DCIT 5(2), MUMBAI V. K. GIRDHARLAL INTERNATIONAL P. LTD, MUMBAI

ITA 7318/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75785 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 21-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 01-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SU RENDRA KUMAR
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI BEFORE SHRI D KARUNAKARA RAO, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.9146/MUM/2010: ASST.YEAR 2006-07 ITA NO.7081/MUM/2011: ASST. YEAR 2007-08 K GIRDHARLAL INTERNATIONAL LTD., (FORMERLY KNOWN AS K GIRDHARLAL INTERNATIONAL P. LTD.) 1003, PANCHRATNA, MAMA PARMANAND MARG, OPERA HOUSE, MUMBAI- 400004 PAN : AACCK6101F VS. ADDL. CIT RANGE 5(2), MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.7318/MUM/2011 : ASST.YEAR 2007-08 ADDL. CIT RANGE 5(2), MUMBAI. VS. K GIRDHARLAL INTERNATIONAL LTD., (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K GOPAL RESPONDENT BY : SHRI SURENDRA KUMAR DATE OF HEARING : 21.01.2014 DATE OF PRONOUNCE MENT : 26.02.2014 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: WITH THIS COMMON ORDER WE WILL DISPOSE OFF ABOVE TI TLED THREE APPEALS, TWO PREFERRED BY THE ASSESSEE AND ONE BY THE REVENU E AS THE ISSUES RAISED THEREIN ARE IDENTICAL IN NATURE. ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 2 2. ITA NO. 9146/M/10 FOR A.Y. 2006-07: THE SOLE GROUND RAISED BY THE ASSESSEE IN THIS APPE AL IS RELATING TO SUSTAINING OF THE INTEREST DISALLOWANCE OF RS. 1066000/- BY T HE CIT(A), MADE BY THE ASSESSING OFFICER U/S 36(1) (III) ON THE GROUND TH AT BORROWED FUNDS WERE USED BY THE ASSESSEE FOR INVESTMENT IN PROPERTY WHI CH ASSET WAS CAPITAL IN NATURE. 3. AT THE OUTSET, THE LEARNED A.R. OF THE ASSESSEE RELIED UPON AN AUTHORITY OF THE HON'BLE BOMBAY HIGH COURT STYLED AS 'CIT VS. RELIANCE UTILITIES AND POWER LTD.' [2009] 313 ITR 340 (BOM.) WHEREIN THE H ON'BLE BOMBAY HIGH COURT HAS HELD THAT IF THERE ARE FUNDS AVAILABLE, B OTH INTEREST FREE AND OVERDRAFT/LOANS TAKEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAIL ABLE WITH THE COMPANY, IF, THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. THE LEARNED AR FROM THE DOCUMENTS HAS FURTHER OFFERED AN EXPLAN ATION THAT OUT OF THE TOTAL INVESTMENTS OF RS. 3,41,56,315/- IN THE PROPE RTY, A SUM OF RS. 3,22,73,315/- HAD ALREADY BEEN INVESTED UPTO 31.3.2 005. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, ONLY THE AMOUNT OF RS. 18 ,83,000/- WAS INVESTED. HE HAS FURTHER EXPLAINED FROM THE CHART THAT OWN F UNDS WERE AVAILABLE WITH THE ASSESSEE FOR THE INVESTMENTS MADE AND THAT IT W AS FOR THE DIAMOND BUSINESS OF THE ASSESSEE, BORROWED FUNDS WERE USED. HE HAS FURTHER SUBMITTED THAT THE NECESSARY EXPLANATIONS WERE GIVEN TO THE A O VIDE LETTER DATED 24.12.2009 BUT THE AO DID NOT CONSIDER THE SAID SUB MISSIONS WHILE MAKING DISALLOWANCE. LEARNED CIT(A) FAILED TO CONSIDER THE SAME. 4. ON THE OTHER HAND, THE CONTENTION OF THE LEARNED D.R. HAS BEEN THAT SUCH A PRESUMPTION WOULD ARISE ONLY IF ON THE DATE OF INVESTMENT, ASSESSEE HAD ITS OWN/INTEREST FREE FUNDS AVAILABLE WITH IT. HE HAS FURTHER CONTENDED THAT ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 3 SINCE THE ASSESSEE HAS NOT PROVIDED ANY FUND FLOW S TATEMENT TO PROVE THAT SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE WITH IT ON THE DATE OF INVESTMENT, HENCE THE PRESUMPTION OF INVESTMENT MADE BY THE ASS ESSEE OUT OF ITS OWN FUNDS WOULD NOT BE APPLICABLE IN THE CASE IN HAND. 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORD. WE MAY OBSERVE THAT THE H ON'BLE BOMBAY HIGH COURT IN THE CASE OF 'CIT VS. RELIANCE UTILITIES A ND POWER LTD.' (SUPRA), HAS OBSERVED THAT IF THERE ARE FUNDS AVAILABLE, BOTH I NTEREST FREE AND OVERDRAFT/LOANS TAKEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAIL ABLE WITH THE ASSESSEE. HOWEVER, THERE SEEMS TO BE FORCE IN THE CONTENTION OF THE LEARNED D.R. THAT SUCH A PRESUMPTION WOULD ARISE ONLY IF ON THE DATE OF INVESTMENT, ASSESSEE HAD ITS OWN/INTEREST FREE FUNDS AVAILABLE WITH IT. HOWEVER, A PERUSAL OF THE ORDERS OF LOWER AUTHORITIES REVEAL THAT THE ABOVE S TATED EXPLANATION PUT BY THE ASSESSEE VIDE LETTER DATED 24.12.2009 REGARDING INV ESTMENTS MADE FROM OWN FUNDS HAS NOT BEEN EXAMINED BY THE LOWER AUTHORITIE S. THE SAME HAS BEEN REJECTED ON THE GROUND OF IT BEING GENERAL IN NATUR E. 6. WE MAY OBSERVE THAT IN DAY TO DAY BUSINESS, IT I S FOR THE ASSESSEE TO SEE HOW TO MANAGE ITS BUSINESS. EVEN THOUGH THE ASSESSE E MAY NOT SHOW IN THE ABSENCE OF SEPARATE FUND FLOW STATEMENT OR SEPARATE ACCOUNTS RELATING TO BUSINESS LOANS AND TRANSACTIONS AND INVESTMENTS MAD E FROM OWN FUNDS, BUT IF THE ASSESSEE IS ABLE TO SHOW THE NEAR PROXIMITY OF AVAILABILITY OF OWN FUNDS MAY BE EXACTLY NOT ON THE DATE OF INVESTMENT OR ADV ANCEMENT OF LOAN BUT IN A VERY NEAR FUTURE DATE OR WITHIN A REASONABLE SHORT PERIOD OF TIME, EVEN THEN THE PRESUMPTION WILL BE THAT THE INVESTMENT WAS MAD E BY THE ASSESSEE FROM HIS OWN FUNDS OR IN ANTICIPATION OF AVAILABILITY OF ITS OWN FUNDS WITHIN A SHORT PERIOD OF TIME. THE PRINCIPLE UNDERLYING THIS PROP OSITION IS THAT A ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 4 BUSINESSMAN HAS TO CIRCULATE HIS MONEY ACCORDING TO THE DAY TO DAY REQUIREMENTS AND THE LIKELY INFLOW AND OUTFLOW OF M ONEY IN THE NEAR FUTURE IS TAKEN INTO CONSIDERATION WHILE MAKING INVESTMENTS. EVEN IF ON THE DATE OF INVESTMENT/EXPENDITURE, OWN FUNDS MAY NOT BE AVAILA BLE WITH THE ASSESSEE BUT IF THE INVESTMENT/ EXPENDITURE IS MADE IN ANTIC IPATION OF AVAILABILITY OF OWN FUNDS AND THE OWN FUNDS ARE AVAILABLE TO THE AS SESSEE WITHIN A VERY SHORT PERIOD OF TIME, THEN UNDER SUCH CIRCUMSTANCES DISAL LOWANCE CANNOT BE MADE ON THE ENTIRE LOAN AMOUNT BUT A VERY REASONABLE PR OPORTIONATE DISALLOWANCE CAN BE MADE AND EVEN IN CERTAIN CASES CAN BE IGNORE D DUE TO THE SHORTNESS OF THE PERIOD BETWEEN THE DATE OF ADVANCEMENT/EXPENDIT URE AND DATE OF AVAILABILITY OF OWN FUNDS. IT CAN BE OBSERVED BY TH E ASSESSING OFFICER FROM THE BALANCE SHEET AS TO WHETHER SUFFICIENT OWN FUND S WERE AVAILABLE TO THE ASSESSEE DURING THE FINANCIAL YEAR OR THE INTEREST FREE FUNDS WERE GENERATED DURING THE COURSE OF THE YEAR EVEN IF THE ASSESSEE COULD NOT PROVE THE AVAILABILITY OF OWN FUNDS ON THE PARTICULAR DATE O F INVESTMENT/ADVANCEMENT/EXPENDITURE. 7. IN VIEW OF OUR ABOVE OBSERVATION, WE SET ASIDE T HE DISALLOWANCE MADE BY THE LOWER AUTHORITIES AND RESTORE THE ISSUE TO T HE FILE OF THE AO WITH A DIRECTION TO FIND OUT AS TO WHETHER SUFFICIENT OWN FUNDS/INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE AND DECIDE ACCORDI NGLY FOLLOWING THE ABOVE GUIDELINES/OBSERVATIONS. NEEDLESS TO SAY THAT THE A .O. WILL PROVIDE PROPER OPPORTUNITY TO THE ASSESSEE TO FILE THE NECESSARY D OCUMENTS INCLUDING FUND FLOW STATEMENT, IF ANY. THE AO THEREAFTER, WILL DUL Y EXAMINE THE EXPLANATION/ DOCUMENTS SO PRODUCED BY THE ASSESSEE IN THIS RESPE CT AND GIVE A SPECIFIC FINDING IN THIS RESPECT BY WAY OF A SPEAKING ORDER. ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 5 8. ITA NO. 7081/M/11 FOR A.Y. 2007-08 THE SOLE ISSUE INVOLVED IN THIS GROUND RELATING TO THE INTEREST DISALLOWANCE IS IDENTICAL TO THE ISSUE RAISED ABOVE IN ITA NO9146/M /10 FOR A.Y.2006-07. IN VIEW OF OUR OBSERVATIONS AND FINDINGS GIVEN ABOVE, THIS ISSUE IS DECIDED AND RESTORED TO THE FILE OF THE AO ACCORDINGLY. 9. ITA NO. 7318/M/11 FOR A.Y. 2007-08 IN THIS APPEAL THE REVENUE HAS AGITATED THE ACTION OF THE CIT(A) IN RESTRICTING THE DISALLOWANCE TO THE EXTENT OF 5% OF THE EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. 10. DURING THE ASSESSMENT PROCEEDINGS THE AO NOTICE D THAT THE ASSESSEE HAS EARNED EXEMPT INCOME. HE THEREFORE MADE THE DIS ALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT APPLYING RULE 8D OF THE I NCOME TAX RULES. IN FIRST APPEAL THE CIT(A) RESTRICTED THE DISALLOWANCE TO THE EXTENT 5% OF THE EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEA R. THE REVENUE IS THUS IN APPEAL BEFORE US ON THIS ISSUE. 11. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORDS ON THIS ISSUE. IT MAY BE OBSERVED THAT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPR A) THE HON'BLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D R.W.S. 14A(2) IS N OT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY IF THE ASSESSE E'S METHOD IS NOT SATISFACTORY. IT HAS BEEN FURTHER HELD THAT RULE 8D IS NOT RETROSPECTIVE AND APPLIES FROM A.Y. 2008-09. FOR THE YEARS FOR WHICH RULE 8D IS NOT APPLICABLE AND IN THE EVENT OF THAT THE AO IS NOT SATISFIED WI TH THE EXPLANATION/WORKING GIVEN BY THE ASSESSEE, DISALLOWANCE UNDER SECTION 1 4A HAS TO BE MADE ON A REASONABLE BASIS. ALMOST SIMILAR VIEW HAS BEEN EXPR ESSED BY HON'BLE DELHI ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 6 HIGH COURT IN THE CASE OF 'MAXOPP INVESTMENT LTD. & OTHERS' VS. CIT (247 ITR 162). 12. IT MAY BE FURTHER OBSERVED THAT IT IS NOT A CAS E WHERE NO EXEMPT INCOME WAS RECEIVED BY THE ASSESSEE DESPITE MAKING INVESTM ENTS FOR EARNING EXEMPT INCOME. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE EXEMPT INCOME EARNED BY THE ASSESSEE WAS VERY LESS OR NOT IN PROPORTION TO THE INVESTMENTS MADE BY THE ASSESSEE FOR THIS PURPOSE. UNDER SUCH CIRCUMSTA NCES THE DIFFERENT CO- ORDINATE BENCHES OF THIS TRIBUNAL HAVE OBSERVED THA T IN SUCH CASES CERTAIN PERCENTAGE OF EXEMPT INCOME CAN CONSTITUTE A REASON ABLE ESTIMATE FOR MAKING DISALLOWANCE FOR THE YEARS EARLIER TO ASSESSMENT YE AR 2008-09. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. 'GODREJ AG ROVET LTD.' (ITA NO.934/2011) DECIDED ON 08.01.13 HAS UPHELD THE ORD ER OF THE TRIBUNAL DIRECTING THE AO TO RESTRICT THE DISALLOWANCE TO TH E EXTENT OF 2% OF THE TOTAL EXEMPT INCOME EARNED BY THE ASSESSEE. 13. HENCE, IN OUR VIEW, THERE IS NO INFIRMITY IN TH E ORDER OF THE CIT(A) IN RESTRICTING THE DISALLOWANCE TO THE EXTENT OF 5% OF THE EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. 14. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED AND APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH FEBRUARY 2014 SD/- SD/- (D KARUNAKARA RAO) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT : 26 TH FEBRUARY, 2014 SA ITA NO.9146/MUM/2010 ITA NO.7081/MUM/2011 ITA NO.7318/MUM/2011 7 COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE C.I.T. CONCERNED MUMBAI 4. THE CIT (A) CONCERNED MUMBAI 5. THE DR, A - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI