Jindal Equipment Leasing & Consultancy, Delhi v. DCIT, New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D : NEW DELHI BEFORE SHRI D.R.SINGH JM AND SHRI R.C.SHARMA AM ITA NOS.3472/DEL/2008 & 3473/DEL/2008 ASSESSMENT YEARS : 2004-05 & 2005-06 M/S JINDAL EQUIPMENT LEASING & CONSULTANCY SERVICES LTD. 37 NAJAFGARH ROAD NEW DELHI. PAN NO.AAACJ0091P. VS. DY.COMMISSIONER OF INCOME TAX CIRCLE-4(1) NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.SAMPATH ADVOCATE. RESPONDENT BY : SMT.PRATIMA KAUSHIK SR.DR. ORDER PER R.C.SHARMA AM : THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINS T THE ORDER OF CIT(A) FOR AY 2004-05 & 2005-06 IN THE MATTER OF ORDER PASSED BY THE AO U/S 143(3) OF THE IT ACT. 2. COMMON GRIEVANCE IN BOTH THE YEARS PERTAINS TO D ISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENDITURE U/S 14A OF IT ACT. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT ASSESSEE IS A FINANCE AND INVESTMENT COMPANY H OLDING SHARES AND SECURITIES OF VARIOUS COMPANIES. IT IS IN THE BUSINESS OF INVEST MENT AND ALSO ADVANCING LOANS ON WHICH IT EARNED INTEREST INCOME. DURING THE COURSE OF SCRUTINY ASSESSMENT THE AO FOUND THAT ASSESSEE IS IN RECEIPT OF DIVIDEND INCOM E RENT AND PROFIT ON SALE OF PURCHASE OF SHARES BESIDES MISCELLANEOUS INCOME AND COMMISSION. IN THE AY ITA-3472 & 3473/DEL/2008 2 2004-05 THE AO FOUND THAT ASSESSEE HAS CLAIMED EXP ENDITURE OF RS.1.63 CRORES WHICH PRIMARILY INCLUDES BANK AND INTEREST CHARGES OF RS.1.45 CRORES. HE ALSO FOUND THAT ADMINISTRATIVE EXPENDITURE WAS ALSO INCU RRED BY THE ASSESSEE. BY INVOKING PROVISIONS OF SECTION 14A THE AO WORKED O UT PERCENTAGE OF DIVIDEND TO INCOME OTHER THAN TAX EXEMPT DIVIDENDS ACCORDINGLY HELD THAT 77% OF THE EXPENSES ALLOCABLE TO THE DIVIDENDS OUGHT TO BE DIS ALLOWED. SIMILARLY HE WORKED OUT THE INTEREST EXPENDITURE ON THE BASIS OF DIVIDE ND INCOME EARNED AND DISALLOWED PROPORTIONATE INTEREST AS INADMISSIBLE U/S 36(1)(II I) OF THE IT ACT. BY THE IMPUGNED ORDER THE CIT(A) CONFIRMED THE DISALLOWAN CE AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. IT WAS CONTENDED BY LEARNED AR THAT UNDER SECTIO N 14A THE AO IS NOT EMPOWERED TO MAKE AD-HOC DISALLOWANCE WITHOUT PIN-P OINTING THE EXPENDITURE ACTUALLY INCURRED FOR EARNING THE EXEMPT INCOME. H E PLACED ON RECORD THE ORDER OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES IN ITA 331 OF 2009 ORDER DATED 4.11.2009 WHEREIN IT WAS HELD THAT THE STAND OF THE REVENUE TO THE EFFECT THAT DIRECTLY OR INDIRECTLY SOME EXPE NDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED U/S 14A AND THE IMPACT OF EXPEND ITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME W HICH MAY NULLIFY THE MANDATE OF SECTION 14A CANNOT BE ACCEPTED. IT WAS ALSO OB SERVED THAT DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT FOR EARNING EXEMPT INCOME NO EXPENDITURE HAD BEEN INCURRED DIS ALLOWANCE U/S 14A CANNOT STAND. 5. IN VIEW OF THIS DECISION LEARNED AR CONTENDED T HAT AO HAS NOT POINTED OUT THE AMOUNT OF INTEREST BEARING LOANS WHICH HAVE BEE N UTILIZED FOR INVESTMENT IN INTEREST FREE SECURITIES. AS PER LEARNED AR ONLY AFTER ESTABLISHING THE NEXUS OF SUCH INTEREST BEARING FUNDS HAVING BEEN UTILIZED FO R INVESTMENT IN SECURITIES THE INCOME OF WHICH IS EXEMPT THE DISALLOWANCE CAN BE MADE WITH REFERENCE TO SUCH ITA-3472 & 3473/DEL/2008 3 INTEREST WHICH IS PAID FOR THE AMOUNT OF FUNDS UTIL IZED FOR EARNING EXEMPT INCOME BY INVESTING IN SECURITIES THE INCOME OF WHICH IS N OT LIABLE TO TAX. HE DRAWN OUR ATTENTION TO THE OBSERVATION OF THE AO WHEREIN HE H AS PROPORTIONATELY WORKED OUT THE ADMINISTRATIVE EXPENSES WITH REFERENCE TO THE D IVIDEND INCOME AND OTHER INCOME EARNED BY THE ASSESSEE. HE ALSO INVITED ATT ENTION TO THE FINDING OF THE AO WHEREIN HE HAS APPORTIONED THE INTEREST EXPENDITURE ON THE BASIS OF DIVIDEND INCOME EARNED RATHER THAN ATTRIBUTING SUCH INTEREST DIRECTLY TO THE FUNDS INVESTED FOR EARNING TAX FREE INCOME. 6. IN VIEW OF THE DECISION OF HON'BLE PUNJAB & HARY ANA HIGH COURT DISALLOWANCE U/S 14A CAN BE MADE ONLY AFTER FINDING OUT SPECIFIC EXPENDITURE WHICH HAS BEEN INCURRED FOR EARNING THE TAX FREE IN COME. HOWEVER NO DISALLOWANCE ON AD-HOC OR PROPORTIONATE BASIS IS TO BE MADE. IN THE INTEREST OF JUSTICE AND FAIR PLAY WE RESTORE BOTH THE APPEALS TO THE FILE OF THE AO FOR ESTABLISHING NEXUS BETWEEN THE INTEREST BEARING FUN DS HAVING BEEN UTILIZED FOR EARNING TAX FREE INCOME. ONLY AFTER ESTABLISHING S UCH NEXUS THE INTEREST EXPENDITURE INCURRED FOR THE SAME CAN BE DISALLOWED . WE FURTHER DIRECT THE AO THAT WHILE DECIDING AFRESH THE DISALLOWANCE ON ACC OUNT OF INTEREST SHOULD NOT EXCEED THE DISALLOWANCE ALREADY MADE IN THE ORIGINA L ORDER DATED 20.11.2006 IN VIEW OF THE DECISION OF ITAT MUMBAI BENCH IN THE CA SE OF INDEXPORT LTD. DATED 29.1.2009. NEEDLESS TO SAY THAT REASONABLE OPPORTU NITY OF HEARING IS TO BE ALLOWED TO THE ASSESSEE BEFORE DECIDING THE ISSUE. WE DIRE CT ACCORDINGLY. 7. SIMILARLY ADMINISTRATIVE EXPENDITURE IS ALSO TO BE DISALLOWED ONLY AFTER ESTABLISHING THE NEXUS OF SPECIFIC EXPENDITURE HAVI NG BEEN INCURRED FOR EARNING THE TAX FREE INCOME. HOWEVER ON AD-HOC BASIS NO DISA LLOWANCE IS TO BE MADE WITHOUT RECORDING A SPECIFIC FINDING TO THIS EFFECT IN VIEW OF THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT AS REFERRED TO ABOVE. WE THEREFORE RESTORE THE MATTER OF AD-HOC/PROPORTIONATE DISALLOWANCE OF ADMINISTRATIVE EXPENSES TO THE ITA-3472 & 3473/DEL/2008 4 FILE OF AO FOR DECIDING AFRESH IN TERMS OF OUR DIRE CTION CONTAINED HEREINABOVE AND ALSO IN TERMS OF THE DECISION OF HON'BLE PUNJAB & H ARYANA HIGH COURT REFERRED TO ABOVE. 8. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY 2010. SD/- SD/- (D.R.SINGH) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 22.01.2010. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT DEPUTY REGISTRAR ITA-3472 & 3473/DEL/2008 5