BANK OF BARODA, MUMBAI v. ADDL CIT RG 4(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.4980/MUM/2009(A.Y. 2002-03) BANK OF BARODA BARODA HOUSE 2 ND FLOOR BEHIND DEEWAN SHOPPING CENTRE S.V.ROAD JOGESHWARI (W) MUMBAI 400 102 PAN:AAACB 1534F (APPELLANT) VS. THE ADDL. CIT RANGE 4(1) AAYKAR BHAVAN 5 TH FLOOR MK ROAD MUMBAI 20. (RESPONDENT) ITA NO.5060/MUM/2009(A.Y. 2002-03) THE ACIT(OSD) RANGE 2(1) AAYKAR BHAVAN 5 TH FLOOR MK ROAD MUMBAI 20. (APPELLANT) VS. BANK OF BARODA BARODA HOUSE 2 ND FLOOR BEHIND DEEWAN SHOPPING CENTRE S.V.ROAD JOGESHWARI (W) MUMBAI 400 102 PAN:AAACB 1534F (RESPONDENT) AASSESSEE BY : SHRI C.C.DALAL REVENUE BY : SHRI NARESH KUMAR BAL ODIA ORDER PER N.V.VASUDEVAN J.M ITA NO.4980/M/09 IS AN APPEAL BY THE ASSESSEE WHILE ITA NO.5060/M/ IS AN APPEAL BY THE REVENUE. BOTH THES E APPEALS ARE DIRECTED AGAINST THE ORDER DATED 23/6/2009 OF CIT(A)-II MUM BAI RELATING TO ASSESSMENT YEAR 2002-03. FIRST WE SHALL TAKE UP FO R CONSIDERATION THE APPEAL OF THE ASSESSEE. THE GROUNDS OF APPEAL OF T HE ASSESSEE READ AS FOLLOWS: ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 2 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE ASESSING OFFICER ERRED IN DISALLOWING THE AMOUNT OF RS.49 06 38 663/- AS ALLEGED EXPENSES AGAINST EXEMPT INCOME. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) II MUMBAI FUR THER ERRED IN ENHANCING OF SUCH DISALLOWANCE OF EXPENSES TO EARN EXEMPT INCOME TO RS. 191 48 94 944/-. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) II WRONGLY AP PLIED RULE 8D TO THE ASSESSMENT YEAR IN QUESTION. 4. THE APPELLANT FILED THE COMPUTATION OF SUCH DISA LLOWANCE OF INTEREST TO THE COMMISSIONER OF INCOME TAX (APPEALS) AT HIS REQUEST AND WITHOUT PREJUDICE; AND 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN RESTORING THE APPEAL TO THE ASSESSING OFFICER AND SHOULD HAVE CONSIDERED ONLY SUCH DISALLOWANCE OF EXPENSES AS ARE IN DIRECT RELA TIONS TO THE EXEMPT INCOME. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF BANKING. THE ASSESSEE EARNED INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT 1961(THE ACT) TO THE EXTENT OF RS. 218 06 16 147/-. IN THE NOTES FILED ALONG WITH RETURN OF INCOME IN ITEM NO.12 AND 16 THE ASSESSEE HAD SUBMITTED THAT EXPENSES INCURRED FOR EARNING INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSES SEE WAS RS.22.5% AND OFFERED TO TAX A SUM OF RS. 49 06 38 633/- WHICH WA S TO BE DISALLOWED U/S.14-A OF THE ACT AS EXPENSES INCURRED IN EARNING THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. T HIS COMPUTATION WAS ACCEPTED BY THE ASSESSING OFFICER. 3. BEFORE THE CIT(A) THE ASSESSEE POINTED OUT THAT THE INTEGRATED TREASURY REGION OF THE ASSESSEE WAS LOOKING AFTER INVESTMEN T OF THE SSESSEE. DURING ASSESSMENT YEAR 2002-03 THE TOTAL EXPENSES OF THE TREASURY BRANCH WAS RS. 18.17 CRORES ON TOTAL INVESTMENT INCOME OF RS. 1613 .84 CRORES. THE PROPORTIONATE EXPENSES THEREFORE WAS RS. 24 55 37 3/- ON EXEMPTED INCOME ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 3 OF RS. 218 CRORES. THE ASSESSEE FURTHER POINTED OUT THAT IT HAD IN ORIGINAL RETURN OF INCOME FILED ON 30/10/2002 DISALLOWED AS PER LAST YEAR 22.5% OF TOTAL EXPENSES OF ASSESSEE BANK AS DISALLOWANCE EXP ENSES. IN A REVISED RETURN OF INCOME FILED ON 29/3/2004 THE ASSESSEE H AS WORKED OUT ACTUAL EXPENSES INCURRED BY INTEGRATED TREASURY REGION LOO KING AFTER INVESTMENTS AND DISALLOWED RS. 24 55 373 TOWARDS EXPENSES INCUR RED FOR EARNING EXEMPTED INCOME. THE ASSESSEE POINTED OUT THAT THE ASSESSING OFFICER HAS NOT DISCUSSED THIS ASPECT IN THE ASSESSMENT ORDER A ND DISALLOWED RS. 49.06 CRORES INSTEAD OF RS. 24.55 LAKHS TOWARDS THESE EXP ENSES. THE ASSESSEE THEREFORE PRAYED THAT THE DISALLOWANCE U/S.14-A OF THE ACT SHOULD BE RESTRICTED TO RS.24.55 LAKHS. 4. THE CIT(A) HOWEVER IN EXERCISE OF HIS POWERS OF ENHANCEMENT WAS OF THE VIEW THAT THE DISALLOWANCE OF EXPENSES INCURRED TO EARN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE MADE IN ACCORDANCE WITH PROVISIONS OF SECTION 14A R.W.R 8D OF THE INCOME TA X RULES WHICH WERE INSERTED BY THE INCOME TAX (5 TH AMENDMENT) RULES 2008 W.E.F. 24/3/2008. IN THIS REGARD THE CIT(A) RELIED ON THE DECISION OF SPECIAL BENCH MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT . LTD. (2008) 26 SOT 603(MUM) WHEREIN IT WAS HELD THAT RULE 8D HAS RET ROSPECTIVE OPERATION. IN ACCORDANCE WITH RULE 8D THE DISALLOWANCE TO BE MADE WAS RS. 19 48 94 944/-. THE CIT(A) ACCORDINGLY DIRECTED TH E ASSESSING OFFICER TO CONSIDER THE DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT IN ACCORDANCE WITH RULE 8D OF IT RULES. 5. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE HA S PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE HO NBLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO.626 OF 2010 IN THE C ASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF I NCOME TAX RANGE ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 4 10(2) MUMBAI & ANR. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIONER OF INCOME TAX RANGE 10( 2) MUMBAI & ORS. BY JUDGMENT DATED 12-8-2010 HAS DEALT WITH THE DISA LLOWANCE THAT CAN BE MADE U/S.14-A OF THE ACT. THE HONBLE COURT ALSO D EALT WITH THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF DAGA C APITAL MANAGEMENT PVT.LTD. 117 ITD 169 (MUM) (SB) AND HAS LAID DOWN T HE FOLLOWING PROPOSITION: I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961 AS WAS A PPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. CONSEQUENTLY NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT BY VIRTUE O F THE PROVISIONS OF SECTION 14A(1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED DISTRIBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPAN Y IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHA RGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDER S. IN THE HANDS OF THE SHAREHOLDER AS THE RECIPIENT OF DIVIDEND INCOME BY WAY OF DIVIDEND DOES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI)EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE THE ASSESSING OFFICE R IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 5 WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHA LL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEV ANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT THE ISSUE WITH REGARD TO DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS TO BE MADE IN ACCORDANCE WITH THE PRINCIPLE LAID DOWN BY THE HONBLE BOMBAY HIGH COURT. RULE 8D SHOULD NOT BE APPLIED AND THE AO HAS TO ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELE VANT FACTS AND CIRCUMSTANCES AND AFTER AFFORDING REASONABLE OPPORT UNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. THE AO S HOULD ALSO CONSIDER THE CLAIM MADE BY THE ASSESSEE IN THE REVISED RETURN OF INCOME FILED THAT THE DISALLOWANCE TO BE MADE U/S.14-A OF THE ACT IS ONLY RS. 24 55 373/-. WE THEREFORE SET ASIDE THE ORDER OF THE CIT(A) ON THI S ISSUE AND REMAND THE ISSUE TO THE A.O FOR FRESH CONSIDERATION AS STATED ABOVE. ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 6 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ITA NO.5060/M/09: 9. THE ASSESSEE IS A GOVERNMENT OF INDIA UNDERTAKIN G. AS PER THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF ONGC VS. COLLECTOR OF CENTRAL EXCISE 1992(SUPPLEMENT -2) SCC 432 NO LIT IGATION IN ANY COURT OR TRIBUNAL CAN BE PROCEEDED WITH BETWEEN THE GOVERNME NT AND PUBLIC SECTOR UNDERTAKING UNLESS THE HIGH POWER COMMITTEE KNOWN A S COMMITTEE OF DISPUTE (COD) PERMITS THE LITIGANTS TO PROCEED IN T HE MATTER. 10. DURING THE HEARING THE LEARNED DR STATED THAT THE REVENUE HAS NOT BEEN ABLE TO OBTAIN APPROVAL OF COD AND NO INTIMATI ON IS RECEIVED IN THIS REGARD. 11. WE ARE OF THE OPINION THAT NO PURPOSE WILL BE S ERVED BY KEEPING THIS APPEAL PENDING. IN THE ABSENCE OF APPROVAL FROM TH E COD THIS APPEAL HAS BECOME INCOMPETENT. THIS APPEAL IS THEREFORE DIS MISSED. HOWEVER IF AND WHEN APPROVAL OF COD IS RECEIVED BY THE REVENUE FOR PURSUING THIS APPEAL THE REVENUE WOULD BE FREE TO MOVE AN APPLICATION FO R RECALL OF THIS ORDER AND FOR DISPOSAL OF APPEAL ON MERIT. ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 7 12. IN THE RESULT APPEAL BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES WHILE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 23 RD DAY OF FEBRUARY 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 23 RD FEB.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.4980&5060/MUM/2009(A.Y. 2002-03) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 15/2/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 17/2/11 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 T O 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