Vimpsan Investment Pvt. Ltd., Ahmedabad V. The Income tax Officer, Ward-8(4), Ahmedabad

MA 40/AHD/2012

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 5640 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 11 month(s) 1 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 23-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 18-11-2016
• Assessment Year: 2001-2002
• Appeal Filed On: 21-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Proportionate interest
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER SN MA NO. AY APPLICANT RESPONDENT 1 39/AHD/2012 (ARISING OUT OF CO NO. 262/AHD/2011) 2001-02 VIMPSAN INVESTMENT PVT. LTD., 505, KAIVANNA, NR. AMBAWADI CIRCLE, PANCHVATI, AHMEDABAD-06 PAN NO. AAACV 7074 Q THE ITO, WARD 8(4), AHMEDABAD 2 40/AHD/2012 (ARISING OUT OF CO NO. 355/AHD/2004) 2001-02 VIMPSAN INVESTMENT PVT. LTD., 505, KAIVANNA, NR. AMBAWADI CIRCLE, PANCHVATI, AHMEDABAD-06 PAN NO. AAACV 7074 Q THE ITO, WARD 8(4), AHMEDABAD 3 28/AHD/2013 (ARISING OUT OF ITA NO. 3475/AHD/2004) 2001-02 VIMPSAN INVESTMENT PVT. LTD., 505, KAIVANNA, NR. AMBAWADI CIRCLE, PANCHVATI, AHMEDABAD-06 PAN NO. AAACV 7074 Q THE ITO, WARD 8(4), AHMEDABAD ASSESSEE BY : SHRI VARTIK CHOKSI, AR REVENUE BY : SHRI MUDIT NAGPAL, SR DR / DATE OF HEARING : 17/11/2017 /DATE OF PRONOUNCEMENT : 23/01/2018 / O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE PRESENT THREE MISCELLANEOUS APPLICATIONS ARE DI RECTED AT THE INSTANCE OF THE ASSESSEE POINTING OUT THE APPARENT ERRORS IN THE ORDER OF THE TRIBUNAL DATED 31.01.2012 PASSED IN ITA NOS. 3475/AHD/2004 & 750/A HD/2007 AND CO NOS. 355/AHD/2004 & 262/AHD/2011. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNED CIT(A) HAS DECIDED THE APPEAL OF THE ASSESSEE ARISEN AGAINST THE ASSESSMEN T ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT IN THE ASSESSMENT YEAR 2001-02 VIDE ORDER DATED MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 2 - 28.09.2004. AGAINST THIS ORDER OF THE CIT(A), REVE NUE HAS FILED AN APPEAL BEARING ITA NO.3475/AHD/2004. ON RECEIPT OF NOTICE, THE AS SESSEE HAS FILED CO NO.355/AHD/2004. NOW, THE ASSESSEE HAS FILED MISCE LLANEOUS APPLICATION NO.28/AHD/2013 IN THE APPEAL OF THE REVENUE AND MIS CELLANEOUS APPLICATION NO.40/AHD/2012 IN ITS CROSS-OBJECTION, I.E., CO NO. 355/AHD/2004. 3. THE LEARNED CIT(A) HAS DECIDED THE APPEAL OF THE ASSESSEE AGAINST PENALTY ORDER PASSED UNDER SECTION 271(1)(C) OF THE ACT ON 07.11.2006. THE REVENUE HAS FILED APPEAL BEFORE THE TRIBUNAL VIDE ITA NO.750/AH D/2007. THE ASSESSEE HAS FILED CROSS-OBJECTION IN THIS APPEAL BEARING CO NO. 262/AHD/2011. THE ASSESSEE HAS FILED A MISCELLANEOUS APPLICATION NO.39/AHD/201 2 IN CO NO.262/AHD/2011. 4. THE CONTROVERSY INVOLVED IN ALL THESE THREE MISC ELLANEOUS APPLICATIONS RELATES TO DETERMINATION OF INTEREST EXPENDITURE WH ICH WAS REQUIRED TO BE DISALLOWED FOR THE PURPOSE OF SECTION 14A READ WITH RULE 8D OF THE INCOME-TAX RULES. THE GROUND OF APPEAL RAISED BY THE REVENUE WHICH IS GENESIS OF THE DISPUTE IS GROUND NO.2, WHICH READS AS UNDER:- T HE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REDUCING THE DISALLOWANCE OF INTEREST FROM RS.3,72,88,743 TO RS.1,17,91,794/- MA DE BY THE ASSESSING OFFICER 5. THE BRIEF FACTS OF THE CASE ARE THAT, ACCORDING TO THE LEARNED ASSESSING OFFICER, THE ASSESSEE HAS EARNED DIVIDEND INCOME WH ICH IS EXEMPT FROM TAX, AND THEREFORE, WITH THE HELP OF SECTION 14A OF THE INCO ME-TAX ACT, READ WITH RULE 8D OF THE INCOME-TAX RULES, HE WORKED OUT A DISALLOWAN CE OF RS. 3,72,88,743/-. ON APPEAL, LEARNED CIT(A) HAS HELD THAT INTEREST EXPEN DITURE ATTRIBUTABLE TO INVESTMENTS IN SHARES, WHICH ARE ON THE NATURE OF S TOCK-IN-TRADE, HAS TO BE EXCLUDED AND, THEREAFTER, AVERAGE INTEREST RATE OF 6.57% IS TO BE CONSIDERED FOR CALCULATING QUANTUM OF INTEREST REQUIRED TO BE DISA LLOWED. THIS REASONING OF THE MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 3 - CIT(A) HAS REDUCED THE DISALLOWANCE TO RS.1,17,91,7 94/-. THE DEPARTMENT WAS NOT SATISFIED WITH THIS ORDER; HENCE CAME UP IN APP EAL BEFORE THE TRIBUNAL. THE ASSESSEE HAS FILED CROSS-OBJECTION FOR THE RETENTIO N OF THE DISALLOWANCE. 6. THE TRIBUNAL HAS, IN PRINCIPLE, CONCURRED WITH T HE FINDINGS OF THE LEARNED CIT(A) AND RECORDED THE FOLLOWING OBSERVATIONS:- '6. WE FIND THAT THE DECISION OF LD. CIT(A) IS ON TH IS BASIS THAT PROPORTIONATE INTEREST ON INVESTMENT OF RS.1793.51 LACS SHOULD BE ON THE BASIS OF AVERAGE RATE OF INTEREST PAID BY THE ASSESSEE. THE AVERAGE RATE OF INTEREST HAS BEEN WORKED OUT BY LD. CIT(A) @ 6.57% AND DISALLOWANCE AT THIS RATE WA S CONFIRMED BY HIM AND THIS HAS BEEN WORKED OUT AT RS. 1,17,91,794 IS AGAINST T HE AMOUNT OF DISALLOWANCE MADE BY THE A.O. OF RS.3,72,88,743. TO THIS EXTENT, THE ORDER OF LD. CIT(A) IS JUSTIFIED BUT HIS ACTION OF REDUCING SHARES HELD AS STOCK IN TRADE OF RS.5,44,89,529 FROM THE AMOUNT OF TOTAL INVESTMENT FOR COMPUTING T HE AMOUNT OF INTEREST TO BE DISALLOWED IS AGAINST THE RATIO LAID DOWN BY THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT (P) LTD. AS REPORTE D IN 119 TTJ 289 (MUM.)(SB). IN THAT CASE, IT WAS HELD BY THE SPECIA L BENCH OF THE TRIBUNAL THAT EVEN FOR SNARES HELD AS STOCK IN TRADE, DISALLOWANC E HAS TO BE MADE U/S.14A. HENCE, THE AMOUNT OF SUCH INVESTMENT CANNOT BE REDU CED TO COMPUTE THE AMOUNT OF INTEREST TO BE DISALLOWED AS HAS BEEN DONE BY LD . CIT(A). THIS ASPECT OF THE ORDER OF LD.CIT(A) IS REVERSED AND THE A.O. IS DIRE CTED TO COMPUTE THE INTEREST TO BE DISALLOWED U/S. 14A @ 6.57% OF RS.23,38,40,647 ( RS.24,85,91,626 - RS.1,47,50,979). THIS GROUND IS PARTLY ALLOWED. 7. IN THE RESULT, APPEAL OF THE REVENUE IN I.T.A. N O.3475/AHD/2004 IS PARTLY ALLOWED.' 7. IN THE MISCELLANEOUS APPLICATION, THE ASSESSEE H AS RAISED TWO FOLD SUBMISSIONS. IT CONTENDED THAT THE CIT(A) AS WELL AS ITAT, BOTH, FAILED TO CONSIDER ITS ARGUMENTS THAT NO INTEREST BEARING FUN DS WERE USED BY THE ASSESSEE FOR MAKING INVESTMENTS, WHICH HAS RESULTED EXEMPTED INCOME. IN THE NEXT FOLD OF CONTENTIONS, THE ASSESSEE CONTENDED THAT IT HAS RECEIVED TOTAL INTEREST INCOME OF RS.13,15,53,537/-; WHEREAS, THE INTEREST EXPENDITUR E AMOUNTS TO RS.12,18,83,793/- THUS, THERE IS A NET INTEREST INCOME OF RS.96,69,74 4/-. A REFERENCE TO THE P&L ACCOUNT HAS BEEN MADE IN THE MISCELLANEOUS APPLICAT ION. ON THE STRENGTH OF THE MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 4 - JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF PR. CIT VS. NIRMA CREDIT & CAPITAL (P.) LTD., RENDERED IN TAX APPEAL NOS. 409 & 514 OF 2017 ON 31.08.2017 (REPORTED IN [2017] 85 TAXMANN.COM 72 (G UJARAT)), IT WAS CONTENDED THAT FOR THE PURPOSE OF MAKING DISALLOWANCE UNDER S ECTION 14A OF THE ACT, ONLY NET INTEREST EXPENDITURE IS TO BE CONSIDERED. HE P OINTED OUT THAT THERE IS NO NET INTEREST EXPENDITURE IN THE CASE OF THE ASSESSEE. IT HAS ONLY NET INTEREST INCOME; THEREFORE, THERE COULD NOT BE ANY DISALLOWANCE. ACC ORDING TO LEARNED COUNSEL FOR THE ASSESSEE, THE TRIBUNAL FAILED TO LOOK INTO THIS ASPECT AND IT IS AN APPARENT ERROR. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, WAS UNABLE TO CONTROVERT THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE. HE SUBMITTED THAT THIS DECISION OF THE HONBLE GUJARAT HIGH COURT CAME SUBSEQUENT TO THE DECISION OF THE ITAT AND ITAT HAS DECIDED TH E ISSUE IN ACCORDANCE WITH THE LAW AVAILABLE AT THAT POINT OF TIME. 9. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D GONE THROUGH THE RECORD CAREFULLY. THE POWER OF RECTIFICATION UNDER SECTION 254(2) OF THE INCOME- TAX ACT CAN BE EXERCISED ONLY WHEN THE MISTAKE WHIC H IS SOUGHT TO BE RECTIFIED IS AN OBVIOUS AND PATENT MISTAKE WHICH IS APPARENT FRO M THE RECORD, AND NOT A MISTAKE WHICH REQUIRES TO BE ESTABLISHED BY ARGUMEN TS AND A LONG DRAWN PROCESS OF REASONING ON POINTS ON WHICH THERE MAY CONCEIVAB LY BE TWO OPINIONS. IT IS ALSO PERTINENT TO OBSERVE THAT A COURT DECIDES A DISPUTE BETWEEN THE PARTIES. THE CASE CAN INVOLVE DECISION ON FACTS. IT CAN ALSO INVOLVE A DECISION ON POINT OF LAW. BOTH MAY HAVE BEARING ON THE ULTIMATE RESULT OF THE CASE . WHEN A COURT INTERPRETS A PROVISION, IT DECIDES AS TO WHAT IS THE MEANING AND EFFECT OF THE WORDS USED BY THE LEGISLATURE, IT IS THE DECLARATION REGARDING TH E STATUTE. IN OTHER WORDS, THE JUDGMENT DECLARES AS TO WHAT THE LEGISLATURE HAD SA ID AT THE TIME OF ENACTMENT OF THE PROVISION, THE DECLARATION IS........... THIS WAS THE LAW, THIS IS THE LAW, THIS IS MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 5 - HOW THE PROVISION SHALL BE CONSTRUED. THOUGH, THE H ONBLE GUJARAT HIGH COURT HAS DECIDED THE CONSTRUCTION OF SECTION 14A, SUBSEQ UENT TO THE DECISION OF THE TRIBUNAL, BUT IT HAS INTERPRETED THAT EXPRESSION A MOUNT OF EXPENDITURE BY WAY OF INTEREST WOULD BE CONSTRUED AS NET INTEREST EXP ENDITURE FOR MAKING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME-TAX RULES. THE DISCUSSION MADE BY THE HONBLE COURT IN PARAGRAPH 1 1 OF THE JUDGMENT READS AS UNDER:- 11. IT IS IN THIS CONTEXT THAT THE COMPUTATION OF FACTOR 'A' IN THE SAID FORMULA ASSUMES SIGNIFICANCE. IN PLAIN TERMS, 'A' REPRESENT S THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST IGNORING THE INTEREST EXPENDITURE A LREADY INCLUDED IN CLAUSE(I). THE EXPRESSION USED BY THE LEGISLATURE IS AMOUNT OF EXP ENDITURE BY WAY OF INTEREST. WHEN THE LEGISLATURE HAS THEREFORE, USED THIS EXPRES SION AMOUNT OF EXPENDITURE, THE SAID TERM SHALL HAVE TO BE INTERPRETED IN THE M ANNER THAT WILL BRING ABOUT THE CORRECT LEGISLATIVE INTENT AND EQUITABLE APPLICATIO N THEREOF. AS IN CASE ON HAND, WHEN THE ASSESSEE PAYS INTEREST ON BORROWINGS AS AL SO EARNS TAXABLE INTEREST ON INVESTMENTS MADE BY HIM DURING A PARTICULAR YEAR, H IS INTEREST EXPENDITURE HAS TO BE CONSIDERED AS ONE WHICH IS THE NET OF INTEREST P AID MINUS INTEREST EARNED. ANY OTHER VIEW WOULD GIVE THE UNINTENDED COMPUTATION OF FACTOR 'A' PROVIDED IN CLAUSE(II) OF SUB-RULE(2) OF RULE 8D WHICH WILL IN TURN DISTORT THE COMPUTATION OF DISALLOWABLE EXPENDITURE UNDER THE SAID CLAUSE. IT IS TRUE THAT THE LEGISLATURE HAS NOT GIVEN ANY FURTHER INDICATION AS TO HOW SUCH AMO UNT OF EXPENDITURE WOULD BE ASCERTAINED. WE WOULD THEREFORE HAVE TO APPLY THE RE ASONABLE TEST AND INTERPRETE THE PROVISION AS IS MOST LIKELY TO GIVE EFFECT TO L EGISLATIVE INTENT FOR DISALLOWANCE OF EXPENDITURE BY AN ASSESSEE FOR EARNING INCOME WHICH IS NOT ACCOUNTABLE TO TAX. IT IS TRUE THAT INVESTMENT MADE BY THE ASSESSEE OUT OF SUCH BORROWED FUNDS WILL CONTINUE TO BE FACTORED IN DENOMINATOR IN THE FORMU LA PROVIDED IN CLAUSE(II) OF SUB RULE(2) SINCE FACTOR 'C' WHICH FORMS THE DENOMINATO R REFERS TO AVERAGE OF TOTAL ASSETS OF ASSESSEE AS ON THE FIRST AND THE LAST DAY OF THE PREVIOUS YEAR. HOWEVER, IGNORING TAXABLE INTEREST EARNED BY THE ASSESSEE FO R THE PURPOSE OF ASCERTAINING THE AMOUNT OF EXPENDITURE INCURRED BY THE ASSESSEE BY W AY OF INTEREST, WOULD AMOUNT TO DISTORTING THE FACTOR 'A' PROVIDED BY THE LEGISL ATURE IN CLAUSE(II) OF SUB RULE(2) OF RULE 8D. IT MAY BE POSSIBLE FOR VARIETY OF REASO NS THAT IN A GIVEN FINANCIAL YEAR THE ASSESSEE MIGHT HAVE EARNED INTEREST INCOME WHIC H IS HIGHER THAN THE INTEREST PAID ON THE BORROWED FUNDS. THIS MAY BE BECAUSE ASS ESSEE'S INVESTMENTS MAY HAVE EARNED INTEREST AT RATES HIGHER THAN THE INTEREST R ATE PAID BY THE ASSESSEE ON THE BORROWINGS OR MAY ALSO BE BECAUSE ASSESSEE'S INVEST MENT IN EARNING INTEREST MAY BE HIGHER IN VALUE THAN THE ASSESSEE'S BORROWINGS, INVITING INTEREST. IN SUCH A SITUATION, ESSENTIALLY, THE ASSESSEE WOULD HAVE EAR NED MORE INTEREST THAN THE MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 6 - INTEREST PAID. IF WE ACCEPT THE INTERPRETATION SUGG ESTED BY THE REVENUE AND APPLY THE FORMULA BY COMPUTING FACTOR 'A' BY TAKING INTO ACCOUNT INTEREST PAID IGNORING THE INTEREST EARNED, THERE WOULD BE DISALLOWANCE UN DER THIS FORMULA EVEN IF IN THE NET RESULT, THE ASSESSEE MAY HAVE NOT PAID ANY INTE REST ON BORROWINGS. 10. A PERUSAL OF THE RECORD WOULD INDICATE THAT THI S ASPECT WAS NOT CONSIDERED BY THE TRIBUNAL. THE ASSESSEE HAS NET INTEREST INC OME AND THEREFORE, THERE WOULD NOT HAVE BEEN ANY DISALLOWANCE UNDER SECTION 14A. TO OUR MIND, IT IS AN APPARENT MISTAKE COMMITTED BY THE TRIBUNAL WHICH DE SERVES TO BE RECTIFIED. THEREFORE, WE RECALL THE ORDER OF THE TRIBUNAL REND ERED ON GROUND NO.2 OF THE REVENUES APPEAL AS WELL AS GROUND NOS. 2, 3, 4 & 5 OF CROSS-OBJECTION BEARING NO.355/AHD/2004. THESE GROUNDS ARE RESTORED FOR RE -ADJUDICATION. THE ORDER OF THE TRIBUNAL IS MODIFIED TO THIS EXTENT. 11. SO FAR AS MISCELLANEOUS APPLICATION NO.39/AHD/2 012 IN CROSS-OBJECTION NO.262/AHD/2011 IS CONCERNED, IT RELATES TO DETERMI NATION OF AMOUNT OF PENALTY IMPOSABLE UNDER SECTION 271(1)(C) OF THE INCOME-TAX ACT. SUB-CLAUSE (C) OF SECTION 271(1) CONTEMPLATES THAT QUANTIFICATION OF PENALTY IS DEPENDED UPON THE ULTIMATE DETERMINATION OF INCOME SHOWING THE ADDITI ONS FOR WHICH AN ASSESSEE COULD BE BLAMED FOR EVASION OF TAXES. THEREFORE, IT IS CONSEQUENTIAL IN NATURE. WE ALLOW THIS MISCELLANEOUS APPLICATION ALSO AND RESTO RE THE ISSUE AGITATED IN THIS CROSS-OBJECTION FOR FRESH ADJUDICATION, AFTER THE A DJUDICATION OF QUANTUM ISSUES. 12. IN THE RESULT, ALL THE THREE MISCELLANEOUS APPL ICATIONS ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 23 RD JANUARY, 2018 AT AHMEDABAD. SD/- SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD, DATED 23/01/2018 *BT. MA NOS . 39 & 40 OF 2012 & 28 AHD 2013 VIMPSAN INVESTMENT PVT LTD VS. ITO AY 2001-02 - 7 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ! / CONCERNED CIT 4. ! ( ) / THE CIT(A) 5. $ '' , , / DR, ITAT, AHMEDABAD 6. - / GUARD FILE. / BY ORDER, TRUE COPY / (DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD