ESTRELA BATTERIES LTD, MUMBAI V. DCIT 2(1), MUMBAI

ITA 7370/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9451 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 04-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 13-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIPDR
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

, E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI . , ! '# $ %, & ' BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI AMIT SHUK LA, JM . / ITA NO. 7370/MUM/2012 ( / ASSESSMENT YEAR : 2009-10 ) M/S. ESTRELA BATTERIES LTD. C/O. KARNAVAT & CO. 2A KITAB MAHAL, 1 ST FLOOR 192 DR. D.N. ROAD MUMBAI 400 001 .. / APPELLANT V/S A CIT (OSD) - 2 ( 1 ) AAYAKAR BHAVAN, M.K. RD. MUMBAI 400020 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AABCE3092Q !' # $ / ASSESSEE BY : SHRI VIJAY MEHTA (AR) % # $ / REVENUE BY : SHRI NEIL PHILIP (DR) & ' # '( / DATE OF HEARING 11.03.2015 )* +, # '( / DATE OF ORDER 20.03.2015 $ / ORDER '# $ %, & (! / PER AMIT SHUKLA, J.M. THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 14 TH SEPTEMBER 2012, PASSED BY THE LEARNED COMMISSIONER (APPEALS)4, MUMBAI, FOR THE QUANTUM OF ASSESSMENT M/S.ESTRELA BATTERIES LTD.. 2 PASSED UNDER SECTION 143(3), FOR THE ASSESSMENT YEAR 2001-02. THE ASSESSEE IS MAINLY AGREED BY DISALLOWANCE U/S.14A R .W. RULE 8D. 2. THE BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF CONSTRUCTION, DEVELOPMENT O F PROPERTY AND TREASURY OPERATIONS. DURING THE YEAR, THE ASSESSEE H AS EARNED DIVIDEND INCOME OF RS.64,21,691/- WHICH WAS CLAIMED AS EXEMPT. FOR THE PURPOSE OF DISALLOWANCE U/S.14A, THE ASSESSEE HAD OFFERED A SUM OF RS.2,40,000/-, IN ITS COMPUTATION OF INCOME. IN RE SPONSE TO THE SHOW CAUSE NOTICE, AS TO WHY THE DISALLOWANCE U/S.14A SHOULD NOT BE MADE IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D, T HE ASSESSEE SUBMITTED THAT, IF THE OVERALL ACCOUNTS AND NATURE O F EXPENDITURE IS TAKEN INTO CONSIDERATION, THEN DISALLOWANCE WOULD WOR K OUT TO RS.18,349/- ONLY AND SECONDLY RULE 8D WOULD NOT BE APPLICABLE ON THE FACTS OF THE CASE. THE ASSESSING OFFICER HELD THAT THE DISALLOWANCE OF RS.2,40,000/- OFFERED BY THE ASSESSEE IS TOO SMALL L OOKING TO THE DIVIDEND INCOME OF RS.64.21 LACS. HE FURTHER ANALYSE D THAT OUT OF THE TOTAL INCOME RECEIPTS OF RS.2,01,48,187/-, AMOUNT OF R S.64,21,691/- IS SOLELY ON ACCOUNT OF DIVIDENDS AND HENCE, IT IS MAJO R SOURCE OF INCOME. ACCORDINGLY, HE WORKED OUT THE DISALLOWANCE UNDER CLA USE (III) OF RULE 8D AT RS.26,45,200/- BY TAKING 0.5% OF AVERAGE INVE STMENT ATTRIBUTABLE FOR INDIRECT EXPENSES. M/S.ESTRELA BATTERIES LTD.. 3 3. IN THE FIRST APPEAL LD. CIT(A) TOO CONFIRMED THE S AID DISALLOWANCE ON THE GROUND THAT THE RULE 8D IS MANDATORY FROM ASSES SMENT YEAR 2008-09. HOWEVER, HE AGREED WITH THE ASSESSEES CONT ENTION THAT THE BANK DEPOSIT OF RS.9.98 CRORES WITH THE HDFC BANK IN NOT TO BE INCLUDED IN OPENING AND CLOSING INVESTMENT FOR CALC ULATING AVERAGE THE INVESTMENT FOR RULE 8D, BECAUSE THE INTEREST FROM TH E SAME IS TAXABLE. SIMILARLY, THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 10 CRORE, IN RELIANCE REGULAR SAVING FUND, WHICH IS A GROWTH FUND , WHEREIN THE DIVIDEND AS WELL AS CAPITAL GAIN IS TAXABLE. ACCORDI NGLY, HE DIRECTED THE AO TO VERIFY THE SAME AND REMOVE IT FROM AVERAGE INVE STMENT FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE UNDER RULE 8 D. 4. BEFORE US THE LD. COUNSEL, SHRI VIJAY MEHTA SUBMI TTED THAT OVERALL NATURE OF ACCOUNTS AND NATURE OF EXPENSES IS TO BE CONS IDERED. HERE IN THIS CASE, ASSESSEES ADMINISTRATIVE EXPENSES IS AT R S.7,28,722/-; EMPLOYEE COSTS AT 1,020,555/-; AND FINANCE CHARGES IS OF RS.14,596/-. APART FROM THIS, THERE ARE NO MAJOR EXPE NSES WHICH HAVE BEEN DEBITED, IN THE P & L ACCOUNT EXCEPT FOR DEPREC IATION. ON THESE FACTS, IT CANNOT BE HELD THAT SUCH A HUGE EXPENDITURE I S TO BE ATTRIBUTED FOR THE PURPOSE OF DISALLOWANCE, UNDER CLA USE (III) OF RULE 8D, WHEN ASSESSEES CORE BUSINESS IS IN REAL ESTATE. TO ATTRIBUTE THE COST FOR THE PURPOSE OF EARNING OF EXEMPT INCOME, THE ASSE SSEE ITSELF HAS M/S.ESTRELA BATTERIES LTD.. 4 DISALLOWED THE SUM OF RS.2,40,000/- CALCULATE @ OF R S.20,000/- PER MONTH WHICH WILL COVER NOT ONLY THE EMPLOYEES COST B UT ALSO THE ADMINISTRATIVE EXPENSES. FURTHER THE ASSESSING OFFIC ER IS REQUIRED TO EXAMINE THE ASSESSEES ACCOUNT AND NATURE OF EXPENSES AND ONLY IF HE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE IN RESP ECT OF SUCH EXPENDITURE, THEN ONLY HE CAN PROCEED TO APPLY RULE 8D . HERE, IN THIS CASE THE ASSESSING OFFICER HAS NOT RECORDED HIS SATIS FACTION NOR EXPRESSED ANY OPINION ABOUT THE CORRECTNESS OF THE C LAIM OF THE ASSESSEE. THUS, LOOKING TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, NO FURTHER DISALLOWANCE OVER AND ABOVE THE SUM OFFERED B Y THE ASSESSEE SHOULD BE DISALLOWED. 5. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT DISALLOWANCE HAS TO BE WORK ED OUT IN ACCORDANCE WITH THE RULE 8D, ONCE PROVISIONS OF 14A COMES TO PLAY. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIAL PLACED ON RECORD. FROM THE PERUSA L OF THE PROFIT AND LOSS ACCOUNT, IT IS SEEN THAT THE ASSESSEE HAS DEBITED FOLLOWING INDIRECT EXPENSES:- (RS.) (I) ADMINISTRATIVE EXPENSES - 7,28,722/- (II) EMPLOYEE COSTS 10,20,555/- (III) DEPRECIATION 9,64,517/- M/S.ESTRELA BATTERIES LTD.. 5 (IV) FINANCE CHARGES 14,596/- (V) LOSS ON SALE OF INVESTMENTS 94,57,739/- OUT OF THE AFORESAID EXPENSES, THE AMOUNT OF LOSS ON SALE OF INVESTMENT AND DEPRECIATION HAS TO BE REMOVED WHICH HAS NOTHING TO DO WITH THE INVESTMENT IN SHARES. THE BALANCE EXPE NSES WHICH HAD BEEN DEBITED, WORKS OUT TO RS.17,63,873/-. FROM T HE SCHEDULE OF INVESTMENT, IT IS SEEN THAT MOST OF THE INVESTMENT HAVE BEEN MADE IN MUTUAL FUNDS AND DEPOSITS IN THE HDFC LTD. S OME OF THE INVESTMENT HAS ALREADY BEEN DIRECTED BY THE CIT(A) TO BE EXCLUDED. IF THE NATURE OF INVESTMENT AND OVERALL INDIRECT EXPEN SES IS TAKEN INTO CONSIDERATION, THEN IT CANNOT BE SAID THAT SUCH A HUGE DISALLOWANCE OF RS.26,45,200/-IS CALLED FOR AS WORK ED OUT BY THE AO. RULE 8D IS NOT A MECHANICAL PROVISION WHICH IS TO BE RESORTED, WHEREVER THERE IS DISALLOWANCE U/S.14A(1). THE SAME HAS BEEN SUBJECTED TO CONDITIONS ENUMERATED IN SUB-SECTION (2) OF SECTION 14A. THE DISALLOWANCE U/S.14A(1) IS MADE, ONLY IF TH E EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO THE EX EMPT INCOME, THAT IS, IT IS NOT FORMING PART OF THE TOTAL INCOME. IF SUCH AN EXPENDITURE IS INCURRED THEN SUB-SECTION(2)PROVIDES THAT THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED I N RELATION TO EARNING OF SUCH EXEMPT INCOME. HOWEVER SUCH A DETERM INATION CAN BE MADE ONLY WHEN THE ASSESSING OFFICER HAVING REGA RD TO THE M/S.ESTRELA BATTERIES LTD.. 6 ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CO RRECTNESS OF THE CLAIM IN RESPECT OF SUCH EXPENDITURE INCURRED IN REL ATION TO THE EXEMPT INCOME. IN OTHER WORDS THE AO HAS TO EXAMINE TH E NATURE OF EXPENDITURE VIS-A-VIS THE EARNING OF THE EXEMPT IN COME. HERE IN THIS CASE THE ASSESSEE HAD OFFERED RS.2,40,000/- FO R THE PURPOSE OF DISALLOWANCE. HOWEVER, THE AO WITHOUT EXAMINING THE SA ME HAS PROCEEDED TO APPLY RULE 8D, AS IF IT IS A NATURAL COR OLLARY TO SECTION 14A. THE BASIC REQUIREMENT THE LAW IS TO EXAMINE THE NATURE OF THE EXPENDITURE WHICH CAN BE SAID TO ATTRIBUTABLE FOR THE EARNING OF THE EXEMPT INCOME. IF THE ASSESSEE HAS INCURRED MAJOR EX PENDITURE FOR ITS CORE BUSINESS, THEN IT IS INCUMBENT UPON THE AO AND IS MANDATORY FOR HIM TO EXAMINE THE NATURE OF EXPENDITU RE AND SATISFY HIMSELF ABOUT THE ASSESSEES CLAIM AS TO WHETHER ANY EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME AND THEN HE HAS TO QUANTIFY THE EXPENDITURE. HERE IN THIS CASE, ONLY CLAUSE (III) OF RULE 8D HAS BEEN INVOKED BY THE AO TO WORK OUT THE INDIRECT EXPENSES, WITHOUT SATISFYING HIMSELF ABOUT TH E ASSESSEES CORRECTNESS OF THE CLAIM. IN ABSENCE OF SATISFYING THE MANDATORY REQUIREMENT AS GIVEN IN SUB-SECTION (2) OF SECTION 14 A, THE DISALLOWANCE OFFERED BY THE ASSESSEE UNDER RULE 14A CANNOT BE TINKERED WITH AND ALSO IT APPEARS TO BE REASONABLE LO OKING TO THE OVERALL INDIRECT EXPENDITURE INCURRED BY THE ASSESSE E. M/S.ESTRELA BATTERIES LTD.. 7 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH DAY OF MARCH 2015. SD/- SD/- SD/ - . D. KRUNAKARA RAO ACCOUNTANT MEMBER SD/ - '# $ % & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, )* DATED:20.03.2015 PATEL )* # '-. /.' / COPY OF THE ORDER FORWARDED TO : (1) !' / THE ASSESSEE; (2) % / THE REVENUE; (3) & 0'( ) / THE CIT(A); (4) & 0' / THE CIT, MUMBAI CITY CONCERNED; (5) .34 '5, ( 5, & ' / THE DR, ITAT, MUMBAI; (6) 4 7' / GUARD FILE. . ' ' / TRUE COPY )* & / BY ORDER 8 / 9 % / (DY./ASSTT. REGISTRAR) ( 5, & ' / ITAT, MUMBAI