B.P. Sheth Investment Pvt.Ltd.,, Ahmedabad v. The Income tax Officer,Ward-1)2),, Ahmedabad

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD C BENCH (BEFORE S/SHRI G.D. AGARWAL VICE-PRESIDENT AND MUKUL KUMAR SHRAWAT JUDICIAL MEMBER) ITA NO.1861/AHD/2009 [ASSTT. YEAR : 2005-2006] B.P. SHETH INVESTMENT PVT. LTD. 705 706 ADITYA B/H. ABHIJIT NR.MITHAKHALI SIX ROAD AHMEDABAD. VS. ITO WARD-1(2) AHMEDABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SUNIL H. TALATI REVENUE BY : DR. RAJA RAM SAH O R D E R PER MUKUL KUMAR SHRAWAT JUDICIAL MEMBER: THIS APPEAL HAS BEEN FILED AT THE BEHEST OF THE ASSESSEE WHICH HAS EMANATED FROM THE ORDER OF THE CIT(A) DATED 13.12.2009. THE FIRST GROUND R AISED IN THE APPEAL IS HEREBY DECIDED AS FOLLOWS: 1. THE LD.CIT(A) ERRED BOTH IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.30 061/- ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENSES. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN V IEW OF THE DETAILED SUBMISSION GIVEN THE ADDITION OF RS.30 061/- OUGHT TO HAVE BEEN DELETED. 2. RELEVANT FACTS IN BRIEF AS EMERGED FROM THE CORR ESPONDING ASSESSMENT ORDER PASSED UNDER SECTION 143(3) DATED 28.09.2007 WERE THAT THE ASSESSEE- COMPANY IS IN THE BUSINESS OF INVESTMENT AND TRADIN G IN SHARES. THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF RS.1 40 878/-. IT WAS NOTICED THAT THE ASSESSEE HAS NOT CHARGED INTEREST FROM FEW PARTIES. IN COMP LIANCE OF SHOW CAUSE NOTICE IT WAS EXPLAINED THAT A RESOLUTION WAS PASSED BY TH E BOARD OF DIRECTORS NOT TO CHARGE INTEREST IN RESPECT OF SOME OF THE PARTIES. HOWEVER IT HAS ALSO BEEN EXPLAINED THAT SOME OF THEM HAVE CLOSED DOWN THEIR BUSINESS DUE TO HEAVY LOSSES THEREFORE THEY WERE NOT IN THE CAPACITY TO PAY THE INTEREST. IT HAS ALSO BEEN EXPLAINED THAT IN RESPECT OF THE TWO AOPS. SI NCE THE ASSESSEE HAPPENED TO BE ONE OF THE MEMBERS THEREFORE IT WAS NOT THE DE POSIT BY THE ASSESSEE IN THOSE AOPS. BUT IT WAS AN ACCUMULATION OF THE PROFIT EAR NED BY THOSE AOPS. HENCE ITA NO.1861/AHD/2009 -2- THERE WAS NO QUESTION OF CHARGING OF INTEREST. THE AO WAS NOT CONVINCED AND HELD THAT SINCE THE ASSESSEE HAD FOLLOWED MERCANTIL E SYSTEM OF ACCOUNTING THEREFORE THE INTEREST SHOULD HAVE BEEN CHARGED AN D BY APPLYING THE RATE OF 3% PER ANNUM MADE THE ADDITION OF RS.30 061/- WHICH W AS CHALLENGED. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHO RITY THE ACTION OF THE AO WAS CONFIRMED. 3. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES WE HAVE NOTICED THAT THE ASSESSEES EXPLANATION HAS NOT BEEN PROPERLY CONSID ERED BY THE AUTHORITIES BELOW AND FOR THE SAKE OF CLARITY THE RELEVANT POR TION IS REPRODUCED BELOW: APPELLANT HAD NOT CHARGED INTEREST ON AMOUNT OUTST ANDING OF FIVE DIFFERENCE PARTIES. IT WAS SUBMITTED AT THE TIME O F PROCEEDING BEFORE AO THAT AMOUNT OUTSTANDING OF TARANG KHARADIA & A. KUMAR & CO. ARE DOUBTFUL TO RECOVER AND SINCE THE PRINCIPLE AMO UNT HAS BECOME IRRECOVERABLE INTEREST IS NOT CHARGED ON THESE LOAN S. ANOTHER PARTY M/S.ANJANA PLATIC PVT. LTD. HAS CLOSED DOWN ITS BUS INESS DUE TO HEAVY LOSES BUT THE APPELLANT HAD EARNED INTEREST I NCOME FROM THIS PARTY SINCE F.Y.97-98 AND IT WAS A 1 ST YEAR OF NOT CHARGING INTEREST AS THE PRINCIPAL AMOUNT ITSELF WAS IRRECOVERABLE CO PY OF ITS ACCOUNT FROM 1-4-96 TO 31-3-2005 IS ENCLOSED. THE BALANCE OF TWO PARTIES A.P. ONE & ASSOCIATES AND A.P. THREE & ASSOCIATES W ERE THE AOP AND IN WHICH THE APPELLANT WAS MEMBER. THE AMOUNT OUTSTANDING IN THESE TWO AOP ACCOUNTS WERE NOT THE DEPOSIT GIVEN B UT IT WAS THE ACCUMULATION OF PROFIT EARNED BY THESE AOP SO IT I S NOT THE DEPOSIT GIVEN. THE TRANSACTIONS WITH THESE AOP ARE DISCUSS ED IN LENGTH WHILE DISALLOWANCE PROFIT FROM AOP. 4. ON PERUSAL OF THIS EXPLANATION IT IS TRANSPIRED THAT IN RESPECT OF THE SAID TWO PARTIES THE MONEY ADVANCED WAS OBVIOUS TO BE N OT RECOVERABLE HENCE THE INTEREST WAS NOT CHARGED BY THE ASSESSEE. HOWEVER IN THIS REGARD INQUIRY HAS NOT BEEN MADE AND THE FACTS ABOUT THEIR FINANCIAL P OSITIONS HAVE NOT BEEN PLACED ON RECORD. LIKEWISE IN RESPECT OF ANJANA PL ASTIC PVT. LTD. THE EVIDENCE ABOUT THE CLOSURE OF THE BUSINESS IS NOT MADE AVAIL ABLE BEFORE THE AO. FURTHER THE BALANCE OUTSTANDING WITH THE TWO AOPS. STATED TO BE THE ACCUMULATION OF THE PROFIT HAS NOT BEEN VERIFIED. ON ACCOUNT OF T HESE REASONS WE DEEM IT PROPER TO REFER THIS GROUND BACK TO THE STAGE OF TH E AO SO THAT THE PROPER ITA NO.1861/AHD/2009 -3- INVESTIGATION CAN BE CARRIED OUT TO ASCERTAIN THE C ORRECTNESS OF THE ABOVE EXPLANATION AS OFFERED BY THE ASSESSEE. WITH THESE OBSERVATIONS THIS GROUND BEING REFERRED BACK TO THE STAGE OF THE ASSESSMENT MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 5. GROUND NO.2 READS AS UNDER: THE LD.CIT(A) FURTHER ERRED IN CONFIRMING THE ADDI TION OF RS.26 387/- UNDER SECTION 14A OF THE IT ACT. IT IS SUBMITTED T HAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN VIEW OF THE DETAIL ED SUBMISSION AND CONSIDERING THE INTEREST FREE FUNDS AVAILABLE THE ADDITION OUGHT NOT TO HAVE BEEN CONFIRMED. 6. IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS E ARNED DIVIDEND INCOME AMOUNTING TO RS.65 463/- DURING THE YEAR. THE ACCE PTED POSITION OF LAW WAS THAT THE DIVIDEND INCOME WAS CLAIMED AS EXEMPT UNDE R SECTION 10 OF THE INCOME TAX ACT. BECAUSE OF THIS REASON THE AO HA S INVOKED THE PROVISIONS OF SECTION 14A OF THE IT ACT. THE AO HAS COMPUTED THE DISALLOWANCE OF RS.29 387/- BY APPLYING THE PROPORTIONATE INVESTMEN T OUT OF TOTAL FUNDS AVAILABLE TOWARDS THE EXEMPTED INCOME AND ALSO MADE AN ADDITION TOWARDS ADMINISTRATIVE EXPENSES BY ESTIMATING THE EXPENDITU RE OF RS.5 000/- INCURRED TO EARN THE EXEMPTED INCOME. IN THIS MANNER A TOTAL DISALLOWANCE OF RS.29 387/- WAS MADE. THE FIRST APPELLATE AUTHORITY HAS CONF IRMED THE SAME. 7. IN RESPECT OF APPLICABILITY OF PROVISIONS OF SEC TION 14A THIS TRIBUNAL IS NOW REFERRING THE SIMILAR ISSUE BACK TO THE STAGE OF TH E AO AFTER PRONOUNCEMENT OF THE JUDGMENT IN THE CASE OF GODREJ AND BOYCE MFG. CO. L TD. 328 ITR 81 (BOM) FOR RE- COMPUTATION OF THE DISALLOWANCE IN ACCORDANCE WITH THE DIRECTION GIVEN BY THE HONBLE BOMBAY HIGH COURT IN THIS REGARD. WE FIND T HAT THE HONBLE HIGH COURT HAS LAID DOWN CERTAIN GUIDELINES FOR COMPUTATION OF DIS ALLOWANCE UNDER SECTION 14A AND THE MATTER HAS BEEN RESTORED BACK TO THE FILE OF TH E AO FOR WORKING OF THE DISALLOWANCE UNDER SECTION 14A. RELEVANT OBSERVATI ON OF THEIR LORDSHIPS READS AS UNDER: ITA NO.1861/AHD/2009 -4- HELD THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24 2008 WOULD APPLY WITH E FFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHE N RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAD TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELE- VANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REA SONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER TH E ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/ INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE T OTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFIC ER CAN ADOPT A REASON- ABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE M AKING THAT DETERMINATION THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE O PPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE M ATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. IN THE PRESENT CASE AS WELL THE AO IS REQUIRED TO C ARRY ON INVESTIGATION AS SUGGESTED HEREINABOVE. THEREFORE WE HEREBY RESTORE THIS GRO UND BACK TO THAT STAGE TO BE DECIDED DE NOVO HENCE MAY BE TREATED AS ALLOWED ONLY FOR STATISTI CAL PURPOSE. 8. GROUND NO.3 READS AS UNDER: THE LD.CIT(A) FURTHER ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITION OF RS.48 268/- BEING SHARE OF PROFIT RECEIVED BY THE A OP WHICH WAS EXEMPT UNDER THE PROVISIONS OF THE INCOME TAX ACT. IN VIE W OF THE SUBMISSIONS MADE AND THE DOCUMENTS FURNISHED THE ADDITION OF RS.48 2 68/- AS THE INCOME OF THE APPELLANT IS UNJUST AND AGAINST THE PROVISIONS OF L AW. IT BE SO HELD NOW AND THE ADDITION OF RS.29 387/- BE DELETED. 9. THE FACTS OF THE CASE AS NOW REVEALED BEFORE US WERE THAT THE AO HAS MADE ADDITION OF RS.48 268/- BECAUSE OF THE REASON THAT THE ASSESSEE HAS NOT SHOWN SHARE OF PROFIT FROM TWO AOPS VIZ. A.P. ONE & ASSOCIATES AND A.P. THREE & ASSOCIATES. IT WAS NOTICED BY THE AO THAT THESE TWO AOPS ALONG WIT H ANOTHER CONCERN VIZ. B.P. SHETH INVESTMENT P. LTD. WERE PARTNERS OF M/S.ANANG ASSOCIATE AND M/S.AMAR ASSOCIATE. THEY HAVE EARNED INCOME OF RS.88 759/- A ND RS.16 173/- RESPECTIVELY. HOWEVER IN RETURN NO SHARE OF PROFIT WAS DISCLOSED BY THE ASSESSEE THOUGH THE ASSESSEE HAPPENED TO BE A MEMBER OF THE AOPS. BECAU SE OF THE SAID REASON THE IMPUGNED ADDITION WAS MADE. THE MATTER WAS CARRIED TO THE FIRST APPELLATE AUTHORITY WHO HAS CONFIRMED THE ACTION OF THE AO. ITA NO.1861/AHD/2009 -5- 10. NOW BEFORE US SHRI SUNIL TALATI LEARNED COUNS EL FOR THE ASSESSEE HAS PLACED THE EXTRACTS OF THE ARTICLES OF ASSOCIATION AND RET URN OF ANANG ASSOCIATE AND AMAR ASSOCIATE. THE MAIN CONTENTION OF THE LEARNED AR I S THAT THE SHARE OF PROFIT SUBJECT MATTER OF THIS CONTROVERSY HAS ALREADY BEEN TAXED AT THE MAXIMUM MARGINAL RATE. THE LEARNED AR HAS ALSO FURNISHED THE STATEMENT OF INCO ME TO DEMONSTRATE THAT ONCE THE MAXIMUM MARGINAL TAX HAS ALREADY BEEN PAID ON THE P ROFITS THEREFORE THE ASSESSEE BEING A MEMBER HAS NO LIABILITY TO PAY TAX AGAIN ON THE SAID AMOUNT. IN SUPPORT OF THIS CONTENTION THE RELIANCE WAS PLACED ON COMMISS IONER OF INCOME-TAX V. BHILAI MACHINE TOOLS 228 ITR 200 (MP) AND OSHWAL TRADERS OSWAL TRADERS VS COMMISSIONER OF INCOME-TAX 228 ITR 195 (MP). 10.1) AN OBJECTION HAS BEEN RAISED BY THE LEA RNED DR DR. RAJA RAM SAH THAT ALL THESE EVIDENCES AND THE ASSESSMENT RECORD AS PRODUCED NOW BEFORE THE TRIBUNAL HAVE NOT BEEN PLACED BEFORE THE AO. 10.2) WE FIND FORCE IN THIS OBJECTION AND THEREF ORE DEEM IT PROPER TO RESTORE THIS GROUND BACK TO THE STAGE OF THE AO SO THAT HE CAN INVESTIGATE THE CORRECTNESS OF THE STATEMENT AS MADE BY THE LEARNED AR THAT THE IMPUGNED PROFIT HAS ALREADY BEEN TAXED IN RESPECTIVE HANDS A T THE MAXIMUM RATE AND THEREFORE THE SHARE OF PROFIT WAS NOT SUBJECT TO TA X AGAIN IN THE HANDS OF THE ASSESSEE. WITH THESE DIRECTIONS THIS GROUND OF TH E ASSESSEE IS ALSO RESTORED BACK FOR FRESH ADJUDICATION HENCE MAY BE TREATED A S ALLOWED BUT FOR STATISTICAL PURPOSE. 11. GROUND NOS.4 5 AND 6 ARE NOT PRESSED HENCE DI SMISSED. 12. IN THE RESULT ASSESSEES APPEAL IS MAY BE TREA TED AS PARTLY ALLOWED ONLY FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON 4 TH FEBRUARY 2011. SD/- SD/- (G.D. AGARWAL) VICE-PRESIDENT (MUKUL KR. SHRAWAT) JUDICIAL MEMBER