Bharat Overseas Bank Ltd. (Since taken over by Indian Overseas Bank), CHENNAI V. Addl. CIT, CHENNAI

ITA 96/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1324 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: C NARESH SHRI SHAJI P JACOB
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOMETAX APPELLATE TRIBUNAL: A-BENCHL: CHEN NAI (BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER & ABRAHAM P. GEORGE. ACCOUNTANT MEMBER) ITA NOS. 95 & 96 / MDS/ 10 ASST.YEARS 1993-94 &2006-07 BHARAT OVERSEAS BANK LTD, (SINCE TAKEN OVER BY INDIAN OVERSEAS BANK). ACCOUNTS DEPARTMENT, 763 ANNA SALAI, CHENNAI 60002 (PAN AAACB133374M) VS THE ADDL.CIT COMPANY RANGE I, CHENNAI. . (APPELLANT) (RESPONDENT) APPELLANT BY: RESPONDENT BY: SHRI C.NARESH SHRI SHAJI P.JACOB ORDER PER BENCH: THESE ARE APPEALS OF THE ASSESSEE AGAINST THE ORDE RS OF THE CIT(A) FOR RESPECTIVE ASSESSMENT YEARS. APPEAL FOR ASST. YEAR 1993-94 IS TAKEN UP FIRST. 2. ONLY ONE GROUND HAS BEEN RAISED BY THE ASSESSEE, WHICH IS REGARDING DISALLOWANCE MADE UNDER SEC.36(1)(VIIA) OF THE INCO ME-TAX ACT, 1961 (THE ACT FOR SHORT). 3. WHEN THE APPEAL WAS TAKEN UP, LD. COUNSEL FOR TH E ASSESSEE, REFERRING TO PAPER BOOK PAGE NO.5 FILED BY HIM, STATED THAT THE COMMITTEE ON DISPUTES HAD NOT GIVEN PERMISSION TO THE ASSESSEE TO PURSUE THI S ISSUE BEFORE THIS TRIBUNAL. ITA NOS. 95-96/MDS//10. 2 4. WE HAVE SEEN THE MINUTES OF THE MEETING OF THE C OMMITTEE ON DISPUTES HELD ON 28-10-2010 FILED BY ASSESSEE AND RELEVANT P APER BOOK PAGE 6. AT SL. NO.24 IT IS MENTIONED THAT PERMISSION HAS BEEN DECL INED BY THE COMMITTEE TO PURSUE THE ISSUE RELATING TO DISALLOWANCE OF BAD DE BTS. IN VIEW OF THIS, APPEAL OF THE ASSESSEE FOR ASST. YEAR 1993-94 STANDS DISMISS ED. 5. NOW WE TAKE UP THE APPEAL OF THE ASSESSEE FOR AS ST. YEAR 2006-07. TWO GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE. FIRST ISSU E IS REGARDING BAD DEBT WRITE OFF OF ` 2,04,096/-, WHICH WAS REMITTED BY THE CIT(A) TO TH E AO. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMMITTEE ON DISPUT ES HAD DECLINED TO GIVE PERMISSION TO THE ASSESSEE TO PURSUE THIS MATTER BE FORE THIS TRIBUNAL, VIDE ITS MINUTES REFERRED SUPRA. 6. WE HAVE SEEN THE MINUTES PLACED AT PAPER BOOK PA GE NO.6 WHICH RELATE TO THE IMPUGNED ASSESSMENT YEAR. COMMITTEE ON DISPU TES HAS DECLINED PERMISSION TO THE ASSESSEE FOR PURSUING THIS MATTER BEFORE THIS TRIBUNAL, THE AMOUNT BEING VERY INSIGNIFICANT. IN VIEW OF THIS, G ROUND NO. 1 RAISED BY THE ASSESSEE IS DISMISSED. 7. SECOND GRIEVANCE OF THE ASSESSEE IS THAT THE CIT (A) UPHELD DISALLOWANCE OF ` 24,27,875/- MADE BY THE AO UNDER SEC. 14A OF THE AC T. 8. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT COMM ITTEE ON DISPUTES HAD ALLOWED THE ASSESSEE TO PURSUE THIS MATTER VIDE ITS MINUTES, MENTIIIONED SUPRA. SUBMISSION OF THE LD. COUNSEL WAS THAT THE AO HAD M ADE THE DISALLOWANCE RELYING ON RULE 8D OF THE INCOME-TAX RULES, 1962 AN D THE DECISION OF SPECIAL ITA NOS. 95-96/MDS//10. 3 BENCH OF THIS TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT P. LTD. (117 ITD 169). ACCORDING TO HIM, HONBLE BOMBAY HIG H COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT (ITA NO.626 & WP NO.758 OF 2010 DATED 12-08-2010) HAD HELD THAT RULE 8D WOULD APPLY ONLY FOR ASST. YEAR 2008-09. TAKING US THROUGH PAPER BOOK PAGE NO.7 TO 13, LD. C OUNSEL SUBMITTED THAT DELHI BENCH OF THIS TRIBUNAL HAD IN ITA NO.4046/DEL/2009 DATED13-10-2010 IN THE CASE OF MINDA INVESTMENTS LTD. V. DCIT HAD, AFTER CONSID ERING THE BOMBAY HIGH COURT DECISION IN GODREJ & BOYCE MFG. CO. LTD.(SUPRA) AND ALSO DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. (323 ITR 518), HELD THAT RULE 8D COULD NOT BE APPLIED FOR A SST. YEARS PRIOR TO ASST. YEAR 2008-09. ACCORDING TO HIM, ASSESSEE HAD NOT INCURRE D ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME AND IN ANY CASE A DISALL OWANCE OF MORE THAN 2% OF THE EXEMPT INCOME FOR MEETING COMMON ADMINISTRATIVE EXPENSES WAS NOT WARRANTED. FOR THIS PROPOSITION, RELIANCE WAS PLACE D ON THE DECISION OF BOMBAY BENCH OF THIS TRIBUNAL IN THE CASE OF GODREJ AGROVE T LTD. V. ACIT (ITA NO.1629/MUM/09 DATED 17-09-2010), COPY OF WHICH WAS PLACED AT PAPER BOOK PAGE NOS.14 TO 20. LD. AR ALSO POINTED OUT THAT IN ASSESSEES OWN CASE THIS TRIBUNAL HAD, FOR ASST. YEAR 2002-03 HELD 2% OF EXE MPT INCOME AS A REASONABLE ESTIMATE FOR MAKING A DISALLOWANCE UNDER SEC.14A OF THE ACT (PAPER BOOK PAGES 21 TO 22). 9. PER CONTRA, LD. DR SUBMITTED THAT THE MATTER HAD TO BE RECONSIDERED BY THE AO IN VIEW OF THE VARIOUS DECISIONS OF VARIOUS AUTH ORITIES WHICH WERE NOT AVAILABLE WHEN THE ISSUE WAS CONSIDERED BY HIM. ITA NOS. 95-96/MDS//10. 4 10. WE HAVE PERUSED THE RECORDS AND CAREFULLY CONSI DERED THE RIVAL SUBMISSIONS. AO HAS MADE A DISALLOWANCE OF EXPENDIT URE OF ` 24,27,875/- RELYING ON RULE 8D OF THE I.T. RULES, 1962 READ ALONGWITH S EC.14A OF THE ACT. EXEMPT INCOME CLAIMED BY THE ASSESSEE WAS ` 3.20.52.869/- BEING INCOME BY WAY OF INTEREST AND DIVIDENDS. ARGUMENT OF THE ASSESSEE BE FORE THE AO WAS THAT IT HAD OWN FUNDS OF ` 597.14 CRORES AND HENCE INVESTMENT OF ` 45.47 CRORES MADE IN TAX FRE BONDS HAD GONE OUT OF SUCH OWN FUNDS AND NOT OU T OF ANY INTEREST BEARING FUNDS. FURTHER ACCORDING TO THE ASSESSEE, IT HAD AD EQUATE INFRASTRUCTURE CONNECTED WITH ITS BANKING BUSINESS AND THERE WAS N O EXPENDITURE WHICH COULD BE ATTRIBUTED TO THE EARNING OF TAX FREE INCOME. NE VERTHELESS, AO AVERAGED INVESTMENT IN TAX FREE BONDS AND EQUITY AND APPLIED 0.5% THEREON FOR ARRIVING AT A FIGURE OF ` 24,27,875/-, WHICH WAS ADDED UNDER SEC. 14A OF THE ACT READ WITH RULE 8D. LD. CIT(A) CONFIRMED THIS DISALLOWANCE TA KING A VIEW THAT THE DECISION IN THE CASE OF HERO CYCLES LTD. (SUPRA) OF HONBLE P&B HIGH COURT WAS DISTINGUISHABLE AND DECISION OF THE SPECIAL BENCH I N DAGA CAPITAL MANAGEMENT P. LTD. (SUPRA) WAS SQUARELY APPLICABLE TO ASSESSE ES CASE. 11. NO DOUBT, IN OUR OPINION, SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. (SUPRA) HAD HELD THAT RULE 8D AP PLIED RETROSPECTIVELY AND SUB-SEC.(2) AND (3) OF SEC.14A OF THE ACT WERE PROC EDURAL IN NATURE AND APPLIED FOR ALL PENDING MATTERS. HOWEVER, BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG.CO. LTD. (SUPRA) CLEARLY HELD THAT RULE 8 D WAS NOTIFIED ONLY ON 24-03- 2008 AND WOULD APPLY W.E.F. ASST. YEAR 2008-09 ONLY . THUS EFFECTIVELY THE DECISION OF THE SPECIAL BENCH THAT RULE 8D HAD RETR OSPECTIVE EFFECT STANDS ITA NOS. 95-96/MDS//10. 5 OVERTURNED. HOWEVER, HONBLE BOMBAY HIGH COURT ALSO HELD THAT FOR SUCH EARLIER YEARS PRIOR TO APPLICATION OF RULE 8D, AO HAD TO AD OPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CIRCU MSTANCES, AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD BEFORE MAKING A DISALLOWANCE UNDER SEC. 14A OF THE ACT. AGAIN, HONBLE APEX COURT IN THE CASE OF WALFORT SHARE & STOCK BROKERS P. LTD.(326 ITR 1) HELD THAT FOR ATTRACTING SEC.14A OF THE ACT THERE HAD TO BE A PROXIMATE CAUSE BETWEEN THE EXEMPT INCOME AND EXPENSES. HONBLE P&B HIGH COURT IN THE CASE OF HERO CYCLES LTD (SUPRA) HELD THAT SEC. 14A DISALLOWANCE SHOULD NOT BE MADE WHEN NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INC OME. MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF GODREJ AGROVET LTD. CITED S UPRA, HELD THAT A DISALLOWANCE OF 2% OF THE EXEMPT INCOME FOR MEETING ADMINISTRATI VE EXPENSES RELATED TO EARNING SUCH EXEMPT INCOME WOULD BE REASONABLE. BUT NEVERTHELESS THE BENCH HAD TAKEN THIS VIEW FOR A REASON THAT FOR EARLIER Y EARS SIMILAR DISALLOWANCE MADE BY THE AO WERE SUSTAINED TO THE EXTENT OF 2% BY THE CIT(A). AS FOR THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MINDA INVESTMENTS LTD., THERE WAS A CLEAR FINDING THAT INCURRING OF EXPENDITURE RELATAB LE TO EARNING OF THE EXEMPT INCOME COULD NOT AT ALL BE PROVED AND ASSESSEES CL AIM THAT NO SUCH EXPENDITURE WAS INCURRED STOOD UNREBUTTED. HERE WE FIND THAT TH E ASSESSEE HAD CLAIMED USE OF ITS BANKING INFRASTRUCTURE FOR EARNING THE EXEMP T INCOME ALSO. ACCORDING TO THE ASSESSEE, ONLY OWN FUNDS WERE UTILIZED FOR MAKING T HE INVESTMENT RESULTING IN THE TAX FREE INCOME. NEITHER THE AO NOR THE CIT(A) HAS GONE INTO THE RECORDS AND VERIFIED WHETHER THIS CLAIM OF THE ASSESSEE WAS COR RECT OR NOT. AS FOR THE DECISION ITA NOS. 95-96/MDS//10. 6 IN ASSESSEES OWN CASE FOR ASST. YEAR 2002-03 (PAPE R BOOK PAGES 21 TO 22) DECIDED BY THIS TRIBUNAL, IT WAS RENDERED PRIOR TO THE DEVELOPMENT OF LAW IN SUBJECT MATTER THROUGH VARIOUS HIGHER JUDICIAL EXPO SITION. AS THE MATTER STANDS TODAY, VARIOUS DECISIONS MENTIONED SUPRA WOULD LEAD TO THE FOLLOWING VIEW REGARDING APPLICATION OF SEC.14A OF THE ACT AND RU E 8D: 1. THOUGH SEC. 14A HAS BEEN INSERTED WITH RETROSPEC TIVE EFFECT FROM 01-04-1962 AND SINCE RULE 89D HAS BEEN NOTIFIE D ONLY ON 24- 03-2008, IT WOULD BE EFFECTIVE ONLY FROM ASST. YEAR 2008-09 ONWARDS. 2. FOR EARLIER ASST. YEARS, THOUGH THE EXPENSES PER TAINING TO EXEMPT INCOME ARE NOT ALLOWABLE, THE DISALLOWANCE H AS TO BE ON A REASONABLE BASIS HAVING REGARD TO THE ACCOUNTS OF T HE ASSESSEE AND AFTER FURNISHING A REASONABLE OPPORTUNITY FOR T HE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. . 3. THIS IN EFFECT WOULD MEAN THAT THE DISALLO WANCE UNDER SEC.14A READ WITH RULE 8D CANNOT EXCEED ACTUAL EXPENSES DEB ITED IN THE P&L ACCOUNT AND THAT THE NOTIONAL DISALLOWANCE SPEC IFIED IN THE RULE 8D(2) CANNOT EXCEED THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE, AS AN EXPENDITURE WHICH HAS NOT BEEN INCU RRED AND CLAIM CANNOT BE DISALLOWED. 12. WE ARE, THEREFORE, OF THE OPINION THAT THE MATT ER NEEDS TO BE REVISITED BY THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE AS WEL L AS THE DISALLOWANCE, IF ANY, TO BE MADE UNDER SEC. 14A OF THE ACT BASED ON DECI SIONS OF VARIOUS AUTHORITIES MENTIONED SUPRA AS ALSO DECISIONS OF ANY BINDING AU THORITIES THAT ARE AVAILABLE WHEN HE RECONSIDER THE MATTER.. ASSESSEE WOULD BE F REE TO PRODUCE NECESSARY EVIDENCE AND RECORDS IN SUPPORT OF ITS CLAIM BEFORE THE AO, AS ALSO ANY OTHER ITA NOS. 95-96/MDS//10. 7 DECISION OF HIGHER JUDICIAL AUTHORITIES WHICH ALL H AVE TO BE DULY CONSIDERED BY THE AO. 13. IN THE RESULT, GROUND NO.2 OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. 14 TO SUMMARISE THE RESULT, APPEAL OF THE ASSESS EE FOR ASST. YEAR 1993-94 IS DISMISSED WHEREAS APPEAL OF THE ASSESSEE FOR ASST.Y EAR 2006-07 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 04 -0 1-2011. SD/- SD/- (U.B.S.BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI: 4TH JANUARY, 2011. NBR CC: ASSESSEE /ASSESSING OFFICER/ CIT(A)/ CIT/ D .R/ GUARD FILE.