Bhaidas Cursondas & Co, Mumbai vs Department Of Income Tax

ी डी. म मोहन, उपा य एवं ी संजय अरोड़ा, लेखा के सम ।

BEFORE SHRI D. MANMOHAN, VP AND SHRI SANJAY ARORA, AM

आयकर अपील सं./I.T.A. No. 5019/Mum/2012 ( नधा रण वष / Assessment Year: 2009-10) Bhaidas Cursondas and Company Addl. CIT, Range-12(1), 6, Vithaldas Chambers, बनाम/ Aayakar Bhavan, M. K. Marg, Mumbai Samachar Marg, Vs. Mumbai-400 020 Mumbai-400 001 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAAFB 4428 P ("नधा$%रती/Assessee) : (राज व /Revenue) & आयकर अपील सं./I.T.A. No. 5021/Mum/2012 ( नधा रण वष / Assessment Year: 2009-10) Addl. CIT, Range 12(1), Bhaidas Cursondas and Company Aayakar Bhavan, M. K. Marg, बनाम/ 6, Vithaldas Chambers, Mumbai-400 020 Vs. Mumbai Samachar Marg, Mumbai-400 001 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAAFB 4428 P (राज व /Revenue) : ("नधा$%रती/Assessee)

"नधा$%रती क( ओर से / Assessee by : Shri Vipul Joshi

राज व क( ओर से/Revenue by : Shri Love Kumar

सनु वाई क( तार,ख / : 03.02.2015 Date of Hearing घोषणा क( तार,ख / : 11.03.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

These are cross appeals, i.e., by the Assessee and the Revenue, agitating the part allowance of the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax 2 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 20.12.2011 by the Commissioner of Income Tax (Appeals)-23, Mumbai ('CIT(A)' for short) vide his order dated 10.05.2012.

Assessee's Appeal (in ITA No. 5019/Mum/2012)

2. The same raises a single ground, reading as under:

'On the facts and circumstances of the case, the Learned CIT(Appeals) has erred in not deleting the entire addition of Rs.98,66,326/- made u/s.14A and instead in restricting the disallowance to Rs.45,63,028/- u/s.14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii).'

3. At the very outset, it was submitted by the ld. Authorized Representative (AR), the assessee's counsel, that the disallowance u/s.14A, made suo motu by the assessee by estimating the impugned expenditure at 5% of the tax exempt income in the form of dividend, i.e., at Rs.7,51,999/-, stood worked by the Assessing Officer (A.O.) at Rs.1,06,18,325/-, and against which part relief has been allowed by the ld. CIT(A), resulting in both the parties being in appeal. The assessee, however, does not wish to contest its appeal and, accordingly, does not press its ground, which concerns, as apparent, deduction u/s.14A made with reference to Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules, 1962.

In view of the foregoing, subject to our observations, if any, with regard to the Revenue's appeal, in-as-much as the same also concerns, in the main, disallowance u/s.14A r/w rule 8D, we dismiss the assessee's appeal in limine as not pressed.

Revenue's Appeal (in ITA No. 5021/Mum/2012)

4. Vide the first two grounds of its appeal, the Revenue agitates the deletion of the disallowance u/s.14A r/w rule 8D(2)(i), which is in respect of direct expenditure, including by way of interest on borrowings, in relation to income/s not forming part of the total income. The assessee is a cotton merchant, whose business is, therefore, seasonal. The A.O., analyzing the assessee's activity in the form of purchase and sale of cotton yarn for the different months of the year, found no purchases of yarn for the 3 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

months of July to October, 2008, while that for the months of June and November, 2008 were also, at a little over 2% of the total purchases for the year, minimal. On the credit side, there was again no sale for the months of August to October, 2008, with minimal sales being observed for the months of June, July, November and December, 2008. There was, thus, correspondingly no business activity, so as to entail deployment of capital, for four to six months during the year. He, accordingly, attributed 1/3rd of the total interest for the year (at Rs.204.52 lacs) towards investment in shares, yielding or liable to yield the tax-exempt dividend income, working the disallowance under rule 8D(2)(i) at Rs.68,17,444/-. The balance interest claim of Rs.136.35 lacs, being the difference of the total claim of Rs.204.52 lacs and that disallowed as direct expenditure (Rs.68.17 lacs), was considered for disallowance under r. 8D(2)(ii) on a proportionate basis, i.e., in the ratio of the average investment in shares to the total assets as per the assessee's balance- sheet.

In appeal, it was argued before the first appellate authority that the calculation by the A.O. is based on a faulty assumption of the funds released on the liquidation of the inventories of cotton yarn during the lean season being utilized toward investment in tax exempt instruments. No direct nexus between the two, however, had been shown by the A.O. The funds had in fact continued to be deployed in the assessee's business. The disallowance u/s.14A r/w r. 8D(2)(i) was, accordingly, directed for deletion by the ld. CIT(A), even as he, relying on the decision in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), upheld the disallowance u/s.14A made with reference to rules 8D(2)(ii) and 8D(2)(iii), so that, aggrieved, the Revenue is in appeal.

5. We have heard the parties, who raised similar contentions before us, as also perused the material on record.

No doubt, the A.O. has established release of no insubstantial funds from its regular business activities of trading in cotton yarn by the assessee during non-seasonal months. So, however, unless he is able to exhibit the investment of those funds in tax- exempt instruments, i.e., which yield or are liable to yield tax-exempt income, it cannot 4 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

be said that the interest on the said funds for the corresponding period is liable for disallowance u/s.14A(1). The ld. AR would in fact, with reference to the assessee's annual accounts for the current year, show that there has been rather a decline in the investment in mutual funds, i.e., the relevant investment, during the year, i.e., from Rs.3090.24 lacs as at the beginning of the year to Rs.973.45 lacs at its end. Though the fund position as at the year-end, would not, in our view exhibit whether the surplus funds of the business were or were not utilized in whole or in part toward the tax exempt investment during the non-seasonal months, the same is a matter of fact and, accordingly, required to be established as so. It is only the assessee's balance-sheet as at the end of the relevant months, or the fund flow statement for the same, or the relevant period, that would show the avenue of the funds released from the inventory of yarn maintained during the seasonal months. The Revenue's case is as such not based on proven facts, but presumptuous. We, accordingly, are in agreement with the ld. CIT(A) that no disallowance u/s.14A(1) r/w r. 8D(2)(i) qua the interest expenditure, as made, is called for, so that its deletion by him is confirmed.

At the same time, however, the interest expenditure liable for allocation under rule 8D(2)(ii), disallowance qua which has been in fact conceded to by the assessee, would stand to be correspondingly increased. This is as the allocation of the interest, as a indirect cost, to be made on a proportionate basis, would have to be with reference to the interest cost for the whole year, as against 2/3rd thereof, as made by the A.O. The same follows as a natural inconsequence of the holding of no part of the total interest, assessed by the A.O. at 1/3rd thereof, as forming part of direct expenditure, so that there could be no reduction in its respect for determining the interest liable for allocation as an indirect cost, i.e., on a pro rata basis. Both the interest cost being allocated, i.e., as between the incomes forming and not forming any part of the total income, as well as the said incomes themselves, it needs to be noted, are for the whole year. This, even otherwise patent, becomes inevitable in the instant case as the assessee neither before us nor before the first appellate authority has made out any case against the disallowance of interest u/s.14A(1) r/w r. 8D(2)(ii). We, accordingly, consider it a serious lapse on the part of the 5 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

ld. CIT(A) in not so directing the A.O. So much so, in our view, the parties themselves should have pointed out this during hearing, which exhibits or reflects smugness on the part of the assessee and a lack of preparation on the part of the ld. Departmental Representative (DR). We direct accordingly, so that the disallowance of interest u/s.14A r/w Rule 8D(2)(ii) shall be with reference to the interest cost for the entire year, i.e., Rs.204.52 lacs, and not Rs.136.35 lacs. As regards our competence to so direct, we rather consider it our bound and duty to do so. The case law on the powers of the tribunal is legion, and for which we may, for ready reference, refer to the decisions inter alia in the case of Kapurchand Shrimal vs. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. vs. CIT [1993] 199 ITR 351 (Bom). We may though clarify that it is not be a case of enhancement, but only of an inter-clause adjustment of the clauses of rule 8D(2) under which the disallowance u/s. 14A is required to be more appropriately made in the facts and circumstances of the case; taking into account the position of law in the matter. Reference though may also be made to the decisions by the apex court inter alia in Martin Burn Ltd. vs. CIT [1993] 199 ITR 606 (SC); CIT vs. Assam Travels Shipping Service [1993] 199 ITR 1 (SC) and CIT vs. S. Nelliappan [1967] 66 ITR 722 (SC). We decide accordingly.

6. Grounds # 3 and 4 of the Revenue's appeal relate to the disallowance of deprecation. The A.O. during the course of assessment proceedings observed the assessee to have sold a part of the assets forming part of the block of assets 'Building' on 25.03.2008, i.e., during the previous year relevant to A.Y. 2008-09, the immediately preceding assessment year, at Rs.1,50,000/-. The same attracts section 50C. The value adopted by the stamp value authority was at Rs.2,30,000/-. He, accordingly, recomputed the opening WDV of the relevant block of assets by reducing the said sum, as 'moneys payable', and allowed the depreciation for the current year accordingly, working the same to Rs.2,78,970/-, i.e., at Rs.5,700/- less than that claimed by the assessee. In appeal, the assessee found favour with the ld. CIT(A) in-as-much as section 50C only applies for computing 'capital gains' arising to the assessee on the transfer of capital assets specified 6 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

therein, so that the same would have no implication toward computing the WDV of the relevant block of assets. Aggrieved, the Revenue is in appeal before us.

7. We have heard the parties, and perused the material on record. The Revenue bases its claim on the decision by the special bench of the tribunal in the case of ITO vs. United Marine Academy [2011] 130 ITD 113 (Mum)(SB). Even as noted by the ld. CIT(A), the said decision, in ratio, only holds that section 50C shall apply equally in respect of depreciable assets; it being the assessee's claim in that case that immovable property, the asset class specified in section 50C, would yet not apply in-as-much as the same is a depreciable asset being used for the purposes of its business by the assessee. We are in complete agreement with the ld. CIT(A). The deeming of section 50C is for the limited purpose for computing the capital gains u/s.45 r/w s. 48 on the assets specified under the said section. The only purport of section 50C is the extent of the matter specified therein, providing (to that extent) an alternate basis to that specified u/s.48, for computing the capital gains chargeable u/s.45. The WDV would have to be necessarily computed in terms of section 43(6), and for which section 50C has no application. The decision in the case of United Marine Academy (supra) shall, therefore, have no application in the facts of the case, even as clarified by the ld. CIT(A), whose decision is accordingly upheld. In fact, how we wonder the opening WDV could be altered without first changing the depreciation for the immediately preceding year and, concomitantly, the WDV at the close of that year. The Revenue's case is wholly untenable in law. We decide accordingly, dismissing the relevant grounds.

8. In the result, we dismiss the Revenue's appeal and dispose the assessee's appeal accordingly.

Order pronounced in the open court on March 11, 2015

Sd/- Sd/- (D. Manmohan) (Sanjay Arora) उपा य / Vice President लेखा सद य / Accountant Member मंब ु ई Mumbai; 3दनांक Dated : 11.03.2015 7 ITA Nos. 5019/M/12 & 5021/M/12 (A.Y. 2009-10) Bhaidas Cursondas and Company

व."न.स./Roshani, Sr. PS

आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :

1. अपीलाथ4 / The Appellant

2. 56यथ4 / The Respondent

3. आयकर आय7 ु त(अपील) / The CIT(A)

4. आयकर आयु7त / CIT - concerned

5. :वभागीय 5"त"न=ध, आयकर अपील,य अ=धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड$ फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai