DCIT, New Delhi V. M/s Jay Pee Ventures Pvt. Ltd., New Delhi

ITA 811/DEL/2011

• Counselvise Citation: 81120114 RSA 2011
• Duration Of Justice: 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 08-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: V K GARG
• Keywords: Business expenditure; Rule of consistency; Retrospective amendment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) SHRI R.P. TOLANI, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.811/DEL./2011 (ASSESSMENT YEAR : 2006-07) DCIT, CIRCLE 4 (1), VS. M/S. JAY PEE VENTURES PV T. LTD., NEW DELHI. 1095, SECTOR A, POCKET A, VASANT KUNJ, NEW DELHI. (PAN : AAACI2356L) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI V.K. GARG, ADVOCATE REVENUE BY : MS Y. KAKKAR, DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF THE ORDER OF THE CIT (APPEALS)-VII, NEW DELHI DATED 01.12.2010 FOR THE A SSESSMENT YEAR 2006-07. THE GROUNDS OF APPEAL READ AS UNDER :- 01. THE ORDER OF THE LEARNED CIT (A) IS ERRONEOUS & CONTRARY TO FACTS AND LAW. 02. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT (APPEALS) HAS ERRED IN RESTRIC TING THE ADDITION UNDER SECTION 14A OF THE INCOME-TAX ACT RS.31,03,972/- AS AGAINST RS.1,49,23,692/- MADE BY THE A.O. 2.1 THE LD. CIT (A) IGNORED THE FACT THAT THE DISAL LOWANCE UNDER SECTION 14A WAS CORRECTLY MADE BY THE A.O. IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF I.T. R ULES, 1961. ITA NO.811/DEL./2011 2 03. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, OR AMEND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF H EARING. 2. THE ONLY ISSUE INVOLVED IN THE GROUND IS RELATIN G TO THE DELETION OF PART OF THE ADDITION MADE U/S 14A OF THE INCOME-TAX ACT. THE ASSESSING OFFICER DISALLOWED RS.1,49,23,692/- ON THE BASIS OF MAKING THE CALCULATION AS PER THE PROVISIONS OF RULE 8D OF INCOME-TAX RULES. THE CIT (A) CONFIRMED THE ADDITION OF RS.31,03,972/- ON ACCOUNT OF DIRECT NEX US OF THE INTEREST TO THE TAX FREE DIVIDEND INCOME. THIS FINDING HAS BEEN GIVEN IN HIS ORDER IN PARA 3.6 WHICH READS AS UNDER :- 3.6 FOR ALL THESE REASONS, THE EXPENDITURE WHICH H AS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT HAS TO BE DETERMINED. TH E APPELLANT SUBMITTED THE DETAILED WORKING SHOWING THAT INTERES T AMOUNTING TO RS.31,03,972/- HAS DIRECT NEXUS WITH T HE TAX FREE DIVIDEND INCOME WHICH IS FOUND TO BE REASONABLE. IT IS ALSO WORTH MENTIONING THAT THE ABOVE WORKING HAS NOT BEE N CONTROVERTED BY THE ASSESSING OFFICER IN THE REMAND PROCEEDINGS. AFTER HAVING CONSIDERED THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, THE PROPORTIONATE DI SALLOWANCE UNDER SECTION 14A OF THE ACT IS RESTRICTED TO RS.31 ,03,972/- AS A RESULT, THE APPELLANT GETS A RELIEF OF RS.1,49,23 ,692/- (RS.1,80,27,664/- MINUS RS.31,03,972/-) AND GROUNDS OF APPEAL NO.1 & 2 ARE PARTLY ALLOWED. 3. THE REVENUES GROUND IS THAT THE DISALLOWANCES W ERE MADE AS PER PROVISIONS OF RULE 8D OF INCOME-TAX RULES. 4. AFTER HEARING BOTH THE SIDES, WE FIND THAT HON'B LE MUMBAI HIGH COURTS DECISION IN THE CASE OF GODREJ & BOYCE VS. DCIT, 328 ITR 81 (MUM.), IS THE ONLY HIGH COURT DECISION AVAILABLE O N THE APPLICABILITY OF THE ITA NO.811/DEL./2011 3 RULE 8D. HON'BLE MUMBAI HIGH COURT IN THE AFORESAI D CASE OBSERVED AS UNDER : RULE 8D R.W. S. 14A (2) IS NOT ARBITRARY OR UNREAS ONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD NOT SATISFACTORY. RULE 8D IS NOT RETROSPECTIVE AND APPL IES FROM AY 2008-09. FOR EARLIER YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BASIS U/S 14A (1) IN AY 2002-03, THE ASSESSEE CLAIMED THAT NO DISALLO WANCE U/S 14A IN RESPECT OF THE TAX-FREE DIVIDEND EARNED BY I T COULD BE MADE AS IT HAD NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDEND. THE AO REJECTED THE CLAIM AND MADE A DISA LLOWANCE U/S 14A. THIS WAS DELETED BY THE CIT (A). ON APPEAL BY THE DEPARTMENT, THE TRIBUNAL FOLLOWED THE JUDGEMENT OF THE SPECIAL BENCH IN DAGA CAPITAL 117 ITD 169 (MUM) (WHERE IT HAD BEEN HELD THAT S. 14A(2) & (3) & RULE 8D ARE PROCEDURAL IN NATURE AND HAVE RETROSPECTIVE EFFECT) AND REMANDED THE MAT TER TO THE AO FOR RE-COMPUTING THE DISALLOWANCE. THE ASSESSEE CHALLENGED THE DECISION OF THE TRIBUNAL. HELD: (1) THE ARGUMENT THAT DIVIDEND ON SHARES / UNITS IS NOT TAX-FREE IN VIEW OF THE DIVIDEND-DISTRIBUTION TAX PAID BY TH E PAYER U/S 115-O IS NOT ACCEPTABLE BECAUSE SUCH TAX IS NOT PAI D ON BEHALF OF THE SHAREHOLDER BUT IS PAID IN RESPECT OF THE PA YERS OWN LIABILITY; (2) S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS TAX -FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXA BLE AND NON-TAXABLE INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATION SHIP OF THE EXPENDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE U/S 14A HAS TO BE EFF ECTED ; ITA NO.811/DEL./2011 4 (3) THE ARGUMENT THAT A LITERAL INTERPRETATION OF S . 14A LEADS TO ABSURD CONSEQUENCES IS NOT ACCEPTABLE. S 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME I.E GROSS INCOME MINUS EXPENDITURE; (4) THE ARGUMENT THAT THE METHOD IN RULE 8D R.W.S 1 4A (2) FOR DETERMINING EXPENDITURE RELATING TO THE TAX-FREE IN COME IS ARBITRARY AND VIOLATIVE OF ARTICLE 14 IS NOT ACCEPT ABLE BECAUSE THERE IS AN ADEQUATE SAFEGUARD BEFORE RULE 8D CAN B E INVOKED. THE AO CANNOT IPSO FACTO APPLY RULE 8D BUT CAN DO S O ONLY WHERE HE RECORDS SATISFACTION ON AN OBJECTIVE BASIS THAT THE ASSESSEE IS UNABLE TO ESTABLISH THE CORRECTNESS OF ITS CLAIM . ALSO A UNIFORM METHOD PRESCRIBED TO RESOLVE DISPUTE S BETWEEN ASSESSEES AND THE DEPARTMENT CANNOT BE SAID TO BE A RBITRARY OR OPPRESSIVE. THERE IS A RATIONALE IN RULE 8D AND ITS METHOD IS FAIR & REASONABLE. IT CANNOT BE SAID THAT THERE I S MADNESS IN THE METHOD OF RULE 8D SO AS TO RENDER IT UNCONSTITU TIONAL; (5) RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX-FREE INCOME . IT APPLIES W.E.F AY 2008-09 ; (6) FOR THE AYS WHERE RULE 8D DOES NOT APPLY, THE A O WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPEN DITURE BY A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CIRCUMSTANCES; (7) ON FACTS, THOUGH IN THE EARLIER YEARS, THE TRIB UNAL HAD HELD THAT THE TAX-FREE INVESTMENTS HAD BEEN MADE OUT OF THE ASSESSEES OWN FUNDS, THIS DID NOT MEAN THAT THERE WAS NO EXPENDITURE INCURRED TO EARN TAX-FREE INCOME. EVEN THOUGH RULE 8D DID NOT APPLY TO AY 02-03, THE AO HAD TO CO NSIDER WHETHER DISALLOWANCE COULD BE MADE U/S 14A (1) . ALSO, THE PRINCIPLE OF CONSISTENCY WOULD NOT APPLY AS S. 14A HAD INTRODUCED A MATERIAL CHANGE IN THE LAW. ITA NO.811/DEL./2011 5 IN VIEW OF MUMBAI HIGH COURT DECISION IN THE CASE O F GODREJ BOYCE VS. DCIT, CITED SUPRA, PROVISIONS OF RULE 8D ARE APPLIC ABLE TO ASSESSMENT YEAR 2008-09 AS THE RULE IS INSERTED W.E.F. 24.03.2008. HON'BLE HIGH COURT ALSO HELD THAT RULE 8D IS NOT APPLICABLE RETROSPECTIVELY . THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2006-07. SINCE THE CIT (A) HAS DISALLOWED THE AMOUNT WHICH WAS DIRECTLY RELATED TO THE TAX FREE INCOME, THEREFORE, , WE FIND NO FAULT IN THE ORDER OF THE CIT (A) AND ACCORDINGLY, UPHOLD THE ORDER OF THE CIT (A). 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 9 TH DAY OF NOVEMBER, 2011. SD/- SD/- (R.P. TOLANI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 9 TH DAY OF NOVEMBER, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-VII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.