S.K.Sabapathy, Vellore V. DCIT, Vellore

ITA 1477/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8711 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 15-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 25-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: NANDITHA SIVARAMAKRISHNAN
• Keywords: Depreciation; Earning of tax free income; Retrospective amendment
• Section: 143(3); 14A; 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . . . , . , % BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.1477/MDS/ 2016 ( / ASSESSMENT YEAR: 2010-11) MR. S.K.SABAPATHY, 1703, PHAST II, SATHUVACHARI, VELLORE-632 009. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-I, VELLORE. PAN: AFUPK0929B ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MS. NANDITHA SIVARAMAKRISHNAN, C.A /RESPONDENT BY : MR. A.V.SREEKANTH, JCIT /DATE OF HEARING : 15 TH JUNE, 2016 /DATE OF PRONOUNCEMENT : 22 ND AUGUST, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THE APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX, (A PPEALS)- 13, CHENNAI DATED 02.03.2016 IN ITA NO.164/CIT(A)- 13/2010-11 PASSED UNDER SECTION 143(3) R.W.S 250(6 ) OF THE ACT. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN HIS A PPEAL, HOWEVER, THE CRUX OF THE ISSUE IS AS FOLLOWS:- I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN HOLDING THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM DEPRECIATION AGAINST THE INTANGIBLE ASSET BEING EXPENDITURE INCURRED 2 ITA NO.1477MDS/2016 TOWARDS ACQUIRING MINING RIGHTS AND ALSO DENIED THE ALTERNATE CLAIM FOR AMORTIZATION. II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ORDER OF THE LEARNED ASSESSING OFFICER WHEREIN HE HAD DISALLOWED THE INTEREST EXPENSES OF RS.67,35,748/- BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIVIDUAL FILED HIS RETURN OF INCOME FOR THE ASSES SMENT YEAR 2010-11 ON 24.09.2010 ADMITTING INCOME OF RS.3,21,8 8,696. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AN D ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E ACT ON 15.02.2013 WHEREIN THE LEARNED ASSESSING OFFICER DENIED THE CLAIM OF DEPRECIATION OF RS.2,49,636/- WITH REG ARD TO THE LUMP SUM PAYMENT FOR MINING RIGHTS AND ALSO MADE DISALLOWANCE INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D TOWARDS INVESTMENTS MADE FOR EARNING EXEMPT INCOME. GROUND NO.1: DEPRECIATION ON MINING RIGHTS: 4.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS.2,49,636/- TOWARDS L UMP SUM 3 ITA NO.1477MDS/2016 PAYMENT MADE FOR ACQUIRING MINING RIGHTS. THE LEAR NED ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSES SEE BECAUSE THERE WAS NO PROVISION UNDER SECTION 32 OF THE ACT FOR MAKING SUCH CLAIM. ON APPEAL, THE LEARNED COMMI SSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESSING OFFICER BY AGREEING WITH THE VIEW OF THE LEARNED ASSESSING OFFICER. BEFORE US, THE LEARNED AUTHORIZE D REPRESENTATIVE SUBMITTED THAT MINING RIGHT IS AN IN TANGIBLE RIGHT AND THEREFORE ELIGIBLE FOR THE CLAIM OF DEPRE CIATION UNDER SECTION 32 OF THE ACT. IN THE ALTERNATIVE, IT WAS A RGUED THAT THE BENEFIT OF AMORTIZATION MAY BE GRANTED TO THE ASSES SEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND, RELIED ON THE ORDERS OF THE REVENUE. 4.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON EXAMI NING THE NATURE OF TRANSACTION, IT IS APPARENT THAT THE BENE FIT OF MINING RIGHTS ACQUIRED BY THE ASSESSEE IS FOR A PARTICULAR PERIOD AND ON EXPIRY OF THE LICENSE SUCH BENEFIT EXTINGUISHES. THEREFORE, THE LUMP SUM PAYMENT MADE BY THE ASSESSEE HAS TO BE EVENLY APPORTIONED OVER THE PERIOD OF THE VALIDITY OF THE 4 ITA NO.1477MDS/2016 MINING RIGHTS. ONLY THEN THE MATCHING CONCEPT COULD BE COMPLIED AND THE ACCURATE INCOME OF THE ASSESSEE FO R THE RELEVANT ASSESSMENT YEARS CAN BE DETERMINED. THEREF ORE, WE HEREBY DIRECT THE LEARNED ASSESSING OFFICER TO WRIT E OFF THE LUMP SUM PAYMENT OF MINING RIGHTS OVER THE PERIOD O F MINING RIGHTS ACQUIRED BY THE ASSESSEE EVENLY IN EACH OF T HE RELEVANT ASSESSMENT YEAR, KEEPING IN VIEW OF AS-19. IT IS ORDERED ACCORDINGLY. GROUND NO.2: DISALLOWANCE OF INTEREST EXPENSES OF RS.67,35,748/- UNDER SECTION 14A R.W.R 8D(2)(III) : 5.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LEARNED ASSESSING OFFICER THAT THE ASSESSEE HAD MADE FOLLOWING INVESTMENTS FOR THE YEAR ENDING 31.03.2010 WHICH DOES NOT YIELD TAXABLE INCOME:- A) INVESTMENT IN SHARES `3,40,55,894 B) INVESTMENT IN LAND ` 1,21,28,790 C) INVESTMENT IN BUILDINGS `2,49,22,804 D) INVESTMENT IN ADVANCES AND DEPOSIT `6,81,37,719 TOTAL ` 13,92,45,207 5 ITA NO.1477MDS/2016 THE LEARNED ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAD INVESTMENT WHICH DO NOT YIELD TAXABLE INCOME AS ON 31.03.2009 AT `17,45,24,731/-. THEREAFTER THE LEARNED ASSESSING OFFICER COMPUTED THE AVERAGE VALUE OF INV ESTMENT @ `15,56,84,969 [ ( `13,92,45,207 + `17,45,24,731) / 2] AND WORKED OUT THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D(2)(II) AT `59,51,323/- AND UNDER SECTION 14A R.W.R 8D(2)(I II) AT `7,84,425/- . THUS THE LEARNED ASSESSING OFFICER DI SALLOWED AN AGGREGATE AMOUNT OF `67,35,748/- BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. 5.2 ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER BY OBSERVING AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT. THE MAIN ARGUMENTS OF THE APPELLANT ARE THAT NO EXEMPT INCOME WAS EARNED DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND THAT OWN FUNDS HAVE BEEN UTILIZED FOR MAKING THE INVESTMENTS WHICH WOULD RESULT IN EXEMPT INCOME. THE APPELLANT ARGUED BEFORE ME THAT WHERE THERE IS NO EXEMPT INCOME THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE RELYING ON THE DECISION OF HIGH COURT OF DELHI IN THE CASE OF CHEMINVEST LTD. (ITA 749/2014 DATED 02.09.2015). IN THIS REGARD IT IS PERTINENT TO REFER TO THE CBDT CIRCULAR NO.5 OF 2014 WHICH IS REPRODUCED BELOW: CIRCULAR NO.5/2014 [F. NO. 225/ 182/2013- ITA.II, DATED 11-2-2014 6 ITA NO.1477MDS/2016 SECTION 14A OF THE INCOME-TAX ACT, 1961 ['ACT'] PROVIDES FOR DISALLOWANCE OF EXPENDITURE IN RELATIO N TO INCOME NOT 'INCLUDIBLE' IN TOTAL INCOME. 2. A CONTROVERSY HAS ARISEN IN CERTAIN CASES AS TO WHETHER DISALLOWANCE CAN BE MADE BY INVOKING SECTION 14A OF THE ACT EVEN IN THOSE CASES WHERE NO INCOME HAS BEEN EARNED BY AN ASSESSEE WHICH HAS BEEN CLAIMED AS EXEMPT DURING THE FINANCIAL YEAR. 3. THE MATTER HAS BEEN EXAMINED IN THE BOARD. IT IS PERTINENT TO MENTION THAT SECTION 14A OF THE ACT WAS INTRODUCED BY THE FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 01.04.1962. THE PURPOSE FOR INTRODUCTION OF SECTION 14A WITH RETROSPECTIVE EFFE CT SINCE INCEPTION OF THE ACT WAS CLARIFIED VIDE CIRCU LAR NO. 14 OF2001 AS UNDER: 'CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME, AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE HAVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CATEGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON-EXEMPT INCOME BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE, IS TAXED. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO T HE EARNING OF TAXABLE INCOME'. THUS, LEGISLATIVE INTENT IS TO ALLOW ONLY THAT EXPENDITURE WHICH IS RELATABLE TO EARNING OF INCOME AND IT THEREFORE FOLLOWS THAT THE EXPENSES WHICH AR E RELATABLE TO EARNING OF EXEMPT INCOME HAVE TO BE CONSIDERED FOR DISALLOWANCE, IRRESPECTIVE 6F THE FA CT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YEAR OR NOT. 4. THE ABOVE POSITION IS FURTHER CLARIFIED BY THE USAGE 7 ITA NO.1477MDS/2016 OF TERM 'INCLUDIBLE' IN THE HEADING TO SECTION 14A OF THE ACT AND ALSO THE HEADING TO RULE-8D OF LT. RULE S, 1962 WHICH INDICATES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME, FOR DISALLOWANCE TO BE TRIGGERED. ALSO, SECTION 14A OF THE ACT DOES NOT US E THE WORD 'INCOME OF THE YEAR' BUT 'INCOME UNDER THE ACT'. THIS ALSO INDICATES THAT FOR INVOKING DISALLOWANCE UNDER SECTION 14A, IT IS NOT MATERIAL THAT ASSESSEE SHOULD HAVE EARNED SUCH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATION. 5. THE ABOVE POSITION IS FURTHER SUBSTANTIATED BY A LANGUAGE USED IN RULE 8D(2)(II) & 8D(2)(III) OF 1. T. RULES WHICH ARE EXTRACTED BELOW: '(II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT OF AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY:- A*B/C WHERE ..... B=THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR;' (III) AN AMOUNT EQUAL TO ONE-HALF PERCENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE- SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR.' 6. THUS, IN LIGHT OF ABOVE, CENTRAL BOARD OF DIRECT TAXES, IN EXERCISE OF ITS POWERS UNDER SECTION 119 OF THE ACT HEREBY CLARIFIES THAT RULE 8D READ WITH SEC TION 14A OF THE ACT PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEA R HAS NOT EARNED ANY EXEMPT INCOME. THE CBDT CIRCULAR SUCCINCTLY EXPLAINS HOW THE 8 ITA NO.1477MDS/2016 PROVISIONS OF SECTION 14A R.W. RULE 8D ARE PPLICABL E EVEN IN A CASE WHERE NO EXEMPT INCOME IS EARNED BY AN ASSESSEE. I FIND THAT THE CONTENTS OF THE CIRCUL AR ISSUED BY THE CBDT WERE NOT BROUGHT TO THE NOTICE OF THE HON'BLE HIGH COURT. IN VIEW OF THE ABOVE, I AM OF THE OPINION THAT THE APPELLANT IS LIABLE FOR DISALLOWANCE U/S.14A R.W. RULE 8D EVEN FOR THOSE YEARS IN WHICH NO EXEMPT INCOME WAS EARNED. 5.3 BEFORE US THE LEARNED AUTHORIZED REPRESENTATIVE MADE THE FOLLOWING SUBMISSIONS:- I) THE ASSESSEE HAD MADE THE INVESTMENTS OUT OF HIS OWN FUNDS AND NOT OUT OF INTEREST BEARING FUNDS. II) THE LEARNED ASSESSING OFFICER HAS ERRONEOUSLY INCLUDED THE INVESTMENTS MADE IN LAND & BUILDING, L OANS & ADVANCES FOR THE PURPOSE OF COMPUTING DISALLOWANC E UNDER SECTION 14A R.W.R 8D OF THE RULES. IN FACT, THE ASSESSEE HAD EARNED TAXABLE RENTAL INCOME FROM HIS LAND & BUILDING AND INTEREST INCOME IN RESPECT OF L OANS AND ADVANCES EXTENDED TO THIRD PARTIES. III) SUBSTANTIAL INVESTMENTS IN SHARES WERE MADE I N THE ASSESSEES OWN COMPANY. 9 ITA NO.1477MDS/2016 IT WAS THEREFORE ARGUED THAT IN THE CASE OF THE ASS ESSEE PROVISIONS OF SECTION 14A OF THE ACT WILL NOT BE AP PLICABLE. 5.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, ARGUED IN SUPPORT OF THE ORDERS OF THE REVENU E AND PRAYED FOR SUSTAINING THE ADDITION MADE UNDER SECTI ON 14A OF THE ACT. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM TH E FACTS OF THE CASE, IT REVEALS THAT THE LEARNED ASSESSING OFF ICER HAS INCLUDED THE INVESTMENT MADE BY THE ASSESSEE IN LAN D, BUILDING AND LOAN EXTENDED TO THIRD PARTIES FOR TH E PURPOSE OF COMPUTING DISALLOWANCE UNDER SECTION 14A R.W.R., RU LE 8D. AS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTA TIVE, EXPENDITURE RELATED TO INVESTMENTS IN LAND, BUILDIN G AND LOAN EXTENDED TO THIRD PARTIES CANNOT BE SAID TO BE EXPE NDITURE INCURRED IN RELATION TO INCOME NOT INCLUDABLE IN TH E TOTAL INCOME OF THE ASSESSEE. NEEDLESS TO MENTION THAT T HE INCOME DERIVED FROM LAND, BUILDING AS WELL AS INTER EST FROM LOAN EXTENDED TO THIRD PARTIES ARE TAXABLE INCOME A ND NOT 10 ITA NO.1477MDS/2016 EXEMPT FROM TAX. THEREFORE, WE HEREBY DIRECT THE LEARNED ASSESSING OFFICER NOT TO INCLUDE THE INVESTMENTS MA DE IN LAND, BUILDING AND THE LOAN EXTENDED TO THIRD PARTI ES WHILE COMPUTING THE DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. FURTHER, IT IS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE THAT T HE ASSESSEE HAS MADE INVESTMENTS PREDOMINANTLY IN HIS OWN COMPANY OUT OF HIS NON-INTEREST BEARING FUNDS AND T HEREFORE NO EXPENSE COULD BE ATTRIBUTABLE FOR MAKING SUCH INVESTMENTS. WE AGREE WITH THIS VIEW OF THE LEARNE D AUTHORIZED REPRESENTATIVE. IT IS OBVIOUS THAT IF TH E ASSESSEE HAS MADE INVESTMENT OUT OF HIS NON-INTEREST BEARING FUNDS IN HIS COMPANY, NO EXPENSE CAN BE ATTRIBUTED FOR MAKIN G SUCH INVESTMENTS BECAUSE THERE IS NO POSSIBILITY FOR THE ASSESSEE TO INCUR ANY EXPENDITURE FOR ARRIVING AT SUCH DECIS ION OR MANAGING THE PORTFOLIO AND ACCORDINGLY, THE PROVISI ONS OF SECTION 14A CANNOT BE INVOKED. HOWEVER, SINCE THE D ETAILS OF THE ENTIRE INVESTMENTS IN SHARES ARE NOT BEFORE US, WE REMIT BACK THE MATTER TO THE FILE OF THE LEARNED ASSESSIN G OFFICER FOR DE NOVO CONSIDERATION AND TO PASS APPROPRIATE ORDER AS PER LAW AND MERIT BASED ON OUR ABOVE MENTIONED OBSERVAT IONS. 11 ITA NO.1477MDS/2016 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREI N ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE 22 ND AUGUST, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 22 ND AUGUST, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF .