ADITYA BIRLA NUVO LTD, V. ADDL CIT RG 1,

ITA 67/LKW/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79094 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 29-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMBIT MISHRA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND DR. S.T.M.PAVALAN, JUDICIAL MEMBER ITA NO.67 /L/2010 (ASSESSMENT YEAR: 2006-07) ADITYA BIRLA NUVO LIMITED, P.O. JAGDISHPUR INDL. AREA. DISTT: SULTANPUR-226001 (U.P.) VS. ACIT, RANGE 1, LUCKNOW PAN : AABCI0553N (APPLICANT) RESPONDENT ) ASSESSEE BY: SHRI YOGESH THAR DEPARTMENT BY : SHRI SAMBIT MISHRA DATE OF HEARING : 09.06.2014 DATE OF PRONOUNCEMENT : 09.06.2014 O R D E R PER DR. S.T.M. PAVALAN, JM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD. CIT(A)-I, LUCKNOW DATED 18.12.2009 FOR THE ASSESSME NT YEAR 2006-07. 2. IN THIS APPEAL, THE ASSESSEE HAS AGITATED THE DE CISION OF THE LD.CIT(A) CONFIRMING THE DISALLOWANCE OF RS.2,27,22,918/- MAD E BY THE AO UNDER SECTION 14A OF THE INCOME TAX ACT. 3. BRIEFLY STATED, THE ASSESSEE, A COMPANY MADE INV ESTMENTS IN SHARES AND MUTUAL FUNDS TO THE EXTENT OF RS.450.72 CRORES, CLA SSIFIED AS LONG TERM INVESTMENT, ON WHICH THE ASSESSEE COMPANY EARNED DIVIDEND OF RS.4, 06,56,408/-. IN THE ASSESSMENT FRAMED, THE AO REQUIRED THE ASSESSEE TO STATE WHY A PPROPRIATE DISALLOWANCE SHOULD NOT BE MADE U/S14A OF THE ACT. IN RESPONSE, THE ASS ESSEE REPLIED THAT THE ASSESSEE COMPANY HAVING SUBSTANTIAL CASH SURPLUS AND NO AMOU NT OF BORROWING HAD BEEN USED FOR MAKING INVESTMENTS. THE COMPANY HAVING ITS CORP ORATE OFFICE AT MUMBAI, AS ITA NO.67/L/2010 ADITYA BIRLA NUVO LIMITED ASSESSMENT YEAR 2006-07 2 VARIOUS MATTERS LIKE INVESTMENT RELATED MATTERS, PO LICY MATTERS, LEGAL COMPLIANCE WERE HANDLED BY MUMBAI OFFICE AND CLAIMED THAT NO DIRECT EXPENSES HAD BEEN INCURRED IN MAKING THE SAID INVESTMENT. ACCORDING TO THE ASSESS EE, AT THE MOST 25% OF THE EXPENSES OF MUMBAI OFFICE AT RS.3,22,637/- MAY BE C ONSIDERED AS RELATING TO INVESTMENT ACTIVITIES WHICH MIGHT BE DISALLOWED. HA VING NOT SATISFIED WITH THE EXPLANATION OFFERED BY THE ASSESSEE, THE AO DISALLO WED RS.2,27,22,918/- UNDER SECTION 14A OF THE ACT OUT OF EXPENDITURE INCURRED ON INTEREST OF RS.43,76,918/- AND RS.1,83,46,000/- OUT OF OTHER EXPENSES AS INDIRECT EXPENDITURE FOR EARNING THE EXEMPT INCOME. IT IS NOTEWORTHY TO MENTION THAT THE AO HAS APPLIED RULE 8D OF THE INCOME TAX RULES FOR WORKING OUT THE SAID DISALLOWANCE. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOWANCE MADE BY THE AO AS IT WAS MANDATORY FOR THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO BE EXEMPT INCO ME IN ACCORDANCE WITH THE PRESCRIBED UNDER RULE 8D. AGGRIEVED BY THE IMPUGNED ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. HAVING HEARD BOTH THE SIDES AS PERUSED THE MATER IAL ON RECORD, IT IS PERTINENT TO MENTION THAT THE IMPUGNED DISALLOWANCE HAS BEEN MADE/CONFIRMED BY THE AO/LD. CIT(A) BY APPLYING RULE 8D OF THE INCOME TAX RULES 1962. AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. VS. DCIT, 328 ITR 81 (BOM) , RULE 8D OF THE INCOME TAX RULES IS APPLICABLE ONL Y PROSPECTIVELY I.E., FROM ASSESSMENT YEAR 2008-09. THE ASSESSMENT YEAR PERTAI NING TO THE CASE IN HAND IS 2006-07 TO WHICH THE SAID RULE IS NOT APPLICABLE. C ONSIDERING THE SAID DECISION, WE ARE OF THE VIEW THAT THE AUTHORITIES BELOW ARE NOT JUST IFIED IN MAKING THE DISALLOWANCE BY INVOKING RULE 8D OF THE INCOME TAX RULES. 5. AS REGARDS THE DISALLOWANCE OUT OF THE EXPENDITU RE INCURRED ON ACCOUNT OF INTEREST OF RS.43,76,918/-, THE PERUSAL OF THE BALA NCE SHEET AVAILABLE AT PAGE NO.29 OF THE PAPER BOOK INDICATES THAT BORROWINGS DURING THE YEAR UNDER CONSIDERATION HAVE ACTUALLY BEEN REDUCED THOUGH INVESTMENTS HAVE SIGNI FICANTLY INCREASED. ALSO, THE OWN FUNDS OF THE ASSESSEE IS SUFFICIENT TO COVER THE IN VESTMENTS. WHEN THE FACT BEING SO, THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN DISALLOW ING RS.43,76,918/- OUT OF EXPENDITURE INVOLVED ON ACCOUNT OF INTEREST. ITA NO.67/L/2010 ADITYA BIRLA NUVO LIMITED ASSESSMENT YEAR 2006-07 3 6. AS REGARDS THE DISALLOWANCE OF RS.1,83,46,000/- ON ACCOUNT OF INDIRECT EXPENSES, AS ALREADY MENTIONED, THE AO HAS INVOKED RULE 8D FOR CALCULATING THE DISALLOWANCE AND THE SAME BEEN UPHELD BY THE LD. CI T(A). THOUGH THE SAME IS NOT IN ACCORDANCE WITH THE DECISION OF THE HONBLE BOMBAY HIGH COURT, YET THE DISALLOWANCE U/S 14A IS TO BE WORKED OUT BY ADOPTING SOME REASON ABLE METHOD. IT HAS BEEN SETTLED NOW THAT PERCENTAGE OF THE EXEMPT INCOME CAN CONSTI TUTE A REASONABLE ESTIMATE FOR MAKING DISALLOWANCE IN THE YEARS EARLIER TO THE A.Y .2008-09. DEPENDING ON THE FACTS IN EACH CASE, SUCH DISALLOWANCE RANGES BETWEEN 2 TO 5 PERCENTAGE OF THE DIVIDEND INCOME. IN THIS CONNECTION, IT IS THE CONTENTION OF THE ASSESSEE THAT RS.3,22,637/- BEING 25% OF THE EXPENSES INCURRED BY THE MUMBAI OF FICE WOULD CONSTITUTE A REASONABLE DISALLOWANCE. ALTERNATIVELY, THE LD.AR H AS CONTENDED THAT 1% OF THE EXEMPT INCOME AS DISALLOWED BY THE AO WHICH HAS BEE N CONFIRMED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE A.Y.2001-02 MAY CON STITUTE A REASONABLE DISALLOWANCE. WHEREAS THE LD.DR HAS VEHEMENTLY ARGU ED FOR UPHOLDING THE ORDER OF THE LD.CIT(A). AFTER CONSIDERING THE ENTIRETY OF FA CTS AND CONTENTION OF BOTH SIDES, WE ARE OF THE CONSIDERED VIEW THAT IT WOULD BE JUST AN D REASONABLE THAT 2% OF THE EXEMPT INCOME WOULD CONSTITUTE A REASONABLE DISALLO WANCE ON ACCOUNT OF INDIRECT EXPENSES FOR EARNING THE EXEMPT INCOME U/S 14A OF T HE ACT. WE DIRECT AND ORDER ACCORDINGLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 9 TH DAY OF JUNE 2014. SD/- SD/- (SANJAY ARORA) (DR.S.T.M.PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED: 09.06.2014 A.K.PATEL , PS ITA NO.67/L/2010 ADITYA BIRLA NUVO LIMITED ASSESSMENT YEAR 2006-07 4 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A)- MUMBAI CONCERNED 4. CIT MUMBAI CONCERNED 5. DR, ITAT, MUMBAI D BENCH 6. GUARD FILE. //TRUE COPY/ / BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI ITA NO.67/L/2010 ADITYA BIRLA NUVO LIMITED ASSESSMENT YEAR 2006-07 5 SR. NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATION SHEETS ARE ATTACHED YES SR.PS/PS 2 DRAFT DICTATED ON SR.PS/PS 3 DRAFT PLACED BEFORE AUTHOR SR.PS/PS 4 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 5 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 6 APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 7 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 8 FILE SENT TO THE BENCH CLERK SR.PS/PS 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 10 DATE ON WHICH FILE GOES TO THE AR 11 DATE OF DISPATCH OF ORDER