MAHINDRA & MAHINDRA FINANCIAL SERVICES LTD, MUMBAI V. ASST CIT CIR 6(3), MUMBAI

ITA 6679/MUM/2011

• Counselvise Citation: 667919914 RSA 2011
• Duration Of Justice: 3 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 05-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A RAMCHANDRAN
• Assessee Lawyers: BHAVIN SHAH VAIBHAVI PATEL
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A; 32

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - B,BENCH , , BEFORE S/SH. JOGINDER SINGH,JUDICIAL MEMBER & RAJENDRA ,ACCOUNTANT MEMBER /. ITA NO. 6679 /MUM/20 11 , / ASSESSMENT YEAR - 2008 - 09 MAHINDRA & MAHINDRA FINANCIAL SERVICES LIMITED , MAHINDRA TOWERS, WORLI ROAD NO.13,WORLI MUMBAI - 400 018. PAN:AAACM 2931R VS ADDL. CIT , RANGE - 6(3) 5 TH FLOOR, AAYAKAT BHAVAN MUMBAI. ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY :SHRI BHAVIN SHAH/ VAIBHAVI PATEL / REVENUE BY : SHRI A. RAMCHANDRAN DR / DATE OF HEARING : 24 - 07 - 2015 / DATE OF PRONOUNCEMENT : 29 - 07 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 01.08.2011 OF CIT - 12 MUMBAI ,THE ASSESSE HAS RAISED FOLLOWING GROUNDS OF APPEALS: 1. LEARNED CIT(A) ERRED IN UPHOLD ING THE ACTION OF ASSESSING OFFICER OF DISALLOWING DEPRECIATION ON LEASED ASSETS TO THE TUNE OF RS.1,58,80,468/ . THE LEARNED CIT (A) OUGHT TO HAVE ALLOWED THE DEPRECIATION FOLLOWING THE ORDERS PASSED BY THE HONORABLE INCOME TAX APPELLATE TRIBUNAL, MUMBAI UPTO ASSESSMENT YEARS 2002 03 IN ASSESSEE'S OWN CASE CONFIRMING ALLOWANCE OF DEPRECIATION TO THE APPELLANT COMPANY. 2. LEARNED CIT(A) ERRED IN UPHOLDING DISALLOWANCE U/S 14A IN RESPECT OF INTEREST I EXPENDITURE OF RS.1,06,37,104 AND ADMINISTRATIVE EXPENSE S OF RS. 7,02,925/ (AGGREGATE RS.1,13,40,029/ ) TOWARDS EARNING OF EXEMPT INCOME OF 217.57 LACS FROM DIVIDEND EARNED BY THE APPELLANT COMPANY. LEARNED CIT (A), WITHOUT PREJUDICE TO EACH OTHER, OUGHT TO HAVE APPRECIATED THAT (I) INVESTMENTS AS OF 31ST MA RCH 2008 BEING MERE 3.30% OF THE AGGREGATE OWNED FUNDS (SHARE CAPITAL + RESERVES) OF THE COMPANY, PRESUMPTION SHOULD HAVE BEEN THAT INVESTMENTS ARE MADE OUT OF OWNED FUNDS. (II) TO THE EXTENT ASSESSEE COMPANY HAVING FACTUALLY ESTABLISHED THAT NON INTEREST BEARING FUNDS RAISED THROUGH ISSUE OF EQUITY SHARES WERE TEMPORARILY PARKED IN UNITS OF MUTUAL FUNDS PENDING ACTUAL USE IN BUSINESS, THERE WAS NO OCCASION TO INVOKE SECTION 14A & APPLY RULE 80. ASSESSEE COMPANY HAVING ALSO ESTABLISHED THAT FUNDS WERE SPECI FICALLY BORROWED FOR THE PURPOSE OF ITS PRIMARY BUSINESS OF VEHICLE FINANCING, ENTIRETY OF THE INTEREST EXPENDITURE CLAIMED BY THE COMPANY WAS FULLY ALLOWABLE U/S 36(1 )(III). (III) CONSIDERING THE FACT THAT INVESTMENTS WERE MAINLY MADE IN MUTUAL FUNDS, E XPENSES RELATABLE TO EARNING OF EXEMPT INCOME COULD NOT HAVE BEEN ESTIMATED AT MORE THAN 0.50% OF THE EXEMPT INCOME EARNED DURING THE YEAR. 3. THE LEARNED CIT (A) FURTHER ERRED IN CONFIRMING THE CLASSIFICATION OF UPS AS ELECTRICAL INSTALLATION AND HENCE EL IGIBLE FOR DEPRECIATION RATE OF 25% APPLICABLE TO GENERAL PLANT & MACHINERY AND NOT AS AN INTEGRAL PART OF COMPUTER ELIGIBLE FOR DEPRECIATION @60% AND THEREBY RESTRICTING THE DEPRECIATION CLAIM TO RS. 11,08,473/ AS AGAINST THE CLAIM MADE BY THE COMPANY AT RS.24,87,652/ U/S 32 OF THE IT ACT. 4. THE LEARNED CIT(A) ERRED IN NOT DELETING THE AD HOC DISALLOWANCE OF RS. 1,03,86,000/ BEING INCREMENTAL EXPENSES ON COMMISSION AND BROKERAGE. CIT(A) HAVING FOUND MERIT IN DETAILED ITA/6679/MUM/2011,AY.2008 - 09 - MMFSL 2 FACTUAL SUBMISSIONS LIKE PAN NOS, T AX DEDUCTION AT SOURCE, CONFIRMATION, PAYMENTS ONLY BY CHEQUE ETC. MADE BEFORE THE AO AND HAVING CONCLUDED THAT THE AO ERRED IN REJECTING THE SUBMISSIONS AND FOLLOWING ORDERS OF EARLIER YEARS, OUGHT TO HAVE DELETED THE DISALLOWANCE MADE BY THE AO. ON FACT S AND CIRCUMSTANCE OF THE CASE AND IN LAW, DISALLOWANCE OF LEGITIMATE EXPENSES INCURRED IN THE COURSE OF BUSINESS IS ENTIRELY UNWARRANTED AND HENCE NEEDS TO BE QUASHED. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE ABOVE GROUNDS, IF NECESSARY. ASSESSEE - COMPANY, ENGAGED IN THE BU SINESS OF FINANCING AUTOMOBILE, FILED ITS RETURN ON 29.09. 2008, DECLARING TO TAL INCOME OF RS.420.73 CRORES.THE ASSESSING OFFICER(AO)FINALIS ED THE ASSESSMENT U/S. 143(3) OF THE ACT,ON 30.12.2010 DETERMIN ING THE I NCOME OF THE ASSESSEE AT RS. 424.63 CRORES. 2. FIRST GROUND OF APPEAL IS ABOVE DISALLOWANCE OF APPRECIATION OF RS.1,58,80,468/ - ON LEASE ASSETS.AT THE TIME OF HEARING BEFORE US, THE AUTHORISED REPRESENTATIVE( AR ) POINTED OUT THAT THE ISSUE HAS BEEN DECIDED I N FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE TRIBUNAL D ELIVERED FOR THE EARLIER YEARS. HE REFERRED TO THE ORDER OF THE TRIBUNAL DATED 2.4.2014(ITA NO.2846/ MUM/2007 - AY 2003 - 04, ITA NO. 05/MUM/2008 - AY 2004 - 05 AND ITA NO.3280/MUM/ 2009 - AY. 2005 - 06). THE DEPART MENT REPRESE NTATIVE (DR) FAIRLY CON CEDE D THAT THE IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSE E BY THE ORDERS OF THE TRIBUNAL, RELIED UPON THE AR . 2.1 . WE FIND THAT THE TRIBUNAL, WHILE DECIDING THE APPEAL FOR THE AY 2003 - 04 HAD HELD AS UNDER : 2.AT THE TIME OF HEARING BEFORE US, THE AR POINTED OUT THAT ISSUE IMPUGNED IN THE TWO YEARS, FOR WHICH THE GROUND WAS RECALLED PERTAINED TO DEPRECIATION ON LEASED ASSETS, WHICH NOW STANDS SETTLED BY THE DECISION OF HORR'BLE SUPREME COURT IN THE CASE OF ICDS LTD. VS CIT, IN CA NO. 3286 TO 3290 OF 2008, WHEREIN IT WAS HELD, 'WHETHER THE APPELLANT (ASSESSEE) IS THE OWNER OF THE VEHICLES WHICH ARE LEASED OUT BY IT TO ITS CUSTOMERS', THE HON'BLE SUPREME COURT OF INDIA, CONCLUDED,EXTRACTED FROM PARA 28 'FROM A P ERUSAL' OF THE LEASE AGREEMENT AND OTHER RELATED FACTORS, AS DISCUSSED ABOVE, WE ARE SATISFIED OF THE ASSESSEE'S OWNERSHIP OF THE TRUCKS IN QUESTION' AND FOLLOWED BY THE DECISION BY THE COORDINATE BENCH AT MUMBAI IN THE CASE OF DEVELOPMENT CREDIT BANK L TD. VS DCIT IN ITAS NO. 3006/MUM/2006 AND 4892/MUM/2003 AND OTHER APPEALS (WHERE ONE OF US WAS A PARTY) AND OTHER DECISIONS RENDERED BY COORDINATE BENCHES OF MUMBAI ITA T, IN THE CASES OF SICOM LTD. ITA NO. 901/MU M/2013.BORKADIS DREDGING LTD. ITA NO. 6151 / MUM/2010 AND G.R. SHIPPING BY HON'BLE BO M BAY HIGH COURT IN ITA 958 OF 2009. 3. SINCE THE ISSUE NOW IS COVERED BY THE HON'BLE SUPREME COURT OF T INDIA IN ICNS LTD. (SUPRA) AND NCB LTD. (SUPRA), RESPECTFULLY FOLLOWING THE RATIO DECIDED IN THE ABOVE CASE ,WE SET ASIDE THE OREDER OF THE CIT(A)AND DIRECT THE AO TO CLAIM OF DEPRECIATION ON LEASED ASSETS,AS CLAIMED BY THE ASSEEEE. RESPECTF ULLY, FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL AND THE JUDGMENT OF THE HONBLE SUPRE ME COURT IN THE CASE OF ICDS LTD.(SUPRA ), WE DECIDE THE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 3 .GROUND NO.2 PERTAINS TO DISALLOWANCE MADE U/S.14A OF THE ACT R .W. RULE 8D OF THE INCOME RULES1962(RULES), AMOUNTING TO RS.1,13,40,029/ - . DURING THE ASSESSMENT PROCEEDINGS , THE AO FOUND THAT T HE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.217ASKED THE ASSESSEE TO EXPLAIN AS TO WHY NECESSARY EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME SHOULD NOT BE DISALLOWED. ITA/6679/MUM/2011,AY.2008 - 09 - MMFSL 3 AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE DATED 13.09.2009, THE AO HELD THAT IN THE EARLIER YEAR SIMILAR DISALLOWANCE WAS MADE. REFERRING TO THE CASE OF GODREJ & BOYCE CO. LTD. OF THE BOMBAY HIGH COURT, THE AO CALCULATED THE DISALLOWANCE AS UNDER: (A ) TOTAL INTEREST PAID EQUAL TO RS.44681.50 LACS ( B ) AVERAGE INVESTMENT RS.(2556.94+2 54.76) /2=1405.85 LACS (C)AVERAGE ASSETS - RS.(622183.59+558880.06)/2=590531.83 LAKHS DISALLOWANCE AS PER RULE 8 D(I)= 0.5% OF B = 7,02,925/ - DISALLOWANCE AS PER RULE 8 D(II)=A*B/C= 1,06,37,104/ - TOTAL DISALLOWANCE U/S.14A OF T HE ACT 1,13,40,029/ - FINALLY,THE AO MADE A DISALLOWANCE OF RS.1.13 CRORES TO THE TOTAL INCOME OF THE ASSESSEE. 3 .1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILED AN APPEAL BEFORE THE FAA,WHO CONFIRMED THE ORDER OF THE AO. 3 .2. BEFORE US,AR ARGUED T HAT IDENTICAL ISSUE WAS DEALT WITH BY THE TRIBUNAL WHILE DECIDING THE APPEAL FOR THE EARLIER YEARS.WE FIND THAT THE TRIBUNAL HAS DELIBERATE D UPON THE ISSUE OF DISALLOWANCE TO BE MA DE U/S.14A OF THE ACT AS UNDER: GROUND NO. 3 & 4 PERTAINS TO DISALLOWANCE 14A WITH REGARD TO INTEREST AT RS.1,41,64,000/ AND OTHER EXPENSES AT RS.3,59,340/ . 12.IT HAD BEEN ARGUED BEFORE THE REVENUE AUTHORITIES THAT THE ASSESSEE HAD SUBSTANTIAL INTEREST FREE FUNDS AVAILABLE, BESIDES INTEREST 1ARING FUNDS. THE ASSESSEE, THEREFO RE, SUBMITTED THAT ON THE MIXED OF FUNDS,HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD.,REPORTED IN 313 ITR 340 (BORN) HELD WHERE SUFFICIENT INTEREST FREE FUNDS ARE AVAILABLE A PRESUMPTION COULD RAISED THAT INVESTMENTS HA VE BEEN MADE OUT OF SUCH INTEREST FREE FUNDS.HENCE,THERE COULD BE NO DISALLOWANCE OF INTEREST OR OTHER ADMINISTRATIVE EXPENSES. 13.HOWEVER,THE AR SUBMITTED,THAT THE ISSUE OF RESTRICTIONS OF DISALLOWANCE TO 2% OF EXEMPT INCOME IS NOW SETTLED BY THE HON 'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS GODREJ AGROVET LTD. IN ITA NO .934 OF 2011 (BOM) DATED 08.01.2013 AND ALSO IN KARUR VYSYA BANK LTD. AS REPORTED IN 20 13 ID2 GJX 0024 TMAD. 14.THE AR SUBMITTED THAT THE ISSUE MAY BE EXAMINED BY THE AO IN THE LIGHT OF THE ABOVE DECISIONS AND APPROPRIATE ADJUDICATION MAY BE GIVEN ON BOTH THE ISSUES.DR DID NOT OBJECT TO THE ISSUE BEING RESTORED TO THE ASSESSING OFFICER FOR DETAIED EXAMINATION. 15.IN THESE CIRCUMSTANCES,WE SET ASIDE THE ORDER OF THE CIT(A) O N THE ISSUES COVERED IN GROUNDS NO.3 & 4 AND DIRECT THE ASSESSING OFFICER FOR FRESH ADJUDICATION AS PER THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASES OF RELIANCE UTILITIES (SUPRA) AND GODREJ AGROVET (SUPRA). FOLLOWING THE ABOVE,WE ARE R ESTORING THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION, WHO WILL DECIDE IT AS PER THE DIRECTIONS CONTAINED IN PARAGRAPH 15 OF THE EARLIER YEARS ORDER. GROUND NO.2 IS PARTLY ALLOWED IN FAVOUR OF THE ASSESSEE. 4 . NEXT GROUND OF APPEAL PERTAINS TO R ESTRICTING THE DEPRECIATION CLAIM TO RS. 11,08,473/ - AS AGAINST THE CLAIM MADE BY THE ASSESSEE AT RS.24,87,652/ - U/S 32 OF THE ACT . BEFORE US,THE AR AND THE DR AGREED THAT IN LIGHT OF EARLIER YEARSDECISION ISSUE HAS TO BE SENT BACK TO THE FILE OF THE AO FO R FRESH ADJUDICATION. 4 .1. WE FIND THAT WHILE DECIDING THE APPEAL FOR THE AY.2006 - 07(ITA/1173 & 1572/MUM/ 2011),THE TRIBUNAL HAS RESTORED THE MATTER AS FOLLOW: GROUND NO.3 PERTAINS TO TREATMENT TO BE GIVEN TO UPS FOR DEPRECIATION. I.E., WHETHER IT IS ELECT RICAL EQUIPMENT AND ALLOWED DEPRECIATION OF RS.1,03,060/ @ 25% OR AN INTEGRAL PART OF COMPUTER AND ALLOWED AT RS. 4,12,242/ ,CLAIMED BY THE ASSESSEE. 53. THE AR, IN ALL FAIRNESS, POINTED OUT THAT IN THE CURRENT YEAR,THE ISSUE NEEDS TO. BE RESTORED TO THE FILE OF THE AO, AS IN THE PRECEDING YEAR, THE ISSUE HAS BEEN RESTORED TO THE AO IN ITA NO. 2846/MUM/2007, TO VERIFY ITS USAGE AND ALLOW THE DEPRECIATION ACCORDINGLY. 54.THE DR DID NOT OBJECT TO THE ISSUE GOING BACK TO THE AO FOR FRESH ADJUDICATIO N. 55. RESPECTFULLY FOLLOWING THE ORDER IN ITA NO. 2846/MUM/2007 IN ASSESSMENT YEAR 2003 ITA/6679/MUM/2011,AY.2008 - 09 - MMFSL 4 04IN THE CASE OF THE ASSESSE,WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE ME OF THE AO FOR ADJUDICATION IN LINE AND FOR THE SAKE OF CONSISTENT STAND ON THE ISSUE, THE DECISION TAKEN IN ASSESSMENT YEARS 2003 04 & 2005 06. FOLLOWING THE ORDERS FOR THE EARLIER YEAR,WE DIRECT THE AO TO FOLLOW THE DIRECTIONS OF THE TRIBUNAL PASSED FOR EARLIER YEAR.GROUND NO.3 IS DECIDED IN FAVOUR OF THE ASSESSEE,I N PART. 5 .LAST GROUND DEALS WITH AD - HOC DISALLOWANCE OF RS. 1,03,86,000/ - ,BEING INCREMENTAL EXPENSES, ON ACCOUNT OF COMMISSION AND BROKERAGE . 5 .1. IT WAS BROUGHT TO OUR NOTICE THAT THE IDENTICAL ISSUE IN THE CASE OF THE APPEAL OF THE ASSESSEE WAS DEALT BY THE TRIBUNAL IN EARLIER AY.AND THAT SAME WAS RESTORED BACK TO THE FILE OF THE AO.IT WAS ALSO STATED BY REPRESENTATIVES OF BOTH THE SIDES THAT THE TRIBUNAL HAD INCREASED THE MONETARY LIMIT FOR VERIFICATION OF COMMISSION AND BROKERAGE PAYMENT TO RS.3 LAKHS. WE WOULD LIKE TO PRODUCE THE ORDER OF THE TRIBUNAL AND SAME READS AS UNDER : 93.GROUND NO.4 PARTIES TO DISALLOWANCE OF RS.5,93,26,688/ ON ACCOUNT OF COMMISSION & BROKERAGE EXPENSES. 94.AT THE TIME OF HEARING, THE AR POINTED OUT THAT IN ITA NO.2846/MUM /2007 IN ASSESSMENT YEAR 2003 04,THE ISSUE WAS RESTORED TO ASSESSING OFFICER TO VERIFY THE VERIFICATION ON THE PARTIES WHOM PAYMENT OF RS.1,00,000/ WAS MADE. HOWEVER, THE AR SUBMITTED THAT IN THE CURRENT YEAR, PRIMARILY THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE ON INCREMENTAL AMOUNT OF COMMISSION AND BROKERAGE. THE AR SUBMITS NEITHER IT IS CASE OF DISALLOWANCE U/S 40(A)(IA) NOR IS THE CASE, WHERE THE AO HAS NOTICED ANY DISPROPORTIONATE INCREASE IN THE EXPENDITURE CLAIMED BY THE ASSESSEE.HE FURTHER A DDS THAT THE AA ACCEPTS THE NATURE OF PAYMENT.HENCE THE EXPENSE SHOULD BE ALLOWED. 95.THE DR SUBMITS THAT AS PER THE ORDER IN THE EARLIER YEARS, THE VERIFICATION HAS TO BE DONE AND THEREFORE TO KEEP THE CONSISTENT VIEW, THE ISSUE MUST BE RESTORED TO T HE AO. 96.THE AR,AT THIS JUNCTURE SUBMITTED THAT IF VERIFICATION HAS TO BE CONDUCTED, THEN, THE LIMIT SET BY THE COORDINATE BENCH FOR VERIFICATION OF EXPENSE OF MORE THAN RS.1,00,000/ , SHOULD BE INCREASED, I.E. FROM 1,00,000/ TO RS. 5,00,000/ , AS B ASE OF RS.1,00,000/ IS TOO LESS. 97.WE HAVE CONSIDERED THE ARGUMENTS.THE ISSUE MUST BE VERIFIED BY THE AO TO RE ADJUDICATE FOR THE SAKE OF CONSISTENCY.HOWEVER,WE ACCEDE TO THE REQUEST OF THE AR TO INCREASE THE BASE OF VERIFICATION FIXED AT RS.1,00,000 / IN THE ORDER IN 2003 04, BEING LOW. WE, THEREFORE, INCREASE THE BASE TO RS.3,00,000/ AND ABOVE FOR THE CURRENT YEAR ONWARDS. 98.WE,THEREFORE, SET ASIDE THE ORDER OF THE CIT{A) ON THIS ISSUE AND DIRECT THE AO TO SEEK CONFIRMATIONS FROM THE PARTIES TO WHOM COMMISSION & BROKERAGE HAS BEEN PAID IN EXCESS OF RS. 3,00,000/ . FOLLOWING THE ABOVE,WE DECIDE GROUND NO.4 IN FAVOUR OF THE ASSESSEE,IN PART AND DIRECT THE AO TO GET CONFIRMATION FROM THE PARTIES WHO HAVE RECEIVED COMMISSION AND BROKERAGE MORE THA N THREE LAKHS AND ABOVE FROM THE ASSESSEE . AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. . ORDER PRO NOUNCED IN THE OPEN COURT ON 29 TH JULY,2015. 29 TH , 2015 SD/ - SD/ - ( / JOGINDER SINGH) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 29 .0 7 .2015 . . . JV . SR.PS. / COPY OF THE ORDER FORWARDED TO : ITA/6679/MUM/2011,AY.2008 - 09 - MMFSL 5 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.