Ausom International Pvt.Ltd., Surat V. The Dy.CIT.,Circle-1, Surat

ITA 885/AHD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80449 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 24-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Assessee Lawyers: M K PATEL
• Keywords: Earning of tax free income
• Section: 14A; 6

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD 0 00 0 0 00 0 , , , , ! '# ! '# ! '# ! '#, , , , $ $ $ $ BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NOS. 885/AHD/2011 ASSESSMENT YEARS: 2007-08 AUSOM INTERNATIONAL PVT. LTD. 610, SWAGAT, C.G. ROAD, AHMEDABAD. PAN: AABCN0895Q VS DY. COMMISSIONER OF INCOME TAX, CIRCLE-1, AHMEDABAD. %& / APPELLANT '(%& / RESPONDENT REVENUE BY : SHRI B.L. YADAV, SR. DR ASSESSEE(S) BY : SHRI M.K. PATEL, AR !) * #+/ // / DATE OF HEARING : 10/10/2014 -./ * #+ / DATE OF PRONOUNCEMENT: 17/10/2014 0 0 0 0/ // / O R D E R PER SHRI N.S. SAINI, ACCOUNTANT MEMBER: THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAIN ST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) BOTH DATED 17.01.2011. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL OF THE ASSESSEE IS THATGROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS T HAT THE LEARNED I.T.O. AND HON. C.I.T. APPEALS HAVE ERRED IN LAW AND ON FACTS IN MAKING AND CONFIRMING DISALLOWANCE U/S. 14A OF THE I.T. ACT, OF RS 6,86,4 79/-. 3. THE FACTS OF THE CASE AS NARRATED BY THE ASSESS ING OFFICER ARE AS UNDER: ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 2 - 'IT IS SEEN THAT THE ASSESSEE HAS EARNED DIVIDEND I NCOME TO THE TUNE OF RS. 49,559/- WHICH IS EXEMPT FROM TAX. THE ASSESSEE HAS MADE INVESTMENT OF RS.2,00,00,000/- AS ON 31/3/2007. IT IS FURTHER SEEN THAT THE ASSESSEE, BEING ENGAGED IN TRADING OF SHARES AND SECURITIES, HAS SHARES AND SECURITIES TO THE EXTENT OF RS. 17,79,181/-AS INVENTORIES AS ON 31/03/2007. THE ASSESSEE HAS TAKEN LOANS OF RS.2,92,25,3261- ON WHICH INTERE ST OF RS. 12,20,237/- HAS BEEN CLAIMED BY THE ASSESSEE. IN AD DITION TO THIS, SOME ADMINISTRATIVE/OTHER EXPENSES MUST BE IN CURRED TO EARN TAX FREE INCOME. THEREFORE, SOME DISALLOWANCE U/S. 14A OF THE I.T. ACT IS WARRANTED. IN THIS REGARD THE ASSES SEE VIDE QUESTIONNAIRE DATED 11/11/2009 WAS ASKED TO FURNISH THE DETAILS. THE RELEVANT DETAILS WERE FURNISHED VIDE T HE SUBMISSION DTD.25/11/2009. AS SEC. 14A OF THE I. T. ACT IS FOU ND TO BE CLEARLY APPLICABLE IN THE CASE OF THE ASSESSEE, THE ASSESSEE VIDE ORDER ENTRY DFD.27/11/2009 WAS ASKED TO SHOW CAUSE WHY DISALLOWANCE U/S. 14A SHOULD NOT BE MADE IN RESPECT OF HOLDING OF MUTUAL FUNDS AND STOCK IN TRADE OF SHARES. FURTHER THE ASSESSEE MUST HAVE INCURRED ADMINISTRAT IVE EXPENSES SUCH AS DOCUMENTATION, SALARIES OF EMPLOYE ES,, HANDLING THE INVESTMENT PORT FOLIO, ADMINISTRATIVE OVER HEADS LIKE STATIONERY, TELEPHONE, COMPUTER, OFFICE EQUIPM ENTS, VEHICLES ETC. EVERY YEAR, A PART OF WHICH CAN BE ATTRIBUTED TO THE INVESTMENT PORT FOLIO. THE MANAGEMENT IS TAKING DEC ISIONS WHETHER TO INVEST OR DISINVEST IN SHARES AND STAFF IS DEVOTING TIME ON EXECUTING SUCH DECISIONS. THIS VIEW FINDS S UPPORT FROM FOLLOWING CASE LAWS. THE CONTENTION OF THE ASSESSEE IS THAT THERE IS NO DIRECT EXPENDITURE RELATABLE TO EARNING OF TAX FREE INCOME . THE CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. TRADING IN SHARES AS WELL AS INVESTMENT IN MUTUAL FUNDS IS UND ERTAKEN BY THE ASSESSEE. IN THE NATURAL COURSE OF THINGS , IT IS OBVIOUS THAT EXPENSES WOULD BE INCURRED IN MAINTAINING, ORGANIZI NG, MONITORING , ETC., OF THE INVESTMENT. THIS FACT ALSO GOES AGAINST THE ASSESSEE'S CONTENTION THAT NO EFFORTS HAVE BEEN MADE BY CONCERN OR ITS STAFF MEMBERS IN EARNING THE TAX FRE E INCOME. BY THE ASSESSEES VERY OWN ADMISSION, A CERTAIN INTERE ST EXPENSE HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO TA X FREE INCOME, MEANING THEREBY THAT FUNDS WERE BORROWED FOR THE PU RPOSE OF INVESTMENT. BORROWING OF FUNDS ITSELF ENTAILS VARIO US ADMINISTRATIVE COSTS. THE ASSESSEE'S CONTENTION THAT FOR INVOKING PROVISION OF SEC.14A (2), EXPENDITURE IS REQUIRED TO BE IDENTIFIED BY TH E AO. THIS ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 3 - CONTENTION OF THE ASSESSEE IS ALSO MISPLACED. SEC. 14A R.W. RULE 8D DOES NOT REQUIRE SPECIFIC IDENTIFICATION OF EXPE NSES. THE SAID PROVISIONS ONLY SPECIFY THAT WHERE AO IS NOT SATISF IED WITH THE CORRECTNESS OF CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO TAX FREE INCOME, THE AO SHALL DETERMINE THE QUANTUM OF DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE I .T. RULES. THE ASSESSEE HAS RELIED ON THE DECISION OF HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE HERO CYCLE LTD. CASE. IT IS HOWEVER NOTED THAT THE DECISION OF M/S. HERO CYCLE S LTD VS CIT, IS PERTAINING TO AY 2004-05, WHEREAS THE SUBSECTION (2 ) AND (3) OF SECTION 14A HAS BEEN INSERTED BY FINANCE ACT 2006, W.E.F. 01.04.2007. RULE 8D ITSELF WAS INSERTED BY THE IT (FIFTH AMEND) RULES, 2008 W.E.F. 24.03.2008. IT IS ALSO TO BE NOTED THAT THE VARIOUS ISSUES RAIS ED BY THE ASSESSEE HAVE BEEN EXTENSIVELY COVERED AND DECIDED IN FAVOUR OF THE REVENUE IN THE CASE OF ITO VS. M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. VIDE ITA NO.8057/MUM/03 FOR AY .2001- 02, BY HON'BLE MUMBAI ITAT (SB). IT IS ALSO TO BE NOTED THAT S.14A DISALLOWS EXPENDITURE 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME' AND IN ORDER FOR THE EXPENDITURE TO BE DISALLOWED, ACTUAL INCOME NEED NOT BE EARNED. THIS VIEW HAS BEEN CONFIRMED IN THE CASE OF CHEMINVEST LTD. V S. /TO (ITAT, DELHI (SB) IN ITA NO. 87/DEL/2008.' 4. ON APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE IN ITS WRITTEN SUBMISSION STATED AS UN DER: '(1) INVESTMENT OF SURPLUS FUNDS IN TWO MUTUAL FUND S (RS.2,00,00,000) AND INCOME OF RS. 49,559/- AS INTEREST EARNED ON THE SAME WHICH IS TAX FREE. (2) EXPENSES OF RS. 15,954/- FOR ABOVE IS INCURRED AS INTEREST PAID TO CORPORATION BANK @ 8%. (LETTER DTD. 7/12/20 09 PARA 6B III) (3) APPELLANT'S BUSINESS IS OF:- 'TRADING IN BULLION, TRADING AND SPECULATION IN SHA RES AND SECURITIES, MUTUAL FUNDS COMMODITIES AND DERIVATIVE S. (LETTER DTD. 2/11/2009 ANNEXURE 'A') HENCE PROVISIONS OF SEC. 14-A ARE NOT APPLICABLE. SUPPORT IS CLAIMED FROM THE CASE OF LEENA RAMCHANDRAN (ITA NO. 1784 OF 2009 - ORDER DTD. 14/6/2010) ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 4 - (4) NO EFFORTS ARE MADE BY ANY BODY INCLUDING STAFF MEMBERS TO EARN INTEREST INCOME. (5) RULE 8D: (A) RULE 8D IS NOT APPLICABLE FOR THIS YEAR AS THE SAME HAS BEEN INTRODUCED W.E.F. 24/3/2008. (B) RULE 8D NOT APPLICABLE AS THE SAME IS NOT RETRO SPECTIVE. (C) YEAR UNDER APPEAL IS ITAY 2007-08. (D) RULE 8D IS INTRODUCED W.E.F. 24/3/2008 INSERTED BY IT (FIFTH ANNDT.) RULE, 2008. HENCE RULE 8D IS NOT APPLICABLE FOR ITAY 2007-08. SUPPORT IS CLAIMED FROM THE DECISION VIZ. GODREJ B OYCE MFG. CO. LTD. V/S DCIT (2010) 234 CTR 1 (BOM). (6) RULE 8D; REQUIREMENTS; (I) A.O. HAS TO IDENTIFY EXPENDITURE TO EARN FAX F REE INCOME. (II) A.O. HAS TO ARRIVE AT CONCLUSION AS TO WHY HE IS NOT SATISFIED WITH THE CLAIM OF ASSESSEE, ONLY THEN RULE 8D CAN B E INVOKED, (7) ASSESSEE HAS STATED AMOUNT OF RS. J5954/- THE I NTEREST PAID TO BANK AS CAN BE CONSIDERED AS DISALLOWABLE U/S I4 A. AO HAS NOT CONSIDERED THE SAME NOR HAS GIVEN ANY REASON FO R THE SAME. (8) WORKING OF RULE 8D (A) AO HAS WORKED DISALLOWABLE @ RS.6,86,479/-. (B) WORKING OF AO IS NOT CORRECT. (THIS IS SUBJECT TO THE CLAIM THAT RULE 8D IS NOT A PPLICABLE).' 5. AFTER GOING THROUGH THE WRITTEN SUBMISSION OF T HE ASSESSEE, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER: 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSES SMENT ORDER AND APPELLANT'S SUBMISSION. ASSESSING OFFICER DISAL LOWED EXPENSES RELATING TO EXEMPT INCOME UNDER SECTION 14 A BY APPLYING RULE 8D. APPELLANT ARGUED THAT THIS RULE I S APPLICABLE ONLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09 AS HE LD BY BOMBAY HIGH COURT DECISION. CONSIDERING THE SAID DE CISION, I AGREE THAT RULE 8D IS APPLICABLE WITH EFFECT FROM A SSESSMENT YEAR 2008-09 HOWEVER THE DISALLOWANCE OF EXPENSES RELATI NG TO EXEMPT INCOME HAS TO BE MADE EVEN IN THIS YEAR. ON GOING THROUGH THE BALANCE SHEET OF THE APPELLANT AS ON 31 MARCH 2007, IT IS SEEN THAT OWN FUND OF THE APPE LLANT IS JUST RS 65.63 LAKHS AND BORROWINGS ARE TO THE EXTENT OF RS 292.25 ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 5 - LAKHS. INVESTMENT RESULTING IN INCOME IS TO THE EXT ENT OF RS 200 LAKHS. THEREFORE IT IS CLEAR THAT THE BORROWED FUND S WERE USED IN MAKING INVESTMENTS RESULTING IN EXEMPT INCOME. APPE LLANT ARGUED THAT IT WAS INVOLVED IN TRADING OF SHARES AN D COMMODITIES AND THEREFORE INCOME IS TAXABLE IN BUSINESS HEAD AN D THEREFORE INCOME IS TAXABLE AND DISALLOWANCE UNDER SECTION 14A IS NOT APPLICABLE. THIS ARGUMENT OF THE APPELLANT IS NOT CORRECT SINCE TRADING INVOLVED INVENTORY OF ONLY RS 17.79 LACS WH ICH IS HARDLY ANYTHING AS COMPARED TO INVESTMENT OF RS 200 LACS R ESULTING IN EXEMPT INCOME. THEREFORE IT IS CLEAR THAT DISALLOWA NCE ON ACCOUNT OF INTEREST AND OTHER EXPENSES IN RESPECT O F EXEMPT INCOME FROM INVESTMENT IN JUSTIFIED. APPELLANT PAID INTEREST OF RS 2.20 LACS WHICH IS SUBSTANTIALLY RELATING TO EXEMPT INCOME. ASSESSING OFFICER DISALLOWED INTEREST IN PROPORTION TO AVERAGE INVESTMENT WITH TOTAL ASSETS OF THE APPELLANT COMPA NY. THIS GAVE THE CORRECT WORKING OF INTEREST EXPENSE RELATING TO INVESTMENT RESULTING IN EXEMPT INCOME. THEREFORE THE DISALLOWA NCE MADE BY THE ASSESSING OFFICER IS JUSTIFIED. EVEN THOUGH RUL E 8D IS NOT APPLICABLE BUT DISALLOWANCE OF INTEREST EXPENSE REL ATING TO INVESTMENT IS TO BE MADE AND THE FORMULA USED BY TH E ASSESSING OFFICER GIVES CORRECT DISALLOWANCE OF INTEREST. ACC ORDINGLY INTEREST DISALLOWANCE IS CONFIRMED. AS REGARDS DISALLOWANCE OF OTHER EXPENSES, AO WORKE D OUT @ .5% OF AVERAGE INVESTMENT AS PER RULE 8D. AFTER G OING THROUGH THE DETAILS OF EXPENSES ON ACCOUNT OF TRADI NG AND ADMINISTRATIVE EXPENSES IT IS SEEN THAT OUT OF TOTA L EXPENSES OF RS 14 LAKHS, THE DISALLOWANCE OF JUST RS 58198 IS M ORE THAN JUSTIFIED. SINCE APPELLANT CAN'T CLAIM THAT FOR MAK ING SUCH HUGE INVESTMENTS AND EARNING EXEMPT INCOME FROM THE SAME , THERE WOULD NOT BE ANY EXPENSES. THE COMMON EXPENSES INCU RRED FOR OVERALL ACTIVITIES ARE ALSO RELATING TO EARNING OF EXEMPT INCOME AND THEREFORE DISALLOWANCE THEREOF IS REQUIRED. CON SIDERING THE OVERALL FACTS OF THE CASE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS JUSTIFIED EVEN WITHOUT RULE 8D. CONSIDER ING THIS, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SE CTION 14A IS CONFIRMED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED TH AT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS 49,559/-. THE ASSESSE E HAS MADE INVESTMENT OF RS 200 LAKHS ON 31.03.2007. THE ASSESSEE IS ENG AGED IN TRADING OF ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 6 - SHARES & SECURITIES AND SHARES & SECURITIES OF RS 1 7,79,181/- WERE HELD BY THE ASSESSEE AS INVENTORY ON 31.03.2007. THE ASSES SEE HAS TAKEN LOAN OF RS 2,92,25,326/- ON WHICH INTEREST OF RS 12,20,327/ - WAS PAID. FURTHER, THE ASSESSEE MUST HAVE INCURRED SOME ADMINISTRATIVE EXP ENSES TO EARN TAX FREE DIVIDEND INCOME. HENCE, SOME DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT IS WARRANTED. THE ASSESSING OFFICER FURTHER OBSERV ED THAT MUMBAI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DAGA C APITAL MANAGEMENT PVT. LTD. IN ITA NO.8057/MUM/03 FOR AY.2001-02 HAS DECID ED THE ISSUE IN FAVOUR OF THE ASSESSEE. HE, OBSERVING THAT U/S. 14A DISAL LOWANCE OF EXPENDITURE HAS TO BE MADE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AND IN ORDER FOR THE EXPENDITURE TO BE DISAL LOWED ACTUAL INCOME NEED NOT BE EARNED, DISALLOWED RS 6,86,479/-. 7. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPE ALS) CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 8. BEFORE US, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE ARGUED THAT THE DECISION IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) HAS BEEN OVERRULED BY THE HONBLE BOMBAY HI GH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (2010) 234 C TR 1 (BOM). SINCE THE SAID DECISION WAS NOT AVAILABLE BEFORE THE ASSESSIN G OFFICER, THEREFORE THE ISSUE SHOULD BE RESTORED BACK TO THE FILE OF THE AS SESSING OFFICER FOR ADJUDICATION OF THE ISSUE AFRESH IN THE LIGHT OF TH E DECISION OF THE HONBLE BOMBAY HIGH COURT. 9. THE DEPARTMENTAL REPRESENTATIVE HAD NO OBJECTIO N TO THE ABOVE SUBMISSION OF THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. 10. IN THE ABOVE FACTS AND CIRCUMSTANCES OF THE CA SE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMAND THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATING AFRESH THE I SSUE OF DISALLOWANCE OF ITA NO 885/AHD/2011 AUSOM INTERNATIONAL PVT. LTD., AHMEDABAD AY 2007-08. - 7 - EXPENDITURE U/S. 14A OF THE ACT IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO. LTD. (SUPRA). THUS, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSE. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE COURT ON FRIDAY, THE 17 TH OF OCTOBER, 2014 AT AHMEDABAD. SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 17/10/2014 GHANSHYAM MAURYA TRUE COPY 0 * '#1 21/# 0 * '#1 21/# 0 * '#1 21/# 0 * '#1 21/#/ COPY OF THE ORDER FORWARDED TO : 1. %& / THE APPELLANT 2. '(%& / THE RESPONDENT. 3. # !3 / CONCERNED CIT 4. !3() / THE CIT(A)-III, AHMEDABAD 5. 1'6 '# , , / DR, ITAT, AHMEDABAD 6. 678 9) / GUARD FILE. 0! 0! 0! 0! / BY ORDER, : :: :/ // / ; ; ; ; ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD