ASST CIT 10(3)(1), MUMBAI V. NANDRAJ DEVELOPERS P. LTD, MUMBAI

ITA 727/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3263 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 02-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N SATHYA MOORTHYDR
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -EBENCH MUM BAI , . . , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER A ND C.N. PRASAD,JUDICIAL MEMBER ./ITA/727/MUM/2015, /ASSESSMENT YEARS: 2009-10 ACIT-10 (3)(1) ROOM NO.212, AAYAKAR BHAVAN M.K ROAD MUMBAI-400 020. VS. M/S. NANDRAJ DEVELOPERS PVT. LTD. 1, SHEFFIELD TOWERS SOCIETY VERSOVA ROAD, ANDHERI (W) MUMBAI-400 058. PAN:AAACN 9951 A ( /APPELLANT ) ( / RESPONDENT) REVENUE BY: SHRI N. SATHYA MOORTHY-DR ASSESSEE BY: NONE / DATE OF HEARING: 18.07.2016 / DATE OF PRONOUNCEMENT: 24.08.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 25/11/2014 OF THE CIT ( A)-17,MUMBAI THE ASSESSING OFFICER(AO) HAS FILED THE PRESENT APPEAL. ASSESSEE-COMPANY IS A CIVIL CONTRACTOR AND BUILDER.IT FILED ITS RETURN OF INCOM E ON 30/09/2009, DECLARING TOTAL INCOME AT RS. 55.73 LAKHS.THE AO COMPLETED THE ASSE SSMENT U/S.143 (3) OF THE ACT, ON 27/ 12/2011,DETERMINING ITS INCOME AT RS.3, 73,99,410/-. 2. THE SOLITARY GROUND OF APPEAL IS ABOUT DELETING THE DISALLOWANCE MADE U/S.14A OF THE ACT.DURING THE ASSESSMENT PROCEEDINGS, THE A O FOUND THAT THE ASSESSEE HAD SHOWN INVESTMENT IN SHARES OF FUTURE INFRA INDI A PRIVATE LTD.OF RS.8.15 CRORES AS ON 31.03.2009 AS AGAINST RS.8.05 CRORES A S ON 31.03.2008,THAT IT HAD NOT MADE ANY DISALLOWANCE U/S.14 A OF THE ACT. HE D IRECTED IT TO EXPLAIN AS TO WHY DISALLOWANCE AS PER THE PROVISIONS OF SECTION 1 4A READ WITH RULE 8D OF THE INCOME TAX RULES,1962 (RULES)SHOULD NOT BE MADE.VID E ITS REPLY DATED 20/ 12/ 2011,THE ASSESSEE MADE ITS SUBMISSION.AFTER CONSIDE RING THE SAME,THE AO HELD THAT THE TERM EXPENDITURE APPEARING IN THE SECTION 14 A WOULD TAKE IN ITS SWEEP NOT ONLY DIRECT EXPENDITURE BUT ALSO ALL FORMS OF E XPENDITURE REGARDLESS OF WHETHER THEY WERE FIXED,VARIABLE, DIRECT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FINANCIAL. HE REFERRED TO THE CASE OF GODREJ AND BO YCE MANUFACTURING COMPANY 727/M/15-NANDRAJ 2 LTD (234 CTR 1)OF THE HONBLE BOMBAY HIGH COURT.HE FURTHER HELD THAT THE DISALLOWANCE HAD TO BE WORKED OUT-EVEN IF THERE WAS NO EXEMPT INCOME, THAT THE ASSESSEE HAD PAID INTEREST OF RS.96.70 LAKHS ON BOR ROWING FOR THE YEAR, THAT THE ASSESSEE HAD MADE INVESTMENT OUT OF THE BORROWED FU NDS ON WHICH INTEREST COST WAS INCURRED BY IT, THAT INTEREST EXPENDITURE HAD T O BE CONSIDERED FOR THE PURPOSE OF CALCULATION FORMULA PRESCRIBED UNDER RULE 8D OF THE RULES. ACCORDINGLY HE MADE A DISALLOWANCE OF RS. 35.13 LAKHS(RS. 31.08 LA KHS UNDER THE HEAD INTEREST EXPENDITURE + RS. 4.05 LAKHS-AN AMOUNT EQUAL TO 0.0 5% OF THE AVERAGE VALUE OF THE INVESTMENTS). 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS CO NTENDED THAT A BARE READING OF THE PROVISIONS OF SECTION 14 A STIPULATED THAT N O DEDUCTION WOULD BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY AN ASSESS EE IN RELATION TO THE INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME,THAT DU RING THE YEAR UNDER CONSIDERATION IT HAD NOT CLAIMED ANY INCOME AS EXEM PT,THAT WHEN THERE WAS NO EXEMPT INCOME NO DISALLOWANCE U/S. 14 A COULD BE MA DE,THAT THE ASSESSEE WAS NOT AVAILING ANY BENEFIT OF EXEMPT INCOME, THAT THE RE SHOULD NOT BE ANY TAX LIABILITY IN THAT REGARD, THAT THE FUNDS BORROWED B Y IT HAD BEEN USED IN THE BUSINESS OF SAND DREDGING, THAT THE INVESTMENT IN T HE SHARE HAD BEEN MADE OUT OF THE SURPLUS FUNDS AVAILABLE WITH IT,THAT THE BALANC E SHEET OF THE ASSESSEE WAS AN EVIDENCE TO PROVE THAT ASSESSEE HAD SUFFICIENT SURP LUS FUNDS FOR MAKING INVESTMENT, THAT IT HAD NOT UTILISED BORROWED FUNDS FOR INVESTMENT PURPOSES.IT RELIED UPON SEVERAL CASES IN THAT REGARD AND ARGUED THAT NO AD HOC DISALLOWANCE OF EXPENDITURE U/S.14A WAS WARRANTED WHERE THE ASSE SSEE HAD SUFFICIENT FUNDS AVAILABLE WITH IT. 3.1. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA REFERRED TO THE CASE OF LAKHANI MARKETING O F THE HONBLE PUNJAB AND 727/M/15-NANDRAJ 3 HARYANA HIGH COURT (DATED 05/06/2014) AND HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S. 14A OF THE ACT FOLLOWING CONDITIO NS HAD TO EXIST: I. THERE MUST BE INCOME TAXABLE UNDER THE ACT II. THE SAID INCOME WAS NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF TH E ACT, III . THE ASSESSEE MUST INCUR EXPENDITURE AND IV. THE EXPENDITURE MUST HAVE A RELATION TO THE INCOME WHICH DOES NOT FORM ORDER OF THE TOTAL INCOME UNDER THE ACT. HE ALSO REFERRED TO THE CASES OF HERO CYCLES (323 ITR 518) AND WINSOME TEXTILE (319 ITR 204) AND HELD THAT THE ASSESSEE HAD NOT EARNED ANY EXEMP T INCOME FOR THE YEAR UNDER CONSIDERATION,THAT THE AO WAS AWARE OF THE FACT,THA T EVEN THEN HE MADE A DISALLOWANCE,THAT HE WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE RULES. 4. DURING THE COURSE OF HEARING BEFORE US, THE DEPARTM ENTAL REPRESENTATIVE(DR) SUPPORTED THE ORDER OF THE AO.NONE APPEARED ON BEHA LF OF THE ASSESSEE,AS STATED EARLIER. 5. WE HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD.TH E UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE HAD NOT SHOWN ANY EXEMPT INCOME IN ITS RETURN FILED FOR THE YEAR UNDER CONSIDERATION, THAT IT HAD NOT C LAIMED ANY EXPENDITURE AGAINST ANY EXEMPT INCOME.AFTER THE PROLONGED LITIGATION AT VARIOUS LEVELS,NOW THE PRINCIPLES GOVERNING THE DISALLOWANCE WITH RESPECT TO SECTION 14 A OF THE ACT READ WITH RULE 8D OF THE RULES HAVE CRYSTALLISED. I T HAS BEEN HELD BY THE VARIOUS HONBLE HIGH COURTS THAT UNTIL AND UNLESS THE ASSES SEE SHOWS EXEMPT INCOME NO DISALLOWANCE CAN BE MADE.THE SECOND LIMB FOR COMPUT ING THE DISALLOWANCE IS CLAIMING THE EXPENDITURE AGAINST THE EXEMPT INCOME. IF AN ASSESSEE HAVING EXEMPT INCOME DOES NOT CLAIM ANY EXPENDITURE AGAINS T IT,THE PROVISIONS OF SEC. 14A CANNOT BE INVOKED.SIMILARLY, IF THE ASSESSEE IS NOT CLAIMING ANY EXEMPT INCOME NO DISALLOWANCE CAN BE MADE. IT IS NOT DIFFI CULT TO UNDERSTAND THE LOGIC BEHIND IT.THE ACT DEBARS THE ASSESSEES FROM CLAIMI NG DOUBLE DEDUCTION. SO, IF 727/M/15-NANDRAJ 4 AN ASSESSEE CLAIMS EXEMPT INCOME ON ONE HAND AND ON THE OTHER SHOWS INCURRING OF EXPENDITURE FOR EARNING THE SAID INCOM E IT WOULD RESULT IN DOUBLE BENEFIT.TO PREVENT THE MISUSE THE OF THE EXEMPTION PROVISIONS,THE LEGISLATURE HAS LAID DOWN A MECHANISM AND THAT FIND PLACE IN TH E PROVISIONS OF SECTION 14 A OF THE ACT.FOR INVOKING THE PROVISIONS OF THE SAI D SECTION THE AO HAS TO ESTABLISH TWO BASIC FACTS I.E.EARNING OF EXEMPT INC OME BY AN ASSESSEE AND INCUR -ING OF EXPENDITURE FOR EARNING THE SAID INCOME. IF THE PRINT CONDITIONS ARE NOT SATISFIED,THE AO CANNOT INVOKE THE PROVISIONS OF SE CTION 14 A OF THE ACT. NOW IT HAS BEEN HELD BY SEVERAL HIGH COURTS THAT IF THE ASSESSEE HAS SUFFICIENT OWN FUNDS THEN NO DISALLOWANCE CAN BE MADE UNDER THE HE AD INTEREST EXPENDITURE, WHILE INVOKING THE PROVISIONS OF SECTION 14 A OF TH E ACT. BESIDES, IF THE ASSESSEE INCURS ANY INTEREST EXPENDITURE FOR ITS RE GULAR INVESTMENT I.E. NOT FOR MAKING THE INVESTMENT, THEN ALSO NO DISALLOWANCE CA N BE MADE.IN THE CASE OF (380 ITR652)THE HONBLE P &H HIGH COURT HAS HELD AS UNDER: SECTION 14A OF THE INCOME-TAX ACT, 1961, EMPOWERS A N ASSESSING OFFICER TO DISALLOW EXPENDITURE IN RELATION TO EXEMPTED INCOME FROM SHA RES IF INTEREST BEARING FUNDS HAVE BEEN USED BY THE ASSESSEE. SECTION 14A MAY ONLY BE INVOKED IF THE ASSESSEE HAS MADE INVESTMENTS IN PURCHASE OF SHARES OUT OF BORROWED F UNDS. AS A CONSEQUENCE, IF THE ASSESSEE HAS INVESTED HIS OWN MONEY IN PURCHASE OF SHARES, THERE IS NO QUESTION OF DISALLOWANCE U/S. 14A . SECTION 14A REQUIRES THE AS SESSING OFFICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS HAVE BEEN USED TO EARN TAX-FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CRED IBLE AND RELEVANT EVIDENCE. THE ONUS, THEREFORE, TO PROVE THAT INTEREST BEARING FUN DS WERE USED, LIES SQUARELY ON THE SHOULDERS OF THE REVENUE. THUS, IF THE ASSESSING OF FICER IS ABLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST- FREE INCOME AS OPPOSED TO THE ASSESSEES OWN FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLOW SUCH A CLAIM. THE ASSESSING O FFICER, HOWEVER, CANNOT, BY RECORDING GENERAL OBSERVATIONS, PARTICULARLY WHERE THE ASSESSEE HAS DENIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT INTER EST BEARING INCOME MUST HAVE BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A , BEING I N THE NATURE OF AN EXCEPTION, WAS TO BE CONSTRUED STRICTLY AND ONLY WHERE THE ASSESSI NG OFFICER RECORDS SATISFACTION, ON THE BASIS OF CLEAR AND COGENT MATERIAL, SHALL AN OR DER BE PASSED U/S. 14A DISALLOWING SUCH A CLAIM. THE HONBLE DELHI HIGH COURT, IN THE CASE OF CHEMIN VEST(378ITR33)HAS DELIBERATED UPON THE ISSUE OF THE 14A DISALLOWANCE AS UNDER: THE EXPRESSION DOES NOT FORM PART OF THE TOTAL INC OME IN SECTION 14A OF THE INCOME-TAX ACT, 1961, ENVISAGES THAT THERE SHOULD B E AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE 727/M/15-NANDRAJ 5 PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCO ME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. IN THE CASE OF OMPRAKASH KHAITAN(376 ITR 390),THE H ONBLE HIGH COURT HAS HELD THAT IN ORDER TO DISALLOW THE EXPENDITURE THER E MUST BE A NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PAR T OF THE TOTAL INCOME. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.THEREFOR E, UPHOLDING HIS ORDER, WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE A O. AS A RESULT, APP EAL FILED BY THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH AUGUST,2016. 24 , 2016 SD/- S D/- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 24.08.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR E BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.