M/s Oswal Overseas, GANDHIDHAM V. The Income Tax Officer, Ward-2., GANDHIDHAM

ITA 855/RJT/2009

• Counselvise Citation: 85524914 RSA 2009
• Duration Of Justice: 2 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 10-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 26-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MK SINGH
• Assessee Lawyers: SANJAY SHAH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI N.R.S. GANESA N (JM) I.T.A. NO.855/RJT/2009 (ASSESSMENT YEAR 2005-06) M/S OSWAL OVERSEAS VS THE ITO, WD.2 D-94, JAWAHAR CHOWK GANDHIDHAM PB NO.9, GANDHIDHAM PAN : AAAFO9978R (APPELLANT) (RESPONDENT) DATE OF HEARING : 10-08-2011 DATE OF PRONOUNCEMENT : 12-08-2011 APPELLANT BY : SHRI SANJAY SHAH RESPONDENT BY: SHRI MK SINGH O R D E R PER N.R.S. GANESAN, JM THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF CIT(A)-II, RAJKOT DATED 19-05-2009 AND PERTAINS TO ASSESSMENT YEAR 2005-06. 2. THE FIRST ISSUE RELATES TO DISALLOWANCE OF RS. 3 2,172 ON ACCOUNT OF EXCESS REMUNERATION PAID TO THE PARTNERS. 3. SHRI SANJAY SHAH, THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT OVERALL REMUNERATION PAID TO THE PARTNERS WAS WITHI N THE LIMIT OF SECTION 40(B) OF THE ACT. HOWEVER, TO SOME OF THE PARTNERS EXCESS A MOUNTS WERE PAID. INTERNAL DISTRIBUTION OF SALARY IS A MUTUAL AGREEMENT BETWEE N THE PARTNERS. THEREFORE, THE EXCESS PAYMENT MADE TO SOME OF THE PARTNERS CANNOT BE DISALLOWED. ITA NO.855/RJT/2009 2 4. ON THE CONTRARY, SHRI MK SINGH, THE LD.REPRESENT ATIVE FOR THE REVENUE SUBMITTED THAT U/S 40(B) OF THE INCOME-TAX ACT ANY PAYMENT MADE IN TERMS OF THE PARTNERSHIP DEED ALONE NEEDS TO BE ALLOWED. IF ANY PAYMENT IS NOT MADE IN CONSONANCE WITH PARTNERSHIP DEED IT CANNOT BE ALLOW ED AS DEDUCTION. THEREFORE, THE EXCESS PAYMENT TO ONE OF THE PARTNERS IS IN VIO LATION OF THE TERMS OF THE PARTNERSHIP DEED. THEREFORE, IT CANNOT BE ALLOWED EVEN THOUGH OVERALL PAYMENT OF SALARY IS WITHIN THE LIMIT PRESCRIBED UNDER SECT ION 40(B) OF THE ACT. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. SECTION 40(B) CLEARL Y SAYS THAT THE PAYMENT OF REMUNERATION TO ANY PARTNER SHALL BE IN ACCORDANCE WITH TERMS OF THE PARTNERSHIP DEED. IT IS ALSO CLARIFIED THAT ANY PAYMENT MADE W HICH WAS NOT AUTHORIZED OR NOT IN CONSONANCE WITH THE PARTNERSHIP DEED CANNOT BE A LLOWED AS DEDUCTION. WHEN THE PARTNERS REMUNERATION IS SPECIFIED IN THE PART NERSHIP DEED EACH PARTNER IS ENTITLED ONLY TO THE SPECIFIED AMOUNT OF REMUNERATI ON. IF THE ASSESSEE PASSES ON ANYTHING MORE THAN THE SPECIFIED AMOUNT, THEN THE P AYMENT MAY NOT BE IN CONSONANCE WITH THE PARTNERSHIP DEED. IF THERE IS ANY MUTUAL AGREEMENT FOR PAYMENT OF REMUNERATION THEN IT IS OPEN TO THE PART NERS TO BRING AMENDMENT IN THE PARTNERSHIP DEED WITH REGARD TO THE PAYMENT OF REMUNERATION WHICH WAS MUTUALLY AGREED UPON. IN THE ABSENCE OF ANY SUCH A MENDMENT IN THE PARTNERSHIP DEED, THE EXCESS PAYMENT MADE TO THE PARTNERS CANNO T BE ALLOWED IN VIEW OF SECTION 40(B) OF THE ACT. THEREFORE, WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED . ITA NO.855/RJT/2009 3 6. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DIS ALLOWANCE OF INTEREST EXPENSES OF RS. 5,03,380. 7. SHRI SANJAY SHAH, THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE INVESTED RS. 36,60,000 IN SHARES FROM OWN FUNDS. THEREFORE, ACCORDING TO THE LD.REPRESENTATIVE, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. REFERRING TO THE DECISION OF THE SPECI AL BENCH OF THIS TRIBUNAL IN DAGA CAPITAL MANAGEMENT PVT LTD 119 TTJ 289 (MUM), THE LD.REPRESENTATIVE SUBMITTED THAT THERE WAS SUBSEQUENT JUDGMENT OF THE MUMBAI HIGH COURT IN GODREJ & BOYCE MFG CO LTD VS DY.CIT 234 CTR (BOM) 1 . THEREFORE, ACCORDING TO THE LD.REPRESENTATIVE, THE PROVISIONS OF SECTION 14A AND RULE 8D HAVE TO BE EXAMINED WITH REGARD TO THE FACTS OF THE CASE IN TH E LIGHT OF THE LAW LAID DOWN BY THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG CO LTD VS DY.CIT (SUPRA). 8. ON THE CONTRARY, THE LD.DR SUBMITTED THAT THERE IS NO MATERIAL AVAILABLE ON RECORD TO SHOW THAT THE ASSESSEE HAS INVESTED HIS O WN FUNDS. MOREOVER, IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUN AL DIRECT AND INDIRECT EXPENSES CANNOT BE ALLOWED U/S 14A. THEREFORE, IT IS IMMATE RIAL WHETHER THE ASSESSEE HAS INVESTED HIS OWN FUNDS OR THE BORROWED FUNDS IN THE SHARES. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND HAVE ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. NO DOUBT , THE SPECIAL BENCH OF THIS TRIBUNAL FOUND THAT RULE 8D QUALIFYING THE DISALLOW ANCE FOR THE PURPOSE OF SECTION ITA NO.855/RJT/2009 4 14A IS OPERATIVE RETROSPECTIVELY. SUBSEQUENTLY THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG CO LTD VS DY.CIT (SUPRA) HAD AN OCCASIO N TO CONSIDER THIS ISSUE ELABORATELY. THE BOMBAY HIGH COURT, AFTER CONSIDER ING THE JUDGMENT OF THE APEX COURT IN CIT VS WALFORT SHARE & STOCK BROKERS PVT L TD (2010) 233 CTR 42 (SC) FOUND THAT THE FOLLOWING PRINCIPLES WOULD EMERGE FR OM THE JUDGMENT OF THE APEX COURT: (A) THE MANDATE OF S.14A IS TO PREVENT CLAIMS FOR D EDUCTION OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE; (B) SEC.14A(1) IS ENACTED TO ENSURE THAT ONLY EXPEN SES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE FOLLOWED; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS W IDENED BY S.14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITURE BETWEEN TAXAB LE AND NON-TAXABLE INCOME OF AN INDIVISIBLE BUSINESS; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET I NCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSES OF S.14A AND EXPENSES TOWARDS NON-TAXABLE INCOME MUST BE EXCLUDED; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTA BLISHED WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE HAS TO BE EFFECTED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DISALLOWED UNDE R S.14A. INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS BROADLY A DVERTED TO AS EXEMPT INCOME AS AN ABBREVIATED APPELLATION. BOTH THE AUTHORITIES BELOW HAD NO OCCASION TO CONSI DER EITHER THE JUDGMENT OF THE BOMBAY HIGH COURT IN GODREJ BOYCE MFG CO LTD VS DY. CIT & ANR (SUPRA) OR THE JUDGMENT OF THE APEX COURT IN CIT VS WALFORT SHARE & STOCK BROKERS (P) LTD ITA NO.855/RJT/2009 5 (SUPRA). ACCORDINGLY WE SET ASIDE THE ORDER OF THE LOWER AUTHORITIES AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER TO RE -CONSIDER THE ISSUE IN THE LIGHT OF JUDGMENT OF THE BOMBAY HIGH COURT IN GODREJ BOYCE M FG CO LTD VS DY.CIT & ANR (SUPRA)AND THE APEX COURT IN CIT VS WALFORT SHARE & STOCK BROKERS (P) LTD (SUPRA) AND THEREAFTER DECIDE THE SAME AFRESH IN AC CORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS ALLOWED, FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 12-08-2011 . SD/- SD/- (A.L. GEHLOT) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER RAJKOT, DT : 12 TH AUGUST, 2011 PK/- COPY TO: 1. ASSESSEE 2. REVENUE 3. THE CIT(A)-III, RAJKOT 4. THE CIT-II, RAJKOT 5. THE DR, I.T.A.T., RAJKOT (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, RAJKOT