M/s. Arihant Fin Cap Markets Ltd.,, Indore v. The Addl CIT,, Indore

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI R.C. SHARMA ACCOUNTANT MEMBER ITA NO.21/IND/2010 A.Y. 2006-07 ARIHANT FINCAP LIMITED MERGED WITH ARIHANT CAPITAL MARKETS LIMITED PAN AJLPJ 3049 E C/O ARORA BANTHIA & TULSIYAN SILVER ARC PLAZA 6 TH FLOOR 20/1 NEW PALASIA INDORE APPELLANT VS ADDL. CIT CIRCLE-I INDORE RESPONDENT APPELLANT BY : SH. AJAY TULSIYAN CA RESPONDENT BY : SH. PRADEEP KUMAR MITRA SR. DR O R D E R PER JOGINDER SINGH JUDICIAL MEMBER THIS APPEAL IS BY THE ASSESSEES AGAINST THE ORDER O F THE LEARNED CIT(A)-I INDORE DATED 17.11.2009 ON THE FOLLOWING GROUNDS: 1.1 THAT THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.1 72 702/- U/S 14A OF THE INCOME TAX ACT. 2 1.2 WITHOUT PREJUDICE TO THE ABOVE AND ONLY AS AN ALTERNATE GROUND THE LD. CIT(A) HAS ERRED IN NOT RESTRICTING THE DISALLOWANCE U/S 14A TO RS.68 539/- . 2. DURING HEARING OF THE APPEAL WE HAVE HEARD SHRI AJAY TULSIYAN LD. COUNSEL FOR THE ASSESSEE AND SHRI PRA DEEP KUMAR MITRA LEARNED SR. DR. AT THE OUTSET THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE ISSUE INVOLVED IN THIS CASE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL 11.11.201 0 IN THE CASE OF SUNIL SATWANI VS. ACIT (ITA NO.6/IND/2010A.Y.2006-07) WH EREIN ON THE IDENTICAL FACTS AND CIRCUMSTANCES INVOLVED THE ASS ESSING OFFICER WAS DIRECTED TO RESTRICT THE DISALLOWANCE U/S 14A TO TH E EXTENT OF 10% OF THE EXEMPT INCOME SHOWN BY THE ASSESSEE. IT WAS ALSO CO NTENDED THAT THE ASSESSEE HAS NOT BORROWED ANY FUND AND CONTINUOUSLY TRADED AS WELL AS INVESTED IN SHARES. A PLEA WAS ALSO RAISED THAT NO LOAN WAS TAKEN AND EVEN NO UNSECURED LOANS FOR WHICH OUR ATTENTION WAS INVITED TO PAGE 16 OF THE PAPER BOOK. ON THE OTHER HAND THE LD. SR. DR CONTENDED THAT THIS APPEAL MAY BE REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER OR ALTERNATIVELY A REASONABLY VIEW MAY BE TAKEN. 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. IN VIEW OF THE ASSERTION MADE BY THE LEARN ED RESPECTIVE COUNSEL WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION O F THE ORDER OF THE TRIBUNAL IN THE CASE OF SUNIL SATWANI (SUPRA) :- 3 THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER OF THE LEARNED CIT(A) DATED 1.10.2009 WHEREIN THE F IRST GROUND RAISED IS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW WHETHER THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION OF RS.68 777/- TO EARN DIVIDEND INCOME BY INVOKING THE PROVISIONS OF SECTI ON 14A OF THE ACT WHEREAS NO SUCH EXPENSES WERE INCURRED/CLAIMED BY THE ASSESSEE. 2. DURING HEARING THE LD. COUNSEL FOR THE ASSESSEE SHRI KAMLESH JAIN CONTENDED THAT SECTION 14A OF TH E ACT IS APPLICABLE WHERE THE EXPENSES WERE INCURRED THEREFORE THE PROVISION IS NOT APPLICABLE ON ASSUMPTION ESPECIALLY WHEN THE EXPENSES WERE NEITHER INCURRED NOR CLAIMED BY THE ASSESSEE. WHIL E MAKING THE ASSESSMENT U/S 143(3) OF THE ACT THE ESTIMATION OF SUCH EXPENSES AS INCIDENTAL TO EARNIN G OF EXEMPTED INCOME IS QUITE UNJUSTIFIED. ON THE OTHER HAND THE LEARNED SENIOR DEPARTMENTAL REPRESENTATIV E SHRI P.K. MITRA CONTENDED THAT THE ASSESSEE UNDER T HE GUISE OF THE PROVISION IS TRYING TO DEFRAUD THE REV ENUE AS SOME EXPENSES ARE BOUND TO BE INCURRED. THE IMPUGNED ORDER WAS DEFENDED. 3. I HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. BRIEF FACTS ARE THAT THE ASSE SSEE IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF EXPORT OF READYMADE GARMENTS AND ALSO TRADING IN SHARES. THE ASSESSEE MAINTAINED SEPARATE AUDITED ACCOUNTS FOR GARMENT BUSINESS AND SHARE BUSINESS. THE ASSESSEE DISCLOSED TOTAL INCOME OF RS.1 00 780/- IN HIS RETU RN FILED ON 31.10.2006. DURING THE ASSESSMENT PROCEEDINGS IT WAS NOTED THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.68 777/- AND CLAIMED THE SAME AS EXEMPTED FROM TAXATION U/S 10(34) AND 10(35) OF THE ACT. AS PER THE REVENUE THE ASSESSEE DID NOT FURNISH ANY DETAIL OF EXPENSES INCURRED FOR EARNING THE DIVIDEND INCOME ACCORDINGLY THE ASSESSING OFFICER ESTIMATED THE EXPENSES AT RS. 68 777/- AND DISALLOW ED THE TOTAL INCOME U/S 14A OF THE ACT. THE LEARNED CIT(A) BY FOLLOWING THE DECISION IN THE CASE OF ITO V. 4 DAGA CAPITAL MANAGEMENT PVT. LTD.; (MUMBAI SPECIAL BENCH) ENDORSED THE STAND OF THE ASSESSING OFFICER AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. UNDER THE AFOREMENTIONED FACTS NOW THE QUESTION ARISES WHETHER ANY ESTIMATED EXPENDITURE CAN BE DISALLOWED UNDER THE PROVISIONS OF SECTION 14A OF T HE ACT. PRIMA FACIE I AM OF THE VIEW THAT THE TOTAL D IVIDEND INCOME OF RS.68 777/- CANNOT BE ADDED AS EXPENDITURE. THERE IS A POSSIBILITY OF INCURRING OF CERTAIN EXPENDITURE AS EVEN INDIRECT EXPENSES FOR EARNING THE TAX FREE INCOME CANNOT BE RULED OUT THOUGH THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODRAJ & BOYCE; UPHELD THE DECISION OF THE SPECIAL BENCH. TO THE EXTENT THAT PRINCIPLE OF APPORTIONMEN T OF EXPENSES IS WIDENED BY SECTION 14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AN D NON- TAXABLE INCOME ON INDIVIDUAL BASIS. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIV ED AT ON AN OBJECTIVE BASIS AS THE TOTAL INCOME CANNOT BE ADJUSTED/ADDED AS EXPENSES. IT WAS FURTHER HELD BY THE HONBLE COURT AS UNDER :- SUB-SECTION (2) DOES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE ASSESSING OFFICER MUST IN THE FIRST INSTANCE DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD I CORRECT AND THE DETERMINA TION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICE R MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WH EN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F THE ASSESSEE THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHER E THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE ASSESSING OFFICER TO ARRIVE AT A SATISFACTION I N REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO TH E METHOD PRESCRIBED BY THE RULES. FOR IT IS ONLY IN THE 5 EVENT OF THE ASSESSING OFFICER NOT BEING SO SATISFI ED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LA W. IN THE LIGHT OF THE ABOVE AND TOTALITY OF FACTS AVA ILABLE IN THE PRESENT APPEAL I DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO THE EXTENT OF 10% OF T HE EXEMPT INCOME SHOWN BY THE ASSESSEE WHICH MAY BE A FAIR ESTIMATE OF SUCH EXPENSES. THIS VIEW IS SUPPORTED BY THE RATIO LAID DOWN IN THE DECISION FR OM DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S PAYA L FINLEASE (P) LTD. V. ITO (ITA NO. 3586/DEL/2010) OR DER DATED 28.9.2010. THEREFORE THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 4. IF THE CONCLUSION DRAWN IN THE AFORESAID ORDER I S KEPT IN JUXTAPOSITION WITH THE FACTS OF THE PRESENT APPEAL THE FACTS ARE THAT THE ASSESSEE EARNED TAX FREE DIVIDEND INCOME OF RS.6 40 518/- WHICH WAS CLAIMED EXEMPT U/S 10(34) OF THE ACT. THE LEARNED ASSESSING OFFICER BY PLACING RELIANCE UPON THE SPECIAL BENCH DECISION IN THE CASE OF ITO V. DAGA CAPITAL MARKET PRIVATE LIMITED; 119 TTJ 289 (M UMB) HELD THAT THE PROVISIONS OF SUB-SECTIONS (2) AND (3) OF SECTION 1 4A OF THE ACT AND RULE 8D OF THE INCOME TAX RULES 1962 ARE VERY MUCH APP LICABLE FOR WORKING OUT THE EXPENDITURE FOR EARNING THE DIVIDEND INCOME . 5. IF THE TOTALITY OF FACTS IS ANALYSED IT IS SEEN THAT THE ASSESSEE EARNED INCOME TAX FREE DIVIDEND INCOME OF RS. 6 40 518/- AND CLAIMED THE SAME AS EXEMPT U/S 10(34) OF THE ACT. AS PER T HE PROVISIONS OF SECTION 14A ANY EXPENDITURE INCURRED FOR EARNING T HE EXEMPTED INCOME CANNOT BE ALLOWED AGAINST TAXABLE INCOME. WHILE CO MPUTING THE EXEMPTED INCOME WHICH IS TAX FREE THE EXPENDITURE INCURRED FOR EARNING 6 THE SAME IS TO BE REDUCED THEREFROM MEANING THEREB Y SUCH EXPENDITURE CANNOT BE ALLOWED AGAINST THE TAXABLE INCOME. SO F AR AS THE DIRECT EXPENDITURE WHICH IS INCURRED FOR SUCH EARNING IS CONCERNED THE SAME IS TO BE DISALLOWED WITHOUT ANY DISPUTE. SO FAR AS THE COMMON EXPENSES ARE CONCERNED WHICH ARE INCURRED BOTH FOR EARNING THE EXEMPTED INCOME AND TAXABLE INCOME A REASONABLE PORTION OF SUCH EXPENSES ATTRIBUTABLE TO SUCH EARNING DESERVES TO BE DISALLO WED. LOOKING TO THE NATURE OF INVESTMENT AND THE EFFORTS REQUIRED FOR M AINTAINING THE ACCOUNTS IN RELATION TO SUCH INVESTMENT A REASONAB LE SUM OF COMMON EXPENSES IS REQUIRED TO BE DISALLOWED. FOR THIS PU RPOSE RULE 8 HAS BEEN INSERTED BY THE INCOME TAX (5TH ) AMENDMENT RULES 2008 WITH EFFECT FROM 24.3.2008 WHICH PRESCRIBES METHOD FOR DETERMIN ING THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOME. THIS RULE WAS HELD TO BE EFFECTIVE RETROSPECTIVE BY THE ITAT SPECIAL BENCH IN THE CASE OF DAGA INVESTMENT (SUPRA). THE HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA) CLARIFIED THE POSITION WITH REGARD TO APPLICABILITY OF RULE 8D AND HELD THAT RULE 8D IS N OT RETROSPECTIVE AND IS APPLICABLE ONLY WITH EFFECT FROM 24.3.2008. SINCE THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2006-07 RULE 8D IS NOT APPL ICABLE TO THE INSTANT YEAR. HOWEVER THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE (SUPRA) FURTHER HELD THAT EVEN IN RELATION TO EARLIER YEAR FALLING BEFORE 24.3.2008 THE ASSESSING OFFICER IS EMPOWERE D TO REASONABLY 7 ESTIMATE SUCH INDIRECT EXPENSES FOR THE PURPOSE OF DISALLOWANCE. IN THE INTEREST OF JUSTICE AND FAIR PLAY WE RESTORE THE E NTIRE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH IN TERMS OF DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODRAJ & BOYCE (SUPRA) AND THE ASSESSEE IS DIRECTED TO FURNISH FULL DETAIL S OF DIRECT AND INDIRECT EXPENSES RELATABLE TO SUCH EARNING OF EXEMPTED INCO ME WE DIRECT ACCORDINGLY. WE DIRECT ACCORDINGLY. 6. SO FAR AS THE ALTERNATE GROUND THAT THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) DID NOT RESTRICT THE DISALL OWANCE TO RS.68 539/- IS CONCERNED AS WE HAVE REMANDED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER THEREFORE NO COMMENT IS REQUIRE D ON THE ALTERNATE PLEA. FINALLY THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 7 TH FEBRUARY 2011. (R.C.SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 7.2.2011 COPY TO: APPELLANT RESPONDENT CIT CIT(A) DR G UARD FILE !VYAS! 8