M/s Sunder Forging, Ludhiana V. ACIT, Ludhiana

ITA 999/CHANDI/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73564 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-03-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 23-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, A.M AND MS. SUSHMA CHOWLA, JM ITA NO. 999/CHD/2013 ASSESSMENT YEAR : 2010-11 SUNDER FORGING V ADDL CIT, RANGE I INDUSTIRAL AREA C LUDHIANA SUA ROAD LUDHIANA AANFS 7430H (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI ASHWANI KUMAR DEPARTMENT BY: SHRI AKHILESH GUPTA DATE OF HEARING 1 1.3.2014 DATE OF PRONOUNCEMENT 20.3.2014 O R D E R PER T.R.SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD . CIT(A)- I, LUDHIANA DATED 31.7.2013. 2 IN THIS APPEAL THE ASSESSEE HAS FILED THE FOLLOWI NG GROUND: THAT ORDER PASSED U/S 250(6) OF INCOME-TAX ACT BY THE LD. CIT(A)-I, LUDHIANA IS AGAINST LAW AND FACTS ON THE FILE IN AS MUCH HE WAS NOT JUSTIFIED TO UPHOLD DISALLOWANCE U/S 14A TO THE EXTENT OF RS. 31,45,903/-. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSE SSEE HAS MADE VARIOUS INVESTMENTS IN THE BENCHMARK EQUIRTY F UND AMOUNTING TO RS. 1,44,57,393/-, HDFC MF MONTHLY INC OME PLAN AMOUNTING TO RS. 1,20,00,000/-, RELIANCE MONEY MANA GER FUND AMOUNTING TO RS. 74,91,143/-, IDFC ARBITRAGE AMOUNT ING TO RS. 50,00,000 AND RELIACNE MONTHLY INCOME PLANT AMOUNTI NG TO RS.1,70,75,000/-. THEREFORE, THE ASSESSING OFFICER INVOKED 2 SECTION 14A READ WITH RULE 8D OF IT RULE AND MADE DISALLOWANCE OF RS. 31,45,903/-. 4 ON APPEAL THE LD. CIT(A) FOLLOWING THE ORDER OF T HE TRIBUNAL IN ASSESSMENT YEAR 2008-09 CONFIRMED THE ADDITION. 5 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FAIRLY CONCEDED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY T HE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSME NT YEAR 2009-10. 6 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE ST RONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 7 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE M ATERIAL ON RECORD, WE FIND THAT IDENTICAL ISSUE CAME UP FO R CONSIDERATION OF THE TRIBUNAL IN ASSESSMENT YEAR 2009-10 IN ITA NO. 1042/CHD/2012 WHICH WAS ADJUDICATED VIDE PA RA 7 WHICH IS AS UNDER: 7 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. WE FIND THAT IDENTICAL ISSUE CAME UP FOR CONSIDERATION OF THE T RIBUNAL AND THE SAME WAS DECIDED AGAINST THE ASSESSEE VIDE PARA 29 TO 33 WHICH READ AS UNDER: 29. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. WE FIND THAT THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. HERO CYCLES LTD, 323 ITR 518 WAS RENDERED FOR ASSESSMENT YEAR 2004-05. LATER ON HON'BLE BOMBAY HIGH COURT IN CASE OF GODRE J AND BOYCE MANUFACTURING CO. LTD V. DCIT, 328 ITR 81 HAS CONSI DERED THE IMPLICATIONS OF SECTION 14A EVEN THE CONSTITUTIONAL VALIDITY AND APPLICABILITY OF RULE 8D IN GREAT DETAIL ULTIMATELY HON'BLE HIGH COURT HAS GIVEN THE FOLLOWING CONCLUSION: 88 OUR CONCLUSION IN T HIS JUDGMENT ARE AS FOLLOW S : (I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FA LLING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME-TAX ACT, 1961 , AS WAS APPLICABLE FOR THE ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE I N COMPUTING THE TOTAL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE A LLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PR OVISIONS OF SECTION 14A(1) ; (II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTIO N 115-O(1) OF ADDITIONAL INCOME-TAX ON PROFITS DECLARED, DISTRIBU TED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE C OMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAY S TAX IN DISCHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND, INCOM E BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS ; 3 (III) THE PROVISIONS OF SUB-SECTIONS (2) AND '(3) O F SECTION 14A OF THE INCOME-TAX ACT 1961 ARE CONSTITUTIONALLY VALID ; (IV) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES AS INSERTED BY THE INCOME-TAX (FIFTH AMENDMENT) RULES, 2008, ARE NOT U LTRA VIRES THE PRO- VISIONS OF SECTION 14A, MORE PARTICULARLY SUB-SECTI ON (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION ; (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RUL ES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APP LY WITH EFFECT FROM THE ASSESSMENT YEAR 2008-09 ; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUBSECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOU ND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFIC ER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE AS SESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD ; (YII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002- 03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL DETE RMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE B ASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFI CER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 30. THE ABOVE DECISION HAS BEEN RENDERED AFTER CONS IDERING THE DECISION OF HON'BLE SUPREME COURT IN CASE OF CIT V. WALFORT SHARE AND STOCK BROKERS P LTD (2010) 326 ITR 1 (S.C), THEREFO RE, IN OUR OPINION, THE RATIO OF THIS DECISION IS APPLICABLE TO THE CAS E OF THE ASSESSEE AND RULE 8D WOULD BE APPLICABLE IN THE PRESENT CASE WHI CH RELATES TO ASSESSMENT YEAR 2008-09. 31. THOUGH THE LD. CIT(A) DELETED THE ADDITION BY O BSERVING THAT INVESTMENT IN MUTUAL FUND IS OUT OF CURRENT ACCOUNT BUT IT WAS NOT DENIED BEFORE US THAT ALL THE RECEIPTS ARE BEING CREDITED TO THE CURRENT ACCOUNT WHICH MEANS CURRENT ACCOUNT IS DEALING WITH THE COM BINED FUND OF THE ASSESSEE-COMPANY. THE ASSESSEE HAS NOWHERE SHOWN TH AT THE INTEREST FREE FUNDS WERE AVAILABLE FOR INVESTMENT IN MUTUAL FUND. IN FACT BEFORE THE PROVISION OF SECTION 14A THE ASSESSEE HAD THE R IGHT TO CLAIM ALL THE EXPENSES IF SUCH EXPENSES COULD NOT BE BIFURCATED I N TERMS OF NORMAL TAXABLE INCOME AND EXEMPTED INCOME IN VIEW OF THE D ECISION OF HON'BLE SUPREME COURT IN CASE OF RAJASTHAN STATE WAREHOUSIN G CORPORATION V. CIT, 242 ITR 450 BUT THIS POSITION CHANGED AFTER TH E INTRODUCTION OF SECTION 14A BY FINANCE ACT, 2001. THE MEMORANDUM E XPLAINING THE PROVISIONS OF FINANCE BILL READS AS UNDER: CERTAIN INCOME ARE NOT INCLUDIBLE WHILE COMPUTATIN G THE TOTAL INCOME AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE AC T. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIV E GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITIN G THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAIN THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE IS TAXED. ON TH E SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EX PENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. 4 IT IS PROPOSED TO INSERT A NEW SECTION 14A SO AS TO CLARIFY THE INTENTION OF THE LEGISLATURE SINCE THE INCEPTION OF THE INCOME-T AX ACT, 1961, THAT NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDIT URE INCURRED BYTHE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME-TAX ACT. THE PROPOSED AMENDMENT WILL TAKE EFFECT RETROSPECTI VELY FROM APRIL 1, 1962 AND WILL ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 1962- 63 AND SUBSEQUENT ASSESSMENT YEAR. 32. IN FACT THE HON'BLE BOMBAY HIGH COURT HAS NOTED THIS POSITION AND THEN CONFIRMED THAT THEORY OF APPORTIONMENT OF EXPE NSES IS VERY MUCH APPLICABLE IN SECTION 14A. IN FACT AT PLACITUM 28 IT HAS OBSERVED AS UNDER: DURING THE COURSE OF THIS JUDGMENT, IT WOULD BE NE CESSARY TO REVISIT THE DECISION OF HON'BLE SUPREME COURT IN WA LFORT. AT THIS STAGE, HOWEVER, IT NEEDS TO BE EMPHASIZED THAT THE PROVISIONS OF SECTION 14A WERE CONSTRUED IN WALFORT TO EVINCE PAR LIAMENTARY INTENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXP ENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AGAINST TAXABLE INCOME. SECTION 14A IS CLARIFICATORY OF THE POSITIO N THAT EXPENSE CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE REL ATABLE TO THE EARNING OF TAXABLE INCOME. ONLY THOSE EXPENSES WHI CH ARE IN RESPECT OF THE EARNING OF TAXABLE INCOME CAN BE AL LOWED. THE SECTION 14A BROADENS THE THEORY OF APPORTIONMENT O F EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME IS EVIDENT FROM THE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPR EME COURT: THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECTIONS 1 5 TO 59, IT IS CLEAR THAT THE WORDS EXPENDITURE INCURRED IN SECT ION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC ., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37). THUS ON THE BASIS OF ABOVE, IT WAS HELD THAT AFTER INTRODUCTION OF SECTION 14A, IT WAS POSSIBLE TO APPORTIONED THE EXPENDITURE BETWEEN TAXABLE INCOME AND EXEMPTED INCOME. RULE 8D READS AS UNDER: (1) WHERE THE ASSESSING OFFICER HAVING REGARD TO T HE ACCOUNT OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE HAL L DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWIN G AMOUNTS, NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A X B C 5 WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSET AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSET S SHALL MEAN, TOTAL ASSET AS APPEARING IN THE BALANCE SHEET EXCLUDING T HE INCREASE ON ACCOUNT OF REVALUATION OF ASSET BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.). CLAUSE (B) OF SUB-SECTION (2) CLEARLY SHOWS THAT IF ASSESSEE DOES NOT SHOW THAT THE INTEREST HAS BEEN INCURRED SPECIFICAL LY FOR A PARTICULAR ITEM OF INCOME THEN IT HAS TO BE APPORTIONED. IN CASE B EFORE US SINCE THE ASSESSEE HAD INCURRED EXPENSES ON INTEREST WHICH CA N NOT BE DIRECTLY RELATED TO PARTICULAR TYPE OF INCOME, THEREFORE, I NTEREST IS REQUIRED TO BE APPORTIONED. 33. PERUSAL OF ASSESSMENT ORDER SHOWS THAT THE DISA LLOWANCE U/S 14A IS BASED ON RULE 8D WHICH HAS BEEN NOTED ABOVE WAS APPLICABLE DURING THE YEAR UNDER CONSIDERATION AND WHICH IS IN CONSO NANCE WITH THE DECISION OF HON'BLE BOMBAY HIGH COURT. THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND RESTORE THAT OF THE ASSESSI NG OFFICER BY CONFIRMING THE DISALLOWANCE U/S 14A. FOLLOWING THE ABOVE ORDER WE DECIDE THIS ISSUE AGAI NST THE ASSESSEE. 8 IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 20.3.2014 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 20.3.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR