TaxTMI 
TaxTMI 
2019 (12) TMI 1030
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....ing on the statements of the dealers without giving any opportunity of cross examination as also without bringing any corroborative material apart from the statements. 3. Without Prejudice to the above grounds, the learned CIT(A) erred in law and on facts in confirming disallowance to the extent of Rs. 29,94,307/- and Rs. 4,11,961/- reflected in work in progress and VAT credit respectively which was not debited to the Profit and Loss Account. 4. Learned CIT(A) erred in law and on facts in confirming disallowance of Rs. 90,42,612/- u/s 14A r.w.s. Rule 8D without recording any satisfaction that any expenditure was incurred for earning exempt income. 5. Learned CIT(A) erred in not appreciating that there was no exempt income earned during the year as also no interest bearing funds were utilized for making investments for tax free income. 6. Learned CIT(A) erred in law and on facts in confirming the disallowance u/s 14A in absence of any nexus of expenditure with tax free income. [B]. Assessment order dated 28.03.2013 was passed by the Assessing Officer ("AO", for short) under section 143(3) of the Income Tax Act, 1961. In this assessment order, the AO mad....
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.... Accountant appeared before your honor on 15.03.2013 and 16.03,2013 and submitted the information asked for and has discussed the case. During the course of hearing, as informed to our All it has communicated to us that your are in possession of certain information received from Sales Tax Department, Mumbai according to which our company has communicated by the Sales Tax Department has booked fictitious purchases amount to Rs. 72,50,159/- and AR was asked to submit his say on this. The time was asked by AR till 19.03.2013 on which we have to send our reply to reach you by 2P' March, 2013. We would like to submit as under: i. During the PI Y. 2009-10, we were carrying some labour some labour contracts and certain Government Projects. The total purchases or labour contract expenses were around 117 crores. The list of alleged fictitious purchases as received by you from Sales Tax Department shown to AR contains purchases from six parties amounting to Rs. 72,50,159/- ii. We are verifying the said transactions with purchase department and at sites. During the F.Y. 2009-10 we were carrying projects of Borivali Sty Walk, ES1C and Nashik. iii. We have prepare....
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....e parties have not been claimed as expenditure in the profit & loss account. It has been contended that a part of the purchases have been debited to the project work in progress account. Instead of getting the purchases verified by producing the parties, the assessee had asked for more time for verifying the Transactions. It can be seen from the records that the assessee was given time from15.03.2013 till 28.03.2013 to reconcile its accounts and file its reply. However, the assessee failed to do so. 5.3. As per the information received by this office, statements of the above mentioned hawala dealers were recorded by the Investigation Wing of the Maharastra Sale Tax / VAT Department. Sh. Munish Rajnikant Modi, who is the proprietor of M/s Supreme Enterprises in his statement categorically confessed to providing only bills. In response to the specific question raised by the Assistant Commissioner of Sale Tax (Inv.) m the statement recorded on 18-11-2008 his reply was as under "Q No, 28 - Do you carry on any real business of sale or purchase of goods? Ans. No. I don't know anything about the business. I have not carried any business what ever done is by Mr. ....
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....d added to the total income of the assessee. (Addition of Rs. 72.50,159/-) 7. From the balance sheet of the assesses for the year ending 31-03-2010, it is seen that the assessee company had made investments aggregating to Rs. 124,60,24,010/- in equity shares and in non cumulative Redeemable preference shares, Since, the investments made by the assessee will yield income which is not includible in the total income of the assessee under the provision of income tax Act, the assessee was asked to explain as to why the provisions of section 14A be not invoked. The assessee has submitted the following reply:- "This is to submit that the company has received the tax free income in the form of dividend amounting to Pm, 33,410/-. This dividend is received on the shares of Model Co. operative Bank. The company has mailed the loan from the hank and it is the pre condition of the loan that the shares of certain amounts has to be purchased by the borrower from the bank The shares are not purchased as investments or to earn the dividend or tax free income. It is also to be noted that there is no any expenditure incurred for purchase of these share of the bank. ....
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....ation to income which does not from part of the total income shall be aggregate of the following amounts namely: (i). The amount of expenditure directly relating to income Which does not form part of total income Nil (ii) In a case where the assessee has incurred expenditure By way of interest during the previous year which is not Directly attributable to any particular income or receipt An amount computed in accordance with the following formula, namely: A. interest Expenses Rs. 44,01,462/- B. Average Investment Rs. 120,46,24,010/- C. Average Assets Rs. 175,59,59,525/- AXB/C Rs. 30,19,492/- (iii) An amount equal to one half percent of the average of the value of investment, income from which does not or Shall not form part of the total income, as appearing in the Balance Sheet of the assessee, on the first day and the last Day of the previous year. 0.5% of average value of investment i.e. B Rs. 60,23.120/- Total [(i)+(ii)+f(iii)] Rs. 90,42,612/- Therefore, I make a disallowance of Rs. 90,42,612/- in accordance with the provisions of Section 14A of the Income Tax Act. Since the assessee has no....
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....notice U/s 143(2) of Income tax Act along with a detailed questionnaire was issued on 30.11.2012. In response to the notice Shri A. J. Dighe, Chartered Accountant and Authorized representative of the assessee attended from time to time and discussed the case and submitted replies. 3. The Assessee is engaged in the business of redevelopment of Housing Societies in the area in and around Mumbai and this is the fourth year of the Company. It has also carried out the work allotted by the local Authorities viz. MMRDA for the Skywalk project etc. During the year the assessee has also executed labour contracts. 4. The AR submitted the details called for and also accounts of the company. From the various discussions held as well as the details filed by the assesses, the income of the assessee is assessed as under. 5. Information has been received from the DIT (Inv.) - I, Delhi vide letter F.No. DIT (lnv.)-l/MVAT/Del/2012-13/87 dated 26.02.2013 enclosing therewith details of non- genuine/bogus bills availed by the assessee M/s Dhanshree Developers Pvt. Ltd. This information was received by the DIT (Inv.), Delhi from DGIT (lnv.), Mumbai who in turn received the sam....
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....eceived by you from Sales Tax Department shown to AR contains purchases from six parties amounting to Rs. 72.50,159/-. ii. We are verifying the said transactions with purchase department and at sites. During the F.Y. 2009-10 we were carrying projects of Borivali Sky Walk, ES1C and Nashik. iii. We have prepared a statement showing the details of above purchases, VAT paid on the same and how much was charged to Profit and Loss Account and how much is carried to Work In Progress. We are enclosing herewith chart showing the details of purchases and amounts charged to Profit and Loss Account etc. It is our practice that only that percentage of purchases is charged to Profit and Loss Account on which revenue is declared and balance is included in the amount of Work in Progress at the end of the year. iv. As such, it will be seen from the chart enclosed that Rs. 38,43,891/- is debited to Profit and Loss Account and Rs. 29.94,307/- is included in the figure of Work in Progress as at the end of the year. The figure of Its 4 11,961/- which is VAT is considered separately. In this situation total figure of 72,50,159/- can in no circumstances be disallowed while comp....
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....n raised by the Assistant Commissioner of Sale Tax (Inv.) in the statement recorded on 18-11-2008 his reply was as under:- "Q No. 28 - Do you carry on any real business of sale or purchase of goods? Ans No. I don't know anything about the business. / have not carried any business what ever done is by Mr. Hemant Muni and Mr. Mahesh his men. 1 once again confirm that /have not sold or purchase any goods. Similarly, Sh. Hashmukh H. Panchal proprietor of M/s Darshan Trade Corporation vide his letter dated 08-12-2011 submitted to the Assistant Commissioner of Sale Tax (I- 28)(Inv.-B), Mumbai admitted that he had not done any genuine business and had issued only tax invoices. He also mentioned that he is willing to submit his affidavit regarding his business activity. His Sale Tax Registration was also cancelled by the Mumbai VAT Department. A copy of affidavit dated 09-12-2011 submitted by him has also been received by this office. Similar information has also been received in respect of Sh. Kamlesh K. Seth Proprietor of M/s Ambica Trade Impex and in respect of other hawala dealers. The information has been supplied by the Maharastra VAT Department to the ....
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....ount payee cheques. The bills contain addresses, VAT numbers of the suppliers. The learned AO did not make any further enquiry. The identity of the suppliers has been proved. It was incumbent on the AO to have gathered some corroborative material in order to show that the purchases are bogus. Reliance is placed on the following decisions- ACIT V Shri Ramila Shah ITA no. 5246/Mum/2013 Ramesh Kumar and Co V ACIT ITA No. 2959/Mum/2014 DCIT V Shri Rajeev Kalathi ITA No. 6727/Mum/2012 Shri Ganpatraj A Sanghavi V ACIT ITA No. 2826/Mum/2013 4. Reliance is placed on decision of Bombay High Court in case of Babulal Borana V 1TO 282 I.TR 251 wherein the Bombay High Court held that where the identity of the persons from whom goods are purchases has been explained, payment are made by account payee cheques, transactions are recorded in books, no addition can be made. 5. The learned AO has not rejected sales in case of the appellant. The learned AO has accepted the books results. Simply on the basis of information from the sales tax Department, the learned AO directly proceeded to disallow the purchases. Reliance is placed on the de....
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....and documentary, so that he can prepare to meet the case against him. This necessary also postulates that he should cross -examine the witness hostile to him. 11. In CIT v. J M D. Communications P. LTD (2010) 320 ITR 17 (ST) (SC) (ITA NO 106 OF 2007 DT16-1-2009(Delhi)(HC) it is held that the Person who has issued the bills has given the statement that he was carrying on the business of issuing bogus accommodation bills on commission basis with the assessee, and this was not put to the assessee for rebuttal or crossexamination, High Court held no substantial question of law. On SLP by revenue the Court held that if the AO wants to use. some statement made before him, then on request by the assessee, is bound to put the deponent for cross .examination. 12. In Kishinchand Chellaram v. CIT (1980) 125 ITR 713 (SC) Supreme Court held that though the proceedings under the Income-tax Act are not governed by the strict rules of evidence, the department is bound to afford an opportunity to controvert and cross examine the evidence on which the department places its reliance. Opportunity of cross examination must be given. The consequence of breach of natural justice is that....
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....the alleged hawala dealers, The assessee has filed its submission vide letter dated 18.3.2013, which is reproduced by the A.O. in the assessment order. However, the A.O. was not satisfied with the submission since the assessee could not get verified the bogus purchases by producing these alleged parties and the sufficient time was allowed to do so. (ii) In the statement recorded by the VAT Department, Mumbai, which is again reproduced in the assessment order in para 5,3, it is clear that the alleged parties denied any business activities carried out for the appellant. There was a specific information from the VAT Department, Mumbai, that the alleged purchases from 7 parties have been made from hawala dealers and therefore, same are not genuine. Therefore, the A.O. came to the conclusion that the appellant failed to prove the genuineness of purchases made from these alleged hawala dealers and made the addition of Rs, 72,50,159/-. (iii) During the appellate proceedings, the appellant has submitted that no material has been referred by the A.O. in assessment order and also no opportunity was given to cross-examine. This argument of the appellant is not acceptable sin....
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....nts or to earn the dividend or tax free income. It is also to be noted that there is no any expenditure incurred for purchase of these share of the bank. Considering the above, the provisions of section 14A of the IT, Act are not attracted in this case and pending on this there is no disallowance made while filing the return of income 8. I have considered the reply filed by the assessee. / do not find any force in the reply submitted by the assessee. Provision of section 14A are mandatory in nature. Section 14A of the Act reads as under Section 14A of the Act states:- "For the purpose of the computing the total income under this Chapter, no deduct ion shall he allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act. The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee ....
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....2,612/- Therefore, I make a disallowance of Rs. 90,42,612/- in accordance with the provisions of Section 14A of the Income Tax Act. Since the assessee has not disallowed the expenses incurred for earning of exempt income, In view of the provisions of the section I4A read with Rule 8D of the Income Tax Rules hence, I am satisfied that the assessee has furnished inaccurate particulars of his income accordingly penalty proceedings are initiated u/s 271(1) (c) of the IT.Act,1961 separately." 6.2 During theappellate proceedings, Ld. AR has filed written submission/objections vide letter dated 16.10.2015. The relevant portion is reproduced as under:- "1. During the course of Assessment Proceedings, the learned AO observed that in the Balance Sheet for the year ended up to 31.3.2010, the appellant had made investment in equity shares in non-cumulative Redeemable Preference Shares of Rs. 1,24,60,24,010/-, According to him, as these investments yield income not includible in income of the appellant, the provisions of Section 14A are applicable. The appellant contended before the learned AO that there is no expenditure incurred for earning any tax free inc....
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....2009-10 7,47,50,000/- Total 1,24,08,26,000/- The above details show that the interest hearing funds were not used for making above investments. The investment was made in earlier years. 5. In so far as the interest paid during the year are concerned, the total interest paid and debited to P & L A/c for the year under consideration is Rs. 44,01,000/-. This interest is paid on total loans of Rs. 52 crores of which more than Rs. 40 Crores were raised during the year whereas the investment in Preference shares of other companies is very old and made in earlier years. The borrowing funds have been used for business purpose of the appellant Company. 6. Section 14A of the Act is relevant and reproduced below:- "14.4, (1) For the purposes of computing the total income under this Chapter no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such meth....
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....tipulation as noticed below is also mandated in sub Rule (I) to Rule 8D of the Rules. 12. Rule 8D of the Rules, again for the sake of convenience, is reproduced below:- "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). The expenditure in relation to income which does not form part of the total income shall he the aggregate of following amounts, namely;- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable so am particular income or receipt, an amount computed in accordance with the following for....
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....m part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act, In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of (he claim of the assessee in respect of such expenditure Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of Section 14A, Sub-section (3) applies to cases where the asses....
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....in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A.(2) and (3) in the correct perspective. As we have, already seen, while discussing the provisions of Sub-sections (2) and (3) of Section I.4.A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in toted income in the manner indicated in sub-rule (2) of Ride 81) of the said Rules. 9. It is, therefore, dear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has thre....
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....earn exempt income. The learned AO neither has examined the books of accounts to arrive at. the satisfaction. On the contrary, the learned AO proceeded on the presumption that once there is exempt income, the provisions of Section 14A are mandatory. In our respectful submission, the above view of the learned AO is legally incorrect in view of the law laid down in various decisions. 12. In respect of interest expenditure, it is submitted that interest expenditure is directly attributable to exempt income. If there is no nexus, the disallowance u/s 14A would not be applicable, Bombay High Court in CAT vs. HDFC Bank Ltd., 366 1TR 505 held that where assessee's capital, profit reserves, etc., were higher than investment in tax free securities, it would have to be presumed that investment made by assessee would be out of interest free funds available with assessee and, consequently, no disallowance could be made u/s J4A. The Hon'ble Bombay High Court in CTT vs. Reliance Utilities and Power Ltd. 313 1TR 340 (Bom) has held that if there are interest free, funds available with the assessee sufficient to meet its investment and, at the same lime, loan has been raised, it can be pre....
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....funds borrowed and investment in shares yielding tax free income and the fact that the owned funds are much more than the amount invested in shares. As such the provisions of section 14A of Income Tax Act in our opinion are not attracted. " Subsequent to the above, Ld. AR has filed further written submission vide letter dated 18.01.2016, which is reproduced as under- "A letter of confirmation from the Model Cooperative Bank is attached wherein the Bank has confirmed the payment of dividend to the assessee company. Also find attached a copy of hank statement of the assessee company showing the entries for such dividend credited to the bank account. Dividend income is exempt u/s 10(34) of the Income Tax Act 1961 which reads as under 10(34) Any income by way of dividend referred to I section 115-0. Section 115-0 refers to Tax on distributed profits of domestic companies and is reproduced below : 115-0. [(I) Notwithstanding anything contained in any other provision of (his Act and subject to the provisions of this section, in addition to the incometax chargeable in respect of the total income of a domestic company for any assessment....
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.... Act, The decisions of Delhi High Court squarely applies to the case of the appellant and therefore no disallowance can he made. As there is no exempt income earned section 14A. of the Income Tax Act 1961 cannot, be invoked and therefore, prayed that addition on account disallowance u/s 14A be deleted. " 6.3 Findings:- The findings are as under: 6.4 I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:- (i) In the assessment proceedings, the appellant has stated that, dividend of Rs. 33,410/- was received on shares of M/s. Model Co, Operative Bank Ltd. and the shares were purchased by the assessee as a precondition for obtaining the loan from the bank. Therefore, it was submitted by the assessee that purchase of share is not an investment in order to earn the dividend income. However, this argument of the assessee did not find favour with the A.O., as the provision of section 14A are mandatory, since assessee claimed that no expenditure has been incurred in relation to this exempt income of dividend amounting....
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.... * It is not possible to employ a person in the company, who is not paid by the company. * It is not possible for a person to engage and involve, in the business activities/decision making, without compensating them directly or indirectly. This implies that any investment decision for earning exempt income, suo-moto is not possible, as human intervention is always required. In view of the above facts and circumstances, the alleged claim of the appellant that no expenditure is incurred, is not acceptable. The expenditure incurred, in relation to exempt income, has to be determined as per Rule 8D of the I.T. Rules, 1962, as the appellant has failed to provide details of such expenditure incurred in relation to exempt income. Accordingly, the AO, is justified, in invoking Rule 81), to determine the amount of expenditure, in relation to the exempt income. CONCLUSION In view of the above, the arguments of the appellant are not acceptable and I do find any infirmity in the calculation made under rule 8D by the AO in determining the disallowance u/s 14A. Therefore, disallowance of Rs. 90,42,618/-, made by the AO u/s 14A, is hereby confirmed. Ac....