ASIA INVESTMENT P. LTD, MUMBAI v. ITO 2(1)(1), MUMBAI

ITA 4412/MUM/2010 | 2004-2005
Pronouncement Date: 30-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 441219914 RSA 2010
Assessee PAN AAACA4539K
Bench Mumbai
Appeal Number ITA 4412/MUM/2010
Duration Of Justice 1 year(s) 4 month(s) 2 day(s)
Appellant ASIA INVESTMENT P. LTD, MUMBAI
Respondent ITO 2(1)(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-09-2011
Date Of Final Hearing 13-09-2011
Next Hearing Date 13-09-2011
Assessment Year 2004-2005
Appeal Filed On 28-05-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A : MUMBAI BEFORE SHRI D. MANMOHAN (VICE PRESIDENT [MZ]) AND SHRI RAJENDRA SINGH (ACCOUNTANT MEMBER) ITA NO.4412/MUM/2010 ASSESSMENT YEAR : 2004-05 ASIA INVESTMENTS PVT. LIMITED 4 TH FLOOR MAGNET HOUSE DOUGALL ROAD BALLARD ESTATE MUMBAI-400 038. ..( APPELLANT ) P.A. NO. (AAACA 4539 K) VS. INCOME TAX OFFICER WARD 2(1)(1) AAYAAKAR BHAVAN MUMBAI. ..( RESPONDENT ) ITA NO.4883/MUM/2010 ASSESSMENT YEAR : 2004-05 INCOME TAX OFFICER WARD 2(1)(1) AAYAAKAR BHAVAN MUMBAI. ..( APPELLANT ) VS. ASIA INVESTMENTS PVT. LIMITED 4 TH FLOOR MAGNET HOUSE DOUGALL ROAD BALLARD ESTATE MUMBAI-400 038. ..( RESPONDENT ) ASSESSEE BY : SHRI SANTOSH PARAB DEPARTMENT BY : MS. USH A NAIR DATE OF HEARING : 15.9.2011 DATE OF PRONOUNCEMENT : . SEPTEMBER 2011 ITA NO.4412 & 4883/M/10 A.Y:04-05 2 O R D E R PER RAJENDRA SINGH (AM). THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 17.3.2010 OF CIT(A) FOR ASSESSMENT YEAR 2004-05. THESE CROSS APPEALS AR E BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE O F CONVENIENCE. THE DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING DISALLOWANCE OF INTEREST EXPENSES UNDER SECTION 14A OF THE INCOME TAX ACT WHEREAS REVENUE HAS DISPUTED THE DECISION OF CIT(A) DELETING THE ADDITI ONS MADE BY AO ON ACCOUNT OF DISALLOWANCE OF VARIOUS EXPENSES. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSE SSEE WHO WAS ENGAGED IN THE BUSINESS OF MANUFACTURING SHEET METAL COM PONENTS FOR THE AUTOMOBILE INDUSTRY HAD DECLARED LOSS OF RS.1 26 39 789 /- FOR THE ASSESSMENT YEAR 2004-05. THE AO NOTED THAT THE SECURED/U NSECURED LOANS HAD INCREASED DURING THE YEAR BY RS.2 43 798 306/- WHE REAS THE INVESTMENT IN SHARES HAD GONE UP BY RS.21 61 59 579/-. THE AO AL SO NOTED THAT OWN FUNDS OF THE ASSESSEE HAD INCREASED BY RS.1 50 18 637/- D URING THE YEAR. THE AO THEREFORE CONCLUDED THAT THE INVESTMENTS HAD BE EN MADE OUT OF BORROWED FUNDS TO THE EXTENT OF RS.20 11 40 942/- (RS. 21 61 59 579 RS.1 50 18 637). ITA NO.4412 & 4883/M/10 A.Y:04-05 3 2.1 THE ASSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF INTE REST OF RS.3 89 64 916/- AS BUSINESS EXPENDITURE. THE AO ASKED T HE ASSESSEE TO EXPLAIN AS TO WHY INTEREST SHOULD NOT BE DISALLOWED AS B ORROWINGS WERE FOR THE PURPOSE OF INVESTMENT AND NOT FOR BUSINESS. THE ASSE SSEE EXPLAINED THAT IT WAS AN INVESTMENT AND FINANCE COMPANY AND THE MAIN BUSINESS ACTIVITY WAS CONTROLLING THE STAKES OF THE COMPANIES OF A NAND GROUP. THE BORROWED FUNDS HAD THEREFORE BEEN UTILIZED FOR THE PURPOSE OF THE BUSINESS AND INTEREST WAS ALLOWABLE AS DEDUCTION. THE AO HOWEVE R DID NOT ACCEPT THE EXPLANATION. IT WAS OBSERVED BY HIM THAT BUSINESS M EANT SYSTEMATIC AND ORGANIZED COURSE OF ACTIVITY. THE ASSESSEE HAD TAKEN ONLY CONTROLLING STAKES IN GROUP COMPANIES WHICH WAS ONLY AN INVESTMENT A ND NOT A BUSINESS ACTIVITY AND THEREFORE SHARES WERE HELD FOR EA RNING DIVIDEND. HE CALCULATED INTEREST @ 18.54% ON THE BORROWINGS OF RS.20 11 40 942/- INVESTED IN SHARES WHICH CAME TO RS.3 72 91 530/- WHICH WAS DISALLOWED BY HIM AS INCURRED FOR NON-BUSINESS PURPOSE. 2.2 THE AO ALSO NOTED THAT THE ASSESSEE HAD EARNED DIVID END INCOME OF RS.5 33 21 840/-. THE AO OBSERVED THAT THE ASSESSEE HAD NOT FILED DETAILS OF DIVIDEND WITH RETURN OF INCOME NOR THE DETAILS WE RE GIVEN DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IT WAS THEREFORE NOT CL EAR IF THE DIVIDEND HAD BEEN RECEIVED FROM COMPANIES REFERRED TO IN SECTION 115-0 WHICH ONLY COULD BE EXEMPT UNDER SECTION 10(4) OF THE A CT. HE THEREFORE ITA NO.4412 & 4883/M/10 A.Y:04-05 4 ADDED THE DIVIDEND INCOME AS INCOME UNDER SECTION 68 OF THE ACT. THE AO ALSO COMPUTED EXPENSES RELATING TO EARNING OF DIVIDEND INCOME. IT WAS OBSERVED BY HIM THAT TOTAL RECEIPTS INCLUDING THE DIVID END WERE RS.9 02 15 763/- AND FOR EARNING THE SAID INCOME MANUF ACTURING AND OTHER EXPENSES INCLUDING DEPRECIATION WERE TO THE TUNE OF RS.3 35 10 993/-. FURTHER THERE WERE INTEREST EXPENSES TO THE TUNE OF R S.16 73 386/- (RS.3 89 64 916 3 72 91 530). HE THEREFORE ATTRI BUTED THE ABOVE EXPENSES TO THE DIVIDEND INCOME IN THE RATIO OF DIVIDE ND INCOME TO TOTAL RECEIPTS WHICH CAME TO RS.2 07 95 654/-. THE AO HOWEVER DID NOT DISALLOW THE ABOVE EXPENSES UNDER SECTION 14A AS THE ENTIRE DIVID END INCOME HAD BEEN TAXED BY HIM UNDER SECTION 68 OF THE ACT. 2.3 THE AO FURTHER OBSERVED THAT LEGAL AND PROFESSIONA L EXPENSES (RS.33 58 590/-); FOREIGN TRAVEL EXPENSES ( RS.8 42 236 /-); ADVERTISEMENT AND BUSINESS PROMOTION EXPENSES (RS.7 21 859/-); LOSS ON E XCHANGE FLUCTUATION (RS.6 09 805/-); AND FINANCE CHARGES OF (RS. 3 89 64 916/-) WERE NOT SUPPORTED BY PROPER PROOF. THE AO ASKED THE ASSESSEE AS TO WHY THE EXPENSES SHOULD NOT BE DISALLOWED. THE ASSESSEE EXPLAINED THAT ITS MAIN BUSINESS ACTIVITY WAS EXERCISING CONTROL OVER COMPANIES OF A NAND GROUP AND TO PROVIDE LONG TERM FINANCE AND MANAGEMENT CONSULTANCY . THE EXPENSES HAD BEEN INCURRED FOR THE PURPOSE OF BUSINESS AND SHOULD BE ALLOWED. THE AO HOWEVER OBSERVED THAT THE ASSESSEE HAD NOT GIVEN DE TAILS OF THESE EXPENSES TOTALING TO RS.4 44 97 406/- NOR THERE WAS ANY DOCUMENTARY ITA NO.4412 & 4883/M/10 A.Y:04-05 5 EVIDENCE TO SHOW THAT THE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE AO FURTHER OBSERVED TH AT THE ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH THE NEXUS OF EXPENSES WITH AN Y BUSINESS. HE THEREFORE DISALLOWED THESE EXPENSES TOTALING TO RS.4 44 97 406/-. 2.4 THE ASSESSEE DISPUTED THE DECISION OF AO. IN APPEAL CIT(A) HELD THAT THE DIVIDEND INCOME BARRING A FEW SMALL AMOUNTS OF RS. 82 560/- RS.55 040/- AND RS.30/- HAD TO BE ASSESSED AS DIVIDEND INCO ME EXEMPT UNDER SECTION 10(34). THE CIT(A) DID NOT ACCEPT THE CLA IM OF THE ASSESSEE THAT ACQUIRING CONTROLLING STAKE WAS BUSINESS OF THE A SSESSEE. IT WAS OBSERVED BY HIM THAT CONTROLLING STAKE WAS CAPITAL INVE STMENT OF THE ASSESSEE AND INTEREST RELATING THERETO WHICH HAD BEEN COM PUTED BY AO AT RS.3 72 91 530/- WAS REQUIRED TO BE CAPITALIZED. IN R ELATION TO ATTRIBUTION OF EXPENSES RELATING TO DIVIDEND INCOME WHICH HAD BEEN COMP UTED BY AO AT RS.2 07 95 654/- CIT(A) HELD THAT THE EXPENSES HAD TO BE COMPUTED UNDER THE PROVISIONS OF RULE 8D FOLLOWING THE DECISION OF SPE CIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT ( 119 TTJ 289). IN REGARD TO DISALLOWANCE OF VARIOUS EXPENSE CIT(A) OBSERVED THAT THE BOOKS OF ACCOUNTS WERE AUDITED AND ALL THE VOUCHERS AND EVIDENC ES WERE AVAILABLE WITH THE ASSESSEE AND THEREFORE EXPENSES WERE ALLOWABLE. THE CIT(A) ACCORDINGLY DIRECTED THE AO TO ALLOW THE EXPENSES. ITA NO.4412 & 4883/M/10 A.Y:04-05 6 2.5 AGGRIEVED BY THE DECISION OF CIT(A) BOTH THE PART IES ARE IN APPEAL BEFORE THE TRIBUNAL. WHEREAS THE ASSESSEE HAS DISPUTED T HE ORDER OF CIT(A) DISALLOWING THE INTEREST EXPENDITURE UNDER SECTION 14A R.W RULE 8D THE REVENUE HAS CHALLENGED THE DECISION OF CIT(A) DELETING THE ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE OF EXPENSES. 3. WE HAVE HEARD BOTH THE PARTIES PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. AS REGARDS THE DISALLOWANCE OF IN TEREST EXPENDITURE UNDER SECTION 14A IS CONCERNED THE ORDER OF CIT(A) DIR ECTING AO TO COMPUTE DISALLOWANCE U/R 8D CANNOT BE UPHELD IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF GODREJ BOYCE MF G. COMPANY LTD. (328 ITR 81) IN WHICH IT HAS BEEN HELD THAT RULE 8D I S NOT RETROSPECTIVE AND IS APPLICABLE FROM 2008-09. THE HONBLE HIGH COURT ALSO HELD THAT IN CASE OF PRIOR YEARS THE EXPENSES RELATING TO EXEMPT INCOME BO TH DIRECT AND INDIRECT HAVE TO BE COMPUTED ON A REASONABLE BASIS. WE FIND TH AT IN THIS CASE THE AO HAD NOT FOLLOWED RULE 8D AND HAD COMPUTED INTERE ST EXPENDITURE RELATING TO EXEMPT INCOME ON A PARTICULAR BASIS. THE CIT(A) HA S NOT GIVEN ANY FINDING ON THE METHOD ADOPTED BY AO AND HAS FOLLOWE D RULE 8D WHICH CANNOT BE UPHELD. IT MAY BE POINTED OUT HERE THAT T HE ASSESSEE IS NOT IN APPEAL AGAINST THE DISALLOWANCE OF INTEREST BY AO TO T HE EXTENT OF RS.3 72 91 530/- RELATING TO THE BORROWED FUNDS UTILI ZED WHICH HAS BEEN CONFIRMED BY CIT(A) AS CAPITAL EXPENDITURE. THEREFORE ATTRIBUTION TOWARDS EXEMPT INCOME IS REQUIRED TO BE MADE ONLY IN RESPECT OF BALANCE INTEREST OF ITA NO.4412 & 4883/M/10 A.Y:04-05 7 RS.16 73 386/-. AS REGARDS THE OTHER EXPENSES CONSIDERED BY AO TOWARDS THE DIVIDEND INCOME THE ASSESSEE IS NOT IN APPEAL AS TH E GROUND RAISED IS ONLY IN RELATION TO DISALLOWANCE OF INTEREST EXPENDITU RE PERTAINING TO THE EXEMPT DIVIDEND INCOME. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER ON THIS ISSUE AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 3.1 THE DISPUTE RAISED IN THE APPEAL OF THE REVENUE I S REGARDING DISALLOWANCE OF THE VARIOUS EXPENSES MENTIONED IN PARA -2.3 EARLIER WHICH HAS BEEN ALLOWED BY CIT(A). AS MENTIONED EARLIER TH E AO HAD DISALLOWED THE EXPENSES ON THE GROUND THAT THE ASSESSEE HAD NOT FILE D DETAILS OF THESE EXPENSES AND COULD NOT PROVE ANY NEXUS OF THE EXPENDIT URE WITH THE BUSINESS OF THE ASSESSEE TO SHOW THAT THE EXPENSES WERE INCUR RED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A) ALLOWED THE EXPENSES ONLY ON THE GROUND THAT BOOKS OF ACCOUNT WERE A UDITED. HE HAS GIVEN NO FINDING WHETHER EXPENSES HAD ANY NEXUS WITH T HE BUSINESS BEING DONE BY THE ASSESSEE AND THAT THE SAME WERE BEING INCURR ED WHOLLY AND EXCLUSIVE FOR THE PURPOSE OF BUSINESS. CIT(A) HAS ALREADY GIVEN A FINDING THAT CONTROLLING STAKE WAS NOT BUSINESS OF THE ASSESSEE AGAI NST WHICH ASSESSEE IS NOT IN APPEAL BEFORE THE TRIBUNAL. THE CI T(A) WAS THEREFORE REQUIRED TO GIVE A FINDING AS TO THE BUSINESS AGAINST WH ICH THE EXPENSES WERE TO BE ALLOWED. FURTHER THE CIT(A) HAS ALREADY UPHELD THE ORDER OF AO ITA NO.4412 & 4883/M/10 A.Y:04-05 8 TREATING THE INTEREST EXPENDITURE TO THE TUNE OF RS.3 72 91 530/- AS CAPITAL EXPENDITURE RELATING TO THE INVESTMENT IN THE GROUP COMPANIES AGAINST WHICH THE ASSESSEE IS NOT IN APPEAL. THEREFORE ONLY THE BALA NCE INTEREST OF RS.16 73 386/- COULD BE CONSIDERED AGAINST REVENUE EXPE NDITURE IF ANY. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTO RE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER ON THE DISALLOWANCE OF EX PENSES AFTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY O F HEARING TO THE ASSESSEE. 4. IN THE RESULT BOTH THE APPEALS ARE ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30.09.2011 SD/- SD/- (D. MANMOHAN) (RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI DATED: 30 TH SEPT. 2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT CONCERNED MUMBAI THE CIT(A) CONCERNED MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR ITAT MUMBAI. ITA NO.4412 & 4883/M/10 A.Y:04-05 9 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 22.9.11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 23.9.11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER