ACIT, Central Circle - II, Kolkata, Kolkata V. M/s. Standard Vinimoy (P)Ltd, Kolkata

ITA 1319/KOL/2012

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0504 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-10-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 13-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Question of law
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOLKATA [ BEFORE SHRI P.K.BANSAL , A . M . & SHRI MAHAVIR SINGH , J.M. ] I.T. A . NO. 1319 /KOL/20 1 2 : ASSESSMENT YEAR : 20 09 - 10 ACIT, C.C. - II , KOLKATA VS - M/S. STA NDARD VINIMOY PVT. LTD. ( APPELLANT) (PAN: AAKCS 0069G ) .. ( RESPONDENT ) DATE OF CONCLUDING THE HEA RING : 2 9 . 05 .201 5 DATE OF PRONOUNCING THE ORDER : 10 .06. 201 5 APPEARANCES : F OR THE DEPARTMENT : SHRI PINAKI MUKHERJEE, SR. DR : FOR THE ASSESSEE : SHRI D. S. DAMLE, FCA O R D E R PER SHRI P.K.BANSAL, A .M. THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A), CENTRAL - III, KOLKATA DATED 20 . 06 .20 1 2 FOR THE ASS ESSMENT YEAR 20 09 - 10 . 2. THE ONLY ISSUE INVOLVED I N THIS APPEAL RELATES TO THE DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME - TAX ACT AMOUNTING TO RS.34,74,755/ - . 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DEBITED A SUM OF RS.43,54,906/ - TO ITS PROFIT & LOSS A/C. ON ACCOUNT OF INTEREST ON T ERM LOAN. THE ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS.2,26,517/ - UNDER THE HEAD OTHER INCOME . THE AUDITOR HAD SHOWN IN THE TAX AUDIT REPORT AMOUNTING TO RS.23,094/ - AS 2 IT A NO. 1319 /KOL/201 2 M/S.STANDARD VINIMAY PVT.LTD. : A. Y R: 20 09 - 10 INADMISSIBLE UNDER SECTION 14A. THE AO NOTED THAT AS PER THE BALANCE - SHEET, THE ASSES SEE HAS INVESTED IN FULLY PAID EQUITY SHARES OF POLLEN DEALCOM PVT. LTD. AMOUNTING TO RS.6 CRORES. THERE WAS A TERM LOAN FROM AXIS BANK AMOUNTING TO RS.7,58,09,730/ - . THERE WERE OTHER INVESTMENTS ALSO WHICH CONSIST OF FULLY PAID EQUITY SHARES OF SUN RISE T IE - UP PVT. LTD. AMOUNTING TO RS.90,225/ - AND RELIANCE MEDIUM TERM FUND - DAILY DIVIDEND PLAN AMOUNTING TO RS.1,25,24,400/ - . THE AO ASKED THE ASSESSEE WHY DISALLOWANCE UNDER SECTION 14A SHOULD NOT BE MADE IN RESPECT OF ENTIRE INVESTMENTS MADE IN POLLEN DEALCO M PVT. LTD., SUN RISE TIE - UP PVT. LTD. AND RELIANCE MEDIUM TERM FUND - DAILY DIVIDEND PLAN. THE ASSESSEE EXPLAINED THAT THE LOAN TAKEN FROM AXIS BANK WAS UTILIZED FOR THE PURPOSE OF GIVING A DEPOSIT OF RS.6 CRORES TO M/S. POLLEN DEALCOM PVT. LTD. FOR GENERAT ING BUSINESS OF THE ASSESSEE AND THEREFORE, THE INTEREST PAID ON SUCH LOAN WAS BUSINESS EXPENDITURE AND, THEREFORE, NO DISALLOWANCE UNDER SECTION 14A OTHER THAN WHAT HAS ALREADY BEEN MADE IN THE RETURN OF INCOME IS WARRANTED TO THE SHARES OF POLLEN DEALCOM PVT. LTD. WERE RECEIVED AS SECURITY FOR THE INTEREST FREE SECURITY DEPOSIT GIVEN TO POLLEN DEALCOM PVT. LTD. (IN SHORT, POLLEN) WITH SPECIFIC CONDITION THAT NO DIVIDEND WOULD EVER BE DECLARED ON SUCH SHARES AND THAT THE ASSESSEE COULD NEVER SELL THOSE SHA RES TO ANY THIRD PARTY. THEREFORE, THERE WAS NO POSSIBILITY OF ANY TAX - FREE INCOME FROM SUCH SHARES. THE AO DID NOT AGREE BUT BY APPLYING RULE 8D READ WITH SECTION 14A, DISALLOWED A SUM OF RS.34,74,755/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER: I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE ASSESSEE. THE AGREEMENT DATED 3 IT A NO. 1319 /KOL/201 2 M/S.STANDARD VINIMAY PVT.LTD. : A. Y R: 20 09 - 10 06.06.2008, A COPY OF WHICH WAS FILED BY THE ASSESSEE AND WHICH WAS BEFORE THE A.O. ALSO AT THE TIME OF ASSESSMENT PROCEEDINGS, SPECIFICALLY PROVIDES THAT THE SHARES ALLOTTED TO THE ASSESSEE BY POLLEN WERE ISSUED ONLY FOR SECURING THE AMOUNT OF SECURITY DEPOSIT AND NO PROFIT AGAINST SUCH SHARES WILL BE GIVEN BY POLLEN NOR SHALL ANY PROFIT ACCRUE TO T HE ASSESSEE IN RESPECT OF THOSE SHARES. THE SAID AGREEMENT ALSO PROVIDED THAT POLLEN SHALL NOT DECLARE ANY DIVIDEND IN RESPECT OF THE SHARE CAPITAL FOR A PERIOD OF NINE YEARS AND THUS, THE ASSESSEE WILL NOT BE ENTITLED TO RECEIVE ANY DIVIDEND ON THOSE SHAR ES. WHEN IT WAS SPECIFICALLY PROVIDED THAT THE SHARES IN QUESTION WERE NOT DIVIDEND BEARING, THEN THE QUESTION OF ANY TAX - FREE INCOME IN THE FORM OF DIVIDEND DOES NOT ARISE. WHEN THERE WAS NO POSSIBILITY OF ANY INCOME WHATSOEVER, LEAVE ASIDE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE, TO ACCRUE OR ARISE ON THOSE SHARES, HOW CAN ANY TAX - FREE INCOME BE PRESUMED TO HAVE ACCRUED ON SUCH SHARES! AS REGARDS THE DECISION OF THE ITAT SPECIAL BENCH B IN THE CASE OF CHEMINVEST LTD. VS. I TO (SUPRA) RELIED UPON BY THE A.O., IT IS OBSERVED THAT IN THAT CASE THE ITAT TOOK NOTE OF THE FINDING OF THE CIT(A) THAT INVESTMENT OUT OF BORROWED FUNDS WAS FOR EARNING OF DIVIDEND, I.E. THE INTEREST ON BORROWED FUNDS WAS RELATABLE TO EARNING OF DIVIDEND ON SHARES. IN THAT CASE THE COURT OBSERVED THAT THE ALLOWANCE OF EXPENDITURE IN RELATION TO DIVIDEND INCOME WOULD BE NOT ADMISSIBLE IN COMPUTING THE INCOME OF AN ASSESSEE UNDER THIS ACT. FROM THE FACTS OF THE CASE IT IS CLEAR THAT THE ASSESSEE HAD NOT INVESTED BORROWED FUNDS IN ANY TAX - FREE INVESTMENT. BORROWED FUNDS WERE UTILIZED TO PROVIDE SECURITY DEPOSIT FOR SECURING BUSINESS FOR THE ASSESSEE FROM POLLEN AND IN LIEU OF SECURING SUCH SECURITY DEPOSIT POLLEN ISSUED SHARES TO THE ASSESSEE. IT WAS SPECI FICALLY PROVIDED FOR AND AGREED TO IN THE AGREEMENT DATED 6TH JUNE, 2008 BETWEEN THE ASSESSEE AND POLLEN THAT NO PROFIT WILL ACCRUE TO THE ASSESSEE ON SUCH SHARES NOR WILL POLLEN DECLARE ANY DIVIDEND ON THOSE SHARES. THESE FACTS CLEARLY SHOW THAT BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE FOR SECURING BUSINESS FROM POLLEN AND NOT FOR 4 IT A NO. 1319 /KOL/201 2 M/S.STANDARD VINIMAY PVT.LTD. : A. Y R: 20 09 - 10 EARNING OF DIVIDEND. THEREFORE, THE FACTS OF THE INSTANT CASE ARE DIFFERENT AND DISTINGUISHABLE FROM THOSE OF CHEMINVEST LTD. VS. ITO (SUPRA). FURTHER, AS DISCUSSED ABOVE, SI NCE NO TAX - FREE INCOME WAS TO ACCRUE OR ARISE ON THE SHARES ISSUED BY POLLEN TO THE ASSESSEE, IT CANNOT BE SAID THAT THE BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE FOR MAKING ANY TAX - FREE INVESTMENT. FOR THE ABOVE DISCUSSION, IT IS HELD THAT NO DISALL OWANCE U/S.14A IS WARRANTED IN RESPECT OF THE SUM OF RS.6 CRORES EXTENDED BY THE ASSESSEE TO POLLEN AS SECURITY DEPOSIT IN THIS CASE EXCEPT IN RESPECT OF THE INTEREST - FREE INCOME WHICH THE ASSESSEE HIMSELF HAD DISALLOWED IN ITS RETURN OF INCOME FILED FOR T HE YEAR UNDER APPEAL. HENCE, THE DISALLOWANCE U/S.14A MADE BY THE A.O. IN RESPECT OF THE SUM OF RS.6 CRORE EXTENDED BY THE ASSESSEE TO POLLEN AS SECURITY DEPOSIT IS DELETED. 4. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME ALONG WITH T HE ORDER S OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE PROVISIONS OF S ECTION 14A. WE FIND THAT THE PROVISIONS OF SECTION 14A, NO DOUBT, SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME, UNDER THIS ACT. THIS MEANS THAT THE BASIC CONDITION PRECEDENT FOR INVOKING THE PROVISIONS OF SECTION 14A IS THAT THERE SHOULD BE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS, WHEREVER THE A SSESSEE EARNED THE INTEREST - FREE INCOME, THE CORRESPONDING EXPENDITURE INCURRED IN EARNING THAT INCOME IS TO BE DISALLOWED. IN THE ABSENCE OF ANY INTEREST - FREE INCOME , THERE CANNOT BE ANY DISALLOWANCE, AS NO CORRESPONDING EXPENDITURES WERE INCURRED TO EARN A PARTICULAR TAX - FREE INCOME. THIS IS AN UNDISPUTED FACT THAT FROM THE INVESTMENT MADE BY THE ASSESSEE IN THE IMPUGNED CASE BY GIVING A DEPOSIT OF RS.6 CRORES TO M/S. POLLEN DEALCOM PVT. 5 IT A NO. 1319 /KOL/201 2 M/S.STANDARD VINIMAY PVT.LTD. : A. Y R: 20 09 - 10 LTD. AND TAKING THEIR SHARES AS SECURITY DEPOSIT WITH THE CONDITION THAT NO DIVIDEND WOULD EVER BE DECLARED ON SUCH SHARES AND THAT THE ASSESSEE COULD NEVER SELL THOSE SHARES TO ANY THIRD PARTY, THE ASSESSEE HAS NOT EARNED ANY TAX - FREE INCOME, WHICH CAN FORM PART OF THE INCOME OF THE ASSESSEE. IN THE ABSENCE OF ANY TAX - FRE E INCOME, THE CORRESPONDING EXPENDITURE TO EARN THAT INCOME CANNOT BE WORKED OUT FOR ITS DISALLOWANCE. OUR AFORESAID VIEW IS DULY SUPPORTED BY THE DECISION OF THE HON BLE JURISDICTION HIGH COURT IN THE CASE OF CIT - VS - M/S. SHIVAM MOTORS (P) LTD. IN I.T. APPEAL NO.88 OF 2014 IN WHICH THE HON BLE HIGH COURT, VIDE ORDER DATED 5.5.2014 HELD AS UNDER: 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 RESPEC T OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, WHAT SECTION 14A PROVIDES IS THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITUR E WHICH IS INCURRED FOR EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION. FOR THE YEAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE OF ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COU LD NOT BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(A), WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF RS.2,03,752/ - MADE BY THE ASSESSING OFFICER WAS IN ORDER. 4.1 SIMILAR VIEW HAS BEEN TAKEN BY THE HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS - CORRTECH ENERGY PVT. LTD. IN TAX APPEAL NO.239 OF 2014 VIDE ORDER DATED 24.03.2014. HON BLE DELHI HIGH COURT HAS ALSO TAKEN THE SIMILAR VIEW VIDE ORDER DA TED 05.09.2014 IN TAX APPEAL NO.486/2014 & ITA NO.299/2014 IN THE CASE OF CIT - VS - HOLCIM INDIA P. LTD. HON BLE PUNJAB & 6 IT A NO. 1319 /KOL/201 2 M/S.STANDARD VINIMAY PVT.LTD. : A. Y R: 20 09 - 10 HARYANA HIGH COURT HAS ALSO TAKEN THE SIMILAR VIEW IN THE CASE OF CIT, FARIDABAD VS - M/S. LAKHANI MARKETING INCL. IN ITA NO.970/2008 VI DE ORDER DATED 02.04.2014. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE. WE, THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF VARIOUS HIGH COURTS, CONFIRM THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A. 5 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDE R PRONOUNCED IN THE OPEN C OURT ON 10.06. 2015 . SD/ - SD/ - ( MAHAVIR SINGH ) (P.K.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 10.06. 2015 TALUKDAR (SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . M/S. STANDARD VINIMOY PVT. LTD. , 119, PARK STREET, WHITE HOUSE, 4 TH FLOOR, BLOCK - D, KOLKATA 700 0 16. 2 A CIT , CC - II , KOLKATA 3 . THE CIT(A), 4. CIT, 5 . DR, TRUE COPY, BY ORDER, ASSTT. REGISTRAR , ITAT, KOLKATA