ASST CIT CIR 1, KALYAN V. SISTONS INDIA P.LTD, THANE

ITA 7239/MUM/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0515 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 05-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAM TIWARI
• Assessee Lawyers: HEMA R BHANUSHALI
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI BEFORE SHRI P K BANSAL, VICE PRESIDENT & SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO. 7239/MUM/2014 ASSESSMENT YEAR : 2010-11 ACIT CIRCLE - 1, KALYAN VS. M/S. SISTONS INDIA PVT LTD W-76, MIDC PHASE-II, DOMBIVLI (EAST) THANE PAN AADCS9489D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAM TIWARI RESPONDENT BY : SMT HEMA R BHANUSHALI DATE OF HEARING : 02. 08 .2017 DATE OF PRONOUNCEMENT : 08 .0 8 .2017 O R D E R PER P K BANSAL, VICE-PRESIDENT: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF THE CIT(A)-I, THANE, DATED 11.08.2014, FOR A.Y. 2010-11 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, AND IN LAW, WHETHER THE LD. CIT(A)-I, THANE WAS CORRECT IN DELETING ADDITION MADE ON ACCOUNT OF DISALLOWANCE O FRS.12,0 0,781/- U/S 14A R.W RULE 8D. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, WHETHER THE LD. CIT(A)-I, THANE WAS CORRECT IN DELETING ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF ` 26,54,640/- ITA NO.7239/MUM/2014 SISTONS INDIA P LTD 2 3. THE BRIEF FACTS RELATING TO GROUND NO.1 IS THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME AMOUNTING TO ` 15,49,833/- DURING THE IMPUGNED ASSESSMENT YEAR, WHICH WAS CLAIMED BY THE ASSESSEE TO BE EXEMPT. HOWEVER, THE ASSESSING OFFICER DISALLOWED PROPORTIO NATE EXPENDITURE OF ` 17,98,642/- U/S 14A READ WITH RULE 8D. AGGRIEVED THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A) MADE NO DISAL LOWANCE IN TERMS OF RULE 8D(2)(II) BUT RESTRICTED THE DISALLOWANCE TO ` 5,97,861/- BEING 0.5% OF THE TOTAL INVESTMENTS IN TERMS OF THE PROVISIONS OF RUL E 8D(2)(III) BY OBSERVING AS UNDER: 11. I HAVE CAREFULLY CONSIDERED THE APPELLANT' S SUBMISSIONS, THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE ASSESS MENT ORDER AND THE FACTS OF THE CASE. THE ISSUE OF DISALLOWANCE OF EXPENDITURE U/S. 14A OF THE I.T. ACT, HAS BEEN EXAMINED IN DETAIL BY MY PREDECESSOR IN THE ASSESSMENT YEAR 2008-09 AS WELL AS IN A.Y. 2 009-10. IN BOTH THESE YEARS, IT WAS HELD THAT NO DISALLOWANCE WAS C ALLED FOR OUT OF INTEREST EXPENDITURE AS PER RULE 8D2(II) AND THE DI SALLOWANCE WAS RESTRICTED TO 0.5% OF THE TOTAL ASSETS AS PER RULE 8D2(III). THE OBSERVATIONS OF MY PREDECESSOR FOR A.Y. 2009-10 ARE REPRODUCED AS UNDER '3.3. THE ABOVE CONTENTIONS OF THE APPELLANT COMPAN Y HAVE BEEN CONSIDERED AND ARE PARTLY ACCEPTABLE. THERE IS A MERIT IN THE ARGUMENTS OF THE AR THAT THE COMPANY IN THE LAST MANY YEARS HAS NOT USED INTEREST BEARING UNSECURED LOANS FOR ACQUIRING THE INVESTMENTS IN SHARES AND MUTUAL FUNDS, WHICH HAVE EARNED THE EXEMPT INCOME. FROM THE PERUS AL OF THE BALANCE SHEETS OF THE COMPANY FROM THE A.Y. 200 3-04 TILL THE YEAR UNDER CONSIDERATION, IT CAN BE OBSERV ED THAT THE UNSECURED LOANS OF THE COMPANY HAVE REMAINED AT ARO UND RS. 221 LAKHS, WHILE IN THE CORRESPONDING PERIOD TH E INVESTMENTS IN THE SHARES AND MUTUAL FUNDS HAVE INC REASED ITA NO.7239/MUM/2014 SISTONS INDIA P LTD 3 FROM RS. 2.40 LAKHS TO RS. 1192.11 LAKHS WHICH CLEA RLY INDICATES THAT THE INVESTMENTS IN THE SHARES AND MU TUAL FUNDS HAVE BEEN MADE, NOT FROM THE BORROWED FUNDS B UT FROM ITS OWN SOURCES BY THE COMPANY. THE APPELLANT COMPANY HAS SUBSTANTIAL SURPLUS FUNDS AND IT IS PRO VED BY THE BANK FIXED DEPOSITS OF THE COMPANY, WHICH ARE A T RS.2865.29 LAKHS AND THE ACCUMULATED PROFITS AT RS. 2447.49 LAKHS AS ON 31.03.2009. ALL THESE FACTS MENTIONED A BOVE PROVE THAT THE COMPANY HAS ENOUGH SURPLUS FUNDS FOR INVESTMENT IN THE SHARES AND MUTUAL FUNDS AND HAS N OT BORROWED ANY FUNDS FOR THESE INVESTMENTS. THEREFORE , THERE IS NO QUESTION OF PAYING ANY INTEREST ON BORROWED F UNDS FOR INVESTMENTS IN THESE STOCKS. AS A CONSEQUENCE, THE APPLICATION OF THE PROVISIONS OF RULE 8D(II) IN THI S CASE IS MISPLACED. 3.4. FURTHER, FROM THE DETAILS FILED, IT CAN BE OBS ERVED THAT THE APPELLANT COMPANY HAS IN FACT EARNED INTEREST I NCOME AMOUNTING TO RS.1,63,33,413/-, WHICH IS INCLUDED IN NET TAXABLE INCOME, OFFERED FOR TAXATION DURING THE PER IOD UNDER CONSIDERATION. THE APPELLANT COMPANY HAS EARN ED NET INTEREST INCOME OF `RS.1,32,70,280/- (RS.1,63,33,41 3 30,63,133), RATHER THAN INTEREST OUTFLOW OF RS.30,6 3,133/- WHICH TAKEN AS THE INTEREST PAYMENT BY THE AO. THE APPELLANT COMPANY HAS NET INTEREST INCOME OF RS.1,32,70,280/- ON WHICH THE DUE TAXES HAVE BEEN P AID IN VIEW OF THE SAME ALSO, THE APPLICABILITY OF THE PRO VISIONS OF RULE 8D(II) IN THIS CASE IS AGAIN MISPLACED AS THE APPELLANT HAS NOT INCURRED ANY INTEREST EXPENDITURE TO EARN T HE EXEMPT INCOME. 3.5, BUT AT THE SAME TIME, IT CANNOT BE DENIED THAT SOME PART OF THE EXISTING ADMINISTRATIVE MACHINERY OF TH E APPELLANT COMPANY MUST HAVE CONTRIBUTED INDIRECTLY TO THE EARNING OF THE EXEMPT DIVIDEND INCOME AND THEREFORE THE ACTION OF THE AO APPLYING THE PROVISIONS OF RULE 8D (2)(III) TO DETERMINE AND DISALLOW THE PROPORTIONATE EXPENDITUR E IN RELATION TO THE EXEMPT INCOME APPEARS TO BE IN THE RIGHT DIRECTION. THE DISALLOWANCE OF THE EXPENDITURE BY T HE AO TO THE EXTENT OF RS. 6,08,404/- BEING THE HALF PERCENT OF THE INVESTMENTS, IS IN ORDER AND THE ADDITION MADE TO T HIS EXTENT AS PER THE PROVISIONS OF SECTION 14A IS CONFIRMED. ' ITA NO.7239/MUM/2014 SISTONS INDIA P LTD 4 12. AS THE FACTS OF THE CASE ARE IDENTICAL TO THE F ACTS OF A.Y. 2009- 10, THE ABOVE REPRODUCED DECISION OF MY PREDECESSOR IS EQUALLY APPLICABLE TO THE APPELLANT'S CASE FOR THE YEAR UND ER CONSIDERATION. THEREFORE, RELYING ON THE ORDER OF MY PREDECESSOR A ND CONSIDERING THE FACTS OF THE CASE, IT IS HELD THAT NO DISALLOWA NCE WAS CALLED FOR IN TERMS OF RULE 8D(2)(II) AND DISALLOWANCE IS REST RICTED TO RS. 5,97,8617- BEING 0.5% OF THE TOTAL INVESTMENTS IN TERMS OF THE PROVISIONS OF RULE 8D(2)(III) OF THE I.T. ACT. TH E AO IS DIRECTED ACCORDINGLY. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE CAR EFULLY CONSIDERED THE SAME. THE LEARNED DR EVEN THOUGH VEHEMENTLY RELIED ON THE ORDER OF THE ASSESSING OFFICER COULD NOT PRODUCE BEFORE US ANY M ATERIAL OR EVIDENCE, WHICH MAY COMPEL US TO REVERSE THE FINDINGS OF THE CIT(A). THE CIT(A) HAS GIVEN A FINDING AFTER APPRECIATING THE FACT THAT NO DISALLOWANCE UNDER RULE 8D(2)(II) CAN BE MADE IN RESPECT OF THE INTEREST EX PENDITURE. WE DO NOT FIND ANY INFIRMITY OR ILLEGALITY IN THE FINDING OF THE C IT(A). WE, THEREFORE, DISMISS GROUND NO.1 TAKEN BY THE REVENUE. 4. GROUND NO.2 RELATES TO DELETION OF THE ADDITION OF ` 26,54,640/- MADE BY THE ASSESSING OFFICER U/S. 36(1)(III). THE BRIE F FACTS RELATING TO THIS ADDITION ARE THAT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD RECEIVED UNSECURED LOANS AMOUNTING TO ` .2,21,22,000/- FROM THE DIRECTORS, ON WHICH INTEREST AMOUNTING TO ` .26,54,640/- HAS BEEN PAID DURING THE YEAR UNDER CONSIDERATION. IT WAS NOTED THAT THE ASSESSEE HAS ALSO INVESTED A SUM OF ` 3,25,00,000/- IN M/S HASSAN BIOMASS COMPANY PVT LT D. THE ASSESSING OFFICER OBSERVED THAT NO APPARENT BENEFIT HAD BEEN DERIVED BY THE ASSESSEE ITA NO.7239/MUM/2014 SISTONS INDIA P LTD 5 FROM THIS INVESTMENT AND HAD DIVERTED INTEREST BEAR ING FUNDS INTO NON- PRODUCTIVE USE BY INVESTING THE SAME IN M/S HASSAN BIOMASS COMPANY PVT LTD. THE ASSESSING OFFICER THEREFORE DISALLOWED TH E INTEREST PAID BY THE ASSESSEE AMOUNTING TO ` .26,54,640/- U/S. 36(1)(III) OF THE I.T.ACT. AGGRI EVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). T HE CIT(A) DELETED THE SAID DISALLOWANCE HENCE, THE REVENUE IS IN APPEAL B EFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE CON SIDERED THE SAME ALONG WITH THE ORDERS OF THE AUTHORITIES BELOW. WE NOTED THAT DURING THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE PAID INTERES T AMOUNTING TO ` 30,63,133/- ON UNSECURED LOAN AND ALSO EARNED INTE REST INCOME AMOUNTING TO ` 1,63,33,413/- RESULTING IN NET INTEREST INCOME AMO UNTING TO ` 1,32,70,280/- AND THE SAME TO TAX. IN VIEW OF THI S FACT, WE DO AGREE WITH THE CIT(A) AND NO DISALLOWANCE OF INTEREST ON UNSEC URED LOANS CAN BE MADE. WE ALSO NOTED THAT THE ASSESSEE HAD INTEREST FREE S URPLUS FUNDS OF ` 2447.49 LACS, WHICH WAS SUFFICIENT TO MEET THE INVESTMENT M ADE BY THE ASSESSEE IN HASSAN BIOMASS COMPANY PVT. LTD. THIS FACT IS CLEA RLY BORNE OUT OF THE ORDER OF THE CIT(A). THE LEARNED DR, EVEN THOUGH RELIED ON THE ORDER OF THE ASSESSING OFFICER, HE COULD NOT CONTRADICT THE FACT THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE MUCH MORE THAN THE INVESTMENT MADE BY THE ASSESSEE IN HASSAN BIOMASS COMPANY PVT. LTD. I N VIEW OF THIS FACT, THE NATURAL INFERENCE WILL BE THAT THE INVESTMENT MADE AMOUNTING TO ITA NO.7239/MUM/2014 SISTONS INDIA P LTD 6 ` 3,25,00,000/- IN HASSAN BIOMASS COMPANY PVT. LTD. ARE NOT OUT OF UNSECURED LOAN BUT OUT OF INTEREST FREE SURPLUS FUN DS AVAILABLE WITH THE ASSESSEE. WE, THEREFORE, CONFIRM THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE OF ` 26,54,640/- MADE BY THE ASSESSING OFFICER U/S. 36( 1)(III) OF THE I T ACT. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH DAY OF AUGUST, 2017. SD/- SD/- (PAWAN SINGH) (P K BANSAL) JUDICIAL MEMBER VICE-PRESIDENT MUMBAI; DATED: 8 TH AUGUST, 2017 SA COPY OF THE ORDER FORWARDED TO : 1. THE APP ELL ANT. 2. THE RESPONDENT. 3. T HE CIT(A), MUMBAI 4. THE CIT 5. DR, E BENCH, ITAT, MUMBAI BY ORDER, #TRUE COPY # ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI