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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 19.05.2016 घोषणा क" तार"ख /Date of Pronouncement : 28-07-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 3rd January, 2014 passed by learned Commissioner of Income Tax (Appeals)- 24, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 19th October, 2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”).
ITA 2808/Mum/2014 2
The grounds of appeal raised by the Assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“A) Taxing Agricultural Income as "Income from other sources
- Rs.1,40,600/- 1) The learned Commissioner of Income Tax (Appeals) - 24, Mumbai [CIT(A)] erred on facts and in law in confirming the order passed by the Deputy Commissioner of Income Tax, Circle - 13(3), Mumbai (AO) taxing the agricultural income earned by the appellant amounting to Rs. 1,40,600/- under the head Income from other sources”.
2) The appellant prays that the addition of Rs. 1,40,600/- made by the AO on account of agricultural income under the head "Income from other sources" and confirmed by the CIT(A) may be deleted.
B) Disallowance u/s. 14A - Rs. 3,13,336/- 3) The learned CIT(A) erred on facts and in law in confirming the order of the AO making a disallowance of Rs. 3,13,336/- u/s. 14A.
4) The learned CIT(A) and the AO failed to appreciate that the appellant had not incurred any expenditure for earning exempt income and hence no disallowance could be made u/s.14A.
5) The appellant prays that the disallowance of Rs. 3,13,336/- made by the AO u/s. 14A and confirmed by the CIT(A) u/s. 14A may be deleted.
C) General 6) The above grounds of appeal are without prejudice to one another and the appellant craves leave to add, alter, amend, delete or modify any of the above grounds of appeal.”
3. The brief facts of the case are that the assessee is engaged in the business of commission agent, transportation and speculation business. The assessee is also Director in M/s Jamanadas Kishandas Samarth Pvt. Ltd.. The AO observed that in the P&L account, the assessee has disclosed a sum of Rs. 1,40,600/- as agricultural income. The A.O. asked the assessee to ITA 2808/Mum/2014 3 furnish details and proof of agricultural income. The assessee only filed copies of extract of land records 7/12. However, the assessee did not filed any details or proof for sale of agricultural products and/or any expenditure incurred for earning agricultural income. Thus, the A.O. treated the same as ‘income from other sources’. Without prejudice to the above , the AO observed that since the assessee has claimed the agricultural income as exempt u/s 10(1) of the Act and hence the same was also taken into account for the purpose of computing disallowance u/s 14A r.w.r. 8D of the Income Tax Rules, 1962. The A.O. observed that the assessee has earned dividend of Rs. 28,089/- and interest of Rs. 9263/- on 8% tax free RBI bond. The assessee did not furnish any explanation in this regard. It was also observed from the balance sheet of the assessee that the assessee has creditors to the tune of Rs. 70,50,000/-for unsecured loans on which the assessee incurred interest expenditure of Rs. 11,52,535/- and another loan of Rs. 2,73,547/- on which the assessee had incurred interest expenditure of Rs. 48,707/- besides investment of Rs. 40,32,648/- and agricultural land worth Rs. 2,27,840/- as on 31st March, 2009. The AO observed that the assessee has diverted the funds to investments and hence interest expenditure was incurred , otherwise owned funds would have been sufficient for running his affairs and no interest expenditure were to be incurred by the assessee. Disallowance of Rs. 3,13,334/- was made by the AO u/s. 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 vide assessment order dated 19th October, 2011 passed by the AO u/s 143(3) of the Act for which the details are as under:- A Expenditure directly attributable to exempt 0 income. B Expenditure not directly attributable to exempt 11,52,535 income. C Investments in shares/RBI Bonds/Agricultural 41,29,384 land as on 31-03-2008 Investments in shares/RBI Bonds/Agricultural 36,32,905 ITA 2808/Mum/2014 4 land as on 31-03-2009 C-1 Average investment 38,81,145 C-2 One half % of average investments 19,406 D Total asset as on 31-03-2008 0 Total asset as on 31-03-2009 3,04,37,026 D-1 Average assets 1,52,18,513 E Interest proportionate to average investment 2,93,929 and the average assets (B* C-1/D-1) F Disallowance = A+E+C-2 3,13,334 4.Aggrieved by the assessment order dated 19.10.2011 passed by the A.O. u/s 143(3) of the Act, the assessee filed his first appeal before the ld. CIT(A).
5. Before the learned CIT(A), the assessee submitted that the assessee owns 119.02 gunthas equivalent to 3 acres of agricultural land. The assessee submitted that he has been consistently showing agricultural income every year , which has been accepted by the Revenue. However, during the year under consideration the Revenue asked the details of agricultural income and proof of the same. The assessee submitted that he had filed copies of 7/12 extracts of land records to show that the assessee is owning agricultural land. The assessee submitted that the said 7/12 extract of land records also showed that the agricultural land were tilled and utilized for rice produce. Since no other details were asked for during the earlier years, the assessee had not maintained any details of the sale proceeds of agricultural produce and the expenses incurred. The A.O. has added agricultural income of Rs. 1,40,600/- as income from other sources. The assessee contended that the assessee is the owner of agricultural land , which is evidenced by 7/12 extracts of land records and the Revenue has accepted the income as agricultural income from year to year in the preceding years even in the assessment framed u/s 143(3) of the Act, hence, no adverse inference was called for on account of agricultural income. The assessee relied on the decision of Hon’ble Supreme Court in the case of K.P. Varghese v. ITO, 131 ITA 2808/Mum/2014 5 ITR 597 (SC), in the case of Umarchand Shah & Bros v. CIT 37 ITR 271 (SC) and the decision of Hon’ble Patna High Court in the case of Md. Umer v. CIT 101 ITR 525 (Pat.).
The assessee also submitted that on the one hand the A.O. has considered the income as unexplained income of the assessee, on the other hand while making disallowance u/s 14A, the A.O. stated that the disallowance is justified as the assessee has earned agricultural income.
The ld. CIT(A) considered the facts and submission of the assessee and observed that the assessee has filed four copies of 7/12 extracts of the agricultural land, however, the assessee had not filed any evidence in support of deriving agricultural income. The said 7/12 extracts of land records also does not indicate that any agricultural activity was carried on by the assessee on these agricultural land and no details of agricultural produce has been filed by the assessee. Merely because of the acceptance of agricultural income in earlier years does not automatically prove that the assessee is carrying on agricultural activity in the current year, and in the absence of evidence in support of carrying on agricultural activity in the relevant previous year, the same cannot be accepted in the present year. The assessee failed to produce any evidence regarding production of any agricultural outputs. Thus, the A.O.’s action to treat the income of Rs. 1,40,600/- as income from other sources was confirmed by learned CIT(A) vide appellate orders dated 03-01- 2014. Similarly, the learned CIT(A) confirmed the additions of Rs.3,13,535/- made by the AO u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 on the grounds that the funds were borrowed by the assessee from time to time from private parties and banks to supplement his financial resources and these borrowed funds along with the assessee’s own funds being mixed funds ITA 2808/Mum/2014 6 were utilized by the assessee for making investment in shares and securities which generated tax free as well taxable income for the assessee. The learned CIT(A) distinguished the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited reported in (2009) 313 ITR 340(Bom. HC) as in the instant case it is fully established that borrowed funds were utilized for investments in shares and securities which generated tax-free income for the assessee. The learned CIT(A) passed appellate orders dated 03-01-2014 confirming/sustaining the additions made by the AO in his assessment order dated 19-10-2011 passed u/s. 143(3) of the Act.
Aggrieved by the appellate order dated 03-01-2014 passed by the ld. CIT(A), the assessee filed second appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the assessee has earned agriculture income to the tune of Rs.1,40,600/- during the relevant previous year which has been assessed to tax by Revenue under the head ‘Income from other sources’. It was submitted that the assessee has duly submitted 7/12 extract of land records to show that agriculture was carried on in the said land and rice was sown therein which led to earning of agriculture income of Rs.1,40,600/- during the relevant previous year, which are placed at paper book page 11-14 filed with the Tribunal. The learned counsel for the assessee submitted that the assessee owns 119.02 gunthas equivalent to 3 acres of agricultural land. The learned counsel for the assessee submitted that the assessee has been consistently showing agricultural income every year , which has been accepted by the Revenue even in assessments framed u/s 143(3) of the Act. However, during the year under consideration the Revenue asked the details of agricultural income and proof of the same. The learned counsel for the assessee submitted that he had filed copies of 7/12 extracts of land records to show that the assessee is owning agricultural land. The assessee submitted that the said 7/12 extract of land records also showed ITA 2808/Mum/2014 7 that the agricultural land were tilled and utilized for rice produce. Since no other details were asked for during the earlier years, the learned counsel for the assessee submitted that the assessee had not maintained any details of the sale proceeds of agricultural produce and the expenses incurred for carrying on agricultural activities during the relevant previous year. The A.O. has added agricultural income of Rs. 1,40,600/- as income from other sources. The assessee contended that the assessee is the owner of agricultural land , which is evidenced by 7/12 extracts of land records and the Revenue has accepted the income as agricultural income from year to year in the preceding years even in the assessment framed u/s 143(3) of the Act, hence, no adverse inference was called for on account of agricultural income. The assessment order framed u/s 143(3) of the Act for the assessment year 2004-05, 2005-06,2006-07 and 2007-08 along with computation of income are placed at paper book page 17-36 filed with the Tribunal.
The learned counsel for the assessee submitted that the assessee had earned dividend of Rs. 28,089/- and interest of Rs. 9263/- on 8% tax free RBI bond during the year under consideration which are exempt income and the assessee had not incurred any expenditure for earning the exempt income and no disallowance u/s 14A of the Act can be made. It is submitted that the assessee has incurred interest expenses amounting to Rs. 11,52,535/- and interest on secured loans amounting to Rs. 48,707/-. It is submitted that the interest on secured loan was for the purposes of the business and with respect to interest on unsecured loans, it is submitted that the assessee is in the business of financing and assessee has earned interest of Rs. 25,37,817/- on the amount financed by him and paid interest of 11,52,535/- on unsecured borrowings , whereby an net interest amount of Rs. 13,85,282/- was earned by the assessee and hence no disallowance can be made out of interest expenses of Rs. 25,37,817/- incurred by the assessee. The assessee ITA 2808/Mum/2014 8 drew our attention to paper book page1-10 where financial statement of the assessee for financial year 2008-09 are placed It was submitted that the total investments made by the assessee yielding taxable and exempt income amounted to Rs. 40,32,648.08 as at 31-03-2009. The assessee has own capital of Rs. 2,28,63,468/- as at 31-03-2009 which is sufficient to cover the investment of Rs. 40,32,648.08 held as at 31-03-2009 and the presumption will lie that the investments are made out of own funds. Since the assessee has sufficient own funds, the investment in assets yielding exempt income has been made out of own funds and not borrowed funds. In support, the assessee relied upon the decision of Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) and decision of HDFC Bank Limited v. DCIT reported in (2016) 67 taxmann.com 42(Bombay). The assessee submitted that since the assessee has sufficient own funds, no disallowance can be made out of interest expenses paid by the asssessee. The learned counsel for the assessee submitted that with respect to other expenses claimed by the assessee as deduction while computing income , that the assessee has himself voluntarily disallowed an amount of Rs. 1,51,630/- towards Godown Repair expenses and Rs.12,870/- out of Rent, Rates and Taxes. It is submitted that these are the amounts of expenditure which are attributable to earning of income from house property and the assessee voluntarily disallowed the same while computing income chargeable to tax. If the interest expenses, godown repair expenses, rent, rates and taxes were removed from the total expenses of Rs. 16,21,585.41, there remains balance expenditure of Rs. 2,55,844.20 out of which a sum of Rs. 2,03,903.75 pertains to depreciation on trucks which was used for transportation business and has nothing to do with the investment activities. No part of Rs. 2,03,903.73 could be allocated towards the earning of exempt dividend income and if said expenses are also removed, the balance amount comes to Rs. 51,940.20 which consisted of bank commission and charges of Rs. 7,227.60, electricity charges of Rs. 22,446/-, interest on service tax of Rs. ITA 2808/Mum/2014 9 99, discount of Rs. 106.85, professional tax of Rs. 2,000/- and professional fees of Rs. 21,680/- , out of which discount and professional tax has nothing to do with the investment activities. Similarly, bank commission & charges were pertaining to the financial activities while professional fee is towards tax- audit fee and for filing return of income. Accordingly, the assessee submitted that having regards to the accounts of the assessee as per mandate of Section 14A(2) of the Act , no expense has been incurred for the purposes of earning exempt income, hence, no disallowance can be made. Without prejudice to the above the assessee submitted that if any disallowance has to be made, the same has to be in the proportion of exempt income to total income which can be applied to balance expenses of Rs. 22,446/- which comes to Rs. 164/- and hence the disallowance should be restricted to Rs. 164/- and hence disallowance of 0.5% of the average value of investment as contemplated under Section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 is not warranted as was done by authorities below.
The ld. D.R. submitted that the assessee was holding 3 acres of land as per the records. The assessee has produced land record vide 7/12 extracts for the year 2006-07 which is placed in paper book page 11-14 whereby it cannot be said that agriculture was carried on by the assessee in the relevant previous year 2008-09 which is presently under appeal. He submitted that the Revenue has accepted the agricultural income in the past but the assessee has to show with cogent evidences that agricultural activity was actually carried on by the assessee in this previous year also as provided u/s 2(1A) of the Act to fall within definition of agricultural income being earned out of the said agricultural activity been carried on the said land. It is for the assessee to give cogent evidences with respect thereof as to actual carrying out of the agricultural activity during the relevant previous year as the primary onus lay on the assessee . It was submitted that principle of res- judicata is not applicable to income tax proceedings and every year is an ITA 2808/Mum/2014 10 independent assessment year . The assessee in the instant previous year is not able to prove that the agricultural operations were actually carried on by the assessee on the said land. The ld. DR relied upon the orders of the learned CIT(A) with respect to both the issues under appeal i.e. treatment of agricultural income as income from other sources and also disallowance u/s 14A of the Act.
We have considered the rival contentions and also perused the relevant material placed on record including case law relied upon. We have observed that the assessee is the owner of 119.02 gunthas of land which is equivalent to 3 acres of agricultural land. The assessee has produced 7/12 land record extract with respect to the land owned by the assessee being stated to be utilized by the assessee for agricultural purposes whereby rice is being reflected as cultivated in the 7/12 extract of land record but the said relevant 7/12 extract of land record produced by the assessee belonged to the year 2006-07 and not to the relevant previous year 2008-09 under instant appeal before us. The assessee has also not produced any other relevant evidences to demonstrate and substantiate that agricultural activities was actually carried out by the assessee during the relevant previous year in the afore- stated land as stipulated and mandated under Section 2(1A) of the Act to fall and classified within the definition of agricultural income to be exempt from income-tax thereof u/s 10(1) of the Act. It is a matter of record that the assessee is declaring agricultural income in the return of income filed with the Revenue year to year and the same was accepted by the Revenue in preceding years even under scrutiny assessments framed u/s 143(3) of the Act. The exemption from income-tax can be granted u/s 10(1) of the Act to the agricultural income earned by the assessee if the agricultural activities are actually carried out on the said land by the assessee during the assessment year as stipulated and mandated under Section 2(1A) of the Act to enable earning of agricultural income to fall within exemption as provided ITA 2808/Mum/2014 11 u/s 10(1) of the Act. One of the objects for exemption from income-tax is to encourage cultivation or actual utilization of land for agricultural purposes and hence if there is neither anything in its condition, nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purpose, the land could not be ''agricultural land''. We are also fully aware that principles of res-judicata is not applicable to the income tax proceedings but principle of consistency is to be followed. In our considered view keeping in view the facts and circumstances of the case, this issue needs to be set aside and restored back to the file of the A.O. for de- novo determination of the issue on merits after considering the contentions, explanations and evidences of the assessee in his defense whereby the assessee will be entitled to produce the relevant evidences and explanations in his defense which shall be admitted by the AO. Needless to say that proper and adequate opportunity of being heard shall be provided to the assessee by the AO in accordance with the principles of natural justice in accordance with law. We order accordingly.
With respect to issue of application of section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 , an amount of Rs. 3,13,334.00 was disallowed by the AO whereby interest expenditure of Rs. 2,93,929/- was disallowed u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 and disallowance of Rs. 19,406/- have been made by the AO being 0.5% of average investment u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962. The assessee submitted that the total investment made in the assets yielding taxable and exempt income were to the tune of Rs. 40,32,648/- as at 31-03-2009 while the assessee has an own capital investment of Rs. 2,28,63,468/- as at 31-03-2009 which are reflected in the Financial Statements as at 31-03-2009 which is sufficient to cover the quantum of investment held as at 31-03-2009 being made out of own funds to the tune of Rs. 40,32,648/- as at 31-03-2009. The financial statements of ITA 2808/Mum/2014 12 the assessee as at 31-03-2009 are placed at paper book page 1-10 filed with the Tribunal. In our considered view keeping in view facts and circumstances of the case , since the assessee’s own capital of Rs. 2,28,63,468/- as at 31- 03-2009 is more than the investment of Rs. 40,32,648/- as at 31-03-2009 held by the assessee, the presumption as contemplated in the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) and. HDFC Bank Ltd. (supra) shall apply and it will be presumed that the assessee has made investment in the aforesaid investments of Rs. 40,32,648/- as at 31-03-2009 out of own funds of the assessee of Rs. 2,28,63,468/- as at 31-03-2009 which are more than sufficient to cover the investment of Rs. 40,32,648/- held by the assessee as at 31-03-2009 Thus, in our considered view disallowance made under Section 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 of interest expenses to the tune of Rs.2,93,929/- is not sustainable in law and is ordered to be deleted . We order accordingly.
With respect to disallowance of Rs.19,406/- being made by the AO and as sustained by the learned CIT(A) u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 being @0.5% of the average investment held by the assessee is also not sustainable in totality as the assessee has keeping in view regards of the accounts of the assessee has explained that the additions to the tune of Rs.19,406/- is not sustainable keeping in view the mandate of Section 14A(2) of the Act of the expenses incurred by the assessee in order to earn exempt income having regards to the accounts of the assessee . The explanation of the assessee with respect to each of the expenses debited to the Profit and Loss Accounts is that with respect to other expenses claimed by the assessee as deduction while computing income , that the assessee has himself disallowed an amount of Rs. 1,51,630/- towards Godown Repair expenses and Rs.12,870/- out of Rent, Rates and Taxes. It is submitted by the assessee that these are the amounts of expenditure which are attributable ITA 2808/Mum/2014 13 to earning of income from house property and the assessee voluntarily disallowed the same while computing income chargeable to tax. If the interest expenses, godown repair expenses, rent, rates and taxes were removed from the total expenses of Rs. 16,21,585.41, there remains balance expenditure of Rs. 2,55,844.20 out of which a sum of Rs. 2,03,903.75 pertains to depreciation on trucks which was stated to be used for transportation business and has nothing to do with the investment activities was the contentions of the assessee before us. No part of Rs. 2,03,903.73 could be allocated towards the earning of exempt dividend income and if these expenses are also removed, the balance amount comes to Rs. 51,940.20 which consisted of bank commission and charges of Rs. 7,227.60, electricity charges of Rs. 22,446/-, interest on service tax of Rs. 99, discount of Rs. 106.85, professional tax of Rs. 2,000/- and professional fees of Rs. 21,680/- , out of which discount and professional tax was stated has no nexus with the investment activities was the submissions of the assessee before us. Similarly, bank commission & charges were stated to be pertaining to the financial activities while professional fee is towards tax-audit fee and professional fee for filing return of income. Accordingly, the assessee submitted that having regards to the accounts of the assessee as per mandate of Section 14A(2) of the Act , no expense has been incurred for the purposes of earning exempt income, hence, no disallowance can be made. Without prejudice to the above the assessee also submitted before us that if any disallowance has to be made, the same has to be in the proportion of the exempt income to total income which can be applied to balance expenses of Rs. 22,446/- being electricity expenses whereby disallowance comes to Rs. 164/- and hence the disallowance should be restricted to Rs. 164/- and hence disallowance of 0.5% of the average value of investment as contemplated under Section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 is not warranted as was done by authorities below was the contention of the assessee before us keeping in view the mandate of Section ITA 2808/Mum/2014 14 14A(2) of the Act. Keeping in view the peculiar facts and circumstances of the case, a reasonable disallowance is to be made as the assessee has explained and jsutify the expenses having regard to the accounts of the assessee as per mandate of Section 14A(2) of the Act and in our considered view, keeping in view totality of the circumstances surrounding the assessee case and explanation submitted by the assessee , interest of justice will be best served if disallowance u/s 14A of the Act with respect to indirect expenditure incurred by the assessee with regard to earning of exempt income is restricted to Rs.2,500/- which in our considered view is reasonable disallowance in the instant case. We order accordingly.
In the result, the appeal filed by the assessee in ITA N0. 2808/Mum/2014 for the assessment year 2009-10 is partly allowed as indicated above.