AJAY C MEHTA & AKSHAY J DOSHI, MUMBAI V. ADDL CIT 24(1), MUMBAI

ITA 7580/MUM/2014

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6269 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 18-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAV
• Assessee Lawyers: PUNEET BOTHRA
• Keywords: Business expenditure; Earning of tax free income; Rule 8D; Set aside
• Section: 14A; 201; 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A , MUMBAI BEFORE S HRI G.S. PANNU (VP ) AND SHRI RAM LAL NEGI (JM) ITA NO. 7580 /MUM/20 1 4 ASSESSMENT YEAR: 2010 - 11 M/S AJAY C MEHTA & AKSHAY J DOSHI, 106, SHREEPAL INDUSTRIAL ESTATE, SV ROAD, JOGESHWARI (WEST), MUMBAI - 400102 PAN: AAGFA2685R VS. THE ADDL. CIT 24(1), MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. MAHAVEER JAIN & PUNEET BOTHRA (AR) REVENUE BY : SHRI RAJESH KUMAR YADAV & SUHAS KULKARNI (DR) DATE OF HEARING: 30/11/ 201 8 DATE OF PRONOUNCEMENT: 23 / 01 /201 9 O R D E R PER RAM LAL NEGI, JM THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 29/09/2014 PASSED BY THE LD. COMMISSIONER OF INCOME TAX ( APPEALS) - 34 , MUMBAI , FOR THE A S S ESSMENT YEAR 2010 - 11 , WHEREBY THE LD. CIT (A) HAS PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE AGAINST ASSESSMENT ORDER PASSED U/S 143 (3 ) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE A CT). 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE ENGAGED IN TRADING OF TDR, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION DECLARING THE TOTAL INCOME OF RS. 4,72,46,518/ - . SINCE, THE CASE WAS SELECTED FOR SCRUTINY, THE AO ISSUED NOTICES U/S 143 (2) AND 142 (1) O F THE ACT. IN RESPONSE TO THE SAID NOTICES, THE AUTHORIZED REPRESENTATIVE ATTENDED THE PROCEEDINGS AND 2 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 FURNISHED THE DETAILS. IT WAS NOTICED THAT THE ASSESSEE HAD EARNED EXEMPT INCOME AMOUNTING TO RS. 1.17 CRORE , THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A SHOULD NOT BE MADE. IN RESPONSE THEREOF THE ASSESSEE CONTENDED THAT THE INVESTMENTS WHICH EARNED EXEMPT INCOME WERE MADE FROM THE INTEREST FREE FUNDS WHICH WERE AVAILABLE WITH IT AND FURTHER CONTENDED THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME . HOWEVER, THE AO REJECTING THE CONTENTION OF THE ASSESSEE MADE DISALLOWANCE OF RS. 43,24,699/ - U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAD DEBITED RS. 5 LACS UNDER TH E HEAD MEMBERSHIP AND SUBSCRIPTION. IT WAS FOUND THAT PAYMENT WAS MADE TO MAHARASHTRA CHAMBER OF HOUSING INDUSTRY ( MCHI ) UNDER THE HEAD LEGAL FUND. ACCORDINGLY, THE ASSESSEE WAS ASKED TO EXPLAIN AND JUSTIFY THE EXPENDITURE. THE ASSESSEE SUBMITTED THAT IT H AD PAID MCHI FOR TAKING ITS VARIOUS CAUSES OF ITS MEMBERS THE ASSESSEE VARIOUS CAUSES TO DIFFERENT FORMS THROUGH ITS TEAM OF LEGAL EXPERTS. THE SAID SUM WAS NOT PAID IN THE FORM OF ANY MEMBERSHIP OR DONATION BUT WAS PAID IN CONNECTION WITH PROTECTING THE I NTEREST OF THE BUSINESS OF THE ASSESSEE . THE AO HOWEVER REJECTED THE CONTENTION OF THE ASSESSEE AND DISALLOWED THE SAME AND ADDED BACK THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE. ACCORDINGLY, T HE AO INTER ALIA MAKING THE SAID ADDITIONS DETERMINED THE TO TAL INCOME OF THE ASSESSEE AT RS. 5,21,46,220/ - AS AGAINST THE RETURNED INCOME OF RS. 4,72,46,518/ - . 3. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER BEFORE THE LD. CIT (A). THE LD. CIT (A) AFTER HEARING THE CONTENTIONS OF THE ASSESSEE CONFIRMED BOTH THE A DDITIONS. 4 . AGGRIEVED BY THE ORDER OF LD. CIT (A), THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING EFFECTIVE GROUND S : - 1. THAT THE CIT (A) GROSSLY ERRED IN IGNORING FACTS OF THE CASE AND CONFIRMING DISALLOWANCE MADE BY AO U/S 14A R.W. RULE 8D RS. 43,24,699/ - . 3 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 2. THAT THE LD. CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY AO ON ACCOUNT OF CONTRIBUTION TO MCHI AMOUNTING TO RS. 500,000/ - TOWARDS LEGAL FUND WHICH IS COLLECTED FROM APPELLANT WITHOUT APPRECIATING THE FACT THAT TH E EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 5. BEFORE US , THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SINCE THE ASSESSEE HAD NOT UTILIZED THE INTEREST BEARING FUNDS FOR EARNING EXEMPT INCOME, TH E AO HAS WRONGLY MADE DISALLOWANCE U/S 14A READ WITH RULE 8D , THEREFORE THE LD. CIT(A) OUGHT TO HAVE DELETED THE ADDITION. THE LD. COUNSEL FURTHER SUBMITTED THAT THE AO CAN MAKE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, AFTER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, RAISES DOUBT ON CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO THE INCOME WHICH DOES NOT FORM THE PART OF THE TOTAL INCOME . THE LD. COUNSEL FURTHER CONTENDED THAT THE INVESTMENTS, WHICH EARNED EXEMPT INCOME WERE MADE OUT OF THE AVAILABLE CAPITAL RESERVES. THE LD. COUNSEL INVITED OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE AS ON 31.03.2010 AND POINTED OUT THAT THE TOTAL CAPITAL RESERVES OF THE ASSESSEE AS ON 31.03.2010 WAS RS. 1,757,199,424/ - AND THE TOTAL INVESTMENT WAS RS. 346,450,346/ - . THE LD. COUNSEL FURTHER PLACING RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER L TD. 221 CTR 435 , SUBMITTED THAT SINCE THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND TO MEET INVESTMENT, IT SHALL BE PRESUMED THAT THE INVESTMENTS WERE MADE FROM THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. 6. ON THE OTHER HAND, THE LD. DEPARTMENT AL REPRESENTATIVE (DR) RELYING ON THE CONCURRENT FINDINGS OF THE AUTHORITIES BELOW SUBMITTED THAT SINCE THE AO HAS MADE THE DISALLOWANCE IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D AFTER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, AND FINDING THAT THE CLAIM OF THE 4 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THE LD. DR FURTHER POINTED OUT THAT THE ASSESSEE HAS WRONGLY PROJECTED THE CAPITAL RESERVE AS UNSECURED LOANS, CUR RENT LIABILITIES AND PROVISIONS, OUTSTANDING PAYABLES AND SUNDRY CREDITORS FOR TDR, REFLECTED IN THE BALANCE CANNOT BE TREATED AS CAPITAL RESERVES AND SURPLUS OF THE ASSESSEE. THE INVESTMENTS MADE BY THE ASSESSEE ARE MORE THAN THE ACTUAL CAPITAL AVAILABLE WITH THE ASSESSEE DURING THE RELEVANT PERIOD. IN THE LIGHT OF THE AFORESAID FACTS, THE LD. DR CONTENDED THAT THERE IS NO MERIT IN THE ASSESSEES CONTENTION. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO GONE THROUGH THE RELEVANT RECORD IN THE LIGHT OF T HE RIVAL CONTENTIONS OF THE PARTIES. THE LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A READ WITH RULE 8D(II) AND (III). WE NOTICE THAT THE AO HAS MADE DISALLOWANCE OF RS. 2,12,15,329/ - UNDER RULE 8D(II) HOLDING THAT SUNDRY CRED IT FOR TDR OF RS. 114.9 CRORE CANNOT BE SAID TO BE THE INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE AS THERE IS CORRESPONDING STOCK IN TRADE OF RS. 127.9CRORE. SIMILARLY, THE AO HELD THAT ADVANCE OF TDR, SUNDRY DEBTORS, ADVANCE AND DEPOSITS REFLECTED IN THE BALANCE SHEET CANNOT BE TREATED AS THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. ON THE BASIS OF THE SAID FACTS, THE AO CONCLUDED THAT THE INVESTMENT MADE BY THE ASSESSEE DURING THE YEAR, WHICH EARNED EXEMPT INCOME WAS MUCH MORE THAN THE INTERES T FREE FUNDS AVAILABLE WITH THE ASSESSEE. FURTHER THE AO NOTICED THAT THE DIVIDEND EARNED BY THE ASSESSEE IS MORE THAN THE GROSS TOTAL INCOME OF THE ASSESSEE. ACCORDINGLY, THE AO HELD THAT THE EXPENSES INCURRED BY THE ASSSESSEE INCLUDE THE EXPENSES INCURRE D FOR EARNING EXEMPT INCOME. THE LD. CIT(A) ENDORSED THE FINDINGS OF THE ASSESSEE REJECTING THE CONTENTION OF THE ASSESSEE THAT ONLY FUNDS AMOUNTING TO RS. 31CRORE WAS INTEREST BEARING FUNDS WHICH WERE UTILIZED FOR MAKING ADVANCE PAYMENT FOR PURCHASE OF TD R. 5 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 8. WE FURTHER NOTICE THAT AO HAS COMPLETELY REJECTED THE CONTENTIONS OF THE ASSESSEE AND COMPUTED THE DISALLOWANCE UNDER RULE 8D(2)(II). THE LD. CIT(A) HAS AFFIRMED THE DISALLOWANCE WITHOUT TAKING INTO CONSIDERATION THE CONTENTIONS OF THE ASSESSEE. IN C IT VS. RELIANCE UTILITIES & POWER LTD. (SUPRA) THE HONBLE BOMBAY HIGH COURT HAS HELD THAT WHERE AN ASSESSEE HAS HIS OWN FUNDS FOR MAKING INVESTMENTS FOR EARNING EXEMPT INCOME, IT SHOULD BE PRESUMED THAT THE ASSESSEE HAS MADE THE INVESTMENTS FROM HIS OWN F UNDS. IN THE PRESENT CASE THOUGH THE ASSESSEE HAS CLAIMED THAT IT HAS NOT UTILIZED THE INTEREST BEARING FUNDS FOR EARNING EXEMPT INCOME, HOWEVER, IT CANNOT BE CONCLUDED FROM THE BALANCE SHEET OF THE ASSESSEE THAT THE ASSESSEE HAS NOT USED THE INTEREST BEAR ING FUNDS FOR MAKING INVESTMENTS IN QUESTION. IN OUR CONSIDERED OPINION, THE CONTENTIONS OF THE ASSESSEE NEED PROPER VERIFICATION BY THE AO TO ASCERTAIN THE AMOUNT OF INTEREST BEARING FUNDS UTILIZED BY THE ASSESSEE FOR EARNING EXEMPT INCOME. WE THEREFORE, SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND REMIT THE ISSUE BACK TO THE AO FOR DETERMINING THE AMOUNT OF INTEREST BEARING FUNDS UTILIZED BY THE ASSESSEE FOR EARNING EXEMPT INCOME AFRESH AFTER HEARING THE ASSESSEE IN THE LIGHT OF THE CONTENTIONS OF THE A SSESSEE FOR MAKING PROPORTIONATE DISALLOWANCE . 9. SO FAR AS THE DISALLOWANCE MADE RULE 8D(III) IS CONCERNED, SINCE THE AO HAS COMPUTED THE DISALLOWANCE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WE DO NOT FIND ANY MERIT IN THE CON TENTION OF THE ASSESSEE. HENCE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A ) TO INTERFERE WITH. HENCE WE PARTLY ALLOW GROUND NO. 1 OF THE ASSESSEES APPEAL FOR STATISTICAL PURPOSES. 10. AS REGARDS THE SECOND GROUND, THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT THE AMOUNT OF RS. 5,00,000/ - PAID TO MCHI HAS A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE. THE SAID AMOUNT WAS PAID TOWARDS THE EXPENSES INCURRED BY MCHI IN REPRESENTING THE ASSESSEE IN VARIOUS FORUMS 6 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 THROUGH THEIR TEAM OF LEGAL EXPERTS. THE LD. COUNSEL FURTHER CONTENDED THAT DURING THE RELEVANT PERIOD THERE WAS A BAN ON UTILIZATION OF TDR CORRIDOR, WHICH WAS CHALLENGED BY MCHI AND AT THE REQUEST OF MCHI THE ASSESSEE MADE PAYMENT OF THE SAID AMOUNT. RELYING ON THE DECISION OF THE HONBLE PATNA HIGH COURT IN THE CASE OF CIT VS. DHARBHANGA SUGAR CO LTD 32 ITR 64 AND DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DELHI CLOTH & GENERAL MILLS LT. VS. CIT 85 ITR 261, THE LD COUNSEL SUBMITTED THAT SINCE THE FINDINGS OF THE LD. CI T(A) IS CONTRARY TO THE RATIO LAID DOWN IN THE AFORESAID CASES, THE SAME IS LIABLE TO BE SET ASIDE. 11. ON THE OTHER HAND THE LD. DR RELYING ON THE FINDINGS OF THE AUTHORITIES BELOW SUBMITTED THAT SINCE THE ASSESEE HAS FAILED TO DEMONSTRATE THAT THE EXPEND ITURE IN QUESTION WAS INCURRED FOR THE BUSINESS OF THE ASSESSEE, THE LD. CIT(A) HAS RIGHTLY CONFIRMED THE DISALLOWANCE MADE BY THE AO. 12. WE HAVE PERUSED THE MATERIAL ON RECORD INCLUDING THE CASES RELIED UPON BY THE ASSESSEE IN THE LIGHT OF THE RIVAL SUB MISSIONS OF THE PARTIES. WE NOTICE THAT THERE IS NO DISPUTE WITH REGARD TO THE PAYMENT MADE TO MCHI. THE AO HAS MADE THE DISALLOWANCE FOR THE REASON THAT THE AMOUNT PAID IS NOT CONNECTED WITH THE BUSINESS OF THE ASSESSEE TO ALLOW THE SAME AS BUSINESS EXPEN DITURE. 13. WE NOTICE THAT IN THE CASES RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE THE HONBLE HIGH COURTS HAVE DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE. IN THE CASE OF DELHI CLOTH & GENERAL MILLS LT. VS. CIT (SUPRA) , THE HONBLE HIGH CO URT HAS ALLOWED THE AMOUNT PAID BY THE ASSESSEE TOWARDS CO NTRIBUTION MADE TO TRADE ASSOCIATION FOR PROTECTION OF TRADE INTEREST AS BUSINESS EXPENDITURE. HENCE, IN THE LIGHT OF THE AFORESAID DECISION WE FIND MERIT IN THE ARGUMENTS OF THE LD. COUNSEL FOR TH E ASSESSEE. HENCE, WE ALLOW THIS GROUND OF APPEAL OF THE ASSESSEEC AND SET ASIDE THE FINDINGS OF THE LD. CIT(A). ACCORDINGLY, WE DIRECT THE AO TO DELETE THE ADDITION. 7 ITA NO. 7580 / MUM/2014 ASSESSMENT YEAR: 2010 - 11 IN RESULT, APPEAL FILED BY THE ASSESSEE FOR A SSESSMENT YEAR 2010 - 2011 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JANUARY, 2019 . SD/ - SD/ - ( G.S. PANNU ) ( RAM LAL NEGI ) VICE PRESIDENT JUDICIAL MEMBER MUMBAI ; DATED: 23 / 01/2019 ALINDRA, PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT( A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI