Dy.CIT Cir- 3 Pune., Pune V. Shri Arun S Sane, Pune

ITA 706/PUN/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5893 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-11-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 09-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Assessee Lawyers: C U CHITALE
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.706/PN/2012 (ASSESSMENT YEAR : 2008-09) DY. COMMISSIONER OF INCOME TAX, CIRCLE 3, PUNE. . APPELLANT VS. SHRI ARUN S. SANE, 11, MAYUR CENTRE, 917/21, F.C. ROAD, SHIVAJI NAGAR, PUNE 4. PAN : ACVPS5154N . RESPONDENT C.O. NO.30/PN/2013 (ARISING OUT OF ITA NO.706/PN/2012) (ASSESSMENT YEAR : 2008-09) SHRI ARUN S. SANE, 11, MAYUR CENTRE, 917/21, F.C. ROAD, SHIVAJI NAGAR, PUNE 4. PAN : ACVPS5154N . CROSS OBJECTOR VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3, PUNE. . APPELLANT IN APPEA L DEPARTMENT BY : MR. S. P. WALIMBE ASSESSEE BY : MR. C.U. CHITALE DATE OF HEARING : 17-01-2014 DATE OF PRONOUNCEMENT : 28-01-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE REVENUE AND THE CROSS- OBJECTION BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS)-II, PUNE DATED 07.12.2011 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 15.12.2010 PASSED BY THE ASSESSING OFFICER U/ S 143(3) OF THE INCOME- TAX ACT, 1961 (IN SHORT THE ACT), PERTAINING TO THE ASSESSMENT YEAR 2008-09. 2. IN THE CROSS-APPEALS THE SOLITARY DISPUTE IS WIT H REGARD TO A DISALLOWANCE OF RS.35,09,724/- MADE BY THE ASSESSING OFFICER. T HE BRIEF FACTS IN RELATION TO ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 THE CONTROVERSY ARE AS FOLLOWS. THE ASSESSEE BEFOR E US IS AN INDIVIDUAL WHO IS RUNNING A PROPRIETARY CONCERN IN THE NAME AND STYLE OF M/S ARUN SANE ASSOCIATES AND IS ALSO A PARTNER IN VARIOUS PARTNER SHIP FIRMS. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS EARNED INCOME BY WAY OF INTEREST, REMUNERATION AND SHARE OF PROFITS FROM THE PARTNERS HIP FIRMS, AS ALSO INTEREST FROM LOANS AND ADVANCES, INTEREST FROM FIXED DEPOSI TS, MISCELLANEOUS, ETC. AND ACCORDINGLY, RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.50,17,040/- WAS FILED. IN THE COURSE OF ASSESSMENT PROCEEDINGS , ASSESSING OFFICER NOTICED THAT IN THE PROFIT & LOSS ACCOUNT PREPARED FOR THE YEAR UNDER CONSIDERATION, ASSESSEE HAD CLAIMED EXPENDITURES UNDER VARIOUS HEA DS AMOUNTING TO RS.35,91,067/-, OTHER THAN THE INTEREST ON LOANS. THE ASSESSING OFFICER ALSO NOTICED THAT ASSESSEE HAD CREDITED IN THE PROFIT & LOSS ACCOUNT SHARE OF PROFIT EARNED FROM THE PARTNERSHIP FIRMS WHICH WAS EXEMPT U/S 10(2A) OF THE ACT. THE ASSESSING OFFICER HAS NOTED IN PARA 3 OF THE AS SESSMENT ORDER THAT ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY EXPENSES SHOULD NOT BE DISALLOWED U/S 14A VIS--VIS INCOME EXEMPT U/S 10(2A) OF THE ACT. IN RESPONSE, ASSESSEE RESISTED THE ACTION OF THE ASSESSING OFFIC ER AND FURNISHED WRITTEN SUBMISSIONS, WHICH HAVE BEEN EXTRACTED BY THE ASSES SING OFFICER IN THE ASSESSMENT ORDER. IN TERMS OF THE SAID SUBMISSIONS , ASSESSEE ASSERTED THAT THE ENTIRE EXPENDITURE DEBITED IN THE PROFIT & LOSS ACCOUNT WAS ALLOWABLE AGAINST THE TAXABLE INCOME EARNED FROM THE PARTNERS HIP FIRMS SUCH AS REMUNERATION AND INTEREST ON CAPITAL WHICH WAS CHAR GEABLE TO TAX U/S 28(V) OF THE ACT. THE ASSESSING OFFICER DID NOT ACCEPT THE PLEA OF THE ASSESSEE AND HELD THAT THE PROVISIONS OF SEC. 14A ARE APPLICABLE SINCE SH ARE OF PROFIT IS NOT INCLUDIBLE IN THE COMPUTATION OF TOTAL INCOME . FURTHER, ACCORDING TO THE ASSESSING OFFICER, THE REMUNERATION RECEIVED FROM T HE PARTNERSHIP FIRMS IS ASSESSED UNDER THE HEAD BUSINESS AND PROFESSION B Y FICTION OF LAW AND IT WAS RECEIVED BY THE ASSESSEE AS A WORKING PARTNER F OR SERVICES RENDERED AND ASSESSEE COULD NOT BE SAID TO BE ENGAGED IN ANY STA NDALONE BUSINESS OF HIS OWN AND THE EXPENSES IN QUESTION WERE RELATED TO TH E BUSINESS OF THE ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 PARTNERSHIP FIRMS. FOR THE AFORESAID REASONS, THE ASSESSING OFFICER HELD THAT THE EXPENSES IN QUESTION WERE TO BE DISALLOWED ON A PROPORTIONATE BASIS. THE SHARE OF PROFIT RECEIVED FROM THE PARTNERSHIP FIRMS EXEMPT U/S 10(2A) OF THE ACT WAS RS.1,07,86,789/- AND THE REMUNERATION INCLUDIBL E IN THE TOTAL INCOME WAS RS.2,50,000/- AND HENCE THE ASSESSING OFFICER CALCU LATED THE EXPENSES PROPORTIONATE TO THE EXEMPT INCOME AT RS.35,09,724/ - OUT OF THE TOTAL EXPENSES OF RS.35,91,067/-. ACCORDINGLY, HE DISALL OWED A SUM OF RS.35,09,724/-, WHILE DETERMINING THE TOTAL INCOME. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). FIRSTLY, THE ASSESSEE ASSAILED THE OBSERVATIONS OF THE ASSES SING OFFICER THAT THE EXPENSES IN QUESTION ARE NOT ALLOWABLE SINCE THE AS SESSEE IS NOT ENGAGED IN ANY STANDALONE BUSINESS. ACCORDING TO THE ASSESSEE , IT WAS A MERE PRESUMPTION ON THE PART OF THE ASSESSING OFFICER TH AT THE IMPUGNED EXPENSES PERTAINED TO THE PARTNERSHIP FIRMS. SECONDLY, WITH OUT PREJUDICE TO THE ABOVE, ASSESSEE CANVASSED THAT THE DISALLOWANCE MADE BY TH E ASSESSING OFFICER WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14 A OF THE ACT R.W. RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES). THIRDLY, IT WAS CANVASSED THAT SECTION 14A OF THE ACT DOES NOT COME INTO OPER ATION AT ALL IN THE PRESENT CASE SINCE NO EXPENDITURE HAS BEEN INCURRED IN RELA TION TO THE EARNING OF SHARE OF PROFITS FROM THE PARTNERSHIP FIRMS WHICH I S EXEMPT FROM TAX. ASSESSEE MADE EXTENSIVE SUBMISSIONS IN THIS REGARD WHICH HAV E BEEN REPRODUCED BY THE CIT(A) IN HIS ORDER. 4. THE CIT(A) HAS NOT ACCEPTED THE REASONING OF THE ASSESSING OFFICER THAT THE EXPENSES CLAIMED IN THE PROFIT & LOSS ACCO UNT WERE NOT ALLOWABLE IN TERMS OF SECTION 37(1) OF THE ACT. ACCORDING TO TH E CIT(A), THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE RULES WE RE CORRECTLY INVOKED BY THE ASSESSING OFFICER, BUT DISALLOWANCE MADE BY THE ASS ESSING OFFICER WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF THE RU LES WHICH WAS MANDATORY ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 W.E.F. ASSESSMENT YEAR 2008-09. THEREFORE, HE SET- ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO WORK OUT THE DISALLOWAN CE IN TERMS OF RULE 8D OF THE RULES. AGAINST THE AFORESAID DECISION OF THE CIT(A ), REVENUE AS WELL AS ASSESSEE ARE IN APPEAL BEFORE THE TRIBUNAL. 5. THE STAND OF THE REVENUE IS THAT THE CIT(A) ERRE D IN NOT APPRECIATING THAT THE THRUST OF THE ASSESSING OFFICERS ENQUIRIE S WAS THE INADMISSIBILITY OF EXPENDITURE U/S 37(1) OF THE ACT WHEREAS A REFERENC E WAS MADE BY THE ASSESSING OFFICER TO SECTION 14A OF THE ACT ONLY AD DITIONALLY. IT HAS ALSO BEEN POINTED OUT THAT THE CIT(A) ERRED IN NOT APPLYING T HE PROVISIONS OF SECTION 37(1) OF THE ACT TO SUSTAIN THE IMPUGNED DISALLOWANCE EVE N THOUGH THE MAIN SOURCE OF INCOME OF THE ASSESSEE DURING THE YEAR UNDER CON SIDERATION WAS EARNING OF EXEMPT INCOME FROM THE VARIOUS PARTNERSHIP FIRMS AN D ASSESSEE DID NOT CARRY OUT ANY ACTIVITIES IN HIS PROPRIETARY CONCERN, M/S ARUN SANE ASSOCIATES. 6. ON THE OTHER HAND, IN ITS CROSS-OBJECTION, THE P LEA OF THE ASSESSEE IS THAT THE ASSESSING OFFICER AS WELL AS THE CIT(A) ER RED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT INASMUCH AS IT WAS THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN R ELATION TO THE EXEMPT INCOME IN QUESTION, BEING THE SHARE OF PROFITS EARN ED FROM THE PARTNERSHIP FIRMS. WITH REGARD TO THE PLEAS OF THE LEARNED DEP ARTMENTAL REPRESENTATIVE IN RELATION TO THE GROUND OF APPEAL RAISED IN THE APPE AL OF THE REVENUE, THE LEARNED COUNSEL POINTED OUT THAT BEFORE THE LOWER A UTHORITIES, ASSESSEE HAS POINTED OUT THAT HE WAS RUNNING AN INDEPENDENT OFFI CE TO LOOK AFTER HIS RESPONSIBILITIES AS PARTNER IN SEVERAL PARTNERSHIP FIRMS AS ALSO HIS OWN CONSTRUCTION BUSINESS. IT WAS POINTED OUT THAT THO UGH DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD NOT UNDERTAKEN ANY CONS TRUCTION PROJECT BUT THE SAME WERE CARRIED OUT IN THE EARLIER YEARS AND ASSE SSEE WAS STILL MAINTAINING THE SAID BUSINESS ACTIVITY. IT WAS ALSO POINTED OU T THAT IN THE PAST YEARS THE SAID POSITION HAS BEEN ACCEPTED AND IN ANY CASE ASS ESSEE WAS EARNING ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 INCOME BY WAY OF REMUNERATION/INTEREST WHICH WAS AS SESSABLE UNDER THE HEAD BUSINESS OR PROFESSION AND THE EXPENDITURES DEBIT ED IN THE PROFIT & LOSS ACCOUNT WERE RELATABLE TO SUCH ACTIVITIES. THEREFO RE, ACCORDING TO THE ASSESSEE INVOKING OF SECTION 37(1) OF THE ACT TO DI SALLOW THE EXPENDITURE ALTOGETHER WAS NOT JUSTIFIED AND ACCORDINGLY THE CI T(A) MADE NO MISTAKE IN SETTING-ASIDE SUCH STAND OF THE ASSESSING OFFICER. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. QUITE CLEARLY, THE STAND OF THE ASSESSING OFFICER THAT NO EXPENSES DEB ITED IN THE PROFIT & LOSS ACCOUNT MERIT ALLOWANCE U/S 37(1) OF THE ACT IS WIT HOUT ANY CREDIBLE BASIS. AS PER THE ASSESSING OFFICER, THE EXPENSES IN QUESTION ARE LAID OUT FOR THE PURPOSES OF THE BUSINESS OF THE FIRMS AND NOT OF TH E ASSESSEE. ON THE CONTRARY, THE CIT(A) HAS NOTED THAT THE ASSESSEE HA S BEEN UNDERTAKING HIS PROPRIETARY BUSINESS SINCE 1991 AND THEREFORE DISAL LOWING THE ENTIRE EXPENDITURE BY INVOKING SECTION 37(1) OF THE ACT WI THOUT ANY ENQUIRY OR VERIFICATION IS NOT JUSTIFIED. THE AFORESAID POSIT ION CONCLUDED BY THE CIT(A) HAS NOT BEEN ASSAILED BEFORE US AND THEREFORE WE FIND N O REASONS TO INTERFERE WITH SUCH CONCLUSION OF THE CIT(A). AS A RESULT THE APP EAL OF THE REVENUE IS DISMISSED. 8. NOW, WE MAY TAKE UP THE INVOKING OF SECTION 14A OF THE ACT BY THE INCOME-TAX AUTHORITIES. ON THIS ASPECT ALSO, WE AR E INCLINED TO AGREE WITH A FUNDAMENTAL SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SECTION 14A OF THE ACT R.W. RULE 8D OF THE RULES HA S BEEN MECHANICALLY INVOKED BY THE INCOME-TAX AUTHORITIES IN THIS CASE WITHOUT COMPLYING WITH THE PRE-REQUISITES. THE ASSESSING OFFICER AS WELL AS T HE CIT(A) HAS PROCEEDED TO INVOKE SECTION 14A OF THE ACT ON THE GROUND THAT AS SESSEE IS IN RECEIPT OF EXEMPT INCOME. AS PER THE CIT(A), ONCE THERE IS RECEIPTS OF EXEMPT INCOME THE PROVISION OF SECTION 14A R.W. RULE 8D GETS ATTR ACTED . THE STAND OF THE ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 ASSESSING OFFICER IS ALSO ON SIMILAR LINES AS NOTED BY US IN THE EARLIER PARAGRAPHS. 9. IN OUR CONSIDERED OPINION, BOTH THE AUTHORITIES BELOW HAVE MISDIRECTED THEMSELVES ON THIS ASPECT OF THE MATTER. THE MANDA TE OF SECTION 14A OF THE ACT IS TO PROHIBIT CLAIMS FOR DEDUCTION OF EXPENDIT URE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. IN OTHER WORDS, THE OBJECT OF SECTION 14A(1) IS TO ENSURE TH AT ONLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOMES ARE ALLOWED AS D EDUCTION. NOW, IN SUB- SECTION (2) OF SECTION 14A OF THE ACT, THE ASSESSIN G OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. SO, HOWEVER, THE INVOKING OF SUB-SECTION (2) OF SECTION 14A OF THE A CT HAS BEEN MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE AS SESSING OFFICER WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVIN G REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE AFORESAID PROPOSITION HAS FOUND EXPOSITION BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE M FG. CO. LTD. VS. DCIT, (2010) 328 ITR 81 (BOM). IN VIEW OF THE AFORESAID AUTHORITATIVE PRONOUNCEMENT OF THE HONBLE BOMBAY HIGH COURT, IT IS IMPERMISSIBLE TO UPHOLD THE PROPOSITION OF THE ASSESSING OFFICER AS WELL AS THE CIT(A) TO THE EFFECT THAT ONCE THERE IS RECEIPT OF EXEMPT INCOME THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE RULES REQUIRING DETERMINATION OF DISALLOWANCE, ARE AUTOMATICALLY ATTRACTED. IN THE PRESENT CASE, BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE THE CIT(A), ASS ESSEE CONSISTENTLY ASSERTED THAT NO EXPENDITURE HAS BEEN INCURRED IN R ELATION TO THE EARNING OF SHARE OF PROFITS FROM THE PARTNERSHIP FIRMS, WHICH IS EXEMPT U/S 10(2A) OF THE ACT. THEREFORE, IT IS A CASE WHERE THE ASSESSING O FFICER AND THE CIT(A) HAVE PROCEEDED TO INVOKE SECTION 14A OF THE ACT WITHOUT APPLICATION OF MIND, WHICH IS CONTRARY TO THE REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A OF THE ACT. ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 10. AT THE TIME OF HEARING, WHEN THE AFORESAID ASPE CT WAS BROUGHT-OUT, THE LEARNED COUNSEL FOR THE ASSESSEE CONSENTED THAT HE HAS NO OBJECTION IF THE ASSESSING OFFICER IS DIRECTED TO RECORD THE SATISFA CTION OR OTHERWISE MANDATED UNDER SUB-SECTION (2) OF SECTION 14A OF THE ACT, HA VING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THEREFORE, WE DEEM IT FIT AND PRO PER TO SET-ASIDE THE ORDER OF THE CIT(A) ON THIS ASPECT AND DIRECT THE ASSESSING OFFICER TO RE-VISIT THE CONTROVERSY IN THE SAID LIGHT. THE REQUIREMENTS OF COMPUTING THE DISALLOWANCE IN TERMS OF RULE 8D OF THE RULES SHALL BE PERMISSIB LE ONLY IN A CASE WHERE THE ASSESSING OFFICER REACHES THE OBJECTIVE SATISFACTIO N WITH REGARD TO THE INCORRECT OF THE CLAIM OF THE ASSESSEE, HAVING REGA RD TO THE ACCOUNTS OF THE ASSESSEE. NOTABLY, THE CLAIM OF THE ASSESSEE HAS B EEN THAT NONE OF THE EXPENDITURES IN QUESTION ARE INCURRED IN RELATION T O THE EARNING OF THE NON- TAXABLE INCOME I.E. SHARE OF PROFITS FROM THE PARTN ERSHIP FIRMS. IN THE RESULT, THE MATTER IS RESTORED BACK TO THE FILE OF THE ASSE SSING OFFICER TO CARRY OUT THE AFORESAID LIMITED EXERCISE, OF COURSE AFTER ALLOWIN G THE ASSESSEE A REASONABLE OPPORTUNITY TO PUT-FORTH MATERIAL AND SUBMISSIONS I N SUPPORT OF HIS RETURN OF INCOME. AFTER CONSIDERING THE SUBMISSIONS AND MATE RIAL PUT-FORTH BY THE ASSESSEE THE ASSESSING OFFICER SHALL ADJUDICATE THE CONTROVERSY WITH REGARD TO THE EXPENDITURE OF RS.35,91,067/- AFRESH IN ACCORDA NCE WITH LAW. THUS, ASSESSEE SUCCEEDS ON ITS CROSS-OBJECTION FOR STATIS TICAL PURPOSES. 11. RESULTANTLY, WHEREAS THE APPEAL OF THE REVENUE IS DISMISSED, THE CROSS-OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 28 TH JANUARY, 2014. SUJEET ITA NO.706/PN/2012 C.O. NO.30/PN/2013 A.Y. 2008-09 COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-II, PUNE; 4) THE CIT-II, PUNE; 5) THE DR, B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE