DCT RG 8(2), MUMBAI vs. KULGAM HOLDINGS P. LTD, MUMBAI

The captioned appeal by the Revenue and Cross Objection by the assessee are directed against the order of the CIT(A)-17, Mumbai dated 20/12/2010, pertaining to the Assessment Year 2005-06, which in turn has arisen from the order passed by the Assessing Officer dated 19/12/2007 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) . 2. In the appeal of the Revenue, the following Grounds of appeal have been raised:-

“1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in restricting the disallowance of Rs.4,98,764/- made under section 14A of the Act to Rs.1,05,458/- without appreciating the facts of the case.

3. On the facts and interest he circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the assessed income cannot be less than the retuned income, in view of the Apex Court’s decision in the case of Goetze India Ltd. [284 ITR 323].”

C.O. No.08/mum/2016 (Assessment Year : 2005-06) accounting service charges and other expenses. It was noted that inspite of incurrence of expenditure, no disallowance was made with respect to the expenditure relatable to the earning of the exempt dividend income, as required by the provisions of section 14A of the Act. The explanation furnished by the assessee to the effect that no specific expenditure was incurred for earning of the dividend income was not found satisfactory and instead the Assessing Officer disallowed a sum of Rs.4,98,764/- under section 14A of the Act on the ground that it was an expenditure incurred for earning of dividend income. The aforesaid disallowance was worked out by allocating the total expenditure incurred of Rs.7,21,943/- against the various incomes earned proportionately.

3.1 In appeal before CIT(Appeals), the assessee company assailed the action of the Assessing Officer on the ground that disallowance was not justified as assessee had not incurred any expenditure for earning of dividend income. It was also claimed by the assessee that the dividend income of Rs.8,46,351/- was earned on the shares of M/s. Nirma Ltd., which were acquired in the financial year 1989-90 and there was no borrowings. It was also explained that the dividend income was received by way of electronic transfer and there was no other specific expenditure incurred on earning of dividend income. Before CIT(Appeals), the assessee made an alternative plea that, if at all, the disallowance under section 14A of the Act was merited the computation in terms rule 8D of the Income Tax Rules, 1962 ( in short ‘the Rules’) be made which would show that the adhoc disallowance made by the Assessing Officer was not justified. The CIT(Appeals)

C.O. No.08/mum/2016 (Assessment Year : 2005-06) noted that the provisions of Rule 8D of the Rules governing the computation of disallowance under section14A of the Act was applicable only from assessment year 2008-09 onwards and for the earlier assessment years the disallowance under section 14A of the Act could made on a reasonable estimate. Accordingly, he restricted the disallowance to Rs.105,458/-, which was an amount determined by applying the formula prescribed in clause (iii) of rule 8D(2) of the Rules.

C.O. No.08/mum/2016 (Assessment Year : 2005-06) regard to the facts and circumstances of the case. The computation of disallowance by the Assessing Officer, in our view, is misdirected and does not taken into consideration the salient features of the present case in as much as the dividend has been received from a single scrip, which has been acquired by the assessee in an earlier financial year of 1989-90 and no ostensible expenditure has been shown to have been incurred towards earning of such income in the present year. The objection of the Ld. Departmental Representative that the CIT(Appeals) erred in applying formula rule 8D of the Rules is rather a misreading of the import of the order passed by the CIT(Appeals). A perusal of para 4.3 of the order reveals that the CIT(Appeals) was conscious that the provisions of rule 8D of the Rules would not apply in the year under consideration but he has formulated an estimated expenditure on a basis akin to that prescribed in rule 8D of the Rules. In our considered opinion, the estimate of disallowance determined by the CIT(Appeals) is required to be examined with respect to its reasonableness in the context of the computation made by the Assessing Officer and, in our view, the estimate made by the CIT(Appeals) does not call for any interference. On this aspect, the order of the CIT(Appeals) is affirmed and Revenue fails.

C.O. No.08/mum/2016 (Assessment Year : 2005-06) 8. In this context, the brief facts are that the assessee company invested in 1612 Optionally Fully Convertible Premium Notes(OFCPNs) of Rs. 25,000/- each for Rs.4.03 crores of M/s. Nirma Industries Ltd. The issue price of OFCPN was Rs.25,000/- each and the face value thereof of Rs.33,750/- was to be paid after a tenure of five years. The holder of OFCPNs had option to invest in the equity shares of M/s. Nirma Industries Ltd. and no interest was payable till maturity. The interest accrued on investment in OFCPN of M/s. Nirma Industries Ltd. for the period ended 31/03/2005 was determined at Rs.28,14,197/-and was offered in the return of income with a qualifying Note attached to return of income, which read as under:-

“The Return of Income includes interest income of Rs.28,14,197 an investment in OFCPN in Nirma Industries Ltd. held as 31.03.05. The said income is offered to avoid litigation without prejudice to the validity of the circular No.2/2002 F.No.149/235/2001-TPL dated 15/02/2002 issued by CBDT.” 8.1 Since the assessee company had offered the said amount as income in its return of income, the Assessing Officer treated it as part of the total income without making any discussion on the stand of the assessee stated in the aforesaid note accompanying the return of income.

8.2 Before CIT(Appeals), assessee company assailed the inclusion of Rs.28,14,197/- in the total income on the ground that such income could not be taxed on accrual basis. The CIT(Appeals) referred to a decision of the Ahmedabad Bench of the Tribunal in the case of Kissan Discretionary Family Trust dated 02/11/2007 for assessment year 2003- 04, wherein on identical issue the stand of the assessee was upheld.

C.O. No.08/mum/2016 (Assessment Year : 2005-06) Accordingly, CIT(Appeals) directed the Assessing Officer to exclude the impugned interest income on OFCPNs from the total income.

8.3 On this aspect, a preliminary point made out by the Ld. Representative for the respondent assessee was that the Grounds of appeal as formulated by the Revenue (reproduced above) does not reflect any grievance with regard to the merit of the decision of the CIT(A) to exclude the impugned sum from the total income. Explaining the said position the Ld. Representative for the assessee pointed out that in the stated Grounds of Appeal, the grievance projected by the Revenue was that the said income was offered by the assessee itself in the return of income and that the final assessed income could not be less than the returned income. Apart there from, the Ld. Representative for the assessee also referred to the order of the Ahmedabad Bench of the Tribunal in the case of assessee itself for assessment years 2002-03 and 2003-04 vide dated 21/06/2013 and also for assessment year 2004-05 vide ITA No.1920/Mum/2009 dated 22/11/2013 to point out that similar issue has been decided in favour of the assessee. It was pointed out that in assessment year 2004-05(supra) also, the objections of the Revenue was on similar lines.

8.4 In this background, the Ld. Departmental Representative merely reiterated the grievance projected in the Grounds of appeal No.2 &3 stated above.

9.1 Thus, on Grounds Nos. 2 & 3 also the Revenue fails.

Order pronounced in the open court on 24/02/2015