Income Tax Appellate Tribunal - Chandigarh
Sh. Suraj Dev Dada , Ludhiana vs Department Of Income Tax on 20 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No. 783/Chd/2011
Assessment Year: 2007-08
Shri Suraj Dev Dada, Prop. Vs. Addl CIT, Range-V,
M/s Dada Motors, Ludhiana
Ludhiana
PAN No. ABPPD2272B
ITA No. 789/Chd/2011
Assessment Year: 2007-08
The AC IT, Range-V, vs Shri Suraj Dev Dada, Prop.
Ludhiana, M/s Dada Motors,
Ludhiana
PAN No. ABPPD2272B
&
C.O. No. 71/Chd/2011
(In ITA No. 789/Chd/2011)
Assessment Year: 2007-08
Shri Suraj Dev Dada, Prop. Vs. Addl CIT, Range-V,
M/s Dada Motors, Ludhiana
Ludhiana
PAN No. ABPPD2272B
(Appellant) (Respondent)
Appellant By : None
Respondent By : Shri N.K.Saini
Date of hearing : 20.10.2011
Date of Pronouncement : 21.10.2011
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ORDER
PER H.L.KARWA, VP These cross appeals by the assessee and Revenue and Cross objection by the assessee are directed against the order of CIT(A)-II, Ludhiana dated 16.6.2011 relating to assessment year 2007-08.
2. In ITA No. 783/Chd/2011, the assessee has taken the following grounds:-
1. That on the facts and circumstances of the case the Ld. CIT(A) erred in upholding the applicability of section 14A of the Income Tax Act in the appellant's case.
2. That on the facts and circumstances of the case the Ld. CIT(A) erred in confirming the addition of Rs. 2.00 lac u/s 14A of the Income Tax Act which is unwarranted, illogical and unlawful and therefore, needs to be deleted.
3. The ground No.2 of the Revenue's appeal reads as under:-
2.(a) That the Ld. CIT(A)-II,. Ludhiana, on facts as well as in law has erred in deleting disallowance of Rs. 6,40,363/-
out of total disallowance of Rs. 8,40,363/- made u/s 14A of Income Tax Act, 1961 read with rule 8-D of I.T. Rules.
(b) That the Ld. CIT(A)-II, Ludhiana has failed to appreciate that the assessee has made investments which would generate exempted income and thus section 14A 3 read with Rule 8-D of the Income Tax Act, 1961 comes into play.
4. Briefl y stated, the facts of the case are that the assessee is engaged in the business of trading of vehicle and spare parts. During the assessment year under consideration, the assessee declared dividend income of Rs. 41,74,500/-. The assessee has received the dividend against investment of Rs. 1,01,22,350/- as on 31.3.2007 and Rs. 1,00,22,350/- as on 31.3.2006. In the return of income, the total income from shares was claimed as exempt u/s 10(34) / 10(35) of the Income Tax Act, 1961 (in short 'the Act'). The Assessing Officer took the view that the dividend income from investment in shares being claimed exempt expenditure incurred in relation to the income was required to be added back to the income of the assessee u/s 14A of the Act. However, the assessee did not admit to have incurred any expenditure in relation to the income which does not form part of the total income under the Act. Therefore, the Assessing Officer asked the assessee to explain why disallowance should not be made u/s 14A in respect of the expenditure incurred and also asked to justify why Rule 8-D may not be applied. In response to the above query, the assessee submitted that no expenditure in this regard was incurred. Investment in most of the shares was very old when section 14A was not on the statute. However, the Assessing Officer observed that what is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenses incurred by the assessee has resulted into exempt income or taxable income. The Assessing Officer invoked the provisions of Rule 8-D and made an addition of Rs. 8,40,363/- to the declared in of the assessee. 4
5. On appeal, the C IT(A) sustained the addition of Rs. 2 lac as against the addition of Rs. 8,40,363/- made by the Assessing Officer.
6. Now the assessee is in appeal against the addition of Rs. 2 lacs sustained by the C IT(A). The Revenue is in appeal against the relief of Rs. 6,40,363/- given by the CIT(A) to the assessee.
7. In this case, the assessee has submitted the written submissions. As per written submissions, it is submitted that the shares of M/s Dada Motors for Rs. 36,80,000/- have been purchased in the years of 1992-93, 1994-95, 1997-98 and 1999-2000. The assessee has also given the year wise break up in the written submissions. It is further contended by the assessee that the above investments have been made out of the capital of the assessee available with him in the books of M/s Dada Motors, a Proprietary concern. The said shares have been introduced in the books of account on 31.3.2004 to avail of the enhanced CC limit from the bank intended to be used for business purposes. Similarl y, the balance amount of investment is out of the capital of the assessee available with him for all these years. The assessee has also submitted the copy of the chart showing company wise and year wise investment for the purchase of shares as Annexure-A (4 pages). The contention of the assessee that no part of the investment made out of borrowed sums could be linked with the loans obtained for the business purpose because substantial capital of the assessee remained in the books of account for all these years, which were dul y verified by the Assessing Officer as well as the CIT(A) from the balance sheets of M/s Dada Motors. Accordingl y, it is the contention of the assessee that provisions of section 14A are not applicable. Alternativel y, it was also submitted by the assessee that onl y such 5 investment can be considered u/s 14A on which exempt income is earned during the year being the essential ingredient as per provisions of section under reference. The other investment cannot be covered u/s 14A where no exempt income is earned. It is also stated that dividend income was earned from M/s Dada Financial Services Pvt Ltd on the investment of Rs. 32,01,000/- and from BOI of Rs. 1,30,500/-. Under these circumstances, at the most the above stated investments could have been considered by the Assessing Officer while making disallowance u/s 14A of the Income Tax Act, leaving aside the merits of the case. It is stated that Assessing Officer was not justified to disallow the expenses u/s 14A on the total investment of Rs. 1,00,22,350/- ignoring the explanations and lawful reasoning given by the assessee during the assessment proceedings.
8. Shri N.K.Saini Ld. DR strongl y supported the order of the Assessing Officer. However, Shri N.K. Saini, Ld. DR admitted that Rule 'D' is applicable from the year 2008-09 in view of the insertion of Rule 8- D by the IT (Fifth Amendment) Rule 2008 w.e.f. 24.3.2008, therefore, the said rule is not applicable for the year under consideration.
9. We have considered the rival submissions and have also perused the materials available on record. It is true that the disallowance of expenses could onl y be made u/s 14A where the expenditure is incurred directl y or indirectl y for earning exempt income as this section can onl y contemplate the expenditure actuall y incurred for earning tax free income and not assumed expenditure or deemed expenditure as held by the Hon'ble Bombay High Court in the case of C IT v Walfort Share and Stock Brokers P. Ltd (2009) 310 ITR 421 (Bom). In the instant case, as an alternative contention, the assessee has submitted that in his case, the dividend 6 income was earned from M/s Dada Financial Services Pvt Ltd on the investment of Rs. 32,01,000/- and from BOI of Rs. 1,30,500/-. The assessee has specificall y stated that under these circumstances at the most the above sated investment could have been considered for making disallowance u/s 14A of the Act. Thus, it is clear that the assessee has made investment in shares and earned exempt income and incurring of expenditure cannot be ruled out. It is also apparent from records that the assessee was having sufficient capital and most of investments were made in the earlier year in the shares of Private Limited companies. Keeping in view the alternative submission of the assessee, we are of the view that the Ld. C IT(A) has correctl y concluded that the assessee has made investment in shares and earned exempt income and incurring of expenditure cannot be ruled out. However, we are of the view that the estimate of disallowance of Rs. 2 lacs made by the CIT(A) is on higher side. In our view, in all fairness, it would be reasonable to reduce the disallowance to Rs. 1,50,000/- Thus, the assessee gets a further relief of Rs. 50,000/- on this count. Ground No.2 of the Revenue's appeal is dismissed while ground Nos. 1 & 2 of the assessee's appeal are allowed partl y.
10. Ground No.1 of the Revenue's appeal reads as under:_
1.(a) That the Ld. CIT(A)-II, Ludhiana, on facts as well as in law, has erred in deleting the disallowance of Rs. 3,60,000/- made u/s 36(I)(iii) of the Income Tax Act, 1961.
(b) The Ld. CIT(A)-II, Ludhiana has erred in deleting the above disallowance despite the fact that the assessee has been unable to explain the purpose of giving the advance of M/s Nalanda Spinners.
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11. The Assessing Officer discussed this issue in para 8 of the assessment order. The Assessing Officer noticed that the assessee had advanced interest free loan of Rs. 25 lacs to M/s Nalanda Spinners Ltd., however, no interest was charged from the part y. The Assessing Officer required the assessee to furnish the explanation / verification / justification alongwith supporting evidence regarding business expediency for advancing the loan. The assessee replied that the said amount was advanced vide cheque No. 83198 dated 27.3.2006 which could not materialize because of the fraudulent behavior of the part y. The assessee also submitted that due to his persistent efforts, part paym ent has been regained and onl y amount of Rs. 7,50,000/- remains unrecovered, therefore, there was no occasion to charge interest on the advanced amount. However, the Assessing Officer observed that the commercial expediency or business purposes of advancing the loan was not proved, therefore, he disallowed Rs. 3,60,000/- and accordingl y made an addition to the returned income of the assessee.
12. On appeal, the C IT(A) deleted the addition by observing as under:-
"I have gone thought the contention of the appellant's counsel and also perused the relevant assessment order, rival submissions of the appellant and Assessing Officer's comments thereupon. The Assessing Officer disallowed interest of Rs. 3,60,000/- on notional basis on the ground that the loan advanced to the said party without any commercial expediency. The said loan was advanced by the applicant on 27.3.2006 i.e. during assessment year 2006-07 and the assessment under appeal is 2007-08. From a perusal of copy of reply before the Assessing Officer, it reveals that the principal amount of said loan was recovered after filing suit in Civil Courts and with the help of some influential 8 persons. Considering the totality of the facts and circumstances of the case and documents filed alognwith submissions, I am in agreement with the appellant's counsel that the appellant not charged any interest on the amount advanced to the M/s Nalanda Spinners, therefore, the Assessing Officer's action to charge interest on notional basis is not sustainable and is directed to be deleted. Thus, this ground of the appellant is allowed.
13. We have considered the rival submissions and have perused the materials available on record. We find that the repl y filed by the assessee before the Assessing Officer is self-explanatory. The Assessing Officer disallowed interest of Rs. 3,60,000/- on notional basis on the ground that the loan advanced to the Nalanda Spinners Ltd was without an y commercial expediency. There is no dispute that the loan was advanced by the assessee on 27.3.2006, i.e. during the assessment year 2006-07. It is also apparent from record that the principal amount of the said loan was recovered after filing recovery suite in Civil Court. It is also apparent from record that the assessee manage to get part payment vide cheques on different dates leaving balance to the tune of Rs. 7,50,000/-. Considering the entire facts and circumstances of the present case, we are of the view that since the principal amount was at stake, there was no occasion for the assessee to charge interest on the advanced amount. At this stage, we may also observe that there is no material on record to controvert the explanation of the assessee. We, therefore, uphold the order of CIT(A) in holding that the assessee has not charged any interest on the amount advanced to M/s Nalanda Spinners, therefore, the Assessing Officer's action to charge interest on notional basis is not sustainable. In view of the above, we uphold the order of CIT(A) and dismiss ground No.1 of the Revenue's appeal.
9C.O. No. 71/Chd/2011
14. Vide ground No.1 of the Cross objection, the assessee has merel y supported the order of C IT(A) in deleting the disallowance of Rs. 3,60,000/- made u/s 36(1)(iii) of the Act and no effective relief has been claimed and, therefore, we dismiss ground No.1 of the Cross objection.
15. Vide ground No.2 of the Cross objection, the assessee has repeated ground Nos.1 & 2 of ITA No. 783/Chd/2011 and hence this ground needs no separate adjudication. We, therefore, dismiss this ground of Cross objection as infructuous.
16. In the result, assessee's appeal is allowed partl y while Revenue's appeal and Cross objections of the assessee are dismissed.
Order Pronounced in the Open Court on this 21 s t day of October, 2011.
Sd/- Sd/-
(MEHAR SINGH) (H.L.KARWA)
ACCOUNTANT MEMBER VICE PRESIDENT
Dated : 21 s t October, 2011
Rkk
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR
True Copy
By Order
Assistant Registrar,
ITAT, Chandigarh