Capital Fortunes Limited, Hyderabad V. Dy. Commissioner of Income Tax, Circle-1(2), Hyderabad

ITA 1165/Hyd/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6532 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 27-06-2018
• Assessment Year: 2013-2014
• Appeal Filed On: 07-07-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N SWAPNA
• Assessee Lawyers: C S SUBRAHMANYAM; V SIVA KUMAR A RS
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 1165/HYD/2017 ASSESSMENT YEAR: 2013-14 CAPITAL FORTUNES PRIVATE LIMITED, HYDERABAD [PAN: AABCC5489P] VS DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI C.S. SUBRAHMANYAM & SHRI V. SIVA KUMAR, ARS FOR REVENUE : SMT. N. SWAPNA, DR DATE OF HEARING : 27-06-2018 DATE OF PRONOUNCEMENT : 31-07-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-1, HYDERABAD, DATED 23-05-2017 ON THE ISSUE OF DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT [ACT]. 2. BRIEFLY STATED, ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING PROFESSIONAL ADVISORY SERVICE S AND FINANCIAL CONSULTANCY SERVICES, E-FILED ITS RETURN OF INCOME ON 30-09-2013, DECLARING A TOTAL INCOME OF RS. 4,78,44,5 65/-. DURING THE COURSE OF ASSESSMENT AO NOTICED THAT ASSESSE E HAD I.T.A. NO. 1165/HYD/2017 :- 2 - : INVESTMENTS OF RS. 8.60 CRORES AND RECEIVED DIVIDEND OF RS.1,119/- DURING THE YEAR. INVOKING THE PROVISIONS OF SECTION 14A, AO DISALLOWED AN AMOUNT OF RS. 8,87,114/- UNDER RULE 8D(2)(II) AND RS. 18,20,728/- UNDER RULE 8D(2)(III) BEING ADMINISTRATIVE EXPENDITURE. ASSESSEE OBJECTIONS WERE NE GATIVED BY AO. AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE THE CIT(A ). 3. BEFORE THE LD.CIT(A), ASSESSEE CONTENDED THE ADDITION MADE BY THE AO. IT WAS CONTENDED THAT NO PART O F THE BORROWED FUNDS WERE DIVERTED FOR INVESTMENT AND ASSE SSEE HAD MORE CAPITAL AND RESERVES THAN THE INVESTMENTS. THE LOAN S ARE CASH CREDIT LOANS FROM BANK MEANT FOR BUSINESS ONLY. FURTHER ASSESSEE HAD NOT SPENT ANY AMOUNT FOR EARNING DIVIDEND WHICH WAS ONLY RS. 1,119/-. LD.CIT(A) UPHELD THE ORDER OF AO BY SUSTAINING THE DISALLOWANCE OF RS. 27,07,842/- U/S. 14A R.W. RULE 8D. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE U S. 4. IT WAS THE CONTENTION THAT NO PART OF THE BORROWED FUNDS WERE DIVERTED AND REFERRED TO THE FINANCIAL STATE MENTS TO SUBMIT THAT AO WRONGLY DISALLOWED UNDER RULE 8D(2)(II) THE INTEREST CLAIMED IN BUSINESS. FURTHER NO EXPENDITURE WA S INCURRED FOR EARNING DIVIDEND INCOME. ALTERNATIVELY, IT WAS SUBMITTED THAT THE DISALLOWANCE CAN BE RESTRICTED TO DIVID END EARNED ONLY FOLLOWING THE CO-ORDINATE BENCH DECISION IN ITA NO. 460/HYD/2017 IN THE CASE OF M/S. KAMADHENU SUKRI T PVT. LTD., VS. INCOME TAX OFFICER DT. 22-11-2017. LD. COUN SEL FOR ASSESSEE HAS FURTHER RELIED ON THE FOLLOWING CASE LAW : I.T.A. NO. 1165/HYD/2017 :- 3 - : A. PR.COMMISSIONER OF INCOME TAX VS. EMPIRE PACKAGE PV T. LTD., [286 CTR 457 (P & H-HC)]; B. JOINT INVESTMENTS PVT. LTD., VS. CIT [372 ITR 694 (DEL- HC)]; C. K. RATANCHAND & CO., VS. ITO [45 ITR (TRIB) 608 (AHD - TRIB); D. PEST CONTROL INDIA PVT. LTD., VS. DCIT, ITAT MUMBAI DATED 31-10-2017; E. TGV PROJECTS & INVESTMENTS PVT. LTD., VS. ACIT ITAT, HYDERABAD, DATED 28-02-2017 (SMC); F. AVSHESH MERCANTILE (P) LTD., VS. DCIT [26 TAXMANN.COM 43 (MUMBAI)/(2012) 54 SOT 19]; G. CIT VS. ORIENTAL STRUCTURAL ENGINEERS P. LTD., [35 TAXMANN.COM 210 (DELHI-HC); H. CIT VS. HOLCIM INDIA (P) LTD., [57 TAXMANN.COM 28) (DELHI)]; I. M/S. KAMADHENU SUKRIT PVT. LTD., VS. ITO, ITAT HYDERABAD BENCH, DATED 22-11-2017; 5. LD.DR, HOWEVER, RELIED ON THE ORDERS OF THE CIT(A ). 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE FACTS ON RECORD AND THE CASE LAW RELIED UP ON. AS SEEN FROM THE ORDER OF THE AO AS WELL AS THE CIT(A), TH ERE IS NO FINDING THAT ASSESSEE HAS INCURRED ANY EXPENDITURE FO R EARNING THE SAID DIVIDEND INCOME. THERE WAS FINDING ON DIVER SION OF BORROWED FUNDS, HENCE THE DISALLOWANCE OF INTEREST UND ER RULE 8D(2)(II) DOES NOT ARISE. ASSESSEE HAD OWN FUND MORE THAT THE I.T.A. NO. 1165/HYD/2017 :- 4 - : INVESTMENTS. CONSEQUENTLY, DISALLOWANCE UNDER RULE 8D( 2)(II) HAS TO BE DELETED. 6.1. COMING TO THE DISALLOWANCE OF % OF AVERAGE VAL UE OF INVESTMENT, SOME PROPORTIONATE EXPENDITURE CAN BE DISALLOWED BUT IN NO CASE, IT SHOULD EXCEED THE AMOUN T EARNED CLAIMING EXEMPTION. THE HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF PR. COMMISSIONER OF INCOME TA X VS. EMPIRE PACKAGE PVT. LTD., (SUPRA), ANSWERED THE QUESTIO N RAISED BY REVENUE IN NEGATIVE, WHEREIN THE REVENUE HA S RAISED WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE TRIBUNAL IS JUSTIFIED IN LAW TO HOLD THE DISAL LOWANCE MADE U/S. 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT IN COME IN THE ABSENCE OF ANY SUCH RESTRICTION BEING THERE IN THE RELEVANT SECTION OR RULE. SIMILAR OPINION WAS ALSO EXPRESSED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD., VS. CIT (SUPRA), WHEREIN THE HON' BLE DELHI HIGH COURT HAS CLEARLY HELD THAT THE PROPORTIONATE OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW TH E ENTIRE AMOUNT AS HAPPENED IN THIS CASE. THE CO-ORDIN ATE BENCH IN THE CASE OF M/S. KAMADHENU SUKRIT PVT. LTD., V S. ITO (SUPRA) RELIED ON ANOTHER DECISION IN THE CASE OF SA HARA INDIA FINANCIAL CORPN. LTD., VS. DCIT [41 TAXMANN.COM 251] (DELHI- TRIB) AND HAS HELD AS UNDER: 8.1. AS CAN BE SEEN FROM THE NATURE OF EXPENDITURE , THERE IS NO INDICATION EVEN THAT THE ABOVE EXPENDITURE IS EX PENDED FOR EARNING DIVIDEND INCOME. AO WITHOUT GIVING ANY SATISFACTOR Y REASON, JUST INVOKED RULE 8D(III) AND DISALLOWED THE AMOUNT. I.T.A. NO. 1165/HYD/2017 :- 5 - : 9. THE CO-ORDINATE BENCH IN THE CASE OF SAHARA INDI A FINANCIAL CORPN. LTD., VS. DCIT (SUPRA) HAS HELD IN PARA 81 A S UNDER: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPUTED THAT THE ADMINISTR ATION, EXPENSES AND BOOKS OF ACCOUNT OF INVESTMENT DIVISION ARE SEPARATELY CARRI ED OUT AND MAINTAINED BY THE ASSESSEE. NO INFIRMITY HAS BEEN FOUND BY THE DEPART MENT IN THIS BEHALF. ONE OF THE MAIN ISSUE IS ON WHOM LIES THE ONUS TO ESTABLISH NE XUS OF AVAILABLE FUNDS WITH FREE AND TAXABLE INCOME. SIMILARLY COURTS HAVE HELD THAT A FINDING IN OBJECTIVE TERMS ABOUT ASSESSEE WORKING BEING UNSATISFACTORY IS TO BE RECO RDED BY AO IN THE ORDER. CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF PUN JAB STATE CO-OP. & MARKETING FED. LTD. (SUPRA) HAS HELD THAT IN ANY CASE THE DIS ALLOWANCE U/S 14A CANNOT EXCEED TAX FREE INCOME OF THE ASSESSEE. IF MECHANICAL METH OD OF RULE 8D IS APPLIED, IT LEADS TO MANIFESTLY ABSURD RESULTS IN AS MUCH AS FOR TAX FREE INCOME OF RS.68,37,583/- DISALLOWANCE OF RS.2,16,51,917 (ENHANCED BY CIT(A) AT RS. 2,19,47,772) IS MADE U/S 14A WHICH IS WAY TOO MUCH THAN THE EXEMPT INCOME. A S THE INTERPRETATION OF PROVISIONS OF SEC. 14A R/W RULE 8D IS LEADING TO UN ANTICIPATED ABSURDITIES WHICH CANNOT BE THE INTENTION OF LEGISLATURE. UNDER THESE CIRCUMSTANCES HELP OF EXTERNAL AIDS OF CONSTRUCTION FOR INTERPRETATION OF STATUTE IS CALLED FOR. LOOKING AT THE VARYING INTERPRETATION OFFERED BY VARIOUS COURTS AND BENCHE S OF TRIBUNAL IN RELATION TO SEC. 14A, IT IS QUITE ARDUOUS TO PRECISELY DECIDE THE IS SUE. IN GIVEN FACTS AND CIRCUMSTANCES WITHOUT GOING INTO ALL THE ISSUES, IN OUR VIEW IT I S APPROPRIATE TO TAKE GUIDANCE FROM CHANDIGARH BENCH JUDGMENT IN THE CASE OF PUNJAB STA TE CO-OPT MARKETING FED. LTD. (SUPRA) HOLDING THAT THE DISALLOWANCE OF EXPENDITUR E IN ANY CASE CANNOT EXCEED THE INCOME EARNED. IN OUR VIEW THIS JUDGMENT TAKES A HO LISTIC VIEW THAT DISALLOWANCE IN TERMS OF SEC. 14A CAN BE MAXIMUM TO THE EXTENT OF E XEMPT INCOME, THERE IS NO DISPUTE THAT IN THIS CASE WHICH IS AT RS. 68,37,583 /-. THIS JUDGMENT IMPLIES THAT REASONABLE EXPENDITURE LESS THAN THE EXEMPT INCOME CAN BE DISALLOWED. IN OUR CONSIDERED OPINION, IN THE INTEREST OF JUSTICE, IT WILL BE REASONABLE TO ESTIMATE AND DISALLOW, 50% OF EXEMPT) INCOME (RS.68,37,583/-) AS RELATABLE TO EXEMPT INCOME U/S 14A R/W RULE 8D. WE DO NOT GO INTO VARIOUS PLEA TAK EN BY BOTH SIDES OFFERING DIVERSE VIEWS BASED ON JUDICIAL CITATIONS. THIS GROUND OF T HE ASSESSEE IS PARTLY ALLOWED. 10. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES, AS THE DISALLOWANCE MADE BY AO HAS RESULTED IN ABSURD SITUATION OF DISA LLOWING GENUINE OTHER BUSINESS EXPENDITURE, ON WHICH ASSESSEE EARNE D MORE THAN RS. 19 LAKHS INCOME (AS AGAINST RS. 8,100/- OF DIVIDEND ), I AM SATISFIED THAT THE DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO THE INCOME EARNED OF RS. 8,100/-. AO IS DIRECTED ACCORDINGLY . 6.2. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN IN VARIOUS JUDGMENTS OF THE HON'BLE HIGH COURTS AND THE DECISIONS OF THE CO-ORDINATE BENCHES, WE ARE OF THE OP INION I.T.A. NO. 1165/HYD/2017 :- 6 - : THAT THE DISALLOWANCE UNDER RULE 8D CANNOT EXCEED THE DIVIDEND INCOME EARNED AND CLAIMED AS EXEMPT. THEREF ORE, THE DISALLOWANCE WORKED OUT UNDER RULE 8D(III) BEING ADMINISTRATIVE EXPENDITURE IS RESTRICTED TO THE AMOUNT OF DIVIDEND EARNED. AO IS DIRECTED ACCORDINGLY. GROUND S ARE PARTLY ALLOWED. 7. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWE D . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JULY, 2018 SD/- SD/- (V. DURGA RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST JULY, 2018 TNMM I.T.A. NO. 1165/HYD/2017 :- 7 - : COPY TO : 1. CAPITAL FORTUNES PRIVATE LIMITED, 8-2-698, 4 TH FLOOR, FLAT NO. 403, MJ TOWERS, ROAD NO. 12, BANJARA HILLS, HYDERABAD. 2. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD. 3. CIT(APPEALS)-1, HYDERABAD 4. PR.CIT(1)-HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.