BPL LTD , Bangalore V. Assistant Commissioner of Income TAx Circle-2(1)(1), Bangalore

ITA 1055/BANG/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7298 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 12-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PADMA MEENAKSHI
• Keywords: Business expenditure; Earning of tax free income; Question of law
• Section: 143(3); 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B, BANGALORE BEFORE SHRI A.K.GARODIA, AM & SHRI GEORGE GEORGE K, JM ITA NO.1055/BANG/2017 : ASST.YEAR 2012-2013 M/S.BPL LIMITED C/O.T.VELUPILLAI & CO. CHARTERED ACCOUNTANTS 3155/A-3, 3 RD FLOOR 11 TH MAIN, 2 ND STAGE INDIRA NAGAR BANGALORE 560 038. PAN : AAACB9461B. ASST.COMMISSIONER OF INCOME-TAX CIRCLE 2(1)(1) BANGALORE. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : --- NONE --- RESPONDENT BY : SMT.PADMAMEENAKSHI, JCIT DATE OF HEARING : 30.10.2017 DATE OF PRONOUNCEMENT : 03.11.2017 O R D E R PER GEORGE GEORGE K, JM THIS APPEAL AT THE INSTANCE OF THE ASSESSEE IS DIR ECTED AGAINST THE CIT(A)S ORDER DATED 23.03.2017. THE RE LEVANT ASSESSMENT YEAR IS 2012-2013. 2. THE GROUNDS RAISED READ AS FOLLOWS:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (CIT) HA S ERRED IN CONFIRMING THE DISALLOWING RS.180,07,160 BY INVOKING SECTION 14A OF THE INCOME TAX ACT. 2. THE CIT HAS ERRED IN ASSUMING THAT FUNDS HAVE BEEN BORROWED TO MAKE INVESTMENT IN SHARES OF VARIOUS COMPANIES. ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 2 3. THE CIT SHOULD HAVE APPRECIATED THE FACT THAT TH E APPELLANT HAD SUFFICIENT FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES. 4. THE CIT HAS FAILED TO ESTABLISH ANY LINK OR NE XUS BETWEEN THE BORROWINGS AND INVESTMENTS MADE OTHER T HAN ASSUMPTIONS AND SURMISES WHICH ARE NOT BASED ON FAC TS. 5. THE CIT SHOULD HAVE APPRECIATED THE FACT BASED ON DOCUMENTS SUBMITTED THAT INTEREST EXPENSES ARE FOR BUSINESS BORROWINGS OF THE APPELLANT AND NOT FOR INVESTMENTS. 6. THE CIT OUGHT TO HAVE RESTRICTED THE DISALLOWA NCE TO THE ACTUAL EXEMPTED INCOME EARNED. 7. THE CIT SHOULD HAVE CONSIDERED THE FACT THAT COMPANIES IN WHICH THE APPELLANT HAS INVESTED ARE COMPANIES UNDER LIQUIDATION OR WINDING UP AND HENCE THERE IS NO POSSIBILITY OF EVER RECEIVING ANY TAX F REE INCOME. 8. THE CIT HAS TOTALLY IGNORED THE DETAILED SUBMISS ION MADE BY THE APPELLANT AND HAS PASSED AN ORDER WITHO UT CONSIDERING THE FACTS AND MERITS OF THE CASE. 9. THE APPELLANT CRAVES PERMISSION TO ADD, DELETE OR ALTER ANY OF THE GROUNDS AT THE TIME OF HEARING. 10. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE H ONORABLE TRIBUNAL MAY KINDLY DELETE THE DISALLOWANCE MADE UN DER SECTION 14A OF THE INCOME TAX ACT OF RS180,07,160 3. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS:- 3.1 THE ASSESSEE IS A COMPANY ENGAGED IN THE MANUFACTURING AND TRADING OF ELECTRONIC GOODS. FOR THE ASSESSMENT YEAR 2012-2013, RETURN OF INCOME WAS FIL ED ON 27.09.2012 DECLARING A LOSS OF RS.9,38,53,069. THE ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 3 ASSESSMENT WAS TAKEN UP FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT. THE ASSESSMENT U/S 143(3) OF THE ACT WAS COMPLETED VIDE ORDER DATED 30.03.2015. IN COMPL ETING THE ASSESSMENT U/S 143(3) OF THE ACT, THE ASSESSING OFF ICER HAD MADE DISALLOWANCE BY INVOKING OF PROVISIONS OF SECT ION 14A OF THE ACT, BEING INTEREST EXPENDITURE AMOUNTING TO RS.1,80,07,160. THE DISALLOWANCE WAS CALCULATED BY INVOKING RULE 8D(2) OF THE INCOME-TAX RULES. THE ASSESSING O FFICER OBSERVED THAT AS THE ASSESSEE HAD BORROWED FUNDS AN D CLAIM OF INTEREST EXPENDITURE ON SUCH BORROWING, THE SAME REQUIRES TO BE DISALLOWED, SINCE BORROWED FUNDS WERE UTILIZE D FOR MAKING INVESTMENT FOR EARNING DIVIDEND INCOME WHICH IS EXEMPTED U/S 10(33) OF THE ACT. 3.2 AGGRIEVED BY THE ASSESSMENT ORDER IN MAKING DISALLOWANCE U/S 14A OF THE ACT, THE ASSESSEE PREFE RRED AN APPEAL TO THE FIRST APPELLATE AUTHORITY. THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THE RELEVANT FINDING OF THE CIT(A) READS AS FOLLOW:- 4.1 ACCORDINGLY IT IS HELD THAT THE ASSESSEE HAD MA DE INVESTMENT IN SHARES WHICH ARE TAX EXEMPTED AND DO NOT YIELD ANY INCOME CHARGEABLE TO TAX UNDER THE INCOME -TAX ACT. IT IS ALSO SEEN THAT THE ASSESSEE HAS BORROWED FUNDS AND HAS CLAIMED INTEREST ON SUCH BORROWING. BOARDS CIRCULAR 5 OF 2014 MANDATES THAT EVEN THOUGH IN THE ABSENCE OF EXPENDITURE TO EARN EXEMPT INCOME DURING THE PREVIOUS YEAR, PROVISIONS OF SEC.14 HAVE TO BE INVO KED AND ALSO IN VIEW OF THE DECISION RENDERED BY THE HO NBLE TRIBUNAL OF MADRAS BENCH IN THE CASE OF LAKSHMI RING TRAVELLERS IN ORDER IN ITA NO.2083/MDS/2011 DT:02/03/2012. THE EXPENDITURE OF RS.1,80,07,160/- I S ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 4 ATTRIBUTABLE TO EXEMPTED INCOME AND IS CORRECTLY DISALLOWED AND ADDED BACK TO THE INCOME RETURNED. 3.3 AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE HAD PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 4. NONE WAS PRESENT ON BEHALF OF THE ASSESSEE. HOWE VER, WE PROCEED TO DISPOSE OF THE APPEAL AFTER HEARING THE LEARNED DEPARTMENTAL REPRESENTATIVE. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTE D THE ORDERS OF THE INCOME TAX AUTHORITIES. 6. WE HAVE THE LEARNED THE LEARNED DR AND PERUSED T HE MATERIAL ON RECORD. UNDISPUTEDLY, IN THE INSTANT CA SE FOR THE ASSESSMENT YEAR 2012-2013, THE ASSESSEE HAD NOT REC EIVED ANY EXEMPTED INCOME. THE HONBLE DELHI HIGH COURT I N THE CASE OF CHEMINVEST LIMITED V. CIT [(2015) 378 ITR 33(DELHI)] HAD HELD THAT SECTION 14A WOULD APPLY ONLY IF EXEMP TED INCOME WAS RECEIVED OR RECEIVABLE DURING THE RELEVA NT PREVIOUS YEAR. THE HONBLE HIGH COURT WAS CONSIDERI NG THE FOLLOWING SUBSTANTIAL QUESTION OF LAW - WHETHER DISALLOWANCE UNDER SECTION 14A OF THE ACT C AN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEE N EARNED OR RECEIVED BY THE ASSESSEE? 6.1 IN ADJUDICATING THE ABOVE SUBSTANTIAL QUESTION OF LAW, THE HONBLE DELHI HIGH COURT HAD CATEGORICALLY HELD THAT WHEN NO EXEMPTED INCOME WAS EARNED IN THE PREVIOUS YEAR RELEVANT TO THE CONCERNED ASSESSMENT YEAR, SECTION 14A CANNO T BE ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 5 INVOKED. THE RELEVANT FINDING OF THE HONBLE DELHI HIGH COURT READS AS FOLLOW:- 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FOR CONSIDERATION, THE COURT FINDS THAT THE COMPLETE AN SWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HO LCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014 I N ITA NO. 486/2014). IN THAT CASE A SIMILAR QUESTION AROS E, VIZ., WHETHER THE ITAT WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY THE ASSESSEE IN T HE RELEVANT AY? THE COURT REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THIS VE RY CASE I.E. CHEMINVEST LTD. V. CIT (2009) 317 ITR 86. THE COURT ALSO REFERRED TO THREE DECISIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE F IRST WAS THE DECISION IN COMMISSIONER OF INCOME TAX, FARIDABAD V. M/S. LAKHANI MARKETING INCL. (DECISION DATED 2ND APRIL 2014 OF THE HIGH COURT OF PUNJAB AND HARY ANA IN ITA NO. 970/2008) WHICH IN TURN REFERRED TO TWO E ARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES L IMITED [2010] 323 ITR 518 AND CIT V. WINSOME TEXTILE INDUST RIES LTD. [2009] 319 ITR 204. THE SECOND WAS OF THE GUJAR AT HIGH COURT IN COMMISSIONER OF INCOME TAX-I V. CORRT ECH ENERGY (P) LTD. [2014] 223 TAXMANN 130 (GUJ.) AND T HE THIRD OF THE ALLAHABAD HIGH COURT IN COMMISSIONER OF INCOME TAX, KANPUR V. SHIVAM MOTORS (P) LTD. (DECIS ION DATED 5TH MAY 2014 IN ITA NO. 88/2014). THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSES SEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT AY IN QUESTION 'CORRESPONDING EXPENDITURE COULD NOT BE WO RKED OUT FOR DISALLOWANCE.' 16. IN CIT V. HOLCIM INDIA (P) LTD. (SUPRA), THE COURT FURTHER EXPLAINED AS UNDER: '15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICUL AR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUENT YEAR WOULD ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 6 OR WOULD NOT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUEN T ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAXABLE WHE RE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVA TE SALE OF SHARES IN AN OFF MARKET TRANSACTION ATTRACT S CAPITAL GAINS TAX. IT IS AN UNDISPUTED POSITION THA T RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE , A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEND DISTRIBUTION TAX.' 17. ON FACTS, IT WAS NOTICED IN CIT V. HOLCIM IND IA (P) LTD. (SUPRA) THAT THE REVENUE HAD ACCEPTED THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSES SEE IN THAT CASE AND THAT EXPENDITURE HAD BEEN INCURRED TO PROTECT INVESTMENT MADE. 18. IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAS NOT BEEN DISPUTED IS THAT THE INVESTMENT BY THE ASSESSEE IN THE SHARES OF MAX INDIA LTD. IS IN THE FORM OF A ST RATEGIC INVESTMENT. SINCE THE BUSINESS OF THE ASSESSEE IS O F HOLDING INVESTMENTS, THE INTEREST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING S UCH INVESTMENT. THE INTEREST EXPENDITURE INCURRED BY TH E ASSESSEE IS IN RELATION TO SUCH INVESTMENTS WHICH GI VES RISE TO INCOME WHICH DOES NOT FORM PART OF TOTAL IN COME. 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW I N HOLCIM INDIA (P) LTD. (SUPRA) AND IN VIEW OF THE ADMITTED FACTUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE STR ATEGIC INVESTMENT IN SHARES OF MAX INDIA LTD.; THAT NO EXE MPTED INCOME WAS EARNED BY THE ASSESSEE IN THE RELEVANT AY AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURR ED BY THE ASSESSEE IS NOT IN DOUBT, THE QUESTION FRAMED IS ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 7 REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE A ND AGAINST THE REVENUE. 20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE D ECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPR A), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURP ORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETH ER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT CO ULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCE S'. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOW ED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHO LLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SU CH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRES SION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID N OT MEAN THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNE D AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THA T PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHA LL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(I II) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESIST IBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MO ODY ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 8 (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECTION 57(III) OF THE ACT, WHERE T HE EXPRESSION USED IS 'FOR THE PURPOSE OF MAKING OR EA RNING SUCH INCOME'. SECTION 14A OF THE ACT ON THE OTHER HAN D CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME.' THE DECISION IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, T HE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SECTIO N 14A OF THE ACT. 22. IN THE IMPUGNED ORDER, THE ITAT HAS REFERRED T O THE DECISION IN MAXOPP INVESTMENT LTD. (SUPRA) AND REMA NDED THE MATTER TO THE AO FOR RECONSIDERATION OF THE ISSU E AFRESH. THE ISSUE IN MAXOPP INVESTMENT LTD. (SUPRA) WAS WHETHER THE EXPENDITURE (INCLUDING INTEREST ON BORR OWED FUNDS) IN RESPECT OF INVESTMENT IN SHARES OF OPERAT ING COMPANIES FOR ACQUIRING AND RETAINING A CONTROLLING INTEREST THEREIN WAS DISALLOWABLE UNDER SECTION 14 A OF THE ACT. IN THE SAID CASE ADMITTEDLY THERE WAS DIVI DEND EARNED ON SUCH INVESTMENT. IN OTHER WORDS, IT WAS N OT A CASE, AS THE PRESENT, WHERE NO EXEMPT INCOME WAS EA RNED IN THE YEAR IN QUESTION. CONSEQUENTLY, THE SAID DEC ISION WAS NOT RELEVANT AND DID NOT APPLY IN THE CONTEXT O F THE ISSUE PROJECTED IN THE PRESENT CASE. 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREIN BEFORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING TH AT THE EXPRESSION 'DOES NOT FORM PART OF THE TOTAL INC OME' IN SECTION 14A OF THE ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE I N THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE P URPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WILL NOT AP PLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING T HE RELEVANT PREVIOUS YEAR. 24. CONSEQUENTLY, THE IMPUGNED ORDER OF THE ITAT IS SET ASIDE AND THE APPEAL IS ALLOWED IN THE ABOVE TERMS. THIS COURT SHOULD NOT BE UNDERSTOOD TO HAVE EXPRESSED AN Y OPINION ON THE ISSUE OF WHETHER FOR THE AY IN QUESTI ON THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE WOULD BE ITA NO.1055/BANG/2017. M/S.BPL LIMITED. 9 ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 36 (1)(III) OF THE ACT. 6.2 IN VIEW OF THE ABOVE JUDGMENT OF THE HONBLE DE LHI HIGH COURT, SINCE FOR THE CURRENT ASSESSMENT YEAR ASSESS EE HAD NOT EARNED ANY EXEMPTED INCOME, WE HOLD THE INVOCATION OF SECTION 14A IS UNCALLED FOR. IT IS ORDERED ACCORDIN GLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 03 RD DAY OF NOVEMBER, 2 017. SD/- SD/- (A.K.GARODIA) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE ; DATED : 03 RD NOVEMBER, 2017. DEVDAS* COPY OF THE ORDER FORWARDED TO : TRUE COPY BY ORDER, (ASSTT. REGISTRAR) ITAT, BANGALORE 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT, BENGALURU. 4. CIT(A)-1, BENGALURU 5. DR, ITAT, BANGALORE 6. GUARD FILE.