TOLANI SHIPPING CO. LTD, MUMBAI v. DCIT CEN CIR 17, MUMBAI

ITA 1663/MUM/2010 | 2002-2003
Pronouncement Date: 28-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 166319914 RSA 2010
Assessee PAN AAACT4127C
Bench Mumbai
Appeal Number ITA 1663/MUM/2010
Duration Of Justice 10 month(s) 27 day(s)
Appellant TOLANI SHIPPING CO. LTD, MUMBAI
Respondent DCIT CEN CIR 17, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-01-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 28-01-2011
Assessment Year 2002-2003
Appeal Filed On 03-03-2010
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER AND SHRI. V. DURGA RAO JUDICIAL MEMBER. I.T.A. NO. 1663/MUM/2010. ASSESSMENT YEAR : 2002-03 M/S TOLANI SHIPPING CO. LTD. DY. COMMISSIONER OF INCOME-TAX 10-A BAKHTAWAR NARIMAN POINT VS. CENTRAL CIRCLE-17 MUMBAI. MUMBAI 400021. PAN AAACT 4127C. APPELLANT BY : SHRI S.M.AGARWAL. RESPONDENT BY : SHRI R.S. SRIVASTAVA. O R D E R PER J. SUDHAKAR REDDY A.M. : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF THE CIT(APPEALS)-39 MUMBAI DATED 10-12-2009. 2. THE SOLE ISSUE THAT ARISES FOR OUR CONSIDERATION IS THE DISALLOWANCE MADE U/S 14A. THE AO AT PAGE 6 AND 7 OF THE ASSESSMENT ORDER HAS CONSIDERED THE DISALLOWANCE U/S 14A IN THE FOLLOWING WORDS: IT IS PERTINENT TO NOTE THAT THE APPELLANT HAS NO T MAINTAINED SEPARATE ACCOUNTS FOR THESE INVESTMENTS IN TAX GENERATING IN COME AND NON TAX GENERATING INCOME. UNDER THE CIRCUMSTANCES EXPENDIT URE IS REQUIRED TO BE PRORATED BETWEEN INVESTMENTS FROM WHICH TAXABLE INC OME HAS BEEN EARNED AND INVESTMENTS WHICH HAVE EITHER YIELDED NO INCOME OR EXEMPT INCOME. WHETHER THE EXACT EXPENDITURE TO EARN TAX GENERATIN G INCOME AND NON TAX GENERATING INCOME IS NOT AVAILABLE THE MOST JUST M ETHOD OF CALCULATING THE RELEVANT EXPENDITURE WOULD BE ON THE BASIS OF PRORA TING OF THE EXPENSES. 2 UNDER THE CIRCUMSTANCES THE PROPORTIONATE DISALLOWA NCE OF THE INTEREST EXPENDITURE RELATED TO TAX FREE INCOME IS COMPUTED AS UNDER : A. FUNDS AVAILABLE AS PER BALANCE SHEET RS. 150 34 49 574/- B. TOTAL INVESTMENT IN THE SHARES AS PER BALANCE SHEET RS.29 09 45 221/- C. PROPORTION OF FUNDS AVAILABLE TO TOTAL INVESTMENT. 19.35% D. AMOUNT OF INTEREST EXPENDITURE RS.12 72 90 532/- E. PROPORTIONATE DISALLOWANCE OF EXPENDITURE ON INTERE ST RS.2 46 31 693/- IT IS ALSO SEEN THAT THE ASSESSEE HAS INCURRED OF R S.10 54 96 914/- ON PAYMENT FOR EMPLOYEES REMUNERATION. IT IS HELD BY T HE HONBLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST LTD. (200 ITR 488) THAT MANAGEMENT EXPENSES ARE ATTRIBUTABLE TO THE EARNING OF DIVIDEND. THOUGH THE DECISION IS IN RESPECT OF SECTION 80M THE HON BLE SUPREME COURT HAS LAID DOWN THE SETTLED LAW THAT THE MANAGEMENT EXPEN SES ARE ATTRIBUTABLE TO EARNING OF TAX FREE INCOME I.E. DIVIDEND. THEREF ORE THE PROPORTIONATE EXPENDITURE ON MANAGEMENT EXPENSES IS ALSO TO BE CO NSIDERED FOR DISALLOWANCE. THE ASSESSEE WAS REQUESTED TO FURNISH THE DETAILS O F EXPENDITURE INCURRED ON MANAGEMENT EXPENSES AND THE NUMBER OF E MPLOYEES OF THE ASSESSEE COMPANY. THE ASSESSEE HAS SUBMITTED THE DE TAILS VIDE LETTER DATED NIL RECEIVED ON 18.03.2005 STATING THAT THE EMPLOYEES OF THE ASSESSEE COMPANY CONSTITUTE SHORE STAFF AND FLOATIN G STAFF. IT IS FURTHER SUBMITTED THAT DURING THE FINANCIAL YEAR ENDED ON 3 1.03.2002 THE TOTAL NUMBER OF EMPLOYEES OF THE ASSESSEE COMPANY WAS 300 APPROXIMATELY CONSISTING OF 32 SHORE STAFF AND 268 FLOATING STAFF . IT IS POINTED OUT BY THE ASSESSDEE IN THIS LETTER THAT THE SHORE STAFF OF 32 EMPLOYEES INCLUDES STAFF MEMBERS ACROSS VARIOUS FUNCTIONS OF THE ORGANIZATIO N ENCOMPASSING TECHNICAL MAINTENANCE PURCHASE ACCOUNTS TAXATIO N AND ADMINISTRATIVE ETC. I HAVE CONSIDERED THE BREAK UP OF EMPLOYEES SUBMITT ED BY THE ASSESSEE. THE ASSESSEES TOTAL RECEIPTS AS PER PROF IT AND LOSS ACCOUNT IS RS.73 20 08 913/- AND INCOME EXEMPT UNDER SECTION 1 0(33) IS RS.1 73 89 670/-. THE RATIO OF TOTAL RECEIPTS TO TA X FREE INCOME WORKS OUT TO RS.2.375%. IT IS ALSO CONSIDERED THAT THE EFFECT IVE NUMBER OF EMPLOYEES TO BE CONSIDERED FOR DISALLOWANCE OF MANA GEMENT EXPENSES ARE APPROXIMATELY 32 IN NUMBER. IT IS SEEN FROM SCH EDULE F OF THE BALANCE SHEET WHICH SHOWS LONG TERM INVESTMENT BY W AY OF FULLY PAID UP EQUITY SHARES OF M/S TOLANI BULKS CARRIERS LTD. A SISTER CONCERN. THE 3 ASSESSEE WAS HOLDING 71 33 000 SHARES OF THE SAID S ISTER CONCERN AS AT 31.03.2001 AND 1 29 84 054 SHARES OF THE SAID COMPA NY AS AT 31.03.2002 RESULTING IN INCREASE IN THE SHARE HOLDING OF M/S T OLANI BULKS CARRIERS LTD. BY 58 51 054 NUMBERS OF SHARES. THEREFORE THE SERVICES OF THE EMPLOYEES WERE CERTAINLY UTILIZED IN CONNECTION WIT H ERNING OF THE DIVIDEND INCOME RELATED TO THE SHARES OF M/S TOLANI BULKS CARRIERS LTD. UNDER THE CIRCUMSTANCES THE DISALLOWANCE OF PROPOR TIONATE EXPENSES OF MANAGEMENT STAFF IS WARRANTED IN VIEW OF THE DECISI ON OF THE HONBLE SUPREME COURT (SUPRA). CONSIDERING THE COMPLEXITY I NVOLVED IN ARRIVING AT EXACT AMOUNT OF MANAGEMENT EXPENDITURE RELATED T O EARNING OF TAX FREE INCOME AND CONSIDERING THE FACTS I ESTIMATE THE DI SALLOWANCE OF MANAGEMENT EXPENSES AT RS.3 00 000/- THUS THE DISALLOWANCE OF PROPORTIONATE EXPENDITURE ON INTEREST AND MANAGEMENT EXPENSES WORKS OUT TO RS.2 49 31 693/-. THE SAME IS THEREFORE DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S 271(1)(C) OF THE I.T. ACT 1961 HAVE BEEN SEPARATELY INITIATED FOR FURNISHING INACCURATE PART ICULARS OF INCOME. 3. THE FIRST APPELLATE AUTHORITY APPLIED RULE 8D AN D ENHANCED THE DISALLOWANCE ONLY IN RESPECT OF ADMINISTRATIVE CHARGES. AS FAR A S INTEREST DISALLOWANCE IS CONCERNED HE DELETED THE SAME. AT PARAS 19 TO 22 THE FIRST APPELLATE AUTHORITY HELD AS FOLLOWS : 19. I HAVE GONE THROUGH THE FACTS OF THE CASE ASS ESSMENT ORDER AND THE APPELLANTS SUBMISSIONS. THE INTEREST PAYMENT WAS M ADE BY THE APPELLANT COMPANY FOR THE FOLLOWING LOANS:- (IN RS.) A) INTEREST PAID AND RECORDED IN SHIP LEDGERS 10 24 7 5 136/- B) INTEREST PAID ON LOAN TAKEN FOR REPAYMENT OF ORIGINAL LOAN TAKEN FOR SHIPS AND FOR GIVING LOAN TO SUBSIDIARY COMPANY RECORDED IN HO LEDGER. 2 47 81 401/- C) INTEREST PAID ON LOAN BANK OVERDRAFT UTILIZED FOR REPAYMENT OF ICICI LOAN ETC. 31 573/- D) SUNDRIES ------------------- TOTAL 12 72 90 532/- 4 OUT OF THE INTEREST PAYMENT OF RS.12 72 90 532/- T HE INTEREST PAYMENT OF RS.10 24 75 136/- IS EXCLUSIVELY FOR THE LOAN TA KEN FOR PURCHASE OF SHIPS. SO THIS CANNOT BE TAKEN FOR THE PURPOSE OF RULE 8D (2)(I) OR 8D(2)(II) OF THE I.T. RULES. 20. FURTHER THE APPELLANT ALSO COULD PROVE THAT TH E LOAN TAKEN FROM DEN NORSKE BANK AND ICICI BANK LTD. AND OVERDRAFT WAS E ITHER USED TOWARDS THE FUNDS USED IN INTER CORPORATE DEPOSITS FROM WHICH I NTEREST INCOME EARNED WHICH WAS TAXED OR TOWARDS THE LOAN GIVEN TO TOLANI BULK CARRIERS FROM WHICH INTEREST WAS EARNED WHICH WAS ALSO TAXED OR T O EARN INCOME FROM SHIPPING. SO THESE INTERESTS ALSO CANNOT BE TAKEN FOR THE PURPOSE OF RULE 8D(2)(I) OR RULE 8D(2)(II) OF THE I.T. RULES. THE A PPELLANT HAS ALSO CLEARLY ESTABLISHED THAT IT WAS HAVING SUFFICIENT SURPLUS F UNDS FROM WHICH TAX FREE INVESTMENTS WERE MADE AND THE APPELLANT COULD PROVE THAT NONE OF THE BORROWED FUNDS WERE USED FOR INVESTMENT IN TAX FREE INVESTMENTS. IT IS ALSO PERTINENT TO NOTE THAT NO ADDITION HAS BEEN MADE U/ S 14A OF THE I.T. ACT FOR THE A.YS. 2003-04 TO 2005-06. 21. I AM CONVINCED THAT THE INTEREST WAS PAID ONLY FOR THE LOANS WHICH WERE TAKEN AND USED FOR EARNING INCOME WHICH WAS TA XABLE AND NO INTEREST BEARING FUNDS WERE USED FOR ACQUIRING ANY TAX FREE INVESTMENTS. 22. IN VIEW OF THIS I HOLD THAT THE PROVISIONS OF SECTION 14A OF THE ACT IS NOT APPLICABLE IN THE APPELLANTS CASE IN THIS ASSE SSMENT YEAR AND I DIRECT THE A.O. TO DELETE THE ADDITION MADE U/S 14A OF THE I.T. ACT WITH REGARD TO INTEREST EXPENDITURE. THIS FINDING IS NOT CHALLENGED BY THE REVENUE. THE CIT(APPEALS) AT PARA 23 HELD AS FOLLOWS : 23. HOWEVER AS FAR AS ADMINISTRATIVE EXPENSES ARE CONCERNED I AM FULLY SATISFIED THAT CERTAIN EXPENSES ARE CERTAINLY CONNE CTED WITH TAX FREE INVESTMENTS AND EARNING OF TAX FREE INCOME. IT IS A PT TO NOTE THAT HONBLE MUMBAI ITAT SPECIAL BENCH IN THE CASE OF ITO VS. DA GA CAPITAL MANAGEMENT LTD. 117 ITD 169 (MUM) (SB) HAS HELD THA T SECTION 14A(2) AND 14A(3) AND THE RULES MADE THEREUNDER ARE PROCED URAL AND IT WILL APPLY TO ALL PENDING MATTERS. RESPECTFULLY FOLLOWING THE HON BLE ITATS DECISION THE A.O. IS DIRECTED TO DISALLOW AN AMOUNT OF ONE-H ALF PERCENT OF THE AVERAGE OF THE VALUE OF THE INVESTMENT INCOME FROM WHICH D OES NOT OR SHALL NOT FORM 5 PART OF THE TOTAL INCOME AS APPEARING IN THE BALAN CE SHEET OF THE APPELLANT ON THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR AS PER RULE 8D(2)(III) OF THE IT RULES. 4. THE ASSESSEE IS AGGRIEVED ONLY ON THIS FINDING. 5. IN VIEW OF THE DECISION OF THE JURISDICTIONAL H IGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (2010) 234 CTR (BOM) 1 RULE 8D CANNOT BE APPLIED TO THE ASSESSMENT YEAR 2002-03. ONLY REASON ABLE AMOUNT OF EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME IS TO BE D ISALLOWED. IN THIS CASE THE AO HAS DETERMINED AS TO WHAT AMOUNT IN HIS VIEW IS A REASOSNABLE DISALLOWANCE AND AT PAGE 7 CAME TO A CONCLUSION THAT THE DISALLOWANCE O F MANAGEMENT EXPENSES SHOULD BE RS.3 LAKHS ONLY. THE LEARNED COUNSEL FOR THE ASS ESSEE IS PREPARED TO ACCEPT THIS ESTIMATE AS A REASONABLE DISALLOWANCE. HENCE WE PAR TLY ALLOW THE APPEAL OF THE ASSESSEE AND DIRECT THE AO TO RESTRICT THE DISALLOW ANCE U/S 14A TO RS.3 LAKHS ONLY. THE ENHANCEMENT DONE BY THE LEARNED CIT(APPEALS) IS DELETED AND THE DISALLOWANCE OF RS.3 LAKHS SUSTAINED. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY 2011. SD/- SD/- (V. DURGA RAO)) (J. SUDHAK AR REDDY) JUDICIAL MEMBER. A CCOUNTANT MEMBER MUMBAI DATED: 28 TH JANUARY 2011. WAKODE 6 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR D-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R ITAT MUMBAI BENCHES MUMBAI.