ACIT, Ludhiana V. Sh. Suraj Dev Dada, Ludhiana

ITA 789/CHANDI/2011

• Counselvise Citation: 78921514 RSA 2011
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 20-10-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 10-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: N K SAINI
• Keywords: Earning of tax free income; Corroborative evidences; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 783/CHD/2011 ASSESSMENT YEAR: 2007-08 SHRI SURAJ DEV DADA, PROP. VS. ADDL CIT, RANGE-V, M/S DADA MOTORS, LUDHIANA LUDHIANA PAN NO. ABPPD2272B ITA NO. 789/CHD/2011 ASSESSMENT YEAR: 2007-08 THE ACIT, RANGE-V, VS SHRI SURAJ DEV DADA, PROP. LUDHIANA, M/S DADA MOTORS, LUDHIANA PAN NO. ABPPD2272B & C.O. NO. 71/CHD/2011 (IN ITA NO. 789/CHD/2011) ASSESSMENT YEAR: 2007-08 SHRI SURAJ DEV DADA, PROP. VS. ADDL CIT, RANGE-V, M/S DADA MOTORS, LUDHIANA LUDHIANA PAN NO. ABPPD2272B (APPELLANT) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI N.K.SAINI DATE OF HEARING : 20.10.2011 DATE OF PRONOUNCEMENT : 21.10.2011 2 ORDER PER H.L.KARWA, VP THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF CIT(A)-II, LUDHIANA DATED 16.6.2011 RELATING TO ASSESSMENT YEA R 2007-08. 2. IN ITA NO. 783/CHD/2011, THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN UPHOLDING THE APPLICABILITY OF SECT ION 14A OF THE INCOME TAX ACT IN THE APPELLANTS CASE. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 2.00 LAC U/S 14A OF THE INCOME TAX ACT WHICH IS UNWARRANTED, ILLOGICAL AND UNLAWFUL AND THEREFORE, NEEDS TO BE DELETED. 3. THE GROUND NO.2 OF THE REVENUES APPEAL READS AS UNDER:- 2.(A) THAT THE LD. CIT(A)-II,. LUDHIANA, ON FACTS AS WELL AS IN LAW HAS ERRED IN DELETING DISALLOWANCE OF RS. 6,40, 363/- OUT OF TOTAL DISALLOWANCE OF RS. 8,40,363/- MADE U/ S 14A OF INCOME TAX ACT, 1961 READ WITH RULE 8-D OF I.T. RULES. (B) THAT THE LD. CIT(A)-II, LUDHIANA HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAS MADE INVESTMENTS W HICH WOULD GENERATE EXEMPTED INCOME AND THUS SECTION 14A 3 READ WITH RULE 8-D OF THE INCOME TAX ACT, 1961 COME S INTO PLAY. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING OF VEHICLE AND SPARE PAR TS. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE D ECLARED DIVIDEND INCOME OF RS. 41,74,500/-. THE ASSESSEE HAS RECEIV ED THE DIVIDEND AGAINST INVESTMENT OF RS. 1,01,22,350/- AS ON 31.3. 2007 AND RS. 1,00,22,350/- AS ON 31.3.2006. IN THE RETURN OF IN COME, THE TOTAL INCOME FROM SHARES WAS CLAIMED AS EXEMPT U/S 10(34) / 10(3 5) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). THE ASSESSING OFFI CER TOOK THE VIEW THAT THE DIVIDEND INCOME FROM INVESTMENT IN SHARES BEING CLAIMED EXEMPT EXPENDITURE INCURRED IN RELATION TO THE INCOME WAS REQUIRED TO BE ADDED BACK TO THE INCOME OF THE ASSESSEE U/S 14A OF THE A CT. HOWEVER, THE ASSESSEE DID NOT ADMIT TO HAVE INCURRED ANY EXPENDI TURE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THEREFORE, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY DISALLOWANCE SHOULD NOT BE MADE U/S 14A IN RESPECT OF THE EXPENDITURE INCURRED AND ALSO ASKED TO JUSTIFY WHY RULE 8-D MA Y NOT BE APPLIED. IN RESPONSE TO THE ABOVE QUERY, THE ASSESSEE SUBMITTED THAT NO EXPENDITURE IN THIS REGARD WAS INCURRED. INVESTMENT IN MOST OF TH E SHARES WAS VERY OLD WHEN SECTION 14A WAS NOT ON THE STATUTE. HOWEVER, THE ASSESSING OFFICER OBSERVED THAT WHAT IS RELEVANT IS TO WORK OUT THE E XPENDITURE IN RELATION TO THE EXEMPT INCOME AND NOT TO EXAMINE WHETHER THE EX PENSES INCURRED BY THE ASSESSEE HAS RESULTED INTO EXEMPT INCOME OR TAX ABLE INCOME. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF RULE 8- D AND MADE AN ADDITION OF RS. 8,40,363/- TO THE DECLARED IN OF TH E ASSESSEE. 4 5. ON APPEAL, THE CIT(A) SUSTAINED THE ADDITION OF RS. 2 LAC AS AGAINST THE ADDITION OF RS. 8,40,363/- MADE BY THE ASSESSIN G OFFICER. 6. NOW THE ASSESSEE IS IN APPEAL AGAINST THE ADDITI ON OF RS. 2 LACS SUSTAINED BY THE CIT(A). THE REVENUE IS IN APPEAL AGAINST THE RELIEF OF RS. 6,40,363/- GIVEN BY THE CIT(A) TO THE ASSESSEE. 7. IN THIS CASE, THE ASSESSEE HAS SUBMITTED THE WRI TTEN SUBMISSIONS. AS PER WRITTEN SUBMISSIONS, IT IS SUBMITTED THAT THE S HARES OF M/S DADA MOTORS FOR RS. 36,80,000/- HAVE BEEN PURCHASED IN T HE YEARS OF 1992-93, 1994-95, 1997-98 AND 1999-2000. THE ASSESSEE HAS A LSO GIVEN THE YEAR WISE BREAK UP IN THE WRITTEN SUBMISSIONS. IT IS FU RTHER CONTENDED BY THE ASSESSEE THAT THE ABOVE INVESTMENTS HAVE BEEN MADE OUT OF THE CAPITAL OF THE ASSESSEE AVAILABLE WITH HIM IN THE BOOKS OF M/S DADA MOTORS, A PROPRIETARY CONCERN. THE SAID SHARES HAVE BEEN INT RODUCED IN THE BOOKS OF ACCOUNT ON 31.3.2004 TO AVAIL OF THE ENHANCED CC LIMIT FROM THE BANK INTENDED TO BE USED FOR BUSINESS PURPOSES. SIMILAR LY, THE BALANCE AMOUNT OF INVESTMENT IS OUT OF THE CAPITAL OF THE ASSESSEE AVAILABLE WITH HIM FOR ALL THESE YEARS. THE ASSESSEE HAS ALSO SUBMITTED T HE COPY OF THE CHART SHOWING COMPANY WISE AND YEAR WISE INVESTMENT FOR T HE PURCHASE OF SHARES AS ANNEXURE-A (4 PAGES). THE CONTENTION OF THE ASSESSEE THAT NO PART OF THE INVESTMENT MADE OUT OF BORROWED SUMS CO ULD BE LINKED WITH THE LOANS OBTAINED FOR THE BUSINESS PURPOSE BECAUSE SUBSTANTIAL CAPITAL OF THE ASSESSEE REMAINED IN THE BOOKS OF ACCOUNT FOR A LL THESE YEARS, WHICH WERE DULY VERIFIED BY THE ASSESSING OFFICER AS WELL AS THE CIT(A) FROM THE BALANCE SHEETS OF M/S DADA MOTORS. ACCORDINGLY, IT IS THE CONTENTION OF THE ASSESSEE THAT PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. ALTERNATIVELY, IT WAS ALSO SUBMITTED BY THE ASSESSE E THAT ONLY SUCH 5 INVESTMENT CAN BE CONSIDERED U/S 14A ON WHICH EXEMP T INCOME IS EARNED DURING THE YEAR BEING THE ESSENTIAL INGREDIENT AS P ER PROVISIONS OF SECTION UNDER REFERENCE. THE OTHER INVESTMENT CANNOT BE CO VERED U/S 14A WHERE NO EXEMPT INCOME IS EARNED. IT IS ALSO STATED THA T DIVIDEND INCOME WAS EARNED FROM M/S DADA FINANCIAL SERVICES PVT LTD ON THE INVESTMENT OF RS. 32,01,000/- AND FROM BOI OF RS. 1,30,500/-. UNDER THESE CIRCUMSTANCES, AT THE MOST THE ABOVE STATED INVESTMENTS COULD HAVE BEEN CONSIDERED BY THE ASSESSING OFFICER WHILE MAKING DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, LEAVING ASIDE THE MERITS OF THE CASE. IT IS STATED THAT ASSESSING OFFICER WAS NOT JUSTIFIED TO DISALLOW THE EXPENSES U/S 14A ON THE TOTAL INVESTMENT OF RS. 1,00,22,350/- IGNORING THE EXPLAN ATIONS AND LAWFUL REASONING GIVEN BY THE ASSESSEE DURING THE ASSESSME NT PROCEEDINGS. 8. SHRI N.K.SAINI LD. DR STRONGLY SUPPORTED THE OR DER OF THE ASSESSING OFFICER. HOWEVER, SHRI N.K. SAINI, LD. D R ADMITTED THAT RULE D IS APPLICABLE FROM THE YEAR 2008-09 IN VIEW OF THE INSERTION OF RULE 8- D BY THE IT (FIFTH AMENDMENT) RULE 2008 W.E.F. 24.3 .2008, THEREFORE, THE SAID RULE IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E ALSO PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS TRUE THAT THE DISALLOWANCE OF EXPENSES COULD ONLY BE MADE U/S 14A WHERE THE EXPENDITURE IS INCURRED DIRECTLY OR INDIRECTLY FOR EARNING EXEMPT INCOME AS THIS SECTIO N CAN ONLY CONTEMPLATE THE EXPENDITURE ACTUALLY INCURRED FOR EARNING TAX F REE INCOME AND NOT ASSUMED EXPENDITURE OR DEEMED EXPENDITURE AS HELD B Y THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V WALFORT SHAR E AND STOCK BROKERS P. LTD (2009) 310 ITR 421 (BOM). IN THE INSTANT CAS E, AS AN ALTERNATIVE CONTENTION, THE ASSESSEE HAS SUBMITTED THAT IN HIS CASE, THE DIVIDEND 6 INCOME WAS EARNED FROM M/S DADA FINANCIAL SERVICES PVT LTD ON THE INVESTMENT OF RS. 32,01,000/- AND FROM BOI OF RS. 1,30,500/-. THE ASSESSEE HAS SPECIFICALLY STATED THAT UNDER THESE C IRCUMSTANCES AT THE MOST THE ABOVE SATED INVESTMENT COULD HAVE BEEN CONSIDER ED FOR MAKING DISALLOWANCE U/S 14A OF THE ACT. THUS, IT IS CLEAR THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES AND EARNED EXEMPT INCOME AND INCURRING OF EXPENDITURE CANNOT BE RULED OUT. IT IS ALSO APPARE NT FROM RECORDS THAT THE ASSESSEE WAS HAVING SUFFICIENT CAPITAL AND MOST OF INVESTMENTS WERE MADE IN THE EARLIER YEAR IN THE SHARES OF PRIVATE LIMITE D COMPANIES. KEEPING IN VIEW THE ALTERNATIVE SUBMISSION OF THE ASSESSEE, WE ARE OF THE VIEW THAT THE LD. CIT(A) HAS CORRECTLY CONCLUDED THAT THE ASS ESSEE HAS MADE INVESTMENT IN SHARES AND EARNED EXEMPT INCOME AND INCURRING OF EXPENDITURE CANNOT BE RULED OUT. HOWEVER, WE ARE O F THE VIEW THAT THE ESTIMATE OF DISALLOWANCE OF RS. 2 LACS MADE BY THE CIT(A) IS ON HIGHER SIDE. IN OUR VIEW, IN ALL FAIRNESS, IT WOULD BE RE ASONABLE TO REDUCE THE DISALLOWANCE TO RS. 1,50,000/- THUS, THE ASSESSEE GETS A FURTHER RELIEF OF RS. 50,000/- ON THIS COUNT. GROUND NO.2 OF THE REV ENUES APPEAL IS DISMISSED WHILE GROUND NOS. 1 & 2 OF THE ASSESSEE S APPEAL ARE ALLOWED PARTLY. 10. GROUND NO.1 OF THE REVENUES APPEAL READS AS UN DER:_ 1.(A) THAT THE LD. CIT(A)-II, LUDHIANA, ON FACTS AS WELL AS IN LAW, HAS ERRED IN DELETING THE DISALLOWANCE OF R S. 3,60,000/- MADE U/S 36(I)(III) OF THE INCOME TAX AC T, 1961. (B) THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN DELETI NG THE ABOVE DISALLOWANCE DESPITE THE FACT THAT THE ASSESS EE HAS BEEN UNABLE TO EXPLAIN THE PURPOSE OF GIVING TH E ADVANCE OF M/S NALANDA SPINNERS. 7 11. THE ASSESSING OFFICER DISCUSSED THIS ISSUE IN P ARA 8 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER NOTICED THA T THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN OF RS. 25 LACS TO M/S N ALANDA SPINNERS LTD., HOWEVER, NO INTEREST WAS CHARGED FROM THE PARTY. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FURNISH THE EXPLANATION / VERIFICATION / JUSTIFICATION ALONGWITH SUPPORTING EVIDENCE REGARDI NG BUSINESS EXPEDIENCY FOR ADVANCING THE LOAN. THE ASSESSEE REPLIED THAT THE SAID AMOUNT WAS ADVANCED VIDE CHEQUE NO. 83198 DATED 27.3.2006 WH ICH COULD NOT MATERIALIZE BECAUSE OF THE FRAUDULENT BEHAVIOR OF T HE PARTY. THE ASSESSEE ALSO SUBMITTED THAT DUE TO HIS PERSISTENT EFFORTS, PART PAYMENT HAS BEEN REGAINED AND ONLY AMOUNT OF RS. 7,50,000/- REMAINS UNRECOVERED, THEREFORE, THERE WAS NO OCCASION TO CHARGE INTERES T ON THE ADVANCED AMOUNT. HOWEVER, THE ASSESSING OFFICER OBSERVED T HAT THE COMMERCIAL EXPEDIENCY OR BUSINESS PURPOSES OF ADVANCING THE LO AN WAS NOT PROVED, THEREFORE, HE DISALLOWED RS. 3,60,000/- AND ACCORD INGLY MADE AN ADDITION TO THE RETURNED INCOME OF THE ASSESSEE. 12. ON APPEAL, THE CIT(A) DELETED THE ADDITION BY O BSERVING AS UNDER:- I HAVE GONE THOUGHT THE CONTENTION OF THE APPELLAN TS COUNSEL AND ALSO PERUSED THE RELEVANT ASSESSMENT OR DER, RIVAL SUBMISSIONS OF THE APPELLANT AND ASSESSING OFFICER S COMMENTS THEREUPON. THE ASSESSING OFFICER DISALLOWE D INTEREST OF RS. 3,60,000/- ON NOTIONAL BASIS ON THE GROUND THAT THE LOAN ADVANCED TO THE SAID PARTY WITHOUT AN Y COMMERCIAL EXPEDIENCY. THE SAID LOAN WAS ADVANCED B Y THE APPLICANT ON 27.3.2006 I.E. DURING ASSESSMENT YEAR 2006-07 AND THE ASSESSMENT UNDER APPEAL IS 2007-08. FROM A PERUSAL OF COPY OF REPLY BEFORE THE ASSESSING OFFICER, IT R EVEALS THAT THE PRINCIPAL AMOUNT OF SAID LOAN WAS RECOVERED AFT ER FILING SUIT IN CIVIL COURTS AND WITH THE HELP OF SOME INFL UENTIAL 8 PERSONS. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND DOCUMENTS FILED ALOGN WITH SUBMISSIONS, I AM IN AGREEMENT WITH THE APPELLANTS COUNSEL THAT THE APPELLANT NOT CHARGED ANY INTEREST ON THE AMOUNT ADVANCED TO THE M/S NALANDA SPINNERS, THEREFORE, T HE ASSESSING OFFICERS ACTION TO CHARGE INTEREST ON NO TIONAL BASIS IS NOT SUSTAINABLE AND IS DIRECTED TO BE DELE TED. THUS, THIS GROUND OF THE APPELLANT IS ALLOWED. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE RE PLY FILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER IS SELF-EXPLANATORY. THE ASSESSING OFFICER DISALLOWED INTEREST OF RS. 3,60,000/- ON NOTIONAL B ASIS ON THE GROUND THAT THE LOAN ADVANCED TO THE NALANDA SPINNERS LTD WAS W ITHOUT ANY COMMERCIAL EXPEDIENCY. THERE IS NO DISPUTE THAT TH E LOAN WAS ADVANCED BY THE ASSESSEE ON 27.3.2006, I.E. DURING THE ASSES SMENT YEAR 2006-07. IT IS ALSO APPARENT FROM RECORD THAT THE PRINCIPAL AMO UNT OF THE SAID LOAN WAS RECOVERED AFTER FILING RECOVERY SUITE IN CIVIL COUR T. IT IS ALSO APPARENT FROM RECORD THAT THE ASSESSEE MANAGE TO GET PART PA YMENT VIDE CHEQUES ON DIFFERENT DATES LEAVING BALANCE TO THE TUNE OF RS. 7,50,000/-. CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE PRESENT C ASE, WE ARE OF THE VIEW THAT SINCE THE PRINCIPAL AMOUNT WAS AT STAKE, THERE WAS NO OCCASION FOR THE ASSESSEE TO CHARGE INTEREST ON THE ADVANCED AMOUNT. AT THIS STAGE, WE MAY ALSO OBSERVE THAT THERE IS NO MATERIAL ON RECOR D TO CONTROVERT THE EXPLANATION OF THE ASSESSEE. WE, THEREFORE, UPHOLD THE ORDER OF CIT(A) IN HOLDING THAT THE ASSESSEE HAS NOT CHARGED ANY INTER EST ON THE AMOUNT ADVANCED TO M/S NALANDA SPINNERS, THEREFORE, THE A SSESSING OFFICERS ACTION TO CHARGE INTEREST ON NOTIONAL BASIS IS NOT SUSTAINABLE. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF CIT(A) AND DISMIS S GROUND NO.1 OF THE REVENUES APPEAL. 9 C.O. NO. 71/CHD/2011 14. VIDE GROUND NO.1 OF THE CROSS OBJECTION, THE AS SESSEE HAS MERELY SUPPORTED THE ORDER OF CIT(A) IN DELETING THE DISAL LOWANCE OF RS. 3,60,000/- MADE U/S 36(1)(III) OF THE ACT AND NO EF FECTIVE RELIEF HAS BEEN CLAIMED AND, THEREFORE, WE DISMISS GROUND NO.1 OF THE CROSS OBJECTION. 15. VIDE GROUND NO.2 OF THE CROSS OBJECTION, THE AS SESSEE HAS REPEATED GROUND NOS.1 & 2 OF ITA NO. 783/CHD/2011 AND HENCE THIS GROUND NEEDS NO SEPARATE ADJUDICATION. WE, THEREFORE, DISMISS T HIS GROUND OF CROSS OBJECTION AS INFRUCTUOUS. 16. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED PAR TLY WHILE REVENUES APPEAL AND CROSS OBJECTIONS OF THE ASSESSEE ARE DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF OCTOBER, 2011. SD/- SD/- (MEHAR SINGH) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 21 ST OCTOBER, 2011 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR TRUE COPY BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH