SEAWIND INVESTMENTS AND TRADING CO.LTD, MUMBAI V. ASST CIT RG 1(3), MUMBAI

ITA 7841/MUM/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0778 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 11-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 12-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARUN KUMAR LD
• Assessee Lawyers: ARATI VISSANJI LD
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 115JB; 37(1); 11

Judgement Text

ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI . . , , BEFORE SHRI D.T. GARASIA, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./I.T.A. NO. 7841/MUM/2010 ( / ASSESSMENT YEAR: 2004-05) SEAWIND INVESTMENTS &TRADING CO. LTD. 9, WALLACE STREET FORT MUMBAI 400 001 / VS. ASSISTANT COMMISSIONER OF INCOME TAX RANGE 1(3) AAYKAR BHAVAN M.K.ROAD MUMBAI 400 020 ./ ./PAN/GIR NO. AACCS-6388-J ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) ' / APPELLANT BY : ARATI VISSANJI, LD. AR #$ ' / RESPONDENT BY : ARUN KUMAR, LD. DR / DATE OF HEARING : 11/05/2017 / DATE OF PRONOUNCEMENT : 19/05/2017 ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 2 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THE CAPTIONED APPEAL BY THE ASSESSEE FOR TH E ASSESSMENT YEAR [AY] 2004-05 ASSAILS THE ORDER OF THE LD. COMMISSIO NER OF INCOME-TAX (APPEALS)- 2 [CIT(A)], MUMBAI DATED 18/08/2010 ON T HE FOLLOWING GROUNDS OF APPEAL:- I) THE LD. CIT(A) HAS ERRED IN WORKING OUT DISALLOW ANCE U/S 14A OF THE ACT. II) THE LD. CIT(A) HAS ERRED IN WORKING OUT OTHER D ISALLOWANCE OF RS. 22.15 LACS, TOWARDS MANAGEMENT CHARGES. III) THE LD. CIT(A) HAS ERRED IN WORKING OUT THE PR OFIT U/S 115JB OF THE INCOME TAX ACT, 1961. 2. FACTS LEADING TO THE DISPUTE ARE THAT THE ASSESS EE, BEING RESIDENT CORPORATE ASSESSEE ENGAGED IN TRADING, INVESTMENT & NEEM PLANTATION , WAS ASSESSED FOR IMPUGNED AY U/S 143(3) AT RS.1,29, 99,257/- UNDER NORMAL PROVISIONS BEFORE SET-OFF OF BROUGHT FORWARD LOSSES AND AT RS.1,07,39,856/- U/S 115JB AS AGAINST RETURNED INCO ME OF RS.57,85,040/- FILED BY ASSESSEE ON 20/10/2004. SIN CE ASSESSEE EARNED EXEMPT DIVIDEND INCOME OF RS.120.27 LACS AGAINST IN VESTMENT IN SHARES / MUTUAL FUNDS ETC. FOR RS.75.38 CRORES, IT MADE SUO-MOTO DISALLOWANCE OF RS.32.17 LACS U/S 14A AGAINST THE SAME WHICH WAS COMPUTED AS PER RATIO OF EXEMPT INCOME TO TOTAL INCOME. TO HAVE BET TER UNDERSTANDING OF THE WORKING DONE BY ASSESSEE DURING THE IMPUGNED AY , THE TOTAL EXPENSES AND INCOME REFLECTED IN THE PROFIT & LOSS ACCOUNT ARE TABULATED BELOW:- ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 3 EXPENDITURE AMOUNT (RS. IN LACS ) PURCHASE OF SHARES 139.78 MANAGEMENT CHARGES 33.60 INTEREST 71.27 OTHER EXPENSES 1.91 TOTAL 246.55 INCOME AMOUNT (RS. IN LACS) INTEREST 4.83 DIVIDEND 120.28 SALE OF SHARES 219.09 INCREASE IN STOCK 47.87 TOTAL 392.07 DURING ASSESSMENT PROCEEDINGS, PER QUERY FROM LD. AO, THE ASSESSEE CONTENDED THAT DISALLOWANCE U/S 14A WAS NOT ASCERTA INABLE AND SUO- MOTO DISALLOWANCE WAS COMPUTED ON THE BASIS OF EARLIER DISALLOWANCE MADE BY THE REVENUE. NOT CONVINCED, LD. AO NOTED TH AT SINCE INTEREST BEARING FUNDS WERE USED TO ACQUIRE THE SHARES AND H ENCE, FULL DISALLOWANCE OF INTEREST OF RS.71.25 LACS WAS CALLE D FOR. REGARDING ADMINISTRATIVE CHARGES FOR THE PURPOSE OF SECTION 1 4A, THE AO COMPUTED THE SAME @30.68%, BEING RATIO OF EXEMPT INCOME VIS- -VIS TOTAL INCOME, OF OTHER EXPENDITURE OF RS.35.51 LACS WHICH CAME TO RS.10.89 LACS. THUS, TOTAL DISALLOWANCE U/S 14A WAS WORKED OUT @ R S.82.16 LACS COMPRISING OF INTEREST DISALLOWANCE OF RS.71.25 LAC S AND EXPENSE DISALLOWANCE OF RS.10.89 LACS. AFTER ADJUSTING SUO-MOTO DISALLOWANCE OF RS.32.17 LACS MADE BY THE ASSESSEE IN THE RETURN OF INCOME, THE NET DISALLOWANCE CAME TO RS.49.98 LACS. 3. THE ASSESSEE SUFFERED ANOTHER DISALLOWANCE TO TH E EXTENT OF 90% OF BALANCE EXPENDITURE OF RS.24.61 LACS OUT OF MANAGEMENT EXPENSES & OTHER EXPENSES , AS THE SAME, IN THE OPINION OF LD. AO, REMAIN ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 4 UNSUBSTANTIATED AND THE ASSESSEE FAILED TO SHOW ANY RECEIPT OF SERVICE AGAINST THOSE EXPENSES. THE DISALLOWANCE THUS WORKE D OUT WAS RS.22.15 LACS. 4. THE THIRD ISSUE, IN THE APPEAL IS RELATED WITH C OMPUTATION OF BOOK PROFIT U/S 115JB. THE ASSESSEE, ALTHOUGH DEDUCTED E XEMPT INCOME WHILE ARRIVING AT BOOK PROFITS U/S 115JB BUT DID NOT ADDE D BACK THE DISALLOWANCE U/S 14A, WHICH, IN THE OPINION OF LD. AO WAS INCLUDIBLE IN VIEW OF THE FACT THAT THE ASSESSEE DEDUCTED EXEMPT INCOME WHILE COMPUTING THE BOOK PROFITS. ACCORDINGLY, THE DISALL OWANCE OF RS.82.16 LACS WORKED OUT BY AO WAS ADDED BACK TO ARRIVE AT B OOK PROFITS U/S 115JB. 5. THE ASSESSEE CONTESTED ALL THE ADDITIONS / DISAL LOWANCES BEFORE LD. CIT(A) WITHOUT ANY SUCCESS VIDE IMPUGNED ORDER DATED 18/08/2010, AGAINST WHICH THE ASSESSEE IN APPEAL BEFORE US. THE LD. CIT(A), IN THE SAID ORDER DIRECTED THE LD. AO TO APPLY RULE 8D, BE ING RETROSPECTIVE IN NATURE TO ARRIVE AT DISALLOWANCE U/S 14A. THE DISAL LOWANCE U/S 37(1) AND ADJUSTMENT TO BOOK PROFITS U/S 115JB WERE CONFIRMED BY THE LD. CIT(A). 6. THE LD. COUNSEL FOR ASSESSEE [AR] WHILE DRAWING OUR ATTENTION TO THE DOCUMENTS PLACED IN THE PAPER-BOOK, CONTENDED THAT SIMILAR ISSUE OF INTEREST DISALLOWANCE CROPPED UP IN ASSESSEES OWN CASE FOR AY 2001- 02 & 2002-03 AND THE TRIBUNAL IN BOTH THE YEARS HAV E SETTLED THE ISSUE PARTLY IN FAVOR OF ASSESSEE AND THEREFORE, FOLLOWIN G THE SAME, VIEW COULD BE TAKEN IN THE IMPUGNED MATTER SO FAR AS DISALLOWA NCE U/S 14A WAS CONCERNED. QUA DISALLOWANCE OF RS.22.15 LACS FROM MANAGEMENT FEES / OTHER EXPENSES U/S 37(1), THE LD. AR CONTENDED THAT THE ASSESSEE DID NOT HAVE ANY SPACE OR MANPOWER OF ITS OWN AND THERE FORE AVAILED THE ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 5 SERVICES FROM ITS PARENT / ASSOCIATED CONCERN NAMEL Y BOMBAY BURMAH TRADING CORPORATION LIMITED AND PAID ALL THOSE EXPENSES AND THEREFORE, ALLOWABLE TO THE ASSESSEE. MOREOVER, THE ASSESSEE I NCURRED CERTAIN EXPENSES AGAINST NEEM PLANTATION BUSINESS WHICH HAS BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT AND HENCE, THE EXPENDITURE CLAIMED IN THE PROFIT & LOSS ACCOUNT WAS FULLY JUSTIFIABLE. 7. PER CONTRA, LD. DR PLACED RELIANCE ON THE FINDINGS OF LD. CIT(A ) AND CONTENDED THAT THE ASSESSEE PAID HEAVY MANAGEME NT FEES OF RS.33.60 LACS TO ITS ASSOCIATED CONCERN BUT COULD N OT DEMONSTRATE RECEIPT OF ANY SERVICE AGAINST THOSE FEES. MOREOVER , NO AGREEMENT IN THIS REGARD COULD EVER BEEN PRODUCED BY THE ASSESSEE AND THEREFORE, RIGHTLY BEEN DISALLOWED SINCE THE ASSESSEE WAS MAINLY ENGA GED IN SHARES TRADING BUSINESS ONLY AND AS MUCH AS MORE THAN 30% OF THE TOTAL INCOME EARNED BY THE ASSESSEE WERE BY WAY OF EXEMPT DIVIDEND INCOME. 8. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED RELE VANT MATERIAL ON RECORD. IT IS NOTED THAT THE ISSUE OF INTEREST DISA LLOWANCE AROSE IN ASSESSEES OWN CASE FOR 2001-02 & 2002-03 WHICH REA CHED UP-TO THE LEVEL OF TRIBUNAL. A PERUSAL OF TRIBUNALS ORDER IT A NO. 5681/MUM/2014 FOR AY 2001-02 ORDER DATED 28/06/2007 REVEALS THAT THE SINCE THE ASSESSEE ACQUIRED THE ADDITIONAL SHARES BETWEEN 27/ 02/2001 AND 23/03/2001, TRIBUNAL DIRECTED THE AO TO RESTRICT TH E INTEREST DISALLOWANCE FOR THIS PERIOD ONLY. FURTHER, TRIBUNAL IN ITA NO. 6528/MUM/2004 FOR AY 2002-03 ORDER DATED 21/02/2008, CONFIRMED THE ACTIO N OF LD. CIT(A) IN COMPUTING THE SAID DISALLOWANCE BY APPLYING AVERAGE COST OF UNSECURED LOANS EXCLUDING ZERO PERCENTAGE INVESTMENT BOND TO ADDITIONAL PURCHASE ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 6 OF SHARES DURING FY 2001-02 FOR RS.8,98,74,155/-. W E FIND THE SAME TO BE A REASONABLE / PLAUSIBLE VIEW AND INCLINED TO FO LLOW THE JUDICIAL PRECEDENT. WE FIND THAT THE ASSESSEE HAS PAID INTER EST OF RS.71,25,923/- DURING IMPUGNED AY AND UNSECURED LOANS AS ON 31/03/ 2004 AS PER FINANCIAL STATEMENTS PRODUCED BEFORE US, STOOD AT R S.980.25 LACS WHICH TRANSLATES INTO AVERAGE COST OF FUND BEING 7.27%. A PPLYING THE SAME TO THE FIGURES OF ADDITIONAL INVESTMENT IN SHARES FOR RS.898.74 LACS, THE DISALLOWANCE THUS WORKS OUT TO BE RS.65.33 LACS, WH ICH THE ASSESSEE SHALL SUFFER AND WHICH IS FAIR AND REASONABLE ALSO KEEPING IN VIEW THE CAPITAL STRUCTURE OF THE COMPANY AS ON 31/03/2004 W HICH IS AS FOLLOWS:- LIABILITIES AMOUNT (RS. IN LACS ) ASSETS AMOUNT (RS. IN LACS ) SHAREHOLDERS FUND 78.20 FIXED ASSETS 8.97 LOAN FUNDS 7585.05 INVESTMENTS 7538.95 NET CURRENT ASSETS 67.72 PROFIT & LOSS A/C 47.61 TOTAL 7663.25 7663.25 WE FIND THAT AGAINST LOAN FUNDS OF RS.7585.05, INVE STMENTS STANDS AT RS.7538.95 LACS AND BOTH THESE ITEMS CONSTITUTE SUB STANTIAL LIABILITIES AND ASSETS RESPECTIVELY OF THE ASSESSEE COMPANY. TH IS BEING THE FACTUAL POSITION, WE CONFIRM THE INTEREST DISALLOWANCE U/S 14A TO THE EXTENT OF RS.65.33 LACS, AS WORKED OUT IN THE ABOVE MANNER. 9. SO FAR AS THE DISALLOWANCE OF MANAGEMENT FEES / OTHER EXPENSES IS CONCERNED, WHETHER U/S 14A OR U/S 37(1), WE ARE OF THE OPINION THAT WHATEVER ARE THE EXPENSES, THEY SHOULD, AT THE THRE SHOLD, FIRST PASS THE TEST OF LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AS ENVISAGED BY SECTION 37(1). UPON PERUSAL OF FACT UAL MATRIX, WE FIND THAT THESE EXPENSES HAVE REMAINED UNSUBSTAN TIATED AT ALL LEVELS. EVEN BEFORE US, THE LD. AR COULD NOT PROVIDE THE DE TAILS OF MANAGEMENT ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 7 FEES OF RS.33.60 LACS AND ALSO COULD NOT PROVE THE FACTUM OF ACTUAL RECEIPT OF ANY SERVICES BACKED BY ANY AGREEMENT / A RRANGEMENT AND MADE A SIMPLE ASSERTION THAT THE SAME WERE MERE REI MBURSEMENT IN NATURE, WITH WHICH WE ARE NOT CONVINCED AS IDENTICA L EXPENSE OF RS.33.60 LACS HAS BEEN CLAIMED IN THE IMMEDIATELY P RECEDING YEAR ALSO. IT COULD ALSO NOT BE SHOWN WHETHER TDS PROVISIONS W ERE COMPLIED WITH AGAINST THE PAYMENT OF MANAGEMENT FEES . THEREFORE, ON THE FACTS OF THE CASE, WE DEEM IT FIT TO RESTORE THE MATTER BACK TO THE FILE OF LD. AO FOR VERIFICATION OF THE EXPENSES CLAIMED BY THE ASSESSE E AND RE-ADJUDICATE THE MATTER OF THEIR ADMISSIBILITY U/S 37(1) AND 14A . THE ASSESSEE IS ALSO DIRECTED TO SUBSTANTIATE HIS CLAIM FORTHWITH IN THI S REGARD FAILING WHICH THE LD. AO SHALL BE AT LIBERTY TO DECIDE THE ISSUE ON T HE BASIS OF MATERIAL AVAILABLE ON RECORD. ACCORDINGLY, GROUND NOS. 1 & 2 OF ASSESSEES APPEAL STANDS PARTLY ALLOWED. 10. SO FAR AS THE ADJUSTMENT OF SECTION 14A DISALLO WANCE FROM BOOK PROFITS U/S 115JB IS CONCERNED, LD. AR BROUGHT TO O UR NOTICE THE FACT THAT IN VIEW OF CONTRARY TRIBUNAL DECISIONS, THE MATTER IS PENDING WITH THE SPECIAL BENCH BUT FAIRLY CONCEDED THAT AT PRESENT, THE MATTER STOOD COVERED AGAINST THE ASSESSEE BY THE JUDGMENT OF HON BLE DELHI HIGH COURT IN CIT VS FEDERAL-MOGUL GOETZE (INDIA) LTD. ITA NO 197 9/2010 ORDER DATED 09/12/2013, WHICH WE HAVE CONSIDERED . THIS BEING THE FACTUAL POSITION, RESPECTFULLY FOLLOWING THE DECISI ON OF HONBLE DELHI HIGH COURT, THIS ISSUE STANDS DECIDED AGAINST THE ASSESS EE. EVEN OTHERWISE, THE ASSESSEE HAS DEDUCTED EXEMPT INCOME WHILE ARRIV ING AT BOOK PROFITS U/S 115JB AND THEREFORE THERE WAS NO LOGIC NOT TO A DJUST THE RELATED ITA NO.7841/M/2010 SEAWIND INVESTMENTS AND TRADING CO. LTD ASSESSMENT YEAR-2004-05 8 EXPENSES IN THE SIMILAR MANNER. ACCORDINGLY, THIS G ROUND OF ASSESSEES APPEAL STANDS DISMISSED. 11. THE LD. AO IS DIRECTED TO RE-COMPUTE INCOME OF THE ASSESSEE UNDER NORMAL PROVISIONS AS WELL AS UNDER SECTION 11 5JB AND ALSO REWORK BROUGHT FORWARD / SET-OFF OF LOSSES, IF REQUIRED. 12. IN NUTSHELL, THE ASSESSEES APPEAL STANDS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH MAY, 2017. SD/- SD/- (D.T. GARASIA) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 19.05.2017 SR.PS:- THIRUMALESH / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. - ( ) / THE CIT(A) 4. - / CIT CONCERNED 5. #'/ , / , / DR, ITAT, MUMBAI 6. 0 / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI