ACIT 2(1), MUMBAI V. FLUANT TRADERS P. LTD, MUMBAI

ITA 7264/MUM/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6218 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 25-10-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 24-12-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P PEERYA
• Assessee Lawyers: F V IRANI
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI S.V. MEHROTRA , ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A.NO. 7264/MUM/2008 ASSESSMENT YEAR : 2005-06 THE ASST. COMMISSIONER OF INCOME- TAX-2(1), ROOM NO. 561, 5TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 VS. M/S. FLUANT TRADERS PVT. LTD., 6-B, RAMPART HOUSE, 6 TH FLOOR, K. DUBASH MARG,MUMBAI 400 001. PAN: AAACF 1571 G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P. PEERYA RESPONDENT BY : SHRI F.V. IRANI O R D E R PER S.V. MEHROTRA, AM: THIS APPEAL BY THE REVENUE, IS DIRECTED AGAINST TH E IMPUGNED ORDER DATED 20.10.2008, PASSED BY THE LEARNED COMMISSIONER OF I NCOME-TAX (APPEALS)-II, MUMBAI, FOR THE ASSESSMENT YEAR 2005-06 ON THE FOLL OWING GROUNDS: 1. THE LEARNED CIT(A) ERRED IN ALLOWING THE INTEREST EXPENSES TO THE EXTENT OF RS.16,25,981/- U/S.14A WITHOUT APPRECIATI NG THE FACT THAT ASSESSEE COMPANY DID NOT HAVE ITS OWN FUNDS AND INV ESTMENT OF RS.76.07 LACS HAD BEEN MADE FROM BORROWED FUNDS OF RS. 1,50,00,000/-. THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE INTEREST OF RS. 16.50 LACS ATTRIBUTA BLE TO THE EARNING OF THE EXEMPT INCOME. 2. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT TH E TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASID E AND THAT OF THE ASSESSING OFFICER RESTORED. 2. THE ASSESSEE, IS A PRIVATE LIMITED COMPANY AND I S ENGAGED IN THE BUSINESS OF MANUFACTURING, PRINTING, SELLING AND TR ADING IN GREETING CARDS. IT FILED ITS RETURN OF INCOME DECLARING LOSS OF RS. 33,19,18 8/-. THE A.O. NOTICED THAT THE ASSESSEE HAD EARNED DIVIDEND OF RS. 2,40,191/-.HOWE VER, NO DISALLOWANCE HAD BEEN MADE UNDER SECTION 14A OF THE ACT IN RESPECT O F EXPENSES INCURRED TO EARN THIS INCOME. AFTER CONSIDERING THE ASSESSEES SUBMI SSIONS AND VARIOUS CASE LAWS ITA NO.7264/M/2008 FLUANT TRADERS P.LTD. 2 AND TAKING NOTE OF THE FACT THAT TOTAL PAID UP SHAR E CAPITAL OF THE ASSESSEE WAS RS.1,00,000/- AND FURTHER THERE WERE NO RESERVES AN D SURPLUS FUNDS, HE OBSERVED THAT TOTAL INVESTMENT IN SHARES ON WHICH EXEMPT DIV IDEND INCOME HAD BEEN MADE FROM BORROWED FUNDS. HE FURTHER OBSERVED THAT THE COMPANY HAD TAKEN UNSECURED LOANS AMOUNTING TO RS. 1,50,00,000/- AND ISSUED 11% INTEREST BEARING DEBENTURES TO THE LENDER AND THE INTEREST HAD BEEN DEBITED IN THE PROFIT & LOSS ACCOUNT. THUS HE CONCLUDED THAT INVESTMENT OF RS. 7 6.07 LACS HAD BEEN MADE FROM BORROWED FUNDS AND THEREFORE, THE ENTIRE INTER EST OF RS. 16.50 LACS THAT HAD BEEN PAID ON THE DEBENTURES ISSUED AGAINST THE BORR OWED FUNDS, WAS ATTRIBUTABLE TO THE EARNING OF THE EXEMPT INCOME. HE, ACCORDING LY, MADE DISALLOWANCE OF RS.16.50 LACS. 3. THE LEARNED CIT(A) FOLLOWING THE ORDER FOR THE A SSESSMENT YEAR 2004-05 DIRECTED THE ASSESSING OFFICER TO DISALLOW 10% OF T HE TOTAL DIVIDEND. 4. BEING AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5. AT THE TIME OF HEARING BOTH THE PARTIES AGREED T HAT IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TH E HONBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX, RANGE 10(2), MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIO NER OF INCOME TAX RANGE 10(2), MUMBAI & ORS. BY JUDGMEN T DATED 12-8-2010, THE MATTER NEEDS TO RESTORE BACK TO THE FILE OF THE A.O . TO DECIDE THE ISSUE IN ACCORDANCE WITH THE SAID DECISION. HOWEVER, THE LEA RNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE DEDUCTION SHOULD NOT EXCEED RS .16.50 LAKHS AS MADE BY THE A.O. HAVING HEARD BOTH THE PARTIES, WE RESTORE THE ISSUE TO THE FILE OF THE A.O. TO DECIDE THE ISSUE IN ACCORDANCE WITH DECISION OF TH E BOMBAY HIGH COURT CITED SUPRA, WHEREIN IT HAS BEEN HELD THAT RULE 8D IS PRO SPECTIVE IN OPERATION. HOWEVER, AS SUBMITTED BY LEARNED COUNSEL, THE DISALLOWANCE C ANNOT EXCEED RS.16.50 LAKHS. ITA NO.7264/M/2008 FLUANT TRADERS P.LTD. 3 6. IN THE RESULT, THE REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF NOVEMBER, 2010 SD. SD. (VIJAY PAL RAO ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED THE 30 TH NOVEMBER, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, MUMBAI CITY II, MUMBAI 4. THE CIT(A)-II, MUMBAI 5. THE DR F BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI