SUNDARAM BUSINESS SERVICES LTD., CHENNAI V. ITO, CORPORATE WARD - 6 (3), CHENNAI

ITA 1736/CHNY/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9428 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 03-06-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AR V SREENIVASANADDL
• Assessee Lawyers: SAROJ KUMAR
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 143(2)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI , # , ' BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR , ACCOUNTANT MEMBER HEARD THROUGH VIDEO CONFERENCING ./ ITA NO.1736/CHNY/2019 /ASSESSMENT YEAR: 2011-12 M/S.SUNDARAM BUSINESS SERVICES LTD., NO.21, PATTULLOS ROAD, CHENNAI-600 002. V . THE INCOME TAX OFFICER, CORPORATE WARD-6(3), NO.121, 7 TH FLOOR, NEW BLOCK, M.G.ROAD, NUNGAMBAKKAM, CHENNAI-600 034. [PAN: AAJCS 9232 J ] ( ) /APPELLANT) ( *+) /RESPONDENT) ) , / APPELLANT BY : MR.SAROJ KUMAR, ADV. *+) , /RESPONDENT BY : MR.AR.V.SREENIVASAN,ADDL.CIT , /DATE OF HEARING : 19.08.2020 , /DATE OF PRONOUNCEMENT : 19.08.2020 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER: THIS APPEAL FILED BY ASSESSEE IN ITA NO. 1736/CHNY /2019 IS DIRECTED AGAINST APPELLATE ORDER DATED 29.03.2019 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI (H EREINAFTER CALLED THE CIT(A)), IN ITA NO.573/2013-14/CIT(A)-15 FOR ASSESSMENT YEAR (AY) 2011-12, THE APPELLATE PROCEEDINGS BEFORE LEARNED C IT(A) HAD ARISEN FROM ASSESSMENT ORDER DATED 23.01.2014 PASSED BY LEARNED ASSESSING OFFICER ITA NO.1736/CHNY/2019 :- 2 -: (HEREINAFTER CALLED THE AO) U/S.143(3) OF THE IN COME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT). THE APPELLATE PROCE EDINGS ARE CONDUCTED BY INCOME-TAX APPELLATE TRIBUNAL, CHENNAI BENCH A, C HENNAI THROUGH VIRTUAL COURT VIA VIDEOCONFERENCING USING WEBEX PLA TFORM. 2. THE GROUNDS OF APPEAL RAISED BY ASSESSEE IN MEM O OF APPEAL FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI (HE REINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- A) THE ORDER OF THE COMMISSIONER OF THE INCOME TAX (APPEALS) IS CONTRARY TO LAW, WEIGHT OF EVIDENCE AND PROBABILITIES OF THE CASE. B) THE COMMISSIONER OF INCOME TAX (APPEALS) HAS CONS IDERED IN HIS ORDER THAT THE INVESTMENTS THAT HAS YIELDED THE EXEMPTED INCOME AL ONE IS TO BE CONSIDERED FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE UNDER RULE 8D(III). THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE CONSIDERED THE SIMILAR STAND FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE UNDER RULE 8D(II), WHICH ALSO PROVIDES THAT THE INVESTMENTS WHICH YIELDED EXEMPT INCOME ONLY NEEDS TO BE TAKEN FOR COMPUTATIO N PURPOSES UNDER RULE 8D(II). C) THE COMMISSIONER OF INCOME TAX (APPEALS) HAS INC ORRECTLY INVOKED THE CLAUSE (2)(II) OF RULE 8D BY CONSIDERING THE ENTIRE INTEREST EXPENDIT URE WITHOUT APPRECIATING THE FACT THAT INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NOT BORR OWED FUNDS. THERE IS NO SPECIFIC INTEREST EXPENDITURE WHICH HAS BEEN INCURRED FOR EA RNING THE DIVIDEND INCOME. D) THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THE FACT THAT THE APPELLANT HAS EARNED INTEREST INCOME WHICH HAS BEEN OFFERED TO TAX IN THE RETURN OF INCOME. EVEN ASSUMING RULE 8D(II) IS TO BE INVOKED, ONLY THE NET INTEREST EXPENSE IS TO BE CONSIDERED FOR THIS PURPOSE. FOR THE REASONS STATED ABOVE AND THOSE THAT MAY BE ADDED AT THE TIME OF HEARING, THE HON'BLE TRIBUNAL MAY BE PLEASED TO ALLOW THE APPEAL OF THE APPELLANT AND GRANT SUCH RELIEF/RELIEFS CONSIDERING THE FACTS AND CIRCUMSTANC ES OF THE CASE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF BUSINESS SUPPOR T SERVICES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS CONDUCTED BY A O U/S 143(3) READ WITH SECTION 143(2) OF THE 1961 ACT , THE DISALLOWA NCE OF EXPENDITURE TO THE TUNE OF RS. 16,12,158/- WAS MADE BY AO BY INVOK ING PROVISIONS OF ITA NO.1736/CHNY/2019 :- 3 -: SECTION 14A OF THE 1961 ACT READ WITH RULE 8D OF TH E INCOME-TAX RULES, 1962 , WHICH DISALLOWANCE OF AFORESAID EXPENDITURE STOOD ADDED TO INCOME OF THE ASSESSEE CHARGEABLE TO TAX, VIDE ASSESSMENT ORDER DATED 23.01.2014 PASSED BY AO U/S 143(3) OF THE 1961 ACT. THE DETAILS OF ADDITIONS MADE BY THE AO BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT READ WITH RULE 8D OF THE 1962 RULES ARE R EPRODUCED IN THE CHART HEREUNDER: RULE 8D AMOUNT (IN RS. RS. RS. RS. ) RULE 8D(I) 300282 RULE 8D(II) = A * B/C 1030697.766 RULE 8D(III) = 0.5% * B 281178.79 TOTAL DISALLOWANCE U/S.14A R.W.RULE 8 D 1612158.566 TOTAL INTEREST PAID NOT ATTRIBUTABLE TO ANY PARTICULAR RECEIPT (A) 3081476 INVESTMENT OPENING BALANCE 112471516 INVESTMENT CLOSING BALANCE 0 TOTAL OF OPENING AND CLOSING INVESTMENT 112471516 AVERAGE INVESTMENT (B) 56235758 OPENING ASSET BALANCE 189699835 CLOSING ASSET BALANCE 146556135 TOTAL OF OPENING AND CLOSING ASSET 336255970 AVERAGE VALUE OF ASSET (C) 168127985 4. THE ASSESSEE BEING AGGRIEVED BY AN ASSESSMENT OR DER DATED 23.01.2014 PASSED BY AO U/S 143(3) OF THE 1961 ACT, FILED FIRST APPEAL WITH LEARNED CIT(A), WHICH STOOD PARTLY ALLOWED BY LEARNED CIT(A) VIDE APPELLATE ORDER DATED 29.03.2019. THE LEARNED CIT(A ) ACCEPTED THE CONTENTION OF THE ASSESSEE THAT DISALLOWANCE OF DIR ECT EXPENDITURE OF RS. 3,00,282/- MADE BY THE AO U/S 14A OF THE 1961 ACT R EAD WITH RULE 8D(2)(I) OF THE 1962 RULES , WAS EARLIER VOLUNTARI LY SUO MOTU DISALLOWED BY ASSESSEE WHILE FILING ITS RETURN OF INCOME WITH REVENUE AND ITS DISALLOWANCE ONCE AGAIN BY AO WHILE FRAMING ASSESSM ENT U/S 143(3) OF ITA NO.1736/CHNY/2019 :- 4 -: THE 1961 ACT HAS LED TO DOUBLE DISALLOWANCE , FOR W HICH RELIEF WAS GRANTED BY LEARNED CIT(A). THIS ISSUE HAS ATTAINED FINALITY . SIMILARLY , WHILE ADJUDICATING GRIEVANCE OF THE ASSESSEE WITH RESPECT TO DISALLOWANCE OF EXPENDITURE MADE BY THE AO U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(III) OF THE 1962 RULES, THE LEARNED CIT(A) TO OK COGNIZANCE OF THE FACT THAT ONLY ONE INVESTMENT WITH BNP PARIBAS GLOB AL SECURITIES OPERATIONS PRIVATE LIMITED TO THE TUNE OF RS. 46,3 0,500/- YIELDED DIVIDEND INCOME WHICH WAS CLAIMED AS AN EXEMPT INCOME BY THE ASSESSEE AND HENCE ACCORDINGLY LEARNED CIT(A) RESTRICTED DISALLO WANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(III) OF THE 1962 RULE S TO ONLY THOSE INVESTMENTS WHICH YIELDED EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION BY APPLYING DISALLOWING RATE OF 0.5% OF AVERAGE INVESTMENTS HELD DURING THE YEAR WHICH ACTUALLY YIELDED AN EXEM PT INCOME DURING THE YEAR UNDER CONSIDERATION , WHICH LED TO RESTRICTING DISALLOWANCE OF EXPENDITURE TO THE TUNE OF RS. 11,576/- BY LEARNED CIT(A) AS AGAINST DISALLOWANCE OF RS. 2,81,179/- MADE BY THE AO. THIS ISSUE HAS ALSO ATTAINED FINALITY. IT IS NOT BROUGHT TO THE NOTICE OF THE BENCH BY LEARNED DR DURING THE COURSE OF HEARING THAT REVENUE IS AGGRIE VED BY THE RELIEF GIVEN BY LEARNED CIT(A) WITH RESPECT TO AFORESAID TWO DIS ALLOWANCES U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(I) AND 8D(2)(III) OF THE 1962 RULES. THE ONLY ISSUE WHICH IS NOW AGITATED BY ASSESSEE BEFORE TRIBUNAL IS WITH RESPECT TO DISALLOWANCE OF INTEREST EXPENDITURE TO THE TUNE OF RS. 10,30,698/- AS WAS MADE BY AO WHILE FRAMING SCRUTIN Y ASSESSMENT WHICH WAS LATER SUSTAINED BY LEARNED CIT(A) IN THE FIRST APPELLATE PROCEEDINGS, ITA NO.1736/CHNY/2019 :- 5 -: BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 A CT READ WITH RULE 8D(2)(II) OF THE 1962 RULES. THE HEARING OF THIS AP PEAL BEFORE TRIBUNAL WAS HELD THROUGH VIDEO CONFERENCING. THE LEARNED COUNSE L FOR THE ASSESSEE OPENED ARGUMENTS AND SUBMITTED THAT WHILE MAKING DI SALLOWANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 196 2 RULES, THE AUTHORITIES BELOW OUGHT TO HAVE CONSIDERED ONLY THOSE INVESTMEN TS WHICH ACTUALLY YIELDED AN EXEMPT INCOME DURING THE YEAR UNDER CONS IDERATION. IT WAS ALSO BROUGHT TO THE NOTICE OF THE BENCH BY LEARNED COUNSEL FOR THE ASSESSEE THAT DURING THE YEAR UNDER CONSIDERATION , THE ONLY INVESTMENT WHICH ACTUALLY YIELDED DIVIDEND INCOME OF RS. 20,36 ,456/- WHICH WAS CLAIMED AS AN EXEMPT INCOME BY ASSESSEE , WAS AN IN VESTMENT IN MUTUAL FUND OF BNP PARIBAS GLOBAL SECURITIES OPERATIONS PR IVATE LIMITED WHICH WAS TO THE TUNE OF RS. 46,30,500/- AS AT 31.03.2010 AND WAS AT RS. NIL AS AT 31.03.2011. IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT TOTAL INVESTMENTS WERE TO THE TUNE OF RS. 11,24,71, 516/- AS AT 31.03.2010 AND THE INVESTMENTS WERE AT RS. NIL AS AT 31.03.201 1. IT WAS SUBMITTED THAT THE ASSESSEE SOLD/REDEEMED ALL ITS INVESTMENTS DURING THE YEAR UNDER CONSIDERATION AND THAT IS HOW THE BALANCE OF INVEST MENT AS AT YEAR END WAS AT RS. NIL. IT WAS ALSO SUBMITTED THAT BORROWI NGS WERE MADE FOR BUSINESS PURPOSES AND NOT FOR MAKING INVESTMENTS. I T WAS SUBMITTED THAT THIS PLEA WAS TAKEN BEFORE THE AUTHORITIES BELOW TH AT NO PART OF INTEREST BEARING BORROWINGS WERE UTILIZED FOR MAKING INVESTM ENTS AND IT IS ONLY INTEREST FREE OWNED FUNDS WHICH WERE DEPLOYED FOR M AKING INVESTMENTS. THUS, IT WAS SUBMITTED THAT NO DISALLOWANCE OF INTE REST EXPENDITURE BY ITA NO.1736/CHNY/2019 :- 6 -: INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES CAN BE MADE. OUR ATTENT ION WAS DRAWN TO THE APPELLATE ORDER OF LEARNED CIT(A) AS WELL TO THE AU DITED FINANCIAL STATEMENT OF THE ASSESSEE WHICH IS PLACED ON RECORD BY THE ASSESSEE BEFORE THE TRIBUNAL. IT WAS SUBMITTED THAT THE ASSE SSEE HAS PAID INTEREST OF RS. 30,81,476/- DURING THE YEAR UNDER CONSIDERATION AND ASSESSEE HAS EARNED INTEREST INCOME OF RS. 29,95,856/-. WITHOUT PREJUDICE AND IN THE ALTERNATIVE, IT WAS SUBMITTED BY LEARNED COUNSEL FO R THE ASSESSEE THAT AT BEST ONLY NET INTEREST EXPENDITURE CAN BE CONSIDERE D FOR DISALLOWANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES AND NOT THE GROSS INTEREST EXPENDITURE INCURRED BY ASSESSEE . IT WAS ALSO SUBMITTED THAT OWNED FUNDS OF THE ASSESSEE WERE TO THE TUNE OF RS. 15,00,00,000/- WHICH WAS MUCH HIGHER THAN THE INVES TMENTS MADE BY THE ASSESSEE AND HENCE IT WAS SUBMITTED THAT NO DISALLO WANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES CAN BE MADE. OUR ATTENTION WAS DRAWN TO APPELLATE ORDER PASSED BY LE ARNED CIT(A) AND THE AUDITED FINANCIAL STATEMENTS SUBMITTED BY THE ASSES SEE . THE LEARNED DR ON THE OTHER HAND RELIED UPON THE APPELLATE ORDER P ASSED BY LEARNED CIT(A). 5. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE HEARING OF THIS APPEAL WAS CONDUCTED THROUGH VI DEO CONFERENCING. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BUSINESS SU PPORT SERVICES. THE ONLY SHORT QUESTION AGITATED BY ASSESSEE IN THIS AP PEAL FILED BEFORE ITA NO.1736/CHNY/2019 :- 7 -: TRIBUNAL IS WITH RESPECT TO DISALLOWANCE OF INTERES T EXPENDITURE TO THE TUNE OF RS. 10,30,697/- BY AUTHORITIES BELOW BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES. WE HAVE OBSERVED THAT ADMITTEDLY THE ASSESSEE HAD INVESTMEN T OF RS.11,24,71,516/- AS AT BEGINNING OF THE PREVIOUS Y EAR AS ON 01.04.2010, WHILE THE INVESTMENTS AT THE CLOSE OF THE PREVIOUS WERE TO THE TUNE OF RS. NIL AS AT 31.03.2011 , WHICH GIVES AVERAGE INVESTME NT OF RS. 5,62,35,758/- HELD BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION . THE ASSESSEE HAS SOLD/REDEEMED ITS ENTIRE INVESTMEN T PORTFOLIO DURING THE YEAR UNDER CONSIDERATION. IT IS THE CONTENTION OF T HE ASSESSEE EVEN BEFORE AUTHORITIES BELOW THAT THE INTEREST BEARING BORROWI NGS WERE UTILIZED FOR BUSINESS PURPOSES AND NOT FOR MAKING INVESTMENTS. T HE AUTHORITIES BELOW HAVE NOT GIVEN ANY FINDING TO CONTRADICT/REBUT THIS PLEA OF THE ASSESSEE. IN ANY CASE, THE ASSESSEES OWN INTEREST FREE FUNDS WHICH WERE DEPLOYED BY THE ASSESSEE IN BUSINESS ( SHARE CAPITAL-LOSSES) WERE TO THE TUNE OF RS. 1234.83 LACS AS AT 31.03.2010 AND RS. 1083.75 LACS AS AT 31.03.2011 , WHICH GIVES AVERAGE CAPITAL DEPLOYED OF RS. 1159.29 LACS DURING THE YEAR UNDER CONSIDERATION, WHICH WAS MUCH HIGHER THAN AV ERAGE INVESTMENT OF RS. 562.35 LACS HELD BY ASSESSEE DURING THE YEAR UN DER CONSIDERATION. THUS, KEEPING IN VIEW AFORESAID FACTS AND IN OUR CO NSIDERED VIEW , THE ADDITIONS AS WERE MADE BY AO WHICH WAS LATER SUSTAI NED BY LEARNED CIT(A) BY DISALLOWING INTEREST EXPENDITURE TO THE T UNE OF RS. 10,30,698/- BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 A CT READ WITH RULE 8D(2)(II) OF THE 1962 RULES IS NOT SUSTAINABLE IN T HE EYES OF LAW WHICH WE ITA NO.1736/CHNY/2019 :- 8 -: ORDER DELETION. OUR DECISION IS SUPPORTED BY DECISI ON OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIE S AND POWER LIMITED (2009) 313 ITR 340(BOM.) ; HONBLE BOMBAY HIGH COUR T IN THE CASE OF HDFC BANK LIMITED V. DCIT REPORTED IN (2016) 383 IT R 529(BOM); HONBLE SUPREME COURT DECISION IN THE CASE OF CIT V . RELIANCE INDUSTRIES LIMITED REPORTED IN (2019) 102 TAXMANN.COM 52(SC) A ND DISMISSAL OF SLP IN THE CASE OF PCIT V. SINTEX INDUSTRIES LIMITED RE PORTED IN (2018)93 TAXMANN.COM 24 (SC). THE ASSESSEE SUCCEEDS IN THIS APPEAL. WE ORDER ACCORDINGLY. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO.1736/CHNY/2019 FOR AY: 2011-12 IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT THROUGH VIDEO CONFER ENCING ON THE CONCLUSION OF HEARING ON 19 TH AUGUST, 2020 IN CHENNAI. SD/- SD/- ( ) (GEORGE MATHAN) /JUDICIAL MEMBER ( # ) ( RAMIT KOCHAR ) /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 19 TH AUGUST, 2020. TLN , *#2 32 /COPY TO: 1. ) /APPELLANT 4. 4 /CIT 2. *+) /RESPONDENT 5. 2 * /DR 3. 4 ( ) /CIT(A) 6. /GF