DCIT, Madurai V. T.R.V.Venkatalakshmi, Aruppukottai

ITA 1915/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8480 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 24-06-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . !' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NOS.1914 & 1915/MDS./2016 / ASSESSMENT YEARS : 2011-12 & 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2, MADURAI. VS. SMT.T.R.V.VENKATALAKSHMI , NO.1,SATHU T.RAMASAMY NAICKER STREET, VADUGARKOTTAI, ARUPPUKOTTAI 626 101. [PAN ABPPV 0449 N] ( #$ / APPELLANT) ( %&#$ /RESPONDENT) / APPELLANT BY : MR.SHIVA SRINIVAS, JCIT D.R /RESPONDENT BY : NONE / DATE OF HEARING : 07 - 0 9 - 201 6 !' / DATE OF PRONOUNCEMENT : 21 - 0 9 - 2016 ' / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS ARE FILED BY THE REVENUE IN IT A NO.1914/MDS./16 FOR ASSESSMENT YEAR 2011-12 & IN IT A NO.1915/MDS/16 FOR ASSESSMENT YEAR 2012-13 ARE DIR ECTED AGAINST THE DIFFERENT ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-1, ITA NO. 1914 & 1915/MDS./2016 :- 2 -: MADURAI, BOTH ORDERS PASSED UNDER SECTION 143(3) OF THE ACT DATED 16.03.2016. SINCE ISSUES INVOLVED IN THESE REVENU ES APPEALS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED TOGETHE R, HEARD TOGETHER, DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE COMMON GROUND IN THESE TWO APPEALS OF REVEN UE IS THAT LD.CIT(A) HAD ERRED IN DIRECTING THE AO TO RESTRICT THE DISALLOWANCE MADE U/S.14A TO THE EXTENT OF DIVIDEND INCOME EARNE D, WHEN THE AO HAS COMPUTED THE DISALLOWANCE AS PER LAW IN ACCORDA NCE WITH SEC.14A R.W.RULE 8D AS PER THE MANDATE OF THE STATUTE. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN TRANSPORT BUSINESS RUNNING OF BUSES AND LORRY TRANS PORTS, ALSO GETTING INCOME FROM OTHER SOURCES. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE DID NOT RECEIVE ANY DIVIDEND INCOME. WHEN THE AO PROPOSED TO APPLY RULE -8D OF INCOME TAX RULES, THE ASSESSEE OBJECTED THAT ALL THE LOANS WERE TAKEN AND UTILIZED BY THE COMPANY FOR BUSINESS PURPOSES AND T HEREFORE, NO BORROWALS WERE TAKEN BY THE COMPANY FOR THE PURPOSE OF INVESTMENT IN SHARES. IT WAS FURTHER CONTENDED THAT THE ASSESSEE HAD ADEQUATE OWN SHARE CAPITAL, RESERVES AND SURPLUS WHEREAS THE INV ESTMENT IN SHARES WAS ONLY LESS THAN THE SHARE CAPITAL AND RESERVES A ND SURPLUS, AND, THEREFORE, IT COULD NOT BE SAID THAT THE BORROWED F UNDS WERE UTILIZED ITA NO. 1914 & 1915/MDS./2016 :- 3 -: FOR EARNING EXEMPT INCOME. FURTHER, IT WAS CONTENDE D THAT THERE IS NO DIRECT EXPENDITURE INVOLVED IN EARNING THE EXEMPT I NCOME. SINCE DIVIDEND INCOME WAS NIL, NO DISALLOWANCE CAN BE MAD E U/S.14A OF THE ACT. THE AO DID NOT ACCEPT THE REPLY AND HELD THAT RULE 8D HAS BEEN NOTIFIED IN MARCH,2008 WHICH IS APPLICABLE FOR THIS ASSESSMENT YEAR AND WORKED OUT THE DISALLOWANCE UNDER RULE-8D AT ` 36,94,810/-. AGGRIEVED WITH THE ORDER OF LD. ASSESSING OFFICER, THE ASSESS EE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 3.1 ON APPEAL, THE LD.CIT(A) PLACED RELIANCE ON TH E DECISION OF THE SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD.V. ITO NEW DELHI REPORTED IN IN [2009] 121 ITD 318 (DELHI) WHEREIN HELD THAT WHEN THE EXPENDITURE IS INCURRED IN RELATION TO EXEMPT INCOM E, IT HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY E XEMPT INCOME IS EARNED BY THE ASSESSEE OR NOT. THE SAME VIEW WAS REITERATE D BY THE BOARD IN CIRCULAR NO. 5/2014 DATED 11-02-2014. HOWEVER, SUBS EQUENTLY VARIOUS HIGH COURTS HAVE TAKEN THE VIEW THAT UNLESS THERE IS EXE MPT INCOME, NO DISALLOWANCE CAN BE MADE. THE JURISDICTIONAL CHENNA I TRIBUNAL ALSO IN THE CASE OF JCIT VS M.BASKARAN (152 LTD 844) HELD THAT IN THE ABSENCE OF DIVIDEND INCOME, NO DISALLOWANCE COULD BE MADE U/S. 14A AND HELD THAT THE HONBLE DELHI SPECIAL BENCH DECISION ,IN THE CASE O F M/S.CHEMINVEST LTD AND CBDT CIRCULAR WERE NO LONGER APPLICABLE. LD.CIT(A) FOLLOWING THE DECISION OF THE JURISDICTIO NAL TRIBUNAL, HAD RESTRICTED THE DISALLOWANCE TO THE DIVIDEND INCOME EARNED BY T HE ASSESSEE DURING THE ITA NO. 1914 & 1915/MDS./2016 :- 4 -: YEAR UNDER CONSIDERATION. AS THERE IS NO DIVIDEND I NCOME, THE ENTIRE DISALLOWANCE IS DELETED. 4. WHEN THE APPEAL WAS TAKEN UP FOR HEARING, NOBODY AP PEARED ON BEHALF OF THE ASSESSEE. THEREFORE, WE ARE OF THE OPINION THAT THE ASSESSEE IS NOT INTERESTED IN PROSECUTING HIS CASE. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE DEPAR TMENTAL REPRESENTATIVE AND PERUSED THE ORDERS OF THE AUTHOR ITIES BELOW. IN THIS CASE, THE LOAN WAS BORROWED BY THE ASSESSEE FO R THE PURPOSE OF BUSINESS AT ` 3/- CRORES FROM CITY UNION BANK LTD., MADURAI (LOAN NO.517467). THE SAID FUND WAS DIVERTED FOR INVESTM ENT IN THE EQUITY SHARES IN M/S.JEYAJOTHI CEMENTS (P) LTD. THE ASSES SEE CLAIMED INTEREST PAID ON THE SAID LOAN FROM THE INCOME OF A SSESSEE UNDER THE HEAD BUSINESS. THE ASSESSEE HAS NOT EARNED DIVID END INCOME FROM THE SHARES WHERE THE ASSESSEE HAS INVESTED BORROWED FUNDS. THE ASSESSING AUTHORITY OBSERVED THAT THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. M. ETHURAJAN REPORTED IN [2005] 273 ITR 95 (MAD) CANNOT BE APPLIED TO THE FACTS OF THE CASE. AS THIS JUDGEMENT WAS DELIVERED BEFORE THE INSERTION OF SE C.14A OF THE ACT. THE HONBLE MADRAS HIGH COURT IN THE CASE OF M. ETH URAJAN (SUPRA) FOLLOWED THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 (SC) WHERE IN HELD THAT:- ITA NO. 1914 & 1915/MDS./2016 :- 5 -: 5 . THE ASSESSING AUTHORITY CONSIDERED THE DECISION IN RAJENDRA PRASAD MOODY' S CASE [1978] 115 ITR 519 (SC) RELIED UPON BY THE LEARNED COUNSEL AND HELD THAT IT IS NOT APPLICABLE TO THE FACT SITUATION. THE REASONS ASSIGNED FOR SUCH A CONCLUSI ON IN THE ASSESSMENT ORDER ARE EXTRACTED HEREUNDER : ' THE DECISION IS WITH REFERENCE TO DEDUCTION ALLOW ABLE UNDER SECTION 57(III) OF THE INCOME-TAX ACT. THE DE CISION RELATES TO AN ASSESS MENT YEAR WHERE DIVIDEND INCOM E WAS TAXABLE IN THE HANDS OF THE ASSESSEE. WITH THE INTR ODUCTION OF SECTION 10(33) OF THE INCOME-TAX ACT FROM THE ASSESSMENT YEAR 1998-99 THE POSITION OF LAW IN REGA RD TO TAXABILITY OF DIVIDENDS HAS BEEN CHANGED SINCE SUCH INCOME BECOMES A PART OF INCOME WHICH DO NOT FORM A PART O F TOTAL INCOME OF THE ASSESSEE. THE PROVISIONS OF SECTION 1 4A INTRODUCED BY THE FINANCE ACT, 2001, WITH EFFECT FR OM APRIL 1, 1962, RETROSPECTIVELY BARS ALLOWING ANY EXPENDIT URE IN RESPECT OF INCOME WHICH IS NOT INCLUDIBLE IN THE TO TAL INCOME. CONSIDERING THIS CHANGE IN THE POSITION OF LAW THE DECI SION OF THE SUPREME COURT RELIED UPON BY THE A SSESSEE DOES NOT APPLY TO THE ASSESSEE' S CASE.' 6. THEREFORE, THE DIVIDEND INCOME IS EXEMPTED FROM THE TAX LIABILITY UNDER SECTION 10(33) OF THE ACT. UNDER SECTION 14A OF THE ACT, EXPENDITURE RELATING TO EXEMPTED INCOME IS NOT ALLO WABLE. THE ASSESSING AUTHORITY HAS CONSIDERED THE ABOVE RELEVA NT FACTOR AND DISALLOWED THE CLAIM OF THE ASSESSEE. HOWEVER, THE FIRST APPELLATE AUTHORITY DECIDED THE ISSUE IN VIEW OF THE ORDER OF THE SPECIAL BENCH IN THE CASE OF CHEMINVES T LTD.V. ITO NEW DELHI (SUPRA). BUT, HOWEVER IN THIS CASE THE UNDISP UTED FACTS ARE THAT THE ASSESSEE BORROWED FUNDS FOR THE BUSINESS PURPOS E AND LATER IT WAS ITA NO. 1914 & 1915/MDS./2016 :- 6 -: DIVERTED INTO INVESTMENT IN SHARES, WHICH HAS NOT Y IELDED ANY INTEREST OR DIVIDEND INCOME, EVEN IF ASSESSEE EARNED DIVIDEN D INCOME, IT IS EXEMPTED U/S.10(33) OF THE ACT FROM THE TAX LIABILI TY AND THE SAME CANNOT BE COMPUTED UNDER THE HEAD INCOME FROM OTHE R SOURCES. THE EXEMPTED INCOME IS NOT LIABLE FOR DEDUCTION IN VIEW OF SEC.14A OF THE ACT. IN VIEW OF THIS, THE CLAIM OF ASSESSEE IS ONLY UNTENABLE AND DECISION RELIED UPON BY THE LD.A.R BEFORE THE LD.CI T(A) HAVE NO APPLICATION TO THE FACTS OF THE CASE. FURTHER, THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SESHASAYEE PAPER AND BOARDS LTD. REPORTED IN [1985] 156 ITR 542 (MAD) WHEREIN HELD T HAT THE BORROWING HAS NOT BEEN MADE EXCLUSIVELY AND WHOLLY FOR THE PU RPOSE OF EARNING INTEREST, IN WHICH CASE ALONE IT SHOULD BE TAKEN AS INCOME, WHICH SHOULD BE DEDUCTED FROM THE INTEREST RECEIPTS. FURT HER, HONBLE KARNATAKA HIGH COURT IN THE CASE OF PRADEEP KAR VS. ACIT REPORTED IN (2009) 319 ITR 0416(KAR HC) WHEREIN HELD THAT DIVID END INCOME BEING EXEMPT U/S.10(33) AND NOT ASSESSABLE TO TAX, ASSESS EE WAS NOT ENTITLED TO DEDUCTION FOR INTEREST IN VIEW OF SEC.1 4A OF THE ACT. 6. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN THE ORDERS OF AO. THE SAME IS CONFIRMED. THE ORDER OF LD.CIT(A) IS REVERSED. ITA NO. 1914 & 1915/MDS./2016 :- 7 -: 7. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE ALLOWED. ORDER PRONOUNCED ON 21 ST SEPTEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 21 ST SEPTEMBER, 2016 K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF