PAHILAJRAI JAIKISHIN, MUMBAI V. ADDL CIT RG 19(3), MUMBAI

ITA 6870/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9268 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 04-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 09-11-2012
• Court: TRIBUNAL
• Keywords: Double taxation relief; Permanent establishment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI VK;DJ VIHYH; VF/KDJ.K] LH U;K;IHB EQACBZ BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER JH FOT; IKY JKO] U;KF;D LNL; ,OA JH JKTSUNZ] YS[KK LNL; DS LE{K ITA NO. 6870/MUM/2012 ASSESSMENT YEAR: - 2009 - 10 M/S PAHILAJRAI JAIKISHIN 6 TH FLOOR, MAKHIJA CHAMBERS 196, TURNER ROAD, BANDRA (W) MUMBAI 400 050. VS.` ADDL. CIT RANGE - 19(3), MUMBAI PIRAMAL CHAMBERS, 3 RD FLOOR, LAL BAUG, PAREL, MUMBAI 400 012. APPELLANT / VIHYKFKHZ RESPONDENT / IZR;FKHZ ITA NO. 7355/MUM/2012 ASSESSMENT YEAR: - 2009 - 10 ADDL. CIT RANGE - 19(3), MUMBAI PIRAMAL CHAMBERS, 3 RD FLOOR, LAL BAUG, PAREL, MUMBAI 400 012. VS.` M/S PAHILAJRAI JAIKISHIN 6 TH FLOOR, MAKHIJA CHAMBERS 196, TURNER ROAD, BANDRA (W) MUMBAI 400 050. APPELLANT / VIHYKFKHZ RESPONDENT / IZR;FKHZ ORDER PER VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 10.09.2012 OF CIT(A) FOR THE A.Y. 2009 - 10. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE IN THIS APPEAL IS AS UNDER: - ASSESSEE BY / FU/KKZFJRH FD VKSJ LS DR. P. DANIEL, SHRI M.P. MAKHIJA AND SHRI S.M. MAKHIJA REVENUE BY / JKTLP DH VKSJ LS SHRI PREMANAND J. DATE OF HEARING 04.03.2015 DATE OF PRONOUNCEMENT 11 .03.2015 M/S PAHILAJRAI JAIKISHIN 2 | P A G E THE LD. CIT(A) IS NOT JUSTIFIED BOTH ON FACT AND IN LAW IN CONFIRMING THE D ISALLOWANCE OF RS. 11,73,949/ - BY THE ASSESSING OFFICER WITHOUT CONSIDERING THE FACTS OF ASSESSEES CASE APPRECIATING THE SUBMISSIONS MADE/CASE LAWS SITED. 2. THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF TEXTILE GOODS IN THE EXPORT MARKET. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE RECEIVED SUBSTANTIAL DIVIDEND INCOME W HICH WAS EXEMPT FROM TAX AND ACCORDINGLY ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE DISALLOWANCE U/S 14A OF THE INCOME TAX ACT SHOULD NOT BE MADE. THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICER THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FO R EARNING THE DIVIDEND INCOME. THE ASSESSING OFFICER MADE THE DISALLOWANCE U/S 14A R.W. RULE 8D ON ACCOUNT OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) AS WELL AS ON ACCOUNT OF ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III). 3. THE ASSESSEE CHALLENGED THE ACTION OF ASSESSING OFFICER BEFORE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS NOT BORROWED ANY FUND AND, THEREFORE, THE DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A IS NOT WARRANTED. THE INTEREST SHOWN IN THE P&L ACCOUNT IS ONLY THE INTEREST PAYABLE TO T HE PARTNERS ON THE CAPITAL ATTRIBUTED BY THE PARTNERS AND, THEREFORE, THE SAID EXPENDITURE CANNOT BE CONTRIBUTED TO THE EARNING OF DIVIDEND INCOME. THE CIT(A) HAS NOT ACCEPTED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE DISALLOWANCE MADE BY ASSESSING OFFICER. 4. BEFORE US, THE LD,. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THERE IS NO BORROWED FUND WITH THE ASSESSEE AND THE INTEREST IN QUESTION IS ONLY IN RESPECT OF PARTNERS CAPITAL IN THE FIRM. IN M/S PAHILAJRAI JAIKISHIN 3 | P A G E SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE VARIOUS DECISIONS INCLUDING FOLLOWING: - I) MAXOPP INVESTMENTS LTD. & ORS. VS. CIT (2012) 247 CTR (DEL) 162 II) KODAK INDIA PVT. LTD. VS. ADDL. CIT (ITA NO. 7349/MUM/2012) III) ACIT NEW DELHI VS. SIL INVESTMENT LTD (2012) 50 SOT 54 (DEL) IV) VISHNU ANANT MAHAJAN VS. ACIT (SPL. BENCH DECISION) V) CIT VS. HERO CYCLES LTD. (2010) 323 ITR 518 (P&H) 5. HE HAS ALSO RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. R.M. CHIDAMBARAM PILLAI 106 ITR 292 AND SUBMITTED THAT THE FIRM IS NOT A LEGAL PERSONA AND UNDER INCOME TAX LAW AND NOT A FULL PERSON, THEREFORE, THE SALARY PAID TO THE PARTNER IS PART OF THE PROFIT OF THE FIRM TAXABLE AS SUCH. THUS THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT THE IN TEREST ON THE CAPITAL ACCOUNT OF PARTNERSHIP CANNOT BE TREATED AS AN EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOME FOR THE PURPOSE OF SECTION 14A OF THE ACT. 6. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW AND SUBM ITTED THAT THE ASSESSEE USED THE CAPITAL EMPLOYED BY THE PARTNERS FOR EARNING THE DIVIDEND INCOME IN QUESTION AND, THEREFORE, THE COST OF CAPITAL CONTRIBUTED BY THE PARTNERS IS AN EXPENDITURE ATTRIBUTABLE FOR EARNING THE INCOME WHICH IS EXEMPT FROM TAX, CO NSEQUENTLY, THE INTEREST ON CAPITAL OF THE PARTNER IS LIABLE TO BE DISALLOWED U/S 14A. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. IT IS PERTINENT TO NOTE THAT THE PROFIT OF THE PARTNERSHIP FIRM IS DISTRIBUTED AMON G THE PARTNERS IN THE RATIO OF THEIR PROFIT SHARING. THE INTEREST PAYMENT TO THE PARTNERS ON THEIR CAPITAL BALANCE IS NOT REVENUE M/S PAHILAJRAI JAIKISHIN 4 | P A G E NEUTRAL AS THE SAME IS TAXABLE IN THE HANDS OF THE PARTNERS. IN A CASE WHERE NO INTEREST IS PROVIDED ON THE CAPITAL ACCOUNT OF PARTNERS, THE CORRESPONDING PROFIT/INCOME OF THE PARTNERSHIP FIRM IS ASSESSED TO TAX AND THE SHARE OF THE PARTNER IS EXEMPT IN THEIR HANDS. THEREFORE WHEN THERE IS A DIRECT RELATION BETWEEN THE SHARE IN THE PROFIT OF THE FIRM AND THE INTEREST ON CAPITAL A CCOUNT THEN THE SAID INTEREST CANNOT BE TREATED AS AN EXPENDITURE TO BE ATTRIBUTABLE FOR EARNING THE DIVIDEND INCOME. ACCORDINGLY, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DELETE THE ADDITION TO THE EXTENT OF DISALLOWANCE U/S 14A ON ACCOUNT OF INTERE ST EXPENDITURE WHICH IS NOT ON THE BORROWED FUND BUT ON THE CAPITAL CONTRIBUTED BY THE PARTNERS. ACCORDINGLY, THIS GROUND OF THE ASSESSEES APPEAL IS PARTLY ALLOWED. 8. THE REVENUE HAS RAISED VARIOUS GROUNDS IN ITS APPEAL, HOWEVER, THE ONLY ISSUE ARISES F ROM THE GROUNDS RAISED BY THE REVENUE IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 49,31,888/ - U/S 40(A)(I) OF THE INCOME TAX ACT. 9. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS MADE A DISALLOWANCE OF RS. 49,31,888/ - ON ACCOUNT OF FOREIGN COMMISSION PAYMENT U/S 40(A)(I) OF THE INCOME TAX ACT FOR WANT OF TDS. ON APPEAL, THE CIT(A) HAS DELETED THE SAID THE DISAL LOWANCE BY TAKING NOTE OF THE FACT THAT AS PER CBDT CIRCULAR NO. 786 OF 7.02.2000, THE ASSESSEE WAS NOT REQUIRED TO MAKE THE DEDUCTION OF TAX AT SOURCE. HOWEVER, THE SAID CIRCULAR WAS WITHDRAWN W.E.F 12.10.2009. THE WITHDRAWAL OF THE CIRCULAR IS NOT RETROS PECTIVE, THEREFORE, FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS NOT REQUIRED TO DEDUCT M/S PAHILAJRAI JAIKISHIN 5 | P A G E THE TAX BEFORE THE CIRCULAR WAS WITHDRAWN. THE FINDINGS OF CIT(A)ON THIS ISSUE ARE RELEVANT IN PARA 3.4 AND 3.5 OF THE IMPUGNED ORDER AS UNDER: - 3.4 THE AO IN PARA 6.15 OF THE ASSESSMENT ORDER HAS ALSO STATED THAT THE BOARD'S CIRCULAR NO.786 DATED 7.02.2000 HAS BEEN WITHDRAWN BY THE BOARD W.E.F. 22.10.2009. BY WITHDRAWING THE CIRCULAR THE BOARD MADE IT CLEAR THAT THE TDS PROVISIONS ARE APPLICABLE TO CO MMISSION PAYMENT TO NON RESIDENTS. IN THIS REGARD THE LEARNED AR HAS MENTIONED THAT THE PREVIOUS YEAR IN THE CASE OF THE APPELLANT IS FROM 1.4.2008 TO 31.03.2008 AND DURING THIS PERIOD THE CIRCULAR WAS VERY MUCH IN EXISTENCE. THE CIRCULAR HAS NOT BEEN WITH DRAWN RETROSPECTIVELY. THEREFORE, THE CASE OF THE APPELLANT IS COVERED BY THE AFORESAID CIRCULAR OF THE BOARD. HOWEVER, THE AO HAS MENTIONED IN THE ASSESSMENT ORDER THAT UNDER DELEGATED LEGISLATIVE POWERS CONFERRED BY THE PARLIAMENT, THE CBDT IS GIVEN THE POWER TO' MAKE SUBORDINATE LEGISLATIONS SUCH AS MAKING OF RULES, ISSUING OF CIRCULARS AND NOTIFICATIONS ETC. THE OPERATION OF SUCH SUBORDINATE LEGISLATION IS ALWAYS RETROSPECTIVE IN NATURE. IN THIS REGARD THE LEARNED AR OF THE APPELLANT HAS RELIED UPON THE DECISION OF SUPREME COURT IN THE CASE OF PROHIBITION S: EXCISE SUPERINTENDENT, AP VS. TODDY TAPPERS COOPERATIVE SOCIETY, MADERAPALLY (AIR 204 (SC) 658. TO THE EFFECT THAT THE SUBORDINATE LEGISLATION IS ALWAYS RETROSPECTIVE IN NATURE. HOWEVER, THE LEARNED AR OF THE APPELLANT ON THE OTHER HAND HAS RELIED UPON A RATHER DIRECT JUDGEMENT ON THE ISSUE OF HON. IT AT MUMBAI BENCH ILL IN THE CASE OF DDIT (INTERNATIONAL TAXATION), MUMBAI VS. SIEMENS AKTIENGESELLSCHAFT DATED 7.12.2009 IN ITA NO. 6133/MUM/2002 FOR AY. 1998 - 99 IN WHICH IT IS HELD AS UNDER: - 'ACCORDINGLY WE HOLD THAT ISSUANCE OF CIRCULAR NO.7 OF 2009 WITHDRAWING THE CIRCULAR NO.23 OF 1969 NO. 163 OF 1975 AND 786 OF 2000 WILL BE OPERATIVE ONLY FROM 22.10.2009 AND NOT PRIOR TO THAT DATE'. THUS THE WITHDRAWAL OF EARLIER CIRCULAR W. E.F 22.10.2009 HAS NO BEARING IN A. Y. 1998 - 99.' 3.5 IN VIEW OF THE CATEGORICAL FINDINGS GIVEN BY THE HON.BLE ITAT MUMBAI 'L' BENCH IN THE AFORESAID DECISION COUPLED WITH THE FACT THAT NO TAX WAS DEDUCTIBLE IN THE CASE OF THE APPELLANT I DIRECT THE AO TO DELETE THE ADDITION OF RS. 49,31,888/ - . THIS GROUND OF APPEAL IS ALLOWED 10. THUS IT IS CLEAR THAT THE CIT(A) HAS DELETED THE DISALLOWANCE BY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF DDIT (INTERNATIONAL TAXA TION), MUMBAI VS. SIEMENS AKTIENGESELLSCHAFT DATED 7.12.2009 IN ITA NO. 6133/MUM/2002 . WE FIND THAT THE ISSUE IS COVERED BY THE M/S PAHILAJRAI JAIKISHIN 6 | P A G E VARIOUS DECISION AS RELIED UPON BY THE LD. AUTHORIZED REPRESENTATIVE AS UNDER: - I) DDIT (INTERNATIONAL TAXATION), MUMBAI VS. SIEMENS AKTIENGESELLSCHAFT . ITA NO. 6133/MUM/2002 . I I ) CIT VS. ANGELIQUE INTERNATIONAL LTD. (2013) 86 CCH 075 (DELHI HC) II I ) DY. CIT V. REDIFF.COM INDIA LTD. ITA NO. 6133/MUM/2002 (MUMBAI L BENCH) 11. IN CASE OF DDIT (INTERNATIONAL TAXATION), MUMBAI VS . SIEMENS AKTIENGESELLSCHAFT (SUPRA), THE TRIBUNAL WHILE CONSIDERING AN IDENTICAL ISSUE HAS HELD IN PARA 5 TO 7 AS UNDER: - 5. IT IS FURTHER NOTED THAT THE TRIBUNAL WHILE TAKING THE VIEW IN ASSESSEE'S IN ASSESSMENT YEAR 1997 - 98 DREW SUPPORT FROM CIRCULAR NO.23 DATED 23.7.1969 PARA 3 OF WHICH BAS BEEN EXTRACTED AT PAGE 16 OF ITS ORDER. FURTHER REFERENCE HAS BEEN MADE IN CIRCULAR NO.786 DATED 7.2.2000. WE FIND THAT THE CENTRAL BOARD OF DIRECT TAXES VIDE CIRCULAR NO. 7 OF 2009 DATED 22.10.2009 HAS WI THDRAWN CIRCULAR NO.7 DATED 23.7.1969 AND ALSO CIRCULAR NO.786 DATED 7.2.2000. ACCORDING TO PARA 3 OF THIS CIRCULAR NO.7 OF 2009 THE EARLIER CIRCULAR NO. 23 DATED 23.7.1969 IS WITHDRAWN 'WITH IMMEDIATE EFFECT', SIMILAR IS THE FATE FOR CIRCULAR NO.786. IT, THEREFORE, BECOMES CLEAR THAT THE CIRCULARS ON WHICH THE TRIBUNAL BAS PLACED RELIANCE WHILE DECIDING THE CASE FOR ASSESSMENT YEAR 1997 - 98 IN ASSESSEE'S OWN CASE HOLD GOOD FOR THE INSTANT YEAR AS WELL. LT IS AXIOMATIC THAT A CIRCULAR IN OPERATION THROUGH TH E ASSESSMENT YEAR 199899 CANNOT BE HELD TO BE IN OPERATIONAL SIMPLY BY REASON OF THE FILET THAT IT HAS BEEN WITHDRAWN IN THE YEAR 2009. THE WITHDRAWAL OF SUCH CIRCULARS WILL BE EFFECTIVE ONLY AFTER THE SAID DATE OF 22ND OCTOBER. 2009 BY WHICH THESE CIRCUL ARS HAVE BEEN WITHDRAWN 'WITH IMMEDIATE EFFECT. ACCORDINGLY WE BOLD THAT ISSUANCE OF CIRCULAR NO.7 OF 2009 WITHDRAWING THE CIRCULAR NO.23 OF 1969. 163 OF 1975 AND 786 OF 2000 WILL BE OPERATIVE ONLY FROM 22.10.2009 AND NOT PRIOR TO THAT DATE. THUS T HE WITHD RAWAL OF EARLIER CIRCULAR WITH EFFECT FROM 22.10.2009 HAS NO BEARING IN ASSESSMENT YEAR 1998 - 99. 6. WE ARE REMINDED OF THE FULL BENCH JUDGMENT OF THE HON'BLE KERALA HIGH COURT IN CIT VS. B.M.EDWARDS. INDIA SEAFOOD [(1979) 119 ITR 334 (KER.) (FB)}. IN THAT CASE THERE WAS SOME CIRCULAR IN OPERATION FROM 1944 ALLOWING THE LOSS SUFFERED BY A SPOUSE TO BE SET OFF AGAINST THE INCOME OF THE OTHER SPOUSE. THE CIRCULAR WAS WITHDRAW N ON APRIL 6, 1972, THAT IS, AFTER THE EXPIRY OF THE ASSESSMENT YEAR 1971 - 72 IN DISPUTE. THOUGH THE ASSESSMENT WAS COMPLETED M/S PAHILAJRAI JAIKISHIN 7 | P A G E AFTER THE WITHDRAWAL OF THE CIRCULAR, THE TRIBUNAL TOOK THE VIEW THAT SINCE THE CIRCULAR WAS IN OPERATION AT THE TIME OF THE COMMEN CEMENT OF THE ASSESSMENT YEAR THE SAME WAS BINDING UPON THE AUTHORITIES DECIDING UPON THE SAME. UPHOLDING THE VIEW OF THE TRIBUNAL THE HON'BLE HIGH COURT HELD THAT THE CIRCULAR REGARDING ALLOWANCE OF LOSS OF THE SPOUSE FROM FIRM IN WHICH THE OTHER SPOUSE W AS PARTNER BEING OPERATIVE IN THE RELEVANT ASSESSMENT YEAR, THE OTHER SPOUSE WAS ENTITLED TO THE BENEFIT OF CIRCULAR EVEN THOUGH IT WAS NOT IN FORCE AT THE LIME OF MAKING THE ASSESSMENT. IN THE LIGHT OF THE RATIO DECIDENT OF THE AFORENOTED JUDGMENT. WE HOL D THAT CIRCULAR NO.23 DATED 23.7.1969 AND 786 DATED 7.2.2000 WHICH WERE OPERATIVE IN THE ASSESSMENT YEAR UNDER CONSIDERATION ARE BINDING EVEN IF WITHDRAWN BY THE LATER CIRCULAR OF TILE YEAR 2009. 7. IN VIEW OF THESE FACTS WE HOLD THAT THE INCOME FROM THE OFFSHORE SUPPLIES IS NOT TAXABLE IN THE HANDS OF THE ASSESSEE UNDER THE REGULAR PROVISIONS OF INCOME TAX ACT, 1961. IN SUCH A SITUATION THERE IS NO NEED TO EXAMINE THE PROVISIONS OF DTAA FOR ASCERTAINING WHETHER THERE IS A PERMANENT ESTABLISHMENT OF THE ASSESS IN INDIA OR NOT. FOR THE FOREGOING REASONS. WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO INFIRMITY IN THE IMPUGNED ORDER ON THIS ISSUE REQUIRING ANY INTERFERENCE. THESE TWO GROUNDS, THEREFORE, STAND DISMISSED. 12. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF CIT(A) QUA THIS ISSUE. 3. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THAT BY THE REVENUE IS DISMISSED. ORDER PRONOUCNED IN THE OPEN COURT ON THIS 11 TH DAY OF MARCH 2015 VKNS'K DH ?KKS'K.KK [KQYS U;K;KY; ES FNUKAD 11 EKPZ 2015 DKS DH XBZA SD/ - SD/ - ( RAJENDRA ) (VIJAY PAL RAO) ( ACCOUNTANT MEMBER / YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; ) MUMBAI DATED 11 .03.2015 SKS SR. P.S, M/S PAHILAJRAI JAIKISHIN 8 | P A G E COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI