Shriram Capital Limited, (Formerly known as, CHENNAI V. ACIT, CHENNAI

ITA 1014/CHNY/2012

• Counselvise Citation: 101421714 RSA 2012
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 31-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 08-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GURU BASHYAM IRS
• Assessee Lawyers: R SIVARAMAN
• Keywords: Business income; Earning of tax free income; Deemed to accrue or arise in india; Question of law; Commercial expediency; Revised return
• Section: 43B; 143(3); 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL C BENCH, CHENNAI. BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT & SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO.1014/MDS/2012 ASSESSMENT YEAR : 2006-07 SHRIRAM CAPITAL LIMITED (FORMERLY KNOWN AS SHRIRAM FINANCIAL SERVICES HOLDINGS PRIVATE LIMITED), 123, ANGAPPA NAICKEN ST, CHENNAI 600 001 [PAN:AABCS2726B] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(2), CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R. SIVARAMAN, ADVOCATE RESPONDENT BY : SHRI GURU BASHYAM, IRS, JCIT DATE OF HEARING : 31.10.2012 DATE OF PRONOUNCEMENT : 08.11.2012 ORDER PER S.S. GODARA, JUDICIAL MEMBER IN THIS APPEAL, THE ASSESSEES CHALLENGE IS TO THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) V, CHENNAI DAT ED 15.03.2012 IN CIT(A)-V/ITA NO. 283/08-09 FOR THE ASSESSMENT YEAR 2006-07 IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 [IN SHORT THE ACT]. 2. IN THE GROUNDS OF APPEAL, INTER ALIA, THE ASSES SEE HAS RAISED FOLLOWING CONCISE PLEAS: I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 2 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE INT EREST DISALLOWED BY THE ASSESSING OFFICER U/S 14A OF ` .1,83,42,330/-. 3. XXXXXXXXXXX 4. XXXXXXXXXXX 5. XXXXXXXXXXX 6. XXXXXXXXXXX 7. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISA LLOWANCE OF EXPENSES UNDER SECTION 14A OF ` .26,21,580/- BEING 2% OF DIVIDEND INCOME OF ` .13,10,79,020/-. 8. XXXXXXXXXXX 9. XXXXXXXXXXX 10. XXXXXXXXXXX 11. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DIS ALLOWANCE U/S 40(A)(IA) OF ` .21,000/-. GROUND NO. 2 3. BRIEF FACTS PERTAINING TO THIS GROUND ARE THAT THE ASSESSEE IS A DOMESTIC COMPANY, WHICH IS ENGAGED IN THE BUSINES S OF INVESTMENT, FILED ITS RETURN ON 30.11.2006 STATING LOSS OF ` .39,72,31,976/- AND SHORT TERM CAPITAL GAINS OF ` .50,11,32,900/- RESULTING IN TAXABLE SHORT TERM CAP ITAL GAINS OF ` .10,39,05,924/-. IT ALSO PREFERRED TO DECLARE LONG TERM CAPITAL GAINS OF ` .203,23,36,211/- AS WELL AS DIVIDEND INCOME OF ` .13,10,79,020/-. THE SAID RETURN WAS FOLLOWED BY A REVISED RETURN DATED 12. 11.2007 FILED AT HE INSTANCE OF THE ASSESSEE. THIS TIME, THE ASSESSEE C HOSE TO SHOW LOSS OF ` .39,72,31,976/- WITH SHORT TERM CAPITAL GAINS OF ` .50,11,37,900/- AND TAXABLE SHORT TERM CAPITAL GAINS WAS SHOWN AS ` .10,39,05,924/-. NOT ONLY THIS, THE ASSESSEE HAS ALSO FILED A RE-REVISED RETURN DATED 29.03.2008 DISCLOSING I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 3 BUSINESS LOSS OF ` .40,94,59,860/- AND REITERATED EARLIER SHORT TERM C APITAL GAINS. 4. IN SCRUTINY PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD BORROWED LOAN AMOUNT OF ` .25.00 CRORES FROM L & T LTD. WHICH WAS AVAILED IN LAST YEAR AND ALSO THE RETURNED DURI NG THE IMPUGNED ASSESSMENT YEAR. IN THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD CLAIMED INTEREST OF ` .3,15,70,273/- QUA THE LOAN ABOVE SAID. IN SUPPORT THEREOF IT PLEADED BEFORE THE ASSESSING OFFICER THA T AN AMOUNT OF ` .14,52,50,000/- WAS UTILIZED FOR INVESTMENT IN EQU ITY SHARES OF GROUP CONCERN NAMELY SHRIRAM INVESTMENT LIMITED AND SHRIR AM TRANSPORT FINANCE CO. LTD. WHICH WAS NOT FOR THE PURPOSE OF EARNING D IVIDEND INCOME; BUT FOR PROMOTING BUSINESS INTERESTS IN FURTHERANCE OF COM MERCIAL EXPEDIENCY. THE ASSESSEE ALSO SOUGHT TO PLACE RELIANCE ON THE CASE LAW OF HONBLE SUPREME COURT 288 ITR 01 S.A. BUILDERS LTD. VS. CIT. THE AS SESSING OFFICER WAS NOT CONVINCED WITH ASSESSEES EXPLANATION TENDERED AS I N HIS VIEW, THE ASSESSEE HAD NOT ADMITTED ANY EXEMPT INCOME, THER EFORE, HE PROCEEDED TO COMPUTE DISALLOWANCE UNDER SECTION 14A OF THE ACT AS ` .1,83,42,330/- THROUGH ASSESSMENT ORDER DATED 30.12.2008. IN APPEAL AS WELL, THE CIT(A) HAS UPHELD THE DISAL LOWANCE. IT IS IN THIS BACKDROP THAT THE ASSESSEE IS AGGRIEVED. 5. THE AR REPRESENTING THE ASSESSEE HAS REITERATED THE SUBMISSIONS I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 4 RAISED IN THE GROUNDS OF APPEAL PERTAINING TO THIS GROUND AND SUBMITTED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE FINDINGS OF THE ASSESSING OFFICER. IT HAS ALSO BEEN STATED THAT IN THIS CASE, THERE WAS N O EXEMPT INCOME FROM INVESTMENT IN QUESTION, WHICH COULD LEAD TO ANY DIS ALLOWANCE UNDER SECTION 14A OF THE ACT. IN THE SAME TUNE, HE HAS ALSO CON TENDED THAT THE INVESTMENT IN QUESTION WAS IN GROUP ENTITIES IN FUR THERANCE TO THE PRINCIPLES OF THE COMMERCIAL EXPEDIENCY AS DEFINED BY THE HO NBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT (SUPRA). IN ADDIT ION TO THIS, HE HAS SOUGHT TO PLACE RELIANCE OF DECISIONS OF CHENNAI ITAT IN THE CASES OF SIVA INDUSTRIES & HOLDINGS LTD. V. ACIT 145 TTJ (CHENNAI) 497, M/S. M SA SECURITIES SERVICES PRIVATE LIMITED IN I.T.A. NO. 1523/MDS/2012 DECIDED ON 17.10.2012, M/S. SHRIRAM CHITS AND INVESTMENTS P. LTD. IN I.T.A. NO. 1088/MDS/2006 DECIDED ON 19.12.2007 AND ACIT VS. M/S. SHRIRAM CAPITAL LTD . [THIS VERY ASSESSEE] IN I.T.A. NO. 123/MDS/2011 DECIDED ON 30.06.2011 AND P RAYED FOR ACCEPTANCE OF THE GROUND. 6. PER CONTRA, THE SUBMISSION OF THE DR IS THAT TH E CIT(A) HAS RIGHTLY CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER. AC CORDINGLY, HE PRAYED FOR UPHOLDING THE SAME. 7. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND ALSO GONE THROUGH RELEVANT FINDINGS AS WELL AS CASE LAW CITED. THERE IS HARDLY ANY DISPUTE THAT THE ASSESSEE HAD INVESTED THE LOAN AMOUNT IN ITS GR OUP CONCERN AND PAID I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 5 INTEREST IN QUESTION. AT THE SAME TIME, IT IS NOTIC ED THAT THERE IS NO EXEMPT INCOME UNDER SECTION 14A OF THE ACT WHICH CAN BE SAID TO HAVE BEEN RESULTED FROM THE INVESTMENT. NEITHER THE ASSESSING OFFICER NOR THE CIT(A) HAVE REPELLED THE CONTENTION OF THE ASSESSEE THAT I T DID NOT EARN ANY EXEMPT INCOME IN LIEU OF THE INVESTMENTS STATED ABOVE. ONC E THIS IS THE FACTUAL POSITION, WE ARE CONSTRAINED TO OBSERVE THAT SECTIO N 14A LOSES ITS APPLICABILITY. THE ABOVE SAID PROVISIONS OF THE AC T HAS BEEN INCORPORATED BY THE LEGISLATURE SO AS TO DETERMINE EXEMPT INCOME DECLARED BY CONCERNED ASSESSEE AS WELL AS TO DISALLOW THE EXPENDITURE IN EARNING SAID INCOME. THE MANDATE OF THE LEGISLATURE IS THAT SECTION 14A OF T HE ACT WOULD BE APPLICABLE WHEN THE INVESTMENT IN QUESTION LEADS TO EARNING OF ANY EXEMPT INCOME BY THE ASSESSEE. IN THE ABSENCE OF EITHER OF TWO SITUATIONS, THE PROVISION DOES NOT APPLY. WE SEE THAT THE SAME VERY LEGAL POSITION HAS BEEN REITERATED IN THE CASE LAW OF SIVA INDUSTRIES & HOL DINGS LTD. VS. ACIT (SUPRA), WHEREIN IT HAS BEEN HELD AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT THE OUTSET A PERUSAL OF THE DECISION OF THE HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF VISVAS PROMOTORS (P) LTD., REFERRED TO SUP RA, CLEARLY SHOWS THAT THE DECISION OF THE HON'BLE PUNJAB & HARYANA H IGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD., REFERRED T O SUPRA AS ALSO THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ AND BOYCE MFG. CO. LTD., REFERRED TO SUPRA, WOULD NOT H AVE THE FORCE OF BINDING PRECEDENT ON THIS TRIBUNAL. HOWEVER, A FUR THER READING OF THE SAID DECISION OF THE HON'BLE JURISDICTIONAL HIGH CO URT CLEARLY SHOWS THAT THE SAID DECISIONS OF THE HON'BLE HIGH COURTS WOULD HAVE A PERSUASIVE EFFECT. KEEPING IN MIND THIS POSITION, IF WE SEE THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. IT IS NOTICED THAT THE HON'BLE BOMBAY HIGH COU RT HAS CONSIDERED I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 6 THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF WALFORT SHARE AND STOCK BROKERS P. LTD., REFERRED TO SUPRA, AND T HE FOLLOWING PRINCIPLES HAVE BEEN SHOWN TO EMERGE FROM SECTION 1 4A AND THE DECISION IN WALFORT SHARE AND STOCK BROKERS P. LTD. : (A) THE MANDATE OF SECTION 14A IS TO PREVENT CLAIM S FOR DEDUCTION OF EXPENDITURE IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE; (B) SECTION 14A(1) IS ENACTED TO ENSURE THAT ONLY E XPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE A LLOWED; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS W IDENED BY SECTION 14A TO INCLUDE EVEN THE APPORTIONMENT OF EX PENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME OF AN INDIVI SIBLE BUSINESS; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET I NCOME. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSES OF SECTION 14A AND EXPENSES TOWARDS NON-TAXABLE INCOME MUST BE EXCLUDE D; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTA BLISHED WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, A DISALLOWA NCE HAS TO BE EFFECTED. AS PER THE SAID DECISION, ONE OF THE MAIN PRINCIPLE S ARE THAT SEC. 14A IS TO PREVENT CLAIMS OF DEDUCTION OF EXPENDITURE IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. SIMILARLY, SEC. 14A(1) IS ENACTED TO ENSURE THAT ONLY EXPENSES INCURRED IN EARNING TAXABLE INCOME ARE ALLOWED. SIMILARLY, THE BASIC P RINCIPLE OF TAXATION IS TO TAX THE NET INCOME AND THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSE OF SEC. 14A AND EXPENSES TOWARDS NON TAXABLE INCOME MUST BE EXCLUDED. A PERUSAL OF THE PROVISIONS OF SEC. 5(1) OF THE ACT PROVIDES FOR THE SCOPE OF THE TOTAL INCOME. IT INCLUDES ALL INC OMES FROM WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RE CEIVED, ACCRUES, ARISES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA OR ACCRUES OR ARISES OUTSIDE INDIA DURING SUCH YEAR. THUS WHAT IS TO BE UNDERSTOOD IS THAT THE TOTAL INCOME IS RELATING TO SUCH YEAR. IF THE ASSESSEE DOES NOT HAVE ANY INCOME AS FALLING WITHIN THE SCOPE OF TOT AL INCOME DURING ANY YEAR THE PROVISIONS OF THE ACT COULD NOT BE APP LIED TO HIM. A PERUSAL OF THE PROVISIONS OF SEC. 14A CLEARLY SHOWS THAT THE WORDS USED THEREIN ARE FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER THIS I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 7 CHAPTER, .EXPENDITURE INCURRED IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS FOR THE APPLICABILITY OF SEC.14A THERE MUST BE (I) INCOME W HICH IS TAXABLE UNDER THE ACT FOR THE RELEVANT ASSESSMENT YEAR AND (2) TH ERE SHOULD ALSO BE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT DURING THE RELEVANT ASSESSMENT YEAR. IF EITHER ONE IS ABSENT, THEN SEC. 14A(1) HAS NO APPLICABILITY. IF WE HAVE TO ASSUME THAT SECTION 14A(1) WOULD APPLY, EVEN WHEN THE ASSESSEE DOES NOT HAVE A NY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THEN IT WOU LD REACH IN A POSITION WHERE IF THE ASSESSEE MAKES ANY INVESTMENT IN ANY S HARES EVEN THOUGH THE ASSESSEE DOES NOT RECEIVE DIVIDEND INCOME, THE EXPENDITURE IN RELATION TO THE INVESTMENT IN THE SHARES WOULD STAN D TO DISALLOWANCE. THIS DISALLOWANCE WOULD CONTINUE YEAR AFTER YEAR AS LONG AS THE ASSESSEE HOLDS THE INVESTMENT, WHETHER HE GETS ANY INCOME OUT OF SUCH INVESTMENT OR NOT. AT A FUTURE POINT OF TIME IF TH E ASSESSEE LIQUIDATES THAT INVESTMENT AND DERIVES A PROFIT ON INVESTMENT WHICH WOULD BE LIABLE FOR TAXATION UNDER THE HEAD LONG TERM CAPIT AL GAINS, THEN THE PROFIT ON THE INVESTMENT WOULD ALSO BE TAXED. THIS IS NOT WHAT IS CONTEMPLATED U/S 14A. WHAT IS TAXABLE DURING THE R ELEVANT ASSESSMENT YEAR IS THE TOTAL INCOME COMPUTED AS PER THE PROVIS IONS OF THE ACT. WHEN COMPUTING THE TOTAL INCOME AS PER SEC.5 THE IN COME SHOULD BE RECEIVED OR DEEMED TO BE RECEIVED OR ACCRUED OR ARI SE OR DEEMED TO ARISE ANY INCOME DURING THE YEAR OR ACCRUE OR ARISE TO HIM OUTSIDE INDIA DURING THE YEAR. A N INVESTMENT WHICH DOES N OT GIVE RISE TO ANY INCOME DEEMED TO ACCRUE OR ARISE CANNOT FORM PART O F THE TOTAL INCOME AND THEREFORE CANNOT FORM INCOME WHICH DOES NOT FOR M PART OF THE TOTAL INCOME UNDER THE ACT. THUS ONCE THERE IS NO CLAIM OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T, THERE CANNOT BE ANY DISALLOWANCE IN RELATION TO AN INVESTMENT WHICH MAY OR MAY NOT GIVE RISE TO ANY 0INCOME WHICH DOES NOT FORM PART O F THE TOTAL INCOME. IN THE PRESENT CASE IT IS NOTICED THAT NONE OF THE INVESTMENTS MADE BY THE ASSESSEE HAS GENERATED ANY DIVIDEND INCOME WHIC H HAS BEEN CLAIMED BY THE ASSESSEE TO BE NOT TO FORM PART OF T HE TOTAL INCOME. IN THE CIRCUMSTANCES, AS IT IS NOTICED THAT THE ASSESS EE DOES NOT HAVE ANY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME NOR HAS THE ASSESSEE MADE SUCH A CLAIM, WE ARE OF THE VIEW THAT NO DISALLOWANCE UNDER SEC. 14A CAN BE MADE ON THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. THIS VIEW OF OURS ALSO FINDS SUPPORT FROM TH E DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF WALFORT SHARE AND STOCK BROKERS P. LTD., REFERRED TO SUPRA, OF THE HON'BLE BOMBAY H IGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD., REFERRED TO SUPRA, AND IS ALSO SUPPORTED BY THE VIEW EXPRESSED BY THE PUNJAB & HAR YANA HIGH COURT IN THE CASE OF WINSOME TEXTILE INDUSTRIES LTD. THE OTHER DECISIONS I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 8 RELIED UPON BY BOTH THE SIDES ARE NOT BEING DISCUSS ED AS THEY ARE FOUND TO HAVE NO SPECIFIC RELEVANCE TO THE ISSUE IN THE A PPEAL BEFORE US. WHEN WE APPLY THE ABOVE SAID RATIO TO THE FACTS OF THE INSTANT CASE, WE ARE ALSO OF THE OPINION THAT SECTION 14A OF THE ACT HAS BEEN WRONGLY APPLIED BY THE ASSESSING OFFICER AND CONFIRMED BY T HE CIT(A). THEREFORE, IN VIEW OF THE FACT THAT THERE IS NO EXEMPT INCOME COM ING OUT FROM THE INVESTMENT MADE BY THE ASSESSEE, WE HOLD THAT NO DI SALLOWANCE UNDER SECTION 14A COULD BE MADE BY THE REVENUE. COMING TO OTHER CASE LAW CITED BY THE ASSESSEE, ONCE WE HAVE HELD THAT SECTION 14A IS NOT EVEN APPLICABLE, WE REFRAIN OURSELF FROM DECIDING THE ISSUE OF COMME RCIAL EXPEDIENCY AS RAISED BY THE ASSESSEE. ACCORDINGLY, THE GROUND IS ACCEPTED IN FAVOUR OF THE ASSESSEE. GROUND NO. 7: 8. FACTS PERTAINING TO THIS GROUND ARE THAT IN THE ENCLOSURES WITH THE RETURN, THE ASSESSEE HAD SHOWN TO HAVE EARNED DIV IDEND INCOME OF ` .13,10,79,020/-. THE ASSESSING OFFICER ISSUED SHOW- CAUSE NOTICE TO THE ASSESSEE AS TO WHY A PART OF EXPENSES AS INCURRED B Y THE ASSESSEE BE NOT ATTRIBUTED FOR EARNING THE EXEMPT INCOME AND DISALL OWED. IN REPLY, THE ASSESSEE REFUSED TO HAVE INCURRED ANY EXPENDITURE. STILL, THE ASSESSING OFFICER DISALLOWED 2% OF THE DIVIDEND AMOUNT AS ` .26,21,580/- ON NOTIONAL BASIS UNDER SECTION 14A OF THE ACT. IN APPEAL, TH E CIT(A) HAS ALSO I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 9 PREFERRED TO UPHOLD THE SAID DISALLOWANCE. THEREFORE, THE ASSESSEE HAS RAISED THE INSTANT GRO UND. 9. RELYING ON THE GROUND RAISED IN THE APPEAL AS W ELL AS CASE LAW REPORTED AS [2012] 250 CTR (KAR) 291CCI LTD. V. JCI T AND [2010] 189 TAXMAN 50 (PUNJ. & HAR.) CIT V. HERO CYCLES LTD., I T HAS BEEN VEHEMENTLY ARGUED BY THE ASSESSEE THAT WITHOUT A POSITIVE FIND ING ABOUT THE EXPENDITURE STATED TO HAVE BEEN INCURRED FOR EARNING EXEMPT INC OME BY THE REVENUE AUTHORITIES, NO DISALLOWANCE CAN BE MADE UNDER SECT ION 14A OF THE ACT. CONTINUING HIS SUBMISSION, THE AR HAS ASSAILED THE ORDER OF THE CIT(A) AND PRAYED FOR DELETING THE DISALLOWANCE. 10. OPPOSING THE ARGUMENTS OF THE ASSESSEE, THE DR REPRESENTING REVENUE HAS SUBMITTED THAT INVARIABLY AS AND WHEN A NY INCOME IS EARNED, SOME EXPENDITURE IS BOUND TO BE THERE. ACCORDINGLY, HE PRAYED FOR UPHOLDING THE DISALLOWANCE AS CONFIRMED BY CIT(A) @ 2% OF EXE MPT INCOME. 11. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND ALSO PERUSED RELEVANT FINDINGS AS WELL AS CASE LAW CITED. THERE IS NO STRIFE BETWEEN THE PARTIES THAT THE ASSESSEE HAS OF COURSE DECLARED EX EMPT INCOME BY WAY OF DIVIDEND AMOUNTING TO ` .13,10,79,020/-. IN ASSESSMENT PROCEEDINGS, ON BEING ASKED BY THE ASSESSING OFFICER ABOUT THE EXPE NDITURE INCURRED, IT WAS THE POSITIVE CASE OF THE ASSESSEE THAT NO DIRECT EX PENDITURE HAD BEEN I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 10 INCURRED. WE NOTICE THAT THE ASSESSING OFFICER THER EAFTER COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT @ 2% OF DIVIDEND INCOME MERELY BY ASSUMING THAT SOME EXPENDITURE IS BOUND T O BE INCURRED WHILE EARNING ANY INCOME. THIS, IN OUR OPINION CANNOT BE HELD AS CORRECT APPROACH ADOPTED BY THE REVENUE AUTHORITIES. IT IS A TRITE P REPOSITION OF THE LAW THAT WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING THE EXEMPT INCOME, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT BE INVOKED THAT TOO, WITHOUT RECORDING POSITIVE FINDING IN SUP PORT. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT (SUPRA) HAS OBSERVED AS UNDER: 5. WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND INCOME, NO NOTIONAL EXPENDITURE COULD BE D EDUCTED FROM THE SAID INCOME. IT IS NOT THE CASE OF THE ASSESSEE RET AINING ANY SHARES SO AS TO HAVE THE BENEFIT OF DIVIDEND. 63% OF THE SHARES, WHICH WERE PURCHASED, ARE SOLD AND THE INCOME DERIVED THEREFRO M IS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 37% OF THE SHARES AR E RETAINED. IT HAS REMAINED UNSOLD WITH THE ASSESSEE. IT IS THOSE UNSO LD SHARES HAVE YIELDED DIVIDEND, FOR WHICH, THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AT ALL. THOUGH THE DIVIDEND INCOME IS EXEMPTED FROM PAYMENT OF TAX, IF ANY EXPENDITURE IS INCURRED IN EARNING THE SAID INCOME, THE SAID EXPENDITURE ALSO CANNOT BE DEDUCTED. BUT IN THIS CASE, WHEN THE ASSESSEE HAS NOT RETAINED SHARES WITH THE INTENTION OF EARNING DIVID END INCOME AND THE DIVIDEND INCOME IS INCIDENTAL TO HIS BUSINESS OF SA LE OF SHARES, WHICH REMAINED UNSOLD BY THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPORTIO NED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTIONS. IN THAT VIEW OF THE MATTER, THE APPROACH OF THE AUTHORITIES IS NOT IN CONFORMITY WITH THE STATUTORY PROVISIONS CONTAINED UNDER THE A CT. THEREFORE, THE IMPUGNED ORDERS ARE NOT SUSTAINABLE AND REQUIRE TO BE SET ASIDE. ACCORDINGLY, WE PASS THE FOLLOWING: ORDER (I) APPEAL IS ALLOWED. (II) IMPUGNED ORDERS ARE HEREBY SET ASIDE. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 11 (III) THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED I N FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. SIMILARLY, THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. HERO CYCLES LTD. (SUPRA) HAS ALSO REITERATED THE SA ME VERY LEGAL POSITION AND HELD AS UNDER: 4. IN VIEW OF FINDING REPRODUCED ABOVE, IT IS CLE AR THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INC OME FROM INTEREST AND THE INVESTMENT IN THE SHARE AND FUNDS WERE OUT OF T HE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXP ENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITUR E IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SE CTION 14A, CANNOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRE S FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWAN CE UNDER SECTION 14A CANNOT STAND. IN THE PRESENT CASE FINDING ON TH IS ASPECT, AGAINST THE REVENUE, IS NOT SHOWN TO BE PERVERSE. CONSEQUENTLY, DISALLOWANCE IS NOT PERMISSIBLE. WE HAVE TAKEN THIS VIEW EARLIER ALSO I N CIT V. WINSOME TEXTILE INDUSTRIES LTD. [IT APPEAL NO. 504 OF 2008, DATED 25-8-2009], WHEREIN IT WAS OBSERVED AS UNDER: '6. CONTENTION RAISED ON BEHALF OF THE REVENUE IS THAT EVEN IF THE ASSESSEE HAD MADE INVESTMENT IN SHARES OUT OF I TS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH INTEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KITTY, AS HELD BY THIS COURT IN CIT V. ABHISHEK INDUSTRIES LT D. [2006] 286 ITR 1 AND THEREFORE, DISALLOWANCE UNDER SECTION 14A WAS JUSTIFIED. 7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. JU DGMENT OF THIS COURT IN ABHISHEK INDUSTRIES (SUPRA) WAS ON TH E ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SIS TER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR IN TEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOS E AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH THE BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 12 CONTEXT. IN THE PRESENT CASE, ADMITTEDLY, THE ASSES SEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTI ON 14A COULD HAVE NO APPLICATION.' TAKING CUE FROM THE ABOVE SAID CASE LAW AND KEEPI NG IN MIND THE FACTS OF THE INSTANT CASE, WE ARE CONSTRAINED TO OB SERVE THAT THE CIT(A) HAS WRONGLY CONFIRMED THE FINDINGS OF THE ASSESSING OFF ICER MAKING THE DISALLOWANCE @ 2% OF THE DIVIDEND INCOME UNDER SECT ION 14A OF THE ACT; THAT TOO, WITHOUT ANY POSITIVE FINDING CORRELATING THE EXPENDITURE WITH EXEMPT INCOME. THEREFORE, THIS GROUND IS ALSO ACCEPTED IN FAVOUR OF THE ASSESSEE. GROUND NO. 11 12. FACTS AS RELEVANT TO THIS GROUND ARE THAT THE ASSESSEE HAD MADE CERTAIN PAYMENTS TO VARIOUS PERSONS IN THE NATURE O F CONSULTANCY CHARGES. AS PER THE ORDERS OF THE ASSESSING OFFICER AND CIT( A), THOUGH THE ASSESSEE HAD DEDUCTED TDS OF ` .1,905/- UNDER SECTION 194J OF THE ACT, STILL IT DID NOT PAY THE SAME IN GOVERNMENT ACCOUNT ON THE DUE DATE AND OR EVEN TILL FILING OF THE RETURN. THEREFORE, THE ASSESSING OFFICER INV OKED SECTION 40(A)(IA) OF THE ACT, WHICH HAS ALSO BEEN UPHELD BY THE CIT(A) . 13. IN SUPPORT OF THE GROUND, THE AR HAS STATED AT THE BAR THAT THE ASSESSEE HAD DEDUCTED TDS AND ALSO DEPOSITED THE SA ME WITH INTEREST IN ACCORDANCE WITH LAW BEFORE THE DUE DATE OF FILING R ETURN UNDER SECTION 139(1) OF THE ACT. IN THE LIGHT THEREOF, HE PRAYED FOR A CCEPTANCE OF THE GROUND BY RELYING ON THE RELEVANT STATUTORY PROVISIONS I.E. S ECTION 43B 1 ST PROVISO OF THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1 11 101 0101 014 44 4/M/ /M/ /M/ /M/12 1212 12 13 ACT. 14. ON BEHALF OF THE REVENUE , THE DR HAS NOT SERIO USLY CONTESTED THE FAIR STATEMENT MADE BY THE AR. 15. WE HAVE CONSIDERED THE ISSUE IN HAND. WE FIND THAT THE ASSESSING OFFICER AS WELL AS THE CIT(A) HAVE HELD THAT THE AS SESSEE DID NOT DEPOSIT THE TDS DEDUCTED BEFORE THE DUE DATE. HOWEVER, KEEPING IN MIND THE FAIR STATEMENT OF THE AR REPRESENTING THE ASSESSEE THAT THE ASSESSEE HAS MADE THE PAYMENT WITH INTEREST, WE HOLD THAT UNDER SECTI ON 43B (I) PROVISO OF THE ACT, THE EXPENDITURE IN QUESTION DESERVED TO BE A CCEPTED. ACCORDINGLY, WE DELETE THE DISALLOWANCE OF ` .21,000/- AS MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A) UNDER SECTION 40(A)(IA) OF THE ACT. 16. IN VIEW OF OUR ABOVE DISCUSSIONS, THE ASSESSEE S APPEAL IS ALLOWED. ORDER PRONOUNCED ON THURSDAY, THE 8 TH OF NOVEMBER, 2012 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (S.S. GODARA) JUDICIAL MEMBER CHENNAI, DATED, THE 08.11.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.