M/s Modern Steels Ltd., Chandigarh V. ACIT, Chandigarh

ITA 681/CHANDI/2014

• Counselvise Citation: 68121514 RSA 2014
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 31-08-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 28-07-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MITTAL
• Assessee Lawyers: ASHOK KUMAR GOEL
• Keywords: Opportunity of being heard; Earning of tax free income; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES, CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT & MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO. 681/CHD/2014 ASSESSMENT YEAR: 2007-08 M/S MODERN STEELS LTD., VS. THE ACIT, CIRCLE 4(1 ), CHANDIGARH CHANDIGARH PAN NO. AAQBCM1871F (APPELLANT) (RESPONDENT) APPELLANT BY : SH. ASHOK KUMAR GOEL RESPONDENT BY : SH. A.K. MITTAL DATE OF HEARING : 31.08.2015 DATE OF PRONOUNCEMENT : 03.09.2015 ORDER PER H.L.KARWA, VP THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A), CHANDIGARH DATED 23.5.2014 RELATING TO ASSESSMENT Y EAR 2007-08. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS:- 1. THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE A DDITION ON THE BASIS OF APPLICATION OF RULE 8D, SIMULTANEOU SLY HOLDING THAT CONTENTION OF THE ASSESSEE THAT RULE 8D WAS NO T APPLICABLE PRIOR TO 1.4.2008 IS NOT A SETTLED POSITION OF LAW. 2. THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE ADDITION ON ACCOUNT OF INTEREST AS PER RULE 8D, EVEN WHEN ON US IS ON ASSESSING OFFICER TO PROVE THE NEXUS OF INTEREST BE ARING FUND AND INVESTMENT, HAVE NOT BEEN DISCHARGED BY ASSESSI NG OFFICER, HENCE RELIEF BE ALLOWED. 2 3. THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE A DDITION OF RS. 111480/- AS ADM. EXPENSES AS PER RULE 8D WHE N THE SAME IS NOT APPLICABLE, FURTHER WITHOUT POINTING EX PENSES ACTUALLY BEEN INCURRED AND FURTHER WHEN NO NEXUS OF EXPENSES HAVE BEEN PROVED BY ASSESSING OFFICER/CIT(A). IN SP ITE OF THE FACT THAT DE MAT CHARGES OF RS. 30152/- ALREADY ADD ED IN THE COMPUTATION OF INCOME AGAINST EXEMTP INCOME. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE COMPANY IS A MINI STEEL PLANT AND MANUFACTURING ALLOYS AND NON-ALLOYS STEEL. THE ASSESSEE SUPPLIED STEEL TO VARIOUS AUTOMOBILE MANUFACTURERS AND THEIR COMPONENT MANUFACTURING UNITS. DURING THE YEAR UNDER CONSIDERATION THE ASSE SSEE HAD SHOWN DIVIDEND INCOME OF RS. 4,33,122/- AND LONG TERM CAPITAL GAIN OF RS. 23,93,793/- WHICH IS STATED TO BE EXEMPT INCOME. THE ASSESSING OFFICER N OTICED THAT THE COMPANY HAD PURCHASED SHARES OF COMPANIES AMOUNTING TO RS. 1,99 ,56,000/- AND MADE AN INVESTMENT OF RS. 1,47,00,000/- IN MODERN AUTOMATIV E LTD AS ON 31.3.2007. THE ASSESSING OFFICER OBSERVED THAT THE INCOME EARNED ( IF ANY) FROM THE ABOVE INVESTMENT WOULD BE IN THE NATURE OF DIVIDEND AND L ONG TERM CAPITAL GAIN WHICH IS AN EXEMPT INCOME AND IS NOT INCLUDED IN THE TOTAL I NCOME OF THE ASSESSEE. THE ASSESSING OFFICER, THEREFORE, HELD THAT IN THIS CAS E PROVISIONS OF SECTION 14A OF THE I.T. ACT, 1961 (IN SHORT, THE ACT) ARE ATTRAC TED. THEREFORE, THE ASSESSING OFFICER ASKED THE ASSESSEE AS TO WHY PROPORTIONATE EXPENSES SHOULD NOT BE DISALLOWED ON THE EXEMPT INCOME U/S 14A. IN RESPON SE TO THE ABOVE QUERY, THE ASSESSEE SUBMITTED A DETAILED REPLY WHICH HAS BEEN REPRODUCED BY THE ASSESSING OFFICER IN PARA 2.3 OF THE ASSESSMENT ORDER. THE AS SESSING OFFICER DID NOT FIND ANY MERIT IN THE REPLY OF THE ASSESSEE AND APPLIED PROV ISIONS OF SECTION 14A READ WITH RULE 8-D OF THE INCOME TAX RULES AND DISALLOWED RS. 6,63,030/-. ACCORDING TO ASSESSING OFFICER, THE PROVISIONS OF SECTION 14A RE QUIRES THAT ANY EXPENDITURE WHICH IS INCURRED IN RELATION TO THE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IS TO BE DISALLOWED. HE FURTH ER OBSERVED THAT IN ADDITION, 3 THE ASSESSEE HAS ALSO INCURRED ADMINISTRATIVE AND M ANAGERIAL EXPENSES TO EARN EXEMPT INCOME. HE FURTHER OBSERVED THAT COMPANY CAN NOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. THE ASSESSING OFFICER CONCLUDED THAT RULE 8D IS APPLICABLE WITH RETROSPECTIVE EFFECT. ON APPEAL, TH E CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT READ WITH RULE 8D OF I.T. RULES AND HENCE THE ASSESSEE IS IN APPEA L BEFORE THE TRIBUNAL. 4. WE HAVE HEARD SHRI ASHOK KUMAR GOEL, LD. COUNSEL FOR THE ASSESSEE AND SHRI S.K. MITTAL LD. DR AT LENGTH AND HAVE ALSO PER USED THE MATERIALS AVAILABLE ON RECORD. AT THE VERY OUTSET, LD. COUNSEL FOR TH E ASSESSEE SUBMITTED THAT RULE 8D OF I.T. RULES, 1961 IS NOT APPLICABLE FOR THE AS SESSMENT YEAR UNDER CONSIDERATION. HE FURTHER POINTED OUT THAT THE ASSE SSING OFFICER HAD RELIED ON THE DECISION OF HON'BLE ITAT, MUMBAI BENCH IN THE CASE OF ITO V. DAGA CAPITAL MANAGEMENT P. LTD [2009] 312 ITR (AT)1 (MUMBAI) WHE REIN IT HAS BEEN HELD THAT RULE 8-D IS APPLICABLE WITH RETROSPECTIVE EFFE CT. ACCORDING TO SHRI ASHOK KUMAR GOEL, LD. COUNSEL FOR THE ASSESSEE THE HON'BL E BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING. CO. LTD VS. D CIT AND ANOTHER [2010] 328 ITR 81 (BOM) HAS DISAPPROVED THE DECISION OF IT AT SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT P. LTD (SUP RA). THE HON'BLE HIGH COURT HAS HELD THAT THE PROVISION OF RULE 8D OF THE I.T. RULES WHICH HAD BEEN NOTIFIED W.E.F. MARCH 24, 2008 WOULD APPLY W.E.F. A SSESSMENT YEAR 2008-09. THE HON'BLE HIGH COURT FURTHER HELD THAT DISALLOWANCE F OR EARLIER PERIOD TO BE DETERMINED ON REASONABLE BASIS. THE HON'BLE HIGH CO URT HAS CATEGORICALLY HELD THAT EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RU LE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAD TO ENFORCE THE PROVISION OF S UB SECTION (1) OF SECTION 14A. IN THIS CASE THE CIT(A) HAS ADMITTED THAT RULE 8D I S NOT APPLICABLE TO THIS YEAR AND AT THE SAME TIME THE CIT(A) HAS CONFIRMED THE O RDER OF THE ASSESSING OFFICER HOLDING THAT METHOD GIVEN IN RULE 8D THOUGH EFFECTI VE FROM 24.3.2008, IS THE 4 PROPER METHOD TO BE APPLIED EVEN TO THE PRECEDING Y EAR WHEN RULE 8D WAS NOT ON THE STATUTE BOOK. IN OUR CONSIDERED VIEW, THE CIT(A ) WAS NOT JUSTIFIED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER ON TH IS ISSUE. SHRI ASHOK KUMAR GOEL, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT I NVESTMENT WAS MADE OUT OF SURPLUS FUNDS. THE BORROWING FROM BANK WAS FOR SPEC IFIC PURPOSES. SHRI ASHOK KUMAR GOEL, LD. COUNSEL FOR THE ASSESSEE ALSO SUBMI TTED THAT ONLY INTEREST FREE FUNDS WERE UTILIZED BY THE ASSESSEE FOR MAKING INVE STMENT IN SHARES AND MUTUAL FUNDS. CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANC ES OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE ORDER OF CIT(A) DESERVES TO B E SET ASIDE AND WE REMAND THE MATTER TO ASSESSING OFFICER WITH A DIRECTION TO DEC IDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER AFFORDING DUE AND REASONA BLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE IS FREE TO PROD UCE ITS ACCOUNTS AND RELEVANT MATERIAL IN SUPPORT OF ITS CASE. IT IS MADE CLEAR T HAT THE PROVISIONS OF RULE 8D OF I.T. RULES, 1962 ARE NOT APPLICABLE TO THE ASSESSME NT YEAR 2007-08. ACCORDINGLY, WE ALLOW GROUND NOS.1 TO 3 OF THE APPEAL FOR STATIS TICAL PURPOSES. 5. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 03.09.2015 SD/- SD/- (RANO JAIN) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 03 SEPTEMBER, 2015 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR