ACIT, Faridabad V. M/s Mascot Footcare, Faridabad

ITA 998/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3893 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 25-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MONA MOHANTY SENIOR
• Assessee Lawyers: S C VASUDEVA
• Keywords: Business expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) SHRI I.P. BANSAL, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.998/DEL./2011 (ASSESSMENT YEAR : 2006-07) ACIT, CIRCLE II, VS. M/S. MASCOT FOOTCARE, FARIDABAD. PLOT NO.130, SECTOR 24, FARIDABAD. (PAN : AACFM2564K) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.C. VASUDEVA, CA REVENUE BY : SMT. MONA MOHANTY, SENIOR DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER : THE REVENUE HAS FILED THIS APPEAL AGAINST THE ORDER OF CIT (APPEALS), FARIDABAD DATED 10.12.2010 FOR THE ASSESSMENT YEAR 2006-07. THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE READ AS UNDER :- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G THE ADDITION OF RS.18,00,081/- MADE BY THE ASSESSING OF FICER ON ACCOUNT OF INTEREST ON INVESTMENT IN THE SHARES OF LAKHANI INDIA LIMITED UNDER SECTION 14A OF THE INCOME TAX A CT, 1961 PARTICULARLY WHEN THE INVESTMENT IN SHARES WHICH YI ELD DIVIDEND INCOME ARE NOT FORMING PART OF THE TOTAL I NCOME BY VIRTUE OF SECTION 10(34) OF THE INCOME TAX ACT, 196 1 AND HENCE, SINCE DIVIDEND DOES NOT FORM THE PART OF TOT AL INCOME AND WHEN THE FINANCIAL BURDEN INCURRED BY THE ASSES SEE FOR ITA NO.998/DEL./2011 2 ACQUIRING SHARES SHOULD HAVE BEEN PROPORTIONATELY D ISALLOWED BY INVOKING SECTION 14 OF THE INCOME TAX ACT, 1961. ' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G THE ADDITION OF RS.3,25,674/- MADE BY THE ASSESSING OFF ICER ON ACCOUNT OF INTEREST ON DEBIT BALANCE OF PARTNERS U/ S 36(1)(III) OF THE INCOME TAX ACT, 1961 DISREGARDING THE FACT THAT THE PARTNERS HAD NOT WITHDRAWN THEIR OWN FUNDS BUT THE BUSINESS FUNDS WHICH BEAR INTEREST COST AND IN CONTRADICTION WITH THE JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 1 (P&H).' 3. THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD, DELETE OR AMEND THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 2. THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF HAWAI CHAPPALS. IN THE GROUND NO.1, THE ISSUE INVO LVED IS REGARDING THE DELETION OF THE ADDITION MADE OF RS.18,00,081/- OUT OF INTEREST PAID RELATING TO INVESTMENTS IN THE SHARES OF LAKHANI INDIA LIMITED OF RS.3,66,84,014/- U/S 14A OF THE INCOME-TAX ACT, 1961. 3. AFTER HEARING BOTH THE SIDES, WE FIND THAT HON'B LE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE VS. DCIT, 328 ITR 81 (MUM.) OBSERVED AS UNDER : RULE 8D R.W. S. 14A (2) IS NOT ARBITRARY OR UNREAS ONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD NOT SATISFACTORY. RULE 8D IS NOT RETROSPECTIVE AND APPL IES FROM AY 2008-09. FOR EARLIER YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BASIS U/S 14A (1) ITA NO.998/DEL./2011 3 IN THIS DECISION, THE HON'BLE HIGH COURT HAS HELD T HAT THE DISALLOWANCES U/S 14A(1) SHOULD BE WORKED OUT ON REASONABLE BASIS. T HE HON'BLE HIGH COURT HAS ALSO HELD AS UNDER :- (2) S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS T AX-FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXA BLE AND NON-TAXABLE INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATION SHIP OF THE EXPENDITURE WITH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE U/S 14A HAS TO BE EFF ECTED ; (3) THE ARGUMENT THAT A LITERAL INTERPRETATION OF S . 14A LEADS TO ABSURD CONSEQUENCES IS NOT ACCEPTABLE. S 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME I.E GROSS INCOME MINUS EXPENDITURE; THE CIT (A) IN THIS CASE HAS GRANTED THE RELIEF TO THE ASSESSEE ON THE BASIS OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F S.A. BUILDERS LIMITED 288 ITR 1 WHERE THE HON'BLE SUPREME COURT HAS HELD THAT WHEN THE INTEREST FREE ADVANCES ARE ESTABLISHED TO BE OUT OF CAPITAL OR PROFITS OF THE ASSESSEE THEN NO DISALLOWANCES CAN BE MADE FOR ADVANCES MADE TO THE SISTER CONCERNS. THE CIT (A) HAS STATED THAT THE ASSESSING OFFICER H AS NOT LOOKED INTO THE ESTABLISHING NEXUS OF BORROWED FUNDS WITH THE FUNDS INVESTED IN THE SHARE CAPITAL OF LAKHANI INDIA LIMITED. THE DECISION OF HON'BLE SUPREME COURT IN THE CASES OF S.A. BUILDERS LIMITED 288 ITR 1 AND ALSO IN THE CASE OF MUNJAL ITA NO.998/DEL./2011 4 SALES CORPORATION VS. CIT 298 ITR 298 ARE ON THE ISSUE OF INTEREST FREE ADVANCE TO THE SISTER CONCERNS. IN THE ASSESSEES CASE, IT IS THE DISALLOWANCE U/S 14A WHEREIN EXPENDITURE INCURRED IN RELATION TO THE INCOME NOT INCLUDIBLE IN THE TOTAL INCOME REQUIRED TO BE DISALLOWED. IN THE CASE OF GODREJ & BOYCE (SUPRA), HON'BLE BOMBAY HIGH COURT HAS HELD THAT SE CTION 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BU SINESS EXPENDITURE INCURRED TOWARDS TAX-FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXA BLE AND NON-TAXABLE INCOME AND ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED REGARDING THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME, DISALLOWANCE U/S 14A HAS TO BE EF FECTED. KEEPING THESE FACTS IN VIEW, WE SET ASIDE THE ORDERS OF AUTHORITI ES BELOW TO WORK OUT THE DISALLOWANCES ON REASONABLE BASIS. 4. IN THE GROUND NO.2, THE ISSUE INVOLVED IS REGARD ING THE DELETION OF ADDITION OF RS.3,25,674/- ON ACCOUNT OF INTEREST ON DEBIT BALANCE OF PARTNERS U/S 36(1)(III) OF THE INCOME-TAX ACT, 1961. 5. WE HAVE HEARD BOTH THE SIDES AND AFTER HEARING A ND CONSIDERING THE FACTS OF THE CASE, WE FIND THAT THE CIT (A) HAS GRA NTED THE RELIEF ON THE BASIS OF DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT, I.E. THE JURISDICTIONAL HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LIMIT ED REPORTED IN 286 ITR 1 (P&H). FURTHER, WE FIND THAT THERE IS OVERALL INCR EASE IN THE CAPITAL FROM THE ITA NO.998/DEL./2011 5 PARTNERS AND NO INTEREST HAS BEEN DEBITED ON THE CR EDIT BALANCE OF THE PARTNERS IN THE BOOKS OF ACCOUNTS OF THE FIRM. FURTHER THER E WAS NO NEXUS BETWEEN THE USE OF BORROWED FUNDS FOR THE NON-BUSINESS PURPOSE. CONSIDERING ALL THESE FACTS, WE FIND NO FAULT IN THE ORDER OF THE CIT (A) AND SUSTAIN THE SAME AND DISMISS THIS GROUND OF REVENUES APPEAL. 6. GROUND NO.3 IS GENERAL IN NATURE AND DOES NOT RE QUIRE ANY ADJUDICATION. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 27 TH DAY OF MAY, 2011. SD/- SD/- (I.P. BANSAL) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 27 TH DAY OF MAY, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) , FARIDABAD. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.