Hyderabad Mutual Benefit Society, Hyderabad, Hyderabad V. ITO, Ward-5(3), Hyderabad, Hyderabad

ITA 693/HYD/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2196 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 18-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GE E TINDERMANN
• Assessee Lawyers: B SATYANARAYANA MURTY
• Keywords: Earning of tax free income; Capital expenditure
• Section: 143(3); 80HHC; 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NOS. 692 & 693/HYD/2017 ASSESSMENT YEARS: 2006-07 & 2008-09 HYDERABAD MUTUAL BENEFIT SOCIETY, HYDERABAD [PAN: AAATH2738Q] VS INCOME TAX OFFICER, WARD-5(3), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI B. SATYANARAYANA MURTY, AR FOR REVENUE : MS. GEETINDERMANN, DR DATE OF HEARING : 26-12-2017 DATE OF PRONOUNCEMENT : 29-12-2017 O R D E R THESE TWO APPEALS ARE BY ASSESSEE AGAINST THE COMMON BUT SEPARATE ORDERS OF COMMISSIONER OF INCOME TAX (APPE ALS)-10, HYDERABAD, DATED 11-11-2016. SINCE BOTH THE APPEALS ARE HAVING COMMON ISSUE, THESE ARE HEARD TOGETHER AND DISPOSED OF BY THIS ORDER. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE-SOCIETY FILED RETURN OF INCOME FOR AY. 2006-07 ON 17-07-2006 CLAIM ING THE NET INCOME OF RS. 3,10,486/- AS EXEMPT BEING A MUTUAL BEN EFIT SOCIETY. THE ORDER U/S. 143(3) OF THE INCOME TAX ACT [ACT] WAS PASSED ON 16-12-2008 BY BRINGING THE INTEREST ON FDRS, INTEREST O N SB A/C AND INTEREST ON INCOME TAX REFUND AS INCOME OF ASSESSE E. LD.CIT(A) UPHELD THE ADDITION TOWARDS INTEREST ON INCO ME TAX REFUND AND DELETED THE OTHER ADDITIONS. ON APPEAL BY THE REVENUE, I.T.A. NOS. 692 & 693/HYD/2017 :- 2 - : THE ITAT IN ITS ORDER DT. 20-03-2013 HAS UPHELD THE TAXA BILITY OF INTEREST ON FDRS, INTEREST ON SB A/C BY RELYING ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF M/S. BANGALORE CLUB [350 ITR 509] (SC), BUT DIRECTED THE ASSESSING OFFICER (AO) TO PASS THE ORDER IN ACCORDANCE WITH SECTION 14 OF THE ACT. WHILE GIVING EFFECT TO THE ORDER OF ITAT, ASSESSEE CLAIMED PROPORTIONATE E XPENDITURE FOR EARNING INCOME U/S. 56(III) OF THE ACT. AO DID N OT ACCEPT ASSESSEES CONTENTION AS HE WAS OF OPINION THAT NO EXP ENDITURE WAS INCURRED FOR EARNING THE DEPOSIT ON FDRS AND SB A/C. AO RELIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF SRI BAS AVESHWARA CREDIT CO-OPERATIVE SOCIETY LTD., VS. CIT IN ITA NO. 524/BANG/2012 DT. 10-05-2013. LD. CIT(A) IN THE IMPU GNED ORDER HAS REJECTED ASSESSEES CONTENTION OF PROPORTIONATE EX PENDITURE, HENCE ASSESSEE IS AGGRIEVED. 2.1. FOR AY. 2008-09, THE FACTS ARE MORE OR LESS SIM ILAR EXCEPT THAT THE AMOUNT INVOLVED WAS INTEREST OF RS. 17,53, 589/- ON BANK FDRS AND RS. 4,755/- ON SB A/C TOTALING TO RS. 17 ,58,344/-. 2.2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS WHIC H ARE COMMON FOR BOTH THE YEARS: 2. THE HON'BLE COMMISSIONER OF INCOME TAX IS NOT J USTIFIED IN SUSTAINING THE DISALLOWANCE OF THE ENTIRE PROPORTIO NATE EXPENDITURE OF RS.16,76,276/- IN COMPUTING THE TAXABLE INCOME OF T HE APPELLANT-SOCIETY. 3. THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD HA VE APPRECIATED THAT COLLECTING FUNDS AND BANKING THEM HAS BEEN A CONTINUOUS AND DAILY PROCESS OF THE APPELLANT-SOCIETY AND THAT ALL THE EMPLOYEES OF THE APPELLANT-SOCIETY ARE INVOLVED IN THIS PROCESS. THEREFORE, THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD HAVE DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTION FROM THE BANK INTEREST AT A PRO PORTIONATE AMOUNT OF EXPENDITURE AS CALCULATED BY THE APPELLANT-SOCIETY. I.T.A. NOS. 692 & 693/HYD/2017 :- 3 - : 4. THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD AL TERNATIVELY HAVE DIRECTED THE ASSESSING OFFICER TO COMPUTE THE INCOME BY DISALLOWING OUT OF THE ENTIRE EXPENDITURE INCURRED BY THE APPEL LANT-SOCIETY THE EXPENDITURE RELATING TO THE EXEMPTED INCOME AS PER THE INCOME TAX RULES. 5. (A) THE HON'BLE COMMISSIONER OF INCOME TAX ERRED IN HOLDING THAT THE ASSESSING OFFICER NEED NOT HAVE ALLOWED ANY EXP ENDITURE FROM THE INCOME COMPUTED. ACCORDING TO THE HON'BLE COMMISSIO NER OF INCOME TAX, ALLOWING ANY EXPENDITURE WILL AMOUNT TO THE ASSESSI NG OFFICER TRAVELLING BEYOND THE DIRECTIONS OF THE HON'BLE INCOME TAX APP ELLATE TRIBUNAL IN SETTING ASIDE THE ASSESSMENT TO THE FILE OF THE ASS ESSING OFFICER. (B) THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD H AVE SEEN THAT THE HON'BLE INCOME TAX APPELLATE TRIBUNAL HAS GIVEN A DIRECTION THAT THE INCOME SHOULD BE COMPUTED AS PER SECTION 14 OF THE INCOME TAX ACT. (C) THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD H AVE SEEN THAT SECTION 14 REFERS TO CLASSIFICATION OF INCOME UNDER DIFFERENT HEADS OF INCOME. THE DIRECTION TO ASSESSEE THE INCOME UNDER THE DIFFERENT HEADS AMOUNTED TO COMPUTATION OF INCOME UNDER THOSE HEADS BY FOLLOWING THE PROVISIONS OF COMPUTATION UNDER THOSE HEADS. THEREF ORE, THE HON'BLE COMMISSIONER OF INCOME TAX SHOULD HAVE DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTION TOWARDS EXPENSES IN THE COMPUTA TION OF INCOME UNDER THAT HEAD. GROUND NO.1 IS GENERAL IN NATURE. 3. LD. COUNSEL REFERRING TO THE ANNUAL REPORTS PLAC ED IN THE PAPER BOOK SUBMITTED THAT ASSESSEE HAD COMMON POOL O F FUNDS AND IT CANNOT BE STATED THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE INTEREST INCOME. TAKING ANALOGY FROM THE PROVISIONS OF SECTION 14A IN WHICH PROPORTIONATE EXPENDITURE WAS TO HA VE BEEN SPENT BY ASSESSEE FOR EARNING EXEMPT INCOME, ASSESSEE S COUNSEL REFERRED TO WORKING GIVEN TO CIT(A) STATING THAT THE PRO PORTIONATE EXPENDITURE CAN BE WORKED OUT ON THE BASIS OF METHODOLO GY ADOPTED UNDER RULE 8D. IT WAS CONTESTED THAT THE SOCIET Y INCOME RECEIVED BY ASSESSEE AND THE AMOUNT SAID TO BE TAXED I S AT THE PERCENTAGE OF 23 [23,50,971/- : 1,03,62,237/-]. ACC ORDINGLY, OUT OF I.T.A. NOS. 692 & 693/HYD/2017 :- 4 - : THE TOTAL EXPENDITURE OF RS. 74,33,767/-, PROPORTIONATE E XPENDITURE COMES TO RS. 16,86,563/- IN AY. 2006-07 WHICH SHOULD BE ALLOWED. 3.1. SIMILARLY, FOR AY. 2008-09, THE PROPORTIONATE EXPENDITURE WORKS OUT TO RS. 16,15,510/-. WHEN ENQUIR ED HOW THE DIRECT EXPENDITURE PERTAINING TO ACTIVITIES OF MUTUAL SO CIETY CAN BE ALLOWED PROPORTIONATELY FOR EARNING THE TAXABLE INCOME, LD. COUNSEL ADMITTED THAT A CORRECT METHODOLOGY COULD NOT BE WORKED OUT AND SO THE PROVISIONS OF SECTION 14A R.W.RULE 8D W ERE TAKEN INTO CONSIDERATION AND THE CLAIMS WERE MADE ACCORDING LY. 4. LD.DR, HOWEVER, RELIED ON THE ORDERS OF AO AND C IT(A) TO SUBMIT THAT THERE IS NO DIRECT EXPENDITURE INCURRED A ND ACCORDINGLY, THE CLAIM OF ASSESSEE FOR EXPENDITURE CA NNOT BE ALLOWED AS PROVISIONS OF SECTION 57(III) CLEARLY STATE S THAT ONLY EXPENDITURE INCURRED WHOLLY AND NECESSARILY SHOULD B E ALLOWED. 5. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND EXAMIN ED THE FACTS AS PLACED ON RECORD. ASSESSEE IS A MUTUAL BENEFIT SOCIETY AND ITS INCOME WAS CLAIMED AS EXEMPT. HOWEVER, CER TAIN SURPLUS FUNDS WERE DEPOSITED IN THE BANKS AND INTEREST WAS EAR NED ON THOSE AMOUNTS WHICH IS THE MAJOR PART OF INCOME, BEING TAXED. FOR AY. 2006-07, THE FD WITH BANK WAS TO THE TUNE OF RS. 4.10 CRORES, AS ON 31-03-2005, WHICH WAS REDUCED TO RS. 2.60 CROR ES AS ON 31-03-2006. THE FDS, HOWEVER, HAVE INCREASED TO RS. 3.14 CRORES AS ON 31-03-2008, WHEREAS THE OPENING FD WAS RS. 1.1 9 CRORES AS ON 31-03-2007. IF WE ADOPT THE RATIO OF RULE 8D, AS A N ANALOGY, NO DIRECT EXPENDITURE HAS BEEN CLAIMED BY ASSESSEE. FOR ADOPTING PROPORTIONATE EXPENDITURE OF OTHER ITEMS, THE INTEREST PAYMENTS I.T.A. NOS. 692 & 693/HYD/2017 :- 5 - : UNDER RULE 8D(II) ARE ALL DIRECTLY RELATED TO ASSESSE ES ACTIVITY AS MUTUAL BENEFIT SOCIETY. THEREFORE, NO PART OF SUCH EX PENDITURE CAN BE ATTRIBUTABLE TO THE EARNING INTEREST. 5.1. COMING TO THE PROPORTIONATE EXPENDITURE UNDER R ULE 8D(2), EVEN THOUGH THE ACT PROVIDES THAT ONLY THAT EXPEN DITURE [NOT BEING CAPITAL EXPENDITURE] LAID OUT WHOLLY AND NECESS ARILY FOR THE PURPOSE OF EARNING SUCH INCOME SHOULD BE ALLOWED UN DER 57 (III). IT IS VERY DIFFICULT TO ADOPT PROPORTIONATE EXPENDITURE PERTAINING TO MANAGEMENT AND ADMINISTRATIVE EXPENDITURE ON THE BASIS OF INCOMES EARNED WHICH MAY NOT GIVE AN APPROPRIATE AMO UNT. AS CAN BE SEEN FROM THE EXPENSES WORKED OUT BY ASSESSEE , IN BOTH THE YEARS BEING MORE OR LESS SAME, EVEN THOUGH THE TAXABL E INCOME VARIED. IN VIEW OF THAT, I AM OF THE OPINION THAT THE ADOPTION OF PROPORTIONATE EXPENDITURE IS NOT AN APPROPRIATE METHOD. LIKEWISE, ADOPTION OF 0.5% ON AVERAGE INVESTMENTS(UNDER RULE 8D (2)(III)) ALSO MAY NOT YIELD APPROPRIATE AMOUNT AS THE DEPOSITS ARE WI THDRAWN AT THE LAST MOMENT, AS STATED IN AY. 2006-07. SINCE THE AN ALOGY ON RULE 8D MAY NOT WORK OUT TO GIVE CORRECT EXPENDITURE, RE LIANCE CAN BE MADE TO THE PROVISIONS OF SECTION 80HHC (BAA), WHE REIN WHILE WORKING OUT THE DEDUCTION U/S. 80HHC, THE LEGISLATURE I N ITS WISDOM, HAS EXCLUDED 10% OF THE AMOUNTS. THE PROVISI ONS OF SECTION 80HHC (BAA)ARE AS UNDER: (BAA) 'PROFITS OF THE BUSINESS' MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON' AS REDUCED BY (1) NINETY PER CENT OF ANY SUM REFERRED TO IN CLAUSES ( IIIA), (IIIB), (IIIC), (IIID) AND (IIIE) OF SECTION 28 OR OF ANY RECEIPTS BY WAY OF B ROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR ANY OTHER RECEIPT OF A S IMILAR NATURE INCLUDED IN SUCH PROFITS; AND I.T.A. NOS. 692 & 693/HYD/2017 :- 6 - : (2) THE PROFITS OF ANY BRANCH, OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATE OUTSIDE INDIA; 5.2. THIS PROVISION WAS IN OPERATION FOR A LONG PER IOD AND MOST OF ASSESSEES HAVE ACCEPTED THE DEDUCTIONS BY EXCL UDING 10% RECEIPTS AS EXPENDITURE AND EXCLUDED 90% OF THE AMOUN TS UNDER THE PROVISIONS OF SECTION 80HHC(BAA). TAKING CUE FROM THE ABOVE, I AM OF THE OPINION THAT ABOUT 10% OF THE RECEIPTS BEING TAX ED CAN BE CONSIDERED AS AN EXPENDITURE LAID OUT WHOLLY AND NECESSARILY FOR EARNING THE INTEREST INCOME. ACCORDINGLY, AO IS DIRECTED TO ALLOW AN AMOUNT OF 10% OUT OF THE INTEREST EARNED ON FD S AND SB A/C AS EXPENDITURE AND WORK OUT THE TAXABLE INCOME. 5.3. AS FAR AS INTEREST ON REFUND IS CONCERNED, THAT W AS NOT DISPUTED BEFORE THE ITAT IN THE ORIGINAL PROCEEDINGS , AS THE LD.CIT(A) UPHELD THE SAME AND ACCORDINGLY, NO DIREC TION CAN BE GIVEN ON THAT AS THE MATTER WAS ALREADY SETTLED EARLIER. THE GROUNDS ARE CONSIDERED ALLOWED PARTLY. 6. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DECEMBER, 2017 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 29 TH DECEMBER, 2017 TNMM I.T.A. NOS. 692 & 693/HYD/2017 :- 7 - : COPY TO : 1. HYDERABAD MUTUAL BENEFIT SOCIETY, C/O. VENUGOPAL & CHENOY, CHARTERED ACCOUNTANTS, 4-1-889/16/2, TILAK ROAD, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-5(3), HYDERABAD. 3. CIT (APPEALS)-10, HYDERABAD. 4. PR.CIT-IV, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.