Shri Mohmadraza M.Merchant,, Bhavnagar v. The ACIT.,Circle-2,, Bhavnagar

ITA 2023/AHD/2009 | 2006-2007
Pronouncement Date: 18-03-2011 | Result: Allowed

Appeal Details

RSA Number 202320514 RSA 2009
Assessee PAN ABRPM3598B
Bench Ahmedabad
Appeal Number ITA 2023/AHD/2009
Duration Of Justice 1 year(s) 8 month(s) 25 day(s)
Appellant Shri Mohmadraza M.Merchant,, Bhavnagar
Respondent The ACIT.,Circle-2,, Bhavnagar
Appeal Type Income Tax Appeal
Pronouncement Date 18-03-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 18-03-2011
Date Of Final Hearing 09-03-2011
Next Hearing Date 09-03-2011
Assessment Year 2006-2007
Appeal Filed On 23-06-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI JM AND A. N. PAHUJA AM) ITA NO.2023/AHD/2009 A. Y.: 2006-07 SHRI MOHMADRAZA M. MERCHANT SAHYOG 2 ND FLOOR KALANALA BHAVNAGAR VS THE A. C. I. T. CIRCLE-2 AYKAR BHAWAN BHAVNAGAR PA NO. ABRPM 3598 B (APPELLANT) (RESPONDENT) APPELLANT BY SHRI TUSHAR HEMANI AR RESPONDENT BY SHRI C. K. SHARMA SR. DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER OF THE LEARNED CIT(A)-XX AH MEDABAD DATED 20-04-2009 FOR ASSESSMENT YEAR 2006-07 ON THE FOLL OWING GROUNDS: 1. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE LD. AO IN INVOKING THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES WHICH CAME INTO THE STATURE BOOK WITH EFFECT FROM 24/3/2008. 2. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE LD. AO IN ERRONEOUSLY COMPUTING THE DISALLOWANCE OF RS.3 96 392/- UNDER RULE 8D R. W. S. 14A OF THE ACT . 3. WITHOUT PREJUDICE TO THE APPLICABILITY OF PROVIS IONS OF S. 14A AND RULE 8D EVEN IF IN ACCORDANCE WITH THE PROVISIONS OF RULE 8D DISALLOWANCE COULD BE MADE OF RS.37 098/- AS CONTEMPLATED BY THE APPELLANT. ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 2 4. BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN PASSING THE ORDERS WITHOUT PROPERLY APPRECIATING THE FACT AND THAT HE FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF BOTH THE AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLE S OF NATURAL JUSTICE AND THEREFORE DESERVES TO BE QUASHED. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE CONFIRMING ACTION OF THE LD. AO IN LEVYING INTEREST U/S 234B/C OF THE ACT. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING THE ACTION OF THE LD. AO IN INITIATING PENALTY U/S 271 (1) ( C) OF THE ACT. 2. BRIEFLY THE FACTS OF THE CASE ON THESE GROUNDS ARE THAT THE AO ISSUED SHOW CAUSE NOTICE AS TO WHY PROPORTIONATE EX PENSES SHOULD NOT BE DISALLOWED U/S 14A OF THE IT ACT FOR EARNING EXEMPT INCOME. IT WAS SUBMITTED THAT THE ASSESSEE GOT DIVIDEND INCOME FROM TWO MUTUAL FUNDS NAMELY RELIANCE GROWTH FUNDS OF RS.2 7 6 818/- AND HSBC MUTUAL FUND OF RS.40 629/- (TOTAL RS.3 17 447/ -). IT WAS EXPLAINED THAT THE ASSESSEE HAD MADE INVESTMENT IN THE ABOVE TWO FUNDS BY GETTING THE FUND FROM A COMPANY IN WHICH THE ASSESSEE IS PARTNER I.E. M/S. MARINE ENTERPRISES AND THE ASSESS EE IS NOT PAYING ANY INTEREST ON THE FUNDS BORROWED FROM THIS FIRM. THE AO HOWEVER APPLYING THE PROVISIONS OF SECTION 14A OF THE IT AC T NOTED THERE IS A MIX-UP OF OWN FUNDS AND BORROWED FUNDS AND INTEREST EXPENSES HAVE BEEN INCURRED IN THE YEAR. ACCORDINGLY RULE 8D WAS INTRODUCED SPECIFICALLY TO CLARIFY SUCH ISSUE WHILE MAKING THE DISALLOWANCE. THE ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 3 AO RELIED UPON THE DECISION OF ITAT SPECIAL BENCH MUMBAI IN THE CASE OF DAGA CAPITAL DATED 28-10-2008 AND HELD THAT WHETHER ONUS WAS ON THE ASSESSEE OR ON THE AO FOR BRINGING ALL I TEMS OF EXPENSES WITHIN SECTION 14A IS IRRELEVANT IN VIEW OF RULE 8D . THE DISALLOWANCE OF EXPENDITURE RELATING TO INVESTMENT EARNED FROM E ARNING OF EXEMPT INCOME WAS CALCULATED AS PER RULE 8D IN THE ASSESSM ENT ORDER AND DISALLOWANCE WAS MADE IN A SUM OF RS.3 96 392/-. TH E ASSESSEE CHALLENGED THE ADDITION BEFORE THE LEARNED CIT(A) A ND SAME SUBMISSIONS WERE REITERATED THAT FUNDS WERE INVESTE D AFTER OBTAINING THE SAME FROM M/S. MARINE ENTERPRISES IN A SUM OF R S.12 50 000/- AND RS.7 50 000/- IN WHICH THE ASSESSEE WAS A PARTN ER. THEREFORE THERE WAS NO NEXUS OF INCURRING ANY DIRECT OR INDIR ECT EXPENDITURE FOR EARNING SUCH EXEMPT DIVIDEND INCOME. IT WAS SUBMITT ED THAT THE AO WITHOUT APPLYING HIS MIND MADE THE ADDITION. IT WAS FURTHER SUBMITTED THAT RULE 8D IS INCORPORATED IN THE STATUTE FROM 24 -03-2008 AND IS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER APPEAL. IN THE ALTERNATIVE CONTENTION IT WAS SUBMITTED THAT EVEN IF RULE 8D IS APPLICABLE THE CALCULATION WOULD SHOW THAT DISALLOWANCE COULD BE M ADE IN A SUM OF RS.37 098/-. THE WORKING OF THE ASSESSEE IS NOTED B Y THE LEARNED CIT(A) IN THE APPELLATE ORDER. THE LEARNED CIT(A) H OWEVER CONFIRMED THE ADDITION AND UPHELD THE ORDER OF THE AO AND CAL CULATION OF THE AO AS PER RULE 8D WAS CONFIRMED. 3. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT NO NEXUS HAS BEEN PROVED BETWEEN THE INVESTMENT AND TH E BORROWED FUNDS. HE HAS SUBMITTED THAT FUNDS WERE OBTAINED FO RM THE FIRM M/S. ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 4 MARINE ENTERPRISES IN WHICH THE ASSESSEE WAS A PART NERS AND NO INTEREST HAS BEEN PAID. HE HAS REFERRED TO PB 46 TO 48 AND DETAILS OF DIVIDEND INCOME PB -49. HE HAS SUBMITTED THAT RULE 8 D IS NOT RELEVANT IN ASSESSMENT YEAR UNDER APPEAL AND ALSO R EFERRED TO THE CALCULATION OF THE AO FOR DISALLOWING THE INTEREST FROM THE ASSESSMENT ORDER COMPARED THE SAME WITH PB-72 TO SHOW THAT THE RE IS A DIFFERENCE IN THE FIGURE TAKEN BY THE AO BECAUSE TH E FIGURES OF RS.2 45 734/- INCLUDES THE INTEREST OF RS.1 48 000/ - WHICH IS TAKEN BY THE AO INCORRECTLY WOULD SHOW THAT IT WAS DOUBLE AD DITION. HE HAS THEREFORE DEMONSTRATED THAT THE CALCULATION MADE B Y THE AO IS INCORRECT. HE HAS SUBMITTED THAT THE ASSESSEE EXPLA INED BEFORE THE LEARNED CIT(A) THAT AT THE MOST DISALLOWANCE COULD BE MADE IN A SUM OF RS.37 098/- AS IS RAISED IN GROUND NO.3 OF THE A PPEAL. 4. ON THE OTHER HAND THE LEARNED DR SUBMITTED THAT THE ISSUE IS NOW COVERED BY THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER 328 ITR 81 IN WHICH THE HONBLE BOMBAY HIGH COURT HELD THAT SECTION 14A IS APPLICABLE TO DIVIDEND INCOME AND I NCOME FROM MUTUAL FUNDS EXEMPT U/S 10(33) OF THE ACT. HE FURTHER SUBMITTED THAT THE HONBLE HIGH COURT HAS ALSO HELD THAT RULE 8D IS NOT RETROSPECTIVE AND IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09 AND THE DISALLOWANCE FOR EARLIER PERIOD TO BE DETER MINED ON REASONABLE BASIS. HE HAS THEREFORE SUBMITTED THAT THE MATTER MAY BE REMANDED TO THE FILE OF THE AO FOR RE-CONSIDERAT ION IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT. ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 5 5. THE LEARNED COUNSEL FOR THE ASSESSEE IN THE REJO INDER SUBMITTED THAT SINCE ALL FACTS WERE PLEADED SPECIFI CALLY BEFORE THE LEARNED CIT(A) THEREFORE THE MATTER MAY NOT BE RE MANDED TO THE FILE OF THE AO FOR RE-CONSIDERATION AND SUBMITTED THAT S AME VIEW IS TAKEN BY ITAT AHMEDABAD BENCH IN THE CASE OF M/S. AQUAGEL CHEMICALS PVT. LTD. IN ITA NO.3533/AHD/2008 DATED 03-09-2010. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL AVAILABLE ON RECORD. THE MATTER IS NOW COVERED BY T HE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER 328 ITR 81 IN WHICH IT WAS HELD AS UNDER: HELD THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24 2008 WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAD TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. F OR THAT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDED INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION THE ASSESSING OFFICER SHOULD ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 6 PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE PLEADED BEFORE THE AO THAT THE DIVIDEN D INCOME WAS EARNED FROM TWO MUTUAL FUNDS OF RELIANCE GROWTH FIN ANCE AND HSBC MUTUAL FUNDS. THE INVESTMENT IS MADE IN THE TW O FUNDS BY GETTING FUNDS FROM THE FIRM M/S. MARINE ENTERPRISES IN WHICH THE ASSESSEE WAS A PARTNER. IT WAS ALSO SUBMITTED THAT THE ASSESSEE DID NOT PAID ANY INTEREST ON THE FUNDS BORROWED FROM TH ESE FIRMS. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING T HE DECISION OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL (SUPRA) WHICH IS NOT MORE RELEVANT IN VIEW OF THE ABOVE DECISION OF THE HONB LE BOMBAY HIGH COURT. THE AO HEAVILY REPLIED UPON RULE 8D FOR THE PURPOSE OF MAKING THE ADDITION WHICH IS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER APPEAL AS PER THE DECISION OF THE HONBLE BOM BAY HIGH COURT. THE FINDING OF THE AO CANNOT BE SUSTAINED. FURTHER THE AO NOTED THAT THERE IS A MIX-UP OF OWN FUNDS AND BORROWED FUNDS A ND INTEREST EXPENSES HAVE BEEN INCURRED IN THE YEAR. IT WOULD THEREFORE SHOW THAT NO COMPLETE BIFURCATION OF INTEREST FREE FUNDS AND BORROWED FUNDS WERE AVAILABLE BEFORE THE AO. FURTHER THE CONTENTI ON OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT EVEN IF DISALLOWA NCE WAS TO BE MADE IT COULD BE MADE ONLY IN A SUM OF RS.37 098/- . IT WOULD SHOW THAT EVEN ACCORDING TO THE SUBMISSION OF THE ASSESS EE CLEAR FACTS WERE NOT ON RECORD TO EXPLAIN AS TO WHAT REASONABLE DISALLOWANCE IS TO BE MADE ON THIS ISSUE. FURTHER THE CONTENTION O F THE LEARNED COUNSEL FOR THE ASSESSEE IS CORRECT THAT THE AO HAS ADDED TWICE THE AMOUNT OF RS.1 48 000/- IN THE DISALLOWANCE OF INTE REST BECAUSE THIS ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 7 FIGURE HAS ALREADY BEEN TAKEN IN THE FIGURE OF RS.2 45 734/- AS IS EXPLAINED BY THE LEARNED COUNSEL FOR THE ASSESSEE FROM PAGE 72 OF THE PAPER BOOK. THESE FACTS THUS WOULD SHOW THAT TH E MATTER REQUIRES RE-CONSIDERATION AT THE LEVEL OF THE AO. IN THE CAS E OF M/S. AQUAGEL CHEMICALS PVT. LTD. (SUPRA) THE FINDING WAS GIVEN O N THE BASIS OF THE FACTS AVAILABLE ON RECORD. HOWEVER IN THE PRESENT CASE IT IS CLEAR THAT THE AO MADE ADDITION BY FOLLOWING RULE 8D WHICH IS NO LONGER APPLICABLE TO THE ASSESSMENT YEAR UNDER APPEAL AND FURTHER NO COMPLETE DETAILS WERE FILED OF THE OWN FUNDS AND BO RROWED FUNDS AND FURTHER THERE IS AN ERROR IN THE CALCULATION OF THE AO AS NOTED ABOVE. THEREFORE IT IS NECESSARY THAT THE AO SHOULD DETER MINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUND S WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED U /S 14A OF THE IT ACT. IN VIEW OF THE ABOVE DISCUSSIONS AND IN THE LI GHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND RESTORE THIS ISSUE TO THE FIL E OF THE AO WITH DIRECTION TO RE-DECIDE THIS ISSUE AFRESH AS PER THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER (SUPRA). THE AO SHALL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE AND THE ASSESSEE IS DIRECTED TO PLACE RELEVANT MATE RIAL BEFORE THE AO FOR RE-CONSIDERATION OF THE ISSUE. ITA NO.2023/AHD/2009 SHRI MODMADRAZA M. MERCHANT VS DCIT CIR-2 BHAVNAG AR 8 7. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18-03-2011 SD/- SD/- (A. N. PAHUJA) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 18-03-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR ITAT AHMEDABAD