ACIT 22, MUMBAI V. ASHAPURA MINECHEM LTD, MUMBAI

ITA 8535/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100962 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-05-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 08-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LAXMI HANDA PURI
• Assessee Lawyers: HARISH M MOTIWALA
• Keywords: Search and seizure; Earning of tax free income
• Section: 143(3); 153A; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.8535/MUM/2010(A.Y : 2005-06) ITA NO.8536/MUM/2010(A.Y : 2004-05) ITA NO.8537/MUM/2010(A.Y. : 2007-08) ASST. COMMISSIONER OF INCOME TAX CC-22, ROOM NO.403, AAYKAR BHAVAN, MUMBAI -400 020 VS. M/S. ASHAPURA MINECHEM LTD. JEEVAN UDYOG BLDG., 3 RD FLOOR, 278, D.N.ROAD,FORT, MUMBAI 400 001 PAN : AA ACS 0957 F (APPELLANT ) .. ( RESPONDENT ) APPELLANT BY MS. LAXMI HANDA PURI R E SPONDENT BY : SHRI HARISH M. MOTIWALA DATE OF HEARING : 06/08/2015 DATE OF PRONOUNCEMENT : 31/08/2015 O R D E R PER G.S. PANNU, AM: THE CAPTIONED APPEALS BY THE REVENUE RELATE T O THE SAME ASSESSEE AND ARE DIRECTED AGAINST THREE SEPARATE O RDERS PASSED BY CIT(A)-39, MUMBAI DATED 15/09/2010 PERTAINING TO AS SESSMENT YEARS ITA NO.8535,8536& 8537/MUM/2010 2 2005-06, 2004-05 AND 2007-08, WITH REFERENCE TO THE RESPECTIVE ORDERS PASSED BY THE ASSESSING OFFICER DATED 24/12/2009 U NDER SECTION 143(3) R.W.S. 153A OF THE INCOME TAX ACT, 1961 ( IN SHORT THE ACT). 2. IN ALL THE APPEALS, REVENUE HAS RAISED A COMMON ISSUE WHICH RELATES TO THE DISALLOWANCE MADE BY THE ASSESSING O FFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. THE SOL ITARY GROUND RAISED BY THE REVENUE IS COMMONLY WORDED IN ALL THE THREE APP EALS, WHICH READS AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN DIRECTING THE AO TO DISALLOW THE EXPENSES AS PER THE DIRECTION OF THE HONOURABLE BOMBAY HIG H COURT IN THE CASE OF M/S GODREJ & BOYCE M MFG. CO . LTD VS . DCIT WHICH IS NOT ACCEPTED BY THE DEPARTMENT. 3. THE BRIEF BACKGROUND OF THE DISPUTE IS THAT THE RESPONDENT- ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVIS IONS OF COMPANIES ACT, 1956 AND IS, INTER-ALIA, ENGAGED IN THE BUSIN ESS OF MINING AND MINERAL PROCESSING. A SEARCH AND SEIZURE ACTION UN DER SECTION 132(1) OF THE ACT WAS CONDUCTED IN THE CASES PERTAINING TO TH E ASSESSEE GROUP ON 20/02/2008. AS A CONSEQUENCE OF THE SEARCH AND SEI ZURE ACTION, THE ITA NO.8535,8536& 8537/MUM/2010 3 ASSESSING OFFICER HAS FINALIZED THE IMPUGNED ASSESS MENTS UNDER SECTION 143(3) R.W.S. 153A OF THE ACT. THE ONLY DI SPUTE BEFORE US RELATES TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U NDER SECTION 14A OF THE ACT, ON THE GROUND THAT ASSESSEE HAD INCURRED C ERTAIN EXPENDITURE IN RELATION TO THE EARNING OF EXEMPT INCOMES. 4. FIRSTLY, WE MAY TAKE UP THE APPEAL PERTAINING TO THE ASSESSMENT YEAR 2005-06 WHEREIN, THE RELEVANT FACTS AS FOLLOWS . IN THE COURSE OF THE IMPUGNED ASSESSMENT PROCEEDINGS, IT WAS NOTICED THA T ASSESSEE COMPANY HAD EARNED DIVIDEND INCOME OF RS.7601/-, WH ICH WAS CLAIMED AS EXEMPT UNDER SECTION 10(33) OF THE ACT. THE ASS ESSING OFFICER NOTICED THAT ASSESSEE HAD DEBITED VARIOUS EXPENSES IN THE P&L ACCOUNT INCLUDING FINANCIAL EXPENSES, THEREFORE, HE COMPUT ED THE AMOUNT DISALLOWABLE UNDER SECTION 14A OF THE ACT BY APPLYI NG THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1961( IN SHORT TH E RULES). IN THIS MANNER, TOTAL DISALLOWANCE WAS WORKED OUT TO RS.14, 58,229/- AND CONSIDERING THAT IN THE ASSESSMENT MADE UNDER SECTI ON 143(3) OF THE ACT ON 22/3/2007 WITH RESPECT TO THE RETURN OF INC OME ORIGINALLY FILED UNDER SECTION 139(1) OF THE ACT WHERE A DISALLOWAN CE OF RS.3800/- WAS ITA NO.8535,8536& 8537/MUM/2010 4 ALREADY MADE, THE BALANCE OF RS.14,54,429/- ( RS.14 ,58,229 MINUS RS.3,800/-) WAS ADDED TO THE RETURNED INCOME. 5. BEFORE CIT(A), ASSESSEE DID NOT DISPUTE THE A MOUNT OF INTEREST EXPENDITURE OF RS.2.07,809/- DISALLOWED BY THE ASSE SSING OFFICER OUT OF THE TOTAL DISALLOWANCE OF RS.14,54,429/-. FOR THE BALANCE OF THE DISALLOWANCE, THE ASSESSEE COMPANY CONTENDED THAT THE ASSESSING OFFICER ERRED IN COMPUTING THE DISALLOWANCE BASED O N RULE-8D OF THE RULES, BECAUSE THE SAID RULE HAS BEEN HELD TO BE A PPLICABLE WITH EFFECT FROM A.Y 2008-09 AND IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION, FOLLOWING THE JUDGMENT OF HONBLE BO MBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPANY LTD. VS. D CIT, 328 ITR 81(BOM). SECONDLY, ASSESSEE ALSO CONTENDED THAT DU RING THE YEAR UNDER CONSIDERATION, OUT OF THE TOTAL INVESTMENT OF RS.2 5,10,86,449/-, A SUM OF RS.18,73,724/- WAS INVESTED IN A FOREIGN SUBSID IARY, THE DIVIDEND FROM WHOM WAS TAXABLE. FURTHER, AN AMOUNT OF RS.2 ,00,000/- WAS INVESTED IN NSE, AND THE DIVIDEND INCOME FROM IT IS ALSO TAXABLE. IN THIS MANNER, ASSESSEE CONTENDED THAT NO FRESH INVE STMENTS WERE MADE, WHICH WOULD YIELD EXEMPT INCOME; AND, THAT THE ADMI NISTRATIVE EXPENSES INCURRED FOR EARNING OF EXEMPT INCOME QUAN TIFIED AT ITA NO.8535,8536& 8537/MUM/2010 5 RS.3800/- IN THE ORIGINAL ASSESSMENT PROCEEDINGS W AS QUITE JUSTIFIED AND THAT NO FURTHER DISALLOWANCE OUT OF ADMINISTRA TIVE EXPENSES WAS LIABLE TO BE MADE. 6. THE CIT(A) CONSIDERED THE SUBMISSIONS PUT FORTH BY THE ASSESSEE AND HELD THAT THE PROVISIONS OF RULE 8D OF THE RULE S COULD NOT BE APPLIED IN THE INSTANT ASSESSMENT YEAR FOLLOWING TH E JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. COMPANY LTD. VS. DCIT (SUPRA). FURTHER, CIT(A) HEL D THAT THE ESTIMATION MADE BY THE ASSESSING OFFICER IN THE COU RSE OF ORIGINAL ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) OF THE ACT DETERMINING AN AMOUNT OF RS.3800/-, AS RELATABLE TO THE EARNING OF EXEMPT INCOME WAS REASONABLE AND NO FURTHER DISALLOWANCE WAS REQUIRED TO BE MADE. AS A CONSEQUENCE THE CIT(A) HAS DIRECTED THE ASSESSING O FFICER TO DELETE A SUM OF RS.12,46,620/- AND RETAIN THE BALANCE DISALL OWANCE OF RS.2,07,809/- U/S. 14A OF THE ACT. 7. BEFORE US, LD. CIT-DR, APPEARING FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND OF THE ASSESSING OFFICER WHIC H IS BASED ON ITA NO.8535,8536& 8537/MUM/2010 6 APPLICATION OF RULE 8D OF THE RULES IN ORDER TO QUA NTIFY THE AMOUNT DISALLOWABLE UNDER SECTION 14A OF THE ACT. 8. ON THE OTHER HAND, LD. REPRESENTATIVE FOR THE AS SESSEE HAS JUSTIFIED THE ORDER OF CIT(A) BY PLACING RELIANCE T HEREON. 9. HAVING HEARD THE RIVAL SUBMISSIONS, WE FIND NO J USTIFIABLE REASON TO INTERFERE WITH THE CONCLUSION DRAWN BY THE CIT(A ). NOTABLY, THE DISALLOWANCE COMPUTED BY THE ASSESSING OFFICER BASE D ON RULE 8D OF THE RULES IS NOT TENABLE IN AS MUCH AS RULE 8D IS A PPLICABLE ONLY W.E.F. ASSESSMENT YEAR 2008-09 AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPANY L TD. VS. DCIT (SUPRA). NEVERTHELESS, THE PROVISIONS OF SECTION 1 4A OF THE ACT, REQUIRE DISALLOWANCE OF EXPENSES RELATED TO THE EARNING OF EXEMPT INCOME. IN THIS CONTEXT, THE ASSESSING OFFICER HAS NOT MADE AN Y EFFORT TO DEMONSTRATE THAT THE ESTIMATION OF SUCH EXPENDITURE AT RS.3800/- MADE DURING THE ORIGINAL ASSESSMENT PROCEEDINGS WAS UNREASONABLE. THE CIT(A), ON THE OTHER HAND, HAS NOTED THAT ESTI MATION OF SUCH EXPENDITURE AT RS.3800/- MADE IN THE COURSE OF ORI GINAL PROCEEDINGS ITA NO.8535,8536& 8537/MUM/2010 7 WAS REASONABLE, A FINDING WHICH HAS NOT BEEN SHOWN TO BE UNTENABLE BY THE REVENUE BEFORE US. THEREFORE, WE FIND NO JU STIFIABLE REASON TO INTERFERE WITH THE ULTIMATE CONCLUSION DRAWN BY CIT (A) FOR ASSESSMENT YEAR 2005-06, WHICH IS HEREBY AFFIRMED. 10. CONSEQUENTLY, THE APPEAL OF THE REVENUE FOR ASS ESSMENT YEAR 2005-06 IS HEREBY DISMISSED. 11. IN SO FAR AS THE APPEAL OF THE REVENUE FOR A.Y 2004-05 IS CONCERNED, IT WAS A COMMON POINT BETWEEN THE PARTIE S THAT THE FACTS AND CIRCUMSTANCES ARE SIMILAR TO THOSE CONSIDERED B Y US IN THE APPEAL FOR A.Y 2005-06. THEREFORE, OUR DECISION IN APPEAL OF THE REVENUE FOR A.Y 2005-06 SHALL APPLY MUTATIS MUTANDIS IN THE APP EAL FOR A.Y 2004- 05 ALSO. CONSEQUENTLY, THE APPEAL OF THE REVENUE FOR A.Y 2004-05 IS ALSO HEREBY DISMISSED. 12. THE ONLY REMAINING APPEAL OF THE REVENUE IS IN RELATION TO A.Y 2007-08. IN ASSESSMENT YEAR 2007-08, THE ASSESSEE WAS FOUND TO HAVE EARNED DIVIDEND INCOME OF RS.3,77,76,400/-, WHICH WAS CLAIMED AS ITA NO.8535,8536& 8537/MUM/2010 8 EXEMPT UNDER SECTION 10(33) OF THE ACT. THE ASSESS ING OFFICER APPLIED THE PROVISIONS OF RULE 8D OF THE RULES AND COMPUTED A DISALLOWANCE OF RS.46,04,325/- UNDER SECTION 14A OF THE ACT, BEING EXPENDITURE RELATED TO THE EARNING OF SUCH EXEMPT INCOME. THE DISALLOW ANCE COMPUTED BY THE ASSESSING OFFICER WAS ON ACCOUNT OF INTEREST EX PENDITURE AS WELL AS OUT OF ADMINISTRATIVE EXPENDITURE, WHICH ACCORDING TO HIM WAS RELATABLE TO THE EARNING OF EXEMPT INCOME. 13. IN APPEAL BEFORE CIT(A), THE ASSESSEE CONTENDED THAT THE INVESTMENTS MADE IN MUTUAL FUNDS, ETC., WHICH YIELD ED THE EXEMPT INCOME WERE MADE OUT OF INTEREST FREE FUNDS, AND TH AT THE INTEREST- BEARING BORROWED FUNDS WERE NOT AT ALL USED FOR MA KING SUCH INVESTMENTS. THE CIT(A), IN PARA 5.2 OF HIS ORDER HAS TABULATED THE MUTUAL FUNDS/SECURITIES, IN WHICH THE INVESTMENTS H AVE BEEN MADE AND HE HAS ALSO TABULATED THE SOURCE FROM WHERE SUCH I NVESTMENTS HAVE BEEN MADE. THE TABULATION SHOWS THAT PRIMARILY ASS ESSEE HAS RAISED SHARE CAPITAL THROUGH QUALIFIED INSTITUTIONAL PLAC EMENTS (QIP) AMOUNTING TO RS.140,09,43,530/-, WHICH HAS BEEN UT ILIZED IN MAKING INVESTMENT IN MUTUAL FUNDS. ITA NO.8535,8536& 8537/MUM/2010 9 13.1 THE CIT(A) HAS ALSO NOTED THAT BY WAY OF NOTE NO.19, ANNEXED TO THE AUDITED BALANCE SHEET, IT HAS BEEN EXPLAINED THAT THE SHARE ISSUE PROCEEDS FROM THE QIP HAS BEEN UTILIZED PRIMARILY T OWARDS INVESTMENT IN MUTUAL FUNDS. FOR ALL THE ABOVE REASONS, CIT(A) CONCLUDED THAT THE INVESTMENT MADE IN THE MUTUAL FUNDS CAME OUT OF INT EREST- FREE FUNDS AND, THEREFORE, NO INTEREST-BEARING BORROWED FUNDS WERE UTILIZED FOR MAKING INVESTMENTS IN MUTUAL FUNDS AND FOR THE SAID REASON THE CIT(A) CONCLUDED THAT NO DISALLOWANCE WAS REQUIRED TO BE MADE OUT OF INTEREST EXPENDITURE WITH REGARD TO INVESTMENTS. H OWEVER, WHILE CONCLUDING, CIT(A) DIRECTED THE ASSESSING OFFICER A S UNDER:- THE A.O IS DIRECTED TO VERIFY WHETHER THE INVESTME NTS MADE IN THE MUTUAL FUNDS WERE MADE OUT OF THE QIP PROCEEDS; AND IF SO, THE A.O IS DIRECTED TO EXCLUDE THE INVESTMENT IN THESE MUTUAL FUNDS FROM THE TOTAL TAX FREE INVES TMENTS AS WELL AS THE TOTAL ASSETS FOR THE PURPOSE OF CALCULATION OF INTEREST DISALLOW ANCE UNDER RULE 8D(2)(II) OF THE I.T. RULES. 13.2 IN SO FAR AS THE DISALLOWANCE MADE BY THE ASS ESSING OFFICER OUT OF THE ADMINISTRATIVE EXPENDITURE IS CONCERNED, THE CI T(A) SET ASIDE THE ACTION OF THE ASSESSING OFFICER IN COMPUTING SUCH DISALLOWANCE BY APPLICATION OF CLAUSE (II) OF RULE 8D OF THE RULES AND INSTEAD DIRECTED THE ASSESSING OFFICER TO DETERMINE DISALLOWANCE ON A REASONABLE BASIS AS PER THE DIRECTIONS OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF ITA NO.8535,8536& 8537/MUM/2010 10 GODREJ & BOYCE MFG. COMPANY LTD. VS. DCIT(SUPRA). AGAINST SUCH DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFO RE US. 14. IN THE ABOVE BACKGROUND, WE HAVE HEARD THE RIVA L COUNSELS AND FIND THAT THERE IS NO JUSTIFICATION FOR INTERFERING WITH THE ORDER OF CIT(A) ON THE ASPECT OF THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. 14.1 IN SO FAR AS, THE ISSUE RELATING TO THE DISALL OWANCE OF INTEREST EXPENDITURE IS CONCERNED, THE CIT(A) HAS DIRECTED T HE ASSESSING OFFICER TO EXAMINE WHETHER THE INVESTMENTS MADE IN MUTUAL F UNDS WERE OUT OF NON-INTEREST BEARING FUNDS OR NOT; AND IF THE ASSE SSING OFFICER FOUND IT TO BE MADE OUT NON-INTEREST BEARING FUNDS, HE HAS B EEN FURTHER DIRECTED TO EXCLUDE SUCH INVESTMENTS IN MUTUAL FUND S FROM THE TOTAL TAX FREE INVESTMENTS AS WELL AS TOTAL ASSETS FOR TH E PURPOSES OF CALCULATION OF INTEREST DISALLOWABLE IN TERMS OF CL AUSE (II) OF RULE 8D(2) OF THE RULES. THE AFORESAID DIRECTION OF CIT(A), IN OUR VIEW IS UN- EXCEPTIONAL AND NO ERROR HAS BEEN BROUGHT OUT BY TH E REVENUE ON THIS ASPECT. IN THE SAME MANNER, WITH RESPECT TO QUANTI FICATION OF DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE IS C ONCERNED, ON THIS ASPECT ALSO WE FIND NO ERROR ON THE PART OF THE CIT (A) IN DIRECTING THE ITA NO.8535,8536& 8537/MUM/2010 11 ASSESSING OFFICER TO DETERMINE THE DISALLOWANCE O N A REASONABLE BASIS FOLLOWING THE JUDGEMENT OF THE HONBLE BOMBAY HI GH COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPANY LTD.(SUPRA). 14.2 BEFORE PARTING, WE MAY STATE HERE THAT THOUGH PROVISIONS OF RULE 8D OF THE RULES ARE NOT APPLICABLE FOR A.Y 2007-08, AS LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. COMPANY LTD. VS. DCIT(SUPRA), SO HOWEVER, THE ASSES SEE IS NOT IN APPEAL AGAINST THE ORDER OF THE CIT(A), WHEREIN Q UA THE INTEREST EXPENDITURE, THE ASSESSING OFFICER HAS BEEN DIRECTE D TO REWORK THE DISALLOWANCE UNDER CLAUSE (II) OF RULE 8D(2) OF TH E RULES SUBJECT TO CERTAIN ADJUSTMENTS. BE THAT IT MAY, WE HAVE ALREA DY HELD THE APPEAL OF THE REVENUE AGAINST THE DIRECTION OF CIT(A) IS W ITHOUT MERIT. 14.4 THUS, APPEAL OF THE REVENUE FOR ASSESSMENT Y EAR 2007-08 IS ALSO DISMISSED. 15. RESULTANTLY, THE CAPTIONED APPEALS OF THE REVEN UE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST, 2015. SD/- SD/- (SANJAY GARG) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI,DATED 31/08/2015 ITA NO.8535,8536& 8537/MUM/2010 12 [ VM. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 21 , MUMBAI 4. CIT - 10 , MUMBAI 5. DR, ITAT, MUMBAI A BENCH 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI