DCIT, Ludhiana V. M/s Rico Auto Inds. Ltd., Ludhiana

ITA 689/CHANDI/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68525 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 05-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J S NAGAR
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, A.M AND MS. SUSHMA CHOWLA, JM ITA NO. 689/CHD/2013 ASSESSMENT YEAR : 2007-08 D.C.I.T. C-I, VS. RICO AUTO INDUSTRIES LTD. LUDHIANA B-28, FOCAL POINT LUDHIANA AAACR 8724R (APPELLANT) (RESPONDENT) APPELLANT BY SHRI J.S. NAGAR RESPONDENT BY: SHRI SUBHASH AGGARWAL DATE OF HEARING 3.9.2013 DATE OF PRONOUNCEMENT 26.9.2013 O R D E R PER T.R.SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 28. 3.2013 OF THE LD. CIT(A)-I, LUDHIANA. 2 IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWI NG GROUNDS: 1 THAT THE LD. CIT(A) HAS ERRED IN LAW IN RESTRICT ING THE ADDITION FROM RS. 9,42,619/- TO RS. 2,00,000/- MADE BY THE ASSESSING OFFICER U/S 14A R.W. RULE 8D OF IT AC T. 2 THAT THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 2,12,870/- MADE BY THE ASSESSING OF FICER ON ACCOUNT OF DISALLOWANCE OUT OF FOREIGN TRAVEL EXPENSES. 3. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASS ESSEE HAS MADE INVESTMENT TO THE TUNE OF RS. 4,24 CRORES IN T HE SHARES. THEREFORE, SECTION 14A R.W. RULE 8D WAS INVOKED AN D DISALLOWANCE OF INTEREST AND EXPENDITURE AMOUNTING TO RS. 9,42,619/- WAS MADE. THIS DISALLOWANCE WAS WORKED OUT VIDE PARA 5.,3 OF THE ASSESSMENT ORDER WHICH READS AS UN DER: 2 5.3 ACCORDINGLY, DISALLOWANCE UNDER SECTION 14A IS COMPUTED AS UNDER:- A) TOTAL INTEREST EXPENDITURE RS. 9,71,00,000/- B) AVERAGE VALUE OF INVESTMENT RS. 4,24,00,000/- C) AVERAGE VALUE OF ASSETS AS ON 31.03.07 AS ON 31.03.08 = 4,93,25,00,000 +6,33,75,00,000 2 = RS. 5,63,50,00,000/- A X B / C = RS. 9,71,00,000 X 4,24,00,000 = RS. 7,30,619/- 5,63,50,00,000 ONE HALF PER CENT OF AVERAGE INVESTMENT OF RS. 4,24 ,00,000/- = RS. 2,12,000/- TOTAL DISALLOWANCE U/S 14 A RS. 9,42,619/- 4 ON APPEAL BEFORE THE LD. CIT(A), IT WAS SUBMITTED THAT RULE 8D WAS NOT APPLICABLE IN ASSESSMENT YEAR 2007- 08 IN VIEW OF THE DECISION OF HON'BLE BOMBAY HIGH COURT I N CASE OF GODREJ & BOYCEE MANUFACTURING CIO. LTD VS. DCIT, 23 4 CTR 1. IT WAS FURTHER SUBMITTED THAT THERE WAS NO NEXUS BE TWEEN THE INVESTMENT MADE AND INTEREST EXPENDITURE BECAUSE AL L THE INVESTMENTS WERE OLD INVESTMENTS. 5 THE LD. CIT(A) AFTER FOLLOWING THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS, RESTRICTED T HE DISALLOWANCE TO RS. 2 LAKHS. 6 BEFORE US, THE LD. DR FOR THE REVENUE STRONGLY SU PPORTED THE ORDER OF THE ASSESSING OFFICER AND ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESSEE SUPPORTED THE IMPUGNED ORDER. 7 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THIS ISSUE HAS BEEN ADJUDICATED BY THE LD. CIT(A) VIDE P APRA 4 TO 6 WHICH READS AS UNDER: 4. I HAVE CONSIDERED THE BASIS OF DISALLOWANCE MADE BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE AR ON TH E ISSUE. IT IS SEEN THAT DISALLOWANCE U/S 14A IN THE CASE OF THE A PPELLANT FOR ASSESSMENT YEAR 2006-07 HAD BEEN MADE BY THE ASSESS ING OFFICER TO THE TUNE OF RS. 9,42,619/- BY APPLYING THE PROVI SIONS OF RULE 3 8D(2) AND THE SAID DISALLOWANCE WAS RESTRICTED TO A N AMOUNT OF RS. 2 LACS ON APPEAL BY THE CIT(A)-I, LUDHIANA VIDE HIS ORDER DATED 17/09/2010. THE ISSUE HAD BEEN DEALT BY THE WORTHY CIT(A)-I, LUDHIANA BY MAKING THE FOLLOWING OBSERVATIONS:- AS PER PROVISIONS OF SECTION 14A ANY EXPENDITURE I NCURRED IN RELATION TO INCOME NO INCLUDIBLE IN TOTAL INCOME SH ALL NOT BE ALLOWED AS DEDUCTION. THE AFORESAID SECTION WAS INTRODUCED BY THE FINANCE ACT 2001 WITH RETROSPECTIVE EFFECT FROM 1.4.1962. T HOUGH IN THE ORIGINAL PROVISIONS OF SECTION 14A THERE WAS NO MET HOD PRESCRIBED FOR COMPUTING THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME NOT INCLUDIBLE IN TOTAL INCOME AND SUCH METHOD WAS BROUGHT ON THE STATUTE BY AN AMENDMENT MADE BY FINA NCE ACT 2006 W.E.F. 1.4.2007 THE FACT REMAINS THAT EVEN BEFORE S UCH METHOD WAS PRESCRIBED BY WAY OF AMENDMENT, THE EXPENDITURE REL ATED TO THE INCOME NOT INCLUDIBLE IN THE TOTAL INCOME WAS NOT A N ALLOWABLE DEDUCTION U/S 14A(1) OF THE ACT. UNDER THESE CIRCUM STANCES WHILE ARS CONTENTION ABOUT DISALLOWANCE OF EXPENSES OF R S. 9,42,619/- BY APPLYING THE METHOD PRESCRIBED UNDER RULE 8D MAY BE TRUE TO SOME EXTENT HOWEVER, EXPENSES RELATED TO EARNING SU CH INCOME NOT INCLUDIBLE IN THE TOTAL INCOME HAVE TO BE COMPUTED AND DISALLOWED. THOUGH AR HAS STATED THAT INVESTMENTS RESULTING INT O TAX FREE INCOMES WERE MADE IN F.Y. 1999-2000 OUT OF ITS OWN INTERNAL RESOURCES HE HAS NOT EXPLAINED ANYTHING ABOUT THE O THER EXPENDITURE INCURRED FOR EARNING SUCH INCOME. ASSES SEE HAS MADE HUGE INVESTMENTS FOR WHICH ASSESSEE IN MY OPINION R EQUIRES AT LEAST BARE MINIMUM INFRASTRUCTURE IN THE FORM OF OF FICE, FURNITURE AND CONSEQUENTIAL EXPENSES, STAFF ETC. AN INCOME CA NNOT BE EARNED IN VACUUM. NO DOUBT ASESSEE IS HAVING ITS BUSINESS OF MANUFACTURING AND SALE OF AUTO PARTS AND CAN CLAIM THAT EXISTING INFRASTRUCTURE AND MAN POWER WAS BEING USED TO HAND LE THE INVESTMENTS AND EARNING TAX FREE INCOME THERE FROM BUT AS ALREADY SAID PART OF SUCH INFRASTRUCTURE AND SERVICES OF TH E EMPLOYEES HAVE TO BE USED FOR EARNING SUCH TAX FREE INCOME. SINCE IN THE ABSENCE OF THE SPECIFIC DETAILS IN EXPENDITURE TO EARN SUCH TAX FREE INCOME CANNOT BE QUANTIFIED AND RULE 8D IS APPLICABLE FROM A.Y. 2007-08 IN MY OPINION IT WOULD BE REASONABLE TO ESTIMATE EXPEN DITURE OF RS. 2 LACS FOR EARNING SUCH TAX FREE INCOME. ACCORDINGLY ADDITION OF RS. 2 LAC IS SUSTAINED OUT OF TOTAL ADDITION OF RS. 9,4 2,619/- AND REMAINING ADDITION OF RS. 7,42,619/- IS DELETED. 5. FURTHER THE ORDER OF THE CIT(A) WAS UPHELD BY TH E HONBLE ITAT CHANDIGARH BENCH A BY MAKING THE FOLLOWING O BSERVATIONS:- WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED REC ORDS. THE CONSTITUTIONAL VALIDITY OF SECTION 14A(2) & (3) OF I.T.ACT AND RULE 8D OF THE INCOME TAX RULES WAS CHALLENGED BEFORE TH E HONBLE BOMBAY HIGH COURT IN GODREJ BOYCE MFG. CO. LTD., 23 4 CTR 1. THE COURT HELD THAT THE PROVISIONS OF RULE 8D WERE NOT ULTRA VIRUS THE PROVISIONS OF SECTION 14A AND IT WAS ALSO HELD THAT THE SAME DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION. IT WAS FURTH ER HELD THAT THE PROVISION OF RULE 8D WAS TO BE APPLIED PROSPECTIVEL Y W.E.F 01.04.2007 I.E. IN RELATION TO ASSESSMENT YEAR 2008 -09 AND SUBSEQUENT YEAR AS THE MEMORANDUM EXPLAINING THE PR OVISIONS OF THE FINANCE BILL 2006 STATES THAT THIS AMENDMENT WO ULD TAKE EFFECT FROM 01.04.2007. THE COURTS FURTHER HELD THAT EVEN IN THE ABSENCE OF SUB-SECTION(2) AND (3) OF SECTION 14 A AND RULE 8D, THE ASSESSIG OFFICER WAS NOT PRECLUDED FROM MAKING APPO RTIONMENT ON ACCOUNT OF EXPENDITURE RELATABLE TO EARNING OF EXEM PT INCOME. WE FIND NO MERIT IN THE CONTENTION OF THE ASSESSEE THAT NO EXPENDITURE IS ATTRIBUTABLE TO THE EARNING OF THE D IVIDEND INCOME, IN 4 VIEW OF THE RATIO LAID DOWN BY THE HONBLE BOMBAY H IGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA). FOLLOWING THE SAME WE UPHOLD THE ORDER OF THE CIT(A) IN RESTRICTING THE D ISALLOWANCE OF RS. 2 LACS BEING THE EXPENDITURE ATTRIBUTABLE TO THE EA RNING OF TAX FREE INCOME. THE PROVISIONS OF RULE 8D ARE APPLICABLE W. E.F. ASSESSMENT YEAR 2008-09 AND CONSEQUENTLY HAVE NO AP PLICATION TO THE YEAR UNDER APPEAL. ACCORDINGLY, THE ESTIMATES M ADE BY THE ASSESSING OFFICER BY APPLYING THE AFORESAID PROVISI ONS OF RULE 8D ARE NOT WARRANTED. UPHOLDING THE ORDER OF THE CIT(A ) WE DISMISS THE GROUNDS OF APPEAL RAISED BY REVENUE AND CROSS O BJECTION RAISED BY THE ASSESSEE. 6. THE FACTS OF THE CASE FOR YEAR UNDER CONSIDERATI ON ARE SIMILAR TO THE FACTS FOR ASSESSMENT YEAR 2005-06 WHEREIN DI SALLOWANCE TO THE TUNE OF RS. 2 LACS HAS BEEN CONFIRMED BY THE HO NBLE ITAT ON THE BASIS OF REASONING GIVEN ABOVE. AS SUCH THE DIS ALLOWANCE MADE BY THE ASSESSING OFFICER IS RESTRICTED TO RS. 2 LAC S. THE ABOVE CLEARLY SHOWS THAT THE LD. CIT(A) HAS BAS ICALLY FOLLOWED THE ORDER OF THE TRIBUNAL AND THEREFORE, WE FIND NOTHING WRONG IN THE ORDER OF THE LD. CIT(A) AND CO NFIRM THE SAME. 8 GROUND NO. 2 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAD INCURRED A SUM OF RS. 36,66,284/- TOWA RDS DIRECTORS FOREIGN TRAVELING. WHEN THE DETAILS WER E CALLED FOR, IT WAS SUBMITTED THAT A SUM OF RS. 15,37,586/- WAS INCURRED ON AIR TICKETS /AIR FARE AND VISA FEE. THE ASSESSING OFFICER OBSERVED THAT OUT OF THE BALANCE EXPENDITURE, THE A SSESSEE HAS INCURRED SOME PERSONAL EXPENSES AND THEREFORE, A S UM OF RS. 2,12,870/- BEING 10% OF THE BALANCE EXPENDITURE, WA S DISALLOWED. 9 ON APPEAL IT WAS MAINLY SUBMITTED THAT ADDITION H AS BEEN MADE ON ADHOC BASIS DESPITE BILLS OF FOREIGN TRAVEL ING WERE FILED. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS ALREADY PAID FRINGE BENEFIT TAX (FBT), THEREFORE, ADDITION WAS NOT MAINTAINABLE. 10 THE LD. CIT(A) FOUND FORCE IN THESE SUBMISSIONS AND DELETED THE ADDITION. 5 11 BEFORE US, THE LD. DR FOR THE REVENUE STRONGLY S UPPORTED THE ORDER OF THE ASSESSING OFFICER. ON THE OTHER H AND, THE LD. COUNSEL OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A). 12 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THIS ISSUE HAS BEEN ADJUDICATED BY THE LD. CIT(A) VIDE P ARA 9 WHICH READS AS UNDER: 9. I HAVE CONSIDERED THE BASIS OF ADDITION MADE BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE AR ON TH E ISSUE. IT IS A MATTER OF FACT THAT THE ASSESSEE HAS FILED RETURN U NDER FRINGE BENEFIT TAX AND ANY ELEMENT OF PERSONAL NATURE GETS DULY COVERED ON ACCOUNT OF SAID PAYMENT. THIS IS TO MEAN THAT NO SEPARATE DISALLOWANCE ON ACCOUNT OF ESTIMATED EXPENDITURE OF PERSONAL NATURE NEEDS TO BE MADE ONCE FBT AT STIPULATED RATE S IS PAID. THEREFORE, DISALLOWANCE MADE BY THE ASSESSING OFFIC ER IS DIRECTED TO BE DELETED. WE FURTHER FIND THAT DESPITE ALL THE DETAILS, THE A SSESSING OFFICER HAS MADE ADDITION ON ADHOC BASIS WHICH IS N OT PERMISSIBLE UNDER THE LAW AND THEREFORE, WE HAVE N O HESITATION IN CONFIRMING THE ORDER OF THE LD. CIT(A). 13 IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 26.9.2013 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 26.9.2013 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR