ECONOMIC PHARMACEUTICALS P. LTD, MUMBAI V. ITO 4(1)(4), MUMBAI

ITA 9213/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8088 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 17-03-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 31-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ASHOK J PATIL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI RAJENDRA SINGH(AM) ITA NO.9213/M/2010 ASSESSMENT YEAR 2007-08 M/S.ECONOMIC PHARMACEUTICALS PVT.LTD. THE ITO 4(1) (4), SIXTH FLOOR 1 ST FLOOR, ABAN HOUSE, 25/31 ROPEWALK AAYAKAR BHAVAN STREET, OFF.R.DUBASH MARG, MUMBAI 400023 M.K. MARG, MUMBAI 400 020. PAN : AAACE 7792 C APPELLANT RESPONDENT ASSESSEE BY : SHRI ASHOK J. PATIL REVENUE BY : SHRI R.K.GUPTA O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 22.11.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-0 8. THE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING DISALLOWANCE OF EXPENSE S RELATING TO THE EXEMPT DIVIDEND INCOME. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE DURING THE YEAR HAD EARNED DIVIDEND INCOME OF RS.51,91,867/- FROM M UTUAL FUNDS AND CAPITAL GAIN OF RS.12,29,156/- FROM SALE OF MUTUAL FUND UNI T WHICH WERE EXEMPT FROM TAX. THE AO IN THE ASSESSMENT ORDER HELD THAT RULE 8D WAS APPLICABLE IN CASE OF THE ASSESSEE ACCORDINGLY HE DISALLOWED A SUM OF RS. 5,51,356/- OUT OF EXPENSES AS PER RULE 8D. IN APPEAL CIT(A) FOLLOWING THE JUDG MENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF GODREJ & BOYCE MANUFACTURING C OMPANY LTD. (328 ITR 81) 2 HELD THAT RULE 8D WAS APPLICABLE ONLY FROM ASSESSME NT YEAR 2008-09 AND THEREFORE WAS NOT APPLICABLE IN CASE OF THE ASSESSE E. IT WAS OBSERVED BY HIM THAT THE ASSESSEE WAS AN INVESTOR AND PORTFOLIO MAN AGERS WERE CHARGING 2 TO 3% OF INVESTMENT AS THEIR FEES ON WHICH THEY HAVE P ROFIT FROM 1 TO 1.5%. THEREFORE EXPENSES IN CASE OF THE ASSESSEE SHOULD V ARY 1 TO 1.5%. HE HOWEVER CONSIDERED 0.5% OF THE AVERAGE INVESTMENT AS THE EX PENSES INCURRED IN RELATION TO THE EXEMPT INCOME WHICH CAME TO RS.5,51 ,356/-. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMIT TED THAT THE ASSESSEE WAS TRADING IN PHARMACEUTICALS BUT THE BUSINESS HAD SUBSTANTIALLY REDUCED DUE TO LULL IN THE MARKET BUT THE ASSESSEE STILL HAD TO INCUR EXPENSES IN RELATION TO THE BUSINESS. IT WAS ALSO POINTED OUT THE TOTAL EXP ENDITURE INCURRED BY THE ASSESSEE WAS ONLY RS.2,60,528/- INCLUDING DEPRECIAT ION OF RS.1,18,461/-. THEREFORE CIT(A) WERE NOT JUSTIFIED DISALLOWING A S UM OF RS.5,51,356/-. IT WAS ALSO POINTED OUT THAT THE AVERAGE INVESTMENT WAS ON LY RS.2.25 CRORES AND EVEN IF DISALLOWANCE IS MADE @ 0.5% IT CAME TO ONLY RS.1 .12 LACS. IT WAS ALSO SUBMITTED THAT SINCE RULE 8D WAS NOT APPLICABLE THE EXPENSES CANNOT BE DISALLOWED AS A PERCENTAGE OF INVESTMENT. ONLY THE ACTUAL EXPENSES SHOULD BE DISALLOWED. IT WAS POINTED OUT THAT THE ASSESSEE HA D MADE INVESTMENT ONLY IN UNIT OF MUTUAL FUNDS AND DURING THE YEAR THERE ONLY 3 CASES OF SALES AND 4 CASES OF PURCHASES. THE DIVIDEND WAS DIRECTLY CREDI TED TO THE BANK ACCOUNT OF THE ASSESSEE AND THERE WERE HARDLY ANY EXPENDITURE INVOLVED. IT WAS ACCORDINGLY URGED THAT ACTUAL EXPENDITURE SHOULD BE REASONABLY ESTIMATED. THE LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF CIT(A). 3 4. I HAVE PERUSED THE RECORDS AND CONSIDERED THE MA TTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXPENSES RELAT ING TO THE EXEMPT INCOME WHICH CONSISTED OF DIVIDEND FROM UNITS OF MUTUAL FU ND AND LONG TERM CAPITAL GAIN FROM SALE OF UNITS. THE TOTAL EXPENSES CLAIMED BY THE ASSESSEE ARE ONLY RS.2,60,528/- WHICH INCLUDES DEPRECIATION OF RS.1,1 8,461/-. THE ASSESSEE IS ALSO DOING TRADING IN PHARMACEUTICAL AND THOUGH THE BUSINESS HAS REDUCED DRASTICALLY THE ASSESSEE HAD TO INCUR CERTAIN EXPEN SES AS WELL AS USE THE ASSET FOR WHICH DEPRECIATION IS ALLOWABLE. AS REGARDS THE EXEMPT INCOME THE ASSESSEE HAS MADE 3 OR 4 TRANSACTIONS DURING THE YEAR AND DI VIDEND THESE DAYS IS DIRECTLY CREDITED TO THE BANK ACCOUNT OF THE ASSESS EE. EXPENSES THEREFORE CANNOT BE VERY HIGH. HOWEVER IT IS ALSO A FACT THAT THERE ARE INBUILT INDIRECT EXPENSES IN THE FORM OF USE OF INFRASTRUCTURAL FACI LITIES AS WELL AS TIME AND EFFORTS OF THE MANAGERS. BOTH DIRECT AND INDIRECT E XPENSES HAVE TO BE ESTIMATED UNDER SECTION 14A AS HELD BY HONBLE HIGH COURT OF MUMBAI IN CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (SUPRA). C ONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN MY OPINION IT WOULD BE REASONABLE TO ESTIMATE EXPENSES RELATING TO EXEMPT INCOME BOTH DIRECT AND INDIRECT AT RS.50,000/-. I ORDER ACCORDINGLY. 5. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY A LLOWED. 6. THE DECISION WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF BOTH THE PARTIES TODAY I.E. 17.03.2011. SD/- (RAJENDRA SINGH) ACCOUNTANT MEMBER DATE : 17.03.2011 AT :MUMBAI 4 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR SMC BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK