICE PREMISES AND NOT USED THE BORROWED FUND AND THEREFORE, NO PORTION OF INTEREST PAID ON BORROWINGS CAN BE DISALLOWED INVOKING SECTION 36(1)(III) OF THE ACT. RESPECTFULLY,FOLLOWING THE ABOVE DECISION,WE DECIDE GROUND NO.2 IN FAVOUR OF THE AO. 8.EFFECTIVE GROUND OF APPEAL FILED BY THE AO IS ABO UT PARTIAL RELIEF GIVEN BY THE FAA,WHILE DEALING WITH THE DISALLOWANCE MADE U/S.14A OF THE A CT.WE HAVE HELD,IN THE EARLIER PART OF OUR ORDER,THAT NO DISALLOWANCE COULD BE MADE UNDER THE SAID SECTION.FOLLOWING THE SAME,EFFECTIVE GROUND,RAISED BY THE AO,IS DISMISSED. AS A RESULT,APPEALS FILED BY THE ASSESSEE STAN D ALLOWED AND THE APPEAL OF THE AO IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER,2015. 7, ,2015 SD/- SD/- ( / SANJAY GARG) ( / RAJENDRA) / JUDICIAL MEMBER !# / ACCOUNTANT MEMBER /MUMBAI, /DATE: 07.10.2015 . . . JV.SR.PS. & ' / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ $' #) , 4. THE CONCERNED CIT / $' #) 5. DR BENCH, ITAT, MUMBAI / !&+ , , . . . 6. GUARD FILE/ ! ! //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.