ADDL CIT RG 2(1), MUMBAI V. HIRAK LEASING & INVESTMENT, MUMBAI

ITA 9009/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8433 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 30-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 24-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND , SHRI RAJENDRA, ACCOUNTANT MEMBER I.TA. NO. 9009/MUM/2010 ASSESSMENT YEAR 2007-08 DCIT-2(1), AAYAKAR BHAVAN, R.NO. 575, 5 TH FLOOR, M.K. ROAD, MUMBAI 400 020. VS. M/S. HIRAK LEASING & INV. PVT LTD., C/6, KRISHNALAYA, N.S. MANKIKAR MARG, CHUNABHATTI, SION (WEST) MUMBAI-400 022. PAN: AAACH 1188 F ( / APPELLANT ) ( ! / RESPONDENT ) REVENUE BY : SHRI RAKESH RANJAN ASSESSEE BY : SHRI DR. K. SHIVARAM ' # $% / DATE OF HEARING : 30-10-2012 &'( # $% / DATE OF PRONOUNCEMENT : 30-10-2012 ) / O R D E R PER RAJENDRA, AM THE PRESENT APPEAL IS DIRECTED AGAINST THE ORDER DT . 14-10-2010 PASSED BY THE CIT(A)-4, MUMBAI. FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISED BY THE ASSESSING OFFICER (AO): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUG NED IN THE GROUNDS ENUMERATED BELOW: 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FA CTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT UPHOLDING THE DISALLOWANCE WORKED OUT UNDER RULE 8D IN SPITE OF THE FACT THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF G ODREJ & BOYCE LTD HELD THAT THERE IS NOTHING WRONG WITH THE AMOUNT WORKED OUT U NDER RULE 8D AND DISALLOWANCES WORKED OUT UNDER RULE 8D IS NOT UNREASONABLE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) FAILED TO APPRECIATE THAT HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE LTD HELD THAT AO HAS TO ENFORCE THE PROVISIONS OF S ECTION 14A (1) AND IS BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM THE PART OF THE TOTAL INCOME UNDER THE ACT . I.TA. NO. 9009/MUM/2010 M/S. HIRAK LEASING & INV. PVT LTD., 2 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT NO PRUDENT BUSINESSMAN COULD INCUR EXPENDITURE MORE THAN THE INCOME DERIVED AND DIRECTED THAT EXPENSES SHOULD BE DISALLOWED IN RATIO OF EXEMPTED AND NON-EXEMPTED INCOME WITHOUT APPRECIATING THAT A LLOWANCE OR DISALLOWANCE OF AN EXPENDITURE DOES NOT DEPEND UPON THE INCOME EARNED DURING THE PREVIOUS YEAR. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) FAILED TO APPRECIATE THAT 63% OF THE TOTAL FUND WAS UTILIZED FOR INVESTMENT IN SHARES FOR THE PURPOSES OF EARNING DIVIDEND WHICH IS EXEMP T AND DOES NOT FORM INCOME CHARGEABLE TO TAX AND THEREFORE, EXPENDITURE INCOME IS TO BE DISALLOWED @ 63% OF THE INTEREST AND OTHER EXPENDITURE INCURRED DURING THE PREVIOUS YEAR. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF DEALIN G IN SHARES AND SECURITIES, FILED ITS RETURN OF INCOME ON 18.10.07 DECLARING TOTAL IN COME OF RS.16.4 CRORES. AO FINALISED THE ASSESSMENT ORDER U/S.143(3) OF THE IN COME-TAX ACT, 1961(ACT), ON 24.12.2009 DETERMINING THE TOTAL INCOME AT RS.17.16 CRORES. 2. DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 22.12 LAKHS AND IT WAS CLAIM ED AS EXEMPT AS PER THE PROVISIONS OF SECTION 10(38) OF THE ACT. ASSESSEE H AD ALSO INCOME UNDER THE HEAD LONG TERM CAPITAL GAINS AMOUNTING TO RS.46.07 LAKHS . AO FOUND THAT THE ASSESSEE HAD NOT DIRECTLY OR INDIRECTLY ATTRIBUTED ANY EXPEN DITURE FOR EARNING THE EXEMPT INCOME. HE ISSUED A LETTER TO THE ASSESSEE FOR SEE KING EXPLANATION AS TO WHY THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES,1962 SHOULD NOT BE INVOKED. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HE HELD THAT ASSESSEE WAS NOT ABLE TO LINK UP THE EXACT, COMPLETE AND PRECISE USE OF MONEY BOR ROWED ON INTEREST, THAT THE ASSESSEE DID INCUR EXPENDITURE WHICH RESULTED IN EA RNING OF EXEMPT INCOME, THAT THE STRESS OF THE ASSESSEE ON EARNING INTEREST INCOME, NOT BY OWN VOLITION, BUT ON ACCOUNT OF BUSINESS EXIGENCIES WAS NOT RELEVANT WITH REFER ENCE TO THE PROVISIONS OF SECTION 14A R.W. RULE 8D. HE FURTHER HELD THAT CALCULATION SUBMITTED BY THE ASSESSEE FOR DISALLOWING THE EXPENSES WAS NOT IN CONFORMITY WITH THE SECTION 14 A AND RULE 8D. INVOKING THE PROVISIONS OF RULE 8D R.W.S.14A OF THE ACT, HE DISALLOWED RS.75.73 LAKHS AS EXPENDITURE INCURRED FOR EARNING EXEMPT-IN COME. AGAINST THE ORDER OF THE AO ASSESSEE PREFERRED AN A PPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA). AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER HE HELD THAT RULE 8D WAS NOT APPLI CABLE IN THE AY UNDER CONSIDERATION, THAT REASONABLE DISALLOWANCE COULD B E MADE FOLLOWING A RATIONAL BASIS, THAT AO HAD DISALLOWED RS.75.73 LAKHS AS EXPENDITUR E INCURRED FOR EARNING EXEMPT INCOME, THAT EXEMPT INCOME EARNED BY THE ASSESSEE W AS OF RS.66.28 LAKHS ONLY (22.21 LAKHS DIVIDEND INCOME + RS.46.07 LAKHS LTCG), THAT DISALLOWANCE WAS NOT JUSTIFIED. HE FURTHER HELD THAT FOR ARRIVING AT A REASONABLE D ISALLOWANCE ONE OF THE METHODS SUBMITTED BY THE AO SHOULD BE ADOPTED.FINALLY,HE RE STRICTED THE DISALLOWANCE TO RS.7.05 LAKHS. 3. BEFORE US, DEPARTMENTAL REPRESENTATIVE (DR) SUBMITT ED THAT THE METHOD ADOPTED BY THE FAA WAS NOT IN ACCORDANCE WITH THE P ROVISIONS OF THE ACT, THAT WHILE ALLOWING THE RELIEF TO THE ASSESSEE FAA HAD NOT GIV EN ANY FINDING ABOUT JUSTIFICATION FOR ADOPTING THE METHOD SUGGESTED BY THE ASSESSEE. AUTHORISED REPRESENTATIVE(AR) SUBMITTED THAT PROVISIONS OF RULE 8D R.W.S. 14A WAS NOT APPLICABLE IN THE YEAR UNDER I.TA. NO. 9009/MUM/2010 M/S. HIRAK LEASING & INV. PVT LTD., 3 CONSIDERATION, THAT INTEREST PAID BY THE ASSESSEE W AS DIRECTLY RELATED TO BUSINESS ACTIVITIES OF THE ASSESSEE, THAT IT HAD NO NEXUS WI TH THE EXEMPT INCOME EARNED DURING THE YEAR, THAT METHOD SUGGESTED BY THE ASSESSEE-COM PANY AND APPLIED BY THE FAA WAS THE MOST REASONABLE METHOD, THAT FAA HAD EXTENSIVEL Y DISCUSSED THE ISSUE AND HAD ARRIVED AT A LOGICAL CONCLUSION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATTER BEFORE US. PRINCIPALLY, WE AGREE WITH THE FAA THAT PROVISIONS OF RULE 8D R.W.S. 14A OF THE ACT ARE NOT APPLICABLE FOR THE A.Y. UNDER CONSIDERATION . IN THESE CIRCUMSTANCES, DIS-ALLOWANCE MADE BY THE AO HAS BEEN RIGHTLY DELET ED BY THE FAA. WE FIND THAT FAA HAS NOT GIVEN ANY REASON FOR ACCEPTING THE METH OD SUBMITTED BY THE ASSESSEE. THE ISSUE OF UTILIZATION OF BORROWED FUND HAS NOT A T ALL BEEN DEALT BY THE FAA IN HIS ORDER. IN OUR OPINION, THIS QUESTION HAS TO BE DEC IDED IN RIGHT PERSPECTIVE. AO HAS CATEGORICALLY, IN PARA NO. 10 OF HIS ORDER HAS STAT ED THAT ASSESSEE WAS NOT ABLE TO LINK UP THE EXACT, COMPLETE AND PRECISE USE OF MONEY BOR ROWED ON INTEREST. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT IN THE IN TEREST OF JUSTICE, MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE FAA TO DECIDE THE ISSUE OF REASONABLE DIS-ALLOWANCE AS PER THE PROVISIONS OF SECTION 14A OF THE ACT. HE I S REQUESTED TO DECIDE THE ISSUE OF BORROWED FUNDS AND THEIR UTILIZATION WITH REFERENCE TO BUSINESS INCOME/EXEMPT INCOME AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE-COMPANY. AS A RESULT, APPEAL FILED BY THE AO STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT O N 30 TH OCTOBER, 2012. SD/- SD/ - ( . . / I.P. BANSAL ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI, *' DATE: 30 TH OCTOBER, 2012 TNMM ) ) ) ) # ## # $+ $+ $+ $+ ,+($ ,+($ ,+($ ,+($ / COPY OF THE ORDER FORWARDED TO : 1. APP ELLANT 2. RESPONDENT 3. THE CONCERNED CIT (A) 4. THE CONCERNED CIT 5. DR H BENCH, ITAT, MUMBAI 6. GUARD FILE !+$ $ //TRUE COPY// ) ) ) )' ' ' ' / BY ORDER, - -- - / . . . . DY./ASSTT. REGISTRAR , / ITAT, MUMBAI