DCIT 1(3), MUMBAI V. TIPCO HOLDINGS LTD, MUMBAI

ITA 84/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92537 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 03-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 03-01-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE S/SHRI VIJAY PAL RAO ( JM ) AND D. KARUNAKAR RAO, (AM) , . , ./ I.T.A. NO S . 84 AND 85 / MUM/20 1 3 ( / ASSESSMENT YE A S R : 20 0 8 - 09 AND 2009 - 10 ) ASSTT. COMMISSIONER OF INCOME TAX - 1(3) , ROOM NO.5 40 , 5 TH FLOOR, AAYAKAR BHAVAN, M K ROAD. MUMBAI - 400020 / VS. M/S TIFCO HOLDINGS LTD , 3 RD FLOOR, MANDLIK HOUSE, MANDLIK ROAD, MUMBAI - 400001 ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO . 164 AND 165 / MUM/20 1 3 ( / ASSESSMENT YE A R S : 200 8 - 09 AND 2009 - 10 ) M/S TIFCO HOLDINGS LTD, MANDLIK HOUSE, MANDLIK ROAD, COLABA , MUMBAI - 400001 / VS. DY . COMMISSIONER OF INCOME TAX - 1(3), AAYAKAR BHAVAN, M K ROAD. MUMBAI - 400020 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAAC T4065F / REVENUE BY SHRI NEIL PHILIP / ASSESSEE B Y SHRI DHARMESH SHAH / DATE OF HEARING : 1 1 .5.2015 / DATE OF PRONOUNCEMENT : 22. 5. 2015 / O R D E R PER VIJAY PAL RAO ( JM ) THESE TWO SET S OF CROSS - APPEALS ARE DIRECTED AGAINST THE TWO SEPARATE ORDER OF THE LD.CIT(A) BOTH DATED 17.10.2012 FOR THE ASSESSMENT YEARS 200 8 - 09 AND 2009 - 10 RESPECTIVELY. SINCE FACTS AS WELL AS ISSUES RAISED IN THESE CROSS - 84 /MUM/201 3, 85/ MUM/201 3, 164/M/165/M/2013 AND 2 APPEALS ARE COMMON, THEREF ORE, FOR THE SAKE OF CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DECIDED BY THIS COMMON ORDER. 2. THE F ACTS OF THE CASE FOR THE ASSESSMENT YEAR 2008 - 09 ARE THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY REGISTERED WITH RBI AS NBFC INVESTM ENT COMPANY. THE ASSESSEE HAS RECEIVED A DIVIDEND INCOME OF RS.4.82 CRORES AND LONG TERM CAPITAL GAIN OF RS.39.04 CRORES. THE ASSESSEE CLAIMED DIVIDEND INCOME AND LONG TERM CAPITAL GAIN AS EXEMPT U/S 10(3 5 ) AND 10(3 8 ) OF THE ACT RESPECTIVELY. THE ASSESSE E SUOMOTU DISALLOWED A SUM OF RS.69.64 LAKHS IN COMPUTATION OF INCOME. THE AO MADE DISALLOWANCE U/S 14A OF RS.1,13,04,344/ - COMPUTED AS PER THE FORMULA GIVEN UNDER RULE 8D OF THE INCOME TAX RULES, 1962. THUS, THE AO HAS MADE AN ADDITION OF RS.50,58 ,468/ - ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE ACT. 3. ON APPEAL, BEFORE THE LD.CIT(A), THE ASSESSEE CONTENDED THAT THE A SSESSEE HAS DEBITED A TOTAL EXPENDITURE OF RS.86.33 LAKHS TO THE PROFIT AND LOSS ACCOUNT AND OUT OF WHICH THE ASSESSEE SUOMOTU H AS DISALLOWED A SUM OF RS. 69.64 LAKHS UNDER SEC TION 14A IN COMPUTATION OF INCOME, THEREFORE, NO FURTHER DISALLOWANCE IS CALLED FOR U/S 14A OF THE ACT. THE ASSESSEE ITSELF HAS WORKED OUT THE AMOUNT OF RS.62,17,115/ - WHICH IS MORE THAN THE ADMINISTRATIV E EXPENSES OF RS.26.13 LAKHS. ACCORDINGLY , THE LD. CIT(A) HAS HELD THAT RULE 8D(2)(III) OF THE RULES CANNOT BE APPLIED IN THIS CASE AND DIRECTED THE AO TO PROPORTIONATE EXPENSES O F RS.26.13 LAKHS ON THE BASIS OF EXEMPT INCOME IN THE RATIO OF T AXAB LE INCOME AND THE PROPORTIONATE EXPENDITURE RELATING TO EXEMPT INCOME TO BE DISALLOWED U/S 14A OF THE ACT. THE LD.CIT(A) FURTHER DIRECTED THE AO TO DISALLOW THE INTEREST EXPENDITURE OF RS.60,49,500/ - . SINCE THE LD.CIT(A) HAS REDUCED DISALLOWANCE ON A CCOUNT OF ADMINISTRATIVE EXPENSES AND FURTHER DIRECTED THE AO TO MAKE A SEPARATE DISALLOWANCE OF INTEREST EXPENDITURE, BOTH THE PARTIES HAVE FILED RESPECTIVE APPEALS FOR THESE TWO ASSESSMENT YEARS. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSIDERED T HE RELEVANT MATERIAL AVAILABLE ON RECORD . THERE IS NO DISPUTE TO THE FACT THAT FOR THESE TWO ASSESSMENT YEARS THE DISALLOWANCE COMPUTED BY THE AO AS PER THE PROVI SI ONS OF RULE 8D OF 84 /MUM/201 3, 85/ MUM/201 3, 164/M/165/M/2013 AND 3 THE RULES IS MORE THAN ACTUAL TOTAL EXPENDITURES DEBITED BY THE ASSESSEE TO THE PROFITS AND LOSS ACCOUNT. THE LD . AR OF THE ASSESSEE HAS SUBMITTED THAT WHEN THE WORKING UNDER RULE 8D GIVES CONTRADICTORY RESULT TO THE ACTUAL FACT THEN THE PROVISIONS OF RULE 8D CANNOT BE APPLIED FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 1 4A OF THE ACT . IN SUPPORT OF THIS CONTENTION HE HAS PLACED RELIANCE ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF CAPE TRADING P LTD V/S ACIT IN ITA NO.3772/MUM/2013 (AY - 2010 - 11) DATED 11.3.2015 . ON THE OTHER HAND, THE LD.DR HAS STRONGLY RELIED UPON THE ORDER OF AO. 5. HAVING REGARD TO THE FACTS THAT THE DISALLOWANCE MADE BY THE AO BY APPLYING RULE 8D EXCEED S THE AMOUNT OF TOTAL EXPENDITURE DEBITED BY THE ASSESSEE TO THE PROFIT AND LOSS ACCOUNT , WE ARE OF THE VIEW THAT FO R THE PURPOSE OF DISALLOWANCE U/S 14A, THE COMPUTATION MADE UNDER RULE 8D CANNOT BE ACCEPTED. IN AN IDENTICAL SITUATION, THE TRIBUNAL IN THE CASE OF CAPE TRADING P LTD (SUPRA) HAS CONSIDERED THE ISSUE OF DISALLOWANCE MADE U/S 14A AND APPLICABILITY OF THE PROVISIONS OF RULE 8D IN PARA 6 OF THE ORDER AS UNDER : 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS DEBITED ADMINISTRATIVE AND OTHER EXPENSES TO THE P&L ACCOUNT OF RS. 7,95,904/ - , THE DETAILS OF THE EXPENSES ARE GIVEN IN SCHEDULE K AS UNDER: - SCHEDULE K ADMINISTRATIVE AND OTHER EXPENSES AUDITORS REMUNERATION (INCLUDING SERVICE TAX) FOR THE YEAR ENDED MARCH 31, 2010 - AUDIT FEES 13,236.00 TAX AUDIT FEES 9,927.00 LEGAL AND PROFESSIONAL FEES 30,142.00 PROFESSION TAX 2,500.00 BUSINESS SUPPORT FEES 661,800.00 PRINTING AND STATIONARY 478.00 BANK CHARGES AND COMMISSION 76,843.00 FILING FEES AND REGISTRATION CHARGES 978.00 7. THE ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE U/S 14A WORKED OUT THE DISALLOW ANCE UNDER RULE 8D(2)(III) AT RS. 20,86,230/ - WHICH SHOWS THAT THE WORKING UNDER THE PROVISIONS OF RULE 8D NEGATES THE ACTUAL TOTAL EXPENDITURE DEBITED BY THE ASSESSEE IN THE P&L ACCOUNT ON ADMINISTRATIVE AND OTHER EXPENSES. IN ANY CASE, DISALLOWANCE CANNO T BE MADE MORE THAN THE TOTAL EXPENSES DEBITED TO THE P&L ACCOUNT. FROM THE DETAILS OF THE 84 /MUM/201 3, 85/ MUM/201 3, 164/M/165/M/2013 AND 4 EXPENSES, IT IS CLEAR THAT MOST OF THE EXPENSES ARE SPECIFIC IN NATURE AND EXCLUSIVELY INCURRED FOR THE BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE, THE EXPENSES ON ACCOUNT OF AUDITOR FEE, LEGAL AND PROFESSIONAL FEES, PROFESSION TAX, BUSINESS SUPPORT FEES CANNOT BE SAID TO HAVE ANY DIRECT OR PROXIMATE NEXUS WITH THE ACTIVITY OF INVESTMENT OR EARNING THE EXEMPT INCOME. THUS THE DISALLOWANCE U/S 14A CAN BE MADE ONLY TO THE EXTENT OF ALLOCATION OF THESE EXPENSES WHICH HAS DIRECT OR PROXIMATE NEXUS WITH EARNING OF EXEMPT INCOME. FROM THE DETAILS OF THE EXPENSES, WE FIND THAT THE PRINTING AND STATIONARY EXPENSES AND BANK CHARGES & COMMISSION ARE ONLY TWO ITEMS WHICH COULD HAVE DIRECT OR PROXIMATE NEXUS WITH THE INVESTMENT AND EXEMPT INCOME. THEREFORE, THE DISALLOWANCE U/S 14A R.W. RULE 8D(2)(III) CANNOT EXCEED TO THE ALLOCABLE EXPENSES INCURRED BY THE ASSESSEE FOR A COMPOSITE ACTIVITY RESULTING CAPE TRADING P. LTD. 5 | P A G E TAXABLE AND EXEMPT INCOME. THE WORKING OF DISALLOWANCE UNDER RULE 8D(2)(III) BY THE ASSESSING OFFICER CLEARLY SHOWS THAT IT EXCEEDS NOT ONLY THE EXPENSES DEBITED AND CLAIMED BY THE ASSESSEE WHICH COULD HAVE A PROXIMATE NEXUS WITH THE EARNING OF EXEMPT INCOME BUT ALSO TO THE TOTAL EXPENDITURE DEBITED BY THE ASSESSEE IN THE P&L ACCOUNT UNDER THE HEAD ADMINISTRATIVE AND OTHER EXPENSES. THEREFORE, IT TURNS OUT TO BE CONTRADICTORY TO THE ACTUAL FACTS AND GIVES ABSURD RESULTS IN COMPLETE DISREGARD TO THE SCHE ME OF DISALLOWANCE U/S 14A. THEREFORE, THE PROVISIONS OF RULE 8D(2)(III) CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE AS IT BECOMES UNWORKABLE AND UNREALISTIC. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT WHEN THE PROVISIONS OF RULE 8D(2)(III) BECOMES UNWORKABLE THEN IN THE ABSENCE OF ANY FINDING AS WELL AS ANY SPECIFIC EXPENSES DEBITED TO THE P&L ACCOUNT WHICH COULD HAVE A DIRECT OR PROXIMATE NEXUS FOR EARNING THE DIVIDEND INCOME THE DISALLOWANCE MADE BY THE ASSESSEE SUO MOTU IS JUST AND PROPE R. ACCORDINGLY, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 6. THUS, SO FAR AS THE PROVISIONS OF RULE 8D(2)(III) ARE CONCERNED, THE SAME CANNOT BE APPLIED IN THE CASE OF ASSESSEE WHEN TH E DISALLOWANCE MADE U/S 14A ON ACCOUNT OF ADMINISTR ATIVE EXPENSES EXCEED THE TOTAL EXPENDITURE DEBITED ON THIS ACCOUNT TO THE PROFIT AND LOSS ACCOUNT . HENCE, RULE 8D CANNOT BE APPLIED FOR MAKING DISALLOWANCE U/S 14A ON ACCOUNT OF ADMINISTRATIVE EXPENSES. THE LD. AR SUBMITTED THAT THE DISALLOWANCE ON AC COUNT OF INTEREST EXPENDITURE IS STRATEGIC ONE AND THE INVESTMENT IN QUESTION STRATEGIC IN NATURE AND NOT MADE WITH THE INTENTION OF EARNING EXEMPT INCOME BECAUSE THE INVESTMENT HAVE BEEN MADE IN THE SISTER CONCERN AND FOR COMMERCIAL EXPEDIENCY. IN SUPP ORT OF THIS CONTENTION HE HAS RELIED UYPON THE ORDERS OF TRIBUNAL IN THE FOLLOWING CASES : A) GAREW ARE WALL ROPES LTD V/S ACIT IN ITA NO.5408 AND 4957/MUM/2012) DATED 15.1.2014 FOR AY 2009 - 10 AND B) M/S J M FINANCIAL LTD V/S ACIT IN ITA N O.4521/MUM/2012) DATED 26.3.2014 FOR AY 2009 - 10. 84 /MUM/201 3, 85/ MUM/201 3, 164/M/165/M/2013 AND 5 THE AUTHORITIES BELOW HAVE NOT EXAMINED THIS ISSUE BY CONSIDERING FACT TH A T THE INVESTMENT IN QUESTION ARE IN THE SISTER CONCERN AND ARE IN THE NATURE OF STRATEGIC INVESTMENT. HOWEVER, THE AS SESSEE ITSELF HAS MADE A DISALLOWANCE OF RS.62.17 LAKHS UNDER SECTION 14A WHICH COVERS THE INTEREST EXPENDITURE OF RS.50,58,468/ - FOR T HE ASSESSMENT YEAR 2008 - 09, THEREFORE, NO FURTHER DISALLOWANCE IS CALLED FOR U/S 14A. SIMILARLY FOR THE ASSE SS MENT YEAR 2009 - 10, THE ASSESSEE MA D E SUO MOTU DISALLOWANCE RS.50.58 LAKSH U/S 14A NO FURTHER DISALLOWANCE IS CALLED FOR. 7 . IN THE RESULT, ASSESSEES APPEALS ARE ALLOWED AND THE APPEALS OF THE REVENUE STAND DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN CO URT ON 22ND MAY , 201 5 . 22ND MAY , 2015 SD SD ( . / D. KARUNAKAR RAO) ( / VIJAY PAL RAO ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI: 22ND MAY , 2015 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPOND ENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI