CATALYST FINANCE LTD, MUMBAI v. ITO 3(1)(3), MUMBAI

ITA 1087/MUM/2013 | 2009-2010
Pronouncement Date: 11-11-2014 | Result: Dismissed

Appeal Details

RSA Number 108719914 RSA 2013
Assessee PAN AAACC5094M
Bench Mumbai
Appeal Number ITA 1087/MUM/2013
Duration Of Justice 1 year(s) 9 month(s) 3 day(s)
Appellant CATALYST FINANCE LTD, MUMBAI
Respondent ITO 3(1)(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 11-11-2014
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 17-11-2014
Date Of Final Hearing 11-11-2014
Next Hearing Date 11-11-2014
Assessment Year 2009-2010
Appeal Filed On 07-02-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH MUM BAI BEFORE SHRI SANJAY ARORA AM AND SHRI AMIT SHUKLA JM ./ I.T.A. NO.1087/MUM/2013 ( / ASSESSMENT YEAR: 2009-10) CATALYST FINANCE LTD. 3 RD FLOOR BAJAJ BHAVAN JAMNALAL BAJAJ MARG NARIMAN POINT MUMBAI-400 021 / VS. INCOME TAX OFFICER 3(1)(3) AAYAKAR BHAVAN M. K. MARG MUMBAI ! ./' ./PAN/GIR NO. AAACC 5094 M ( !# /APPELLANT ) : ( $%!# / RESPONDENT ) !# & ' / APPELLANT BY : DR. K. SHIVRAM & SHRI AJAY R. SINGH $%!# & ' / RESPONDENT BY : SHRI V. K. BORA () * & + / DATE OF HEARING : 11.11.2014 DATE OF ORDER : 17.11.2014 / O R D E R PER SANJAY ARORA A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-6 MUMBAI (CIT(A) FOR SHO RT) DATED 16.01.2013 PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2009-10 VIDE ORDER DATED 09.12.2011. 2. THE APPEAL RAISES TWO GROUNDS I.E. QUA THE DISALLOWANCE OF INTEREST EXPENDITURE U/S. 14A(1) AND TWO THE CORRESPONDING DISALLOWANC E OF BOOK PROFIT U/S.115JB OF THE ACT. THE ASSESSEE-COMPANY IN THE BUSINESS OF INVESTMENT LEASING AND FINANCE WAS OBSERVED DURING THE COURSE OF HEARING TO HAVE RECEIVED GROSS DIVIDEND AT RS.6 55 522/- CLAIMED 2 ITA NO.1087/MUM/2013 (A.Y. 2009-10) CATALYST FINANCE LTD. VS. ITO AND ALLOWED TAX EXEMPT U/S.10(34) OF THE ACT. THE A SSESSEE HAD FURTHER MADE SUO MOTU DISALLOWANCE ON ACCOUNT OF INTEREST AT RS.30 98 069 /- THERE-AGAINST BESIDES ANOTHER IN RESPECT OF DEMAT CHARGES AT RS.4 714/-. THE DISALLO WANCE U/S. 14A(1) IN ITS VIEW HAD BEEN RIGHTLY MADE AND OUGHT TO BE ACCEPTED AS SUCH . IN VIEW OF THE ASSESSING OFFICER (A.O.) THERE WAS NO BASIS FOR SUCH RESTRICTION EI THER ON FACTS OR IN LAW SO THAT THE SAME WAS NOT ADMISSIBLE AND ACCORDINGLY COMPUTED THE D ISALLOWANCE U/S.14A APPLYING RULE 8D AT RS.59 84 395/- INCLUDING QUA INDIRECT ADMINISTRATIVE EXPENDITURE COVERED UNDER R. 8D(2)(III) AT RS.5 78 704/- WHICH THOUGH IS NOT I N DISPUTE BEFORE US. THE SAME STOOD CONFIRMED IN APPEAL; THE LD. CIT(A) OBSERVING THAT THE FUNDS ARE FUNGIBLE AND THAT THE ASSESSEE HAD FAILED TO ESTA BLISH A NEXUS BETWEEN THE INTEREST EARNED AND THAT EXPENDED; INTEREST (AT RS.84.30 LACS) BEIN G THE PRINCIPAL SOURCE OF THE ASSESSEES INCOME SO THAT THE PRESCRIBED FORMULA FOR ALLOCATI NG INTEREST ATTRIBUTABLE TO OTHER INCOME BASED ON PROPORTIONATE INVESTMENT WOULD APPLY. AGG RIEVED THE ASSESSEE IS IN APPEAL. 3. BEFORE US THE LD. AUTHORIZED REPRESENTATIVE (AR ) THE ASSESSEES COUNSEL ON BEING QUERIED ON THE BASIS OF THE DISALLOWANCE OF INTEREST AT RS.30.98 LACS WOULD SUBMIT THE SAME TO BE THE DIFFERENCE BETWEEN THE INTEREST EARNED (RS.84.30 LACS) AND THAT PAID (RS.115.28 LACS). ON IT BEING POINTED OUT TO HIM TH AT THE INTEREST RECEIVED COULD BE AT A RATE HIGHER THAN THAT AT WHICH THE SAME WAS PAID; W OULD RATHER UNDERSTANDABLY BE SO SO THAT THERE COULD BE SOME PROFIT ELEMENT THEREIN WH ICH WOULD NEED TO BE EXCLUDED I.E. EVEN APPLYING THE ASSESSEES METHOD HE CONCEDED TH ERETO SUBMITTING THAT A DIRECTION FOR A FURTHER ADJUSTMENT TOWARD SUCH INTEREST DIFFERENT IAL BASED ON THE AVERAGE RATE OF INTEREST EARNED AND EXPENDED COULD BE MADE I.E. VIS--VIS THAT DISALLOWED BY THE ASSESSEE PER ITS RETURN OF INCOME. ON IT BEING FURTHER POINTED OUT TO HIM THAT THE ASSESSEES METHOD WAS EVEN OTHERWISE FLAWED IN-AS-MUCH AS IT WAS BASE D ON THE ASSUMPTION WHICH MAY NOT OBTAIN THAT THE ENTIRE FUNDS LENT EARNING INTERES T ARE SOURCED FROM BORROWED CAPITAL ONLY IT WAS EXPLAINED BY HIM THAT NO FURTHER DISALLOWANC E WOULD BE WARRANTED IN-AS-MUCH AS THE INVESTMENTS WERE MADE IN THE PAST FROM THE ASSE SSEES OWN CAPITAL ADDUCING A CHART DETAILING THE INVESTMENT IN SHARES ALONG WITH THE D ATES OF THEIR ACQUISITION AS WELL AS THE 3 ITA NO.1087/MUM/2013 (A.Y. 2009-10) CATALYST FINANCE LTD. VS. ITO SOURCE OF THEIR FUNDING. ON BEING QUERIED IF THIS I NFORMATION HAD BEEN ALSO FURNISHED BEFORE THE AUTHORITIES BELOW HE ADMITTED TO IT BEI NG NOT SO. THE LD. DEPARTMENTAL REPRESENTATIVE (DR) ON THE OT HER HAND WOULD SUBMIT THAT NO CASE FOR ANY INTERFERENCE WITH THE IMPUGNED ORDE R WAS MADE OUT IN-AS-MUCH AS THE ASSESSEE HAD ABYSMALLY FAILED TO SUBSTANTIATE AT AN Y STAGE ITS CLAIM OF THE INVESTMENTS LIABLE TO YIELD INCOME NOT FORMING PART OF THE TOTA L INCOME AS HAVING BEEN FINANCED FROM NON-INTEREST BEARING CAPITAL SO THAT NO PART OF TH E INTEREST PAID COULD BE AS CLAIMED SAID TO BE ATTRIBUTABLE THERETO. IN FACT THE LD. CIT(A) HAS CLARIFIED THAT THE FUNDS ARE FUNGIBLE SO THAT EVEN IF THE ASSESSEES CLAIM AS BEING NOW MADE BEFORE THE TRIBUNAL WAS TRUE IT WOULD HAVE TO SUBSTANTIATE THE SAME WITH REFERENCE TO THE FUND POSITION AS OBTAINING FOR THE CURRENT YEAR FOR WHICH THE INTEREST EXPENDITUR E IS BEING CLAIMED. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. THE FACTS OF THE CASE ARE NOT IN DISPUTE. THE FUND POSITION OF AN ENTITY IS LIABLE TO CHANGE OVER TIME. AS SUCH WHATEVER MAY HAVE BEEN T HE SOURCE OF FINANCING THE INVESTMENT IN SHARES BY THE ASSESSEE IN THE PAST I T IS ITS FINANCING AS DISCERNED FROM THE FINANCIAL POSITION FOR THE RELEVANT YEAR THAT IS R ELEVANT IN-AS-MUCH AS THE DISALLOWANCE IF ANY TO BE MADE IS ONLY QUA THE INTEREST ON THE BORROWED CAPITAL AS WOULD BE A TTRIBUTABLE TO SUCH INVESTMENT FOR THE CURRENT YEAR. E.G. IF THE INVESTMENT WAS FINANCED BY BORROWED CAPITAL SINCE REPAID FROM OWN CAPITAL OR PROFIT C OULD IT BE SAID THAT THE INVESTMENT CONTINUES TO BE FINANCED BY INTEREST BEARING BORROW ED CAPITAL ? IN FACT AS WE OBSERVE FROM THE INVESTMENT CHART ADDUCED THE SOURCE OF FU NDING OF MANY AN INVESTMENT IN SHARES IS ICD I.E. INTER-CORPORATE DEPOSITS WH ICH ONLY DENOTES BORROWED CAPITAL. FURTHER EVEN AS OBSERVED DURING THE COURSE OF HEAR ING WITH REFERENCE TO THE ASSESSEES BALANCE-SHEET (PB PGS.3-14) TO OF-COURSE NO REPUDI ATION BY THE LD. AR THE ASSESSEES ENTIRE CAPITAL OF RS.8.36 CRORES BOTH AT THE BEGINNING AND THE CLOSE OF THE YEAR STANDS COMPLETELY WIPED OFF; THE DEBIT BALANCE OF THE PROF IT AND LOSS ACCOUNT AS AT THE RELEVANT DATES BEING AT RS.11.36 CRORES AND RS.11.62 CRORES RESPECTIVELY. THE ASSESSEES NET WORTH BEING NEGATIVE THROUGHOUT THE YEAR ALL ITS ASSETS INCLUDING THE TAX-EXEMPT INVESTMENT IN 4 ITA NO.1087/MUM/2013 (A.Y. 2009-10) CATALYST FINANCE LTD. VS. ITO SHARES STAND FINANCED FROM BORROWED CAPITAL IN THE FORM OF UNSECURED LOANS . PROPORTIONATE ALLOCATION AS ADVOCATED BY R. 8D(2)( II) STATUTORILY PRESCRIBED PER S. 14A THUS BECOMES EVEN OTHERWISE I.E. HAVING REGARD TO THE ASSESSEES ACCOUNTS THE MOST APPROPRIATE METHOD. IT NEEDS TO BE APPRECIATED THAT SEC. 14A HAS AS EXPLAINED BY THE HONBLE COURT IN GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM) WIDENED THE THEORY OF APPORTIONMENT. WE ARE CONSCIOUS THAT IT COULD BE ARGUED THAT THE ASSESSEES METHOD WHICH PRESUMES THE ENTIRE PORTFOLIO OF LOANS AND ADVANCES - YIELDING INTEREST INCOME AS BEING FINANCED FROM BORROWED CAPITAL ALSO GETS THUS VALI DATED I.E. SAVE THE ADJUSTMENT FOR THE PROFIT ELEMENT AFORE-NOTED. THE ARGUMENT IMPRESSIV E AT FACE IS MISPLACED. THIS IS AS IT FAILS TO CONSIDER THE INTEREST CORRESPONDING TO THE CAPITAL NOT REPRESENTED BY ANY ASSETS REFERRED TO HERE-IN-BEFORE BEING AT RS. 3 CRS. AND RS. 3.26 CRS. AS AT THE BEGINNING AND THE CLOSE OF THE YEAR RESPECTIVELY. THE INTEREST IN RES PECT OF THE SAID FUNDS SINCE LOST WOULD ALSO STAND TO BE ALLOCATED AMONGST THE ASSESSEES A SSETS. QUA THIS WE OBSERVE THE INTEREST (INCOME) ON ADVANCES TO BE MUCH HIGHER THAN ON INVE STMENTS YIELDING DIVIDEND SO THAT THE LOSS OR DEFICIENCY ON ACCOUNT OF INTEREST COST WHICH IS THE PRINCIPAL EXPENDITURE IS SUBSTANTIALLY IF NOT WHOLLY ATTRIBUTABLE TO THESE INVESTMENTS. THE PROPORTIONATE METHOD U/R. 8D(2)(II) FOLLOWED BY THE REVENUE ACCORDING E QUAL WEIGHT TO ALL THE ASSETS IRRESPECTIVE OF THE INCOME GENERATED BY THEM AND T HEREFORE THEIR CONTRIBUTION TO THE LOSS (OF CAPITAL) THUS RATHER FAVOURS THE ASSESSEE IN THE FACTS OF THE CASE. WE ACCORDINGLY FIND NO MERIT IN THE ASSESSEES CAS E AND HAVE NO HESITATION IN UPHOLDING THE IMPUGNED ORDER QUA THIS DISALLOWANCE. GD. 1 IS DISMISSED. 5. NO SPECIFIC ARGUMENTS WERE RAISED BY THE ASSESSE E QUA ITS GROUND 2 WHICH WAS IN FACT ALSO NOT A SUBJECT MATTER OF APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE MATTER HOWEVER BEING LEGAL WE ADMIT THE SAME. THE DISALL OWANCE OF EXPENDITURE INTEREST OR ADMINISTRATIVE IS ONLY OF THAT INCURRED BY THE ASS ESSEE. IF THE SAME IS NOT IN THE BOOKS OF ACCOUNT WHERE WE WONDER IT IS ? BOTH THE INCOME AND EXPENDITURE DETERMINING THE NET PROFIT WHICH FORMS THE BASIS FOR COMPUTING INCOME UNDER THE ACT ARE ONLY AS PER THE 5 ITA NO.1087/MUM/2013 (A.Y. 2009-10) CATALYST FINANCE LTD. VS. ITO BOOKS OF ACCOUNT. THE PROVISION OF SECTION 14A ONLY CODIFIES THE LAW WHICH IS OTHERWISE INHERENT IN TAX JURISPRUDENCE THAT ONLY THE NET IN COME (I.E. NET OF THE EXPENDITURE) FROM WHATEVER SOURCE IS TO BE BROUGHT TO TAX AND CONSE QUENTLY ONLY THE NET INCOME WHERE TAX-EXEMPT IS TO BE SO. FURTHER RULE 8D PRESCRIBE S A METHOD/S TOWARD DETERMINING THE SAID INCOME I.E. ON NET BASIS PROVIDING A UNIFOR M BASIS FOR ASCERTAINING THE AMOUNT OF EXPENDITURE LIABLE TO BE EXCLUDED IN COMPUTING THE INCOME CHARGEABLE TO TAX. THE LEGAL BASIS FOR THE RELEVANT ADJUSTMENT I.E. QUA THE EXPENDITURE RELATABLE TO THE EXEMPT INCOME IN DETERMINING THE BOOK PROFIT WHICH IS AN ALTERNATE METHOD OF TAXATION I.E. WHERE THE INCOME COMPUTED UNDER THE REGULAR PROVISIONS OF THE ACT FALLS BELOW THE PRESCRIBED PERCENTAGE OF BOOK PROFIT IS PER CLAUSE (F) OF EXPLANATION 1 BELOW SUB-SECTION (2) OF SECTION 115JB. WE THEREFORE AGAIN FIND NO BASIS FOR NOT CONFIRMI NG THE ADJUSTMENT OF THE EXPENDITURE AS FINALLY SUSTAINED FOR DISALLOWANCE U/S. 14A(1) IN COMPUTING THE BOOK PROFIT U/S.115JB. WE DECIDE ACCORDINGLY; OUR DECISI ON BEING SUPPORTED BY A HOST OF DECISIONS BY THE TRIBUNAL VIZ. - JSW ENERGY LIMITED V. ACIT (IN ITA NO. 498/BANG/2010 DATED 27/12/2013) - ITO V. RBK SHARE BROKING PVT. LTD. (IN ITA NOS.7546 & 6678/MUM/2011 DATED 24.07.2013); - ESQUIRE PRIVATE LIMITED VS. DCIT (IN ITA NO.5688/MUM/2011 DATED 29.08.2012); - ITO VS. SEA WIND INVESTMENT & TRDG. CO. LTD. (IN ITA NO.6320/MUM/2004 DATED 17.10.2007). 6. IN THE RESULT THE ASSESSEES APPEAL IS DISMISSE D. - . (/ 0 & & 12 ORDER PRONOUNCED IN THE OPEN COURT ON NOVEMBER 11 2014 AT THE CONCLUSION OF THE HEARING SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 3* MUMBAI; 4( DATED : 17.11.2014 6 ITA NO.1087/MUM/2013 (A.Y. 2009-10) CATALYST FINANCE LTD. VS. ITO ).(../ ROSHANI SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. !# / THE APPELLANT 2. $%!# / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. 7)8 9 $(:/ + :/- 3* / DR ITAT MUMBAI 6. 9 <0 = * / GUARD FILE !' / BY ORDER )/* + (DY./ASSTT. REGISTRAR) 3* / ITAT MUMBAI