IN THE INCOME TAX APPELLATE TRIBUNAL
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
I.T. A. No.1443/Del/2011
Assessment Year : 2007-08
Moods Hospitality Pvt. Ltd.,
D-363, Defence Colony,
PAN:AADCM5127C
(Appellant)
Vs.
Income-tax Officer,
Ward No.5(4),
(Respondent)
I.T. A. No.1693/Del/2011
Assessment Year : 2007-08
Asstt. Commissioner of Income-tax,
Circle 5(1),
(Appellant)
Vs.
Moods Hospitality Pvt. Ltd.,
D-363, Defence Colony,
PAN: AADCM5127C
(Respondent)
Assessee by:Shri Anil
Shri Pawan Kumar Mishra, Advocate.
Respondent by:
O R D E R
PER K.D. RANJAN, ACCOUNTAT MEMBER:
These cross appeals by the assessee and Revenue for Assessment Year 2007-08 arise out of the order of the Commissioner of Income-tax (Appeals)-VIII,
2. First issue which is common in both the appeals relates to addition made under sec. 14A of the Act. The facts of the case stated in brief are that the assessee is a company engaged in chain of Chinese food restaurants. During the year under consideration the assessee received dividend of Rs.19,73,982/-. In response to a query, it was submitted by the assessee that dividend income has been earned by it from mutual funds the investment wherein was made out of fresh capital received during the year under consideration and also from zero coupon preference shares issued by the assessee company. According to the assessee, share capital obtained during the year under consideration was not immediately required for any business activity and therefore, same was parked temporarily in mutual funds. Thus, according to the assessee, there was no interest expenditure incurred in accordance with the earning of dividend income. Similarly in regard to other indirect expenses also, it was claimed that the assessee did not incur any expenditure direct or indirect for earning dividend income and also no man power was deployed for this purpose entailing any expenses. However, this contention of the assessee was rejected by the Assessing Officer. The AO relying on the decision of ITAT, Special Bench in the case of ITO vs. Daga Capital Management (P) Ltd., made disallowance by applying Rule 8D of the Income-tax Rules, 1962 of Rs.13,83,959/- which included interest expenses of Rs.7,25,050/- and the balance indirect expense was of Rs.6,58,909/-.
3. Before the CIT(A), similar arguments were advanced by the assessee. Reliance was also placed on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., wherein applicability of Rule 8D has been held to be with prospective effect. The learned CIT(A) on examination of facts observed that the assessee was having sufficient interest-free funds at its disposal particularly after Investment Agreement with Matrix Partners India Investment Holding, LLC , dated 9th November, 2006 and therefore, there was no justification in making disallowance on account of interest by adopting Rule 8D of the Income-tax Rules, 1962. He also observed that interest payment made by the assessee was in connection with exclusive needs of the assessee and therefore, the same could not have been apportioned on the basis of average value of investment and average total value of assets. The learned CIT(A) therefore, held that disallowance on account of interest was not justified. However, as regards the
disallowance of expenditure, he rejected the contention of the counsel of the assessee that no expenditure was at all incurred by the assessee in relation to earning dividend income of Rs.19,73,982/-. He therefore, estimated 10% of dividend income as disallowance amounting to Rs.1,97,398/-.
4. The assessee is aggrieved by affirming the addition of Rs.1,97,398/- and the Revenue is aggrieved against deletion of balance addition made by the Assessing Officer. Before us, the learned Authorized Representative of the assessee submitted that Rs.25 crore was invested in mutual funds and there was no expenditure incurred by the assessee for earning the dividend on mutual funds. He referred to page 129 of Paper Book in support of his contention that borrowed funds were not utilized for the purpose of investment in units of mutual fund. It was also submitted that no expenditure was incurred by the assessee for earning dividend income. On the other hand, the learned Sr. DR strongly supported the order of the Assessing Officer.
5. We have heard both the parties and gone through the material available on record. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT (2010) 328 ITR 81 has held that provisions of Rule 8D are applicable prospectively i.e. from the Assessment Year 2008-09. It has also been held that under sec. 14A, the AO can disallow the amount which has direct nexus with the exempt income and expenditure incurred. In the case of the assessee, the AO has estimated the disallowance by applying Rule 8D in view of the decision of ITAT, Special Bench in the case of ITO vs. Daga Capital Management (P) Ltd. (2009) 117 ITD 169 (Mum.)(SB), which has been over-ruled by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). Disallowance under sec. 14A can be made if the expenditure incurred has nexus with the exempt income. Since the Assessing Officer had not examined the issue relating to nexus between the expenditure incurred and exempt income earned, we set aside the matter to the file of the Assessing Officer with the directions to examine whether any administrative expenditure was incurred for earning the exempt income. The AO is directed to decide the issue afresh in the light of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). Needless to say, the Assessing Officer will provide opportunity of being heard to the assessee.
6. The next issue for consideration in assessee’s appeal relates to disallowance of Rs.5,00,000/- made by the AO on ad hoc basis. The AO during the course of assessment proceedings asked the details of packing material. However, details were not filed nor the books of accounts were produced for verification, and in the absence of quantitative details, the AO made ad hoc disallowance of Rs.5,00,000/- invoking the provisions of sec. 69C of the Act.
7. On appeal before the learned CIT(A), it was submitted by the assessee that complete details of expenditure were furnished before the AO and there was no specific query regarding any specific item of expenditure, which remained unanswered/un-replied. It was submitted that no specific explanation or information regarding packing material expenses or other expenses was sought for. Therefore, it was argued that there was no justification for making ad hoc disallowance of Rs.5,00,000/-. The learned CIT(A) however, observed that the assessee has not been maintaining
quantitative details of opening stock, purchases, consumptions and closing stock. The assessee was also not maintaining any records so that the items of packing material could be co-related with the revenue generated by it in the respective accounting years. Therefore, in the absence of any specific explanation, the learned CIT(A) upheld the disallowance.
8. Before us, the learned AR of the assessee submitted that no specific query was raised by the Assessing Officer. The assessee filed all the details. Therefore, disallowance made by the AO is not justified.
9. We have heard both the parties and gone through the material available on record. It was submitted by the assessee before the learned CIT(A) that complete details of expenditure were furnished before the AO and no defect has been pointed out by the Assessing Officer. No specific query regarding packing material expenses or other expenses has been raised by the AO. It is a settled law that ad hoc disallowance without pointing out any mistake is not justified. We therefore, delete the addition made by the AO and sustained by the learned CIT(A).
10. In the result, appeals filed by the assessee is partly allowed and by the Revenue is allowed for statistical purposes.
11. This decision is pronounced in the
Sd/- Sd/-
(R.P. TOLANI) (K.D. RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
*mg
By Order
Deputy Registrar, ITAT.
