Shankar Chemicals Works, Ahmedabad v. The Dy,CIT.,Circle-12,, Ahmedabad

ITA 3181/AHD/2009 | 2004-2005
Pronouncement Date: 29-07-2011 | Result: Allowed

Appeal Details

RSA Number 318120514 RSA 2009
Assessee PAN AAKFS9416Q
Bench Ahmedabad
Appeal Number ITA 3181/AHD/2009
Duration Of Justice 1 year(s) 8 month(s) 2 day(s)
Appellant Shankar Chemicals Works, Ahmedabad
Respondent The Dy,CIT.,Circle-12,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 29-07-2011
Date Of Final Hearing 26-07-2011
Next Hearing Date 26-07-2011
Assessment Year 2004-2005
Appeal Filed On 27-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B BEFORE SHRI D. K. TYAGI JUDICIAL MEMBER AND SHRI A. K. GARODIA ACCOUNTANT MEMBER I.T.A. NO. 3181/ AHD/2009 (ASSESSMENT YEAR 2004-05) M/S. SHANKAR CHEMICALS WORKS OPP. DHOBIS CHAWL NEAR AJIT MILLS RAKHAIL AHMEDABAD VS. DCIT CIRCLE 12 AHMEDABAD I.T.A. NO. 2927 & 3180/ AHD/2009 (ASSESSMENT YEAR 2004-05) M/S. KIRTI CHEMICALS WORKS OPP. DHOBIS CHAWL NEAR AJIT MILLS RAKHAIL AHMEDABAD VS. DCIT CIRCLE 12 AHMEDABAD PAN/GIR NO. : AAKFS9416Q / AADFK0423G (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI S N SOPARKAR SR. ADV. WITH SHRI BUNDISH SOPARKAR RESPONDENT BY: SHRI SAMIR TEKRIWAL SR. DR O R D E R PER SHRI A. K. GARODIA AM:- OUT OF THESE THREE APPEALS TWO APPEALS ARE FILED BY M/S. KIRTI CHEMICAL WORKS AND THE REMAINING ONE APPEAL IS FILE D BY A DIFFERENT ASSESSEE OF THE SAME GROUP I.E. M/S. SHANKAR CHEMIC AL WORKS. ONE APPEAL OF M/S. KIRTI CHEMICAL WORKS IS IN THE CASE OF QUAN TUM PROCEEDINGS AND THE REMAINING TWO APPEALS; ONE OF M/S. KIRTI CHEMICAL W ORKS AND OTHER OF M/S. SHANKAR CHEMICAL WORKS ARE IN RESPECT OF PENALTY PR OCEEDINGS. ALL THESE I.T.A.NOS. 2927 3180 3181 /AHD/2009 2 THREE APPEALS WERE HEARD TOGETHER AND ARE BEING DIS POSED OFF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. REGARDING THE QUANTUM APPEAL OF M/S. KIRTI CHEMI CAL WORKS IT WAS SUBMITTED BY THE LD. A.R. OF THE ASSESSEE THAT ON I DENTICAL ISSUE THE TRIBUNAL HAS DECIDED THE MATTER AGAINST THE ASSESSEE IN ANOT HER APPEAL OF THE SAME GROUP I.E. IN THE CASE OF M/S. SHANKAR CHEMICAL WOR KS IN I.T.A. NO. 379/AHD/2008 DATED 09.06.2011 AND HENCE HE HAS NOT HING MORE TO SAY WITH REGARD TO THE QUANTUM APPEAL OF M/S. KIRTI CHEMICAL WORKS. 3. REGARDING THE GROUNDS OF APPEAL OF M/S. KIRTI CH EMICAL WORKS IN QUANTUM PROCEEDINGS WE FIND THAT THE ONLY ISSUE IN VOLVED IS REGARDING DISALLOWANCE OF RS.24 71 153/- U/S14A OUT OF TOTAL INTEREST PAID TO THE PARTNERS OF RS.37 61 441/-. THE AMOUNT OF DISALLOW ANCE HAD BEEN WORKED OUT BY THE A.O. ON PRORATA BASIS BEING THE VALUE OF INVESTMENT IN SHARES AND MUTUAL FUNDS ETC. OF RS.2 53 47 212/- OUT OF TOTAL ASSETS OF THE ASSESSEE FIRM OF RS.3 87 07 385/-. IN THE CASE OF GROUP CONCERN M/S. SHANKAR CHEMICAL WORKS (SUPRA) THE TRIBUNAL ORDER IN QUANTUM PROCEE DINGS IS AGAINST THE ASSESSEE AND ONE OF US I.E. ACCOUNTANT MEMBER IS A PARTY IN THAT ORDER OF THE TRIBUNAL. THE FACTS IN BOTH THESE CASES I.E. IN TH E CASE OF M/S. SHANKAR CHEMICAL WORKS AND IN THE CASE OF M/S. KIRTI CHEMIC AL WORKS ARE ADMITTED TO BE IDENTICAL. IN THAT CASE THE TRIBUNAL HAS CO NSIDERED ALL THE ARGUMENTS OF THE ASSESSEE AND HAS DECIDED THE ISSUE AGAINST THE ASSESSEE AS PER PARA 6 TO 6.9 OF THAT TRIBUNAL ORDER. THESE PARAGRAPHS OF TH AT TRIBUNAL ORDER ARE BEING REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 6. WE HAVE HEARD BOTH THE SIDES ON VARIOUS PLEAS BUT WE ARE NOT SATISFIED. WE DECIDE EACH AND EVERY CONTENTION RAISED BY THE ID. COUNSEL OF THE ASSESSEE. THE FIRST CONTENTION RAISE D BY HIM HAS ALREADY BEEN REJECTED BY US IN PARA NO.5 ABOVE. REG ARDING THE SECOND CONTENTION RAISED BY HIM THAT ANY DISALLOWANCE OF I NTEREST UNDER SECTION 14A WILL AMOUNT TO DOUBLE DISALLOWANCE WE WOULD LIKE TO POINT OUT THAT THIS CONTENTION IS ALSO DEVOID OF AN Y MERIT. FOR THE PURPOSE OF DECIDING THIS ASPECT WE FIRST REPRODUCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A WHICH IS AS UNDER: I.T.A.NOS. 2927 3180 3181 /AHD/2009 3 '14A.(1) FOR THE PURPOSES OF COMPUTING- THE TOTAL I NCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT.' 6.1 AS PER THE PROVISIONS CONTAINED IN SECTION 14A( 1) AS REPRODUCED ABOVE WE FIND THAT THE EXPENDITURE INCURRED FOR EA RNING EXEMPT INCOME SHALL NOT BE CONSIDERED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV. IT IMPLIES THAT SUCH EXPENDITURES ARE T O BE ALLOWED AS DEDUCTION WHILE WORKING OUT EXEMPT INCOME UNDER CH APTER-ILL. HENCE UNDER SECTION 14A ONLY SOME SPECIFIC TREATME NT IS TO BE GIVEN TO THOSE EXPENDITURE WHICH ARE INCURRED FOR EARNIN G EXEMPT INCOME. THIS TREATMENT IS THIS THAT THOSE EXPENSES SHOULD B E DISREGARDED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV AND SHOULD BE REDUCED FROM EXEMPT INCOME UNDER CHAPTER III. HENCE THERE IS NO DOUBLE ADDITION OR DOUBLE DISALLOWANCE. PARTNERS HAVE SHARE IN ALL THE INCOMES OF THE FIRM. AS PER THE AFORESAID TREATMENT IN THE HANDS O F THE FIRM REGARDING EXPENSES INCURRED FOR EARNING EXEMPT INCOME TAXABL E INCOME OF THE FIRM WILL INCREASE AND EXEMPT INCOME-OF THE FIRM WI LL GO DOWN BY SAME AMOUNT AND HENCE TOTAL OF BOTH WILL REMAIN SAM E. THE TOTAL SHARE OF PROFIT OF THE PARTNER IN THE INCOME OF THE FIRM WILL ALSO REMAIN SAME BUT HIS SHARE IN THOSE INCOME WHICH ARE EXEMP T IN THE HANDS OF THE FIRM WILL BE LESS AND THE SHARE IN THOSE INCOM E WHICH ARE TAXABLE IN THE HANDS OF THE FIRM WILL BE MORE BUT THE ENTI RE SHARE OF PROFIT RECEIVABLE BY A PARTNER FROM A FIRM IS EXEMPT AND H ENCE THERE IS NO IMPACT IN THE HANDS OF THE PARTNER. SINCE THERE IS NO DISALLOWANCE AS SUCH IN THE HANDS OF THE FIRM AND THE EXPENDITURE I NCURRED FOR EARNING EXEMPT INCOME ARE NOT ALLOWED TO BE REDUCED FROM TA XABLE INCOME BUT CAN BE REDUCED FROM EXEMPT INCOME THERE IS NO EFFECTIVE DISALLOWANCE IN THE HANDS OF THE FIRM FOR THE EXPEN SES INCURRED FOR EARNING EXEMPT INCOME AND HENCE THERE IS NO QUESTIO N OF ANY DOUBLE DISALLOWANCE OR DOUBLE ADDITION. THEREFORE THIS PL EA OF THE ID. COUNSEL OF THE ASSESSEE IS ALSO REJECTED. 6.2 ONE MORE CONTENTION RAISED BY THE ID. COUNSEL O F THE ASSESSEE IS THAT IF AT ALL ANY DISALLOWANCE HAS TO BE MADE IN T HE HANDS OF THE FIRM DIRECTION SHOULD BE GIVEN THAT TO THAT EXTENT INT EREST INCOME SHOULD NOT BE TAXED IN THE HANDS OF CONCERNED PARTNERS. IN THIS REGARD HE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 28( V) WHICH READS AS UNDER: '28.(V) ANY INTEREST SALARY BONUS COMMISSION OR REMUNERATION BY WHATEVER NAME CALLED DUE TO OR RECEIVED BY A PAR TNER OF A FIRM FROM SUCH FIRM: I.T.A.NOS. 2927 3180 3181 /AHD/2009 4 PROVIDED THAT WHERE ANY INTEREST SALARY BONUS CO MMISSION OR REMUNERATION BY WHATEVER NAME CALLED OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SEC TION 40 THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE E XTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED' 6.3 FROM THE ABOVE PROVISO TO SECTION 28 (V) IT IS SEEN THAT IF THERE IS ANY DISALLOWANCE OF INTEREST IN THE HANDS OF THE FI RM DUE TO CLAUSE (B) OF SECTION 40 INCOME IN THE HANDS OF THE PARTNER H AS TO BE ADJUSTED TO THE EXTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUC TED IN THE HANDS OF THE FIRM. HENCE IT IS SEEN THAT THE OPERATION OF T HE PROVISO TO SECTION 28(V) WILL COME INTO PLAY ONLY IF THERE IS SOME DIS ALLOWANCE IN THE HANDS OF THE FIRM UNDER CLAUSE (B) OF SECTION 40 BU T IN THE PRESENT CASE THE DISALLOWANCE IS UNDER SECTION 14A AND NOT UNDER SECTION 40(B) AND THEREFORE THE PROVISO TO SECTION 28(V) IS NOT APPL ICABLE AND THE PARTNER OF THE ASSESSEE FIRM DID NOT DESERVE ANY RELIEF ON THIS ACCOUNT. MOREOVER BEFORE US IS THE ASSESSEE FIRM ONLY AND | NOT THE PARTNERS AND HENCE WE DO NOT GIVE ANY DIRECTION ON THIS ASP ECT. ' 6.4 THE ID. COUNSEL OF THE ASSESSES ALSO DREW OUR A TTENTION TO THE PROVISIONS OF SUBSECTION (2 A) OF SECTION 10 AND IT S EXPLANATION AND IT HAS BEEN -CONTENDED THAT AS PER THE PROVISIONS OF T HIS EXPLANATION TO SECTION 10(2A) REMUNERATION OR INTEREST WHICH IS DISALLOWED IN THE HANDS OF DIE FIRM WILL NOT SUFFER TAXATION IN THE HANDS OF THE PARTNER. THIS CONTENTION OF THE ID. COUNSEL OF THE ASSESSEE IS ALSO DEVOID OF ANY MERIT. WE REPRODUCE THE RELEVANT PROVISION WHI CH IS AS UNDER: '10.(2A) IN THE CASE OF A PERSON BEING A PARTNER OF A FIRM WHICH IS SEPARATELY ASSESSED AS SUCH HIS SHARE IN THE TOTAL INCOME OF THE FIRM. EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE THE S HARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM SEPARATELY ASSESSED AS S UCH SHALL NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER LAW BE AN AMOUNT WHICH BEARS TO THE TOTAL INCOME OF. THE FIRM THE SA ME PROPORTION AS THE AMOUNT OF HIS SHARE IN THE PROFITS OF THE FIRM IN A CCORDANCE WITH THE PARTNERSHIP DEED BEARS TO SUCH PROFITS. ' 6.5 FROM THE ABOVE PROVISION WE FIND THAT IT HAS B EEN SPECIFIED IN THE SAME THAT SHARE OF A PARTNER IN THE TOTAL INCOME OF A FIRM IS EXEMPT. THERE IS NO DISPUTE ON THIS ASPECT. WHAT IS BEING C ONTENDED BY THE ID. COUNSEL OF THE ASSESSEE IS THIS THAT IF ANY INTERE ST IS DISALLOWED IN THE HANDS OF THE FIRM THE SAME SHOULD NOT FORM PART OF TOTAL INCOME IN THE HANDS OF THE PARTNER BUT THE EXPLANATION TO SECTION 10(2A) DOES NOT SUPPORT HIS CASE. IN OUR HUMBLE UNDERSTANDING AS PER THIS EXPLANATION TO SECTION 10(2A) THE TOTAL INCOME OF THE FIRM AS I.T.A.NOS. 2927 3180 3181 /AHD/2009 5 ASSESSED SHOULD BE CONSIDERED AND THE SHARE OF THE CONCERNED PARTNER SHOULD BE WORKED OUT AS PER ITS PROFIT-SHARING RAT IO AS SPECIFIED IN THE PARTNERSHIP DEED AND SUCH SHARE OF THE RELEVANT PAR TNER SHOULD BE CONSIDERED AS EXEMPT UNDER SECTION 10(2A). HENCE T HIS CONTENTION OF THE ID. COUNSEL IS ALSO REJECTED. 6.6 NEXT CONTENTION RAISED BY HIM IS THIS THAT INTE REST PAID TO PARTNERS IS DISTRIBUTION OF PROFIT ALLOCATED TO THE PARTNERS IN THE FORM OF INTEREST AND HENCE INTEREST TO PARTNERS CAN BE TAXED ONCE E ITHER IN DIE HANDS OF DIE FIRM OR IN THE HANDS OF THE PARTNER AND IT CANN OT BE TAXED IN BOTH HANDS. IT IS ALSO HIS CONTENTION THAT SINCE THE PAR TNERS HAVE PAID TAX ON INTEREST RECEIVED BY THEM FROM THE FIRM NO PORTION OF INTEREST PAID TO PARTNERS CAN BE DISALLOWED AND IF IT IS DISALLOWED IT WILL AMOUNT TO DOUBLE TAXATION. THIS CONTENTION OF THE ID. COUNSEL IS ALSO DEVOID OF ANY MERIT BECAUSE INTEREST TO PARTNERS BY THE FIRM IS NOT DISTRIBUTION OF PROFIT BY THE FIRM BECAUSE INTEREST IS PAYABLE TO T HE PARTNERS IF IT IS SO PRESCRIBED IN THE PARTNERSHIP DEED EVEN IF THERE I S NO PROFIT IN THE HANDS OF THE FIRM. IF THE FIRM PAYS INTEREST TO THE PARTNERS AND THE FIRM IS HAVING LOSS LOSS OF THE FIRM WILL INCREASE TO T HAT EXTENT AND IT WILL BE ALLOWED TO CARRY FORWARD IN THE HANDS OF THE FIR M AND THEREFORE PAYMENT OF INTEREST BY-THE FIRM TO ITS PARTNERS IS NOT DISTRIBUTION OF PROFITS BY THE FIRM TO THE PARTNERS. WE HAVE ALSO O BSERVED SOMEWHERE IN ABOVE PARAGRAPHS THAT THERE IS NO DISALLOWANCE A S SUCH OF INTEREST IN THE HANDS OF THE FIRM AND ONLY THE MANNER OF ALLOWI NG DEDUCTION ON ACCOUNT OF INTEREST OR OTHER EXPENSES INCURRED FOR EARNING EXEMPT INCOME IS SPECIFIED IN SECTION 14A AS PER WHICH D EDUCTION ON ACCOUNT OF EXPENSES INCURRED FOR EARNING EXEMPT INC OME CANNOT BE ALLOWED FOR COMPUTING TOTAL INCOME UNDER CHAPTER IV AND HENCE IMPLIEDLY THE SAME HAS TO BE DEDUCTED FROM THE EXE MPT INCOME TO BE COMPUTED UNDER CHAPTER HI. THIS CONTENTION OF ID. C OUNSEL OF THE ASSESSEE IS ALSO REJECTED. 6.7 ONE MORE CONTENTION HAS BEEN RAISED BY HIM THAT SECTION I4A TALKS OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME AND INTEREST PAID TO PARTNERS IS NOT AN EXPENDITURE AT ALL AND IT IS A SPECIAL DEDUCTION ALLOWED TO THE FIRM U NDER SECTION 40(B). THIS CONTENTION OF THE ID. COUNSEL OF THE ASSESSEE IS ALSO DEVOID OF ANY MERIT BECAUSE THERE IS NO DEDUCTION ALLOWED UNDER S ECTION 40(B). IN FACT SECTION 40(B) IS A RESTRICTING SECTION FOR VA RIOUS DEDUCTIONS ALLOWABLE UNDER SECTION 30 TO 38. AS PER CLAUSE (II ) OF SECTION 40(B) INTEREST PAID TO ANY PARTNER IS NOT ALLOWABLE IF I T IS NOT AUTHORISED BY OR NOT IN ACCORDANCE WITH THE TERMS OF THE PARTNERS HIP DEED. AS PER CLAUSE (IV) OF SECTION 40(B) IT HAS BEEN SPECIFIED THAT EVEN IF PAYMENT OF INTEREST TO PARTNER IS AUTHORISED AND IS IN ACCO RDANCE WITH THE TERMS I.T.A.NOS. 2927 3180 3181 /AHD/2009 6 OF THE PARTNERSHIP DEED THE INTEREST ALLOWABLE SHO ULD NOT BE MORE THAN THE-AMOUNT CALCULATED @ 12% SIMPLE INTEREST PER ANN UM. HENCE WE HAVE SEEN THAT SECTION 40(B) IS ACTUALLY RESTRICTIN G AND REGULATING DEDUCTION ALLOWABLE TO THE FIRM ON ACCOUNT OF PAYME NT OF INTEREST TO PARTNERS AND IS NOT AN ALLOWING SECTION. HENCE ALL OWING SECTION FOR ALLOWING DEDUCTION OF INTEREST REMANDS SECTION 36(L )(III) AND THEREFORE THE PAYMENT OF INTEREST TO PARTNERS IS ALSO AN EXPE NDITURE ONLY AND THEREFORE THE SAME IS ALSO HIT BY THE PROVISIONS O F SECTION 14A IF IT IS FOUND THAT THE SAME HAS BEEN INCURRED FOR EARNING E XEMPT INCOME. THIS CONTENTION IS ALSO REJECTED. 6-8 THE LAST PLEA OF THE ID. COUNSEL OF THE ASSESSE E IS THAT DISALLOWANCE OF INTEREST SHOULD BE RESTRICTED TO RS.8 62 465/- AS PER THE WORKING GIVEN AT PAGE 8 OF THE PAPER BOOK.' THE ID. COUNSEL OF THE ASSESSEE EXPLAINED THAT THIS IS AN ALTERNATIVE PLEA WITHOUT PREJUDICE TO GROUND NO.2. ELABORATING THIS PLEA THE ID. COUNSEL OF THE ASSESSEE POINTED OUT THAT THE AO DISALLOWED THE INTEREST IN PROPORTION T O AMOUNT OF INVESTMENT AND TOTAL FUND EMPLOYED WHEREAS IT SHOUL D BE IN PROPORTION TO TAXABLE AND NON-TAXABLE AND PAYMENT OF INTEREST. THIS PLEA OF THE ID. COUNSEL OF THE ASSESSEE IS ALSO LIABLE TO BE REJECT ED BECAUSE IF ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME THE SAME HAS TO BE DISALLOWED EVEN IF THERE IS NO ACTUAL EAR NING OF ANY EXEMPT INCOME. IF INTEREST-BEARING BORROWED FUNDS ARE UTIL ISED FOR THE PURPOSE OF INVESTMENT IN SHARES AND THERE IS NO RECEIPT OF DIVIDEND INCOME OR IF THERE IS ONLY MEAGRE AMOUNT OF DIVIDEND INCOME EVE N THEN THE WHOLE AMOUNT OF INTEREST EXPENDITURE INCURRED FOR THIS PU RPOSE WILL BE SUBJECT TO DISALLOWANCE UNDER SECTION 14A BECAUSE T HE SAME HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. HENCE THE ACTU AL EARNING OF EXEMPT INCOME IS NOT RELEVANT. IN THE EARLIER PERIO D WHEN DIVIDEND INCOME WAS NOT EXEMPT INTEREST EXPENDITURE INCURRE D ON BORROWED FUNDS USED FOR INVESTMENT IN SHARES WAS HELD TO BE FULLY ALLOWABLE EXPENSES EVEN IF THERE WAS NO ACTUAL RECEIPT OF D IVIDEND OR INSUFFICIENT/MEAGRE AMOUNT OF DIVIDEND INCOME. THE LOGIC WAS THAT THE ENTIRE EXPENDITURE HAS BEEN INCURRED FOR EARNING TA XABLE DIVIDEND INCOME AND HENCE IT IS ALLOWABLE EVEN IF THERE IS NIL OR SMALL AMOUNT OF DIVIDEND INCOME. THIS ASPECT HAS BEEN APPROVED B Y VARIOUS COURTS AND HENCE THE SAME JUDGEMENT SUPPORTS THIS VIEW AL SO THAT EVEN IN CASE OF 'NIL' OR SMALL AMOUNT OF DIVIDEND INCOME T HE ENTIRE INTEREST EXPENDITURE INCURRED FOR MAKING INVESTMENT IN SHARE S IS TO BE CONSIDERED AS EXPENDITURE INCURRED FOR EARNING EXEM PT INCOME AND THE SAME HAS TO BE DISALLOWED UNDER SECTION 14A. HENCE THIS PLEA IS ALSO REJECTED. I.T.A.NOS. 2927 3180 3181 /AHD/2009 7 6.9 IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDERS OF THE ID. CIT(A) AS PER WHICH HE HAS CONFIRMED THE DISALLOWANCE OF INTEREST OF RS .17 04 535/- WHICH WAS MADE BY THE AO UNDER SECTION 14A OF THE I.T. AC T. WE ARE THEREFORE INCLINED TO UPHOLD THE ORDER OF THE ID. CIT(A). RESONANTLY ALL THE GROUNDS RAISED BY THE ASSESSEE IN THIS APPE AL ARE REJECTED. 4. HENCE IN THE PRESENT CASE ALSO WE DO NOT FIND ANY MERIT IN QUANTUM APPEAL OF THE ASSESSEE M/S. KIRTI CHEMICAL WORKS AN D THE SAME IS DISMISSED BY FOLLOWING THE TRIBUNAL ORDER IN THE CASE OF SHAN KAR CHEMICAL WORKS (SUPRA). IN THE RESULT APPEAL OF M/S. KIRTI CHEMI CAL WORKS IN I.T.A. NO. 2927/AHD/2009 IS DISMISSED. 5. THE REMAINING TWO APPEALS ARE IN PENALTY PROCEED INGS IN THE CASES OF M/S. KIRTI CHEMICAL WORKS AND M/S. SHANKAR CHEMICAL WORKS. THE GROUNDS ARE IDENTICAL EXCEPT DIFFERENCE IN AMOUNT A ND HENCE WE REPRODUCE THE GROUNDS FROM PENALTY APPEAL OF M/S. KIRTI CHEMI CAL WORKS IN I.T.A.NO. 3180/AHD/2009 WHICH ARE AS UNDER: (1) THE LEARNED COMMISSIONER (APPEAL) FAILE D TO UNDERSTAND THE FACTS AND CIRCUMSTANCES OF THE CASE. (2) THE LEARNED COMMISSIONER (APPEAL) ERRED IN NO T DECIDING THE FOLLOWING GROUNDS OF APPEAL RAISED BEFORE HIM : A. 'THE LEARNED ASSESSING OFFICER ERRED IN LEVYIN G PENALTY OF RS.8 86 526/- U/S 271(1) (C) WITHOUT OFFERING REASO NABLE OPPORTUNITY OF BEING HEARD. THERE IS LACK OF NATURA L JUSTICE.' B. 'THE LEARNED ASSESSING OFFICER ERRED IN LEVYING PENALTY OF RS.8 86 526/- U/S 271(1) (C) WITHOUT CONSIDERING TH E REPLY OF THE ASSESSEE VIDE LETTER DATED 05/11/2008 WHICH WAS FIL ED ON 10/11/2008.' (3) THE LEARNED COMMISSIONER (APPEAL) ERRED IN C ONFIRMING LEVY OF PENALTY OF RS.8 86 526/- U/S 271(1) (C) AGAINST THE ADDITION OF RS. 24 71 153/- ON ACCOUNT PROPORTIONATE DISALLOWANCE U /S 14A CONSIDERING THE ASSESSEE HAS FURNISHED INACCURATE P ARTICULARS OF ITS INCOME. I.T.A.NOS. 2927 3180 3181 /AHD/2009 8 (4) THE LEARNED COMMISSIONER (APPEAL) ERRED IN C ONFIRMING LEVY OF PENALTY OF RS.8 86 526/- U/S 271(1) (C) THOUGH THE APPELLATE ORDER PASSED BY HIM IN QUANTUM APPEAL WAS NOT SERVED ON T HE APPELLANT. (5) YOUR APPELLANT PRAYS FOR APPROPRIATE RELIEF ON ABOVE GROUNDS OF APPEAL. (6) YOUR APPELLANT CRAVES LEAVE TO ADD ALTER AMEND SUBSTITUTE OR WITHDRAW ANY OF THE GROUNDS OF APPEAL STATED HEREIN ABOVE. 6. THE BRIEF FACTS OF THE CASE ARE THAT AGAINST THE DISALLOWANCE MADE BY THE A.O. U/S 14A OUT OF INTEREST PAYMENT TO PARTNER S AND TO OTHERS THE A.O. INITIATED PENALTY PROCEEDINGS U/S 271(1)(C) AND AFT ER HEARING THE ASSESSEE THE A.O. IMPOSED THE PENALTY OF RS.8 86 526/- IN THE CA SE OF M/S. KIRTI CHEMICAL WORKS . SIMILARLY IN THE CASE OF M/S. SHANKAR CHE MICAL WORKS THE A.O. IMPOSED PENALTY OF RS.6 11 502/- U/S 271(1)(C) FOR THE SAME REASON I.E. FOR THE DISALLOWANCE U/S 14A OUT OF INTEREST PAID TO PA RTNERS AND OTHERS. BEING AGGRIEVED BOTH THESE ASSESSES CARRIED THE PENALTY MATTER IN APPEAL BEFORE LD. CIT(A) BUT WITHOUT SUCCESS AND NOW BOTH THE ASSESS EES ARE IN FURTHER APPEAL BEFORE US. 7. IT IS SUBMITTED BY THE LD. A.R. THAT ALTHOUGH IN QUANTUM PROCEEDINGS THE TRIBUNAL HAS DECIDED THE ISSUE AGAINST THE ASSE SSEE BUT PENALTY IS NOT JUSTIFIED BECAUSE THE DISALLOWANCE U/S 14A WAS A DE BATABLE ISSUE DURING THE RELEVANT PERIOD. IN SUPPORT OF THIS CONTENTION HE PLACED RELIANCE ON THE TRIBUNAL DECISION RENDERED IN THE CASE OF DCIT VS. NALWA INVESTMENTS LTD. IN I.T.A. NO. 3805/DEL/2010 DATED 29.10.2010. HE S UBMITTED A COPY OF THIS TRIBUNAL DECISION AND DRAWN OUR ATTENTION TO PARA 4 .1 OF THE TRIBUNAL ORDER WHERE IT IS NOTED BY THE TRIBUNAL IN THAT CASE THAT SECTION 14A WAS INSERTED IN THE ACT BY FINANCE ACT 2001 RETROSPECTIVELY FROM . 01.04.1962 AND THIS SECTION WAS AMENDED BY FINANCE ACT 2006 W.E.F. 01.0 4.2007 PROVIDING FOR MODE AND METHOD OF DISALLOWANCE TO BE MADE UNDER TH IS SECTION AND FINALLY RULE 8D WAS FRAMED IN THE YEAR 2008 PRESCRIBING TH E METHOD TO ARRIVE AT THE I.T.A.NOS. 2927 3180 3181 /AHD/2009 9 AMOUNT TO BE DISALLOWED UNDER THIS PROVISION. IT W AS CONTENDED BEFORE THE TRIBUNAL IN THAT CASE THAT THUS TILL THE DATE OF F ILING OF RETURN THE INCOME FOR THE RELEVANT YEAR I.E. ASSESSMENT YEAR 2005-06 IN T HAT CASE THERE WAS NO RULE PRESCRIBED TO ARRIVE AT THE AMOUNT TO BE DISALLOWED AND IT WAS CONTENDED THAT IN SUCH A SITUATION THERE COULD BE A GENUINE DIFFE RENCE OF OPINION BETWEEN THE ASSESSEE AND THE A.O. AS TO WHETHER ANY AMOUNT WAS TO BE DISALLOWED AT ALL AND IF YES THE MODE AND METHOD OF COMPUTATION OF THE AMOUNT. OUR ATTENTION WAS ALSO DRAWN TO PARA 5 OF THE TRIBUNAL DECISION WHICH CONTAINS THE DECISION OF THE TRIBUNAL AND IT IS POINTED OUT THAT IT WAS HELD BY THE TRIBUNAL IN THAT CASE THAT EVEN IN ABSENCE OF ANY A TTEMPT ON THE PART OF THE ASSESSEE IT CAN BE SAID THAT THE QUESTIONS OF DISA LLOWANCE AND ITS QUANTIFICATION ARE QUITE DISPUTABLE AND CAN LEAD TO BONA FIDE DIFFERENCE IN OPINION BETWEEN THE ASSESSEE AND THE AUTHORITIES AN D IN SUCH A SITUATION THE LEVY OF PENALTY IS NOT JUSTIFIED. RELIANCE WAS AL SO PLACED ON THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF RELIANCE PETROPRODUCTS PVT. LTD. AS REPORTED IN 322 ITR 158 (S.C.). IT WAS THE SUBM ISSION THAT IN THAT CASE ALSO THE DISPUTE WAS REGARDING PENALTY IN RESPECT OF DISALLOWANCE U/S 14A AND THE MATTER WAS DECIDED IN FAVOUR OF THE ASSESSE E. 8. AS AGAINST THIS LD. D.R. OF THE REVENUE SUPPORT ED THE ORDERS OF AUTHORITIES BELOW. IT WAS ALSO SUBMITTED THAT THE FACTS AS WELL AS THE LAW WAS VERY MUCH CLEAR IN THE PRESENT CASE BECAUSE OUT OF THE TOTAL INVESTMENT OF THE ASSESSEE FIRM THE MAJOR INVESTMENT WAS IN SHARES A ND MUTUAL FUND UNITS AND HENCE THE ASSESSEE SHOULD HAVE SUO MOTO DISALLOWED THE PROPORTIONATE INTEREST EXPENDITURE WHICH HAS NOT BEEN DONE BY THE ASSESSEE AND HENCE FOR THE SAME PENALTY IMPOSED BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) IS JUSTIFIED IN BOTH THE CASES. IT IS ALSO SUBMITTED THAT DISALLOWANCE WAS MADE BY THE A.O. U/S 14A WHEREAS ALL THE ARGUMENTS RAISE D BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW ARE REGARDING SECTION 40(B) W HICH ARE NOT RELEVANT AND HENCE NO CASE HAS BEEN MADE OUT BY THE ASSESSEE FO R DELETING THE PENALTY. I.T.A.NOS. 2927 3180 3181 /AHD/2009 10 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS PERUSE D THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORIT IES BELOW AND THE JUDGMENTS CITED BY THE LD. A.R. OF THE ASSESSEE. I N THE CASE OF RELIANCE PETROPRODUCTS PVT. LTD. (SUPRA) ALSO THE DISPUTE W AS REGARDING IMPOSITION OF PENALTY U/S 271(1)(C) WITH REFERENCE TO DISALLOWANC E MADE BY THE A.O. U/S 14A. IN THAT CASE THE PENALTY WAS DELETED BY LD. CIT(A) AND THAT ORDER OF LD. CIT(A) WAS UPHELD BY THE TRIBUNAL AS WELL AS BY THE HON'BLE HIGH COURT AND AN APPEAL WAS FILED BY THE DEPARTMENT BEFORE TH E HONBLE APEX COURT AND THAT APPEAL OF THE DEPARTMENT WAS DISMISSED BY THE HONBLE APEX COURT. THE RELEVANT PARA OF THE JUDGEMENT OF HONBLE APEX COURT IS REPRODUCED BELOW: IT WAS TRIED TO BE SUGGESTED THAT SECTION 14A OF T HE ACT SPECIFICALLY EXCLUDED THE DEDUCTIONS IN RESPECT OF THE EXPENDITU RE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IT WAS FURTHER POINTED OUT TH AT THE DIVIDENDS FROM THE SHARES DID NOT FORM THE PART OF THE TOTAL INCOME. IT WAS THEREFORE REITERATED BEFORE US THAT THE ASSESSING OFFICER HAD CORRECTLY REACHED THE CONCLUSION THAT SINCE THE ASSESSEE HAD CLAIMED EXCESSIVE DEDUCTIONS KNOWING THAT THEY ARE INCORRECT; IT AMOU NTED TO CONCEALMENT OF INCOME. IT WAS TRIED TO BE ARGUED TH AT THE FALSEHOOD IN ACCOUNTS CAN TAKE EITHER OF THE TWO FORMS; (I) AN I TEM OF RECEIPT MAY BE SUPPRESSED FRAUDULENTLY; (II) AN ITEM OF EXPENDITUR E MAY BE FALSELY (OR IN AN EXAGGERATED AMOUNT) CLAIMED AND BOTH TYPES A TTEMPT TO REDUCE THE TAXABLE INCOME AND THEREFORE BOTH TYPES AMOUN T TO CONCEALMENT OF PARTICULARS OF ONE'S INCOME AS WELL AS FURNISHIN G OF INACCURATE PARTICULARS OF INCOME. WE DO NOT AGREE AS THE ASSE SSEE HAD FURNISHED ALL THE DETAILS OF ITS EXPENDITURE AS WELL AS INCOM E IN ITS RETURN WHICH DETAILS IN THEMSELVES WERE NOT FOUND TO BE INACCU RATE NOR COULD BE VIEWED AS THE CONCEALMENT OF INCOME ON ITS PART. IT WAS UP TO THE AUTHORITIES TO ACCEPT ITS CLAIM IN THE RETURN OR NO T. MERELY BECAUSE THE ASSESSEE HAD CLAIMED THE EXPENDITURE WHICH CLAIM W AS NOT ACCEPTED OR WAS NOT ACCEPTABLE TO THE REVENUE THAT BY ITSEL F WOULD NOT IN OUR OPINION ATTRACT THE PENALTY UNDER SECTION 271(L)(C ). IF WE ACCEPT THE CONTENTION OF THE REVENUE THEN IN CASE OF EVERY RET URN WHERE THE CLAIM MADE IS NOT ACCEPTED BY THE ASSESSING OFFICER FOR A NY REASON THE ASSESSEE WILL INVITE PENALTY UNDER SECTION 271(L)(C ). THAT IS CLEARLY NOT THE INTENDMENT OF THE LEGISLATURE. I.T.A.NOS. 2927 3180 3181 /AHD/2009 11 10. THE LD. D.R. OF THE REVENUE COULD NOT POINT OUT ANY DIFFERENCE IN THE FACTS IN THE PRESENT TWO CASES AND THE CASE OF RELI ANCE PETROPRODUCTS PVT. LTD. (SUPRA) AND HENCE WE ARE OF THE CONSIDERED OP INION THAT PENALTY ISSUE IN THE PRESENT CASE IN RESPECT OF DISALLOWANCE U/S 14A IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HONBLE A PEX COURT RENDERED IN THE CASE OF RELIANCE PETROPRODUCTS PVT. LTD. (SUPRA ) AND HENCE RESPECTFULLY FOLLOWING THIS JUDGEMENT OF HONBLE APEX COURT WE HOLD THAT THE PENALTY IMPOSED BY THE A.O. AND CONFIRMED BY LD. CIT(A) IS NOT JUSTIFIED IN THESE TWO CASES AND WE DELETE THE SAME. IN THE RESULT A PPEALS OF BOTH THE ASSESSEES ARE ALLOWED. 11. IN THE COMBINED RESULT QUANTUM APPEAL OF THE A SSESSEE IN THE CASE OF M/S. KIRTI CHEMICAL WORKS IS DISMISSED AND BOTH THE PENALTY APPEALS OF BOTH THE ASSESSEES ARE ALLOWED. 12. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY 2011. SD./- SD./- (D. K. TYAGI) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED : 29 TH JULY 2011 SP COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR AHMEDABAD 6. THE GUARD FILE I.T.A.NOS. 2927 3180 3181 /AHD/2009 12 1. DATE OF DICTATION 27/7 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 28/7 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. 28/7 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 29/7 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S. 29/7 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 29/7/11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. ..