M/s. Bhoruka Investment Ltd., Kolkata V. CIT, Kol-IV, Kolkata, Kolkata

ITA 799/KOL/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54539 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 14-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIRAJ KUMAR
• Assessee Lawyers: N K PODDA R; A K TIBREWAL
• Keywords: Opportunity of being heard; Earning of tax free income; Revenue expenditure; Rule 8D; Set aside
• Section: 143(3); 142(1); 14A; 143(2); 263

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOL KATA () BEFORE , /AND , ! . '# . ) [BEFORE SRI MAHAVIR SINGH, JM & SHRI C. D. RAO, AM] $ $ $ $ / I.T.A NO. 799/KOL/2009 %& '( %& '( %& '( %& '(/ // / ASSESSMENT YEAR : 2004-05 M/S. BHORUKA INVESTMENT LTD. VS. COMMISSIONER OF INCOME-TAX, KOL-IV (PAN-AABCB 9008 R) KOLKATA (*+ /APPELLANT ) (,-*+/ RESPONDENT ) FOR THE APPELLANT: S/SHRI N. K. PODDAR & A. K. TIBREWAL FOR THE RESPONDENT: SHRI NIRAJ KUMAR DATE OF HEARING: 22.09.2011 DATE OF PRONOUNCEMENT: 22.09.2011 . / ORDER PER MAHAVIR SINGH, JM ( , , , , ) THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF REVIS ION ORDER OF CIT-IV, KOLKATA IN M. NO. CIT. KOL-IV/U/S.263/08-09/6618-6620 DATED 20/27 .03.2009 PASSED U/S. 263 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). ASSESSMENT WAS FRAMED BY DY. CIT, CIRCLE-10, KOLKATA U/S. 143(3) OF THE ACT FOR ASSES SMENT YEAR 2004-05 VIDE HIS ORDER DATED 29.12.2006. 2. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT, KOL-IV, REVISING THE ASSESSMENT FRAMED BY ASSESSING OFFICER U/S. 143 (3) OF THE ACT, PASSED U/S. 263 OF THE ACT DIRECTING THE AO TO MAKE DISALLOWANCES BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT R.W.S. RULE 8D OF INCOME-TAX RULES, 1962 (THE RULE S). 3. BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF INVESTING IN SHARES AND SECURITIES AND ALSO GRANT O F LOANS AND ADVANCES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR RELEVANT ASSESSMENT YEAR 2004- 05 ON 31.10.2004 AND ASSESSMENT WAS FRAMED BY ISSUING NOTICES U/S. 143(2) AND 142(1) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NOTICED THAT IT HAD EARNED DIVIDEND INCOME OF RS.13,19,635/- AND CLAIMED THE SAME AS EXEMPT U/S. 10(34) OF THE A CT. THE ASSESSING OFFICER WAS OF THE VIEW THAT WITH THE INTRODUCTION OF SECTION 14A OF THE AC T, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY ASSESSEE IN RELATION TO INC OME WHICH DOES NOT FORM PART OF TOTAL INCOME. HENCE, HE ESTIMATED REASONABLE DISALLOWANC E AT 1% OF EXEMPT INCOME AS EXPENSES 2 ITA 799/K/2009 M/S. BHORUKA INVESTMENT LTD. A.Y. 04-05 AND ACCORDINGLY, HE DISALLOWED A SUM OF RS.13,196/- AS EXPENSES INCURRED FOR EARNING THIS DIVIDEND INCOME AND ADDED TO THE RETURNED INCOME OF THE ASSESSEE. 4. SUBSEQUENTLY, CIT, KOL-IV ISSUED SHOW CAUSE NOTI CE NO CIT,KOL-IV/U/S.263/2007- 08/3470 DATED 05.11.2007 WHEREIN HE REQUIRED THE AS SESSEE TO EXPLAIN AS TO WHY THE ASSESSMENT FRAMED IS NOT TREATED AS ERRONEOUS INASMUCH AS PREJ UDICIAL TO THE INTEREST OF REVENUE FOR THE REASON THAT THE CLAIM OF EXPENDITURE OF INTEREST AM OUNTING TO RS.26,77,175/- IS ATTRIBUTABLE TO EXEMPTED INCOME, THEREFORE, THE AO HAS WRONGLY ALLO WED THE SAME AS REVENUE EXPENDITURE. THE CIT, PROPOSED TO REVISE THE ASSESSMENT ORDER BY PASSING AN ORDER U/S. 263 OF THE ACT. THE ASSESSEE REPLIED VIDE LETTERS DATED 29.11.2007 AND 05.12.2008 AND EXPLAINED DETAILS OF PURCHASE OF SHARES DURING FY ENDING 31.03.2003 AND 3103.2004 , INCLUDING SOURCES OF ACQUISITION AND ALSO DETAILS OF DIVIDEND RECEIVED DURING THE YEAR E NDING 31.03.2004. THE ASSESSEE ALSO FILED COPY OF AUDITORS REPORT ALONG WITH NOTES ON ACCOUN T AS WELL AS ASSESSEES BALANCE SHEET AND P&L ACCOUNT FOR F.Y. ENDING 31.03.1997, WHICH WERE FILED BEFORE AO FOR THE RELEVANT ASSESSMENT YEAR. HOWEVER, CIT WAS NOT CONVINCED AN D HE SET ASIDE THE ASSESSMENT WITH A DIRECTION TO EXAMINE THE RECORDS AFTER PROVIDING RE ASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE VIDE ORDER DATED 20.03.2009. CIT ALSO DIR ECTED THAT RULE 8D OF THE RULES IS APPLICABLE RETROSPECTIVELY IN VIEW OF THE DECISION OF ITAT, SP ECIAL BENCH, MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (2009) 312 ITR (A T) 1 (MUM,S.B.). AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE, FIRST OF ALL, TOOK US TO FACTS AND FIGURES I.E. DETAILS O F PURCHASE OF SHARES DURING THE YEARS ENDING 31.03.20 03 AND 31.03.2004 INCLUDING SOURCE OF ACQUISITION, WHICH ARE GIVEN AT ASSESSEES PAPER BO OK PAGES 9, 10 AND 11. HE STATED THAT ALL THESE PURCHASES ARE OUT OF SALE PROCEEDS OF SHARES DURING ASSESSMENT YEAR 2003-04 AND IN ASSESSMENT YEAR 2004-05 OUT OF LOAN RECOVERED FROM TCI INFRASTRUCTURE FINANCE LTD. AND NOT OUT OF LOANS OR ADVANCE TAKEN BY ASSESSEE AND EVEN MAJORITY OF INVESTMENT IS OUT OF SALE PROCEEDS OF SALE OF SHARES HELD FROM 1997-98. THE ASSESSEE ALSO FILED DETAILS OF DIVIDEND RECEIVED. HE ALSO STATED THAT IN VIEW OF THESE FAC TS, THERE IS NO INVESTMENT OUT OF BORROWED FUNDS AND ONCE THERE IS NO INVESTMENT OUT OF BORROW ED FUNDS NO DISALLOWANCE CAN BE MADE. WE FIND THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) HAS ALREADY HELD THE APPLICABILITY OF RULE 8D OF TH E RULES AS PROSPECTIVE AND NOT RETROSPECTIVE W.E.F. ASSESSMENT YEAR 2007-08, WHEREIN HONBLE HIG H COURT HAS ALSO DIRECTED TO RECOMPUTE THE DISALLOWANCE, IN CASE THERE IS A NEXUS OF EXPEN SES WITH EXEMPT INCOME, BY LAYING DOWN THE PRINCIPLES AS UNDER: 3 ITA 799/K/2009 M/S. BHORUKA INVESTMENT LTD. A.Y. 04-05 (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH E FFECT FROM THE ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFF ICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; (VII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002 -03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH D OES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT REASONABLE BASIS FOR EFFECTING THE APPORTIONM ENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT AND GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CAS E 6. WE FIND FROM RECORDS AND SUBMISSIONS OF THE ASSE SSEES COUNSEL THAT THE CLAIM OF EXPENDITURE OF INTEREST AMOUNTING TO RS.26,77,175/- IS NOT ATTRIBUTABLE TO EXEMPTED INCOME AS THE ASSESSEE REPLIED VIDE LETTERS DATED 29.11.2007 AND 05.12.2008 AND EXPLAINED DETAILS OF PURCHASE OF SHARES DURING FY ENDING 31.03.2003 AND 31.03.2004, INCLUDING SOURCES OF ACQUISITION AND ALSO DETAILS OF DIVIDEND RECEIVED D URING THE YEAR ENDING 31.03.2004. WE FIND FROM THE ABOVE THAT THE INVESTMENT IN PURCHASE OF S HARES IS OUT OF ASSESSEES OWN FUNDS AND THAT ALSO REFLECTED IN THE BALANCE SHEET FOR THE YE AR ENDING 31.03.1997 AND ALSO FROM THE SOURCES OF SALE OF SHARES DURING THE YEAR ENDING 31 .03.2003 AND 31.03.2004. WE FIND FROM RECORDS AND COPY OF AUDITORS REPORT ALONG WITH NOT ES ON ACCOUNT AS WELL AS ASSESSEES BALANCE SHEET AND P&L ACCOUNT FOR F.Y. ENDING 31.03.1997, W HICH WERE FILED BEFORE AO FOR THE RELEVANT ASSESSMENT YEAR THAT THESE INVESTMENTS ARE OUT OF ASSESSEES OWN FUNDS. IN VIEW OF THE ABOVE FACTS, WE ARE OF THE VIEW THAT, ON MERITS, TH E EXPENDITURE OF INTEREST IS NOT ATTRIBUTABLE TO EXEMPTED INCOME AND THE AO HAS RIGHTLY ALLOWED THE CLAIM OF ASSESSEE WHILE FRAMING ASSESSMENT U/S. 143(3) OF THE ACT. ONCE IT IS ESTA BLISHED THAT, THE ASSESSEE HAS MADE INVESTMENT IN SHARES OUR OF ITS OWN FUNDS AND EXPENDITURE OF I NTEREST ON BORROWED FUNDS, WHICH WERE NOT USED FOR THE PURPOSE OF INVESTMENT IN SHARES FROM W HERE ASSESSEE EARNED DIVIDEND INCOME, WHICH IS CLAIMED AS EXEMPT, THE INTEREST CANNOT BE ATTRIBUTED TO EXEMPTED INCOME. ONCE THE ISSUE IS DECIDED ON MERITS IN FAVOUR OF THE ASSESSE E, THE CIT HAS WRONGLY INVOKED THE JURISDICTION U/S. 263 OF THE ACT FOR REVISING THE A SSESSMENT FRAMED U/S.143(3) OF THE ACT BY THE AO. EVEN OTHERWISE, ON JURISDICTION, WE FIND THAT THE AO HAS EXAMINED THIS ISSUE, WHICH IS 4 ITA 799/K/2009 M/S. BHORUKA INVESTMENT LTD. A.Y. 04-05 CLEAR FROM RECORDS THAT THE AO VIDE QUESTIONNAIRE D ATED 20.04.2006 RAISED A SPECIFIC QUERY AND REPLIED BY THE ASSESSEE VIDE LETTER DATED 24.05.200 6 AS UNDER: 7. PLEASE PRODUCE THE DETAILS OF INTEREST RECEIVED AND INTEREST PAID WITH COPIES OF LOAN CONFIRMATIONS, PURPOSE FOR WHICH LOAN WAS BORROWED AND GIVEN AND RATE OF INTEREST. 7. DETAILS OF INTEREST RECEIVED AND PAID WITH COPI ES OF LOAN CONFIRMATIONS ARE ENCLOSED. WE DO HEREBY REITERATE AND CONFIRM THAT THE ENTIRE BORROWED FUNDS HAD BEEN USED BY US FOR THE PURPOSES GRANTING LOANS & ADVANCES IN THE C OURSE OF OUR FINANCING BUSINESS AS WELL AS FOR PURCHASING THE OFFICE SPACE. WE FIND, IN VIEW OF THE ABOVE FACTS THAT THE AO HAS MADE DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 14A QUA THE DIVIDEND INCOME E ARNED BY ASSESSEE BY ESTIMATING THE EXPENSES INCURRED FOR EARNING THIS DIVIDEND (THAT I S NOT THE SUBJECT MATTER BEFORE US AND ASSESSEE HAS NOT FILED ANY APPEAL AGAINST THE SAME) . WE ARE OF THE VIEW THAT THE AO HAS FORMED AN OPINION IN RESPECT TO THE INTEREST EXPENDITURE A ND JUST ON THE BASIS OF ESTIMATE MADE A DISALLOWANCE, CAN IN SUCH CIRCUMSTANCES THE CIT REV ISE THE ASSESSMENT BY INVOKING THE PROVISIONS OF SECTION 263 OF THE ACT. KEEPING IN M IND THESE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT SECTION 263 OF THE ACT POSTULATES THA T THE COMMISSIONER CAN REVISE AN ORDER PASSED BY THE ASSESSING OFFICER ONLY IF (I) IT IS E RRONEOUS, AND (II) IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IF THE ORDER SOUGHT TO B E REVISED IS NOT PREJUDICIAL TO THE INTERESTS OF THE REVENUE THE COMMISSIONER HAS NO JURISDICTION TO REVISE IT. THE FAILURE OF THE ASSESSING OFFICER TO DEAL WITH THE CLAIM OF THE ASSESSEE IN T HE ASSESSMENT ORDER MAY BE AN ERROR, BUT AN ERRONEOUS ORDER BY ITSELF IS NOT ENOUGH TO GIVE JUR ISDICTION TO THE COMMISSIONER TO REVISE IT UNDER SECTION 263 OF THE ACT. IT MUST FURTHER BE SH OWN THAT THE ORDER WAS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IT IS NOT EACH AND EVERY ORDER PASSED BY THE ASSESSING OFFICER WHICH CAN BE REVISED UNDER SECTION 263 OF THE ACT. A BARE READING OF SECTION 263(1) OF THE ACT MAKES IT CLEAR THAT THE PRE-REQUISITE TO EXERCISE OF JURI SDICTION BY THE COMMISSIONER SUO MOTU UNDER IT, IS THAT THE ORDER OF THE AO IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE COMMISSIONER HAS TO BE SATISFIED WITH TWIN CONDITIONS, NAMELY, (I) THE ORDER OF THE AO SOUGHT TO BE REVISED IS ERRONEOUS; AND (II) IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IF ONE OF THEM IS ABSENTIF THE ORDER OF T HE AO IS ERRONEOUS BUT IS NOT PREJUDICIAL TO THE REVENUE OR IF IT IS NOT ERRONEOUS BUT IS PREJUD ICIAL TO THE REVENUERECOURSE CANNOT BE HAD TO SECTION 263(1) OF THE ACT. THIS VIEW OF OURS IS SUPPORTED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. VS . CIT (2000) 243 ITR 83 (SC). IF THE ORDER IS NOT ERRONEOUS, THEN IT CANNOT BE PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IN VIEW OF THE ABOVE DISCUSSION, CONSIDERING THE FACTS OF THE CASE , WE ALLOW THE APPEAL OF ASSESSEE. 5 ITA 799/K/2009 M/S. BHORUKA INVESTMENT LTD. A.Y. 04-05 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . 8. ORDER PRONOUNCED IN OPEN COURT. SD/- SD/- . '# '#'# '# . ! , (C. D. RAO) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ( #! #! #! #!) )) ) DATED : 22ND SEPTEMBER, 2011 /0 %12 3 JD.(SR.P.S.) . 4 , 5 '6- COPY OF THE ORDER FORWARDED TO: 1 . *+ / APPELLANT M/S. BHORUKA INVESTMENT LTD., P-10, NEW CIT ROAD, 1 ST FLOOR, KOLKATA-73. 2 ,-*+ / RESPONDENT, CIT, KOL-IV, KOLKATA. 3 . .% ( )/ THE CIT(A), KOLKATA 4. .% / CIT, KOLKATA 5 . => ,% / DR, KOLKATA BENCHES, KOLKATA - ,/ TRUE COPY, .%?/ BY ORDER, 2 /ASSTT. REGISTRAR .