M/s Empire Packages (P) Ltd., Chandigarh V. ITO, Chandigarh

ITA 978/CHANDI/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90195 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 10-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 07-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Earning of tax free income; Question of law; Initiation of penalty proceedings
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES SMC CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT ITA NO. 978/CHD/2013 ASSESSMENT YEAR: 2009-10 M/S EMPIRE PACKAGES (P) LTD. VS. THE ITO # 18, SECTOR 9 A WARD 1(3) CHANDIGARH CHANDIGARH PAN NO. AAACE5023G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MOHIT DHIMAN RESPONDENT BY : SHRI R.K. GUPTA DATE OF HEARING : 15/06/2015 DATE OF PRONOUNCEMENT: 18/06/2015 ORDER PER H.L.KARWA, VP THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF CIT(A), CHANDIGARH DT. 18/07/2013 RELATING TO ASSESSMENT YE AR 2009-10. 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWIN G GROUNDS: 1. THAT THE ORDER PASSED UNDER SECTION 250(6) BY THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS), CHANDIGARH IN APPEAL NO. 576/ 11-12 DATED 18.07.2013 IS CONTRARY TO LAW AND FACTS OF THE CASE. 2. A) THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERRED IN UPHOLDING TH E DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER AMOUNTING TO RS. 4,09,675 /- BY INVOKING THE PROVISIONS OF SECTION 14 A OF THE INCOME TAX ACT, 1961. B) WITHOUT PREJUDICE TO THE GROUND NO. 2 (A), THE D ISALLOWANCE SUSTAINED BY THE HONBLE COMMISSIONER OF INCOME TAX (APPEALS), I S HIGHLY EXCESSIVE. 3. A) THAT IN THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) GRAVELLY ERRED IN SUSTAINING T HE ADDITION OF RS. 2,22,110/- MADE BY THE LD. ASSESSING OFFICER BY CAPITALIZING T HE INTEREST ON FIXED ASSETS. 2 B) WITHOUT PREJUDICE TO THE GROUND NO. 3(A), THE A DDITION SUSTAINED BY THE HONBLE COMMISSIONER OF INCOME TAX (APPEALS), IS HI GHLY EXCESSIVE. 4. THAT THE APPELLANT CRAVES TO ADD, AMEND OR ALTER ANY GROUND OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 5. ANY OTHER GROUND THAT MAY BE TAKEN UP AT THE TIM E OF HEARING WITH THE PERMISSION OF THE HONBLE INCOME TAX APPELLATE TRIB UNAL, CHANDIGARH. 3. GROUND NO. 1 OF THE APPEAL IS GENERAL IN NATURE AND HENCE NO COMMENTS ARE BEING GIVEN. 4. GROUND NO. 2 OF THE APPEAL RELATES TO DISALLOWAN CE OF RS. 4,09,675/- MADE UNDER SECTION 14 A OF THE INCOME TAX ACT (IN SHORT THE ACT), READ WITH RULE 8 D OF INCOME TAX RULES 1962 (IN SHORT THE RULE). THE ASSESSEE COMPANY IS IN THE BUSINESS OF MANUFACTURING AND SALE OF CORRUGATED BO XES AND SHEETS. DURING THE YEAR UNDER CONSIDERATION, THE TOTAL TURNOVER OF THE ASSESSEE WAS AT RS. 29,38,26,526/- AS AGAINST TURNOVER OF RS. 24,15,15, 000/- IN THE IMMEDIATELY PRECEDING YEAR. THE AO DISALLOWED THE SUM OF RS. 4, 09,675/- UNDER SECTION 14 A READ WITH RULE 8 D AND ADDED BACK THE SAME TO THE I NCOME OF THE ASSESSEE. THE AO OBSERVED THAT THE ASSESSEE HAS MADE INVESTME NT IN SHARES AND MUTUAL FUNDS AMOUNTING TO RS. 10,87,172/- AS ON 31-03-2009 . THE INVESTMENT IN SHARES AND MUTUAL FUNDS AS ON 31.03.2008 WAS AT RS. 12,75, 076/-. THIS YEAR, THE ASSESSEE HAS SHOWN INCOME FROM DIVIDEND AT RS. 1,11,564/-. T HE ASSESSEE HAS PURCHASED 15 ACRES OF LAND, OUT OF WHICH, 3 ACRES HAVE BEEN U SED FOR SETTING UP AN INDUSTRIAL UNIT. ACCORDING TO AO THE PROPORTIONATE COST OF 12 ACRES OF LAND WHICH WAS NOT BEING USED FOR BUSINESS PURPOSES COMES TO R S. 33.75 LACS. THE AO OBSERVED THAT THE ASSESSEE COMPANY HAS INVESTED RS. 33.75 LACS IN AGRICULTURAL LAND AND THE INCOME EARNED FROM THIS AGRICULTURAL L AND IS EXEMPT U/S 10(1) OF THE I.T. ACT. HE FURTHER OBSERVED THAT ASSESSEE CO MPANY HAS SHOWN AGRICULTURAL INCOME OF RS. 32,000/- FOR THE YEAR UNDER CONSIDERA TION, WHICH HAS BEEN CLAIMED AS EXEMPT U/S 10(1) OF THE ACT. SINCE, THE AGRICULTURAL INCOME AND DIVIDEND INCOME IS EXEMPT FROM INCOME TAX UNDER SEC TION 10 OF THE ACT, THE AO 3 ASKED THE ASSESSEE TO EXPLAIN AS TO WHY ADDITION SH OULD NOT BE MADE ON THIS ACCOUNT AS PER LAST YEARS IMPUGNED ORDER. WHEN CON FRONTED, ASSESSEE FURNISHED REPLY ON 19.12.2011 STATING INTERALIA THA T THERE IS NO AGRICULTURAL INCOME DURING THIS YEAR, ONLY EXPENSES OF RS. 4,395/- HAS BEEN INCURRED ON THIS ACCOUNT. THE AO OBSERVED THAT ON PERUSAL OF ANNEXURE-J ATTAC HED TO THE BALANCE-SHEET REVEALED THAT THE ASSESSEE HAS SHOWN MISCELLANEOUS INCOME OF RS. 32,000, FURTHER NARRATION OF WHICH HAS BEEN GIVEN AS AGRICU LTURAL INCOME. AS REGARDS, DIVIDEND INCOME FROM MUTUAL FUNDS, THE ASSESSEE STA TED IN THE REPLY THAT NO INTEREST BEARING LOANS HAVE BEEN TRANSFERRED FOR IN VESTMENT IN THE MUTUAL FUNDS. THE AO CONCLUDED THAT THE CONTENTION OF THE ASSESSE E ON BOTH COUNTS IS NOT ACCEPTABLE. AFTER EXAMINING THE VARIOUS DETAILS ON RECORD THE AO WORKED OUT THE DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8 D AND AS PER THE SAID WORKING AN AMOUNT OF RS. 4,09,675/- WAS DISALLOWED. 5. ON APPEAL THE LD. CIT(A) UPHELD THE ORDER OF THE AO, AND HENCE THE ASSESSEE IN APPEAL BEFORE THE TRIBUNAL. 6. I HAVE HEARD SHRI. MOHIT DHIMAN LD. COUNSEL FOR THE ASSESSEE AND SHRI. R.K. GUPTA LD. DR AT LENGTH AND HAVE ALSO PERUSED THE MA TERIALS AVAILABLE ON RECORD. IT IS APPARENT FROM THE RECORDS THAT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE HAD EARNED DIVIDEND INCO ME OF RS. 1,11,564/- AND THE CASE OF THE ASSESSEE WAS THAT HE HAD NOT MADE A NY EXPENDITURE ON EARNING SUCH INCOME. THE CASE OF THE REVENUE IS THAT IF THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAD BEEN INCURRED OR ABOUT THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE, IT IS MANDATORY FOR HIM TO COMPUTE THE EXPENDITURE RELATING TO THE EXEMPT INCOME AS PE R RULE 8 D. IN MY CONSIDERED OPINION THE STAND OF THE REVENUE IS CONT RARY TO THE DECISION RENDERED BY THE HONBLE JURISDICTIONAL HIGH COURT O N THIS ISSUE IN THE CASE OF CIT VS. DEEPAK MITTAL 2013, (38 TAXMAN 83) (HON'BLE HIG H COURT OF PUNJAB & 4 HARYANA) WHEREIN THE HONBLE COURT HELD THAT THE DI SALLOWANCE UNDER SECTION 14 A REQUIRES FINDING OF INCURRING OF EXPENDITURE W HERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, D ISALLOWANCE UNDER SECTION 14 A CAN NOT STAND. WHEN THE ASSESSEE CLAIM S THAT HE HAD NOT MADE ANY EXPENDITURE ON EARNING EXEMPT INCOME, THE AO IN TERMS OF SUB SECTION (2) OF SECTION 14 A IS REQUIRED TO COLLECT SUCH MATERI AL EVIDENCE TO DETERMINE EXPENDITURE, IF ANY, INCURRED BY THE ASSESSEE IN RE LATION TO EARNING OF EXEMPT INCOME. THE FINDINGS OF THE LOWER AUTHORITIES ARE C ONTRARY TO THE ABOVE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT. IN TERMS OF SUB-SECTION 2 OF SECTION 14 A, IT WAS INCUMBENT UPON THE AO TO BRING SUCH MATERIAL OR EVIDENCE ON RECORD IN ORDER TO DETERMINE EXPENDITURE, IF ANY, INCURRED BY THE ASSESSEE. THE AO HAS WORKED OUT THE DISALLOWANCE RELYING ON RULE 8 D MEC HANICALLY WHICH IS NOT THE CORRECT WAY. FURTHER THE CASE OF THE ASSESSEE WAS T HAT NO INTEREST BEARING LOANS HAD BEEN DIVERTED FOR MAKING THE INVESTMENT IN SHAR ES AND MUTUAL FUNDS HOWEVER, BOTH THE AUTHORITIES BELOW HAVE NOT GIVEN ANY FINDINGS WHETHER THE ABOVE CONTENTION OF THE ASSESSEE WAS CORRECT OR WRO NG. THE LD. CIT(A) HAS OBSERVED THAT THE CONTENTION OF THE ASSESSEE THAT N O INTEREST BEARING LOANS HAD BEEN DIVERTED FOR MAKING THE IMPUGNED INVESTMENT DO ES NOT HOLD ORDER BECAUSE THE DISALLOWANCE IS TO BE MADE UNDER SECTIO N 14 A READ WITH RULE 8 D OF THE INCOME TAX RULE AND IT IS IMMATERIAL AS TO W HETHER INTEREST BEARING LOANS HAD BEEN UTILIZED FOR THE PURPOSE OF THESE INVESTME NTS (INCOME FROM WHICH IS EXEMPT). IN MY OPINION THE ABOVE CONTENTION OF THE ASSESSEE REQUIRES RECONSIDERATION AT THE LEVEL OF THE AO. ON PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW, I FIND THAT THE AUTHORITIES BELO W HAVE NOT GIVEN ANY FINDINGS REGARDING AGRICULTURAL INCOME, IF ANY CLAIMED BY TH E ASSESSEE. THIS ASPECT OF THE MATTER IS ALSO REQUIRES RECONSIDERATION AT THE LEVEL OF AO. THE ALTERNATIVE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF THE JUDGMENT OF 5 HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVES TMENT PVT LTD. VS. CIT (ITA 117/2015 DT. 25/02/2015) (DHC), DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8 D CAN NOT EXCEED THE EXEMPT INCOME. THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT PVT. LTD. VS. CIT(SUPRA) M ADE THE FOLLOWING IMPORTANT OBSERVATIONS: 7. DURING THE COURSE OF HEARING, COUNSEL FOR THE PETITIONER HAD RELIED UPON A DECISION OF THIS COURT IN COMMISSIONER OF INCOME TA X VI V. TAIKISHA ENGINEERING INDIA LTD., (ITA 115/2014, DECIDED ON 25.11.2014). THE COURT HA D, IN THAT JUDGMENT, HIGHLIGHTED THE NECESSITY IN VIEW OF THE PECULIAR WORDING OF SECTIO N 14 A (2) THAT COMPUTATION OR DISALLOWANCE OF THE ASSESSEE, OR CLAIM THAT NO EXPE NDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMINED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSESSEES EXPLANATION IS UNSATISFACTORY, CAN THE A O PROCEED FURTHER. 8. THE COURT IN TAIKISHA ENGINEERING (SUPRA) PERTINENT LY OBSERVED:- THUS, SECTION 14 A (2) OF THE ACT AND RULE 8 D(1) IN UNISON AND AFFIRMATIVELY RECORD THAT THE COMPUTATION OR DISALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME M UST BE EXAMINED WITH REFERENCE TO THE ACCOUNTS, AND ONLY AND WHEN THE EX PLANATION / CLAIM OF THE ASSESSEE IS NOT SATISFACTORY, COMPUTATION UNDER SUB RULE(2) TO RULE 8 D OF THE RULES IS TO BE MADE. 13. WE NEED NOT, THEREFORE, GO ON TO SUB RULE (2) T O RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RECORDED THE SATISFACTION, WHICH IS MANDATED BY SUB SECTION(2) TO SECTION 14 A OF THE ACT AND SU B RULE (1) TO RULE 8 D OF THE RULES. 9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DISCLOS ED WHY THE APPELLANT / ASSESSEES CLAIM FOR ATTRIBUTING RS. 2,97,440/- AS A DISALLOWA NCE UNDER SECTION 14 A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PR OCEED FURTHER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNT S AND REJECTION IF ANY OF THE ASSESSEES CLAIM OF EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO AN ASP ECT WHICH IS COMPLETELY UNNOTICED BY THE CIT(A) AND THE ITAT. THE THIRD, AN D IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS T HAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000/-, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110% OF THAT SUM,I.E., RS. 52,56,197/-. B Y NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8 D BE INTERPRETED SO AS TO MEA N THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOW ANCE IS INDICATED IN SECTION 14 A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPE NDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. 10. FOR THE ABOVE REASONS, THE IMPUGNED ORDER OF THE IT AT IS SET ASIDE. THE QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE. CONSE QUENTLY, ORDER OF THE AO IS SET ASIDE. THE INITIATION OF PENALTY PROCEEDINGS ALSO I S SET ASIDE. THE MATTER IS REMITTED TO THE AO FOR FRESH CONSIDERATION IN ACCORDANCE WIT H THE ABOVE DIRECTIONS. THE APPEAL IS PARTLY ALLOWED. 7. IN THE INSTANT CASE, THE INCOME FROM DIVIDEND HA S BEEN SHOWN AT RS. 1,11,564, THE DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8 D WORKED OUT BY THE ASSESSING OFFICER COMES TO RS. 4,09,675/-. THUS IT IS CLEAR THAT THE AO HAS 6 DISALLOWED THE ENTIRE TAX EXEMPT INCOME WHICH IS NOT PERMISSIBLE IN VIEW OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT REFERRED T O ABOVE. THE HONBLE DELHI HIGH COURT HELD THAT THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION14 A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITUR E INCURRED BY HE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THE DISALLOWANC E UNDER SECTION 14 A READ WITH RULE 8 D AS WORKED OUT BY THE AO IS NOT IN ACC ORDANCE WITH LAW AND AS SUCH WORKING IS NOT SUSTAINABLE. 8. IN VIEW OF THE ABOVE OBSERVATIONS, I THINK IT IS APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND REMIT THE MATTER TO THE FILE OF AO WITH A DIRECTION TO DECIDE THE ISSUE A FRESH IN ACCORDANCE WITH LAW AFTER AFFORDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE AS SESSEE. 9. AT THE TIME OF HEARING OF THE APPEAL SHRI. MOHIT DHIMAN LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS FOR GROUND NO. 3 TO 5 OF THE APPEAL, AND HENCE THE SAME ARE DISMISSED AS NOT PRESSED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18/06/2015 SD/- (H.L.KARWA) VICE PRESIDENT DATED : 18/06/2015 AG COPY TO:1. THE APPELLANT,2. THE RESPONDENT,3.THE CI T, 4.THE CIT(A),5. THE DR