T.Chandra Sekhar Rao, Vijayawada V. The Addl.CIT, Vijayawada

ITA 20/VIZ/2015

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9630 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 12-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Tax effect
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 142(1); 14A; 143(2)

Judgement Text

ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.20/VIZAG/2015 ( / ASSESSMENT YEAR: 2011-12) SRI T. CHANDRA SEKHAR RAO, VIJAYAWADA VS. ADDL CIT, RANGE - 1, VIJAYAWADA [PAN: ABJPT6231C ] ( % / APPELLANT) ( &'% / RESPONDENT) ./I.T.A.NO.27/VIZAG/2015 ( / ASSESSMENT YEAR: 2011-12) ACIT, CIRCLE - 1(1), VIJAYAWADA VS. SRI T. CHANDRA SEKHAR RAO, VIJAYAWADA ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI C. SUBRAHMANYAM, AR / RESPONDENT BY : SHRI R.S. ARAVINDAKSHAN,DR / DATE OF HEARING : 14.12.2016 / DATE OF PRONOUNCEMENT : 23.12.2016 ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 2 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THESE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE ARE DIRECTED AGAINST ORDER OF THE CIT(A), VIJAYAWAD A DATED 31.10.2014 AND IT PERTAINS TO THE ASSESSMENT YEAR 2011-12. SI NCE, THE FACTS ARE IDENTICAL AND ISSUES ARE COMMON, THEY ARE CLUBBED, HEARD TOGETHER AND DISPOSED-OFF BY WAY OF THIS COMMON ORDER FOR THE SA KE OF CONVENIENCE. ITA NO.20/VIZAG/2015: 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS AN INDIVIDUAL CARRYING BUSINESS IN MANUFACTURE OF VESTS AND BRIEF S UNDER THE NAME AND STYLE OF M/S. THATAVARTHI APPARELS FILED HIS RE TURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 30.9.2011 DECLARING TOTA L INCOME OF ` 40,74,340/- BESIDES AGRICULTURAL INCOME OF ` 1,24,900/-. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND ACCORDINGLY NO TICES U/S 143(2) & 142(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CAL LED AS 'THE ACT') WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZE D REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISH ED BOOKS OF ACCOUNTS AND OTHER DETAILS CALLED FOR. THE ASSESSM ENT WAS COMPLETED U/S 143(3) OF THE ACT DETERMINING THE TOTAL INCOME OF ` 77,90,185/- INTER-ALIA MAKING ADDITIONS TOWARDS DISALLOWANCE OF INTEREST PAID ON LOAN ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 3 U/S 14A OF THE ACT AND GROSS PROFIT ESTIMATED ON EX CESS TRADE DEBTORS DISCLOSED TO THE BANK. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS. THE CIT(A ) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE CONFIRMED ADDITIONS MADE TOWARDS DISALLOWANCE U/S 14A OF THE ACT, HOWEVER, DELETED A DDITIONS MADE TOWARDS ESTIMATION OF GROSS PROFIT ON SUNDRY DEBTOR S DISCLOSED TO BANK. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 3. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM ASSESSEES APPEAL IS ADDITIONS TOWARDS DISALLOWANCE U/S 14A OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. DISALLOW ED INTEREST PAID ON LOAN U/S 14A OF THE ACT FOR THE REASON THAT THE ASS ESSEE HAS MADE INVESTMENTS IN SHARES OF SISTER COMPANIES WITHOUT E ARNING ANY DIVIDEND INCOME. THE A.O. WAS OF THE OPINION THAT ANY EXPEN DITURE INCURRED IN RELATION TO EXEMPT INCOME IS NOT ALLOWABLE DEDUCTIO N. THE A.O. FURTHER WAS OF THE OPINION THAT EVEN IF NO DIVIDEND INCOME IS RECEIVED, ANY EXPENDITURE INCURRED IN RELATION TO SUCH EXEMPT INC OME IS NOT ALLOWABLE AS DEDUCTION. IT IS THE CONTENTION OF THE ASSESSEE THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE ONLY WHEN THE RE IS AN EXEMPT ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 4 INCOME, WHICH IS INCLUDIBLE IN TOTAL INCOME OF THE ASSESSEE. IN CASE THERE IS NO EXEMPT INCOME RECEIVED OR THERE IS NO E XEMPT INCOME INCLUDIBLE IN TOTAL INCOME, THE PROVISIONS OF SECTI ON 14A OF THE ACT CANNOT BE APPLIED TO DISALLOW EXPENDITURE INCURRED ON SUCH EXEMPT INCOME. 4. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATER IALS ON RECORD, WE FIND THAT THE A.O. DISALLOWED INTEREST PAID ON L OAN BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. ACCORDING TO THE A.O., EXPENDITURE INCURRED IN RELATION TO ANY EXEMPT INCOME WHETHER S UCH INCOME IS RECEIVED DURING THE FINANCIAL YEAR OR NOT CANNOT BE ALLOWED AS DEDUCTION U/S 14A OF THE ACT. ACCORDING TO THE A.O., THE PRO VISIONS OF SECTION 14A OF THE ACT WILL COME INTO OPERATION, EVEN THOUGH TH ERE IS NO EXEMPT INCOME RECEIVED DURING THE FINANCIAL YEAR. THE MOM ENT THE ASSESSEE HAS INCURRED ANY EXPENDITURE IN RELATION TO ANY AMO UNT WHICH IS INVESTED TO EARN EXEMPT INCOME IS NOT ALLOWABLE AS DEDUCTION . WE DO NOT FIND ANY MERITS IN THE ARGUMENTS OF THE ASSESSEE, FOR TH E REASON THAT THE PROVISIONS OF SECTION 14A OF THE ACT WILL COME INTO OPERATION ONLY WHEN THERE IS AN EXEMPT INCOME WHICH IS INCLUDIBLE IN TO TAL INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. THIS VI EW WAS EXPRESSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINV EST LTD. VS. CIT (2015) 378 ITR 33, WHEREIN IT WAS OBSERVED THAT IN CASE THERE IS NO ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 5 EXEMPT INCOME WHICH IS INCLUDIBLE IN THE TOTAL INCO ME OF THE RELEVANT ASSESSMENT YEAR, ANY EXPENDITURE INCURRED IN RELATI ON TO SUCH EXEMPT INCOME CANNOT BE DISALLOWED BY INVOKING THE PROVISI ONS OF SECTION 14A OF THE ACT. THEREFORE, WE ARE OF THE VIEW THAT THE A.O. WAS ERRED IN DISALLOWING INTEREST PAID ON LOANS, BORROWED FOR TH E PURPOSE OF INVESTMENT IN SHARES OF SISTER COMPANIES BY INVOKIN G THE PROVISIONS OF SECTION 14A OF THE ACT. 5. COMING TO THE CASE LAWS RELIED UPON BY THE ASSES SING OFFICER. THE A.O. RELIED UPON THE DECISION OF HONBLE HIGH COURT OF KERALA IN THE CASE OF SMT. LEELA RAMACHANDRAN (2010) 36 (I) ITCL 223 A ND ALSO HONBLE HIGH COURT OF DELHI, IN THE CASE OF MAXOPP INVESTME NT LTD. & OTHERS VS. CIT & OTHERS (2011) 347 ITR 272 AND OBSERVED THAT S INCE SECTION 14A OF THE ACT BARS ANY DEDUCTION PERTAINING TO ANY EXP ENDITURE INCURRED BY THE ASSESSEE FOR EARNING ANY INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME, ANY EXPENDITURE INCURRED IN RELATION TO EARNING EXEMPT INCOME CANNOT BE ALLOWED AS DEDUCTION. WE HAVE EXAM INED THE CASE LAWS RELIED UPON BY THE A.O. IN THE LIGHT OF THE FA CTS OF THE PRESENT CASE AND FOUND THAT THE CASE LAWS RELIED UPON BY THE A.O . ARE FACTUALLY DIFFERENT FROM THE ASSESSEES CASE AND ACCORDINGLY CANNOT BE APPLIED TO THE FACTS OF THE ASSESSEES CASE. ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 6 6. COMING TO THE CASE LAWS RELIED UPON BY THE ASSES SEE. THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE HI GH COURT OF DELHI, IN THE CASE OF CHEMINVEST LTD. VS. CIT (SUPRA). THE H ONBLE HIGH COURT, UNDER SIMILAR SET OF FACTS, HELD THAT NO DISALLOWAN CE U/S 14A OF THE ACT CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAD BEEN EARNED OR RECEIVED BY THE ASSESSEE. THE EXPRESSION DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF THE ACT WHICH ENVISA GES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME WHICH WAS NOT INCLUD IBLE IN THE TOTAL INCOME DURING THE RELEVANT PREVIOUS YEAR FOR THE PU RPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID IN COME. THE SECTION 14A OF THE ACT WOULD NOT APPLY IF NO EXEMPT INCOME WAS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW: IN CIT V. HOLCIM INDIA (P) LTD ., THE COURT FURTHER EXPLAINED THAT INCOME EXEMPT U/S 1 PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN YEARS. IT W AS AN UNDISPUTED POSITION THAT RESPONDENT ASSESSEE WAS AN INVESTMENT COMPANY AI INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND TH EREBY SECURING RIGHT TO MANAGE POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OUT AND WAS R IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE CORN PAR STRI CTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAY MENT OF DIVIDEND. DECLARED, IT WAS SUBJECTED TO DIVIDEND DISTRIBUTION TAX. (PARA 16) ON FACTS, IT WAS NOTICED IN CIT V. HOLCIM INDIA (P) LTD . THAT THE REVENUE HAD ACCEPT GENUINENESS OF THE EXPENDITURE I NCURRED BY THE ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 7 ASSESSEE IN THAT CASE AND THAT EXPENDITURE HA( INCU RRED TO PROTECT INVESTMENT MADE. (PARA 17) IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAD N OT BEEN DISPUTED WAS THAT THE INVESTMENT ASSESSEE IN THE SHARES OF MAX IN DIA LTD. WAS IN THE FORM OF A STRATEGIC INVESTMENT. SIN BUSINESS OF THE ASSESSEE WAS OF HOLDING INVESTMENTS, THE INTEREST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING SUCH INVESTMEN T. THE INTEREST EXPENDITURE INCURRED ASSESSEE WAS IN RELATION TO SU CH INVESTMENTS WHICH GIVES RISE TO INCOME WHICH DOES NOT FORM PART OF TO TAL INCOME. (PARA 18) IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD . AND IN VIEW OF THE AC FACTUAL POSITION IN THIS CASE THAT T HE ASSESSEE HAS MADE STRATEGIC INVESTMENT IN SHARES OF MA LTD.; THAT NO EXEMPTED INCOME WAS EARNED BY THE ASSESSEE IN THE RELEVANT AY AND SIR G ENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT IN DOUB T, THE QUESTION FRAMED REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE A ND AGAINST THE REVENUE. (PARA 19) SINCE THE SPECIAL BENCH HAS RELIED UPON THE DECISIO N OF THE SUPREME COURT IN RAJENDRA MOODY , IT WAS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NO BEGIN WITH T HAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXP UNDER SECT/ON 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AG AINST DIVIDEND INCOME ASS UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. UND ER SECTION 57 (III) OF THE ACT DEDUCTION IS IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF OR EARNING SUCH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURR ED FOR MA EARNING SUCH INCOME', DID NOT MEAN THAT ANY INCOME SHOULD I N FACT HAVE BEEN EARNED AS A C PRECEDENT FOR CLAIMING THE EXPENDITUR E. NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS T O THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSAR Y THAT ANY SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' (PARA 20) THERE WAS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION U/S 57(III), WH EXPRES SION USED WAS 'FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME SECTION 14 A ON THE HAND CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME. THE DECISION IN RAJENDRA PRASAD MOODY CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCO ME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWED U/S 14A. (PARA 21) IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBE FORE THE COURT ANSWERS THE QUESTION FRAMED HOLDING THAT THE EXPRESSION 'DO ES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A OF THE EL THAT THERE S HOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH WAS NOT INCLUDIBLE IN THE TOTAL DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EX PENDITURE INCURRED IN ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 8 TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WOU LD NOT APPLY IF NO EXEMPT INCOME WAS OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. (PARA 23) 7. IN THIS VIEW OF THE MATTER AND ALSO RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT (SUPRA), WE ARE OF THE VIEW THAT NO DISALLOWANC E CAN BE MADE U/S 14A OF THE ACT, WHEN THERE IS NO EXEMPT INCOME RECE IVED OR RECEIVABLE DURING THE RELEVANT ASSESSMENT YEAR. THEREFORE, WE DIRECT THE A.O. TO DELETE ADDITIONS MADE TOWARDS DISALLOWANCE OF INTER EST UNDER THE PROVISIONS OF SECTION 14A OF THE ACT. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ITA NO.27/VIZAG/2015: 9. THIS APPEAL IS FILED BY THE REVENUE AGAINST ORDE R OF THE CIT(A), VIJAYAWADA DATED 31.10.2014 FOR THE ASSESSMENT YEAR 2011-12. 10. WHEN THIS APPEAL IS TAKEN UP FOR HEARING, THE LD . COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE TAX EFFECT INVOLVED IN THIS APPEAL IS BELOW RS.10 LAKHS. AS PER THE LATEST CIRCULAR NO.2 1/2015 DATED 10.12.2015 OF CBDT BEING RETROSPECTIVE IN NATURE, T HE APPEAL FILED BY THE REVENUE IS NOT MAINTAINABLE. THE LD. D.R. HAS NOT RAISED ANY OBJECTION. IN VIEW OF THE ABOVE, THE APPEAL FILED BY THE REVENUE IS NOT MAINTAINABLE. HENCE, THE SAME IS DISMISSED. ITA NO.20 & 27/VIZAG/2015 T. CHANDRA SEKHAR RAO, VIJAYAWADA 9 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 23 RD DEC16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 23.12.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT SRI T. CHANDRA SEKHAR RAO, PROP. M/S. THATAVARTHI APPARELS, PLOT NO.51, 52, JRD TATA INDUSTRIAL ESTAT E, KANURU, VIJAYAWADA 2. / THE RESPONDENT ADDL. CIT, RANGE-1, VIJAYAWADA 3. + / THE CIT, VIJAYAWADA 4. + ( ) / THE CIT (A), VIJAYAWADA 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM