THAUMATARGIX INTERNET SERVICES PVT. LTD., MUMBAI V. THE ASSISTANT COMMISSIONER OF INOCME TAX-5(3), MUMBAI

ITA 7601/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8303 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 11-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJIV M SHAH
• Keywords: Depreciation; Earning of tax free income
• Section: 14A; 10

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E MUMBAI . . , . / BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER / AND , . . SHRI RAJENDRA, ACCOUNTANT MEMBER . / ITA NO. 7601/MUM/2011 / ASSESSMENT YEAR 2008-09 M/S. THAUMATARGIX INTERNET SERVICES PVT. LTD., 12, DAMODAR NIWAS, 32/34, C.P. TANK ROAD, MUMBAI-400 004. PAN: AABCT 5580 A VS. THE ASST. COMMISSIONER OF INCOME TAX 5(3), MUMBAI. ( / APPELLANT ) ( ! / RESPONDENT ) ' / APPELLANT BY : SHRI SANJIV M. SHAH ! # ' /RESPONDENT BY : SHRI MOHIT JAIN # $%& / DATE OF HEARING : 18-10-2012 '( # $%& / DATE OF PRONOUNCEMENT : 07-11-2012 )* / O R D E R PER RAJENDRA, AM THE PRESENT APPEAL IS DIRECTED AGAINST THE ORDER DT .28.07.2011PASSED BY THE CIT(A)-9, MUMBAI. FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISED BY THE ASSESSEE- COMPANY: THE FOLLOWING GROUNDS OF APPEAL ARE WITHOUT PREJUDI CE TO ONE ANOTHER 1) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -9 ERRED IN CONFIRMING DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S. 14A R.W. RULE 8D. 2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -9 HAS ERRED IN IGNORING THE FACT THAT THE DISALLOWANCE, IF ANY IS IN RELATION TO THE EXPENSES INCURRED TO EARN EXEMPT INCOME AND NOT ABSOLUTE OR ARBITRARY. 3) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT RULE 8D IS ULTRA VIRES THE PROVISIONS OF S. 14A AND THE SAME COULD NOT BE APPLIED TO MAKE DISALLOWANCE U/S. 14A. ITA NO. 7601/MUM/2011 M/S. THAUMATARGIX INTERNET SERVICES PVT. LTD. 2 4) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE APPELLANT HAD MADE DISALLOWANCE U/S. 14A AND THEREF ORE PROVISIONS OF RULE 8D COULD NOT BE APPLIED TO THE CASE OF THE APPELLANT. 5) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE DISALLOWANCE U/S. 14A IS WITHOUT JURISDICTION AND B AD IN LAW. 6) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -9 HAS ERRED IN NOT CONSIDERING THE VARIOUS CASE LAWS CITED BY THE ASSESSEE. 7) THE APPELLANT PRAYS THAT: I) DISALLOWANCE MADE U/S. 14A BE DELETED; II) RECOVERY OF DEMAND IN DISPUTE MAY BE STAYED; III) PERSONAL HEARING MAY BE GRANTED; IV) ANY OTHER RELIEF YOUR HONOURS MAY DEEM FIT. 8) THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 2. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF INVEST MENT INTO SHARES AND UNITS OF MUTUAL FUND, FILED ITS RETURN OF INCOME ON 31.03.2009 DECLARING TOTAL INCOME OF RS. 68.69 LAKHS. ASSESSMENT ORDER WAS FINALISED BY THE ASSESSING OFFICER (AO) U/S.143(3) OF THE INCOME-TAX ACT,1961(ACT) ON 29.11 .2010 DETERMINING THE TOTAL INCOME AT RS. 72.03 LAKHS. 2.1. DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESSEE DURING THE YEAR HAD EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND AT RS.34,71,566/-. DURING THE YEAR INVESTMENT IN SHARES AND FUNDS WERE SHOWN AT RS.7.3 9 CRORES. IN THIS REGARD THE ASSESSEE WAS ASKED ABOUT THE APPLICABILITY OF DISAL LOWANCE U/S. 14 A OF THE ACT. IN RESPONSE TO THE SAME THE ASSESSEE VIDE ITS LETTER D ATE 12.10.2010 SUBMITTED THAT IT HAD ALREADY DISALLOWED TO SUM OF RS.9.80 LAKHS (EXCLUDI NG DEPRECIATION) IN THE COMPUTATION OF INCOME. AO INVOKING THE PROVISIONS OF SEC.14A R.W. RULE 8D OF INCOME TAX RULES,1962 (RULES) HELD THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE. HE FURTHER DISALLOWED RS.3.34 LAKHS TO THE TOTAL INCOME OF THE ASSESSEE THUS DISALLOWING A SUM OF RS.13.14 LAKHS. 2.2. AGAINST THE ORDER OF THE AO ASSESSEE PREFERRED AN A PPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA). AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER HE HELD THAT DISALLOWANCE INCREASE D BY THE AO WAS JUSTIFIED. 3. BEFORE US, AUTHORISED REPRESENTATIVE (AR) SUBMITTED THAT THE COMPANY HAD NOT INCURRED ANY DIRECT EXPENSES TO EARN SUCH INCOM E, THAT THE COMPANY HAD NOT INCURRED ANY EXPENSE ON ACCOUNT OF INTEREST, THAT I T HAD MADE THE ENTIRE INVESTMENT OUT OF ITS OWN FUNDS, THAT THE ASSESSEE HAD USED SERVIC ES OF DISTRIBUTION AGENT OF MUTUAL FUND TO EARN DIVIDEND INCOME FROM INVESTMENTS, THAT IF AT ALL ANY EXPENSES WERE INCURRED, THEY WERE OF INDIRECT NATURE, THAT THE AS SESSEE HAD WORKED OUT DISALLOWANCE ON A SCIENTIFIC BASIS, THAT WHILE CALCULATING THE D ISALLOWANCE AO INCLUDED DEPRECIATION ALSO, THAT CONSIDERING THE DEPRECIATION FOR 14A DIS ALLOWANCE WAS AGAINST THE PROVISIONS OF LAW, THAT DISALLOWANCE MADE BY THE AS SESSEE SHOULD BE ACCEPTED. HE RELIED UPON THE CASES OF GODREJ BOYCE MFG.CO.LTD., GODREJ AGROVET LTD.(ITA/1629/MUM/09 DTD.17.09.2010) AND VISHNU ANA NT MAHAJAN (16TRIB.657 ITA NO. 7601/MUM/2011 M/S. THAUMATARGIX INTERNET SERVICES PVT. LTD. 3 AHD SPECIAL BENCH). DEPARTMENTAL REPRESENTATIVE (D R) RELIED UPON THE ORDER OF THE AO AND FAA. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL SUBMITTED BEFORE US. THERE IS NO DOUBT THAT SECTION 14A (1) OF THE ACT PROVIDES FOR DISALLOWANCE OF EXPENSES IN RESPECT OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN OTHER WORDS DISALLOWANCE IS REQUIRED TO BE MADE IN RESPECT OF EXPENSES INCURRED TO EARN EXEMPT INCOME. AS A RESULT, NO DIS ALLOWANCE CAN BE MADE, IF NO EXPENSES WERE INCURRED TO EARN SUCH INCOME. SECONDL Y, APPLICATION OF SECTION 14 A (2) DOES NOT COME IN TO PLAY ONCE IT IS SHOWN THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE TO EARN EXEMPT INCOME. BESIDES PROVISI ONS OF SECTION 14A (2) AND 14A (3) R/W RULE 8D ARE APPLICABLE PROVIDED SECTION 14A (1) DETAILS ARE NOT ACCEPTED. IF WE APPLY THESE BROAD PARAMETERS IN THE CASE UNDER C ONSIDERATION WE FIND THAT DISALLOWANCE INCREASED BY THE AO AND UPHELD BY THE FAA IS NOT JUSTIFIED. 4.1. THE ASSESSEE HAS EARNED EXEMPT INCOME IN THE NATURE OF DIVIDEND FROM MUTUAL FUNDS THAT IS EXEMPT U/S 10 (35)(A) OF THE ACT. WE FIND THAT IN THE CASE UNDER CONSIDERATION THE ENTIRE INVESTMENT WAS MADE OUT OF OWN SHARE CAPITAL RESERVES AND OUT OF SALE PROCEEDS OF INVESTMENTS MADE BY THE COM PANY. IN OTHER WORDS, THE ENTIRE INVESTMENTS WAS MADE OUT OF OWN FUNDS. IN THE CASE UNDER CONSIDERATION NEITHER ANY FUNDS WERE BORROWED NOR ANY INTEREST WAS PAID ON SU CH LOANS. WE HAVE NOT COME ACROSS ANY EVIDENCE PROVING THAT COMPANY HAD NOT US ED SERVICES OF MUTUAL FUND DISTRIBUTORS FOR INVESTING IN MUTUAL FUNDS. IT IS A KNOWN FACT THAT MUTUAL FUND DISTRIBUTORS RENDER VARIOUS SERVICES TO THEIR CUSTO MERS. MOST OF THE MUTUAL FUNDS ALSO OFFER ACCOUNT STATEMENTS WHICH ARE DIRECTLY RECEIVE D BY THE ASSESSEE. THUS, THERE IS EVERY POSSIBILITY THAT NO DIRECT EXPENSES ARE REQUI RED TO BE INCURRED FOR EARNING SUCH INCOME. NEITHER THE AO NOR THE FAA HAVE, IN THEIR ORDERS, MENTIONED THAT ASSESSEE COMPANY HAD ACTUALLY INCURRED DIRECT EXPENSES TO EA RN THE EXEMPT INCOME. ON THE OTHER HAND ASSESSEE HAS PROVED THAT IT HAD NOT INCU RRED ANY EXPENDITURE FOR EARNING THAT DOES NOT FORM PART OF TOTAL INCOME. WE FIND T HAT ASSESSEE HAD DISALLOWED THE INDIRECT EXPENSES ON A VERY REASONABLE BASIS. OUT OF THE TOTAL EXPENDITURE CLAIMED TO HAVE BEEN INCURRED A SUM OF RS.3.41 LAKHS IS RELAT ED TO DEPRECIATION. IF WE TAKE IN TO CONSIDERATION THE ABOVE REFERRED FACT IT CAN SAFELY BE STATED THAT THE ASSESSE HAS DISALLOWED ALMOST EVERYTHING WHILE CALCULATING THE 14A DISALLOWANCE. WE ARE OF THE FIRM OPINION THAT DEPRECIATION CANNOT AND SHOULD NO T BE TAKEN IN TO CONSIDERATION FOR COMPUTING DISALLOWANCE U/S.14 A OF THE ACT. CASES RELIED UPON BY THE AR SUPPORT THE ARGUMENTS ADVANCED BY HIM. IN THESE CIRCUMSTANCES, WE REVERSE THE ORDER PASSED BY THE FAA. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH NOVEMBER, 2012. SD/- SD/- ( . . / B.R. MITTAL ) ( / RAJENDRA ) )+ / JUDICIAL MEMBER & )+ / ACCOUNTANT MEMBER MUMBAI, ,) DATE: 7 TH NOVEMBER, 2012 ITA NO. 7601/MUM/2011 M/S. THAUMATARGIX INTERNET SERVICES PVT. LTD. 4 TNMM )* )* )* )* # ## # $- $- $- $- .-$ .-$ .-$ .-$ / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. THE CONCERNED CIT (A) 4. THE CONCERNED CIT 5. DR E BENCH, ITAT, MUMBAI 6. GUARD FILE !-$ $ //TRUE COPY// )* )* )* )* / BY ORDER, / // / / 0 0 0 0 DY./ASSTT. REGISTRAR , / ITAT, MUMBAI