PALM GROVE BEACH HOTELS P.LTD, MUMBAI V. ASST CIT CEN CIR 23, MUMBAI

ITA 863/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84231 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 01-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY B SAWANT
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 863/MUM/2013 ASSESSMENT YEAR: 2009-10 PALM GROVE BEACH HOTELS PVT. LTD. CONSTRUCTION HOUSE B, 2 ND FLOOR, 623, LINKING ROAD, KHAR (W), MUMBAI- 400 052 PAN: AAACP 2735 J VS. ACIT CENTRAL CIR - 23 MUMBAI (APPELLANT) (RESPON DENT) ASSESSEE BY : SHRI SANJAY B. SAWANT REVENUE BY : SHRI V.K. BO RA DATE OF HEARING : 10 . 11 . 2014 DATE OF PRONOUNCEMENT : 10 . 1 1 .2014 O R D E R PER AMIT SHUKLA, JM: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AG AINST ORDER DATED 26.11.2012, PASSED BY THE LD.CIT(A) -14 , FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3), FOR THE A.Y. 2009- 10, MAINLY ON DISALLOWANCE OF RS.48,74,535/- MADE AS U/S 14A READ WITH RULE 8D. 2. BRIEF FACTS ARE THAT, DURING THE YEAR THE ASSESS EE COMPANY HAD EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND OF RS. 2,19,99,865/- AND SHARE PROFIT FROM A PARTNERSHIP FIRM AMOUNTING TO R S.1,46,977/-. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD NOT Q UANTIFIED ANY AMOUNT OF EXPENDITURE FOR THE PURPOSE OF DISALLOWANCE IN T ERMS OF SECTION 14A. THE ASSESSING OFFICER THUS FELT SATISFIED THAT THE PROVISIONS OF SECTION 14A ITA NO. 7758/MUM/2011 M/S. CABLE CORPORATION OF INDIA LTD. ASSESSMENT YEAR: 2005-06 2 READ WITH RULE 8D ARE APPLICABLE IN THE ASSESSEES CASE, HENCE HE PROCEEDED TO WORK OUT THE DISALLOWANCE. ACCORDINGLY , HE DISALLOWANCE UNDER CLAUSES (II) AND (III) OF RULE 8D (2) FOR SUM S AGGREGATING RS.48,74,535/- WAS MADE. 3. BEFORE THE LD. CIT(A), IT WAS SUBMITTED THAT, SO FAR AS DISALLOWANCE OF INTEREST IS CONCERNED, THE SAME SHO ULD NOT BE MADE AS THE ASSESSEE HAD RESERVE AND SURPLUS OF MORE THAN 1 54 CORES, WHEREAS THE INVESTMENT CAPABLE OF EARNING EXEMPT INCOME WAS ONLY AROUND RS. 17 CRORES AND THEREFORE, IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. 313 ITR 340, NO DISALLOWANCE SHOULD BE MADE. HOWEVER, THE L D. CIT(A) REJECTED THE ASSESSEES CONTENTION ON THE GROUND THAT, SIMIL AR ISSUE HAD ARISEN IN THE CASE OF THE ASSESSEE IN A.Y. 2008-09, WHERE THI S ISSUE WAS DECIDED AGAINST THE ASSESSEE BY THE CIT(A). 4. BEFORE US LEARNED COUNSEL SUBMITTED THAT IN A.Y. 2008-09, THE TRIBUNAL HAS PARTLY ALLOWED THE DISALLOWANCE, FIRST LY, BY DELETING THE DISALLOWANCE OF INTEREST ON THE GROUND THAT THERE W AS HUGE SURPLUS FUNDS AND SECONDLY, CONFIRMING THE ADMINISTRATION E XPENSES, BEING 0.5% OF AVERAGE INVESTMENT. FURTHER WITH REGARD TO AMOUN T INVESTED IN FIRMS, THE DIRECTION WAS GIVEN FOR PROPORTIONATE DISALLOWA NCE, AFTER FOLLOWING THE DECISION OF SPECIAL BENCH IN THE CASE OF VISHNU ANAND MAHAJAN VS. ACIT [(2012) 147 TTJ (AHD) (SB) 142]. HE FURTHER SUBMITTED THAT, NO FRESH INVESTMENT WAS MADE IN THIS YEAR AND THEREFOR E, THE ISSUE IS ENTIRELY COVERED BY THE DECISION OF THE TRIBUNAL FO R A.Y. 2008-09. THE LD. DR ON THE OTHER HAND RELIED UPON ORDER OF THE A O AS WELL AS LD. CIT(A). ITA NO. 7758/MUM/2011 M/S. CABLE CORPORATION OF INDIA LTD. ASSESSMENT YEAR: 2005-06 3 5. AFTER CONSIDERING THE IMPUGNED ORDER AND ALSO TH E ORDER OF THE TRIBUNAL, WE FIND THAT, THE TRIBUNAL HAS ADJUDICATE D THE ISSUE IN THE FOLLOWING MANNER. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT TH E DISALLOWANCE OF RS.76.71 LAKH BASICALLY COMPRISES OF TWO COMPONE NTS, BEING, FIRSTLY THE INTEREST' DISALLOWED AT RS.59.79 LAKH A ND SECONDLY, OTHER EXPENSES DISALLOWED AT 0.5%. AS REGARDS THE F IRST COMPONENT, BEING, DISALLOWANCE OF INTEREST WE FIND THAT THE ASSESSEE STATED BEFORE THE LEARNED CIT(A) THAT THE TOTAL INVESTMENT LEADING TO EXEMPT INCOME WAS ONLY RS.34. 44 CRORE AS AGAINST WHICH ITS OWN FREE RESERVES AND SHARE CAPIT AL WERE TO THE TUNE OF ~119.85 CRORE. THE LEARNED CIT(A) DID NOT C ONSIDER THIS FACT AS RELEVANT AND UPHELD THE DISALLOWANCE. 4. SECTION 14A BASICALLY PROVIDES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS, IT IS ABUNDANTLY CLEAR THAT T HE INCURRING OF ANY EXPENDITURE IN RELATION TO EXEMPT INCOME IS SIN E QUA NON FOR QUALIFYING AS TO DISALLOWANCE U/S 14A. UNLESS THERE IS SOME DEDUCTION CLAIMED FOR EXPENSES QUA THE EXEMPT INCOM E, THE DISALLOWANCE U/S 14A DOES NOT GET TRIGGERED. HERE I S A CASE IN WHICH THE ASSESSEE CATEGORICALLY SUBMITTED BEFORE T HE LEARNED CIT(A) THAT ITS INVESTMENT LEADING TO EXEMPT INCOME WAS ONLY RS.34.44 CRORE AS AGAINST FREE RESERVES AND SHARE C APITAL TO THE TUNE OF RS.119.85 CRORE. WE HAVE PERUSED THE BALANC E SHEET OF THE ASSESSEE FOR THE YEAR IN QUESTION FROM WHICH IT IS EVIDENT THAT SHARE CAPITAL AND FREE RESERVES ARE MORE THAN RS.10 0 CRORE. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS. RELIANCE UTILITIES AND POWER LTD. [(2009) 313 ITR 340 (BORN. )] HAS HELD THAT IF THERE ARE INTEREST FREE FUNDS AVAILABLE WIT H THE ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME T IME LOAN HAS BEEN RAISED IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FREE FUNDS AND RESULTANTLY NO DISALLOWANCE OF INTEREST CAN BE MADE, IN REACHING THIS CONCLUSION, THE HON'BLE H IGH COURT FOLLOWED ANOTHER JUDGMENT OF THE HON'BLE SUPREME CO URT IN EAST INDIA PHARMACEUTICAL WORKS V. CIT [(1997) 224 ITR 6 27 (SC)). IN VIEW OF THE ABOVE DECISIONS, IT IS OBVIOUS THAT NO PART OF INTEREST CAN BE CONSIDERED TO HAVE BEEN INCURRED TOWARDS INV ESTMENT FETCHING EXEMPT INCOME. ONCE THERE IS NO DEDUCTION FOR INTEREST EXPENDITURE IN THIS REGARD, THERE CANNOT BE ANY QUE STION OF MAKING ANY DISALLOWANCE U/S 14A. WE, THEREFORE, ORD ER FOR THE ITA NO. 7758/MUM/2011 M/S. CABLE CORPORATION OF INDIA LTD. ASSESSMENT YEAR: 2005-06 4 DELETION OF ADDITION U/S 14A TO THE EXTENT OF RS.59 .79 LAKH ON ACCOUNT OF INTEREST IN RELATION TO INVESTMENT IN TA X FREE BONDS. 5. THE SECOND COMPONENT OF THIS DISALLOWANCE IS A S UM OF RS.16.92 LAKHS WHICH WAS MADE BY THE ASSESSING OFFI CER AT THE RATE OF OF THE AVERAGE OF THE VALUE OF INVESTMENT , INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME. PRINCIPAL LY WE SEE NO REASON TO INTERFERE WITH THE DISALLOWANCE MADE AS P ER RULE 8D BECAUSE THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008-2009 AND AS PER THE JUDGMENT OF THE HON'BLE JURISDICTION AL HIGH COURT IN CASE OF GODREJ & BOYCE LTD. MFG. CO. VS. DCIT [( 2010) 328 ITR 81 (BOM)], DISALLOWANCE U/S 14A IS MAINTAINABLE AS PER RULE 8D FROM ASSESSMENT YEAR 2008-2009 ONWARDS. 6. THE LEARNED AR CONTENDED THAT WHILE COMPUTING TH E SAID DISALLOWANCE AT RS.16.92 LAKHS, THE ASSESSING OFFIC ER ALSO INCLUDED THE AMOUNT INVESTED BY THE ASSESSEE IN SHA RE CAPITAL OF CERTAIN FIRMS, INTEREST FROM WHICH WAS OFFERED FOR TAXATION. FROM THE ASSESSMENT ORDER IT CAN BE SEEN THAT THE A.O. HAS DISCUSSED AT PAGE 2 PARA 5 THAT THE SHARE OF PROFIT FROM PAR TNERSHIP FIRM / AOP AT RS.1,54,169 WAS CLAIMED AS EXEMPT U/S 10 OF THE ACT. IN SO FAR AS DISALLOWANCE U/S A IN THIS REGARD IS CONC ERNED, WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF VISHNU ANAND MAHAJAN V. ACIT [(2012) 147 TTJ (AHD.) (SB) 1 42) HAS DISCUSSED THE ISSUE WHEN THERE IS RECEIPT OF INTERE ST FROM THE FIRM CHARGEABLE TO TAX AND SHARE IN THE PROFITS WHICH IS EXEMPT. IN THIS ORDER THE SPECIAL BENCH HAS LAID DOWN A MECHANISM F OR WORKING OUT THE DISALLOWANCE U/S 14A. THE ASSESSING OFFICER IS DIRECTED TO WORK OUT THE SECOND PART OF DISALLOWANCE AS PER RUL E 8D AFRESH IN THE LIGHT OF THE AFORE-NOTED ORDER OF THE SPECIAL B ENCH AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6. SINCE SIMILAR FACTS ARE PERMEATING THOUGH IN THI S YEAR ALSO AND THERE ARE NO FRESH INVESTMENT IN THIS YEAR, THEREFO RE, CONSISTENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN THE EARLIER YEAR, WE ALSO ORDER ACCORDINGLY. THUS, AO IS DIRECTED THAT, SO FAR AS THE DISALLOWAN CE OF INTEREST IS CONCERNED IN THE WORKING OF RULE 8D, NO ADDITION/DI SALLOWANCE SHOULD BE MADE. AS REGARDS THE DISALLOWANCE ON ACCOUNT OF IND IRECT EXPENSES, BY ADOPTING 0.5% OF THE AVERAGE INVESTMENT, WE CONFIRM THE DISALLOWANCE AS WORKED OUT IN ACCORDANCE WITH THE RULE 8D. LASTL Y, WITH REGARD TO THE ITA NO. 7758/MUM/2011 M/S. CABLE CORPORATION OF INDIA LTD. ASSESSMENT YEAR: 2005-06 5 DISALLOWANCE ON ACCOUNT OF AMOUNT INVESTED IN SHARE CAPITAL OF PARTNERSHIP FIRM, WE DIRECT THE AO TO FOLLOW THE EA RLIER ORDER OF THE TRIBUNAL IN A.Y. 2008-09 AND WORK OUT THE DISALLOWA NCE. ACCORDINGLY GROUND RAISED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED. 0 ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DAY OF NOVEMBER, 2014. SD/- SD/- (SANJAY ARORA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 10.11.2014 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR C BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.