M/s. Prasad Production Pvt. Ltd., CHENNAI V. ITO (OSD), CHENNAI

ITA 740/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1078 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 23-02-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 17-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA
• Keywords: Earning of tax free income; Question of law
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C CHENNAI (BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER) .. I.T.A. NO. 740/MDS/2010 ASSESSMENT YEAR : 2007-08 M/S PRASAD PRODUCTION PVT. LTD., NO.28, ARUNACHALAM ROAD, CHENNAI 600 086. PAN : AAACP3614Q (APPELLANT) V. THE INCOME TAX OFFICER (OSD), MEDIA CIRCLE I, CHENNAI 600 034. (RESPONDENT) APPELLANT BY : SHRI SAROJ KUMAR PARIDA RESPONDENT BY : SHRI TAPAS KUMAR DUTTA O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE AGAINST THE O RDER DATED 31.3.2010 OF THE COMMISSIONER OF INCOME TAX (APPEAL S)-VI, CHENNAI, ITS GRIEVANCE IS THAT DISALLOWANCE OF EXPE NSES OF RS.33,92,466/- MADE BY THE A.O. UNDER RULE 8D OF IN COME-TAX RULES, 1962 WAS CONFIRMED. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE BUSINESS OF PRODUCTION AND EXPLOITATION OF FEATURE FILMS, HA D SHOWN EXEMPT I.T.A. NO. 740/MDS/10 2 INCOME OF RS.3,44,73,250/- IN ITS RETURN FOR THE IM PUGNED ASSESSMENT YEAR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE A.O. FROM THE FINANCIAL STATEMENTS THAT INVESTM ENT OF THE ASSESSEE HAD INCREASED FROM RS.24.70 CRORES TO RS.2 5.08 CRORES. THESE WERE IN ADDITION TO INVESTMENTS IN PARTNERSHI P FIRM OF MORE THAN RS.2 CRORES. ASSESSEE WAS REQUIRED TO EXPLAIN WHY SECTION 14A OF INCOME-TAX ACT, 1961 (HEREINAFTER CALLED AS THE ACT) READ WITH RULE 8 OF I.T. RULES SHOULD NOT BE APPLIED FOR MAKING DISALLOWANCE. REPLY OF THE ASSESSEE WAS THAT IT HA D NOT INCURRED ANY EXPENSES EITHER DIRECTLY OR INDIRECTLY FOR EARNING THE EXEMPT INCOME. AS PER THE ASSESSEE, IT HAD SUBSTANTIAL RESERVE FRO M WHICH THE INVESTMENTS WERE MADE. A.O. FOUND THAT THE ASSESSE E HAD CLAIMED FINANCE CHARGES OF RS.1,18,29,970/- ON SECURED AND UNSECURED LOANS RAISED BY IT. THOUGH IT WAS HAVING RESERVES AND SU RPLUS OF RS.1,37,93,00,829/- THERE WERE ALSO BORROWINGS COMI NG TO RS.13,06,70,025/-. AS PER THE A.O., IF THE RESOURC ES WERE USED BY ASSESSEE IN ITS BUSINESS, BORROWED FUNDS WOULD NOT HAVE BEEN NECESSARY AND ITS CLAIM THAT ONLY RESERVES AND SURP LUS WERE USED IN MAKING THE INVESTMENTS COULD NOT BE ACCEPTED. HE, THEREFORE, INOKED RULE 8D AND MADE DISALLOWANCE UNDER SECTION 14A OF THE ACT. SUCH I.T.A. NO. 740/MDS/10 3 DISALLOWANCE WAS WORKED OUT AS PER THE FORMULA PRES CRIBED IN RULE 8D AND CAME TO RS.33,92,466/-. 3. IN ITS APPEAL BEFORE THE CIT(APPEALS), SUBMISSIO N OF THE ASSESSEE WAS THAT SUCH A DISALLOWANCE WAS UNCALLED FOR, SINCE IT HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO EXEMPT INCOME. SOME CONTENTIONS AS MADE BEFORE THE A.O. WERE REITERATED . LD. CIT(APPEALS) RELYING ON THE DECISION OF SPECIAL BEN CH OF THIS TRIBUNAL IN THE CASE OF ITO V. DAGA CAPITAL MANAGEMENT PVT. LTD. 312 ITR (AT) 1 (MUMBAI)(SB), HELD THAT SECTION 14A OF THE A CT HAD TO BE APPLIED AND RULE 8D WHICH PRESENTED THE METHOD OF W ORKING OUT THE DISALLOWANCE UNDER SUB-SECTIONS (2) AND (3) OF SECT ION 14A WAS TO BE RETROSPECTIVELY APPLIED. HE, THEREFORE, WAS OF THE VIEW THAT A.O. WAS JUSTIFIED IN INVOKING RULE 8D AND DISALLOWANCE MADE WAS CONFIRMED. 4. NOW BEFORE US, LEARNED A.R. SUBMITTED THAT THE D ECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) HAS BEEN OVERTURNED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO. LTD. V. DCIT (2010) 234 CTR (BOM) 1. ACCORDING TO HIM, IT HAS BEEN HELD BY BOMBAY HIGH COURT THAT PROVISIONS OF RULE 8D WHICH WERE NOTIFIED ON I.T.A. NO. 740/MDS/10 4 24.3.2008 WOULD APPLY FROM ASSESSMENT YEAR 2008-09 AND THE IMPUGNED ASSESSMENT YEAR BEING 2007-08, THE A.O. FE LL IN ERROR IN APPLYING SUCH RULE FOR MAKING THE DISALLOWANCE. FU RTHER, AS PER THE LEARNED A.R., A DISALLOWANCE UNDER SECTION 14A COUL D BE MADE ONLY IF THERE WAS A PROXIMATE NEXUS BETWEEN THE EXEMPT I NCOME AND EXPENDITURE INCURRED. FOR THIS PROPOSITION, RELIAN CE WAS PLACED ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT V . WALFORT SHARE & STOCK BROKERS (P) LTD. (326 ITR 1). RELIANCE WAS A LSO PLACED ON THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT I N THE CASE OF CIT V. HERO CYCLES LTD. (323 ITR 518) FOR THE PROPO SITION THAT UNLESS AN EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCO ME, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT WOULD BE MADE. 5. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS CAREFULLY. AS PER THE ASSESSEE, IT HAD NOT INCURRE D ANY EXPENDITURE WHATSOEVER FOR EARNING EXEMPT INCOME OF RS.3,44,73, 250/-. NO DOUBT, IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) THE SPECIAL BENCH OF THIS TRIBUNAL DID HOLD THAT RULE 8 D APPLY RETROSPECTIVELY AND SUB-SECTIONS (2) AND (3) OF SEC . 14A OF THE ACT WERE PROCEDURAL IN NATURE AND APPLIED FOR ALL PENDI NG MATTERS. HOWEVER, HON'BLE BOMBAY HIGH COURT IN THE CASE OF G ODREJ & BOYCE I.T.A. NO. 740/MDS/10 5 MFG. CO. LTD. (SUPRA) CLEARLY HELD THAT RULE 8D WAS NOTIFIED ON 24.03.2008 WOULD APPLY W.E.F. ASST. YEAR 2008-09 ON LY. HON'BLE BOMBAY HIGH COURT ALSO HELD THAT EVEN PRIOR TO ASST . YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, A.O. HAD TO ENFORC E THE PROVISIONS OF SUB-SEC. (1) OF SEC. 14A OF THE ACT. THUS, THOU GH THE DECISION OF THE SPECIAL BENCH THAT RULE 8D HAD RETROSPECTIVE EF FECT, WAS OVERTURNED BY THE BOMBAY HIGH COURT, IT WAS ALSO CL EARLY HELD THAT THE A.O. WAS DUTY BOUND TO DISALLOW THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO INCOME WHICH DID NOT FORM P ART OF THE TOTAL INCOME UNDER THE ACT. HON'BLE BOMBAY HIGH COURT FU RTHER HELD THAT A.O. HAD TO ADOPT A REASONABLE BASIS OR METHOD CONS ISTENT WITH ALL RELEVANT FACTS AND CIRCUMSTANCES, AFTER GIVING REAS ONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RE CORD. IF WE LOOK AT THE DECISION OF HON'BLE APEX COURT IN THE CASE OF W ALFORT SHARE & STOCK BROKERS (P) LTD.S CASE (SUPRA) HELD THAT FOR ATTRACTING SEC. 14A OF THE ACT THERE HAD TO BE A PROXIMATE CAUSE BETWEE N THE EXEMPT INCOME AND EXPENSES. HON'BLE APEX COURT WAS SEIZED OF AN ISSUE REGARDING BUSINESS LOSS SET OFF AGAINST DIVIDEND IN COME ON UNITS BOUGHT CUM DIVIDEND AND SOLD EX-DIVIDEND. CONTENTI ON OF THE DEPARTMENT IN THAT CASE WAS THAT EXPENDITURE CLAIME D BY THE I.T.A. NO. 740/MDS/10 6 ASSESSEE SHOULD BE TREATED AS INCURRED FOR PURPOSE OF EARNING EXEMPT INCOME AND HENCE IT HAD TO BE DISALLOWED. I T WAS NOT A CLAIM FOR EXPENDITURE CLAIMED BUT A CLAIM FOR BUSINESS LO SS ARISING OUT OF PURCHASES OF UNITS CUM-DIVIDEND AND THEREAFTER SELL ING IT AT LOWER COST ON EX-DIVIDEND BASIS, AFTER RECEIVING THE DIVIDEND. HON'BLE APEX COURT HELD THAT THE ONLY IMPACT ON THE EXEMPTING PR OVISION SEC. 10(33) FOR UNITS INCOME IS BY SEC. 94(7) OF THE AC T AND ONE COULD NOT INTERPRET SEC. 14A AS LEADING TO THE SAME CONCLUSIO N, AS THEN SEC. 94(7) OF THE ACT WOULD BE RENDERED NUGATORY. THE C ASE OF HERO CYCLES LTD. (SUPRA) OF HON'BLE P&B HIGH COURT WAS A N APPEAL FILED BY DEPARTMENT WHICH WAS DISMISSED AS NOT INVOLVING SUB STANTIAL QUESTION OF LAW. THE REASON MENTIONED BY THE HON'B LE P&B HIGH COURT WAS THAT WHEN FOR EARNING EXEMPT INCOME NO EX PENDITURE WAS INCURRED, DISALLOWANCE UNDER SEC. 14A WOULD NOT STA ND. 6. WE ARE OF THE OPINION THAT THE VARIOUS DECISIONS MENTIONED BY US SUPRA WOULD LEAD TO FOLLOWING VIEW WITH REGARD T O APPLICATION OF SEC. 14A AND RULE 8D AS IT STANDS TODAY: (I) THOUGH SEC. 14A HAS BEEN INSERTED WITH RETROSPE CTIVE EFFECT FROM 01-04-1963 AND SINCE RULE 89D HAS BEEN NOTIFIED ONLY ON 24-03-2008, IT WOULD BE EFFECTIVE ONLY FROM ASST. YEAR 2008-09 ONWARDS. I.T.A. NO. 740/MDS/10 7 (II) FOR EARLIER ASST. YEARS, THOUGH THE EXPENSES P ERTAINING TO EXEMPT INCOME ARE NOT ALLOWABLE, THE DISALLOWANCE H AS TO BE ON A REASONABLE BASIS HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND AFTER FURNISHING A REASONABLE OPPORTUN ITY FOR THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. (III) THIS IN EFFECT WOULD MEAN THAT THE DISALLOWAN CE UNDER SEC. 14A READ WITH RULE 8D CANNOT EXCEED ACTUAL EXP ENSES DEBITED IN THE P&L ACCOUNT AND THAT THE NOTIONAL DI SALLOWANCE SPECIFIED IN THE RULE 8D(2) CANNOT EXCEED THE ACTUA L EXPENDITURE INCURRED BY THE ASSESSEE, AS AN EXPENDI TURE WHICH HAS NOT BEEN INCURRED AND CLAIMED CANNOT BE DISALLO WED. 7. WE FIND THAT IN THE INSTANT CASE BEFORE US, THE AUTHORITIES BELOW HAD GONE BY AN ASSUMPTION THAT RULE 8D OF THE RULES APPLIED FOR THE IMPUGNED ASST. YEAR THOUGH SUCH RULE WAS NOTIFIED O NLY ON 22-03- 2008. AS ALREADY MENTIONED BY US, AS THE LAW STANDS TODAY, SUCH RULE HAD ONLY PROSPECTIVE EFFECT. THE CASE OF THE ASSESSEE HAS NOT BEEN TESTED BASED ON THE LAW THAT EMERGES OUT OF TH E VARIOUS DECISIONS MENTIONED SUPRA. ASSESSEE, IN FACT, IN I TS APPEAL BEFORE THE CIT(A) NEVER RAISED THE CONTENTION REGARDING NO N APPLICABILITY OF RULE 8D IN THE IMPUGNED ASST. YEAR. BUT AT THE SAM E TIME, AS ALREADY MENTIONED BY US, ASSESSEE HAD ALWAYS ARGUED THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INC OME. 8. WE ARE THEREFORE, OF THE OPINION THAT THIS MATTE R NEEDS REVISIT BY THE A.O. WE, THEREFORE, SET ASIDE THE ORDERS OF TH E AUTHORITIES BELOW I.T.A. NO. 740/MDS/10 8 AND REMIT THE MATTER TO THE A.O. TO CONSIDER THE DI SALLOWANCE, IF ANY, IF REQUIRED TO BE MADE UNDER SEC. 14A OF THE ACT BASED ON THE VARIOUS JUDGEMENTS MENTIONED SUPRA. ASSESSEE WOULD BE FREE TO PRODUCE NECESSARY EVIDENCE AND RECORDS IN SUPPORT OF ITS CL AIM BEFORE THE A.O. AS ALSO ANY OTHER DECISION OF HIGHER JUDICIAL AUTHORITIES WHICH HAVE TO BE DULY CONSIDERED BY THE A.O. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUSION OF HEARING ON THE TWENTY THIRD DAY OF FEBRUARY, 2011. SD/ SD/- (U.B.S. BEDI) (ABRAHAM P. G EORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 23 RD FEBRUARY, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-VI, CHENNAI-34 (4) CIT, CHENNAI-IV, CHENNAI (5) D.R. (6) GUARD FILE