DCIT, New Delhi V. M/s. SVP Industries Ltd., Muzaffarnagar

ITA 6652/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97402 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 09-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 17-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRESH BEDI
• Assessee Lawyers: BALWANT SINGH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

1 ITA NO. 6652/D EL/2013 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO.- 6652/DEL/2013 (ASSESSMENT YEA R-2008-09) DCIT CENTRAL CIRCLE-19 NEW DELHI (APPELLANT) VS SVP INDUSTRIES LTD. VILLAGE & POST MANSOORPUR MUZAFFARNAGAR AAECS3637C (RESPONDENT) APPELLANT BY SH AMRESH BEDI, SR. DR RESPONDENT BY SH.BALWANT SINGH, ADV. ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 14/10/2013 PASSED BY CIT(A) XII, NEW DELHI. 2. THE GROUND OF APPEAL RAISED BY THE REVENUE IS AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) HAS ERRED IN THE CIT(A) IN DELETING THE DISA LLOWANCE OF RS.16,00,583/- MADE BY THE A.O U/S14A, READ WITH RULE 8D. DATE OF HEARING 09.09.2015 DATE OF PRONOUNCEMENT 23.09.2015 2 ITA NO. 6652/D EL/2013 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) HAS ERRED IN HOLDING THE DISALLOWANCE U/S14A , READ WITH RULE 8D CANNOT BE MADE IN THIS CASE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) HAS ERRED IN HOLDING THAT RULE 8D APPLIED ON LY IN A CASE WHERE THE ASSESSEE HAS PAID INTEREST ON INVEST MENT. 4. THE ORDER OF THE CIT(A) IS ERRONEOUS AND IS NOT TENABLE ON FACTS AND IN LAW. 3. THE ASSESSEE COMPANY IS ENGAGED IN BUSINESS OF M ANUFACTURE AND SALE OF SPIRIT, IMFL, AND COUNTRY LIQUOR. AS P ER THE RETURN OF INCOME THE ASSESSEE HAD MADE INVESTMENTS DURING THE YEAR AND EARNED THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THE INVESTMENT AT THE BEGINNING OF THE YEAR WERE RS.3,9 5,26,224/- AND AT THE CLOSE OF THE YEAR THE AMOUNT OF THE INVESTME NTS WAS RS.5,34,94,339/-. THE ASSESSEE WAS ASKED TO EXPLAI N VIDE ORDER SHEET ENTRY DATED 24/5/2010 AS TO WHY THE DISALLOWA NCE ON INVESTMENTS BE NOT MADE AS ENVISAGED IN SECTION 14A OF THE INCOME TAX ACT, 1961. IN REPLY TO THIS QUERY, THE ASSESSE E REPLIED AS UNDER: IN RESPECT OF INCOME NOT FORMING PART OF TOTAL IN COME UNDER SECTION 14A OF THE INCOME TAX ACT WHEREIN IT WAS SPECIFICAL LY PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DO NOT FOR M PART OF TOTAL INCOME UNDER THE ACT. HENCE THE INCOME FROM PROPER TY OF RS.48,000/- DISCLOSED IN COMPUTATION OF INCOME SHAL L NOT FALL UNDER PART OF TOTAL INCOME OF THE COMPANY. 4. THE AO HELD THAT AS MAKING INVESTMENTS IS NOT TH E BUSINESS OF THE ASSESSEE, THE PROPORTIONATE EXPENDITURE ON THE AMOUNTS SPENT 3 ITA NO. 6652/D EL/2013 ON THESE INVESTMENTS HAS TO BE DISALLOWED UNDER THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INC OME TAX RULES. THE AO FURTHER HELD THAT IT IS A WELL SETTLED LAW T HAT ONLY THOSE EXPENSES CAN BE ALLOWED TO THE ASSESSEE WHICH ARE I NCURRED AND RELATABLE TO THE EARNING OF TAXABLE INCOME. FURTHE R, TO AVOID LITIGATION WITH REGARD TO CALCULATION OF DISALLOWAN CE UNDER THIS SECTION, EXPLANATION BY WAY OF RULE 8D OF THE INCOM E TAX RULES HAS BEEN PROVIDED WHEREIN A CLEAR FORMULA HAS BEEN GIVE N TO CALCULATE THE EXPENSES WHICH ARE RELATABLE TO THE TAX FREE IN COME I.E., THE INVESTMENTS OF THE ASSESSEE. IN VIEW OF THESE REAS ONS, THE DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX AC T CALCULATED BY AO AS UNDER:- 1 AMOUNT OF EXPENDITURE DIRECTLY RELATING TO THE EXEMPT INCOME NIL 2 INTEREST EXPENDITURE, WHICH IS NOT DIRECTLY RELATED TO THE EXEMPT INCOME 2,19,48,539 CALCULATED @ AVERAGE RATE OF INTEREST ON AVERAGE OF INVESTMENT @ AVERAGE UTILIZATION 13,68,032 3 AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AVERAGE VALUE OF INVESTMENTS, INCOME FROM WHICH IS TAX FREE AS APPEARING IN THE BALANCE SHEET ON THE FIRST AND LAST DAY OF THE PREVIOUS YEAR 4 ITA NO. 6652/D EL/2013 INVESTMENT AT THE BEGINNING OF THE YEAR I.E, 1/4/2007 3,95,26,224 INVESTMENT AT THE CLOSE OF THE YEAR I.E, 31/3/2008 5,34,94,339 AVERAGE 4,65,10,281 ONE-HALF PERCENT OF THE ABOVE AVERAGE AMOUNT 2,32,551 4 TOTAL AMOUNT AS PER RULE 8D (U/S 14A) 16,00,583 5. THE CIT(A) HELD THAT THE INVESTMENT AT THE BEGIN NING OF THE YEAR WAS RS.5,03,41,498/- AND AT THE END OF THE YEA R IT WAS RS.5,34,94,339/-. THUS, THERE WAS INCREASE IN THE INVESTMENT TO THE TUNE OF RS.31,52,841/-. THIS INCREASE IN INVES TMENT WAS STATED TO BE MADE OUT OF THE FUNDS AVAILABLE WITH THE ASSE SSEE AND THEREFORE, NO COMPONENT OF INTEREST ON THIS AMOUNT WAS INVOLVED WHICH COULD WARRANT APPLICABILITY OF SECTION 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES . THE CIT(A) CATEGORICALLY OBSERVED THAT THE ASSESSEE CONTENDED THAT NO EXPENSES HAVE BEEN INCURRED IN EARNING THE EXEMPT I NCOME OF RS.96,622/-. 6. THE DR RELIED UPON THE ASSESSMENT ORDER AND STAT ED THAT MAKING INVESTMENT IS NOT A BUSINESS OF THE ASSESSEE AND 5 ITA NO. 6652/D EL/2013 PROPORTIONATE EXPENDITURE AMOUNT SPENT ON THESE INV ESTMENTS HAS RIGHTLY BEEN DISALLOWED BY THE AO. 7. THE AR RELIED ON THE CIT(A)S ORDER AND STATED T HAT NO EXPENDITURE WAS INCURRED ON THESE INVESTMENT DURING THE YEAR. 8. WE HAVE PERUSED THE RECORDS AND PROCEEDINGS AS W ELL AS THE SUBMISSIONS MADE BY BOTH THE PARTIES. IN THIS PARTI CULAR CASE THE INVESTMENT AT THE BEGINNING OF THE YEAR WAS RS. 5,0 3,41,498/- AND AT THE END OF THE YEAR, IT WAS RS.5,34,94,339/-. T HERE WAS INCREASE IN THE INVESTMENT TO THE EXTENT OF RS.31,52,841/-. THIS INCREASE IN INVESTMENT WAS STATED TO BE MADE OUT OF THE FUNDS A VAILABLE WITH THE ASSESSEE, AND, THEREFORE, NO COMPONENT OF INTER EST ON THIS AMOUNT WAS INVOLVED AS PER ASSESSEE. THE ASSESSEE HAS CONTENDED THAT NO EXPENSES HAVE INCURRED IN EARNING THE EXEMP T INCOME OF RS.96,622/-. THE SAME WAS RECORDED IN CIT(A)S ORDE R AS WELL. THE AO WHILE DISALLOWING THIS HAS NOT BROUGHT ON RECORD ANYTHING TO ESTABLISH THAT THE ASSESSEE HAD INCURRED ANY EXPENS ES WHILE EARNING THIS EXEMPT INCOME. THEREFORE, THE ACTION OF THE AO IN DISALLOWING THE SAME OF RS.16,00,583/- AGAINST THE DIVIDEND INCOME OF RS.96,622/- U/S 14A READ WITH RULE 8D IS NOT JUS T AND PROPER AS THERE IS NO EXPENDITURE INCURRED BY THE ASSESSEE FO R INCREASE IN THE INVESTMENT. THOUGH THE ASSESSING OFFICER HAS GIVEN THE FINDING THAT AS MAKING INVESTMENT IS NOT THE BUSINESS OF THE ASS ESSEE ACCORDINGLY THE PROPORTIONATE EXPENDITURE ON THE AM OUNTS SPENT ON THESE INVESTMENTS NEEDS TO BE DISALLOWED HE HAS NOT STATED ANY SPECIFIC SATISFACTION WHILE APPLYING SECTION 14A RE AD WITH RULE 8D 6 ITA NO. 6652/D EL/2013 IN THIS PARTICULAR CASE. THE PROVISION OF SECTION 14A OF THE ACT INCORPORATES THAT THE ASSESSING OFFICER SHALL DETER MINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT IN ACCORDA NCE WITH LAW SUCH METHOD AS MAY BE PRESCRIBED AND IF THE ASSESSI NG OFFICER AFTER TAKING INTO CONSIDERATION OF THE ACCOUNTS OF THE AS SESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE EXPENDITU RE INCURRED WAS NOT CLEARLY STATED IN THE ASSESSMENT ORDER BY THE A SSESSING OFFICERS AS WELL AS NEITHER THE ASSESSEE HAS GIVEN ANY SUBST ANTIAL EVIDENCE IN RESPECT OF HIS CLAIM THAT HE HAS NOT INCURRED AN Y EXPENDITURE FOR INVESTMENT. THOUGH CIT(A) HELD THAT PROVISIONS OF RULE 8D FOR DETERMINING SUCH EXPENSES APPLIES ONLY IN CASE WHER E THE ASSESSEE PAYS INTEREST ON THE INVESTMENT. BUT IN THIS CASE THERE ARE CERTAIN EXPENSES WHICH ANY ASSESSEE CAN INCUR DURING THE PR OCESSW OF INVESTMENT AND SUCH EXPENSES/EXPENDITURE HAS TO BE TAKEN INTO ACCOUNT. THE ASSESSING OFFICER HAS NOT GIVEN CLEAR PICTURE ABOUT THE EXPENDITURE WHICH HAS BEEN INCURRED BY THE ASSESSEE AND, THEREFORE, THE SAME HAS TO BE LOOKED INTO BY THE AO . 9. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH R EGARD TO THE EXPENDITURE OR NO EXPENDITURE IN RELATION TO EXEMPT INCOME, THE AO MUST SPECIFY COGENT REASONS FOR THE SAME AND HAS TO SHOW WHY HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESS EES CLAIM AS HELD IN CASE OF MAXOPP INVESTMENT LTD. V. COMMISSIONER O F INCOME-TAX, NEW DELHI [2011] 15 TAXMANN.COM 390 (DELHI HC). THE HONBLE 7 ITA NO. 6652/D EL/2013 SUPREME COURT IN CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. 326 ITR 1 (SC) WHEREIN IT WAS HELD THAT F OR ATTRACTING SECTION 14A, THERE HAS TO BE PROXIMATE CAUSE FOR DI SALLOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOM E. IN CASE OF CIT-II VS. HERO CYCLES LTD. (ITA NO. 331/2009 (O&M) : DECIDED ON 04.11.2009) THE PUNJAB AND HARYANA HIGH COURT HELD THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEM PT INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER S ECTION 14A CANNOT STAND. 10. BESIDES THAT THE CIT(A) HAS GIVEN A FINDING THA T THERE WAS NO EXPENDITURE INCURRED BY THE ASSESSEE FOR INCREASE I N INVESTMENT AND WHEN THE EXPENSES IN RESPECT OF EXEMPT INCOME HAVE NOT BEEN INCURRED BY THE ASSESSEE, THE QUESTION OF DISALLOWA NCE U/S. 14A DOES NOT ARISE. IN ASSESSEES CASE, INCREASE IN INV ESTMENT WAS FROM THE FUNDS AVAILABLE WITH THE ASSESSEE AND NO INTERE ST HAS BEEN PAID, BUT THERE ARE CERTAIN EXPENDITURES WHICH ARE INCURR ED DURING THE PROCESS OF INVESTMENT. WHILE APPLYING PROVISIONS UN DER SECTION 14A OF THE ACT AND RULE 8D OF THE INCOME TAX RULES, THE SE FACTORS SHOULD BE LOOKED INTO. BUT IN THIS CASE, THE CIT(A) HELD THAT THE ASSESSING OFFICER HAS NOT PLACED ANY MATERIAL ON RE CORD NOR HAS HE MADE ANY CLEAR CUT FINDING TO PROVE THAT ANY EXPEND ITURE HAD BEEN INCURRED BY THE ASSESSEE AND THUS DISALLOWANCE U/S. 14A READ WITH RULE 8D IS NOT WARRANTED INSTEAD SHOULD HAVE BEEN R EMANDED BACK THE MATTER TO THE ASSESSING OFFICER TO VERIFY THE E XPENDITURE INCURRED WHILE EARNING THE DIVIDEND INCOME. THUS FI NDING OF THE 8 ITA NO. 6652/D EL/2013 CIT(A) THAT THE DISALLOWANCE OF RS. 16,00,583 AGAIN ST DIVIDEND INCOME OF RS. 96,622/- WAS NOT PROPER. IN VIEW OF THE ABOVE THE MATTER IS REMANDED BACK TO THE ASSESSING OFFICER FO R EXAMINING THE EXPENDITURE INCURRED AGAINST THE INVESTMENT AS AGAI NST THE DIVIDEND INCOME EARNED BY THE ASSESSEE. 11. IN RESULT, APPEAL OF THE REVENUE IS DISPOSED OF F ACCORDINGLY. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 23 RD OF SEPTEMBER 2015. SD/- SD/- ( S.V. MEHROTRA) (SUCHI TRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23/09/2015 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 9 ITA NO. 6652/D EL/2013 DATE 1. DRAFT DICTATED ON 10.09.2015 PS 2. DRAFT PLACED BEFORE AUTHOR 10.09.2015 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 11.09.2015 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 18.09.2015 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 18.09.2015 PS/PS 6. KEPT FOR PRONOUNCEMENT ON 23.09.2015 PS 7. FILE SENT TO THE BENCH CLERK 23.09.2015 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 10 ITA NO. 6652/ DEL/2013