ITO, Ward-2(1), Guntur V. Vasantha Traders, Guntur

ITA 17/VIZ/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3970 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2013-2014
• Appeal Filed On: 12-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V APPALA RAJU
• Keywords: Business income; Earning of tax free income; Question of law; Rule 8D
• Section: 14A; 10

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER . / I . T .A.NO. 17 /VIZ/ 201 8 ( / ASSESSMENT YEAR: 20 1 3 - 1 4 ) ITO WARD - 2(1) GUNTUR VS. M/S VASANTHA TRADERS D.NO.4 - 383/6, THIMMAPURAM(V) EDLAPADU(M) GUNTUR [PAN : AAHFV8178M ] ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI V.APPALA RAJU, DR / RESPONDENT BY : SHRI G.V.N.HARI, AR / DATE OF HEARING : 2 6 . 04. 201 8 / DATE OF PRONOUNCEMENT : 04 . 0 5 .201 8 / O R D E R PER D.S. SUNDER SINGH , ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME - TAX ( APPEALS) [CIT(A)] - 1 , GUNTUR VIDE ITA NO. 03 / 2016 - 1 7/CIT(A - 1)/GNT DATED 21 . 12 .201 7 FOR THE ASSESSMENT YEAR 20 1 3 - 1 4 . 2 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR 2. ALL THE GROUNDS OF APPEAL IN THIS CASE ARE RELATED TO THE ADDITION MADE BY THE ASSESSING OFFICER(AO) U/S 14A R.W.R.8D OF INCOME TAX ACT . IN THIS CASE, THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.19,27,290/ - . THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE MADE INVESTMENT OF RS.8,02,00,000/ - IN M / S VASANTHA INDUSTRIES LTD. (FORMERLY KNOWN AS M/S VASANTHA SPINNERS LTD.,). THE AO ALSO FOUND THAT THE ASSESSEE HAS TAKEN SECURED LOAN FROM KOTAK MAHINDRA BANK TO THE EXTENT OF RS.18,67,59,851/ - AND CLAIMED EXPENDITURE OF RS.1,06,35,394/ - AS INT EREST ON BAN K LOAN. THE AO FURTHER NOTED TH AT THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE RELATABLE TO THE INVESTMENTS MADE AS REQUIRED U/S 14A OF I.T.ACT. TH E AO CALLED FOR THE EXPLANATION FROM THE ASSESSEE AS TO WHY THE EXPENDITURE RELATABLE INVESTMENTS SHOUL D NOT BE DISALLOWED AND ADDED BACK TO THE INCOME AND IN RESPONSE , T HE ASSESSEE FILED ITS EXPLANATION STATING THAT IT HAD NOT RECEIVED ANY INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THUS CONTENDED THAT NO EXPENDITURE IS REQUIRED TO BE DISALLOWED U/ S 14 A OF I.T.ACT. THE AO FOUND THE DIRECT NEXUS OF SECURED LOAN S AND THE INVESTMENT MADE BY THE ASSESSEE IN M/S VASANTHA INDUSTRIES LTD AND ACCORDINGLY DISALLOWED THE INTEREST RELATABLE TO THE INVESTMENTS 3 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR MADE BY THE ASSESSEE WHICH WORKED OUT TO RS.36,40, 228/ - U/S 14A OF I.T.ACT. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) DELETED THE ADDITION MADE BY THE AO ON THE REASON THAT THE ASSESSEE HAD NO T EARNED INCOME WHICH DOES NOT F ORM PART OF TOTAL INCO ME THAT WAS EXEMPT . HENCE, THE CIT(A) HELD THAT NO DISALLOWANCE IS CALLED FOR AND ACCORDINGLY DELETED THE ADDITION. 4. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL. DURING THE APPEAL HEARING, THE LD.DR ARGUED TH AT THOUGH DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS NOT RECEIVED ANY INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME , BUT THE ASSESSEE MADE THE INVESTMENTS WHICH YIELDS EXEMPT INCOME I.E. DIVIDEND AND LONG TERM CAPITAL GAINS . HENCE, ARGUED THAT THE AO HAS RIGHTLY MADE THE DISALLOWANCE WHICH REQUIRED TO BE UPHELD . PER CONTRA, THE LD.AR RELIED ON THE DECISION OF ITAT HYDERABAD BENCH IN ITA NO.343/HYD/2017 IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2012 - 13 AND ARGUED THAT HO NBLE ITAT HYDERABAD BENCH HAS ALLOWED THE APPEAL OF THE ASSESSEE FOLLOWING THE DECISION OF REDINGTON (INDIA) LTD VS ACIT REPORTED IN 4 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR (2017)77 TAXMANN257 (MAD), SINCE THE FACTS ARE IDENTICAL, THE ASSESSEES CASE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH CITED SUPRA HENCE NO DISALLOWANCE IS CALLED FOR. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE MADE THE INVESTMENTS OF RS.8,02,00,000/ - IN M/S VASANTHA INDUSTRIES LTD. IT IS UNDISPUTED FACT TH AT THE ASSESSEE HAS NOT EARNED ANY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS NOT DERIVED ANY DIVIDEND INCOME. IN THE ASSESSES OWN CASE, THE COORDINATE BENCH OF ITAT, HYDERABAD CITED SUPRA FO LLOWING THE DECISION OF HONBLE MADRAS HIGH COURT HELD THAT NO DISALLOWANCE IS CALLED FOR U/S 14A , IN THE ABSENCE OF EXEMPT INCOME. FOR READY REFERENCE, WE EXTRACT PARANO.6 OF THE ITATS ORDER WHICH READS AS UNDER : 6. HAVING REGARD TO THE RIVAL CONTENTI ONS AND MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE CASE OF M/S KARVY STOCK BROKING LIMITED (CITED SUPRA) HAS CONSIDERED THE ISSUE AT LENGTH AND ALSO THE CBDT CIRCULAR NO. 5 OF 2014 DATED 11 - 02 - 2014, AND THE DECISION OF THE HON'BLE HIGH COURT OF M ADRAS IN THE CASE OF REDINGTON (INDIA) LTD. VS. ACIT REPORTED IN (2017) 77 TAXMANN 257 (MAD) TO HOLD THATITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. WHERE THERE IS NO EXEMPT INCOME EARNED DURING THE RELEVANT FINANCIAL YEAR, THERE CANNOT BE ANY DI SALLOWANCE U/S 14 A OF THE IT ACT . FOR THE SAKE OF READY REFERENCE, THE RELEVANT PARA IS REPRODUCED HEREUNDER: 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE PROVISIONS OF SECTION 14A ARE APPLICABLE TO EXPENDITURE WHICH HAS BEEN 5 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR INCURRED FOR EARNING OF EXEMPT INCOME IRRESPECTIVE OF WHETHER THE INVESTMENT IS FOR BUSINESS OR NO N BUSINESS PURPOSES. BUSINESS INCOME OF CERTAIN BUSINESS ENTITIES SUCH AS 10% EOU'S OR INDUSTRIES SET UP IN FREE TRADE ZONES ETC., ARE FULLY EXEMPT FROM TAX AND ANY EXPENDITURE INCURRED FOR EARNING OF SUCH INCOME IS TO BE DISALLOWED U/S 14 A OF THE ACT . THEREFORE, THE ASSESSEE'S CONTENTION THAT SINCE THE ASSESSEE HAS MADE THE INVESTMENT IN THE SUBSIDIARIES FOR GENERATING REVENUE AND NOT FOR EARNING OF DIVIDEND INCOME, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE IS NOT ACCEPTABLE. BUT, HOWEVER, IT IS SUBJECT TO THE ASSESSEE EARNING EXEMPT INCOME DURING THE RELEVANT PREVIOUS YEAR. IT IS SEEN THAT THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE RELEVANT F.Y. THE AO HAS RELIED UPON THE CIRCULAR OF CBDT TO MAKE THE DISALLOWANCE EVEN THOUGH, THE ASSESSEE HAS NOT EARNED ANY INCOME WHICH IS EXEMPT FROM TAX, BUT WE FIND THAT THE HON'BLE MADRAS HIGH COURT HAS CONSIDERED THE SAID CBDT CIRCULAR AND HAS HE LD AS UNDER: 'THE ASSESSEE HAD INVESTMENTS IN COMPANIES TO THE TUNE OF RS. 177.56 CRORES THAT HAD NOT YIELDED ANY RETURNS IN THE PREVIOUS YEAR RELEVANT TO THE PRESENT ASSESSMENT YEAR. THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE UNDER SECTION 14A , READ WITH RULE 8D DESPITE OBJECTIONS THAT THE PROVISIONS OF THE ABOVE SAID SECTION WOULD NOT BE ATTRACTED IN A CASE WHERE NO ACTUAL EXEMPT INCOME HAD BEEN EARNED. ON FURTHER APPEAL, THE TRIBUNA L ALSO CONFIRMED THE DISALLOWANCE. ON APPEAL TO THE HIGH COURT: ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. SECTION 14A WAS INSERTED PROVIDING THAT NO DEDUCTION SHALL BE ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF INCOME EXEMPT FROM TAXATION. THE SUPREME COURT IN THE JUDGMENT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD. [2010] 326 ITR 1/192 TAXMAN 211 HAS OBSERVED THAT SECTION 14A DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE PROVISION THUS IS CLEARLY RELATABLE TO THE EARNING OF ACTUAL INCOME AND NOT NOTIONAL OR ANTICIPATED INCOME. THE COMPUTATION OF TOTAL INCOME IN TERMS OF SECTION 5 IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSESSMENT OF ADMITTEDLY NOTIONAL INCOME, PARTICULARLY IN THE CONTEXT OF EFFECTING A DISALLOWANCE IN CONNECTION THEREWITH. [PARA 10] THE COMPUTATION OF DISALLOWANCE IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESULT IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. [PARA 11] NO THING MUCH TURNS ON THE USE OF THE WORD 'INCLUDABLE' AND THE PHRASE 'UNDER THE ACT' IN SECTION 14A AND THE EMPHASIS LAID OR THE INTERPRETATION OF THE SAME BY THE REVENUE CANNOT BE ACCEPTED. AN ASSESSMENT I N TERMS OF THE INCOME - TAX ACT IS SPECIFIC TO AN 6 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR ASSESSMENT YEAR AND THE RELATED PREVIOUS YEAR. [PARA 14] THE PROVISIONS OF SECTION 10 IN CHAPTER III DEAL ING WITH 'INCOMES NOT INCLUDED IN TOTAL INCOME' COMMENCES WITH THE PHRASE 'IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR, ANY INCOME FALLING WITHIN ANY OF THE FOLLOWING CLAUSES SHALL NOT BE INCLUDED........' [PARA 14] THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOULD RELATE 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 AITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. YEAR WHERE THERE IS NO EXEMPT INCOME, THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASSUMED INCOME. THE LANGUAGE OF SECTION 14A(1) SHOULD BE READ IN THAT CONTEXT AND SUCH THAT IT ADVANCES THE SCHEME OF THE ACT RATHER THAN DISTORT IT. [PARA 15] IN CONCLUSION, THE PROVISIONS OF SECTION 14A , READ WITH RULE 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM I.E. IN THE ABSENCE OF EXEMPT INCOME. THE QUESTION OF LAW ARE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT AND THE APPEAL ALLOWED. [PARA 16]' WE FIND THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR TO THE FACTS BEFO RE THE HON'BLE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD (CITED SUPRA) AND RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALLOW THE ASSESSEE'S APPEAL AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S 14A. THUS, ASSESSEE'S GROUNDS OF APPEAL N OS. 2, 3 & 5 ARE REJECTED AND GROUND OF APPEAL NO.4 IS ALLOWED. SIMILAR VIEW WAS TAKEN BY THIS TRIBUNAL IN THE CASE OF M/S RASHTRIYA ISPAT NIGAM LTD., VISAKHAPATNAM FOR THE ASSESSMENT YEAR 2004 - 05 IN ITA NO.13/VIZ/2013 IN PARA NO.36 OF THE CITED ORDER. SINCE THE FACTS ARE IDENTICAL, RESPECTFULLY FOLLOWING THE VIEW TAKEN BY COORDINATE BENCH , WE HO LD THAT NO DISALLOWANCE IS CALLED FOR U/S 14A IN THE ABSENCE OF EXEMPT INCOME. ACCORDINGLY, WE CONFIRM THE ORDER OF THE LD.CIT(A) AND DISMISS THE APPEAL OF THE REVENUE. 9 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED . 7 ITA NO . 17 /VIZ/201 8 M/S VASANTHA TRADERS, GUNTUR THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 4 TH MAY , 20 1 8 . SD/ - SD/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 04 .0 5 .2018 L.RAMA, SPS / COPY OF THE ORDER FORWARDED TO: - 1. / THE APPELLANT - ITO, WARD - 2(1), GUNTUR 2 . / M/S VASANTHA TRADERS, D.NO.4 - 383/6,THIMMAPURAM(V), EDLAPADU(M), GUNTUR 3 . THE PR. COMMISSIONER OF INCOME TAX , GUNTUR 4. THE COMMISSIONER OF INCOME - TAX(APPEALS) - 1 , GUNTUR 5 . , , / DR, ITAT, VISAKHAPATNAM 6. / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM