MAHESH VRAJLAL BABARIA, MUMBAI V. ASST CIT CIR 14(3), MUMBAI

ITA 7421/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6607 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VIPUL B JOSHI; VINOD VASA
• Keywords: Deemed owner of house property; Business income; Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

1 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SA NJAY GARG, JUDICIAL MEMBER . . , , ./I.T.A. NO.7422/MUM/2011 ( / ASSESSMENT YEAR :2008-09) JIGAR RAJESH BABARIA 1 ST FLOOR, MANSOOR BUILDING, 98, PRINCESS STREET, MUMBAI-400002 / VS. ASSTT.COMMISSIONER OF INCOME TAX, CIRCLE 14(3), MUMBAI-400020 ( / APPELLANT) .. ( !' / RESPONDENT) ./ ./PAN/GIR NO. : AELPB7429K ./I.T.A. NO.7421/MUM/2011 ( / ASSESSMENT YEAR :2008-09) MAHESH VRAJLAL BABARIA 1 ST FLOOR, MANSOOR BUILDING, 98, PRINCESS STREET, MUMBAI-400002 / VS. ASSTT.COMMISSIONER OF INCOME TAX, CIRCLE 14(3), MUMBAI-400020 ( / APPELLANT) .. ( !' / RESPONDENT) ./ ./PAN/GIR NO. : AEQPB4249C / ASSESSEES BY : S/ SHRI VIPUL B JOSHI & VINOD VASA !' % /REVENUE BY : SHRI RAVI PRAKASH % ( / DATE OF HEARING : 10.3.2014 % ( /DATE OF PRONOUNCEMENT : 10.4.2014 2 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 / O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THESE TWO APPEALS PERTAIN TO SAME ASSESSMENT YEAR 2008-09. THE ASSESSEES IN THESE APPEALS BELONGS TO SAME FAMILY M EMBERS AND ONE ISSUE REGARDING APPLICABILITY OF SECTION 14A R.W.R.8D IS COMMON IN THESE APPEALS. THEREFORE, FOR THE SAKE OF CONVENIENCE, THESE APPEA LS WERE HEARD TOGETHER AND ARE BEING DECIDED BY THIS COMMON ORDER. I.T.A. NO.7422/MUM/2011 2. THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSE E AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAF TER REFERRED TO AS CIT(A)] DATED 07.09.2011 3. THE ONLY SUBSTANTIVE ISSUE RAISED BY THE ASSESS EE THROUGH HIS GROUNDS OF APPEAL IS WITH REGARD TO THE CONFIRMATION OF DISAL LOWANCE OF RS.11,11,673/- U/S 14A OF THE INCOME TAX ACT, 1961 (THE ACT). 4. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO A S THE AO) DURING THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE H AD RECEIVED A SUM OF RS.4,93,700/- BY WAY OF DIVIDEND AND CLAIMED THE SA ME AS EXEMPT INCOME. THE ASSESSEE CLAIMED THAT HE HAD INCURRED NO EXPENDITUR E TO EARN THE EXEMPT INCOME. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR INVESTMENT AND BUSINESS PURPOS ES. NO BORROWED MONEY WAS USED FOR INVESTMENT PURPOSES. HOWEVER THE AO OB SERVED THAT THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE OF RS.50,25,915/- IN RELATION TO BUSINESS INCOME. THE AO AFTER TAKING INTO CONSIDERATION LAR GE VOLUME OF BUSINESS TURNOVER, RELATED EXPENDITURE CLAIMED BY THE ASSESS EE AND THE AMOUNT OF EXEMPT INCOME EARNED BY THE ASSESSEE WORKED THE DIS ALLOWANCE U/S.14A R.W.R.8D AND ADDED BACK THE SAME TO THE TOTAL INCOM E OF THE ASSESSEE. 5. IN FIRST APPEAL, THE LD. CIT(A) OBSERVED THAT ALL INDIRECT EXPENSES IN 3 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 FORM OF OFFICE PREMISES EXPENSES, STATIONERY EXPENS ES, MISCELLANEOUS EXPENSES, STAFF EXPENSES, TELEPHONE EXPENSES, ACCOUNTING EXP ENSES, PORTFOLIO MANAGEMENT EXPENSES, TRAVELING EXPENSES, VEHICLE EX PENSES AND DEPRECIATION ON PREMISES, VEHICLE, FURNITURE ETC WERE CERTAINLY ATTRIBUTABLE TO EARNING EXEMPT INCOME. HE THEREFORE HELD THAT A PART OF TH E COMMON EXPENSES WAS ALLOCABLE TOWARDS THE EARNING OF DIVIDEND INCOME. H E THEREFORE HELD THAT THE PROVISIONS OF SECTION 14A R.W.R.8D HAD RIGHTLY BEE N INVOKED BY THE AO AND CONFIRMED THE DISALLOWANCE. AGGRIEVED AGAINST THE O RDER OF THE CIT(A), THE ASSESSEE HAS COME IN APPEAL BEFORE US. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. RE PRESENTATIVES OF THE PARTIES. IT MAY BE OBSERVED THAT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. 328 ITR 81 , THE HON'BLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D R.W.S. 14A(2) IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY IF THE ASSESSEE'S METHOD IS NOT SATISF ACTORY. IT HAS BEEN FURTHER HELD THAT RULE 8D IS NOT RETROSPECTIVE AND APPLIES FROM A.Y. 2008-09. IT MAY BE FURTHER OBSERVED THAT UNDER SECTION 14A OF THE INCO ME TAX ACT, RESORT CAN BE MADE TO RULE 8D OF THE INCOME TAX RULES FOR DETERMI NING THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME, IF, THE A O IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE IN RE SPECT OF SUCH EXPENDITURE. 7. WE MAY FURTHER OBSERVE THAT THE HON'BLE BOMBA Y HIGH COURT IN THE CASE OF 'CIT VS. RELIANCE UTILITIES AND POWER LTD.' HAS OBSERVED THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTEREST FREE AND OVERDRAFT/L OANS TAKEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST FREE FUND GENERATED OR AVAILABLE WITH THE ASSESSEE. HOWEVER A PERUSAL OF THE ORDERS OF LOWER AUTHORITIES REVEALS THAT THE ABOVE STATED EXPLANATION PUT FORTH BY THE ASSESSEE REGARDING INVESTMENTS MADE FROM OWN FUNDS HAS NOT BEEN EXAMIN ED BY THE LOWER AUTHORITIES. 7.1 WE MAY FURTHER OBSERVE THAT IN DAY TO DAY BUSI NESS, IT IS FOR THE ASSESSEE TO SEE HOW TO MANAGE ITS BUSINESS. EVEN THOUGH THE ASSESSEE MAY NOT SHOW IN THE ABSENCE OF SEPARATE FUND FLOW STATEMENT OR SEPA RATE ACCOUNTS RELATING TO BUSINESS LOANS AND TRANSACTIONS AND INVESTMENTS MAD E FROM OWN FUNDS, BUT IF 4 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 THE ASSESSEE IS ABLE TO SHOW THE NEAR PROXIMITY OF AVAILABILITY OF OWN FUNDS MAY BE EXACTLY NOT ON THE DATE OF INVESTMENT OR ADVANCE MENT OF LOAN BUT IN A VERY NEAR FUTURE DATE OR WITHIN A REASONABLE SHORT PERIO D OF TIME, EVEN THEN THE PRESUMPTION WILL BE THAT THE INVESTMENT WAS MADE 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 PROPOSITION IS THAT A BUSINESSMAN HAS TO CIRCULATE HIS MONEY ACCORDING TO THE DAY TO DAY REQ UIREMENTS AND THE LIKELY INFLOW AND OUTFLOW OF MONEY IN THE NEAR FUTURE IS T AKEN INTO CONSIDERATION WHILE MAKING INVESTMENTS. EVEN IF ON THE DATE OF INVESTME NT/EXPENDITURE, OWN FUNDS MAY NOT BE AVAILABLE WITH THE ASSESSEE BUT IF THE I NVESTMENT/ EXPENDITURE IS MADE IN ANTICIPATION OF AVAILABILITY OF OWN FUNDS A ND THE OWN FUNDS ARE AVAILABLE TO THE ASSESSEE WITHIN A VERY SHORT PERIOD OF TIME, THEN UNDER SUCH CIRCUMSTANCES DISALLOWANCE CANNOT BE MADE ON THE EN TIRE LOAN AMOUNT BUT A VERY REASONABLE PROPORTIONATE DISALLOWANCE CAN BE M ADE AND EVEN IN CERTAIN CASES CAN BE IGNORED DUE TO THE SHORTNESS OF THE PE RIOD BETWEEN THE DATE OF ADVANCEMENT/EXPENDITURE AND DATE OF AVAILABILITY OF OWN FUNDS. IT CAN BE OBSERVED BY THE ASSESSING OFFICER FROM THE BALANCE SHEET AS TO WHETHER SUFFICIENT OWN FUNDS WERE AVAILABLE TO THE ASSESSEE DURING THE FINANCIAL YEAR OR THE INTEREST FREE FUNDS WERE GENERATED DURING THE C OURSE OF THE YEAR EVEN IF THE ASSESSEE COULD NOT PROVE THE AVAILABILITY OF OWN FU NDS ON THE PARTICULAR DATE OF INVESTMENT/ADVANCEMENT/EXPENDITURE. 7.2 IN THE CASE IN HAND THE ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR INVESTMENT AND BUSINESS PURPOSES. THE L D. AR OF THE ASSESSEE HAS FURTHER SUBMITTED THAT THE ASSESSEE BEING IN TRANSP ORT BUSINESS, THE INTEREST WAS PAID TO THE FINANCE COMPANY FOR THE PURCHASE OF TRU CKS WHICH WERE USED FOR TRANSPORT BUSINESS OF THE ASSESSEE. THERE HAD BEEN A DIRECT CORRELATION BETWEEN THE INTEREST EXPENDITURE AND BUSINESS OF THE ASSESS EE. THE INTEREST EXPENDITURE WAS NOT ATTRIBUTABLE TO EXEMPT INCOME. 7.3 HOWEVER, A PERUSAL OF THE ASSESSMENT ORDER REVE ALS THAT THE AO WITHOUT RECORDING ANY DISSATISFACTION WITH REGARD TO THE CL AIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARNIN G THE EXEMPT INCOME, STRAIGHTWAY APPLIED RULE 8D AGAINST THE MANDATE OF THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. THE LD. CIT(A) ALSO FAILED TO CONSIDER THE SUBMISSIONS OF THE ASSESSEE THAT THE ASSESSEE HAD BEEN MAINTAINING SEPARATE ACCOUNTS FOR BUSINESS AND INVESTMENT PURPOSES WHILE CONFIRMING THE DISALLOWANCE. 5 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 7.4 IN VIEW OF OUR ABOVE OBSERVATION, WE SET ASIDE THE DISALLOWANCE MADE BY THE LOWER AUTHORITIES AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO FIND OUT AS TO WHETHER SUFFICIENT OWN FUNDS/INTE REST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE FOR INVESTMENT PURPOSES SO FAR DISALLOWANCE RELATING TO INTEREST EXPENDITURE IS CONCERNED. THE AO WILL ALSO CONSIDER THE ISSUE RELATING TO DISALLOWANCE OF ADMINISTRATIVE EXPENSES, IF ANY, IN CURRED INCLUDING THE ALLOCATION OUT OF INDIRECT COMMON EXPENSES FOR EARNING OF EXE MPT INCOME AND TO DECIDE THE ISSUE ACCORDINGLY FOLLOWING THE ABOVE GUIDELINE S/OBSERVATIONS. NEEDLESS TO SAY THAT THE A.O. WILL PROVIDE PROPER OPPORTUNITY T O THE ASSESSEE TO FILE THE NECESSARY DOCUMENTS AND ACCOUNTS ETC. INCLUDING FUN D FLOW STATEMENT, IF ANY AS PER LAW. THE AO THEREAFTER, WILL DULY EXAMINE THE E XPLANATION/ DOCUMENTS SO PRODUCED BY THE ASSESSEE IN THIS RESPECT AND GIVE A SPECIFIC FINDING IN THIS RESPECT BY WAY OF A SPEAKING ORDER. THE GROUND TAK EN BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO.7421/MUM/2011 8. THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSE E AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAF TER REFERRED TO AS CIT(A)] DATED 06.09.2011 RELEVANT TO THE ASSESSMENT YEAR 2 008-09. 9. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE HAS AGITATED THE CONFIRMATION OF HOUSE PROPERTY INCOME AT RS.4,85,655/- AS AGAINS T RS.90,457/- DECLARED BY ASSESSEE. THE ASSESSEE HAD DECLARED THE INCOME FR OM HOUSE PROPERTY FROM UNOCCUPIED RESIDENTIAL PREMISES AS DEEMED LET OUT P ROPERTY U/S 23(1) OF THE INCOME TAX ACT, 1961 ON ADHOC BASIS. HOWEVER, THE AO TOOK THE DEEMED LET OUT VALUE AT THE RATE OF 8% OF BOOK VALUE OF THOS E PROPERTIES. 10. IN FIRST APPEAL, THE LD. CIT(A) CONFIRMED THE SAID DISALLOWANCE. 11. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS CONTENDED THAT THE AO WAS NOT SUPPOSED TO CALCULAT E THE ANNUAL LETTING VALUE(ALV) ON THE BASIS OF 8% OF BOOK VALUE OF THE PROPERTY RATHER THAN THE AO WAS REQUIRED TO ASCERTAIN THE ALV OF THE PROPERTY TAKING INTO CONSIDERATION FAIR 6 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 MARKET RENT IN THE VICINITY IN WHICH THE PROPERTY IS LOCATED OR THE MUNICIPAL RATEABLE VALUE ETC. HOWEVER, HE HAS FURTHER SUBM ITTED THAT THE ASSESSEE IS DISPUTING ONLY THE METHOD OF ASCERTAINING THE ALV O F THE PROPERTY BUT HE DOES NOT PRESS THE QUANTUM OF THE INCOME ASSESSED BY LOW ER AUTHORITIES TOWARDS INCOME FROM HOUSE PROPERTY. HE HAS FURTHER STRE SSED THAT THE ISSUE MAY BE KEPT OPEN FOR THE SUBSEQUENT YEARS. 11.1 IN VIEW OF THE ABOVE SUBMISSIONS MADE BY LD.AR , THE QUANTUM AMOUNT ASSESSED BY LOWER AUTHORITIES AS ALV OF THE PROPER TY IS HEREBY UPHELD. HOWEVER, THE ISSUE IS KEPT OPEN SO FAR SO THE MET HOD OF CALCULATION OF ALV IS CONCERNED. THE ASSESSEE WILL BE AT LIBERTY TO RAIS E HIS CONTENTIONS IN THIS RESPECT IN SUBSEQUENT YEARS. THE METHOD ADOPTED BY LOWER AU THORITIES FOR ASCERTAINING ALV FOR THE CURRENT YEAR WILL NOT BE BINDING UPON T HE ASSESSEE IN SUBSEQUENT YEARS. WITH THE ABOVE OBSERVATIONS GROUND NO.1 OF T HE APPEAL IS HEREBY DISMISSED. 12. VIDE GROUND NO.2, THE ASSESSEE HAS AGITATED THE DISALLOWANCE OF RS.70,01,260/- U/S 14A R.W.R.8D. THE ASSESSEE IN T HIS CASE IS ENGAGED IN THE CAR RENTAL BUSINESS. THE CONTENTION OF LD. AR HAS BEEN THAT LOAN WAS TAKEN FOR THE CAR RENTAL BUSINESS, WHEREAS THE ASSESSEE HAD INVES TED HIS OWN MONEY FOR INVESTMENT FOR EARNING EXEMPT INCOME. THE FACTS AS WELL AS CONTENTION RAISED BY THE ASSESSEE ARE IDENTICAL TO THAT OF THE FACTS RAI SED IN ITA NO.7422/MUM/2011 IN ASSESSEES FAMILY MEMBERS CASE AS DISCUSSED ABOVE AND HAS BEEN RESTORED TO THE FILE OF AO FOR A FRESH DECISION AFTER GIVING O PPORTUNITY OF BEING HEARD TO THE ASSESSEE AS PER LAW. ON THE SAME FOOTING, AND FOLLO WING THE ABOVE FINDING, WE RESTORE THIS ISSUE TO THE FILE OF AO FOR FRESH AP PLICATION OF MIND AND ADJUDICATION ACCORDINGLY. THE GROUND NO.2 IS ALLOWED FOR STATI STICAL PURPOSE. 13. IN GROUND NO.3, THE ASSESSEE HAS AGITATED THE C ONFIRMATION OF DISALLOWANCE OF EXPENSES ON ADHOC BASIS AT THE RATE OF 10% RELATING TO TELEPHONE EXPENSES, CONVEYANCE AND TRAVELLING EXPEN SES, PRINTING, STATIONERY AND OFFICE EXPENSES. 7 I.T.A. NO.7421/MUM/2011 I.T.A. NO.7422/MUM/2011 14. THE AO AFTER CONSIDERING THE SIZE AND NATURE O F BUSINESS AND GEOGRAPHIC CONDITIONS WHERE THE ASSESSEE CARRIES ON BUSINESS, HAS MADE DISALLOWANCE AT THE RATE OF 10% ON ADHOC BASIS. 15. THE LD. AR BEFORE US HAS SUBMITTED THAT DISALLO WANCE ON ADHOC BASIS AT THE RATE OF 10% IS ON HIGHER SIDE. IT MAY BE REDU CED. 15.1 THE LD. CIT(A) WHILE CONFIRMING THE SAID ADHOC DISALLOWANCE HAS NOTED THAT THE ASSESSEE DID NOT SUBMIT ANY EVIDENCE TO R EBUT THE FINDINGS OF THE AO REGARDING NONE VERIFIABLE NATURE OF EXPENSES AND PERSONAL ELEMENT INVOLVED THEREIN. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A) WHILE CONFIRMING THE SAID DISALLOWANCE. GROUND NO.3 OF THE APPEAL IS HEREBY DISMISSED. 16. IN THE RESULT, THE APPEAL BEARING ITA NO.7422/M UM/2011 IS ALLOWED FOR STATISTICAL PURPOSES AND ITA NO.7421/MUM/2011 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 10TH AP RIL, 2014 % - . 10TH APRIL,2014 % SD SD (P.M.JAGTAP/ . . ) ( SANJAY GARG/ ) ACCOUNTANT MEMBER/ JUDICIAL MEMBER/ MUMBAI; . DATED : 10/04/2014 . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT. 3. 1 ( ) / THE CIT(A)- 4. 1 / CIT 5. 2 !4 , ( 4 , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) ( 4 , /ITAT, MUMBAI