DCIT (OSD) 8(2), MUMBAI V. KHANNA HOTELS P.LTD, MUMBAI

ITA 6488/MUM/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3269 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 04-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIKRAM BATRA
• Keywords: Earning of tax free income
• Section: 14A; 115JB; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI BEFORE SHRI G.S.PANNU (AM) AND SHRI RAM LAL NEGI (J M) ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 THE D CIT 8(2 ), (OSD), ROOM NO. 209, 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI- 400 020 VS. M/S. KHANNA HOTELS PVT.LTD. 197, D.N.NAGAR, ANDHERI (W), MUMBAI- 400053. PAN : AAACK0075E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI. VIKRAM BATRA RESPONDENT BY : SHRI. ANUJ KISNADWALA DATE OF HEARING: 24/09/2015 DATE OF PRONOUNCEMENT: 29/01/2016 O R D E R PER RAM LAL NEGI, JM THE PRESENT APPEAL HAS BEEN FILED BY THE REVEN UE AGAINST ORDER DATED 27/02/2013 PASSED BY THE LD. CIT(APPEALS)-17, MUMBAI PERTAINING TO THE ASSESSMENT YEAR 2010-11. 2.1 BRIEF FACTS OF THE CASE EMANATING FROM THE RE CORD ARE THAT THE ASSESSEE COMPANY BEING ENGAGED IN THE BUSINESS OF R UNNING CLUB HAVING VARIOUS FACILITIES SUCH AS INDOOR AND OUTDOO R GAMES, SPORTS, HEALTH CLUB, BARS AND RESTAURANTS BANQUET HALL FOR ITS MEMBER APART FROM THE BUSINESS OF EXPORT OF PRECIOUS STONES, FIL ED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-2011 DECLARING THE TOT AL INCOME OF RS. 4,33,37,260/-. THE RETURN WAS PROCESSED AND ASSESSM ENT ORDER WAS ACCORDINGLY PASSED. THE ASSESSEE HAD SUO MOTO MADE DISALLOWANCE OF 2 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 RS. 6,07,845/- U/S 14A OF THE INCOME TAX ACT, 1961( IN SHORT THE ACT) READ WITH RULE 8D OF THE INCOME TAX RULES, INSTEAD OF RS. 65,76,251/- AS EXPENDITURE DISALLOWABLE UNDER SECTION 10 OF THE ACT (PRO RATA FOR DIVIDEND INCOME). THE AO ADDED RS. 65,76,251/- TO T HE INCOME OF THE ASSESSEE HOLDING THAT THERE IS NO PROVISIONS U/S 115JB OF THE ACT, THE EXPENDITURE DISALLOWED U/S 14A READ WITH RULE 8D IS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME U/S 10 OF THE ACT , THE ENTIRE DISALLOWANCE OF RS. 65,76,251/- IS LIABLE TO BE ADD ED TO THE BOOK PROFIT U/S 115JB OF THE ACT. ACCORDINGLY THE AO COMPUTED T HE TOTAL INCOME OF THE ASSESSEE AT RS. 10,13,46,870/- 2. AGGRIEVED BY THE ASSESSMENT ORDER THE ASSESSEE CHALLENGED THE ORDER BEFORE THE LD. CIT(A). THE CIT(A) RELYING UPON THE RATIO LAID DOWN BY THE HONBLE DELHI COURT IN MAXOPP INVESTMENT LTD. VS CIT(2012)247CTR(DEL) AND OTHER CASES RELIED UPON BY THE APPELLANT/ASSESSEE ALLOWED THE APPEAL OF THE ASSESS EE HOLDING AS UNDER:- NOW IN THE LIGHT OF THE FORGOING, I FIND THAT LD. AO HAS MECHANICALLY APPLIED THE PROVISIONS OF SECTION 14A. THE APPELLANT CLEARLY BROUGHT OUT THE FACTS THAT BOTH T HE STCG OF RS. 56,62,674 AND LTCG OF RS. 6,52,06,426 ARE INCLUDED IN THE COMPUTATION OF BOOK PROFIT AND ONLY RS. 92,41,515/- WHICH ARE ATTRIBUTABLE TO THE DIVIDEND INCOME ARE EXEMPT. THE ENTIRE INVESTMENT TRANSACTIONS OF THE APPELLANT HAD BEEN C ARRIED OUT THROUGH PORTFOLIO MANAGEMENT SERVICES(PMS) FOR WHIC H A SUM OF RS. 44,96,864/- HAVE BEEN INCURRED AS PMS FEES AND RS. 3,95,101/- TOWARDS DEPOSITORY CHARGES WHICH ARE DE BITED TO THE PROFIT & LOSS ACCOUNT. THEREFORE THE ENTIRE EXP ENDITURE ARE ASCERTAINABLE AND THE LD. AO HAS APPLIED RULE 8D TO THE ENTIRE 3 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 INCOME IGNORING THE FACT THAT THE INCOME FROM CAPIT AL GAIN IS NOT EXEMPT FOR THE PURPOSES OF BOOK PROFIT. 3. DISSATISFIED WITH THE IMPUGNED ORDER PASSED B Y THE LD. CIT(A), THE REVENUE HAS PREFERRED THE PRESENT APPEAL ON THE FOLLOWING DEFECTIVE GROUNDS:-. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.65,76,251/- U/S 14A OF THE ACT BY THE ASSESSING OFFICER TO THE ASSESSING OFFICER TO THE ASSESSEES BOOK PROFIT AND INSTEAD UPHOLDING THE ADDITION OF RS.6,07,845/- MADE BY THE ASSESSEE TO ITS BOOK PROFIT ON ACCOUNT OF DISALLOWANCE U/S 1 4A OF THE ACT, WITHOUT CONSIDERING THE FACT THAT THE ASSESSEE HAD ITSELF COMPUTED DISALLOWANCE OF RS.65,76,251/- U/S 14A REA D WITH RULE 8D AND OFFERED THE SAME FOR TAX IN ITS COMPUTA TION OF TOTAL INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.65,76,251/- U/S 14A OF THE ACT BY THE ASSESSING OFFICER TO THE ASSESSEE'S BOOK PROFIT AND CONSEQUENTLY UPHOLDI NG THE ASSESSEE'S CLAIM OF DIFFERENT COMPUTATIONS OF DISAL LOWANCE U/S 14A OF THE ACT FOR THE PURPOSE OF COMPUTATION OF BO OK PROFIT U/S 115JB AND FOR THE PURPOSE OF COMPUTATION OF TOTAL I NCOME UNDER THE REGULAR PROVISIONS OF THE ACT, WITHOUT APPRECIA TING THAT SUCH DIFFERENT COMPUTATIONS OF DISALLOWANCE U/S 14A HAVE NOT BEEN PROVIDED IN SECTION 14A OR IN SECTION 115JB OF THE ACT' 4. BEFORE US, THE LD. DR HAS SUBMITTED THAT THE LD. CIT(A) HAS WRONGLY DELETED THE ADDITIONAL OF RS. 65,76,251/- U/S 14A OF THE 4 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 ACT MADE BY THE ASSESSING OFFICER TO ASSESSEES BO OK PROFIT AND INSTEAD OF UPHOLDING THE ADDITION OF RS. 6,07,845/- MADE BY THE ASSESSEE TO ITS BOOK PROFIT ON ACCOUNT OF DISALLOW ANCE U/S 14A OF THE ACT, WITHOUT CONSIDERING THE FACT THAT THE ASSE SSEE HAD ITSELF COMPUTED DISALLOWANCE OF RS. 65,76,251/- U/S 14A R/ W RULE 8D. 5. ON THE OTHER HAND THE LD. COUNSEL FOR THE APPELL ANT/ASSESSEE HAS SUBMITTED THAT INCOME COMPUTED AS PER NORMAL PROVISIONS OF THE ACT WAS RS. 4,33,37,260/- HOWEVER, THE APPELLA NT BEING A COMPANY, COMPUTED BOOK PROFIT AS PER SECTION 115JB OF THE ACT WHICH WORKED OUT TO RS. 9,53,78,463/-. THE TAX AS PER NORMAL PROVISIONS OF THE ACT WAS WORKED OUT AT RS. 1,22,18 ,362/- WHEREAS THE TAX ON THE BOOK PROFIT COMPUTED AT 15% OF THE BOOK PROFIT WAS WORKED OUT AT RS. 1,43,06,769/-. SINCE THE TAX SO C OMPUTED ON THE BOOK PROFIT U/S 115JB WAS HIGHER THAN THE TAX COMP UTED ON THE NORMAL INCOME, THE RETURN OF INCOME WAS FILED DECL ARING THE BOOK PROFIT COMPUTED UNDER SECTION 155JB AT RS. 9,53,78, 463/- AS DEEMED TOTAL INCOME. 6. THE LD. AR FURTHER CONTENDED THAT, AS PER SUB-C LAUSE (II) BELOW THE EXPLANATION [1] TO SECTION 115JB THE DIVIDEND O F RS. 92,41,515/- WAS NOT REQUIRED TO BE INCLUDED IN BOOK PROFIT. HOWEVER, THE ASSESSEE IS ENTITLED FOR DEDUCTION OF AN AMOUNT RS. 44,96,864/- INCURRED AS PORTFOLIO MANAGEMENT SERVIC ES (PMS) FEES AND RS. 3,95,101/- INCURRED AS DEPOSITORY CHARGES A S THE ENTIRE INVESTMENT TRANSACTION HAD BEEN CARRIED OUT THROUGH PMS FOR EARNING SHORT TERM CAPITAL GAIN OF RS. 56,62,674/- AND LONG TERM CAPITAL GAIN OF RS. 6,52,06,426/-. THE LD. AR FURTH ER RELIED ON THE 5 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 DECISION OF CHANDIGARH BENCH OF ITAT IN THE CASE OF SPRAY ENGINEERING PVT. LTD. (53 SOT 70). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE DOCUMENTS ON RECORD IN THE LIGHT OF THE RESPECTIVE SUBMISSIONS OF THE PARTIES. THE ONLY GRIEVANCE OF THE REVENUE IS T HAT THE LD. CIT(A) HAS WRONGLY DELETED THE ADDITION OF RS. 65,76,251/- MADE BY AO TO THE BOOK PROFIT OF THE ASSESSEE UNDER SECTION 14A O F THE ACT. 8. THE ASSESSEE HAS CALCULATED THE DISALLOWANCE UND ER SECTION 14A OF THE ACT R/W RULE 8D OF THE INCOME TAX RULES 1962 TO ASCERTAIN AS TO WHETHER THE TAX IS REQUIRED TO BE P AID UNDER THE NORMAL PROVISIONS OF THE ACT OR TO BE PAID UNDER TH E PROVISIONS OF SECTION 115JB OF THE ACT. SINCE THE TAX CALCULATED ON BOOK PROFIT WAS MORE THAN THE TAX CALCULATED UNDER GENERAL PROV ISIONS OF THE ACT, THE ASSESSEE WAS REQUIRED TO PAY TAX ON BOOK P ROFIT. IT IS DUE TO THIS REASON THAT THE ASSESSEE HAS CALCULATED THE DISALLOWANCE PROPORTIONATE TO THE AGGREGATE EXPENSES INCURRED ON EARNING EXEMPT INCOME. AS PER THE FACTS EMANATING FROM THE RECORD THE MAJOR COMPONENT OF INVESTMENT INCOME IS LONG TERM C APITAL GAIN, WHICH IS 81.40% THAT HAS BEEN INCLUDED IN BOOK PROF IT. DIVIDEND CONSTITUTES 11.53% WHICH IS NOT REQUIRED TO BE INCL UDED IN BOOK PROFIT AND THE THIRD IS SHORT TERM CAPITAL GAIN WHI CH CONSTITUTES 7.06% AND THE SAME HAS ALSO BEEN INCLUDED IN THE BO OK PROFIT. AS PER THE RECORD TOTAL EXPENDITURE INCURRED TO EARN T HE SAID INCOME COMES TO RS. 52,69,140/- THEREFORE, THE ASSESSEE HA S CALCULATED THE AMOUNT OF ADDITION PROPORTIONATE TO THE DIVIDEN D AMOUNT. ON THE OTHER HAND THE AO HAS MADE ADDITION OF THE ENTI RE AMOUNT I.E., 6 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 RS 65,76,251/- CALCULATED BY THE ASSESSEE HIMSELF U /S 14A OF THE ACT R/W RULE 8D. 9. THE AFORESAID FACTS GIVE RISE TO A QUESTION THAT WHETHER IN THE PRESENT CASE ADDITION OF DISALLOWANCE CALCULATED B Y THE AO IS JUSTIFIED OR THE PROPORTIONATE AMOUNT CALCULATED BY THE ASSESSEE NEEDS TO BE ADDED TO THE BOOK PROFIT? 10. SECTION 14A OF THE ACT BARS ALLOWANCE OF ANY EX PENDITURE FOR EARNING INCOME WHICH DOES NOT CONSTITUTE TOTAL INCO ME OF THE ASSESSEE AND THE EXPENSES INCURRED CAN BE ALLOWED O NLY TO THE EXTENT THE SAME ARE RELATABLE TO EARNING OF TAXABLE INCOME. HENCE, ONLY THE ACTUAL EXPENDITURE WHICH IS MADE FOR EARNI NG EXEMPT INCOME IS DISALLOWABLE UNDER SECTION 14A. RULE 8D(2 ) OF THE INCOME TAX RULES, PRESCRIBES THE METHOD FOR DETERMINING TH E AMOUNT OF EXPENDITURE IN RELATION TO THE INCOME NOT INCLUDABL E IN THE TOTAL INCOME WITHIN THE MEANING OF SECTION 14A OF THE ACT AND RULE 8D(1) STIPULATES CONDITIONS UNDER WHICH THE AO SHAL L DETERMINE THE AMOUNT OF EXPENDITURE AS PER THE METHOD PRESCRI BED UNDER RULE 8D(2). 11. IN THE PRESENT CASE, THE FINALLY ASSESSED INCOM E OF THE ASSESSEE HAS BEEN COMPUTED IN TERMS OF SECTION 115J B OF THE ACT. THE DISALLOWANCE UNDER SECTION 14A OF THE ACT UNDER THE NORMAL PROVISIONS OF THE ACT WAS DETERMINED AT RS.65,76,25 1/-, WHEREIN INCOME BY WAY OF LONG TERM AND SHORT TERM CAPITAL G AINS AND DIVIDEND WAS EXEMPT. ON THE CONTRARY, IN THE CONTE XT OF COMPUTING INCOME UNDER SECTION 115JB OF THE ACT, THE INCOME O N ACCOUNT OF LONG TERM AND SHORT TERM CAPITAL GAIN WAS INCLUDABL E AND ONLY 7 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 DIVIDEND INCOME WAS EXCLUDABLE OR EXEMPT. IN SUCH A SITUATION, PROPORTION OF THE AMOUNT DISALLOWABLE UNDER SECTION 14A OF THE ACT VIS--VIS THE INCOME TREATED AS EXEMPT UNDER THE MA T PROVISIONS (I.E. 115JB OF THE ACT) WOULD VARY. AS PER THE CAL CULATION FURNISHED BY THE ASSESSEE AT THE TIME OF HEARING, SUCH DISALL OWANCE WORKS OUT TO RS.7,58,633/- AS AGAINST SUO-MOTO DISALLOWAN CE OF RS.6,07,845/- MADE BY THE ASSESSEE IN THE RETURN OF INCOME. THEREFORE, IN OUR VIEW THOUGH THE ACTION OF THE CIT (A) IS ACCEPTED IN PRINCIPLE, THE ENTIRE AMOUNT DISALLOWED BY THE ASSE SSING OFFICER COULD NOT HAVE BEEN DELETED. AS A CONSEQUENCE, IT IS DIRECTED THAT THE TOTAL DISALLOWANCE BE FIXED AT RS.7,58,633/- (I NCLUSIVE OF SUO- MOTO DISALLOWANCE OF RS.6,07,845/- MADE BY THE ASSE SSEE). 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JANUARY, 2016. SD/- SD/- ( G.S.PANNU ) ( RAM LAL NEGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED:29/01/2016 8 ITA NO 6488/MUM/2013 ASSESSMENT YEAR: 2010-11 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. '#$ % , %' , / DR, ITAT, MUMBAI 6. $() * / GUARD FILE. + + + + / BY ORDER, + //TRUE COPY// , ,, ,/ // /+- . +- . +- . +- . (DY./ASSTT. REGISTRAR) %' %' %' %', , , , / ITAT, MUMBAI PRAMILA