M/s. Kherani Paper Mills Mills Pvt.Ltd., Mumbai V. The Dy.CIT.,Cent.Circle-3, Surat

ITSSA 553/AHD/2012

• Counselvise Citation: [2016] 122 COUNSELVISE.COM (IT) 2307 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-09-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 08-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R I PATEL
• Assessee Lawyers: P M MEHTA WITH G M THAKOR
• Keywords: Opportunity of being heard; Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI S.S. GODARA, JUDICIAL MEMBER) IT(SS)A NOS: 553 TO 556/AHD/2012 (ASSESSMENT YEARS: 2007-08 TO 2010-11) M/S. KHERANI PAPER MILLS PVT. LTD. 410-416, RAHEJA PLAZA, 4 TH FLOOR, 15B, SHAH INDUSTRIAL ESTATE, NEXT TO AFCONS, ANDHERI WEST MUMBAI-400058 V/S DY. CIT CENTRAL CIRCLE-3, SURAT (APPELLANT) (RESPONDENT) PAN: AAACK9923D APPELLANT BY :SHRI P.M. MEHTA WITH G.M.THAKOR, A. R. RESPONDENT BY : SHRI R.I. PATEL, CIT/ D.R. ( )/ ORDER DATE OF HEARING : 21 -09-201 6 DATE OF PRONOUNCEMENT : 23 -09-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THE ABOVE CAPTIONED APPEALS BY THE ASSESSEE ARE DIR ECTED AGAINST A CONSOLIDATED ORDER OF THE LD. CIT(A)-II, AHMEDABAD DATED 30.08.2012 PERTAINING TO A.YS. 2007-08 TO 2010-2011. IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 2 2. AS ALL THE APPEALS WERE DECIDED BY THE FIRST APPELL ATE AUTHORITY BY A CONSOLIDATED ORDER, ITSELF SHOW THAT THE ISSUES ARE COMMON AND THE FACTS ARE IDENTICAL IN ALL THESE CAPTIONED APPEALS. THEREFORE, ALL THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 3. THE COMMON GRIEVANCE OF THE ASSESSEE IN ALL THESE A PPEALS RELATES TO THE DISALLOWANCE MADE U/S. 14A OF THE ACT. WHICH CA N BE APPRECIATED BY THE FOLLOWING CHART:- A.Y. INTEREST DISALLOWANCE ADMINISTRATIVE DISALLOWANCE TOTAL DISALLOWANCE 14A 2007-08 442424 58585 5,01,009 2008-09 1072421 105123 11,77,544 2009-10 1359172 108803 14,67,976 2010-11 1313196 108788 14,21,985/- 4. WHEN THE IMPUGNED ADDITIONS WERE AGITATED BEFORE T HE LD. CIT(A), THE LD. CIT(A) OBSERVED AND DECIDED AS UNDER:- 3.1 DURING THE COURSE OF THE APPELLATE PROCEEDINGS, THE LD. ARS APPEARING ON BEHALF OF THE APPELLANT, HAVE ARGUED THAT SO FAR AS A.Y. 2007-08 IS CONCERNED, NO DISALLOWANCE U/S. 14A CAN BE MADE APPLYING RULE 8D AS SUCH RULE WAS NOT ON STATUTE IN RELEVANT ASSESSMENT YEAR AND SUCH RULE APPLIED FROM A.Y. 2008-2009. FOR REMAINING ASSESSMENT YEARS, IT WAS ARGUED; THAT EVEN THOUGH RULE 8D IS APPLICABLE FROM A.Y. 2008-2009 AS OBSERVED BY HON'B LE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LI MITED BUT AS SAID DECISION HAS BEEN CHALLENGED BEFORE HON'BLE SUPREME COURT, T O KEEP THE ISSUE ALIVE, THE ADDITION U/S 14A HAS BEEN CHALLENGED. THE LD ARS HA VE NOT DISPUTED THE WORKING OF DISALLOWANCE MADE U/S 14A OF THE ACT APPLYING RU LE 8D FOR ALL THE ASSESSMENT YEARS AND HAVE NOT DENIED THAT INTEREST BEARING FUN DS WERE NOT UTILIZED IN MAKING INVESTMENT IN SHARES FROM WHICH EXEMPT INCOME IS EA RNED. IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 3 3.2 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDE RS AND THE SUBMISSION FILED BY THE APPELLANT. THE ASSESSING OFFICER HAS DISALLOWED EXPENDITURE U/S 14A OF THE ACT APPLYING RULE 8D OF THE ACT FOR A.Y. 2007-2008, THE APPELLANT HAS ARGUED THAT NO DISALLOWANCE U/S 14A CAN BE MADE IN CURRENT YEAR, AS RULE 8D IS APPLICABLE FROM A.Y. 2008-2009. HOWEVER, THIS ARGUM ENT OF THE APPELLANT CANNOT BE ACCEPTED AS THE APPELLANT HAS EARNED TAX FREE IN COME BY MAKING INVESTMENT IN SHARES AND THE APPELLANT HAS NOT PROVED THAT NO INT EREST BEARING BORROWED FUNDS WERE UTILIZED FOR MAKING INVESTMENT IN SHARES OR NO OTHER EXPENDITURE WAS INCURRED FOR MAKING SUCH INVESTMENT HENCE DISALLOWA NCE U/S 14A IS NECESSARY. FURTHER, HON'BLE BOMBAY HIGH COURT IN CASE OF GODRE J & BOYCE MANUFACTURING COMPANY LIMITED V/S DCIT 328 ITR 81 HAS HELD AS UND ER:- 'SECTION 14A OF THE INCOME-TAX ACT 1961 READ WITH R ULE 8 OF THE INCOME- TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - ASSESSMENT YEAR 2002-03 - WHETHER PROVISIONS OF SUB- SECTIONS (2) AND (3) OF SECTION 14A ARE CONSTITUTIO NALLY VALID - HELD, YES - WHETHER PROVISIONS OF RULE 8D AS INSERTED BY INCOME -TAX (FIFTH AMENDMENT) RULES, 2008 ARE NOT ULTRA VIRES PROVISIO NS OF SECTION 14A, MORE PARTICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF CONSTITUTION - HELD, YES - WHETHER PROVISIONS OF RU LE 8D WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24-3-2008 ARE NOT RETROSP ECTIVE IN NATURE AND SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-0 9 - HELD, YES - WHETHER EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, ASSESSING OFFICER HAD TO ENFORCE PROVIS IONS OF SUB-SECTION (1) OF SECTION 14A AND FOR THAT PURPOSE, ASSESSING OFFI CER WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAD BEEN INCURRED IN RE LATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDER ACT B Y ADOPTING A REASONABLE BASIS OR METHOD CONSISTENT WITH AIL RELE VANT FACTS AND CIRCUMSTANCES - HELD, YES' IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 4 FURTHER, HON'BLE DELHI HIGH COURT IN CASE OF MAXOPP INVESTMENT LTD V/S CIT 203 TAXMANN 364 HAS HELD AS UNDER: 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND, N OT RETROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATISFY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGAR D TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REF LECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE O THER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT R EASONS THAT THE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY THE ASSESSEE IS N OT CORRECT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITUR E ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD BE APPROPRIATE TO RECALL THE WORDS OF THE SUPREME COUR T IN WALFORT SHARE & STOCK BROKERS (P.) LTD. (SUPRA) TO THE FOLLOWING EF FECT:- THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER S ECTION 14 A.' SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE I SSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSES SING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE, THE ASSESSI NG OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITUR E OR NO EXPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CO NCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMIN ATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSESSING OFFICER IS IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 5 NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER G IVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REAS ONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT' IN THE PRESENT CASE, THE APPELLANT WHILE FILING THE RETURN OF INCOME HAS NOT DISALLOWED ANY EXPENDITURE IN RELATION TO INVESTMEN T IN SHARES WHICH HAS RESULTED INTO TAX FREE INCOME. EVEN THE APPELLANT HAS NOT ES TABLISHED THAT NO INTEREST BEARING FUNDS WERE UTILIZED FOR MAKING SUCH INVESTM ENTS NOR SUBMITTED ANY OTHER REASONABLE METHOD FOR APPORTIONMENT OF EXPENDITURE AS HELD BY HON'BLE DELHI AND BOMBAY HIGH COURT SUPRA. THEREFORE, RULE 8D FRA MED FOR GIVING FORMULA FOR DISALLOWANCE OF PROPORTIONATE INTEREST AND OTHER EX PENDITURE RELATING TO EXEMPT INCOME IS CORRECTLY APPLIED BY THE (5) ASSESSING OF FICER EVEN IN A.Y. 2007-2008 BECAUSE SUCH FORMULA TAKE CARE OF AVAILABILITY OF B OTH INTEREST FREE FUNDS AND INTEREST BEARING FUNDS AVAILABLE WITH APPELLANT AND DISALLOWANCE WORKED OUT ON SUCH BASIS IS REASONABLE AND ACCEPTABLE METHOD OF A PPORTIONMENT. CONSIDERING THE SAME, DISALLOWANCE U/S I4A MADE BY THE ASSESSIN G OFFICER IN A.Y. 2007-2008 IS UPHELD. 5. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. AT TH E VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT SO FAR AS ASSE SSMENT YEAR 2007- 08 IS CONCERNED, IT IS A SETTLED PROPOSITION OF LAW THAT RULE 8D IS NOT APPLICABLE AS THE SAME IS MADE APPLICABLE FROM A.Y. 2008-09. THE LD. COUNSEL FURTHER STATED THAT IN RESPECT OF OTHER ASS ESSMENT YEARS SINCE THE OWN FUNDS OF THE ASSESSEE ARE FAR IN EXCESS OF THE INVESTMENT, NO DISALLOWANCE IS TO BE MADE. IT IS THE SAY OF THE LD . COUNSEL THAT EVEN THE ADMINISTRATIVE EXPENSES CANNOT BE DISALLOWED BE CAUSE OF THE STRATEGIC INVESTMENT. PER CONTRA, THE LD. D.R. STRO NGLY STATED THAT THE IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 6 FACTUAL CLAIM OF THE LD. COUNSEL DOES NOT EMANATE F ROM THE ORDERS OF THE AUTHORITIES BELOW. REPRESENTATIVES OF BOTH SIDE S AGREED FOR THE RESTORATION OF THE ISSUES TO THE FILES OF THE A.O. FOR THE CONSIDERATION OF THE FACTUAL CLAIMS MADE BY THE LD. COUNSEL. 6. HAVING HEARD THE RIVAL CONTENTIONS, WE HAVE CAREFUL LY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE ANNUAL ACCOUNTS OF THE ASSESSEE PLACED BEFORE US IN THE FO RM OF THE PAPER BOOK. 7. SO FAR AS ASSESSMENT YEAR 2007-08 IS CONCERNED, IT IS NOW SETTLED POSITION THAT APPLICABILITY OF RULE 8D IS WITH EFFE CT FROM ASSESSMENT YEAR 2008-09, THEREFORE, RULE 8D IS NOT AT ALL APPL ICABLE FOR ASSESSMENT YEAR 2007-08. EVEN IN SUBSEQUENT YEARS W HERE THE RULE 8D IS APPLICABLE, THE CONTENTIONS OF THE LD. COUNSE L THAT OWN FUNDS ARE FAR IN EXCESS OF THE INVESTMENT CANNOT BE BRUSHED A SIDE LIGHTLY. FURTHER, IF THE INVESTMENTS ARE MADE FOR STRATEGIC PURPOSES, IN OUR UNDERSTANDING OF THE LAW, NO DISALLOWANCE SHOULD BE MADE. 8. HOWEVER, SINCE THESE FACTUAL ASPECTS HAVE NOT BEEN CONSIDERED BY THE LOWER AUTHORITIES, IN THE INTEREST OF JUSTICE AND F AIR PLAY, WE RESTORE THIS ISSUE TO THE FILES OF THE A.O. THE ASSESSEE IS DIRECTED TO PROVE THAT ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE OWN FU NDS QUA THE INVESTMENTS. SECONDLY, THE ASSESSEE IS DIRECTED TO ESTABLISH THAT INVESTMENT WAS FOR STRATEGIC PURPOSES. THE A.O. IS DIRECTED TO CONSIDER THE CLAIM OF THE ASSESSEE AND DECIDE THE ISSUE AFRE SH AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. IT(SS)A NO. 553 TO 556/AHD/2012 . A.YS. 2007-0 8 TO 2010-11 7 9. BEFORE PARTING, WE FIND THAT SIMILAR DISALLOWANCES WERE MADE BY THE A.O IN SUBSEQUENT ASSESSMENT YEARS I.E. A.Y. 2011-1 2 & 2012-13. WE ALSO FIND THAT THE DISALLOWANCES MADE BY THE A.O. H AVE BEEN DELETED BY THE FIRST APPELLATE AUTHORITY. WE HAVE BEEN TOLD THAT THE REVENUE HAS ACCEPTED THE FINDINGS OF THE LD. CIT(A). WE DIR ECT THE A.O. TO CONSIDER THIS FACT ALSO WHILE DECIDING THE ISSUE. 10. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 23 - 09- 2016. SD/- SD/- (S. S. GODARA) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD