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IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN (AM) AND SANJAY GARG, (JM)
.. , ,
./I.T.A. No.2820/Mum/2013
( / Assessment Year : 2008-09)
M/s Rare Enterprises, / The Commissioner of Income Tax
105, Sir Vithaldas Chambers, Vs. Central-IV,
16, Mumbai Samachar Marg, Aayakar Bhavan,
Fort, M K Road,
Mumbai-400023. Mumbai-400020
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. : AAEFR8176J
/ Revenue by : Shri S C Tiwari and
Ms.Natasha Mangat
/Assessee by : Shri R R Prasad
/ Date of Hearing
: 17.7.2014
/Date of Pronouncement : 28.8.2014
/ O R D E R
Per B.R.BASKARAN, Accountant Member:
The appeal filed by the assessee is directed against the revision order
dated 18.3.2013 passed by Ld CIT, Central IV, Mumbai u/s 263 of the Act and it
relates to the assessment year 2008-09. The assessee is challenging the validity
of revision order passed by Ld CIT.
2. The facts that led to the passing of revision order are set out in brief. The
assessee herein is a partnership firm and is engaged in the business of Trading
of shares. It filed its return of income for the year under consideration declaring
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a total income of Rs.119.23 crores. The assessment was completed u/s 143(3)
of the Act by the Additional Commissioner of Income tax-12(1) on 29-12-2010.
3. Later the Ld CIT examined the assessment record and took the view that
the assessment order passed by the AO was erroneous and prejudicial to the
interests of revenue on the issue relating to the disallowance made u/s 14A of
the Act. The Ld CIT noticed that the assessee has received following exempted
income during the year under consideration:-
(a) Dividend income Rs. 1,99,80,161/-
(b) Surplus from Partnership firm (RaRe Investment)-Rs.12,42,62,603/-
The Ld CIT further noticed that the assessing officer has disallowed a sum of
Rs.8,20,304/- only u/s 14A of the Act. The Ld CIT took the view that the
disallowance is required to be made in terms of Rule 8D of the Income tax Rules,
which provide for making disallowance in the following manner:-
(a) 8D(2)(i) : Expenditure directly relating to income.
(b) 8D(2)(ii) : Interest expenses not directly attributable to any income or
receipt.
(c) 8D(2)(iii) : The amount of ½ percent of the average value of
investment.
According to Ld CIT, the assessing officer has made disallowance in terms of
Rule 8D(2)(i) of the Rules only. The Ld CIT took the view that the assessing
officer has failed to make disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii).
The Ld CIT noticed that the assessee has paid interest of Rs.19.04 crores and
the investments were reflected to the extent of Rs.83.34 crores. Accordingly, the
I.T.A. No.2820/Mum/2013
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Ld CIT held that the impugned assessment order has been rendered erroneous
and prejudicial to the interest of the revenue.
4. The assessee submitted before the Ld CIT that the investment in
partnership firm was made out of its own funds. The assessee, by placing
reliance on the decision rendered by Hon'ble Supreme Court in the case of CIT
Vs. A.W. Figgies & Co. & Ors.(24 ITR 405)(SC), further submitted that the
partnership firm, per se, does not have separate legal existence from its
partners. Accordingly it was contended that the income earned by a partner
from the partnership firm should not be considered as exempted income. The
assessee further submitted that the Tribunal in the case of Yatish Trading
Company has held that the interest paid on acquisition of shares held as stock in
trade need not be disallowed against the dividend income. The assessee
submitted that even in the case of Daga Capital management P Ltd (117 ITD
169), two members had taken contrary view and the decision was rendered on a
majority view. Accordingly the assessee submitted that the assessing officer has
taken one of the possible views. The assessee also submitted that the assessing
officer, before invoking Rule 8D, should arrive at satisfaction that the claim made
by the assessee is not correct. Accordingly, the assessee contended before the
Ld CIT the impugned assessment order cannot be considered to be erroneous,
since the AO has taken one of the possible views.
5. The Ld CIT was not convinced with the contentions of the assessee. By
placing reliance on the decision of Hon'ble jurisdictional High Court in the case of
Godrej & Boyce Mfg Co. Ltd (234 CTR 1)(Bom), the Ld CIT held that the
procedure prescribed under Rule 8D for making disallowance u/s 14A takes
I.T.A. No.2820/Mum/2013
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effect from the assessment year 2008-09 onwards. Further, by placing reliance
on the Special bench of Tribunal in the case of Daga Capital Management (P) Ltd
(supra), the Ld CIT held that the interest paid on borrowed capital utilized for
acquiring shares held as stock in trade is required to be included in computing
disallowance u/s 14A of the Act. The ld CIT further noticed that the assessee
has not furnished a separate cash flow statement which can convincingly prove
that the funds utilized for investment was not out of borrowed funds.
Accordingly, the Ld CIT held that the disallowance computed u/s 14A by the AO
is not in accordance with Rule 8D of the IT Rules and the same is erroneous and
prejudicial interest of the revenue. The Ld CIT also felt that the assessing officer
did not make proper enquiries in this regard. In support of his views, the Ld
CIT placed reliance on the following case law:-
(a) Paul Mathew and Sons Vs. CIT (263 ITR 101)(Kerala)
(b) CIT Vs. South India Shipping Corpn. Ltd (233 ITR 546)(Mad)
(c) Rampyari Devi Saraogi Vs. CIT (67 ITR 84)(SC)
(d) Smt. Tara Devi Aggarwal Vs. CIT (88 ITR 323)(SC)
(e) Addl. CIT Vs. Mukul Corporation (111 ITR 312)(Guj)
Accordingly, the Ld CIT set aside the order of the AO and directed him to
compute the disallowance u/s 14A of the Act as per the provisions of Rule 8D of
the Income tax Rule by considering the facts discussed by him and after
providing reasonable opportunity for being heard to the assessee. Aggrieved,
the assessee has filed this appeal.
6. The Ld Counsel appearing for the assessee submitted that the Ld CIT has
erred in law in presuming that the income from partnership firm falls in the
category of exempted income as contemplated in sec. 14A of the Act. He
submitted that, under the Partnership Act, the partners are individually called
I.T.A. No.2820/Mum/2013
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partners and collectively as "firm". As such both the partners and the firm
represents one and same entity only, which is made clear by Hon'ble Supreme
Court in the case of A.W. Figgies & Co. & Ors (supra). He submitted that the
income of the partnership firm is assessed to tax in the hands of the partnership
firm itself and hence the share income received by the assessee has suffered tax
already. Hence, it cannot be equated with Dividend income and cannot be
considered as exempted income. He further submitted that the assessee herein
is having both own funds and borrowed funds. The investments made in the
partnership firm is covered by the own funds alone. He submitted that when the
interest free funds available with the assessee is sufficient to meet its
investments and the assessee had also raised a loan, then it can be presumed
that the investments were made from the interest free funds available. For this
proposition, the Ld A.R placed reliance on the decision rendered by Hon'ble
jurisdictional Bombay High Court in the case of CIT Vs. Reliance Utilities & Power
Ltd (313 ITR 340).
7. He further submitted that the Ld CIT was not correct in law in presuming
that the disallowance u/s 14A is required to be computed compulsorily under
Rule 8D of the I.T Rules. In this regard, the Ld A.R invited our attention to the
decision rendered by Hon'ble Bombay High Court in the case of Godrej & Boyce
Mfg. Co. Ltd Vs. DCIT (2010)(328 ITR 81), wherein the Hon'ble High Court has
held that the provisions of sec. 14A does not authorize or empower the AO to
apply the prescribed method irrespective of the claim made by the assessee.
Accordingly he submitted that the view entertained by Ld CIT is not sustainable
in law and hence the impugned revision order needs to quashed.
I.T.A. No.2820/Mum/2013
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8. The Ld A.R further submitted that the Hon'ble Supreme Court in the case of
Malabar Industrial Co. Ltd Vs. CIT (2000)(243 ITR 83)(SC) has held as under:-
"The phrase `prejudicial to the interests of Revenue' has to be read in
conjunction with an erroneous order passed by the AO. Every loss of
revenue as a consequence of an order of AO cannot be treated as
prejudicial to the interests of Revenue, for example, when an ITO adopted
one of the courses permissible in law and it has resulted in loss of
revenue; or where two views are possible and the ITO has taken one view
with which the CIT does not agree, it cannot be treated as an erroneous
order prejudicial to the interests of Revenue unless the view taken by the
ITO is unsustainable in law."
The Ld A.R submitted that the above said view was reiterated by the Hon'ble
Supreme Court again in the case of CIT Vs. Max India Ltd (2007)(295 ITR 282).
The Ld A.R submitted that the assessing officer, in the instant case, has applied
his mind with regard to the disallowance to be made u/s 14A of the Act and has
computed the disallowance by considering the accounts of the assessee.
Accordingly he submitted that the assessing officer has adopted one of the
possible courses permissible in law and hence the Ld CIT was not justified in
holding that the assessment order is erroneous and prejudicial to the interests of
revenue, simply because the Ld CIT was under the belief that the disallowance is
required to be made as prescribed under Rule 8D of the I.T Rules.
9. The Ld D.R, on the contrary, submitted that the jurisdictional High Court in
the case of Godrej & Boyce Mfg. Co. Ltd (supra) has held that the provisions of
Rule 8D shall apply to the year under consideration, viz., assessment year 2008-
09. The Ld D.R further submitted that the assessee has failed to furnish the
details and also failed to prove before the Ld CIT that interest bearing funds
were not utilized for making investments in the partnership firm. He further
I.T.A. No.2820/Mum/2013
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submitted that the assessing officer has failed to apply his mind on this aspect
and hence the assessment order will be rendered erroneous and prejudicial to
the interests of revenue. In this regard, the Ld D.R placed reliance on the
decision rendered by Hon'ble Supreme Court in the case of Malabar Industrial
Co.Ltd (supra) and also the decision rendered by Hon'ble Karnataka High Court
in the case of Infosis Technologies (341 ITR 293)(kar).
10. In the rejoinder, the Ld A.R submitted that the assessing officer has
adopted one of the possible courses permissible in law and hence the Ld CIT was
not justified in passing the impugned revision order. He submitted that the view
entertained by Ld CIT that the Rule 8D is mandatory is contrary to the binding
decision of Hon'ble Bombay High Court. Accordingly, he contended that the
impugned revision order cannot be sustained.
11. We have heard the rival contentions and carefully perused the record.
The scope of revision proceedings initiated under section 263 of the Act was
considered by Hon'ble Bombay High Court in the case of Grasim Industries Ltd. V
CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble
Supreme Court. The relevant observations are extracted below:
"Section 263 of the Income-tax Act, 1961 empowers the
Commissioner to call for and examine the record of any proceedings
under the Act and, if he considers that any order passed therein, by
the Assessing Officer is erroneous in so far as it is prejudicial to the
interests of the Revenue, to pass an order upon hearing the assessee
and after an enquiry as is necessary, enhancing or modifying the
assessment or cancelling the assessment and directing a fresh
assessment. The key words that are used by section 263 are that the
order must be considered by the Commissioner to be "erroneous in so
far as it is prejudicial to the interests of the Revenue". This provision
has been interpreted by the Supreme Court in several judgments to
which it is now necessary to turn. In Malabar Industrial Co. Ltd. v.
CIT [2000] 243 ITR 83, the Supreme Court held that the provision
"cannot be invoked to correct each and every type of mistake or
I.T.A. No.2820/Mum/2013
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error committed by the Assessing Officer" and "it is only when an
order is erroneous that the section will be attracted". The Supreme
Court held that an incorrect assumption of fact or an incorrect
application of law, will satisfy the requirement of the order being
erroneous. An order passed in violation of the principles of natural
justice or without application of mind, would be an order falling in
that category. The expression "prejudicial to the interests of the
Revenue", the Supreme Court held, it is of wide import and is not
confined to a loss of tax. What is prejudicial to the interest of the
Revenue is explained in the judgment of the Supreme Court (head
note) :
"The phrase `prejudicial to the interests of the Revenue' has to be
read in conjunction with an erroneous order passed by the Assessing
Officer. Every loss of revenue as a consequence of an order of the
Assessing Officer, cannot be treated as prejudicial to the interests of
the Revenue, for example, when an Income-tax Officer adopted one
of the courses permissible in law and it has resulted in loss of
revenue, or where two views are possible and the Income-tax Officer
has taken one view with which the Commissioner does not agree, it
cannot be treated as an erroneous order prejudicial to the interests of
the Revenue unless the view taken by the Income-tax Officer is
unsustainable in law."
The principle which has been laid down in Malabar Industrial Co. Ltd.
[2000] 243 ITR 83 (SC) has been followed and explained in a
subsequent judgment of the Supreme Court in CIT v. Max India Ltd.
[2007] 295 ITR 282."
12. In Gabriel India Ltd. [1993] (203 ITR 108) (Bom), law on this aspect was
discussed in the following manner by the Hon'ble jurisdictional High Court (page
113) :
" . . . From a reading of sub-section (1) of section 263, it is clear
that the power of suo motu revision can be exercised by the
Commissioner only if, on examination of the records of any
proceedings under this Act, he considers that any order passed
therein by the Income-tax Officer is ` erroneous in so far as it
is prejudicial to the interests of the Revenue' . It is not an
arbitrary or unchartered power, it can be exercised only on
fulfillment of the requirements laid down in sub-section (1).
The consideration of the Commissioner as to whether an order
is erroneous in so far as it is prejudicial to the interests of the
Revenue, must be based on materials on the record of the
proceedings called for by him. If there are no materials on
record on the basis of which it can be said that the
Commissioner acting in a reasonable manner could have come
I.T.A. No.2820/Mum/2013
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to such a conclusion, the very initiation of proceedings by him
will be illegal and without jurisdiction. The Commissioner
cannot initiate proceedings with a view to starting fishing and
roving enquiries in matters or orders which are already
concluded. Such action will be against the well-accepted policy
of law that there must be a point of finality in all legal
proceedings, that stale issues should not be reactivated
beyond a particular stage and that lapse of time must induce
repose in and set at rest judicial and quasi-judicial
controversies as it must in other spheres of human activity.
(See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106
ITR 1 (SC) at page 10) . . ."
13. On a careful perusal of the law discussed by the Hon'ble Jurisdictional
High Court and the Hon'ble Supreme Court, it is clear that an order cannot be
termed as erroneous unless it is not in accordance with law. This section does
not visualize a case of substitution of the judgment of the Commissioner for that
of the Income-tax Officer, who passed the order unless the decision is held to
be erroneous. If the Income-tax Officer had applied his mind while making an
assessment and determines the income either by accepting the accounts or by
making some estimate himself after making due enquiries, then the said
assessment order cannot be termed as erroneous simply because, the
Commissioner, on perusal of the records, may be of the opinion that the
estimate made by the officer concerned was on the lower side. That would not
vest the Commissioner with power to re-examine the accounts and determine
the income himself at a higher figure. Hence, there must be some prima facie
material on record to show that tax which was lawfully exigible has not been
imposed or that by the application of the relevant statute on an incorrect or
incomplete interpretation a lesser tax than what was just has been imposed .
I.T.A. No.2820/Mum/2013
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14. Now, we shall examine the issue before us by considering the facts
prevailing in the instant case and also applying the law as interpreted by the
jurisdictional High Court and Hon'ble Supreme Court. A perusal of the revision
order passed by Ld CIT, it may be seen that the Ld CIT has considered the
impugned assessment order as erroneous and prejudicial to the interests of
revenue for the following reasons:-
(a) The assessing officer is required to compute the disallowance u/s
14A of the Act as per the procedure laid down in Rule 8D of the IT Rules
as per the decision of Godrej & Boyce Mfg Co Ltd (supra), which is
effective from AY 2008-09.
(b) Interest paid on borrowed capital utilized for acquiring shares held as
stock in trade is to be included in the calculation of disallowance to be
made u/s 14A as per Rule 8D in terms of the Special Bench decision in the
case of Daga Capital Management (P) Ltd (supra)
It can be seen that the second ground flows from the first ground only.
However, the Ld A.R has pointed out to us that the Hon'ble Bombay High Court,
in the case of Godrej & Boyce Mfg Co Ltd (supra), has clearly held that the
provisions of sec. 14A does not authorize or empower the AO to apply the
prescribed method irrespective of the claim made by the assessee. It is now well
settled proposition that the assessing officer should examine the claim of the
assessee having regard to the accounts maintained by the assessee and only, if
he is not satisfied with the claim, then he can proceed to compute the
disallowance u/s 14A of the Act in terms of Rule 8D of the I.T Rules. The
Hon'ble Bombay High Court in the above said case has clearly stated that the
satisfaction of the AO has to be objectively arrived at on the basis of the
accounts and after considering all the relevant facts and circumstances. In this
regard, it can be seen that the Hon'ble Delhi High Court has also expressed
I.T.A. No.2820/Mum/2013
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identical view in the case of Maxopp Investment Ltd Vs. CIT (2012)(347 ITR
272)(Delhi).
15. In the instant case, we have noticed that the Ld CIT has initiated the
revision proceedings mainly on the reasoning that the assessing officer has failed
to follow the procedure prescribed under Rule 8D of the I.T Rules. However, it
can be seen that the view entertained by the Ld CIT is not correct in view of the
decision rendered by the jurisdictional High Court in the case of Godrej & Boyce
Mfg. Co. Ltd (supra) and also the decision rendered by the Hon'ble Delhi High
Court in the case of Maxopp Investment Ltd (supra). Thus, the very foundation,
on which the revision proceeding was initiated in the instant case, was found to
be not correct. In that case, the impugned revision proceeding is liable to be
quashed, as the view entertained by Ld CIT on the issue of disallowance u/s 14A
is not in accordance with the law.
16. Further, it is the case of the assessee that it was having both interest free
funds and interest bearing funds. Thus, by relying on the decision of
jurisdictional High Court in the case of Reliance Utilities & Power Ltd (supra), the
assessee has contended before Ld CIT that the investments in the partnership
firm has been made out of own funds only.
17. A perusal of the assessment order would show that the assessing officer
has examined the issue of disallowance to be made u/s 14A of the Act. During
the year under consideration, the assessee had declared a dividend income of
Rs.1.99 crores and the net profit returned by it was 129.34 crores. Accordingly,
it was contended by the assessee before the AO, during the course of
assessment proceedings, that there is no requirement of making any
I.T.A. No.2820/Mum/2013
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disallowance of interest or for invoking Rule 8-D. Thus, it is seen that the issue
relating to invoking of the provisions of Rule 8D was specifically questioned by
the assessing officer and the assessee has given above said reply. There after, it
is seen that the assessing officer has proceeded to compute the disallowance at
Rs.8,20,304/-. Thus, it is seen that the assessing officer has examined the
applicability of Rule 8D to the case of the assessee herein. After considering the
explanations given by the assessee, the assessing officer has computed the
disallowance cited above.
18. Thus, it is seen that the assessing officer has examined the issue of
disallowance to be made u/s 14A of the Act and has adopted one of the courses
permissible in Law. Hence, the assessment order cannot be termed as
erroneous and prejudicial to interests of revenue simply because the Ld CIT is
having a different view in this matter. In any case, we have seen that the view
entertained by the Ld CIT is not correct in law. Under these circumstances, in
our view, the Ld CIT was not justified in passing the impugned revision order.
19. Accordingly, we set aside the impugned revision order passed by Ld CIT.
20. In the result, the appeal filed by the assessee is allowed.
The above order was pronounced in the open court on 28th Aug, 2014.
28th Aug, 2014
Sd sd
( /SANJAY GARG) ( .. / B.R. BASKARAN)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai: 28th
Aug,2014.
I.T.A. No.2820/Mum/2013
13
. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
|
