CRESCENT ORGANICS P. LTD, MUMBAI V. ASST CIT 8(3)(OSD), MUMBAI

ITA 785/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84083 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-07-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 30-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Source of fund; Valuation report; Onus to prove; Revenue expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM ./I.T.A. NO. 785/MUM/2013 ( / ASSESSMENT YEAR: 2006-07 CRESCENT ORGANICS P. LTD. WINDSOR, 2 ND FLOOR, CST ROAD KALINA, SANTACRUZ (E) MUMBAI 400098 / VS. ASSISTANT COMMISSIONER OF INCOME TAX, 8(3) (OSD) MUMBAI ./PAN : AAACC1690D ( /APPELLANT ) .. ( ! / RESPONDENT ) ' # / APPELLANT BY : SHRI PIYUSH CHHAJED ! ' # / RESPONDENT BY : SHRI NEIL PHILIP $% & ' ' /DATE OF HEARING : 03.11.2014 ()* ' ' / DATE OF ORDER : 07.11.2014 / O R D E R PER SANJAY ARORA, AM THIS IS AN APPEAL BY THE ASSESSEE, ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-21, MUMBAI (CIT(A) FOR SH ORT) DATED 19.12.2012, DISMISSING ASSESSEES APPEAL CONTESTING ITS ASSESSMENT UNDER S ECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 15.12.2008 FOR THE ASSESSMENT YEAR (AY) 2006-07. 2. THE APPEAL RAISES TWO GROUNDS, WHICH WE SHALL TA KE UP IN SERIATIM: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN DIREC TING THE AO TO COMPUTE DISALLOWANCE U/S.14A IN ACCORDANCE WITH RUL E 8D, WHEN THE SAME IS NOT APPLICABLE FOR THE ASSESSMENT YEAR IN APPEAL . 2 ITA NO. 785/MUM/2013 (A.Y. 2006-07) CRESCENT ORGANICS P. LTD. VS. ASST. CIT 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFI RMING THE DISALLOWANCE OF RS.2,92,200/- ON ACCOUNT OF FINANCE CHARGES PAID TO THE BANK TOWARDS DOCUMENTATION AND PROCESS EXPENSES FOR SECURING FINANCE. 3. THE BRIEF FACTS IN RELATION TO GD #1 ARE THAT T HE ASSESSEE WAS DURING THE ASSESSMENT PROCEEDINGS FOUND TO HAVE EARNED DIVIDE ND INCOME AT RS. 48,953/-, AS WELL AS HOLDING INVESTMENT IN EQUITY SHARES, WHICH COULD YIELD INCOME NOT LIABLE TO TAX, SO THAT DISALLOWANCE UNDER SECTION 14A WAS WARRANTED. FURTHER, THE ASSESSEE HAVING NOT MADE ANY DISALLOWANCE THERE-UNDER, THE ASSESSING OF FICER (AO), APPLYING RULE 8D, WORKED OUT THE SAME AT RS.19,05,170/-. IN APPEAL, T HE LEARNED CIT(A) FOUND THAT OUT OF THE TOTAL INVESTMENT IN SHARES, AN AMOUNT OF RS.55 4.16 LAKHS WAS INVESTED IN KEMSOL LTD., DUBAI, A SISTER CONCERN, RESIDENT OUTSIDE IND IA, INCOME WHERE-FROM, WHETHER BY WAY OF DIVIDEND OR CAPITAL GAINS, WOULD BE SUBJECT TO T AX IN INDIA. ACCORDINGLY, THE AO WAS DIRECTED TO EXCLUDE THE SAID INVESTMENT IN RECKONIN G THE DISALLOWANCE UNDER SECTION 14A(1) R/W R. 8D. 4.1 BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE (A R) OF THE ASSESSEE, REFERRING TO THE ASSESSEES BALANCE SHEET (AT PAPER-BOOK PAGES 1 & 2 ), CONTENDED THAT THE ASSESSEE HAD, APART FROM CAPITAL AT RS.98.40 LAKHS, RESERVES AND SURPLUS AT RS.870.59 LAKHS (I.E., AS ON 31.03.2006), SO THAT THE PRESUMPTION IN LAW WOULD B E THAT THE ENTIRE INVESTMENT IN SHARES IS FINANCED BY OWN CAPITAL AND, THEREFORE, NO DISAL LOWANCE ON ACCOUNT OF INTEREST, WHICH COMPRISES THE DISALLOWANCE U/S. 14A IN THE MAIN, WO ULD OBTAIN. REFERENCE IN THIS REGARD WAS ALSO MADE BY HIM TO THE DECISION BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD . [2009] 313 ITR 340 (BOM). THE DISALLOWANCE IN RESPECT OF INDIRECT ADMINISTRATIVE EXPENSES, EXCLUD ING THE INVESTMENT IN KEMSOL LTD., SINCE DIRECTED TO BE EXCLUDED BY THE LD. CIT(A), WO ULD WORK OUT TO ONLY RS. 11,431/- (PB PG. 3). 4.2 THE LD. D.R., ON THE OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW, STATING THAT THE DISALLOWANCE UNDER SECTION 14A IS A STATUTORY DISALLOWANCE, SO THAT IT WOULD OBTAIN WHERE THE ASSESSEE IS NOT ABLE TO ESTA BLISH THE SOURCE OF FUNDING OF ITS 3 ITA NO. 785/MUM/2013 (A.Y. 2006-07) CRESCENT ORGANICS P. LTD. VS. ASST. CIT DIFFERENT ASSETS. RULE 8D, THOUGH NOT MANDATORY FOR THE CURRENT YEAR, IS ONLY A REASONABLE METHOD, PREMISED ON A PROPORTIONATE FUNDING (OF ALL ASSETS) WHERE A DIRECT OR CLEAR NEXUS IS NOT, AS IN THE INSTANT CASE, SHOWN BY THE ASSESS EE, SO THAT THERE IS NO INFIRMITY IN THE SAME BEING APPLIED FOR THE CURRENT YEAR. THE DISALL OWANCE QUA ADMINISTRATIVE EXPENSES STANDS REDUCED TO A MINIMAL AMOUNT, TO WHICH THE AS SESSEE HAS, OR COULD HAVE, NO SERIOUS OBJECTION. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 NO DOUBT RULE 8D IS NOT MANDATORY FOR THE CURRE NT YEAR, SO THAT THE REVENUE IS FREE TO INVOKE ANY METHOD, INCLUDING THAT PRESCRIBE D U/R. 8D, IN MAKING A REASONABLE ESTIMATE OF THE AMOUNT WHICH STANDS TO BE DISALLOWE D, EITHER ON ACCOUNT OF INTEREST OR OTHER INDIRECT EXPENSES, I.E., U/S. 14A(1), IN RESP ECT OF INCOME NOT FORMING PART OF THE TOTAL INCOME FOR THE CURRENT YEAR. THE HONBLE JURI SDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM) HAS ABUNDANTLY CLARIFIED T HE LAW IN THE MATTER. DISALLOWANCE U/S. 14A(1) IS A STATUT ORY DISALLOWANCE. THE ONUS TO PROVE THAT NO EXPENDITURE IN RELATION TO INCOME, WHICH IS TAX-EXEMPT, STANDS INCURRED AND, FURTHER, WITH REFERENCE TO ITS ACCOUNTS, IS ON THE ASSESSEE. THE DISCUSSION BY THE HONBLE COURT QUA DISALLOWANCE OF INTEREST, WHICH BEARS REFERENCE TO THE DECISION BY IT IN THE CASE OF RELIANCE UTILITIES & POWER LTD . (SUPRA), BEING RELIED UPON BY THE ASSESSEE, IS AT PARAS 85-87 (OF PGS. 135 TO 138) OF THE JUDGMENT, TO WHIC H THEREFORE REFERENCE BE MADE. THE FOLLOWING OBSERVATIONS (AT PARA 85) ARE TELLING AND , THEREFORE, REPRODUCED: IN ALL THESE DECISIONS, THE TRIBUNAL HELD THAT NO NEXUS HAD BEEN ESTABLISHED BETWEEN BORROWED FUNDS AND INVESTMENTS BY THE ASSES SEE IN DIVIDEND YIELDING SHARES/INCOME YIELDING MUTUAL FUNDS. NOW A SSUMING THAT THIS IS SO, THE ONLY CONCLUSION WHICH EMERGES IS THAT THE A SSESSEE HAD UTILIZED ITS OWN FUNDS FOR THE PURPOSE OF MAKING THE INVESTMENTS . THE FACT THAT THE ASSESSEE HAS UTILIZED ITS OWN FUNDS IN MAKING THE I NVESTMENTS WOULD NOT BE DISPOSITIVE OF THE QUESTION AS TO WHETHER THE ASSES SEE HAD INCURRED EXPENDITURE IN RELATION TO THE EARNING OF SUCH INCO ME. EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN FUNDS FOR MAKING INVESTMENTS W HICH HAVE RESULTED IN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED IN THE EARNING OF THA T INCOME WOULD HAVE TO BE DISALLOWED. THAT IS EXACTLY A MATTER WHICH THE A SSESSING OFFICER HAS TO 4 ITA NO. 785/MUM/2013 (A.Y. 2006-07) CRESCENT ORGANICS P. LTD. VS. ASST. CIT DETERMINE. WHETHER OR NOT ANY EXPENDITURE WAS INCUR RED BY THE ASSESSEE IN RELATION TO THE EARNING OF NON-TAXABLE INCOME FALLS WITHIN THE DOMAIN OF THE ASSESSING OFFICER. THE BASIS ON WHICH THE TRIBUNAL HAD COME TO ITS DECISION FOR THE ASSESSMENT YEARS 1998-99, 1999-200 0 AND 2001-02 WOULD NOT CONCLUDE THAT QUESTION. 5.2 IN VIEW OF THE FOREGOING, WE, UNDER THE CIRCUMS TANCES, ONLY CONSIDER IT FIT AND PROPER THAT THE MATTER IS RESTORED BACK TO THE FILE OF THE AO TO ENABLE THE ASSESSEE TO PRESENT ITS CASE IN THE MATTER. WHERE, FOR INSTANCE , THE LOANS ON WHICH THE INTEREST LIABILITY HAS BEEN SUFFERED, ARE DEDICATED LOANS, I.E., TOWAR D SPECIFIED BUSINESS PURPOSES, AND STAND UTILIZED FOR THE SAME, INTEREST THEREON WOULD STAND TO BE ALLOWED UNDER SECTION 36(1)(III) IN FULL, SO THAT NO DISALLOWANCE UNDER SECTION 14A WOULD ENSUE. IN THE ABSENCE OF SUCH UTILIZATION BEING SHOWN OR ESTABLISHED BY THE ASSES SEE, THE PRESUMPTION OF ALL THE ASSETS BEING PROPORTIONATELY FUNDED CANNOT BE FAULTED WITH FOR THE PURPOSE OF DISALLOWANCE U/S.14A(1). REFERENCE IN THIS RESPECT MAY BE MADE T O SEVERAL DECISIONS BY THE TRIBUNAL, AS IN THE CASE OF DY. CIT VS. DAMANI ESTATES & FINANCE (P.) LTD. [2013] 25 ITR (TRIB) 683 (MUM); AFL (P.) LTD. VS. ASST. CIT [2013] 28 ITR (TRIB) 263 (MUM); AND KUNAL CORPORATION VS. ASST. CIT [2013] 28 ITR (TRIB) 277 (MUM). SIMILARLY, AS REGA RDS THE INDIRECT ADMINISTRATIVE EXPENSES, THE ONUS IS CLEAR LY ON THE ASSESSEE TO SHOW THAT NO EXPENDITURE IS ATTRIBUTABLE TO THE INVESTMENTS WHIC H ARE LIABLE TO YIELD INCOME NOT FORMING PART OF THE TOTAL INCOME. WE DECIDE ACCORDI NGLY. 6. THE SECOND AND ONLY OTHER GROUND RAISED IS IN RE SPECT OF DISALLOWANCE OF RS.2,92,200/- ON ACCOUNT OF DOCUMENTATION AND OTHER MISCELLANEOUS CHARGES PAID FOR SECURING BANK FINANCE. THE SAME STANDS DISALLOWED O N THE BASIS THAT THE IMPUGNED PAYMENT FALLS WITHIN THE AMBIT OF INTEREST, STATU TORILY DEFINED UNDER SECTION 2(28A) OF THE ACT, SO THAT BEING INCURRED PRIOR TO THE DATE O F THE ACQUISITION OF THE ASSET BEING FINANCED, THE SAME WOULD STAND TO BE INCLUDED AS A PART OF THE COST OF THE RELEVANT ASSET AND, ACCORDINGLY, IS DISQUALIFIED FOR BEING ALLOWED UNDER SECTION 36(1)(III) READ WITH PROVISO THERETO. 5 ITA NO. 785/MUM/2013 (A.Y. 2006-07) CRESCENT ORGANICS P. LTD. VS. ASST. CIT 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE LD. CIT(A) HAS CONSIDERED THE IMPUGNED EXPENDITURE, WHICH IS PRIMA RILY (RS.2,84,720/-) TOWARD STAMPING CHARGES ON THE FRANKING OF VARIOUS LOAN DO CUMENTS EXECUTED IN RESPECT OF WINDSOR TERM LOAN FROM ITS BANK (UNION BANK OF INDI A), AS BEING A PART OF INTEREST, SO THAT HAVING BEEN INCURRED PRIOR TO THE DATE WHEN TH E ASSET WAS PUT TO USE, WOULD STAND TO BE CAPITALIZED IN TERMS OF THE EXTANT LAW, I.E., SE CTION 43(6) R/W S. 36(1)(III) AND PROVISO THERETO. WE ARE UNABLE TO APPRECIATE THE REVENUES CASE IN-AS-MUCH AS STAMPING CHARGES CANNOT BE EQUATED WITH OR CONSIDERED AT PAR WITH TH E SERVICE OR OTHER CHARGES LEVIED BY THE BANK IN RESPECT OF MONEY BORROWED OR DEBT INCUR RED. THE SAME, THOUGH MAY BE CHARGED BY THE BANK, ARE PAYABLE TO THE GOVERNMENT EXCHEQUER AS STAMP DUTY ON THE DEBT OR OTHER RELATED (AS SECURITIZATION OR MORTGAGE) TR ANSACTION/S. THE SAME IS ONLY REVENUE EXPENDITURE, NO PART WHEREOF COULD BE CAPITALIZED A S A PART OF THE COST OF THE ASSET. THE LAW IN THE MATTER IS WELL-SETTLED, REFERENCE FOR WH ICH MAY BE MADE TO THE DECISION BY THE HONBLE APEX COURT IN THE CASE OF INDIA CEMENTS LTD. VS. CIT [1966] 60 ITR 52 (SC), ALSO RELIED UPON BEFORE US BY THE ASSESSEE. SIMILARLY, T HE CHARGES FOR VALUATION REPORT (RS.7,350/-) AND NOTARY (RS.130/-) ARE AGAIN INCIDE NTAL CHARGES INCURRED TOWARD SPECIFIC NON-BANKING (FINANCING), COLLATERAL SERVICES AVAILE D IN RELATION TO THE DEBT TRANSACTION AND, THEREFORE, CANNOT BE CONSIDERED AS PART OF THE INTEREST COST PAID TO THE BANK, DEDUCTION QUA WHICH IS EXIGIBLE U/S.36(1)(III). THE DISALLOWANCE IS THUS MISCONCEIVED AND IS HEREBY DIRECTED FOR DELETION. WE DECIDE ACCO RDINGLY. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. +* , $- .+ ' % 0 ' 12 ORDER PRONOUNCED IN THE OPEN COURT AT THE CONCLUSIO N OF THE HEARING ON 03/11/2014. SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER 3& MUMBAI; 4$ DATED: 07/11/2014 6 ITA NO. 785/MUM/2013 (A.Y. 2006-07) CRESCENT ORGANICS P. LTD. VS. ASST. CIT !'#$ %$' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. ! / THE RESPONDENT. 3. ( ) / THE CIT(A)-21 4. / CIT-10 5. 5%6 7 $8- , ' 8-* , 3& / DR, ITAT, MUMBAI 6. 7 9. : & / GUARD FILE. & / BY ORDER, '' ''''''''''''''''''''''''''''''''' ()&*'+ (DY./ASSTT. REGISTRAR) '' ,' 3& / ITAT, MUMBAI N.P.