FERANI HOTELS P LTD, MUMBAI V. ACIT CEN CIR 23, MUMBAI

ITA 857/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84292 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 03-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 01-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY B SAWANT
• Keywords: Earning of tax free income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI , , BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARO RA, AM ./ I.T.A. NO. 857/MUM/2013 ( / ASSESSMENT YEAR: 2009-10) FERANI HOTELS PVT. LTD. CONSTRUCTION HOUSE B, 2 ND FLOOR, 623, LINKING ROAD, KHAR (W), MUMBAI-400 052 / VS. ASST. CIT, CENTRAL CIRCLE 23, AAYAKAR BHAVAN, MUMBAI-400 020 ./! ./PAN/GIR NO. AAACF 0693 B ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) ' % & / APPELLANT BY : SHRI SANJAY B. SAWANT #$ ' % & / RESPONDENT BY : SHRI JITENDRA KUMAR ' ()* % +, / DATE OF HEARING : 17.09.2014 -./ % +, / DATE OF PRONOUNCEMENT : 17.11.2014 0 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-40, MUMBAI (CIT(A) FOR SH ORT) DATED 06.11.2012, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2009-10 VIDE ORDER DATED 28.12.2011. 2. THE ASSESSEE, IN THE BUSINESS OF REAL ESTATE AND HOTELS, WAS OBSERVED TO HAVE FOR THE RELEVANT YEAR DIVIDEND INCOME AT RS.25,80,944/- AS WELL AS PROFIT FROM PARTNERSHIP FIRM (AT RS. 1,46,977/-), CLAIMED EXEMPT UNDER DIFFERENC E CLAUSES OF SECTION 10 OF THE ACT. SECTION 14A OF THE ACT WOULD THEREFORE APPLY, EVEN AS THE ASSESSEE HAD MADE NO 2 ITA NO. 857/MUM/2013 (A.Y. 2009-10) FERANI HOTELS PVT. LTD. VS. ASST. CIT DISALLOWANCE OF ANY EXPENDITURE IN RELATION TO THIS INCOME. THE SAME WAS WORKED OUT UNDER RULE 8D, AT RS.35,70,437/-, AS UNDER: A) QUA DIRECT EXPENDITURE (R. 8D(2)(I)) NIL B) QUA INDIRECT EXPENDITURE (R. 8D(2)(II) RS.25,60,423/ - C) QUA INDIRECT EXPENDITURE OTHER THAN INTEREST (R. 8D(2 )(III)) RS.10,10,014/- THE SAME BEING CONFIRMED IN FIRST APPEAL, THE ASSES SEE IS IN SECOND APPEAL. ADDITIONAL GROUND IS ALSO RAISED BEFORE US FOR THE FIRST TIME IN RESPECT OF THE CORRESPONDING ADJUSTMENT IN COMPUTING THE BOOK PROF IT U/S.115JB; THE RELEVANT FACTS BEING ON RECORD. THE ISSUE BEING LEGAL, WE ADMIT TH E SAID GROUND. WE SHALL PROCEED ISSUE-WISE. WITH REGARD TO INTERES T, THE ASSESSEE CONTENDED TO HAVE SUFFICIENT CAPITAL OF ITS OWN, I.E., A CAPITA L BASE OF RS.160.98 CRORES, AS AGAINST A TOTAL INVESTMENT OF RS.85.32 CRS. AS ON 31.03.2009, SO THAT INVESTMENT IN SHARES (RS.14.79 CRS.) AND IN PARTNERSHIP FIRM (RS.10.39 CRS.), YIEL DING TAX EXEMPT INCOMES, MUST BE CONSIDERED AS OUT OF OWN CAPITAL, ENTAILING NO INTE REST EXPENDITURE AND, THUS, DISALLOWANCE THEREOF. TOWARD THIS, RELIANCE STANDS PLACED ON THE DECISION IN THE CASE OF ASSESSEES SISTER CONCERN IN PALM GROVE BEACH HOTELS PRIVATE LIMITED (IN ITA NO. 5678/MUM/2011 DATED 22.03.2013/COPY ON RECORD) AND SHOPPERS STOP LIMITED VS. ACIT (IN ITA NOS. 1448 AND 4475/MUM/2010 DATED 30.08.2011), WHEREIN THIS PRINC IPLE STANDS ACCEPTED FOLLOWING CIT VS. RELIANCE UTILITIES & POWER LTD. [2009] 313 ITR 340 (BOM). WITH REGARD TO THE EXPENDITURE OTHER THAN INTEREST, THE ASSESSEES STAND IS OF HAVING INCURRED A LESSER EXPENDITURE. FURTHER, AS REGARDS THE DISALLOWANCE QUA PROFIT FROM PARTNERSHIP FIRM, THE MATTER WOULD NEED TO BE RESTO RED BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.) TO APPLY THE RATIO OF THE DECISION B Y THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF VISHNU ANAND MAHAJAN V. CIT [2012] 147 TTJ 142 (AHD)(SB), AS DIRECTED BY THE CO-ORDINATE BENCH IN THE CASE OF PALM GROVE BEACH HOTELS PVT. LTD. (SUPRA). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 AS REGARDS THE CLAIM QUA DISALLOWANCE OF INTEREST EXPENDITURE, THE ARGUMENT OF SUFFICIENT CAPITAL, SO THAT THE SAME MUST BE PRESUM ED AS HAVING BEEN APPLIED TOWARD INVESTMENTS YIELDING TAX EXEMPT INCOME, MISSES THE POINT COMPLETELY. THE MATTER HAS TO 3 ITA NO. 857/MUM/2013 (A.Y. 2009-10) FERANI HOTELS PVT. LTD. VS. ASST. CIT BE DECIDED ON THE BASIS OF FACTS AND NOT PRESUMPTIO NS. UNTIL AND UNLESS THEREFORE IT IS SHOWN AND, AGAIN, WITH REFERENCE TO THE ASSESSEES ACCOUNTS, THAT THE INVESTMENTS HAVE BEEN FINANCED FROM OWN CAPITAL, SO THAT NO PART OF THE BORROWED CAPITAL HAS BEEN UTILIZED FOR THE PURPOSE, NO SUCH PRESUMPTION WOULD HOLD, AN D THE RULE OF APPORTIONMENT, PRESCRIBED BY R. 8D, MANDATORY W.E.F. A.Y. 2008-09, SHALL APPLY. THE DECISION IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) STANDS RENDERED IN THE CONTEXT OF SECTION 36(1)(III), AND WOULD THUS BE OF LITTLE RELEVANCE. IT NEEDS TO BE APPRECIATED THAT THE DISALLOWANCE U/S.14A IS A STATUTORY DISALLOWANCE, C ONSTITUTING A COMPLETE CODE IN ITSELF. THE SAID DECISION WAS CITED BEFORE, AND STANDS DISC USSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM). IT STANDS EXPLAINED THAT SECTION 14A HAS WIDEN THE THE ORY OF APPORTIONMENT, WHICH ONLY SEEKS TO EFFECTUATE THE PRINCIPLE OF ONLY THE NET ( I.E., NET OF ALL EXPENSES) INCOME, WHETHER POSITIVE OR NEGATIVE, BEING LIABLE TO, OR NOT SO, I .E., AS THE CASE MAY BE, TO TAX. THE RELEVANT DISCUSSION APPEARS AT PARAS 85-86 (PGS. 13 5-137 OF THE REPORTS), A PART OF WHICH WE CONSIDER IT RELEVANT TO REPRODUCE, AS UNDER: IN ALL THESE DECISIONS, THE TRIBUNAL HELD THAT NO NEXUS HAD BEEN ESTABLISHED BETWEEN BORROWED FUNDS AND INVESTMENTS BY THE ASSES SEE IN DIVIDEND YIELDING SHARES/INCOME YIELDING MUTUAL FUNDS. NOW A SSUMING THAT THIS IS SO, THE ONLY CONCLUSION WHICH EMERGES IS THAT THE A SSESSEE HAD UTILIZED ITS OWN FUNDS FOR THE PURPOSE OF MAKING THE INVESTMENTS . THE FACT THAT THE ASSESSEE HAS UTILIZED ITS OWN FUNDS IN MAKING THE I NVESTMENTS WOULD NOT BE DISPOSITIVE OF THE QUESTION AS TO WHETHER THE ASSES SEE HAD INCURRED EXPENDITURE IN RELATION TO THE EARNING OF SUCH INCO ME. EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN FUNDS FOR MAKING INVESTMENTS W HICH HAVE RESULTED IN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED IN THE EARNING OF THA T INCOME WOULD HAVE TO BE DISALLOWED. THAT IS EXACTLY A MATTER WHICH THE A SSESSING OFFICER HAS TO DETERMINE. WHETHER OR NOT ANY EXPENDITURE WAS INCUR RED BY THE ASSESSEE IN RELATION TO THE EARNING OF NON-TAXABLE INCOME FALLS WITHIN THE DOMAIN OF THE ASSESSING OFFICER. THE BASIS ON WHICH THE TRIBUNAL HAD COME TO ITS DECISION FOR THE ASSESSMENT YEARS 1998-99, 1999-200 0 AND 2001-02 WOULD NOT CONCLUDE THAT QUESTION. WHERE THEREFORE THE ASSESSEE IS ABLE TO SHOW, WITH REFERENCE TO ITS ACCOUNTS, OF THE BORROWED CAPITAL HAVING FINANCED A PARTICULAR ASSET (OR ASSET CLASS), THE INTEREST COST 4 ITA NO. 857/MUM/2013 (A.Y. 2009-10) FERANI HOTELS PVT. LTD. VS. ASST. CIT RELATABLE THERETO WOULD NECESSARILY HAVE TO BE CONS IDER AS EXPENDED TOWARD THE SAME. UPON THIS BEING CONVEYED BY THE BENCH DURING HEARIN G, THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUNSEL, WOULD SUBMIT THAT THE BORROWED CAPITAL IN THE INSTANT CASE IS IN FACT WHOLLY FOR BUSINESS PUR POSES, BEING TOWARD THE ASSESSEES HOTEL PROJECT AT KODAIKANAL AND THE REAL ESTATE BUSINESS AT MUMBAI. WE OBSERVE NO FINDINGS IN THE MATTER ON RECORD. SO, HOWEVER, IF, AS CLAIMED, THE BORROWED CAPITAL IS IN THE FORM OF DEDICATED FUNDS, I.E., SPECIFIED ACTIVITIES AND/OR ASSETS, SO THAT THE SAME STANDS UTILIZED FOR THE SAME PURPOSE/S, AND WHICH WOULD BE WHERE THE TE RMS AND CONDITIONS OF THE BORROWING HAVE BEEN MET, THERE COULD BE NO PRESUMPTION WITH R EGARD TO THE BORROWED FUNDS HAVING BEEN USED FOR ANY PURPOSE OTHER THAN THE SAME AND, ACCORDINGLY, NO PART OF THE INTEREST COULD BE CONSIDERED AS HAVING NOT BEEN UTILIZED FOR BUSINESS PURPOSES AND, HENCE, TOWARD FINANCING THE INVESTMENT/S. THE PRESUMPTION OF PROP ORTIONATE FUNDING, ON WHICH THE FORMULA PRESCRIBED U/R. 8D(2)(II) IS PREMISED, WOUL D NOT OBTAIN IN THAT CASE. THIS REPRESENTS THE FINDING BY THE TRIBUNAL IN SEVERAL C ASES, APPLYING GODREJ & BOYCE MFG. CO. LTD. (SUPRA), AS IN THE CASE OF HERCULES HOISTS LTD. VS. ASST. CIT [2013] 22 ITR (TRIB.) 527 (MUM); KUNAL CORPORATION VS. ASST. CIT [2013] 28 ITR (TRIB) 277 (MUM); AND AFL P. LTD. VS. ASST. CIT [2013] 28 ITR (TRIB) 263 (MUM). UNDER THE CIRCUMST ANCES, WE ONLY CONSIDER FIT AND PROPER THAT THE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. TO ALLOW THE ASSESSEE AN OPPORTUNITY TO PRESENT AND EXHIBIT ITS CASE AS STATED HEREINABOVE, THE ONUS FOR WHICH WOULD ONLY BE ON IT, AND SHALL STAND TO BE DE CIDED IN TERMS OF OUR FOREGOING OBSERVATIONS, ON THE BASIS OF DEFINITE FINDINGS OF FACT TO BE ISSUED BY THE A.O. THE OTHER ASPECT OF THE DISALLOWANCE U/S. 14A IS IN RESPECT OF INDIRECT ADMINISTRATIVE EXPENDITURE, COVERED UNDER RULE 8D(2 )(III), AT RS. 10.10 LACS THE SAME STANDS MADE APPLYING THE SAID RULE. WHILE THE A.O. EFFECTED THE DISALLOWANCE INVOKING THE SAID RULE, MANDATORY FOR THE CURRENT YEAR, THE LD. CIT(A), IN APPEAL, REJECTED THE ASSESSEES CONTENTION OF THE RULE BEING ARBITRARY. FURTHER, THE A.O. HAVING RENDERED HIS SATISFACTION WITH REFERENCE TO THE FACTS OF THE CAS E, RULE 8D STOOD TRIGGERED AND, ACCORDINGLY, THE DISALLOWANCE WAS TO BE, IN HIS VIE W, CONFIRMED. NO SPECIFIC CONTENTION IN THIS REGARD STOOD MADE BEFORE US. THE ASSESSEE F AILING TO SUBSTANTIATE ITS CLAIM OF HAVING NOT INCURRED ANY EXPENDITURE IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL 5 ITA NO. 857/MUM/2013 (A.Y. 2009-10) FERANI HOTELS PVT. LTD. VS. ASST. CIT INCOME, WE FIND NO INFIRMITY IN THE ORDERS OF THE A UTHORITIES BELOW AND, ACCORDINGLY, CONFIRM THE DISALLOWANCE OF THE INDIRECT ADMINISTRA TIVE EXPENDITURE, WHICH IS THE SUBJECT MATTER OF DISALLOWANCE UNDER R.8D(2)(III), I.E., IN PRINCIPLE. WE MAY THOUGH FURTHER CLARIFY THAT THE DISALLOWANC E QUA INVESTMENT IN PARTNERSHIP FIRM, I.E., TO THE EXTENT IT SURVIVES OUR DIRECTION S AFORE-SAID, SHALL BE COMPUTED IN TERMS OF THE DECISION BY THE LARGER BENCH OF THE TRIBUNAL IN VISHNU ANAND MAHAJAN (SUPRA). WE DECIDE ACCORDINGLY. 3.2 THE ONLY OTHER ISSUE ARISING IN THIS APPEAL IS WITH REGARD TO THE ADJUSTMENT TO THE BOOK PROFIT QUA THE DISALLOWANCE EFFECTED U/S. 14A OF THE ACT, RAI SED BY THE ASSESSEE PER AN ADDITIONAL GROUND. NO SPECIFIC ARGUMENTS WERE RA ISED BY THE ASSESSEE QUA THIS GROUND, WHICH WAS IN FACT ALSO NOT A SUBJECT MATTER OF APPE AL BEFORE THE FIRST APPELLATE AUTHORITY. THE MATTER, HOWEVER, BEING LEGAL, WE ADMIT THE SAME . THE DISALLOWANCE OF EXPENDITURE, INTEREST OR ADMINISTRATIVE, IS ONLY OF THAT INCURRE D BY THE ASSESSEE. IF THE SAME IS NOT IN THE BOOKS OF ACCOUNT, WHERE WE WONDER IT IS ? BOTH THE INCOME AND EXPENDITURE, DETERMINING THE NET PROFIT, WHICH FORMS THE BASIS FOR COMPUTING INCOME UNDER THE ACT, ARE ONLY AS PER THE BOOKS OF ACCOUNT. THE PROVISION OF SECTION 14A ONLY CODIFIES THE LAW, WHICH IS OTHERWISE INHERENT IN TAX JURISPRUDENCE, THAT ONLY THE NET INCOME (I.E., NET OF THE EXPENDITURE), FROM WHATEVER SOURCE, IS TO BE BROUGH T TO TAX AND, CONSEQUENTLY, ONLY THE NET INCOME, WHERE TAX-EXEMPT, IS TO BE SO. FURTHER, RULE 8D PRESCRIBES A METHOD/S TOWARD DETERMINING THE SAID INCOME, I.E., ON NET BASIS, PR OVIDING A UNIFORM BASIS FOR ASCERTAINING THE AMOUNT OF EXPENDITURE LIABLE TO BE EXCLUDED IN COMPUTING THE INCOME CHARGEABLE TO TAX. THE LEGAL BASIS FOR THE RELEVANT ADJUSTMENT, I .E., QUA THE EXPENDITURE RELATABLE TO THE EXEMPT INCOME, IN DETERMINING THE BOOK PROFIT, WHIC H IS AN ALTERNATE METHOD OF TAXATION, I.E., WHERE THE INCOME COMPUTED UNDER THE REGULAR P ROVISIONS OF THE ACT FALLS BELOW THE PRESCRIBED PERCENTAGE OF BOOK PROFIT, IS PER CLAUSE (F) OF EXPLANATION 1 BELOW SUB-SECTION (2) OF SECTION 115JB. WE, THEREFORE, FIND NO REASON OR BASIS FOR NOT CONF IRMING THE ADJUSTMENT OF THE EXPENDITURE, AS FINALLY SUSTAINED FOR DISALLOWANCE U/S. 14A(1), IN COMPUTING THE BOOK 6 ITA NO. 857/MUM/2013 (A.Y. 2009-10) FERANI HOTELS PVT. LTD. VS. ASST. CIT PROFIT U/S.115JB. WE DECIDE ACCORDINGLY; OUR DECISI ON BEING SUPPORTED BY A HOST OF DECISIONS BY THE TRIBUNAL, VIZ. - CATALYST FINANCE LTD. V. ITO (IN ITA NO. 1087/MUM/2013 DATED 17/11/2014) - JSW ENERGY LIMITED V. ACIT (IN ITA NO. 498/BANG/2010 DATED 27/12/2013) - ITO V. RBK SHARE BROKING PVT. LTD. (IN ITA NOS.7546 & 6678/MUM/2011 DATED 24.07.2013); - ESQUIRE PRIVATE LIMITED VS. DCIT (IN ITA NO.5688/MUM/2011 DATED 29.08.2012); - ITO VS. SEA WIND INVESTMENT & TRDG. CO. LTD. (IN ITA NO.6320/MUM/2004 DATED 17.10.2007). 4. IN THE RESULT, THE ASSESSEES PARTLY ALLOWED FOR STATISTICAL PURPOSES. 1/+2 (341+ % 5% 678 9 0 ) : + % + ; ORDER PRONOUNCED IN THE OPEN COURT ON NOVEMBER 17, 2014 SD/- SD/- (JOGINDER SINGH) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ' <* MUMBAI; =( DATED : 17.11.2014 ).(. ./ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. ' >+ ( ) / THE CIT(A) 4. ' >+ / CIT - CONCERNED 5. A)B #+(3 , , 3/ , ' <* / DR, ITAT, MUMBAI 6. D4 E* / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , ' <* / ITAT, MUMBAI