ACIT, Circle-14(1), Hyderabad, Hyderabad V. Small is Beautiful, Hyd, Hyderabad

ITA 1063/HYD/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6015 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 29-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.NO.1063/HYD/2016 ASSESSMENT YEAR 2006-2007 THE ACIT, CIRCLE-14(1), HYDERABAD. VS. M/S. SMALL IS BEAUTIFUL, HYDERABAD. TELANGANA STATE. (APPELLANT) (RESPONDENT) FOR REVENUE : SMT. SUMAN MALIK FOR ASSESSEE : -NONE- DATE OF HEARING : 15.11.2016 DATE OF PRONOUNCEMENT : 15.11.2016 ORDER PER D. MANMOHAN, V.P. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-9, HYDERABAD AND IT PERTAI NS TO THE A.Y. 2006-07. THE ONLY GROUND URGED BY THE REVENUE R EADS AS UNDER: IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,77,12,790 TO WARDS DISALLOWANCE UNDER SECTION.14A OF THE INCOME TAX AC T, 1961. 2. THE ASSESSEE TRUST IS ENGAGED IN THE BUSINESS OF INVESTMENT AND RECOGNISED AS A VENTURE CAPITAL FUND. FO R THE YEAR UNDER CONSIDERATION IT DECLARED LOSS OF RS.42,12 ,564. THE RETURN HAVING BEEN TAKEN-UP FOR SCRUTINY THE ASSESSING OFFICER EXAMINED THE BOOKS OF ACCOUNT AND NOTICED THAT IT PAID A N AMOUNT OF RS.1.77 CRORES AS MANAGEMENT FEE TO M/S. KSK ENERGY 2 ITA.NO.1063/HYD/2016 M/S. SMALL IS BEAUTIFUL, HYDERABAD. VENTURE LTD. SINCE THE ACTIVITY OF THE TRUST IS INVESTMEN TS IN POWER PROJECTS, THE INCOME OF THE ASSESSEE IN THE FORM OF DIVIDEND IS EXEMPT FROM TAX AND THE EXPENDITURE INCURRED BEING ATTRIBUTABLE TO THE EXEMPT INCOME THE SAME DESERVES TO BE DISALLOWED UNDER SECTION 14A OF THE ACT. 3. WHEN THE SAME WAS PUT TO THE ASSESSEE, THE LD. A.R. OF THE ASSESSEE SUBMITTED THAT THE ASSESSEES INCOME IS N OT ONLY IN THE FORM OF DIVIDEND BUT ALSO CAPITAL GAINS ON AC COUNT OF SELLING OF THE INVESTMENTS MADE BY THE TRUST AND HENCE THE ENTIRE EXPENDITURE SHOULD NOT BE DISALLOWED. IT WAS FURTHER ARGUED THAT THE ASSESSING OFFICER HAD NO POWER TO ESTIMATE PROPORTI ONATE EXPENDITURE AS THE AMENDMENT RELATES TO ASSESSING OFFIC ERS POWERS FOR PROPORTIONATE DISALLOWANCE WHICH IS APPLI CABLE W.E.F. 01.04.2007 WHEREAS THE ISSUE ON HAND PERTAINS TO THE A. Y. 2006- 2007. 4. THE ASSESSING OFFICER OBSERVED THAT SUB-SECTION (2 ) OF SECTION 14A HAS BEEN INSERTED W.E.F. 01.04.2007 WHIC H IS CLARIFICATORY IN NATURE AND THEREFORE, IT HAS RETROSPEC TIVE OPERATION. HE FURTHER OBSERVED THAT THE ASSESSEE IS A VE NTURE CAPITAL FUND AS PER THE CERTIFICATE ISSUED BY SEBI AND AS SUCH ITS ENTIRE INCOME IS EXEMPT UNDER THE PROVISIONS OF SEC TION 10(23FB) OF THE ACT BUT THE EXPENDITURE DESERVES TO BE SE PARATELY DISALLOWED. HE ACCORDINGLY COMPUTED THE INCOME AS UND ER : INCOME RETURNED RS.( - ) 42,12,564 ADD: MANAGEMENT FEE DISALLOWED (AS DISCUSSED ABOVE) RS. 1,77,12,790 INCOME ASSESSED RS. 1,35,00,226 LESS: INCOME EXEMPTED UNDER SECTION.10(23FB) RS. 1,35,00,226 INCOME ASSESSED RS. NIL TAX THEREON RS. NIL 3 ITA.NO.1063/HYD/2016 M/S. SMALL IS BEAUTIFUL, HYDERABAD. 5. AGGRIEVED ASSESSEE CONTENDED BEFORE THE CIT(A) TH AT THERE WAS NO INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME AND HENCE THE QUESTION OF APPLICABILITY OF PROVISIONS OF SECTION 14A DOES NOT ARISE. BRIEF SUBMISSIONS OF THE ASSESSEE BEFORE THE CIT(A) ARE EXTRACTED BY THE CIT(A) IN PARA-5 OF HIS O RDER. 5.1. LD. CIT(A) OBSERVED THAT SUB-SECTIONS (2) AND (3 ) OF SECTION 14A WERE INTRODUCED W.E.F. 01.04.2007 AND HEN CE THE SAME WILL NOT BE APPLICABLE TO THE ASSESSMENT YEAR UNDE R CONSIDERATION, APART FROM THE FACT THAT THE APPELLANT DID N OT TURN ANY EXEMPT INCOME NOR CLAIMED ANY INCOME AS EXEMPT DU RING THE YEAR AND HENCE THE QUESTION OF DISALLOWABILITY OF ANY EXPENDITURE DOES NOT ARISE. FOR THE SAKE OF EASY REFERENCE THE OPE RATIVE PORTION OF THE ORDER OF THE CIT(A) IS EXTRACTED BELOW : 6.1. I HAVE CAREFULLY EXAMINED THE ASSESSMENT OR DER, FACTS OF THE CASE AND THE SUBMISSIONS OF THE ASSESS EE. AS CONTENDED BY THE ASSESSEE THE TRUST DID NOT EARN AN Y EXEMPT INCOME NOR CLAIMED ANY INCOME AS EXEMPT DURING THE YEAR UNDER CONSIDERATION. FURTHER, SINCE SUB SEC. 2 & 3 OF SEC.14A WERE INTRODUCED W.E.F. 01.04.2007, THE SAME WILL NOT BE APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. FIRSTLY, IT IS PERTINENT TO UNDERSTA ND THE LEGISLATIVE INTENT IN INSERTING THE SECTION 14A. PR OVISIONS OF SECTION 14A OF THE ACT WERE INTRODUCED TO DISALLOW ANY EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. PRIOR TO THE INTRODUCTION OF SECTION 14A OF THE ACT, THE HON'BLE SUPREME COURT IN THE CASES OF CIT VS., MAHARASHTRA SUGAR MI LLS LTD., 82 ITR 452 (SC) AND RAJASTHAN STATE WAREHOUSING CORPORATION VS., CIT 242 ITR 450 (SC) HELD THAT WHE RE THE ASSESSEE CARRIES ON INDIVISIBLE BUSINESS RESULTING IN BOTH TAXABLE AS WELL AS NONTAXABLE INCOME, THEN NO PART OF EXPENDITURE INCURRED BY THE ASSESSEE COULD BE DISAL LOWED ON THE GROUND THAT THE SAME MAY HAVE BEEN INCURRED IN RELATION TO THE EXEMPT INCOME. THE DISALLOWANCE CANNOT BE MA DE ON THE ASSUMPTION THAT THE INVESTMENT MAY YIELD EXEMPT INCOME IN FUTURE AND MAY NOT BE INCLUDED IN 'TOTAL INCOME' OF THAT YEAR. IT WOULD BE ANOMALOUS IF DISALLOWANCE OF EXPE NDITURE IS 4 ITA.NO.1063/HYD/2016 M/S. SMALL IS BEAUTIFUL, HYDERABAD. MADE MERELY BECAUSE THE INVESTMENT MAY YIELD EXEMPT INCOME, EVEN WHEN NO SUCH INCOME IS EARNED SECTION 14A REQUIRES ACTUAL EARNING OF EXEMPT INCOME AND INCURR ING OF EXPENDITURE IN RELATION THERETO. 6.2. I PLACE RELIANCE ON THE CASE OF THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. M/S. SHIVAM MOTORS (P) LTD. ITA 88 OF 2014 (DECIDED ON 05.05.2014), WHEREIN IT WAS HELD A S FOLLOWS : AS REGARDS THE SECOND QUESTION, SECTION 14A OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY TH E ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, SEC. 14A PROVIDES THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED FOR EARNING THE INCOM E IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED AN TAX FREE INCOME. HENCE IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE. 6.3. IT HAS BEEN SIMILARLY HELD, RECENTLY, BY THE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY PVT. LTD. ITA 239 OF 2014 (DECIDED ON CIT VS . M/S. LAKHANI MARKETING ITA 970 OF 2008, ORDER DT. 02.04.2014 AND ALSO IN THE CASE OF JOINT INVESTMENT S P. LTD. VS. CIT (2015) 372 ITR 694 (DELHI) (HC). 7. IN VIEW OF THE ABOVE FACTS & CIRCUMSTANCE OF THE CASE, AND SINCE THE APPELLANT DID NOT EARN ANY EXEMPT INCOME NOR CLAIMED ANY INCOME AS EXEMPT DURING THE YEAR, THE ORDER OF THE ASSESSING OFFICER CANNOT BE SUSTAINED AND THE CLAIM OF THE APPELLANT IS ALLOWED. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 5 ITA.NO.1063/HYD/2016 M/S. SMALL IS BEAUTIFUL, HYDERABAD. 6. NONE APPEARED ON BEHALF OF THE ASSESSEE. WE HAVE HEARD THE LD. D.R. AND CAREFULLY PERUSED THE RECORD. AS COULD BE NOTICED FROM THE ORDER OF THE LD. CIT(A), THE DECISION WAS RENDERED IN FAVOUR OF THE ASSESSEE BY FOLLOWING VARI OUS CASE LAW REFERRED TO ABOVE WHEREAS, THE LD. D.R. COULD NOT PLAC E ANY DECISION WHEREIN A CONTRARY VIEW WAS TAKEN WHICH INTUR N CAN SUPPORT THE STAND OF THE REVENUE. 7. HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE ORDER PASSED BY THE LD. CIT(A) DOES NOT CALL FOR ANY INTERFERENCE AND THEREFORE, THE APPEAL FI LED BY THE REVENUE IS DISMISSED, AS PRONOUNCED IN THE OPEN COUR T. ORDER PRONOUNCED IN THE OPEN COURT ON 15.11.2016. SD/- SD/- (B.RAMAKOTAIAH) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT HYDERABAD, DATED 15 TH NOVEMBER, 2016. VBP/- COPY TO 1. THE ACIT, CIRCLE-14(1), HYDERABAD. 2. M/S. SMALL IS BEAUTIFUL, 8-2-293/82/A/431/A, ROAD NO.22, JUBILEE HILLS, HYDERABAD 500 033. TELANGANA STATE. 3. CIT(A)-9, 2 ND FLOOR ANNEXE, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD 500 004. 4. PR. CIT-6, HYDERABAD. 5. D.R. ITAT A BENCH, HYDERABAD. 6. GUARD FILE.