Bellwether Microfinance Fund Private Limited, Hyderabad V. ACIT, Circle-1(3), Hyderabad

ITA 908/HYD/2013

• Counselvise Citation: 90822514 RSA 2013
• Duration Of Justice: 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 30-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADAGIRI
• Assessee Lawyers: NARENDRA SINGH
• Keywords: Additional evidence
• Section: 234B; 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 908/HYD/2013 ASSESSMENT YEAR : 2007-08 BELLWETHER MICROFINANCE FUND PVT. LTD., HYDERABAD. PAN: AADCS4132K THE ASST. COMMISSIONER OF INCOME-TAX, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY S/SHRI DEEPAK CHOPRA & NARENDRA SINGH REVENUE BY SHRI B. YADAGIRI DATE OF HEARING 26-12-2013 DATE OF PRONOUNCEMENT 08-01-2014 O R D E R PER B. RAMAKOTAIAH, A.M.: THIS IS AN ASSESSEES APPEAL AGAINST THE ORDER OF C IT(A)-V, HYDERABAD DATED 14-02-2013 FOR THE ASSESSMENT YEAR 2007-08. 2. ASSESSEE RAISED 11 GROUNDS IN ITS APPEAL. GROUN DS NOS. 1 TO 7 PERTAIN TO DISALLOWANCE U/S 40A OF THE IT ACT. GROU ND NOS. 8 & 9 ARE ON DISALLOWANCE U/S 14A. GROUND NO. 10 IS ON CLAIM OF CARRIED FORWARD LOSS. GROUND NO. 11 IS ON LEVY OF INTEREST U/S 234B . ASSESSEE FILED PAPER BOOK CONTAINING PAGES 81 AND ADDITIONAL EVIDE NCE FROM PAGES 82 TO 121. 3. WE HAVE HEARD THE LEARNED COUNSEL AND LEARNED DR . 2 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. 4. AS REGARDS THE ISSUE OF DISALLOWANCE U/S 40A, IT IS OBSERVED THAT ASSESSEE CLAIMED RS. 1,00,92,636/- BEING FUND MANAGEMENT FEES PAID TO CASPIAN ADVISORS PVT. LTD (FUND MANAGER COM PANY). OBSERVING THAT THE SAID AMOUNT WAS PAID IN EXCESS B Y RS. 5,88,108/- FROM THE TERMS OF AGREEMENT, AS THE FUND MANAGER HO LDS MORE THAN 20% EQUITY SHARES IN THE ASSESSEE COMPANY AND IS AL SO A TRUSTEE OF BELLWETHER MICROFINANCE TRUST CREATED BY ASSESSEE C OMPANY, THE AO HELD THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF RS. 1,00,92,636/- FOR THE SERVICE RENDERED BY THE COMPANY. ACCORDINGL Y, CONSIDERING THE SERVICES RENDERED BY THE FUND MANAGER COMPANY, THE AO WORKED OUT THE REASONABLE EXPENDITURE TOWARDS FUND MANAGEMENT FEE AT RS. 45,58,270/- AND DISALLOWED THE BALANCE OF RS. 55,34 ,366/- U/S 40A(2)(B) OF THE ACT, FOLLOWING THE CASES IN CASE O F B.K. KHANNA & COMPANY (P) LTD, DELHI HIGH COURT AND IN THE CASE O F CIT VS. CHANDULAL KESHAVLAL & CO, 38 ITR 601 (SC). AGGRIEVE D, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 4.2 BEFORE THE CIT(A), ASSESSEE CLAIMED THAT HOLDIN G 20% INTEREST BY THE FUND MANAGEMENT COMPANY IN ASSESSEE COMPANY DOES NOT GIVE ANY RIGHT TO MAKE ANY OTHER INVESTMENTS OF THE FUND OTHER THAN ONE STATED IN THE OBJECTS, CLASSIFYING THE FUND MAN AGER AS INTERESTED PARTY U/S 40A(2)(A) GOING BY THE SHAREHOLDING IS NO T CORRECT AND THE PAYMENT WAS MADE IN TERMS OF THE SERVICES RENDERED BY THE FUND MANAGER. ASSESSEE ALSO FURTHER SUBMITTED VARIOUS IS SUES ON THE FEE STRUCTURE, ON BUILDING THE INVESTMENT PORTFOLIO, ET C. AND CLAIMED THAT THERE WAS A PROFESSIONAL RELATIONSHIP BETWEEN THE T WO PARTIES AND NO BENEFIT IS DERIVED BY EITHER PARTIES BY SHIFTING IN COME. AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, THE CIT(A) SUSTAINED THE DISALLOWANCE BY STATING AS UNDER: 6.2 I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSIONS OF THE APPELLANT. EXCEPT MAKING SOME GE NERAL OBSERVATIONS AGAINST THE ISSUES RAISED BY THE AO, A ND REFERRING TO THE TRADE PRACTICES IN THE LINE OF THIS BUSINESS , THE APPELLANT 3 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. HAD NOT BROUGHT OUT ANY RELIABLE EVIDENCE TO SHOW T HAT THE PARTIES ARE NOT RELATED TO EACH OTHER AND THE TRANS ACTION WAS MADE IN A PROFESSIONAL MANNER. ON THE CONTRARY, THE AO HAD GONE THROUGH THE AGREEMENT FOR PAYMENT OF FUND MANA GEMENT FEE AND POINTED THAT THERE IS EXCESS PAYMENT OF RS. 5,88,108/- AND ALSO WORKED OUT THE REASONABLE PAYMENT THAT CAN BE ALLOWED FOR THE SERVICES RENDERED BY THE FUND MANAG ER AFTER TAKING INTO VARIOUS CRITERIA. THE APPELLANT HAD NOT CONTENDED OR BROUGHT OUT ANYTHING NEW ON THIS ISSUE BUT IS CLAIM ING THAT PAYMENT IS REASONABLE. THEREFORE, I AM NOT INCLINED TO GO AGAINST THE DETAILED REASONING BROUGHT BY THE AO AN D ACCORDINGLY, THE DISALLOWANCE MADE IS SUSTAINED. 4.3 REFERRING TO THE OBSERVATIONS OF AO AND ORDER O F CIT(A), IT WAS THE SUBMISSION THAT LD. CIT(A) REJECTED THE DETAIL ED SUBMISSIONS MADE WITHOUT ASSIGNING ANY REASON. REFERRING TO THE PAPER BOOK FILED, LD. COUNSEL SUBMITTED THAT ASSESSEE ENTERED INTO AN AGREEMENT AS PER THE MARKET NORMS AND THE PAYMENT OF FUND MANAG EMENT FEES IS AT ARMS LENGTH. IT WAS FURTHER SUBMITTED THAT AO H AS CALCULATED THE RATE OF TAX AT THE SAME AS CLAIMED BY ASSESSEE, BUT , DID NOT ALLOW THE FEES ON CERTAIN INVESTMENTS AND ASSETS WITHOUT ASSI GNING ANY REASON. JUSTIFYING THE CLAIM, LD. COUNSEL SUBMITTED THAT AD DITIONAL EVIDENCE WILL PROVE THE ADVICE GIVEN BY THE FUND MANAGER AND INVESTMENT MADE IN VARIOUS SHARES. IT WAS ALSO CONTENDED THAT AO WR ONGLY INVOKED PROVISIONS OF SECTION 40A WITHOUT BRINGING ANY COMP ARABLE CASES OR ANY JUSTIFICATION. IT WAS THE CONTENTION THAT AO DI D NOT EXAMINE THE CLAIM IN ITS CORRECT PERSPECTIVE. 4.4 LD. DR REFERRING TO THE DETAILED ORDERS OF REVE NUE AUTHORITIES JUSTIFIED THE DISALLOWANCE. 4.5 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE R IVAL CONTENTIONS IN THE LIGHT OF FACTS PLACED BEFORE US AND ARGUMENT RAISED. AS SEEN FROM THE ORDER OF AO, IT IS NOTICED THAT AO CONSIDERED THE DISALLOWANCE U/S 37(1) WHEREAS THE DISALLOWANCE WAS MADE U/S 40A. THE ORDER IS INCONSISTENT IN ITS OBSERVATIONS AND F INDINGS. SOME PLACES AO SAYS PAYMENT IS EXCESSIVE (U/S 40A) AND A T SOME OTHER 4 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. PLACE HE SAYS PAYMENT CANNOT BE SAID TO BE LEGITIM ATE AND INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS (U/S 37(1)). WE ARE OF THE OPINION THAT AO IS UNABLE TO COME TO A D ECISION UNDER WHAT PROVISION HE HAS TO DISALLOW (WHATEVER MAY BE THE J USTIFICATION), AND WITH A PREDETERMINED VIEW, AO PROCEEDED WITH DISALL OWANCE OF THE CLAIM. 4.6 AS SEEN FROM THE PAPER BOOK ASSESSEE COMPANY EN TERED INTO AN AGREEMENT TO PAY FUND MANAGEMENT FEES AT 3.5% ON EQUITY OR EQUITY LINKED INVESTMENTS ON COST BASIS, 2.25% ON D EBT INVESTMENTS ON PRINCIPLE AND 1% ON ALL OTHER INVESTMENTS. THERE ARE OTHER CONDITIONS ALSO AND WAS SUBJECTED TO MINIMUM PAYMEN T OF RS. 8 MILLION (RS. 80 LAKHS) PER ANNUM. VIDE ANNEXURE 9 T O THE SUBMISSIONS TO AO (PAGE 54) ASSESSEE JUSTIFIED THE PAYMENT AND SUPPORTED BY VARIOUS CALCULATIONS MADE. ON PERUSING THE ORDER OF AO, WE ARE OF THE OPINION THAT AO DID NOT EXAMINE THE CLAIM IN ITS CO RRECT PERSPECTIVE AT ALL. 4.7 AS SEEN FROM THE AGREEMENT, EVEN THOUGH IT WAS ENTERED BETWEEN ASSESSEE COMPANY AND ADVISOR (NO DOUBT, REL ATED PERSON U/S 40A) THE SIGNATORIES TO THE AGREEMENT ARE DIREC TORS ON BEHALF OF FOREIGN INVESTORS (GRAY GHOST MICROFINANCE FUND AND HIVOS TRIODOS FUND FOUNDATION, USA AND NETHERLANDS RESPECTIVELY), WHICH INDICATE THAT THE RATE OF COMMISSION IS APPROVED BY MAJORITY OF FUND INVESTORS. EVEN THE COPIES OF AGREEMENTS ARE TO BE SENT TO THE M ONLY TO THEIR FOREIGN ADDRESS. 4.8 THE AO HAS ACCEPTED THE RATE OF FEES PAID AND C ALCULATED THE SAME BASIS ON SOME INVESTMENTS/DEBTS/OTHER ASSETS, BUT, DISALLOWED AT 100% CLAIM ON SOME OTHER INVESTMENTS AND ASSETS WITHOUT ANY JUSTIFICATION. 5 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. 4.9 THE ADDITIONAL EVIDENCE FILED WHICH WAS CLAIMED TO BE IN SUPPORT OF PAYMENT FOR THE SERVICES RENDERED, IS IN FACT, REQUIRE VERIFICATION BY AO. LD. CIT(A) DID NOT EXAMINE ANY OF THE ISSUES, BUT, SIMPLY REJECTED , EVEN THOUGH, ASSESSEE PLACED DETA ILED SUBMISSIONS BEFORE HIM. IN VIEW OF THIS, WE ARE OF THE FIRM OPI NION THAT THE ISSUE REQUIRES RE-EXAMINATION BY AO AFRESH. FOR THIS PURP OSE, WE SET ASIDE THE ORDERS ON THIS ISSUE AND RESTORE IT TO THE FILE OF AO FOR FRESH CONSIDERATION AFTER GIVING DUE OPPORTUNITY TO ASSES SEE TO SUBSTANTIATE THE CLAIM. ACCORDINGLY, GROUNDS 1 TO 7 ARE ALLOWED FOR STATISTICAL PURPOSES. 5. AS REGARDS THE ISSUE OF DISALLOWANCE U/S 14A, IT IS OBSERVED THAT ASSESSEE ADMITTED DIVIDEND INCOME OF RS. 62,85 ,760/- AND CLAIMED THE SAME AS EXEMPT U/S 10(35) OF THE ACT AN D ALSO RECEIPT OF RS. 36,16,741/- BEING DIVIDEND REFERRED TO SECTION 115-0 OF THE ACT CLAIMED AS EXEMPT U/S 10(34) OF THE ACT. DURING ASS ESSMENT PROCEEDINGS, ASSESSEE WAS ASKED TO FURNISH THE DETA ILS OF EXPENDITURE INCURRED IN RELATION TO EARNING OF THE ABOVE EXEMPTED INCOMES. AFTER CONSIDERING THE REPLY OF ASSESSEE, A O INVOKED THE PROVISIONS OF SECTION 14A R.W.S RULE 8D AND WORKED OUT THE EXPENDITURE RELATABLE TO EARNING OF THE ABOVE EXEMP TED INCOME AND DISALLOWED THE SAME. 5.2 BEFORE THE CIT(A), IT WAS CONTENDED THAT RULE 8 D IS APPLICABLE FROM ASSESSMENT YEAR 2008-09 AND NOT RELEVANT FOR T HE SUBJECT ASSESSMENT YEAR AND RELIED ON THE DECISIONS IN THE CASES OF CHEM INVEST LTD. VS. ITO AND GODJRE & BOYCE MFG. CO. LTD . VS. DCIT. 5.3 LD. CIT(A) REJECTED THE CONTENTION OF ASSESSEE, STATING AS UNDER: 7.2 I HAVE GONE THROUGH THE ASSESSMENT ORDER, THE SUBMISSIONS OF THE APPELLANT AND THE CASE LAWS RELI ED UPON BY THE APPELLANT. IT IS WORTHWHILE REFER TO THE DECISI ON RENDERED IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [ 2010] 194 6 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. TAXMAN 203 (BOM.), WHICH WAS ALSO RELIED UPON BY TH E APPELLANT WHEREIN WHILE OBSERVING THAT RULE 8D WAS APPLICABLE FROM AY 2008-09 AND DO NOT HAVE ANY RETROSPECTIVE E FFECT, ALSO HELD THAT THE AO HAD TO ENFORCE PROVISIONS OF SUB-S ECTION (1) OF SECTION 14A AND FOR THAT PURPOSE, AO WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAD BEEN INCURRED IN RE LATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDE R ACT BY ADOPTING A REASONABLE BASIS OR METHOD CONSISTENT WI TH ALL RELEVANT FACTS AND CIRCUMSTANCES. THE SAID REASONAB LE BASIS MENTIONED IN THE ABOVE DECISION OF THE BOMBAY HIGH COURT WAS NOT DIFFERENT FROM RULE 8D, SINCE RULE 8D WAS INTRO DUCED TO BRING IN A UNIFORM METHOD FOR THE PURPOSE OF ARRIVI NG AT THE EXPENDITURE IN RELATION TO EARNING OF THE EXEMPTED INCOME. THEREFORE, GOING BY THE ABOVE DECISION, WHICH WAS A LSO RELIED UPON BY THE APPELLANT, I SEE NO REASON TO TAKE A DI VERGENT VIEW FROM THE VIEW TAKEN BY THE AO IN BRINGING TO TAX TH E RELATABLE EXPENDITURE TO EARN THE EXEMPTED INCOME. ACCORDINGL Y, THE ADDITION MADE BY THE AO AT RS. 31,57,034/- IS SUSTA INED. 5.4 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE UNABLE TO AGREE WITH THE OPINION OF LD. CIT(A). IT IS VERY CLEAR FR OM THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODRE J AND BOYCE MFG. CO. LTD., VS. DCIT & ANR., 328 ITR 81 (BOM.) THAT RULE 8D IS NOT APPLICABLE TO THE IMPUGNED ASSESSMENT YEAR. SO, THE CALCULATIONS PRESCRIBED UNDER THE RULE CANNOT BE IN VOKED IN THE GUISE OF REASONABLE DISALLOWANCE. THEREFORE, WE SET ASIDE THE ORDERS ON THIS ISSUE AND RESTORE THE ISSUE TO T HE FILE OF AO TO DETERMINE THE REASONABLE DISALLOWANCE ON FACTS A ND CONSIDERING LAW ON THIS ISSUE. GROUND NOS. 8 & 9 AR E ALLOWED FOR STATISTICAL PURPOSES. 6. AS REGARDS THE ISSUE OF CARRY FORWARD LOSS, IT I S OBSERVED THAT ASSESSEE CLAIMS SET OFF CARRY FORWARD LOSSES, IF TOTAL INCOME BECOMES POSITIVE. THIS ASPECT WAS NOT CONTES TED BEFORE LD. CIT(A) AND THERE IS NO FINDING ON THIS I SSUE. THIS BEING A LEGAL GROUND, WE DIRECT THE AO TO EXAMINE T HE RECORD AND ALLOW NECESSARY SET OFF OF CARRIED FORWARD LOSS ES. GROUND NO. 10 IS ALLOWED FOR STATISTICAL PURPOSES. 7 ITA NO. 908/HYD/201 BELLWETHER MICROFINANCE FUND PVT. LTD. 7. AS REGARDS ISSUE OF INTEREST U/S 234B, IT IS OBS ERVED THAT EVEN THOUGH CALCULATION OF INTEREST U/S 234B IS MANDATOR Y, AO IS DIRECTED TO VERIFY THE CALCULATIONS, TO BE IN ACCORDANCE WIT H THE PROVISIONS OF THE ACT. 8. IN THE RESULT, APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 8 TH JANUARY, 2014. SD/- SD/- (D. MANMOHAN) (B. RAMA KOTAIAH) VICE PRESIDENT ACCO UNTANT MEMBER HYDERABAD, DATED: 8 TH JANUARY, 2014 KV COPY TO:- 1) M/S BELLWETHER MICROFINANCE FUND PVT. LTD., 8-2- 596/5/B/1/D, ROAD NO. 10, BANJARA HILLS, HYDERABAD 500 034. 2) ACIT, CIRCLE 1(3), AYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3) CIT(A)-V, HYDERABAD. 4) CIT-I, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.