M/s Ramtech Software Solutions Pvt. Ltd., Ludhiana V. DCIT, Ludhiana

ITA 695/CHANDI/2015

• Counselvise Citation: 69521514 RSA 2015
• Duration Of Justice: 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 06-11-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 27-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES SMC CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT ITA NO. 695/CHD/2015 ASSESSMENT YEAR: 2010--11 M/S RAMTECH SOFTWARE SOLUTIONS VS. THE DCIT, CIRCL E-V, PVT. LTD., LUDHIANA LUDHIANA PAN NO. AABCR0991F (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBHASH AGGARWAL RESPONDENT BY : MS. RAJINDER KAUR DATE OF HEARING : 06.11.2015 DATE OF PRONOUNCEMENT : 31 .12.2015 ORDER PER H.L.KARWA, VP THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER OF CIT(A)-2 LUDHIANA DATED 14.5.2015 RELATING TO ASSESSMENT YEA R 2010-11. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- 1. THAT THE LD. CIT(A)-2 HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 2,67,587/- U/S 14A R.W. RULE 8D (2)(III) OF THE INCOME TAX RULES. 2. THAT THE LD. CIT(A) HAS IGNORED THE FACT THAT WHILE WORKING OF THE DISALLOWANCE UNDER RULE 8D(2)(III) IT IS ON LY THE INVESTMENTS WHICH YIELD EXEMPT INCOME ARE TO BE TAK EN INTO CONSIDERATION AND FURTHER NO EXPENDITURE HAD BEEN I NCURRED FOR EARNING THE EXEMPT INCOME AND THE ASSESSING OFF ICER HAS ALSO NOT POINTED OUT THAT ANY EXPENDITURE HAS BEEN INCURRED SO AS TO CALL FOR ANY DISALLOWANCE. 2 3. THAT IN ANY CASE THE DISALLOWANCE IS AGAINST THE LA W AND THE FACTS OF THE CASE. 4. THAT THE ORDER OF THE CIT(A) IS PERVERSE AND PREJUD ICED IN AS MUCH AS HE HAS NOT EVEN GIVEN CREDIT FOR THE DISALL OWANCE OF RS. 2,37,874/- ALREADY DISALLOWANCE BY THE APPELLAN T UNDER RULE 8D(2)(III). 5. THAT EVEN THE DISALLOWANCE MADE SUO-MOTTO IS JUSTIF IED AND THE APPELLANT IS ENTITLED TO RELIEF OF THE AMOUNT A LREADY DISALLOWED. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT AS SESSEE HAD SHOWN INVESTMENT OF RS. 5,28,71,243/- AND RS.5,41,63,826/- AS ON 31. 3.2009 AND 31.3.2010 RESPECTIVELY. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE CLAIMED INTEREST EXPENSES OF RS. 61,377/-. THE ASSESSING OFFICER ASK ED THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INVE STMENT SHOULD NOT BE MADE. AFTER OBTAINING THE REPLY OF THE ASSESSEE, THE ASSE SSING OFFICER COMPUTED THE DISALLOWANCE OF RS. 8D(2) AS UNDER:- I) RULE 8D(2)(1) RS. 2,12,966 II) 8D(2)(II) RS. 5,150/- III) 8D(2)(II) RS. 2,67,587/- TOTAL RS. 4,85,703/- ACCORDINGLY, AN AMOUNT OF RS. 4,85,703/- WAS DISALL OWED U/S 14A OF THE ACT. 3. ON APPEAL, THE LD. CIT(A) ALLOWED PARTIAL RELIE F TO THE ASSESSEE FOLLOWING THE EARLIER ORDER PASSED IN ASSESSEES CASE FOR TH E ASSESSMENT YEARS 2009-10 DATED 27.3.2015. AGAINST THE SAID ORDER, THE ASSESS EE WAS IN APPEAL BEFORE THE TRIBUNAL IN ITA NO. 470/CHD/2015 AND THE TRIBUNAL V IDE ORDER DATED 14.8.2015 HELD AS UNDER:- 3 9. I HAVE HEARD THE RIVAL CONTENTION AND PERUSED T HE MATERIAL ON RECORD. 10. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAD SU OMOTO DISALLOWED AN AMOUNT OF RS. 1,81,677/- BEING PMS EX PENSES INCURRED BY IT DURING THE YEAR. IT IS ALSO A MATTER OF RECORD THAT THE ASSESSEE VIDE ITS LETTER DT. 19.12.2011 ST ATED BEFORE THE AO THAT PROVISION OF SECTION 14A ARE NOT APPLICABLE IN ITS CASE AS NO LOAN HAS BEEN TAKEN DURING THE YEAR UNDER CON SIDERATION AND ALL INVESTMENTS HAVE BEEN MADE OUT OF OWN SOURC ES. SAME ARGUMENT WERE REITERATED BEFORE THE CIT(A) ALSO. 11. IN SUCH A SCENARIO, THE A.O. HAD TO RECORD A SA TISFACTION AS TO WHY HE IS NOT SATISFIED WITH THE DISALLOWANCE MADE BY THE ASSESSEE. UNDER SUB SECTION (2) TO SECTION 14A, THE AO IS REQUIRED TO EXAMINE THE ACCOUNTS OF THE ASSESSEE AN D ONLY WHEN HE IS NOT SATISFIED WITH THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO E XEMPT INCOME, HE CAN DETERMINE THE AMOUNT OF EXPENDITURE WHICH SHOULD BE DISALLOWED IN ACCORDANCE WITH THE METHOD PRESCRIBED, I.E; RULE 8 D. SUB RULE (1) OF RULE 8 D ALSO CATEGORICALLY STATES THE SAME POSITION. SUB RULE (2 ) WILL NOT CAME INTO OPERATION UNLESS AND UNTIL THE SPECIFIC C ONDITION PRESCRIBED UNDER SUB RULE (1) ARE SATISFIED. I DO N OT FIND ANY SUCH SATISFACTION BEING RECORDED IN THE PRESENT CAS E BY THE AO, BEFORE HE INVOKED SUB RULE (2) OF RULE 8D OF THE RU LES & MADE THE RECOMPUTATION. 12. THERE ARE A NUMBER OF JUDICIAL PRONOUNCEMENTS T O THIS PROPOSITION BY MANY HIGH COURTS, INCLUDING THE JURI SDICTIONAL PUNJAB & HARYANA HIGH COURT. IN THE CASE OF ABHISHE K INDUSTRIES LTD. (SUPRA), ON WHICH THE COUNSEL OF TH E ASSESSEE HAS ALSO PLACED RELIANCE, IT HAS BEEN HELD THAT THE AO HAS TO RECORD A SATISFACTION THAT INTEREST BEARING FUNDS H AVE BEEN USED TO EARN TAX FREE INCOME AND THE SATISFACTION T O BE RECORDED MUST BE BASED UPON CREDIBLE AND RELEVANT E VIDENCE. SIMILAR VIEW HAD BEEN TAKEN IN THE CASE OF DEEPAK M ITTAL (SUPRA) ALSO. HONBLE DELHI HIGH COURT, IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LTD.(2015) 370 ITR 338 ( DELHI), AFTER A THREADBARE ANALYSIS OF THE SECTION 14A AND RULE 8D, ALSO HAS HELD THE SAME. 13. IN VIEW OF THE ABOVE, THE ACTION OF THE AO INVO KING THE PROVISIONS OF RULE 8D OF INCOME TAX RULES, 1963, CO ULD NOT BE HELD PROPER. HOWEVER, I FIND THAT THE RELEVANT FACT S OF THE CASE ARE ALREADY ON RECORD, THEREFORE, I DO NOT THINK IT PROPER TO REMAND THE MATTER TO THE AO FOR A FRESH DECISION AS PER LAW. SINCE ARGUMENTS AT LENGTH WERE MADE ON THE MERITS O F THE CASE ALSO, THEREFORE, I PROCEED TO DECIDE THE MERITS OF CASE IN SUCCEEDING PARAGRAPHS. 4 14. LD. AR ALSO RAISED THE ISSUE THAT WHILE MAKING COMPUTATION UNDER RULE 8D(2)(III) THE AO HAS TAKEN THE TOTAL VALUE OF INVESTMENTS BOTH AT THE OPENING AND CLOSIN G OF THE YEAR, WHILE IT SHOULD BE THE TOTAL VALUE OF TAX FRE E INCOME YIELDING INVESTMENTS ONLY. I SEE THAT EVEN THE CIT( A) HAS AGREED WITH THE SAID CONTENTION OF THE ASSESSEE AND HAD GIVEN THE A.O. A DIRECTION TO DO THE SAME. THE FINDINGS A RE GIVEN AT PAGE 7 PARA 4.7 LAST SENTENCE OF THE CIT(A)S ORDER IN THE FOLLOWING WORDS: THE AO IS DIRECTED TO VERIFY THE FACTS AND RECOMP UTE THE DISALLOWANCE UNDER RULE 8D(2)(III) BY TAKING TH E VALUE OF INVESTMENT PERTAINING TO ONLY THOSE INVEST MENTS, INCOME FROM WHICH IS NOT TAXABLE. 15. SHRI SUBHASH AGGARWAL , LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE DIRECTION GIVEN BY THE LD. CIT(A ) ARE NOT PROPER AND CORRECT IN LAW. ACCORDING TO THE LD. COU NSEL FOR THE ASSESSEE THE AO MAY BE DIRECTED THAT WHILE WOR KING OUT THE DISALLOWANCE UNDER RULE 8D(2)(III), IT IS ONLY THE INVESTMENTS WHICH YIELD EXEMPT INCOME ARE TO BE TAK EN INTO CONSIDERATION. I FIND SUBSTANCE IN THE ABOVE SUBMIS SION OF LD. COUNSEL FOR THE ASSESSEE AND ACCORDINGLY I MODIFY T HE ORDER OF LD. CIT(A) TO THE ABOVE EXTENT AND DIRECT THE AO TH AT WHILE WORKING OUT THE DISALLOWANCE UNDER RULE 8D(2)(III) , IT IS ONLY THE INVESTMENTS WHICH YIELD EXEMPT INCOME ARE TO BE TAKEN INTO CONSIDERATION. THIS GROUND OF APPEAL IS DISPOSED OF IN ABOVE TERMS. 16. FURTHER, THE AR PRAYED FOR THE CREDIT OF SUOMOT O DISALLOWANCE OF PMS EXPENSES AMOUNTING TO RS. 1,81, 667/- MADE BY THE ASSESSEE. A DETAIL OF THESE EXPENSES WE RE ALSO FILED DURING THE COURSE OF HEARING, STATING THAT TH ESE ARE THE ONLY EXPENSES INCURRED BY THE ASSESSE FOR EARNING T AX FREE INCOME. IT WAS ALSO STATED AT THE BAR THAT THE TAX FREE INCOME HAS BEEN EARNED ONLY THROUGH THE PORTFOLIO MANAGEME NT BY THESE PORTFOLIO MANAGERS ONLY. IT WAS ALSO STATED T HAT NO OTHER EXPENDITURE WAS INCURRED TO EARN THE SAID TAX FREE INCOME. NOW THE ONLY ISSUE TO BE DECIDED IS WHETHER THE CRE DIT OF PMS EXPENSES SHOULD BE GIVEN TO THE ASSESSEE UNDER RULE 8D(2)(I) OR RULE 8D(2)(III) . THE AO HAS NOT GIVEN CREDIT OF THE SAID EXPENSES WHILE COMPUTING DISALLOWANCE UNDER RULE 8D . HOWEVER IT CAN BE SEEN THAT, WHILE COMPUTING THIS H E HAS COMPUTED NIL AMOUNT UNDER RULE 8D(2)(I) AND RS. 289 293/- UNDER RULE 8D(2)(III). THERE IS NO DISPUTE BEFORE M E REGARDING RULE 8D(2)(II). THE CIT(A), HOWEVER WHILE ADJUDICAT ING THE ISSUE HAS HELD THAT THE CREDIT OF PMS EXPENDITURE H AS BEEN GIVEN UNDER RULE 8D(2)(I) BY THE AO. HIS FINDING TO THIS EFFECT HAS ALREADY BEEN QUOTED EARLIER IN THIS ORDER. IN P RINCIPLE HE 5 HAS ACCEPTED THE PROPOSITION OF THE ASSESSEE THAT C REDIT OF PMS EXPENSES SUOMOTO DISALLOWED BY THE ASSESSEE SHOULD BE GIVEN TO HIM OUT OF THE DISALLOWANCE COMPUTED UNDER RULE 8D. IT IS A FACT THAT FOR MAKING INVESTMENTS, CONTINUING WITH PORTFOLIO MANAGEMENT, SELECTING PORTFOLIO MANAGER AND DECIDIN G ABOUT THE AMOUNT OF INVESTMENTS AND PERIOD OF INVESTMENTS INVOLVE DECISION MAKING PROCESS AT MANAGERIAL LEVEL AND THE REFORE INVOLVE ADMINISTRATIVE COSTS. THESE ALL A PART OF O VERHEAD EXPENSES WHICH AN ASSESSEE OUGHT TO INCUR FOR EARNI NG TAX FREE INCOME. A PART OF THESE ACTIVITIES ARE BEING TAKEN CARE OF BY THE PORTFOLIO MANAGER, WHO TAKE THEIR FEE INTURN. I N SUCH CIRCUMSTANCES, IT CANNOT BE DENIED THAT THESE ARE T HE EXPENSES WHICH HAVE BEEN PERCEIVED WHILE DRAFTING CLAUSE (II I) OF RULE 8D. IN SUCH CIRCUMSTANCES, THE PART OF THE EXPENSES BEING IN THE NATURE OF PMS EXPENSES, WHICH THE ASSESSEE ITSE LF HAS DISALLOWED, IT IS PERTINENT TO GIVE CREDIT OF THE S AME TO THE ASSESSEE UNDER THE SAME CLAUSE. THE RELIANCE, IN THIS REGARD, PLACED BY THE AR ON T HE ORDER OF THE BANGALORE BENCH OF THE ITAT IN THE CAS E OF M/S ICICI VENTURE FUNDS MANAGEMENT (SUPRA), IS NOT OUT OF PLACE, WHERE, IN A SIMILAR CIRCUMSTANCES THE ITAT HELD AS UNDER: 10. AS REGARDS THE DISALLOWANCE OF THE GENERAL ADMINISTRATIVE EXPENSES UNDER RULE 8D (2)(III) THE AO HAS COMPUTED THE DISALLOWANCE BEING 0.5% OF THE AVERAGE INVESTMENTS. IT IS NOT DISPUTED THAT THE ASSESSE HAS RECEIVED DIVIDEND INCOME ON WHICH THE EXPENDITURE INCURRED BY VARIOUS VENTURE CAPITAL FUNDS HAS ALREADY BEEN DISALLOWED AND THE AMOUNT RECEIVED BY THE ASSESSEE IS NET AMOUNT. THEREFORE, FOR THE PURPOSE OF DISALLOWANCE U/S 14A EXPENDITURE ALREADY DISALLOWED FROM THE DIVIDEND INCOME PRIOR OT THE ALLOCATION TO THE ASSESSEE IS REQUIRED TO BE TAKEN INTO ACCOUNT. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DIRECT THE AO TO RE-COMPUTE THE DISALLOWANCE BY REDUCING THE AMOUNT OF EXPENDITURE ALREADY DISALLOWED FROM THE DIVIDEND INCOME FROM THE AMOUNT WORKED OUT BY THE AO AT RS. 6.04,000/-. IN VIEW OF THE ABOVE THE CREDIT OF SUOMOTO DISALLOW ANCE OF RS. 1,81,677/- MADE BY ASSESSEE ON ACCOUNT OF PM S EXPENDITURE INCURRED BY IT IS TO BE ALLOWED TO IT. MY VIEW ALSO GETS ITS STRENGTHENED BY THE ORDER OF DELHI ITAT IN THE CASE OF DCIT VS. M/S I P SUPPORT SERVICES INDIA (P) LTD., I TA NO. 6 524/DEL/2013 DT. 08/08/2013, WHEREBY WHILE ADJUDICA TING THE SAME ISSUE, THE HONBLE BENCH HELD AS UNDER: IT HAS BEEN HELD THAT THE ASSESSEE HAD ITSELF ADDED PORTFOLIO MANAGEMENT EXPENDITURE INCURRED FOR MAINTAINING PORTFOLIO OF THE ASSESSEE AND THE ASSESSEE HAS ADDED EXPENDITURE OF PORTFOLIO MANAGEMENT SERVICES VOLUNTARILY, THEN IF IT IS FOUND THAT NO INTEREST EXPENDITURE STOOD DEBITED IN THE P&L ACCOUNT. RULE 8D R/W SECTION 14A OF THE ACT CANNOT BE INVOKED. ACCORDINGLY, WE HOLD THAT THE COMMISSIONER OF INCOME TAX(A) RIGHTLY UPHELD PART ADDITION IN THIS REGARD AND ANOTHER PART OF THE ADDITION HAS BEEN DELETED ON JUSTIFIED GROUNDS. WE ARE UNABLE TO SEE ANY VALID REASON TO INTERFERE WITH THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (A) IN THIS REGARD. THE COMMISSIONER OF INCOME TAX (A) HAS FOLLOWED THE ORDER OF THE TRIBUNAL FOR AY 2007-08(SUPRA) AND HAS ACCEPTED SUO MOTO ESTIMATED AMOUNT OFFERED BY THE ASSESSEE FOR TAXATION, HENCE WE UPHOLD THE OBSERVATIONS AND FINDINGS OF THE 10 ITA NO. 524/DEL/2013 ASST. YEAR: 2009-10 COMMISSIONER OF INCOME TAX (A) IN THIS REGARDS. 17. IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO RED UCE THE AMOUNT OF PMS EXPENSES FROM THE DISALLOWANCE COMPUT ED BY HIM UNDER RULE 8D(2)(III). 18. IN THE RESULT, APPEAL IS ALLOWED PARTLY AS INDI CATED ABOVE. 4. THE FACTS OF THE PRESENT YEAR ARE SIMILAR TO THA T OF ASSESSMENT YEAR 2009- 10. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUN AL PASSED IN ASSESSEES CASE IN ITA NO. 477/CHD/2015 RELATING TO ASSESSMENT YEAR 2009-10, FIRST I MODIFY THE DIRECTIONS OF CIT(A) GIVEN IN PARA 4.4 OF THE IMPUG NED ORDER TO THE FOLLOWING EXTENT. AND DIRECT THE ASSESSING OFFICER THAT WHILE WORKIN G OUT THE DISALLOWANCE UNDER RULE 8D(2)(III), IT IS ONLY THE INVESTMENT WH ICH YIELD EXEMPT INCOME ARE TO BE TAKEN INTO CONSIDERATION. 7 5. ACCORDINGLY, GROUND NOS. 1 & 2 OF THE APPEAL IS DISPOSED OF IN THE ABOVE TERMS. FURTHER, THE LD. COUNSEL FOR THE ASSESSEE P RAYED FOR THE CREDIT SUO-MOTTO DISALLOWANCE OF PMS EXPENSES AMOUNTING TO RS. 2,12, 966/- MADE BY THE ASSESSEE. IN VIEW OF THE DECISION OF TRIBUNAL FOR THE ASSESSMENT YEAR 2009-10, THE ASSESSING OFFICER IS DIRECTED TO REDUCE THE AMO UNT OF PMS EXPENSES AMOUNTING TO RS. 2,12,966/- FROM THE DISALLOWANCE C OMPUTED BY HIM UNDER RULE 8D(2)(III) OF THE ACT. 6. NO OTHER POINT WAS RAISED OR ARGUED BEFORE ME. 7. IN THE RESULT, THE APPEAL IS ALLOWED PARTLY AS I NDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 31.12.2015 SD/- (H.L.KARWA) VICE PRESIDENT DATED : 31 ST DECEMBER, 2015 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR