ACIT 2(1)(1), MUMBAI V. CENTRUM CAPITAL LTD, MUMBAI

ITA 18/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3520 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 02-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SU JIT BANGAR
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AN D SHRI SANJAY GARG, JUDICIAL MEMBER ITA NOS.26 & 27/M/2015 ASSESSMENT YEARS: 2010-11 & 2011-12 M/S. CENTRUM CAPITAL LTD., BOMBAY MUTUAL BUILDING, 2 ND FLOOR, DR. D.N. ROAD, FORT, MUMBAI 400 001 PAN: AAACC5099G VS. DCIT, CIRCLE 2(1), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RESPONDENT) ITA NOS.18 & 19/M/2015 ASSESSMENT YEARS: 2010-11 & 2011-12 ACIT 2(1)(1), R.NO.561, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 VS. M/S. CENTRUM CAPITAL LTD., BOMBAY MUTUAL BUILDING, 2 ND FLOOR, DR. D.N. ROAD, FORT, MUMBAI 400 001 PAN: AAACC5099G (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI JEHANGIR MISTRI, A.R. WITH SURE NDRA NIJSURE, A.R. REVENUE BY : SHRI SUJIT BANGAR, D.R. DATE OF HEARING : 26.07.2016 DATE OF PRONOUNCEMENT : 19.08.2016 O R D E R PER BENCH: THE ABOVE CAPTIONED BUNCH OF CROSS APPEALS TWO BY THE ASSESSEE AND THE TWO BY THE REVENUE HAVE BEEN DIRECTED AGAINST THE O RDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER R EFERRED TO AS THE CIT(A)] OF EVEN DATE 28.10.2014 RELEVANT TO ASSESSMENT YEA R A.Y. 2010-11 AND 2011- 12 RESPECTIVELY. ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 2 2. THE SOLE AND COMMON ISSUE RAISED IN ALL THE APPE ALS IS REGARDING THE DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX AC T, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. 3. FIRST WE TAKE UP THE APPEAL OF ASSESSEE BEARING ITA NO.26 AND CROSS APPEAL OF THE REVENUE BEARING ITA NO.18/M/2015 RELE VANT TO A.Y. 2010-11. ITA NO.26 & 18/M/2015 FOR A.Y. 2010-11 4. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE A O) NOTED THAT THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD CLAIMED TAX EXEMPT DIVIDEND INCOME OF RS.6,75,076/- AND TAX EXEMPT LONG TERM CAPITAL GAIN S OF RS.19,62,821/-. WHEN ASKED TO EXPLAIN AS TO WHY THE DISALLOWANCE UNDER S ECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES SHOULD NOT BE MADE IN RESPECT OF TAX EXEMPT INCOME, THE ASSESSEE EXPLAINED THAT IT HAD N OT INCURRED ANY EXPENSES TO EARN THE SAID TAX EXEMPT INCOME. THE ASSESSEE, EVE N, HAD SUO-MOTO DISALLOWED AN AMOUNT OF RS.4,70,062/- IN ITS COMPUTATION OF TO TAL INCOME. HOWEVER, THE AO DID NOT AGREE WITH THE ABOVE SUBMISSION OF THE A SSESSEE. HE COMPUTED THE DISALLOWANCE AS PER THE PROVISIONS OF SECTION 14A R EAD WITH RULE 8D OF THE INCOME TAX RULES, 1962 OF RS.2,65,36,592/-. HOWEVE R, SINCE THE ASSESSEE AT ITS OWN HAD ALREADY DISALLOWED A SUM OF RS.4,70,062 /-, THE AO MADE THE ADDITION OF THE REMAINING AMOUNT OF RS.2,60,66,530/ -. BEING AGGRIEVED BY THE ABOVE DISALLOWANCE MADE BY THE AO, THE ASSESSEE PRE FERRED APPEAL BEFORE THE LD. CIT(A). 5. IT WAS PLEADED BEFORE THE LD. CIT(A) THAT THE IN VESTMENTS WERE MADE BY THE ASSESSEE IN ITS OWN SUBSIDIARIES AND ASSOCIATES THAT CERTAIN INVESTMENTS WERE NOT CAPABLE OF EARNING OF EXEMPT INCOME AS INC OME THERE FROM WAS INCLUDABLE INTO THE TAXABLE TOTAL INCOME OF THE ASS ESSEE. FURTHER THAT THE OWN FUNDS OF THE ASSESSEE WERE MORE THAN THE INVESTMENT S MADE AND THEREFORE IN THE LIGHT OF THE LAW LAID DOWN BY THE HONBLE BOMBAY HI GH COURT IN THE CASE OF ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 3 CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 THERE WAS A PRESUMPTION THAT OWN FUNDS OF THE ASSESSEE WERE USE D FOR INVESTMENTS AND THEREFORE NO DISALLOWANCE ON ACCOUNT OF INTEREST EX PENDITURE WAS ATTRACTED. FURTHER, A PLEA WAS ALSO TAKEN THAT THE ASSESSEE DU RING THE YEAR HAD ALSO EARNED INTEREST INCOME AND THAT FOR COMPUTATION OF INTERES T EXPENDITURE, THE NETTING OF THE INTEREST INCOME AND INTEREST EXPENDITURE SHOULD BE DONE AND NET INTEREST EXPENDITURE SHOULD BE TAKEN INTO CONSIDERATION. 6. AFTER CONSIDERING THE ABOVE SUBMISSIONS OF THE A SSESSEE, THE LD. CIT(A), WHILE RELYING UPON THE DECISION OF HIS PREDECESSOR IN RELATION TO EARLIER ASSESSMENT YEAR I.E. A.Y. 2009-10, HELD THAT ONLY T HOSE INVESTMENTS INCOME FROM WHICH WAS EXEMPT WERE TO BE TAKEN FOR TAKING T HE AVERAGE VALUE OF INVESTMENT FOR COMPUTING DISALLOWANCE AS PER RULE 8 D. HE, THEREFORE, DIRECTED THE AO TO EXCLUDE THE INVESTMENTS, THE INCOME FROM WHICH WAS NOT EXEMPT, FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE UNDER SE CTION 14A READ WITH RULE 8D. THE LD. CIT(A) FURTHER, WHILE RELYING UPON THE VARIOUS DECISIONS OF THE TRIBUNAL, HELD THAT THE NET INTEREST EXPENDITURE IS TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE OF IN TEREST EXPENDITURE UNDER SECTION 14A. 7. BEING AGGRIEVED BY THE ABOVE DECISION OF THE LD. CIT(A), THE ASSESSEE HAS COME IN APPEAL CONTENDING THAT SINCE THE OWN FU NDS OF THE ASSESSEE WERE MORE THAN THE INVESTMENTS MADE, HENCE AS PER THE LA W LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. R ELIANCE UTILITIES AND POWER LTD. (SUPRA), THE PRESUMPTION WOULD BE THAT THE ASSESSEE HAD USED ITS OWN FUNDS FOR THE PURPOSE OF MAKING INVESTMENTS; HE NCE, NO DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 14A WAS ATTRACTE D IN THE CASE OF THE ASSESSEE. IT HAS BEEN FURTHER PLEADED THAT SINCE T HE INVESTMENTS HAVE BEEN MADE IN SUBSIDIARY AND ASSOCIATE COMPANIES WHICH WE RE STRATEGIC INVESTMENTS AND THE SAME WERE NOT MADE FOR THE PURPOSE OF EARNI NG OF EXEMPT INCOME NOR SUCH INVESTMENTS HAD YIELDED ANY EXEMPT INCOME, HEN CE, THOSE INVESTMENTS ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 4 SHOULD HAVE BEEN EXCLUDED FROM THE TOTAL INVESTMENT S WHILE APPLYING RULE 8D. CERTAIN OTHER GROUNDS HAVE ALSO BEEN TAKEN REGARDIN G THE DISALLOWANCE OF INTEREST INCURRED ON BANK FEES TAKEN FOR TRADING IN BONDS, INCOME FROM WHICH WAS CHARGEABLE TO INCOME TAX AND REGARDING THE DISA LLOWANCE OF BANK CHARGES ETC. 8. THE REVENUE, ON THE OTHER HAND, HAS COME IN APPE AL AGITATING THE ACTION OF THE LD. CIT(A) IN DIRECTING THE AO TO EXCLUDE TH E INVESTMENTS MADE IN FOREIGN COMPANIES AND TO CONSIDER THE NET INTEREST EXPENDITURE FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II) . 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. THE U NDISPUTED FACTS ARE THAT MOST OF THE INVESTMENTS HAVE BEEN MADE BY THE ASSES SEE IN THE GROUP AND ASSOCIATE COMPANIES WHICH WERE STRATEGIC INVESTMENT S AND NO DIVIDEND INCOME HAS BEEN RECEIVED BY THE ASSESSEE ON THOSE INVESTME NTS. IT IS ALSO UNDISPUTED THAT THE OWN FUNDS OF THE ASSESSEE WERE MORE THAN T HE INVESTMENTS MADE DURING THE YEAR. THE LD. COUNSEL FOR THE ASSESSEE HAS BRO UGHT OUR ATTENTION TO PAGE 7 OF THE IMPUGNED ORDER WHEREIN THE SUBMISSIONS OF TH E ASSESSEE HAVE BEEN RECORDED BY THE LD. CIT(A) AND IT HAS BEEN MENTIONE D THAT THE OWN FUNDS OF THE ASSESSEE AS ON 31.03.09 WERE AT RS.1,99,30,02,1 19/- AND AS ON 31.03.10 WERE AT RS.2,03,79,45,490/-. THE INVESTMENTS AS ST OOD ON 31.03.09 WERE AT RS.94,20,52,398/- AND AS ON 31.03.10 WERE AT RS.93, 23,07,397/-. A PERUSAL OF THE ABOVE, REVEALS THAT THE OWN FUNDS OF THE ASSESS EE AT THE END OF THE FINANCIAL YEAR HAVE INCREASED, WHEREAS THE INVESTMENTS AT THE END OF YEAR HAVE DECREASED TO SOME EXTENT. MOREOVER, THE AMOUNT OF INVESTMENT S IS MUCH LOWER THAN THE OWN FUNDS AVAILABLE TO THE ASSESSEE. THE HONBLE B OMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) HAS HELD THAT IF THERE ARE FUNDS AVAILABLE, BOTH IN TEREST FREE AND OVER DRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAILABL E WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENT. SIMILAR VIEW HAS ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 5 BEEN TAKEN IN THE CASE OF CIT VS. HDFC BANK LTD. IN ITA NO.330 OF 2012 DECIDED ON 23RD JULY 2014 BY THE HONBLE BOMBAY HIG H COURT. IN THE LIGHT OF THE ABOVE CITED DECISIONS, EVEN OTHERWISE, NO INTER EST DISALLOWANCE IS ATTRACTED IN RELATION TO INVESTMENTS MADE BY THE ASSESSEE AS THE ASSESSEE HAD ITS OWN SUFFICIENT FUNDS FOR THE PURPOSE OF MAKING INVESTME NTS. 10. FURTHER, THE HONBLE DELHI HIGH COURT IN THE CA SE OF JOINT INVESTMENT PRIVATE LIMITED (SUPRA) HAS HELD THAT SECTION 14 OF THE ACT OR RULE 8D CANNOT BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMP T INCOME OF THE ASSESSEE IS TO BE DISALLOWED. THAT THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT OF T AX EXEMPT INCOME. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEM INVES TMENTS VS. CIT (2015) 61 TAXMAN.COM 118 HAS HELD THAT SECTION 14A WILL NO T APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVAN T PREVIOUS YEAR AND THAT THE EXPRESSION DOES NOT FORM PART OF THE TOTAL INCOME , IN SECTION 14A OF THE ACT ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME WHICH IS NOT INCLUDED IN THE TOTAL INCOME DURING THE RELEVANT PR EVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. ALMOST IDENTICAL ISSUE HAS BEEN TAKEN BY THE HONBLE ALLAH ABAD HIGH COURT IN THE CASE OF CIT KANPUR VS. M/S. SHIVAM MOTORS PVT. LTD. IN ITA NO.88 OF 2014 VIDE ORDER DATED 05.05.2014; BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECTH ENERGY PVT. LTD. IN ITA NO.239 OF 20 14 VIDE ORDER DATED 24.03.2014 AND BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. DELITE ENTERPRISES IN ITA NO.110 OF 2009 VIDE ORDER DATED 26.02.09. 11. WE FIND THAT IN THE CASE IN HAND, THE ASSESSEE HAS CLAIMED EXEMPT DIVIDEND INCOME OF RS.6,75,076/- AND EXEMPT LONG TE RM CAPITAL GAIN OF RS.19,62,821/-. THE AO, HOWEVER, MADE A DISALLOWAN CE OF RS.2,65,36,592/- IN ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 6 RELATION TO EXPENDITURE INCURRED FOR EARNING OF THE ABOVE EXEMPT INCOME. THE ASSESSEE ITSELF HAS DISALLOWED AN AMOUNT OF RS.4,70 ,062/- IN ITS COMPUTATION OF INCOME. CONSIDERING THE PROPOSITION OF LAW LAID DO WN BY THE VARIOUS HIGH COURTS AS DISCUSSED ABOVE, THE DISALLOWANCE IN THIS CASE IS RESTRICTED TO THE EXTENT THAT IS SUO-MOTO OFFERED BY THE ASSESSEE AT RS.4,70,062/-. 12. IN VIEW OF THE ABOVE, THE APPEAL OF THE ASSESSE E IS TREATED AS PARTLY ALLOWED WHEREAS THE APPEAL OF THE REVENUE IS TREATE D AS DISMISSED. 13. NOW COMING TO THE CROSS APPEAL OF ASSESSEE BEAR ING ITA NO.27/M/2015 AND REVENUES APPEAL BEARING ITA NO.19/M/2015 RELEV ANT TO A.Y. 2011-12. ITA NO.27 & 19/M/2015 FOR A.Y. 2011-12 14. THE ASSESSEE, DURING THE YEAR, HAD EARNED EXEMP T DIVIDEND INCOME OF RS.3,41,877/- AND EXEMPT LONG TERM CAPITAL GAIN OF RS.37,78,124/-. THE AO, HOWEVER, HAS MADE DISALLOWANCE OF RS.2,76,43,070/- UNDER SECTION 14A ON ACCOUNT OF EXPENDITURE INCURRED FOR EARNING OF THE EXEMPT INCOME. THE FACTS FOR THE YEAR UNDER CONSIDERATION AND THE NATURE OF INVESTMENTS ARE IDENTICAL AS TO THAT OF A.Y. 2010-11. THE MAJOR PART OF THE INV ESTMENTS WERE MADE IN THE GROUP/ASSOCIATE COMPANIES OF THE ASSESSEE FOR STRAT EGIC PURPOSES AND THE OWN FUNDS OF THE ASSESSEE WERE MORE THAN THE INVESTMENT S MADE. THE ASSESSEE HAS, SUO-MOTO, DISALLOWED AN AMOUNT OF RS.16,71,322/- AS EXPENDITURE IN RELATION TO EARNING OF EXEMPT INCOME. IN VIEW OF OUR FINDINGS GIVEN ABOVE AND IN THE LIGHT OF THE VARIOUS CASE LAWS AS DISCUSSED ABOVE, THE DISALLOWANCE IN THIS CASE IS ALSO RESTRICTED TO THAT WHAT HAS BEEN SUO-MOTO O FFERED BY THE ASSESSEE AT RS.16,71,322/-. 15. IN VIEW OF THE ABOVE, THIS APPEAL OF THE ASSESS EE IS TREATED AS PARTLY ALLOWED WHEREAS THE APPEAL OF THE REVENUE IS TREATE D AS DISMISSED. ITA NOS.26 & 27/M/2015 & ITA NOS.18 & 19/M/2015 M/S. CENTRUM CAPITAL LTD. 7 16. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AND THAT OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19.08.2016. SD/- SD/- (D. KARUNAKARA RAO) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 19.08.2016. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.