ACIT, CHENNAI V. Equitas Holding Pvt Ltd., CHENNAI

ITA 1424/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7960 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2017
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 06-02-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 20-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: B. JAISHEILA
• Keywords: Earning of tax free income; Wholly owned subsidiary; Commercial expediency; Rule 8D; Capital Gains
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 14A; 201; 143(2); 13

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . , . , BEFORE SHRI M. BALAGANESH , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY, J UDICIAL MEMBER ./ I.T.A. NO. 1424 /MDS/201 6 / ASSESSMENT YEAR :20 1 2 - 1 3 THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(1), CHENNAI 600 0 34. VS. M/S. EQUITAS HOLDING PVT. LTD . , 672, 4 TH FLOOR, TEMPLE TOWERS, ANNA SAL AI, CHENNAI 600 035. [PAN:AA A C U9126C ] ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI A.V. SREEKANTH, JCIT / RESPONDENT BY : MS. B. JAISHEILA, C.A. / DATE OF HEARI NG : 0 6 . 02 .201 7 / DATE OF P RONOUNCEMENT : 13 . 02 .201 7 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 6 , C HENNAI, DATED 03 . 03.2016 RELEVANT TO THE ASSESSMENT YEAR 2012 - 13. THE ONLY EFFECTIVE GROUND RAISED IN THE APPEAL OF THE REVENUE IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT ]. I.T.A . NO . 1424 /M/ 1 6 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 28.03.2013 DECLARING TOTAL INCOME AT .1,26,71,670/ - AND REVISED THE SAME ON AN INCOME OF .1,19,44,690/ - AND FURTHER REVISED THE RETURN ON 25.02.2014 DECLARING INCOME OF .97,36,520/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT DATED 23.09.2 013 WAS ISSUED AND DULY SERVED ON THE ASSESSEE. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT BY DETERMINING TOTAL INCOME OF THE ASSESSEE AT .1,75,03,473/ - AFTER MAKING VARIOUS DISALLOWANCE S. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND RAISED A GROUND WITH REGARD TO THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING VARIOUS DECISIONS OF THE TRIB UNAL, THE LD. CIT(A) ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. ON BEING AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. DR HAS VEHEMENTLY ARGUED THAT THE ORDER OF THE TRIBUNAL IN THE CASE OF EIH ASSOCIATED HOTELS LTD. V. DCIT IN I.T. A. NOS. 1503 & 1624/MDS/2012 DATED 17.07.2013, WHICH WAS FOLLOWED BY THE LD. CIT(A), HAS NOT ATTAINED FINALITY AND SINCE THE DEPARTMENT HAS PREFERRED AN APPEAL BEFORE THE HON BLE MADRAS HIGH COURT AND THE SAME IS PENDING IN TCA NO. 227/14, HE HAS PLEADED T HE ORDER OF THE LD. CIT(A) SHOULD BE REVERSED. I.T.A . NO . 1424 /M/ 1 6 3 5. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A) AND ALSO PLACED RELIANCE ON THE RECENT JUDGEMENT IN THE CASE OF REDINGTON (INDIA) LTD. V. ADDL. CIT IN T.C.A. NO. 520 OF 2016 DATED 23.12.2016, WHEREIN, THE HON BLE JURISDICTIONAL HIGH COURT HAS HELD THAT WHEN THERE IS NO EXEMPT INCOME THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE . 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS AVAILABLE ON RE CORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. FROM THE BALANCE SHEET, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA D INVESTMENTS OF .261.40 CRORES, WHICH WA S AN INCREASE FROM .13.71 CRORES IN THE PREVIOUS YEAR. MOST OF THE INVESTMENTS ARE IN SUBSIDIARY COMPANIES. SINCE ANY INVESTMENT IN A COMPANY IS CAPABLE OF EARNING DIVIDEND, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT BE MADE. VIDE HIS REPLY DATED 18.11.2014, THE AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME AND ALSO DID NOT INCUR ANY DIRECT EXPENDITURE TO EARN THE EXEMPT INCOME AND MOREOVER NO INDIRECT/COMMON INTEREST EXPENSES HAVE BEEN INCURRED/CLAIMED. IT WAS ALSO SUBMITTED THAT THE EXPENDITURE ON INVESTMENT IN SUBSIDIARY WAS OUT OF COMMERCIAL EXPEDIENCY AND HENCE NO EXPENDITURE CAN BE DISALLOWED. HOWEVER, BY APPLYING THE PROVISIONS OF RULE 8 D, THE ASSESSING OFFICER HAS I.T.A . NO . 1424 /M/ 1 6 4 ESTIMATED THE EXPENSES AND DISALLOWED A SUM OF .68,77,953/ - AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 6.1 ON APPEAL, BY FOLLOWING THE DECISIONS OF THE COORDINATE BENCHES OF THE TRIBUNAL IN THE CASE OF ACIT V. M. BASKARA N IN I.T.A. NO. 1717/MDS/2013 DATED 31.07.2014 AS WELL AS IN THE CASE OF EIH ASSOCIATED HOTELS L TD. V. DCIT IN I.T.A. NOS. 1503 & 1624/MDS/2012 DATED 17.07.2013, THE LD. CIT(A) DELETED THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 6.2 IN THIS CASE, THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME IN THE YEAR UNDER CONSIDERATION AND MOREOVER NO EXPENDITURE WAS INCURRED. IT WAS ALSO NOT DISPUTED BY THE DEPARTMENT THAT THE ASSESSEE HAS NOT MADE INVESTMENT IN WHOLLY OWNED SUBSIDIARIES. WHEN THE ASSESSEE HAS MADE INVESTMENTS IN ITS OWN SUBSIDIARIES , IT WAS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT INVESTMENT IN SUBSIDIARIES WAS OUT OF COMMERCIAL EXPEDIENCY AND HENCE NO EXPENDITURE CAN BE DETERMINED AND DISALLOWED IN VIEW OF THE DECISION OF TH E TRIBUNAL IN THE CASE OF EIH ASSOCIATED HOTELS LTD. V. DCIT (SUPRA). WE HAVE PERUSED THE ABOVE ORDER OF THE TRIBUNAL, WHEREIN, IT WAS OBSERVED AND HELD AS UNDER: 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RIVAL PARTIES. WE HAVE ALSO EXAMINED THE ORDE RS PASSED BY THE AUTHORITIES BELOW AND THE JUDGMENTS/ORDERS CITED BY THE REPRESENTATIVES OF BOTH THE PARTIES. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE RELATES TO DISALLOWANCE MADE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER HAS MADE DISALLOWANCE TO THE TUNE OF RS. 4,32,66,500/ - . THE CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 4.6 LAKHS WHICH IS FULLY EXEMPT U/S. 10(34) OF THE ACT. I.T.A . NO . 1424 /M/ 1 6 5 THE ASSESSEE HAS MADE VOLUNTARILY DISALLOWANCE OF RS. 45,927/ - U/S. 14A. THE ASSESSEE H AS MADE FRESH INVESTMENTS TO THE TUNE OF RS. 9.4 CRORES DURING THE YEAR. THE ASSESSING OFFICER HELD THAT THE INVESTMENTS HAVE BEEN MADE FROM THE FRESH SECURED LOANS OBTAINED DURING THE YEAR BY THE ASSESSEE. THE CIT(APPEALS) AFTER GOING THROUGH THE SUBMISSI ONS MADE BY THE PARTIES HAS COME TO THE CONCLUSION THAT THE ASSESSEE HAS MADE INVESTMENTS FROM ITS OWN FUNDS EXCEPT FOR THE SHORT TERM INVESTMENTS MADE IN HDFC CASH MANAGEMENT FUND AND DSPML CASH PLUS FUND IN RESPECT OF WHICH THE AMOUNTS WERE INVESTED FROM INTEREST BEARING FUNDS BORROWED FROM HBSC. THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS OF CIT(APPEALS). WE ARE OF THE CONSIDERED OPINION THAT THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FO R EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS. 64,18,19,775/ - , RS. 63,3 1,25,715/ - IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY T HE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THAT OF THE REVENUE IS DISMISSED. THE FI NDINGS OF THE CIT(APPEALS) ON THE ISSUE ARE ACCORDINGLY MODIFIED. 6.3 FURTHER, IN THE CASE OF REDINGTON (INDIA) LTD. V. ADDL. CIT (SUPRA), THE HON BLE JURISDICTIONAL HIGH COURT HAS HELD AS UNDER: 15. THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOULD REL ATE ONLY TO THE PREVIOUS YEAR WHEN THE INCOME WAS EARNED AND NONE OTHER AND CONSEQUENTLY THE EXPENDITURE INCURRED IN CONNECTION THEREWITH SHOULD ALSO BE DEALT WITH IN THE SAME PREVIOUS YEAR. THUS, BY APPLICATION OF THE MATCHING CONCEPT, IN A YEAR WHERE THE RE IS NO EXEMPT INCOME, THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASSUMED INCOME. (MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT (225 ITR 802). THE LANGUAGE OF S. 14A(1) SHOULD BE READ IN THAT CONTEXT AND SUCH THAT IT ADVANCE S THE SCHEME OF THE ACT RATHER THAN DISTORT IT. 16. IN CONCLUSION, WE ARE OF THE VIEW THAT THE PROVISIONS OF S. 14A READ WITH RULE 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM I.E., IN THE ABSENCE OF EXEMPT INCOME. THE QUESTIONS OF LAW ARE I.T.A . NO . 1424 /M/ 1 6 6 ANSWE RED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT AND THE APPEAL ALLOWED. NO COSTS. IN VIEW OF THE ABOVE DECISIONS, WE DO NOT FIND ANY FLAW IN THE ORDER PASSED BY THE LD. CIT(A) AND ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 7 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED ON THE 13 TH FEBRUARY , 201 7 AT CHENNAI. SD/ - SD/ - ( M. BALAGANESH ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 13 . 02 .201 7 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.