Suray Sriharsha, Madanpalle, Chittoor V. ACIT, Circle-1(1), Tirupathi, Tirupathi

ITA 716/HYD/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2970 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-05-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 26-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KOMALI KRISHNA
• Assessee Lawyers: S RAMA RAO
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES CIRCUIT BENCH A, AT TIRUPATI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 716/HYD/2017 ASSESSMENT YEAR: 2012-13 SURAY SRIHARSHA, MADANAPALLE [PAN: AERPS2718C] VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1), TIRUPATI (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S. RAMA RAO, AR FOR REVENUE : SMT. KOMALI KRISHNA, DR DATE OF HEARING : 15-05-2018 DATE OF PRONOUNCEMENT : 23-05-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-TIRUPATI, DATED 10-03-2017. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO DISALLO WANCE U/S. 14A OF THE ACT. 2. BRIEFLY STATED FACTS ARE, ASSESSEE IS IN THE BUSINES S OF MONEY LENDING AND REAL ESTATE BUSINESS AND HAS DECLARED IN COME OF RS. 21,88,000/- DURING THE YEAR. ON NOTICING THAT ASSE SSEE HAS CLAIMED INTEREST EXPENDITURE TO AN EXTENT OF RS. 50,90,5 45/- IN ITS P&L A/C AND ALSO HAD INVESTMENT TO THE EXTENT OF RS. 2 .16 CRORES, I.T.A. NO. 716/HYD/2017 :- 2 - : AO INVOKED THE PROVISIONS OF SECTION 14A AND DISALLOW ED AN AMOUNT OF RS. 9,95,150/- UNDER RULE 8D2(II) AND RS. 84,086/- UNDER RULE 8D(2)(III), THUS MAKING TOTAL DISALLOWANCE OF RS. 10,79,236/-. 3. BEFORE THE LD.CIT(A), IT WAS CONTENDED THAT NO AMOUNT OF BORROWED FUNDS WERE DIVERTED TO INVESTMENTS IN SHARES AND SECURITIES, WHICH WERE MADE OUT OF OWN FUNDS. THE BO RROWED FUNDS ON WHICH INTEREST WAS PAID ARE USED FOR MONEY L ENDING BUSINESS ONLY. IT WAS FURTHER SUBMITTED THAT NO EXPENDIT URE WAS INCURRED FOR EARNING THE DIVIDEND INCOME OF RS. 1,7 0,862/-. ACCORDINGLY, IT WAS CONTENDED THAT NO DISALLOWANCE U/S. 14A IS WARRANTED. LD.CIT(A), HOWEVER, SUPPORTED THE ACTION OF AO AND DISMISSED THE APPEAL. 4. LD. COUNSEL SUBMITTED THAT NO BORROWED FUNDS WERE UTI LIZED FOR THE PURPOSE OF INVESTMENT AND THE DISALLOWANCE MADE UNDER RULE 8D(2) IS NOT WARRANTED. WITH REFERENCE TO DISALL OWANCE OF EXPENDITURE ALSO IT WAS SUBMITTED THAT ASSESSEE HAS NOT I NCURRED ANY EXPENDITURE AND HENCE, DISALLOWANCE PER SE IS NOT WARRANTED. WITHOUT PREJUDICE TO THE ABOVE, LD. COUNSEL ALSO SUBMI TTED THAT DISALLOWANCE CAN ONLY BE RESTRICTED TO THE DIVIDEND EA RNED AND CLAIMED AS EXEMPTION, IN VIEW OF THE PRINCIPLES LAI D DOWN ON THE SUBJECT PARTICULARLY IN THE CASE OF M/S. KAMADHENU SUK RIT PVT. LTD., VS. ITO, ITAT HYDERABAD BENCH, DATED 22-11-201 7. IN SUPPORT, ASSESSEE HAS RELIED ON THE FOLLOWING CASE LA W: A. PR.COMMISSIONER OF INCOME TAX VS. EMPIRE PACKAGE PV T. LTD., [286 CTR 457 (P & H-HC)]; I.T.A. NO. 716/HYD/2017 :- 3 - : B. JOINT INVESTMENTS PVT. LTD., VS. CIT [372 ITR 694 (DEL-H C)]; C. K. RATANCHAND & CO., VS. ITO [45 ITR (TRIB) 608 (AHD -TRIB); D. PEST CONTROL INDIA PVT. LTD., VS. DCIT, ITAT MUMBAI DATE D 31-10-2017; E. TGV PROJECTS & INVESTMENTS PVT. LTD., VS. ACIT ITAT, HYDERABAD, DATED 28-02-2017 (SMC); F. AVSHESH MERCANTILE (P) LTD., VS. DCIT [26 TAXMANN.COM 43 (MUMBAI)/(2012) 54 SOT 19]; G. CIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD., [35 TAXMANN.COM 210 (DELHI-HC); H. CIT VS. HOLCIM INDIA (P) LTD., [57 TAXMANN.COM 28) (D ELHI)]; 5. LD.DR SUPPORTED THE ORDERS OF THE AO AND CIT(A). 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. IT IS TO BE ADMITTED THAT AO HAS NOT GIVEN ANY FINDING THAT THE BORROWED FUN DS HAVE BEEN DIVERTED FOR NON-BUSINESS INVESTMENT PURPOSES. HOWEVER, NEITHER THE CIT(A) NOR THE AO HAS EXAMINED THIS ASPECT AND ASSESSEE ALSO HAS NOT PLACED ANY EVIDENCE WHY THE I NTEREST CLAIMED SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF WORKING O UT THE DISALLOWANCE U/S. 8D(2)(II). THEREFORE, WITHOUT GOIN G TO THE MERITS OF DISALLOWANCE UNDER WHICH 8D(2)(II) AND (III), WE ARE OF THE OPINION THAT ALTERNATE CONTENTION THAT THE DISALLOWANCE CAN BE R ESTRICTED TO THE DIVIDED EARNED CAN BE ACCEPTED. THE CO-ORDINATE B ENCH IN THE CASE OF M/S. KAMADHENU SUKRIT PVT. LTD., VS. ITO, ITA T HYDERABAD BENCH, DATED 22-11-2017 RELIED ON ANOTHER DECISION I N THE CASE OF SAHARA INDIA FINANCIAL CORPN. LTD., VS. DCIT [41 TAXM ANN.COM 251] (DELHI-TRIB) AND HAS HELD AS UNDER: I.T.A. NO. 716/HYD/2017 :- 4 - : 8.1. AS CAN BE SEEN FROM THE NATURE OF EXPENDITURE , THERE IS NO INDICATION EVEN THAT THE ABOVE EXPENDITURE IS EXPEN DED FOR EARNING DIVIDEND INCOME. AO WITHOUT GIVING ANY SATISFACTOR Y REASON, JUST INVOKED RULE 8D(III) AND DISALLOWED THE AMOUNT. 9. THE CO-ORDINATE BENCH IN THE CASE OF SAHARA INDI A FINANCIAL CORPN. LTD., VS. DCIT (SUPRA) HAS HELD IN PARA 81 AS UNDER : WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPUTED THAT THE ADMINISTRATION, E XPENSES AND BOOKS OF ACCOUNT OF INVESTMENT DIVISION ARE SEPARATELY CARRIED OUT AND MAINTAINED BY THE ASSESSEE. NO INFIRMITY HAS BEEN FOUND BY THE DEPARTMENT IN THIS BEHALF. ON E OF THE MAIN ISSUE IS ON WHOM LIES THE ONUS TO ESTABLISH NEXUS OF AVAILABLE FUNDS WITH FREE AND TAXABLE INCOME. SIMILARLY COURTS HAVE HELD THAT A FINDING IN OBJECTIVE TERMS ABOUT ASSESSEE WORKING BEING UNSATISFACTORY IS TO BE RECORDED BY AO IN THE ORDER . CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF PUNJAB STATE CO-OP. & MARKETING FED. LT D. (SUPRA) HAS HELD THAT IN ANY CASE THE DISALLOWANCE U/S 14A CANNOT EXCEED TAX FREE INCOME OF THE ASSESSEE. IF MECHANICAL METHOD OF RULE 8D IS APPLIED, IT LEADS TO MANIFESTLY ABSUR D RESULTS IN AS MUCH AS FOR TAX FREE INCOME OF RS.68,37,583/- DISALLOWANCE OF RS.2,16,51,917 (E NHANCED BY CIT(A) AT RS. 2,19,47,772) IS MADE U/S 14A WHICH IS WAY TOO MUCH THAN THE EXEM PT INCOME. AS THE INTERPRETATION OF PROVISIONS OF SEC. 14A R/W RULE 8D IS LEADING TO UN ANTICIPATED ABSURDITIES WHICH CANNOT BE THE INTENTION OF LEGISLATURE. UNDER THESE CIRCUMSTA NCES HELP OF EXTERNAL AIDS OF CONSTRUCTION FOR INTERPRETATION OF STATUTE IS CALLED FOR. LOOKIN G AT THE VARYING INTERPRETATION OFFERED BY VARIOUS COURTS AND BENCHES OF TRIBUNAL IN RELATION TO SEC. 14A, IT IS QUITE ARDUOUS TO PRECISELY DECIDE THE ISSUE. IN GIVEN FACTS AND CIRC UMSTANCES WITHOUT GOING INTO ALL THE ISSUES, IN OUR VIEW IT IS APPROPRIATE TO TAKE GUIDANCE FROM CHANDIGARH BENCH JUDGMENT IN THE CASE OF PUNJAB STATE CO-OPT MARKETING FED. LTD. (SUPRA) HOLDING THAT THE DISALLOWANCE OF EXPENDITURE IN ANY CASE CANNOT EXCEED THE INCOME EA RNED. IN OUR VIEW THIS JUDGMENT TAKES A HOLISTIC VIEW THAT DISALLOWANCE IN TERMS OF SEC. 14A CAN BE MAXIMUM TO THE EXTENT OF EXEMPT INCOME, THERE IS NO DISPUTE THAT IN THIS CAS E WHICH IS AT RS. 68,37,583/-. THIS JUDGMENT IMPLIES THAT REASONABLE EXPENDITURE LESS T HAN THE EXEMPT INCOME CAN BE DISALLOWED. IN OUR CONSIDERED OPINION, IN THE INTER EST OF JUSTICE, IT WILL BE REASONABLE TO ESTIMATE AND DISALLOW, 50% OF EXEMPT) INCOME (RS.68 ,37,583/-) AS RELATABLE TO EXEMPT INCOME U/S 14A R/W RULE 8D. WE DO NOT GO INTO VARIO US PLEA TAKEN BY BOTH SIDES OFFERING DIVERSE VIEWS BASED ON JUDICIAL CITATIONS. THIS GRO UND OF THE ASSESSEE IS PARTLY ALLOWED. 10. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES, AS THE DISALLOWANCE MADE BY AO HAS RESULTED IN ABSURD SITUATION OF DISA LLOWING GENUINE OTHER BUSINESS EXPENDITURE, ON WHICH ASSESSEE EARNED MORE THAN RS. 19 LAKHS INCOME (AS AGAINST RS. 8,100/- OF DIVIDEND), I AM SATISFIED THAT THE DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO THE I NCOME EARNED OF RS. 8,100/-. AO IS DIRECTED ACCORDINGLY. 6.1. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN IN VARIOUS JUDGMENTS OF THE HON'BLE HIGH COURTS AND THE DECISIONS OF THE I.T.A. NO. 716/HYD/2017 :- 5 - : CO-ORDINATE BENCHES, WE ARE OF THE OPINION THAT THE DI SALLOWANCE UNDER RULE 8D CANNOT EXCEED THE DIVIDEND INCOME EARN ED AND CLAIMED AS EXEMPT. THEREFORE, THE DISALLOWANCE WORKED OUT UNDER RULE 8D IS RESTRICTED TO THE AMOUNT OF DIVIDEND EARNED. AO IS DIRECTED TO MODIFY THE ORDER ACCORDINGLY. GROUND IS P ARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MAY, 2018 SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT ME MBER HYDERABAD, DATED 23 RD MAY, 2018 TNMM I.T.A. NO. 716/HYD/2017 :- 6 - : COPY TO : 1. SURAY SRIHARSHA, C/O. M/S. KGM GUPTA & CO., CHARTERED ACCOUNTANTS, 10/67, GANDHI ROAD, CHITTOOR . 2. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(1 ), TIRUPATI. 3. CIT(APPEALS)-TIRUPATI. 4. PR.CIT-TIRUPATI. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.