Ashok Narayan Bhosle, Pune V. Addl. CIT, Range-8, Pune

ITA 717/PUN/2013

• Counselvise Citation: 71724514 RSA 2013
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.404/PN/2013 (ASSESSMENT YEAR : 2009-10) DY. COMMISSIONER OF INCOME TAX, CIRCLE- 8, PUNE. . APPELLANT VS. SHRI ASHOK NARAYAN BHOSALE, BUNGLOW AT KAVERINAGAR, PRATHAM HOUSING SOCIETY, WAKAD, PUNE 411 057. PAN : AASPB3588Q . RESPONDENT ITA NO.717/PN/2013 (ASSESSMENT YEAR : 2009-10) ASHOK NARAYAN BHOSLE, BUNGLOW AT KAVERINAGAR, PRATHAM HOUSING SOCIETY, WAKAD, PUNE 411 057. PAN : AASPB3588Q . APPELLANT VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE- 8, PUNE. . RESPONDENT DEPARTMENT BY : MR. S. P. WALIMBE ASSESSEE BY : MR. VIJAY KENDHE DATE OF HEARING : 23-06-2014 DATE OF PRONOUNCEMENT : 26-06-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED CROSS-APPEALS, EACH BY THE REVENUE AN D THE ASSESSEE, PERTAINING TO THE ASSESSMENT YEAR 2009-10, WERE HEA RD TOGETHER AND ARE BEING DISPOSED-OFF BY WAY OF A CONSOLIDATED ORDER F OR THE SAKE OF CONVENIENCE AND BREVITY. THE CAPTIONED CROSS-APPEALS ARE DIREC TED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V, PUNE DATED 14.11.2012 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 29.12.2011 PAS SED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). ITA NO.404/PN/2013 ITA NO.717/PN/2013 2. THE ASSESSEE BEFORE US IS AN INDIVIDUAL AND IS, INTER-ALIA, ENGAGED IN THE BUSINESS OF MANUFACTURING AND JOB WORKS OF PRES S TOLLS, JIGS FIXTURES, WINDMILL PARTS, ETC. AND TRADING IN SHARES. FOR TH E ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE FILED A RETURN OF INCOME DE CLARING TOTAL INCOME OF RS.17,78,06,186/- WHICH WAS SUBJECT TO SCRUTINY ASS ESSMENT U/S 143(3) OF THE ACT WHEREBY THE TOTAL INCOME HAS BEEN DETERMINED AT RS.19,15,86,490/- AFTER MAKING CERTAIN DISALLOWANCES/ADDITIONS. THE DISALL OWANCES/ADDITIONS MADE BY THE ASSESSING OFFICER WERE CARRIED IN APPEAL BEFORE THE CIT(A), WHO HAS ALLOWED PARTIAL RELIEF. NOT BEING SATISFIED WITH T HE PARTIAL RELIEF ALLOWED BY THE CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US AND THE REVENUE IS IN APPEAL BY WAY OF A CROSS-APPEAL ON THE RELIEFS ALLOWED BY THE CIT(A). IN THIS BACKGROUND, WE MAY NOW CONSIDER THE ASSESSEES APPE AL WHEREIN THE FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISED :- 1. THE LEARNED CIT (APPEALS)-V, PUNE HAS ERRED IN LAW AS WELL AS IN FACTS WHILE CONFIRMING THE ADDITION OF RS.12, 08,968/- IN RESPECT OF LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION UND ER RULE 115 OF THE INCOME TAX RULES SINCE THESE RULES ARE NOT APPLICAB LE TO THE ASSESSEE. 2. ALTERNATIVELY AND WITHOUT PREJUDICING THE GROUND S OF APPEAL NO.1 HERE IN ABOVE THE PROVISION OF RULE 115 BE COR RECTLY APPLIED AND THE ADDITION BE WORKED OUT CORRECTLY AS GIVEN IN ANNEXU RE AS APPENDED HERE TO AND THE DISALLOWANCE/ADDITION BE RESTRICTED TO A RE ASONABLE AMOUNT. 3. THE LEARNED CIT (APPEALS)-V, PUNE HAS ERRED IN L AW AS WELL AS IN FACTS WHILE CONFIRMING THE ADDITION RS.1,69,2 14/- BEING THE AMOUNT OF CONTRIBUTION TO GROUP GRATUITY FUND ON THE GROUND T HAT THE ASSESSEE HAS NOT SET UP APPROVED WITHOUT IGNORING THE FACT THAT THAT ASSESSEE HAS ALREADY FILED THE AGREEMENT BETWEEN LIC AND ASSESSE E WITH THE INCOME TAX DEPARTMENT FOR APPROVAL WITHIN PRESCRIBED TIME AND THE LEARNED COMMISSIONER OF INCOME TAX HAS NOT PROCESSED THE SA ME. 4. THE LEARNED CIT (APPEALS)-V, PUNE HAS ERRED IN L AW AS WELL AS IN FACTS WHILE CONFIRMING THE ADDITION RS.4,88,2 66/- UNDER RULE 8D READ WITH SEC. 14A IN RESPECT OF DIVIDEND INCOME RS.10,5 3,836/- BEING EXEMPT U/S.10 SINCE THE ASSESSEE HAS INVESTED THE FUNDS IN SHARES AND MUTUAL FUNDS OUT OF SURPLUS GENERATED FROM BUSINESS AND NO BORROWED FUNDS ARE UTILIZED FOR THE SAME AND IN PARTICULAR S INCE NO EXPENDITURE OF WHATSOEVER NATURE IS CLAIMED IN THE BOOKS OF ACCOUN TS IN RESPECT OF EARNING THE SAID DIVIDEND INCOME AND IN EFFECT PROV ISION OF RULE 8D READ WITH SEC. 14A ARE NOT APPLICABLE IN THE INSTANT CAS E OF THE ASSESSEE. 5. ALTERNATIVELY AND WITHOUT PREJUDICE TO THE GROUN D OF APPEAL NO.6 HEREINABOVE THE ADDITION BE REDUCED TO THE REA SONABLE EXTENT BY APPLYING CORRECT INTERPRETATION OF RULE 8D READ WIT H SECTION 14A OF THE INCOME TAX ACT. ITA NO.404/PN/2013 ITA NO.717/PN/2013 3. THE GROUNDS OF APPEAL NO.1 AND 2 RELATE TO AN AD DITION OF RS.12,08,968/- SUSTAINED BY THE CIT(A) ON ACCOUNT O F APPLICATION OF RULE 115 OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) I N ORDER TO CALCULATE THE VALUE IN INDIAN RUPEES OF INCOME ARISING IN FOREIGN CURRENCY. RULE 115 OF THE RULES PRESCRIBES THAT THE RATE OF EXCHANGE FOR THE CALCULATION OF THE VALUE IN RUPEES OF ANY INCOME ARISING TO THE ASSESSEE IN FOR EIGN CURRENCY SHALL BE THE TELEGRAPHIC TRANSFER BUYING RATE OF SUCH CURRENCY A S ON THE SPECIFIED DATE. IN RESPECT OF INCOME CHARGEABLE UNDER THE HEAD PROFIT S AND GAINS OF BUSINESS AND PROFESSION THE SPECIFIED DATE HAS BEEN EXPLA INED TO BE THE LAST DAY OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER CONSIDERATION. THE ASSESSEE BEFORE US IS ENGAGED IN IMPORT OF GOODS FR OM ABROAD AS WELL AS EXPORT OF GOODS ABROAD. THE ASSESSING OFFICER EXAM INED THE DETAILS OF FOREIGN EXCHANGE LOSS/GAIN ACCOUNTED BY THE ASSESSE E. THE ASSESSING OFFICER NOTICED THAT THE GAIN/LOSS ARISING IN RELAT ION TO THE AMOUNTS PAYABLE WAS TO BE ACCOUNTED FOR ON THE BASIS OF THE FOREIGN EXCHANGE RATE PREVAILING AS ON THE LAST DAY OF THE PREVIOUS DATE I.E. 31.03. 2009. ACCORDINGLY, THE ASSESSEE WAS SHOW-CAUSED TO SUBMIT A WORKING AS PER RULE 115 OF THE RULES. THE ASSESSEE RESISTED THE APPLICATION OF RULE 115 O F THE RULES BUT CALCULATED AN AMOUNT OF RS.52,74,305/- WHICH WAS LIABLE TO BE ADDED TO INCOME ON AN APPLICATION OF RULE 115 OF THE RULES. THE SAID AMO UNT WAS ADDED TO THE RETURNED INCOME BY THE ASSESSING OFFICER. IN APPEA L, THE CIT(A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER IN-PRINCIPLE BUT RED UCED THE DISALLOWANCE TO RS.12,08,968/- ON THE GROUND THAT ONE OF THE TRANSA CTIONS PERTAINING TO UNIT EXP 005 PERTAINED TO ANOTHER ASSESSMENT YEAR. AGAI NST THE ADDITION SUSTAINED BY THE CIT(A), ASSESSEE IS IN APPEAL BEFO RE US. 4. BEFORE US, THE LEARNED COUNSEL HAS SUBMITTED THA T RULE 115 OF THE RULES IS NOT APPLICABLE IN THE PRESENT CASE SINCE ASSESSE E HAS DULY REALIZED THE AMOUNTS DURING THE YEAR UNDER CONSIDERATION ITSELF. ITA NO.404/PN/2013 ITA NO.717/PN/2013 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS DEFENDED THE ORDER OF THE LOWER AUTHORITIES BY PLAC ING RELIANCE ON THE SAME. 6. HAVING CONSIDERED THE RIVAL STANDS, WE FIND NO R EASON TO INTERFERE WITH THE CONCLUSION DRAWN BY THE CIT(A), WHICH READ AS U NDER :- 6. I HAVE CAREFULLY CONSIDERED THE CASE AS WELL AS REPLY OF THE APPELLANT. IN THIS CASE, THE ASSESSING OFFICER HAS APPLIED RULE 115 OF INCOME- TAX RULES IN RESPECT OF FOREIGN EXCHANGE LOSS PERTA INING TO AMOUNT PAYABLE AS ON 31.03.2008, AS HE WAS OF THE VIEW THAT THE SA ME HAS TO BE CALCULATED AS PER RULE 115 OF THE INCOME-TAX RULES. THE STAND OF THE ASSESSING OFFICER IN INVOKING PROVISIONS OF RULE 115 IS QUITE CORRECT. THE ASSESSING OFFICER HAS PASSED ORDER U/S. 154 OF THE INCOME-TAX ACT AS FAR AS QUANTIFICATION IS CONCERNED WHICH IS A SUBJECT-MATTER OF GROUND NO.2. THEREFORE, TECHNICALLY APPLICATION OF RULE 115 IS CORRECT AND ACCORDINGLY, ACTION OF THE ASSESSING OFFICER IS UPHELD. THUS, THE GROUND IS DISMISSED. 7. THE AFORESAID DISCUSSION BY THE CIT(A) CLEARLY S HOWS THAT RULE 115 OF THE RULES HAS BEEN INVOKED BY THE INCOME-TAX AUTHOR ITIES WITH RESPECT TO AMOUNT PAYABLE IN FOREIGN CURRENCY AS ON THE CLOS E OF THE PREVIOUS YEAR; THUS, THERE IS NO JUSTIFICATION FOR THE ASSESSEES REPRESENTATIVE TO SAY THAT THE IMPUGNED AMOUNT IS RELATABLE TO FOREIGN EXCHANGE PR OCEEDS REALIZED DURING THE YEAR ITSELF. IN ANY CASE, THERE IS NO MATERIAL TO SUPPORT THE ASSERTIONS OF THE ASSESSEE. THUS, NO ERROR CAN BE FOUND IN THE A CTION OF THE INCOME-TAX AUTHORITIES, HAVING REGARD TO THE EXPLICIT PROVISIO NS OF RULE 115 OF THE RULES. THUS, ON GROUNDS OF APPEAL NOS.1 AND 2, ASSESSEE HA S TO FAIL. 8. BY WAY OF GROUND OF APPEAL NO.3, THE GRIEVANCE O F THE ASSESSEE IS AGAINST THE ACTION OF THE CIT(A) IN SUSTAINING THE ADDITION OF RS.1,69,214/- REPRESENTING CONTRIBUTION TO THE GROUP GRATUITY FUN D. THE LOWER AUTHORITIES HAVE DISALLOWED THE CONTRIBUTION TO THE GROUP GRATU ITY FUND ON THE GROUND THAT THE GROUP GRATUITY SCHEME WAS NOT APPROVED BY THE C OMPETENT AUTHORITY. 9. IN THIS CONNECTION, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DURING THE COURSE OF THE PROCEEDINGS BEFORE THE LOW ER AUTHORITIES, ASSESSEES ITA NO.404/PN/2013 ITA NO.717/PN/2013 APPLICATION SEEKING APPROVAL TO THE GROUP GRATUITY SCHEME WAS UNDER PROCESS AND THE COMMISSIONER OF INCOME TAX-V, PUNE VIDE ORD ER DATED 20.09.2013 HAS SINCE ACCORDED APPROVAL TO THE GROUP GRATUITY S CHEME. THEREFORE, IT IS POINTED OUT THAT THE OBJECTION RAISED BY THE LOWER AUTHORITIES TO DENY THE DEDUCTION ON ACCOUNT OF CONTRIBUTIONS PAID TO THE G ROUP GRATUITY FUND, NO LONGER REMAINS AND THEREFORE THE DEDUCTION BE ALLOW ED. THE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX-V, PUNE DATED 20. 09.2013 APPROVING THE GROUP GRATUITY SCHEME OF ULTRA ENGINEERS EMPLOYEES GROUP GRATUITY CUM ASSURANCE SCHEME HAS BEEN PLACED ON RECORD. 10. IN VIEW OF THE AFORESAID POSITION CANVASSED BY THE ASSESSEE WHICH HAS NOT BEEN CONTROVERTED BY THE LEARNED DEPARTMENTAL R EPRESENTATIVE, WE DEEM IT FIT AND PROPER TO DIRECT THE ASSESSING OFFICER T O CONSIDER THE APPROVAL THE COMMISSIONER OF INCOME TAX-V, PUNE DATED 20.09.2013 (SUPRA) AND ALLOW THE CLAIM OF THE ASSESSEE ON ACCOUNT OF CONTRIBUTION TO THE GROUP GRATUITY FUND AS PER LAW. THUS, ON THIS GROUND ASSESSEE SUCCEEDS . 11. BY WAY OF GROUNDS OF APPEAL NO.4 AND 5, THE PLE A OF THE ASSESSEE IS THAT THE LOWER AUTHORITIES HAVE ERRED IN MAKING AN ADDITION OF RS.4,88,266/- BY APPLYING SECTION 14A OF THE ACT. 12. BRIEFLY PUT, THE FACTS RELEVANT FOR THE PRESENT CONTROVERSY ARE THAT THE ASSESSEE HAD EARNED AN INCOME OF RS.10,53,836/- BY WAY OF DIVIDENDS WHICH WAS EXEMPT U/S 10(34) AND/OR SECTION 10(38) OF THE ACT. IT WAS ALSO NOTICED THAT AS ON 31.03.2009 ASSESSEE HAD INVESTMENT OF RS .4,08,50,000/- IN MUTUAL FUNDS. THE ASSESSEE WAS SHOW-CAUSED BY THE ASSESSI NG OFFICER AS TO WHY EXPENDITURE INCURRED IN RELATION TO THE AFORESAID E XEMPT INCOME BE NOT DISALLOWED IN TERMS OF SECTION 14A OF THE ACT. IN RESPONSE, ASSESSEE SUBMITTED THAT THERE WAS NO EXPENDITURE INVOLVED IN COLLECTING THE DIVIDEND INCOME. ASSESSEE ALSO SUBMITTED THAT THERE WAS NO INTEREST EXPENDITURE ITA NO.404/PN/2013 ITA NO.717/PN/2013 INVOLVED IN MAKING THE IMPUGNED INVESTMENT. WITH R EGARD TO SECURED LOANS, IT WAS EXPLAINED BY THE ASSESSEE THAT THE SAME WERE FO R THE PURPOSES OF ACQUIRING MACHINERIES. WITH REGARD TO THE CASH CRE DIT FACILITY AVAILED FROM THE BANK, IT WAS CONTENDED THAT THERE WAS AVERAGE DEBIT BALANCE; AND, HOWEVER WHENEVER THERE WAS A CREDIT BALANCE THE SAME WAS UT ILIZED FOR THE PURPOSES OF BUSINESS TRANSACTIONS AND NOT FOR MAKING INVESTMENT S. THE ASSESSEE ALSO POINTED OUT THAT HAVING REGARD TO THE RESERVES AND PROFITS FOR THE INSTANT YEAR AS WELL AS FOR THE IMMEDIATELY PRECEDING YEAR, THE SAME WERE SUFFICIENT TO COVER THE INVESTMENTS MADE AND THEREFORE IT WAS CON TENDED THAT THE INVESTMENTS IN MUTUAL FUNDS WERE WHOLLY OUT OF THE PROFITS OF BUSINESS AND NOT OUT OF BORROWED FUNDS. 13. THE EXPLANATION RENDERED BY THE ASSESSEE WAS NO T FOUND ACCEPTABLE BY THE ASSESSING OFFICER. FIRSTLY, THE ASSESSING O FFICER NOTED THAT THE EXPENSES SUMMARY SUBMITTED BY THE FUND MANAGERS OF THE ASSESSEE SHOWED FEE AND OTHER EXPENSES BEING CHARGED IN RELATIO N TO THE INVESTMENTS IN MUTUAL FUNDS AND SHARES. SECONDLY, THE ASSESSING O FFICER ALSO NOTED THAT IT COULD NOT BE ESTABLISHED THAT THE INVESTMENTS WERE MADE OUT OF INTEREST-FREE FUNDS HAVING REGARD TO THE MATERIAL ON RECORD AND T HAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH THAT INVESTMENTS WAS MADE OUT THE INTEREST-FREE FUNDS. THE ASSESSING OFFICER HAS NOTED IN PARA 9.2 OF THE ASSESSMENT ORDER THAT THE PLEAS RAISED BY THE ASSESSEE WERE NOT SUBSTANTIATED BY ANY DETAILS. IN THESE CIRCUMSTANCES, THE ASSESSING OFFICER INVOKED RULE 8 D OF THE RULES IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT. AS PE R THE WORKING GIVEN IN PARA 9.7 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS WORKED OUT THE DISALLOWANCE IN TERMS OF RULE 8D OF THE RULES AT RS .4,88,266/-. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO HAS SINCE UPHELD THE ACTION OF THE ASSESSING OFFICER APPLYING RULE 8D OF THE RU LES FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 14A OF THE ACT. HOWEVER , HE HAS REDUCED THE DISALLOWANCE TO RS.4,36,782/- INSTEAD OF RS.4,88,26 6/- ON ACCOUNT OF A ITA NO.404/PN/2013 ITA NO.717/PN/2013 CALCULATION MISTAKE. NOT BEING SATISFIED WITH THE ORDER OF THE CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US. 14. BEFORE US, THE ONLY PLEA RAISED BY THE ASSESSEE IS THAT THE PROFITS EARNED BY THE ASSESSEE DURING THE YEAR AND THE PREC EDING ASSESSMENT YEAR ARE ENOUGH TO COVER THE INVESTMENT IN MUTUAL FUNDS AND THEREFORE IT COULD NOT BE SAID THAT ANY EXPENDITURE ON ACCOUNT OF INTEREST HAS BEEN INCURRED FOR MAKING THE INVESTMENTS WHICH HAVE YIELDED THE EXEMP T INCOME. IT WAS ALSO ASSERTED THAT NO EXPENDITURE HAS BEEN INCURRED FOR COLLECTION OF DIVIDEND INCOME. IN THESE CIRCUMSTANCES, IT IS SOUGHT TO BE MADE OUT THAT THE APPLICATION OF RULE 8D OF THE RULES TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT IS UNJUSTIFIED. 15. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW BY PL ACING RELIANCE ON THE SAME. 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN THE PRESENT CASE, THE STAND OF THE ASSESSEE IS THAT NO INTEREST HAS BEEN INCURRED ON FUNDS UTILIZED FOR MAKING IMPUGNED INVESTMENTS IN MUTUAL FUNDS, WHICH HAVE YIELDED EXEMPT INCOME. IN THIS CONNECTION, THE POINT BROUG HT OUT BY THE INCOME-TAX AUTHORITIES IS THAT THE INVESTMENTS HAVE BEEN MADE OUT OF THE CASH CREDIT (OVERDRAFT) ACCOUNT MAINTAINED BY THE ASSESSEE WITH ITS BANK. AS PER THE REVENUE, THE UTILIZATION OF CASH CREDIT ACCOUNT TO MAKE THE INVESTMENTS SHOWS THAT ASSESSEE HAS INDEED UTILIZED INTEREST BEARING FUNDS FOR MAKING THE IMPUGNED INVESTMENTS. THE ASSESSEE HAS SOUGHT TO C OUNTER THE SAME BY STATING THAT THE CASH CREDIT ACCOUNT FACILITY WAS H AVING A DEBIT BALANCE ON AN AVERAGE AND WHENEVER THERE WAS A CREDIT BALANCE THE SAME WAS UTILIZED FOR BUSINESS PURPOSES AND NOT FOR MAKING INVESTMENTS. THE AFORESAID ASSERTION OF THE ASSESSEE HAS BEEN FOUND TO BE UNSUBSTANTIATE D BY THE ASSESSING OFFICER, AS PER HIS OBSERVATIONS IN PARA 9.2 OF THE ASSESSMENT ORDER. ITA NO.404/PN/2013 ITA NO.717/PN/2013 CONSPICUOUSLY, THE AFORESAID POSITION PREVAILED BEF ORE THE CIT(A); AND, THE SAME CONTINUES BEFORE US ALSO. THUS, IN THE ABSENC E OF ANY FACTUAL SUPPORT THE PLEA OF THE ASSESSEE DESERVES TO BE REJECTED. ACCORDINGLY, THE ASSESSING OFFICER WAS JUSTIFIED IN INVOKING RULE 8D OF THE RU LES IN ORDER TO COMPUTE THE DISALLOWANCE U/S 14A OF THE ACT. MOREOVER, THE ASS ESSING OFFICER HAS ELABORATELY DISCUSSED THE ISSUE AND IN-PARTICULAR, HE HAS POINTED OUT EXISTENCE OF EXPENSES RELATING TO THE EARNING OF INCOME FROM MUTUAL FUNDS, BEING FEE AND OTHER EXPENSES CHARGED BY FUND MANAGER, ETC.. THEREFORE, CONSIDERING THE OVERALL FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE LOWER AUTHORITIES WERE JUSTIFIED IN APPLYING RULE 8D OF T HE RULES FOR THE PURPOSES OF COMPUTING THE AMOUNT DISALLOWABLE U/S 14A OF THE AC T. IN SO FAR AS THE QUANTIFICATION OF DISALLOWANCE IS CONCERNED, AN APP ROPRIATE RELIEF HAS ALREADY BEEN ALLOWED BY THE CIT(A) AND THEREFORE WE FIND NO REASON TO INTERFERE WITH THE DISALLOWANCE SUSTAINED BY THE CIT(A). AS A RES ULT, WITH RESPECT TO THE GROUNDS OF APPEAL NO.4 AND 5, ASSESSEE FAILS. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 18. NOW, WE MAY CONSIDER THE APPEAL OF THE REVENUE WHEREIN THE ONLY ISSUE RAISED IS WITH REGARD TO THE ACTION OF THE CI T(A) IN DELETING THE ADDITION OF RS.69,68,516/- MADE BY THE ASSESSING OFFICER BY INV OKING SECTION 41(1) OF THE ACT. 19. IN THIS CONNECTION, BRIEF FACTS ARE THAT THE AS SESSING OFFICER OBSERVED THAT ASSESSEE WAS GRANTED VAT ACCOUNT OF RS.69,68,5 16/-, WHICH WAS NOT CREDITED TO THE PROFIT & LOSS ACCOUNT AND THEREFORE THE ASSESSING OFFICER SHOW-CAUSED THE ASSESSEE AS TO WHY THE SAME WAS NOT TAXABLE AS BENEFIT BY WAY OF REMISSION OF A LIABILITY WITHIN THE MEANING OF SECTION 41(1) OF THE ACT. THE ASSESSEE RESISTED THE ACTION OF THE ASSESSING O FFICER AND EXPLAINED THAT THE REFUND WAS OUT OF EXCESS PAYMENT OF VAT MADE IN RELATION TO THE ITA NO.404/PN/2013 ITA NO.717/PN/2013 PURCHASES. THE ASSESSEE ALSO EXPLAINED THAT SECTIO N 41(1) OF THE ACT WAS NOT APPLICABLE SINCE ASSESSEE HAD NOT CLAIMED ANY DEDUC TION IN THE PAST ON ACCOUNT OF PAYMENT OF VAT ON PURCHASES. APART FROM OTHER ARGUMENTS ASSESSEE ALSO POINTED OUT THAT OUT OF RS.69,68,516/ - A SUM OF RS.15.72 LACS IN ANY CASE RELATED TO CAPITAL TRANSACTIONS AND NOT IN RELATION TO ANY REVENUE TRANSACTION. THE ASSESSING OFFICER, HOWEVER, ASSES SED THE AFORESAID AMOUNT OF REFUND OF VAT AS INCOME IN THE HANDS OF THE ASSE SSEE. 20. THE CIT(A) HAS SINCE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. THE CIT(A) NOTED THAT SECTION 41(1) OF TH E ACT WAS NOT APPLICABLE TO THE IMPUGNED TRANSACTION SINCE THE VAT PAYMENTS WER E NEITHER DEBITED AND NOR CREDITED TO THE PROFIT & LOSS ACCOUNT. THE CIT (A) HAS FOUND THAT ASSESSEE MAINTAINED THE SEPARATE ACCOUNT FOR VAT PAYMENTS AN D REFUNDS; AND, THAT WHEN A PAYMENT IS NOT CLAIMED AS EXPENDITURE OR DED UCTION, THEN THE RECEIPT OF REFUND ON ACCOUNT OF EXCESS PAYMENT OF VAT, WOUL D NOT BE INCLUDIBLE AS INCOME WITHIN THE MEANING OF SECTION 41(1) OF THE A CT. THE CIT(A) HAS DEALT WITH THE FACTUAL ASPECT OF THE MATTER IN PARA 17 OF HIS ORDER AND HAS CONCLUDED THAT THE ADDITION WAS NOT JUSTIFIED. IN SUM AND SU BSTANCE, THE CIT(A) FOUND THAT PAYMENT OF VAT WAS NOT ALLOWED AS A DEDUCTION IN THE PAST YEARS OR THE CURRENT YEAR AND THEREFORE THE QUESTION OF APPLICAB ILITY OF SECTION 41(1) OF THE ACT DOES NOT AROSE AS A RESULT OF REFUND OF VAT. A GAINST THE AFORESAID DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT CONTROVERTED THE FACTUAL FINDINGS ARRIVED AT BY THE CIT(A) WITH REGA RD TO IN-APPLICABILITY OF SECTION 41(1) OF THE ACT, IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. SO HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATIVE HA S SUBMITTED THAT THE ASSESSING OFFICER HAD RELIED UPON THE JUDGEMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MYSORE THERMO ELECTRIC (P ) LTD. VS. CIT, (1996) 221 ITR 504 (KARNATAKA) WHEREBY IT HAS BEEN HELD THAT T HE VAT REFUND IS LIABLE TO ITA NO.404/PN/2013 ITA NO.717/PN/2013 BE TAXED EVEN IF IN THE PAST NO DEDUCTION HAS BEEN CLAIMED IN THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF PAYMENT OF VAT. 22. ON THE OTHER HAND, THE LEARNED REPRESENTATIVE F OR THE ASSESSEE HAS VEHEMENTLY DEFENDED THE ORDER OF THE CIT(A) BY POIN TING OUT THAT INVOKING OF SECTION 41(1) OF THE ACT IS POSSIBLE ONLY IN A SITU ATION WHERE REFUND OR REMISSION OF LIABILITY ARISES IN A CASE WHERE THE S AME HAS BEEN ALLOWED AS DEDUCTION, BUT IN THE PRESENT CASE, REFUND IN QUEST ION IS NOT LINKED TO ANY ALLOWANCE OR DEDUCTION OF EXPENDITURE CLAIMED IN TH E PAST. 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. SECTION 41(1) OF THE ACT HAS BEEN INVOKED BY THE ASSESSING OFFICER I N THE PRESENT CASE TO INCLUDE AN AMOUNT OF VAT REFUND AS INCOME IN THE HA NDS OF THE ASSESSEE. THE ASSESSEE HAS RESISTED THE APPLICABILITY OF SECT ION 41(1) OF THE ACT ON THE GROUND THAT SECTION 41(1) COVERS A SITUATION WHERE ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF A LOSS EXPENDITURE OR A TRADING LIABILITY INCURRED BY THE ASSESSEE; AND, FOR WHICH SUBSEQUENTLY ASSESSEE OBTAINS A BENEFIT IN CASH OR OTHERWISE BY WAY OF REMISSION OR CESSATION OF SUCH LIABILITY. THE PHRASEOLOGY OF SE CTION 41(1) OF THE ACT LENDS IT TO AN INTERPRETATION THAT IT SEEKS TO TAX AN AMOUNT , WHICH HAS BEEN ALLOWED DEDUCTION IN THE ASSESSMENT FOR ANY PAST YEAR OR IN THE YEAR IN WHICH ASSESSEE GETS A REFUND. THE CASE OF THE ASSESSEE, AND WHICH HAS BEEN UPHELD BY THE CIT(A), IS TO THE EFFECT THAT THE IMP UGNED REFUND OF VAT AMOUNTING TO RS.69,68,516/- WAS NOT CLAIMED AS AN E XPENDITURE OR DEDUCTION EITHER IN THE PAST OR THE CURRENT ASSESSMENT YEAR A ND THEREFORE IT CANNOT BE BROUGHT INTO TAX NET BY APPLYING SECTION 41(1) OF T HE ACT. THE AFORESAID FACTUAL ASSERTION OF THE ASSESSEE HAS BEEN APPRECIATED BY T HE CIT(A) IN THE FOLLOWING MANNER :- ITA NO.404/PN/2013 ITA NO.717/PN/2013 17. THUS, FROM READING OF SEC.41(1), IT IS CLEAR T HAT FIRST CRITERIA TO BE MADE WHILE APPLYING SEC. 41(1) THAT AN ALLOWANCE OR DEDUCTION MUST HAVE BEEN MADE IN THE ASSESSMENT YEAR FOR ANY YEAR IN RE SPECT OF THE AMOUNT WHICH IS SOUGHT TO BE TREATED AS INCOME U/S. 41(1) OF THE INCOME-TAX ACT. IN THIS CASE, FROM THE REPLY FILED BY THE APPELLANT, I T IS SEEN THAT VAT IS NEITHER DEBITED NOR CREDITED IN THE PROFIT & LOSS A/C. THE APPELLANT HAS SUBMITTED THAT A SEPARATE ACCOUNT IS MAINTAINED FOR VAT AND THE SA ME IS NOT CLAIMED AS EXPENDITURE WHEN PAYMENT IS MADE AND ACCORDINGLY TH E SAME WILL NOT FALL UNDER THE HEAD INCOME, WHEN REFUND IS CLAIMED. . . 18. THEREFORE, SINCE THE AMOUNT OF VAT IS NEITHER B EING CLAIMED OR ALLOWED AS DEDUCTION IN ANY EARLIER ASSESSMENT, THERE IS NO QUESTION OF TAXING THE SAME U/S. 41(1) OF INCOME-TAX ACT. IN FA CT, IT IS THE APPELLANT'S OWN MONEY WHICH IS PAID WHILE MAKING PURCHASES, PAI D AS VAT WHICH IS REFUNDED AFTER SETTING OFF OF VAT AS PER PROVISIONS OF MAHARASHTRA VALUE ADDED TAX 2002. THE ASSESSING OFFICER HAS RELIED UP ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. THIRUM ALAI SWAMY NAIDU AND SONS 230 (ITR) 534. HOWEVER, IT IS SEEN THAT TH E FACTS ARE DISTINGUISHABLE IN THE SENSE THAT IN THAT CASE SALE S TAX DEDUCTION WAS CLAIMED AND ALLOWED AND THEREFORE, IT WAS HELD THAT WHEN THE AMOUNT IS REFUNDED THE SAME IS TAXABLE U/S. 41(1) OF INCOME-T AX ACT. THE ASSESSING OFFICER HAS ALSO RELIED UPON HON'BLE KARNATAKA HIGH COURT'S DECISION IN THE CASE OF MYSORE THERMO ELECTRIC (P) LTD. VS. CIT 221 ITR 504. IN THAT CASE IT IS SEEN THAT THE SALES TAX PAYMENT WAS DISPUTED AND THEREFORE IT WAS NOT CLAIMED IN THE PROFIT & LOSS A/C AND WHEN THE ASSES SEE WON IN APPEAL THE SAME WAS REFUNDED. THE HON'BLE KARNATAKA HIGH COURT HELD THAT THE SAME IS TAXABLE U/S. 41(1) OF INCOME-TAX ACT AS NON CLAI M OF THE SAME IN PROFIT & LOSS A/C HAS NOTHING TO DO WITH THE ALLOWABILITY OF THE AMOUNT. SINCE SALES TAX PAYMENT WAS ALLOWABLE IN THE PROFIT & LOSS A/C THE SAME WAS REQUIRED TO BE TAXED U/S. 41(1) OF INCOME-TAX ACT. IN THIS C ASE THE FACTS ARE DIFFERENT IN THE SENSE THAT THE ISSUE HAS BEEN DECIDED ON THE BASIS OF ALLOWABILITY AND NOT ON ACCOUNT OF PRINCIPLES OF ACCOUNTING. THE HON'BLE SUPREME COURT IN THE CASE OF POLYFLEX (LNDIA)(P) LTD. VS. CIT 257 ITR 343 HAS HELD THAT SEC. 41(1) APPLIES IF IN THE ASSESSMENT FOR THE REL EVANT YEAR AN ALLOWANCE OF DEDUCTION HAS BEEN MADE IN RESPECT OF ANY LOSS E XPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. SINCE, IN THIS CASE THERE WAS NO ALLOWANCE OF ANY EXPENDITURE THE QUESTION OF APPLIC ABILITY OF SEC. 41(1), DOES NOT ARISE. THEREFORE, ON THE FACTS AND CIRCUM STANCES OF THE CASE, IT IS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED I N TREATING THE AMOUNT OF RS.69,68,516/- U/S. 41(1) OF THE INCOME-TAX ACT. A CCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N. THE GROUND IS THUS ALLOWED. 24. THE AFORESAID FINDINGS OF THE CIT(A), IN OUR VI EW, ARE FAIR AND APT, DO NOT REQUIRE ANY INTERFERENCE FROM OUR SIDE. THE RELIANC E PLACED BY THE ASSESSING OFFICER ON THE JUDGEMENT OF THE HONBLE KARNATAKA H IGH COURT IN THE CASE OF MYSORE THERMO ELECTRIC (P) LTD. (SUPRA) HAS ALSO BE EN FOUND BY THE CIT(A) TO BE MISPLACED ON ACCOUNT OF DISTINCTION IN FACTS. I N-FACT, THE CIT(A) HAS RELIED UPON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF POLYFLEX (INDIA) (P) LTD. VS. CIT (2002) 257 ITR 343 (SC) TO EMPHASIZE THAT SECTION ITA NO.404/PN/2013 ITA NO.717/PN/2013 41(1) OF THE ACT WOULD APPLY ONLY IF IN THE ASSESSM ENT FOR RELEVANT YEAR AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN RESPECT OF ANY LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. SINCE IN THE PRESENT CASE, IN THE ASSESSMENT FOR ANY YEAR NO ALLOWANCE OR DEDUCTION O F ANY EXPENDITURE IN RESPECT OF THE IMPUGNED VAT AMOUNT HAS BEEN ALLOWED , FOLLOWING THE RATIO OF THE AFORESAID JUDGEMENT OF THE HONBLE SUPREME COUR T THE APPLICABILITY OF SECTION 41(1) OF THE ACT IS NOT JUSTIFIED. THUS HA VING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND NO REASON TO DIS TRACT FROM THE ORDER OF THE CIT(A) ON THIS ASPECT AND ACCORDINGLY, THE REVENUE FAILS IN ITS APPEAL. 25. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 26. RESULTANTLY, WHEREAS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH JUNE, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 26 TH JUNE, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-V, PUNE; 4) THE CIT-V, 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