DR. KIRTIKUMAR L. UPADHAYAYA, MUMBAI V. ASST CIT 11(2), MUMBAI

ITA 6670/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7946 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PITAMBER DAS
• Keywords: Depreciation; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI , ! ! ! ! , ' ' ' ' BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER . : . : . : . : 6670 6670 6670 6670/ // / / // / 2011, ) ! *! 2008-09 ITA NO. : 6670/MUM/2011 , AY 2008-09 DR. KIRTIKUMAR L UPADHAYAYA, 6- ALKA BUILDING, 15 TH ROAD, SOUTH AVENUE, SANTACRUZ(W), MUMBAI -400 054 / .: PAN: AAAPU 0289 R VS ACIT -11(2), AAYAKAR BHAVAN, M K ROAD, MUMBAI -400 020 /0 (APPELLANT) 12/0 (RESPONDENT) APPELLANT BY : SHRI NISHIT GANDHI RESPONDENT BY : SHRI PITAMBER DAS )345 /DATE OF HEARING : 07-08-2014 67* 345/ DATE OF PRONOUNCEMENT : 13-08-2014 8 8 8 8 O R D E R ! ! ! ! , . . . . . .. . PER VIVEK VARMA, J.M. : THE APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORD ER OF CIT(A) 3, MUMBAI, DATED 15.07.2011, WHEREIN, THE FOLLOWING GR OUNDS HAVE BEEN TAKEN: 1. DISALLOWNACE U/S 14A READ WITH RULE 8D : 1.1 THE LEARNED COMMISSIONER OF INCOME TAX - 3, MUMBAI [THE LD. CIT(A)] ERRED IN CONFIRMING THE ACTION OF THE ASSE SSING OFFICER (THE AO) WHEREBY THE AO ERRED IN MAKING DISALLOWA NCE OF RS. 1,67,251/- INVOKING THE PROVISION OF SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT) READ WITH RULE 8D OF THE INC OME TAX RULES, 1962. 1.2 IT IS SUBMITTED THAT IN THE FACTS AND IN THE CIRCUM STANCES OF THE CASE AND IN LAW, NO SUCH DISALLOWANCE WAS CALLED FO R. 1.3 ASSUMING BUT NOT ADMITTING-THAT THE PROVISION OF SE CTION 14A OF THE ACT READ WITH RULE 8D WAS REQUIRED TO BE INVOKED , IT IS SUBMITTED THAT THE CALCULATION IS NOT IN ACCORDANCE WITH THE LAW AND THE DISALLOWANCE ARBITRARY AND EXCESSIVE. 2. DISLLOWNACE OUT OF CAR & TELEPHONE EPENSES : 2.1 THE LD. CIT(A) ERRED IN CONFIRMING IN TOTO AND AD HOC DISALLOWANCE (20%) OUT OF DEPRECIATION ON CAR, MOTO R CAR EXPENSES, REPAIR OF CAR AND TELEPHONE EXPENSES, TOT ALING RS. 1,65,831/-, MADE BY THE AO. DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 2 2.2 IT IS SUBMITTED THAT IN THE FACTS AND THE CIRCU MSTANCES OF THE CASE AND IN LAW, NO SUCH DISALLOWANCE WAS CALLED FO R. 2. GROUND NO. 1 PERTAINS DISALLOWANCE OF RS. 1,67,2 51/- U/S 14A. 3. IN THE ASSESSMENT PROCEEDINGS, THE AO NOTICED TH AT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 6,59,821/-, WHICH WAS CLAIMED AGAINST THE DIVIDEND INCOME. THE AO, THEREFORE, PRO CEEDED TO COMPUTE THE DISALLOWANCE U/S 14A READ WITH RULE 8D. HE COMP UTED THE DISALLOWANCE AS PER RULE 8D(III), I.E. .5% ON AVERA GE INVESTMENT AND WORKED OUT THE DISALLOWABLE EXPENSE AT RS. 1,67,251 /-. 4. AGGRIEVED, THE ASSESSEE APPROACHED THE CIT(A) AN D REITERATED HIS SUBMISSIONS, AS MADE BEFORE THE AO. 5. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, OBSERVED, I HAVE CONSIDERED THE FACTS AND PERUSED THE MATERI AL ON RECORD. IT IS SEEN THAT THE APPELLANT HAS EARNED DI VIDEND INCOME OF RS. 6,59,821/- ON SHARES, MUTUAL FUNDS, ETC. WHIC H IS CLAIMED AS EXEMPT THE APPELLANT HAS DEBITED EXPENDI TURE ADMINISTRATIVE/EXPENSES AND INTENT TO BANK AS FINAN CIAL EXPENSES IN THE PROFIT AND LOSS ACCOUNT. THEREFORE, THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING DIVIDEND INCOME CANNOT BE ACCEPTED AS IT IS IMPOSSI BLE TO EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCREASING ANY EXPENSES. THIS VIEW IS FORTIFIED BY DECISION IN THE CASE OF C ITICORP FINANCE (INDIA) LTD. (2007) 108 ITD 471 (MUM) WHEREIN IT WA S HELD THAT 'IF IS DIFFICULT TO ACCEPT THE HYPOTHESIS THAT ONE CAN EARN SUBSTANTIAL DIVIDEND INCOME WITHOUT INCURRING ANY E XPENSES, WHATSOEVER, INCLUDING MANAGEMENT OR ADMINISTRATIVE EXPENSES AND GUJARAT GAS FINANCIAL SERVICES LTD V ACIT (2008) 14 DIR (AHD) (SB) 481) WHEREIN IT WAS HELD THAT 'THERE IS N O DISPUTE AND THERE CANNOT BE ANY DOUBT, THAT SOME EXPENDITUR E IS INCURRED FOR MAKING OR EARNING THE INCOME FROM DIVI DEND. I FIND THAT THE AO HAS MADE DISALLOWANCE ON THE BASIS OF RU LE 8D WHICH IS VERY MUCH APPLICABLE FOR AY UNDER CONSIDERA TION AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE O F GODREJ & BOYCE MANUFACTURING CO. LTD V DCIT (2010) 328 ITR 81 (BORN). THE HON'BLE HIGH COURT FURTHER LAID DOWN THE FOLLOW ING PRINCIPLES ON PG.] 21 OF THE JUDGMENT:- 'FOR THAT P URPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXP ENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASS ESSING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 3 ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U/S. 14A. THE ASSESS ING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT.' THEREFORE, FOLLOWING THE ABOVE JUDG MENT OF HON'BLE JURISDICTIONAL HIGH COURT OF BOMBAY IT WOUL D BE REASONABLE TO MAKE THE DISALLOWANCE AS PER SECTION 14A OF THE ACT AND READ WITH RULE 8D INCOME TAX RULES, 1962. SINC E THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE DIRECT INTEREST IS NIL HENCE SAME WILL BE CONSIDERED AS NI L THE AVERAGE VALUE OF INVESTMENTS, INCOME FROM WHICH DOE S NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARIN G IN THE BALANCE SHEET OF THE ASSESSEE ON THE 1ST DAY AND TH E LAST DAY OF THE PREVIOUS YEAR WOULD BE CONSIDERED AT 0.57O O F THE AVERAGE INVESTMENT FOR DISALLOWANCE UNDER RULE 8D O F INCOME- TAX RULES 1962. 3.3.1 THE AMOUNT EQUAL TO 0.5% OF THE AVERAGE OF TH E VALUE OF INVESTMENTS, INCOME FROM WHICH DOES NOT OR SHALL NO T FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHE ET OF THE ASSESSEE ON THE PT DAY AND THE LAST DAY OF THE PREV IOUS YEAR. THE LOGIC AND RATIONALE OF TAKING 0.5% OF THE AVERA GE VALUE OF THE INVESTMENTS - INCOME FROM WHICH DOES NOT OR SHA LL NOT FORM PART OF THE TOTAL INCOME IS BECAUSE THE APPELLANT W ILL HAVE CERTAIN VARIABLE EXPENSES AND CERTAIN OTHER EXPENSE S FOR MANAGING THIS PORTFOLIO/INVESTMENT AND WHEN THE ACC OUNTS ARE COMPOSITE AND APPELLANT CANNOT ITSELF SEGREGATE THE VARIOUS EXPENSES WHICH CAN BE ATTRIBUTED TO THE EXEMPT INCO ME AND THOSE TO THE TAXABLE INCOME THEN THE ONLY REASONABL E METHOD TO DETERMINE THE EXPENSES INCURRED IN RELATION TO THE EXEMPT INCOME CAN BE BY APPORTIONMENT - SO THE APPORTIONME NT HAS BEEN DONE AT 0.5% OF THE AVERAGE VALUE OF THE INVES TMENT- INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME BECAUSE NORMALLY IN SIMILAR SCHEMES UNDERTAK EN BY PORTFOLIO MANAGERS AND THE LIKE THE TOTAL EXPENSES CHARGED BY SUCH PORTFOLIO MANAGERS ARE IN THE RANGE OF 2 TO 3% WHICH ALSO INCLUDES THEIR PROFIT ELEMENT OF 1 TO 11/2% - WHICH HAS TO BE EXCLUDED WHILE DOING SUCH APPORTIONMENT IN APPELLAN T'S CASE AND THEN THE BALANCE THAT REMAINS IS 1 TO 1 1/2% - OUT OF WHICH THE FIXED EXPENSES (ADMINISTRATIVE) WILL BE EXCLUDED BECAUSE THE PORTFOLIO MANAGERS IS DOING THE SAME EXCLUSIVEL Y WHEREAS THE APPELLANT AS HIS OWN BUSINESS OTHER THAN THE EX EMPT INCOME - SO WHAT HAS TO BE CONSIDERED ONLY - THE VA RIOUS EXPENSES INCURRED IN RELATION TO SUCH EXEMPT INCOME AND THEREFORE FROM THE BALANCE OF 1 TO 1 1/2% ONLY 0.5% IS BEING CONSIDERED FOR ESTIMATING THE VARIABLE EXPENSES INC URRED IN RELATION TO THE EXEMPT INCOME. THIS IS THE METHOD A ND BASIS FOR ARRIVING AT THE FIGURE OF 0.5% OF THE AVERAGE VALUE OF THE INVESTMENT. IT IS SEEN THAT THE AO HAS MADE DISALLOW ANCE AT RS. 1,67,251 BY TAKING 0.5% OF THE AVERAGE INVESTMEN T OF RS. 3,34,50,225 AS SHOWN IN BALANCE SHEET AS ON 31-3-20 08. THEREFORE, THE DISALLOWANCE MADE AT RS. 1,67,251 AS PER RULE 8D OF INCOME-TAX RULES 1962 IS CORRECT AND VALID HE NCE SAME ARE SUSTAINED. DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 4 6. THE CIT(A), THEREFORE, SUSTAINED THE DISALLOWANC E, AS COMPUTED BY THE AO. 7. AGAINST THIS ORDER OF THE CIT(A), THE ASSESSEE I S NOW BEFORE THE ITAT. 8. BEFORE US, THE AR SUBMITTED THAT THE ASSESSEE IS A DOCTOR, HAVING SPECIALIZATION IN KIDNEY AILMENTS AND IS ATT ACHED TO/CONSULTANT WITH A NUMBER OF HOSPITALS FOR THE PAST MORE THAN 2 5 YEARS. 9. THE AR SUBMITTED THAT IT IS FACT THAT THE ASSESS EE DEPLOYS HIS OWN MONEY TOWARDS INVESTMENT IN SHARES AND THE PORT FOLIO HAS GROWN OVER THE YEARS. 10. THE AR FURTHER SUBMITTED THAT THOUGH THE REVENU E AUTHORITIES RELIED ON THE DECISION OF GODREJ & BOYCE MFG. CO. L TD. VS DCIT, REPORTED IN 328 ITR 81 (BOM), THEY FAILED TO COMPLY TO THE SAFEGUARDS, AS PROVIDED THEREIN AND BY THE LEGISLATURE. THE AR POINTED OUT THAT THE REVENUE AUTHORITIES DID NOT COMPLY WITH THE STATUTO RY REQUIREMENTS, SUCH AS RECORDING OF SATISFACTION, REFERENCE TO THE BOOKS OF ACCOUNT AND MOST IMPORTANTLY, IGNORING THE FACT THAT THERE WAS NO DISALLOWANCE IN THE PRECEDING YEARS. THE AR ALSO TOOK US THROUGH THE DETAILS OF ADMINISTRATIVE & OTHER EXPENSES AND SUBMITTED THAT NOT ONE EXPENSE COULD BE INDICATED TO BE TOWARDS SHARES. 11. THE AR SUBMITTED THAT FUNDAMENTALLY, THE REVENU E AUTHORITIES HAVE COMPUTED THE DISALLOWANCE AS PER RULE 8D(III), WHERE THE WORDS USED IS AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAG E OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR . AS SUBMITTED BY THE DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 5 AR, WITHOUT RECORDING THE SATISFACTION THAT EXPENDI TURE WAS TO BE COMPUTED FOR STATUTORY DISALLOWANCE. 12. ON THE QUERY FROM THE BENCH, AS TO WHY THE RATI O LAID DOWN IN THE CASE OF DH SECURITIES PVT. LTD. VS DCIT WAS NOT APPLICABLE TO THE CASE OF THE ASSESSEE, THE AR POINTED OUT THAT THE T HIRD MEMBER DECISION WAS DISTINGUISHABLE ON FACTS. THE AR SUBMI TTED THAT THE DECISION OF THE TM WAS PRIMARILY ON COMPUTATION AS PER RULE 8D(II), HENCE THE CASE OF THE ASSESSEE WAS DISTINGUISHABLE. 13. THE AR, THEREFORE, SUBMITTED THAT ON THE FACTS OF THE CASE, NO DISALLOWANCE COULD BE MADE U/S 14A READ WITH RULE 8 D. 14. THE DR RELIED ON THE ORDERS OF THE REVENUE AUTH ORITIES. 15. WE HAVE HEARD THE ARGUMENTS AND HAVE PERUSED TH E MATERIAL PLACED BEFORE US. FROM THE ORDERS OF THE REVENUE AU THORITIES, WE DO NOT FIND ANYTHING, WHICH COULD LEAD US TO THE CONCLUSIO N THAT THE REVENUE AUTHORITIES COMPLIED WITH THE LEGAL AND STATUTORY R EQUIREMENTS AND ALSO, AS HELD IN THE CASE OF GODREJ & BOYCE MFG. CO . LTD. ( SUPRA ). WE HAVE GONE THROUGH THE VARIOUS DECISIONS AS REFERRED TO IN THE WRITTEN SUBMISSIONS, BUT WE INTEND TO RELY ON THE DECISION OF J K INVESTORS VS. ACIT IN ITA NO. 7858/MUM/2011 THE COORDINATE BENCH AT MUMBAI (WHERE ONE OF US WAS A PARTY), HELD, 18. AFTER CONSIDERING THE PRINCIPLES LAID DOWN BY VARIOUS JUDGMENTS, IT IS IMPERATIVE THAT THE ASSESS ING OFFICER CAN INVOKE RULE 8D ONLY WHEN HE RECORDS SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF T HE ASSESSEE. THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCO ME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 6 HAVE TO INDICATE COGENT REASONS FOR THE SAME. THERE FORE, IT IS ALL THE MORE NECESSARY THAT AO HAS TO EXAMINE THE ACCOUNTS OF ASSESSEE FIRST AND THEN IF HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM, ONLY HE CAN INVO KE RULE 8D. NO SUCH EXAMINATION WAS MADE OR SATISFACTION WA S RECORDED BY AO IN THIS CASE. IT WAS NOTICED THAT TH E ASSESSING OFFICER HAS NOT CONSIDERED THE CLAIM OF THE ASSESSE E AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D ON THE PRESUMPTION THAT PORT FOLIO MANAGEMENT INVOLVES AT LEAST 2% OF CHARG ES. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THA T FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. WE NOTICE THAT ASSESSEE ITSELF DISALLOWED TH E INTEREST WHICH IS DIRECTLY APPLICABLE, DMAT CHARGES AND ADMINISTRATIVE EXP ON ESTIMATION TOTALING TO RS. 1,55,44,610/-. ASSESSEE IS A HUNDRED CRORE TURNOVER COMPANY. AO HAS NOT EXAMINED ANY EXPENDITURE CLAIMED IN P&L ACCOUNT SO AS TO RELATE TO EXEMPT INCOME, NOR GAVE A FINDING THAT ASSESSEE CLAIM IS N OT CORRECT FOR ANY REASON. RULE 8D CANNOT BE INVOKED DIRECTLY WITHOUT SATISFYING ABOUT THE CLAIMS OR OTH ERWISE. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. WE THEREFORE, ALLOW THE GROUND OF APPEAL. 16. ALTHOUGH WE HAD DELETED THE ENTIRE DISALLOWANCE IN THE CASE, AS REFERRED TO BY US, BUT WE FEEL, THAT A TOKEN AD-HOC DISALLOWANCE OF RS. 25,000/- SHALL SUFFICE AND BRING QUIETUS TO THE ISSUE. 17. GROUND NO. 2 PERTAINS TO AD-HOC DISALLOWANCE OF RS. 1,65,831/- EQUIVALENT TO 20% OF DEPRECIATION ON CAR (RS. 57,25 8/-), MOTOR CAR EXPENSES (RS. 2,85,597/-), REPAIRS OF CAR (RS. 10,0 00/-) AND TELEPHONE EXPENSE (RS. 1,04713), AGGREGATING TO RS. 4,57,568/ -, HOLDING THAT CERTAIN EXPENSES OF PERSONAL NATURE COULD NOT BE RU LED OUT. 18. THE DR RELIED ON THE ORDER OF THE REVENUE AUTHO RITIES WHEREAS, THE AR ARGUED THAT NO EXPENSE COULD BE ATTRIBUTED A S PERSONAL IN NATURE AND IN ANY CASE THE DISALLOWANCE WAS EXCESSI VE. 19. AFTER GOING THROUGH THE FACTS, WE FIND THAT ACT UAL DISALLOWANCE COMES TO 36.24% AND NOT 20% (AT 20%, DISALLOWANCE W OULD COME TO RS. 91,513/-). THE AO ALSO, HAS NOT HELD TO BE NON BUSINESS EXPENSES. DR. KIRTIKUMAR L UPADHAYAYA ITA NO. 6670/MUM/2011 7 IN ANY CASE WE FEEL THAT THE AD-HOC DISALLOWANCE WA S AT A HIGHER SIDE. IN THIS VIEW OF THE MATTER, IN OUR OPINION, THAT A DISALLOWANCE OF RS. 45,750 SHALL SUFFICE, WHICH SHALL NOT BE ATTRIBUTED TOWARDS ANY EXPENSE HEAD. 20. IN THE RESULT, BOTH THE GROUNDS BEING PARTLY AL LOWED, THE APPEAL IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH AUGUST, 2014. SD/- SD/- ( ) ( ! ! ! !) (B R BASKARAN) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 13 TH AUGUST, 2014 14/ COPY TO:- 1) /0/ THE APPELLANT. 2) 12/0/ THE RESPONDENT. 3) THE CIT (A)-3, MUMBAI. 4) ; 11 , MUMBAI / THE CIT-11, MUMBAI. 5) <=14) , , THE D.R. A BENCH, MUMBAI. 6) =>!? COPY TO GUARD FILE. 8) / BY ORDER / / TRUE COPY / / [ @/AB , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *DEA) .). * CHAVAN, SR. PS