Data Software Research Company (International) Pvt Ltd., CHENNAI V. ACIT, CHENNAI

ITA 2170/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8093 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: misc
• Appeal Filed On: 19-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B LAKSHMINARYANANJCIT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business expenditure; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.2169 & 2170 /MDS./2015 ( ! ! / ASSESSMENT YEARS :2004-05,2005-06,) M/S.DATA SOFTWARE RESEACH COMPANY (INTERNATIONAL) PVT. LTD., KASTURI TOWERS, NO.6,SMITH ROAD, CHENNAI 600 002. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI 600 034. PAN AAACD 1285 B ( / APPELLANT ) ( / RESPONDENT ) ./ I.T.A.NOS.2171 & 2172 /MDS./2015 ( ! ! / ASSESSMENT YEARS :2005-06,2006-07,) THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI 600 034. VS. M/S.DATA SOFTWARE RESEACH COMPANY (INTERNATIONAL) PVT. LTD., KASTURI TOWERS, NO.6,SMITH ROAD, CHENNAI 600 002. ITA NOS.2169 TO 2172 /MDS/2015 2 PAN AAACD 1285 B ( / APPELLANT ) ( / RESPONDENT ) ASSESSEE BY : MR.R.VIJAYARAGHAVAN,ADVOCATE REVENUE BY : MR.B.LAKSHMINARYANAN,JCIT, D.R % ' / DATE OF HEARING : 05.01.2016 % ' /DATE OF PRONOUNCEMENT : 03.02.2016 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THESE TWO APPEALS IN ITA NOS.2169/MDS/2015 & 2170/MDS/2015 ARE FILED BY THE ASSESSEE, AGGRIEVED BY THE SEPARATE ORDERS OF THE LD. CIT-I, CHENNAI IN NEW NO.ITA144/C IT(A)-1/13-14 & IN NEW NO.ITA.88/CIT(A)-1/09-10 BOTH THE ORDERS DA TED 27.08.2015 PASSED U/S. 143(3) R.W.S.254 & U/S.143(3) R.W.S.147 OF THE ACT FOR THE ASSESSMENT YEARS 2004-05 & 2005-06 RESPECTIVELY AN D THE OTHER TWO APPEALS IN ITA NOS.2171/MDS/2015 & NO.2172/MDS /2015 ARE FILED BY THE REVENUE, AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) IN NO.ITA.88/CIT(A)-1/09-10 (SUPRA) & NO.ITA.37/CIT(A) -1/10-11 BOTH ITA NOS.2169 TO 2172 /MDS/2015 3 THE ORDERS DATED 27.08.2015 FOR THE ASSESSMENT YEAR S 2005-06 & 2006-07 RESPECTIVELY. 2.1 ASSESSEES APPEAL THE ASSESSEE HAS RAISED THREE ELABORATE IDENTICAL GROUNDS IN ITS APPEALS, HOWEVER THE CRUX OF THE ISSUE IN BO TH THESE APPEALS IS THAT THE LD. CIT(A) HAS ERRED IN DIRECTI NG THE LD. A.O TO MAKE PROPORTIONATE DISALLOWANCES ON INTEREST ON THE CURRENT INVESTMENTS IN SHARE APPLICATION MONEY U/S. 14A OF THE ACT AS EXPENDITURE INCURRED IN RELATION TO INCO ME NOT INCLUDED IN TOTAL INCOME. 2.2. REVENUES APPEAL THE REVENUE HAS RAISED THREE IDENTICAL AND ELABORATE GROUNDS IN ITS APPEALS, HOWEVER THE CRUX OF THE ISS UE IN BOTH THE APPEALS IS THAT THE REVENUE IS AGGRIEVED B Y THE ORDER OF THE LD. CIT(A) WHO HAS ERRED IN DIRECTING THE LD. A.O TO DELETE THE DISALLOWANCE MADE U/S.14A OF THE ACT TO ITA NOS.2169 TO 2172 /MDS/2015 4 THE TUNE OF ` 35,69,500/- & ` 12,53,356/- FOR THE ASSESSMENT YEAR 2005-06 & 2006-07 RESPECTIVELY. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE EXPORT. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR ALL THE RELEVANT ASSESSMENT YEARS. SUBSEQUENTLY , RETURNS FILED BY THE ASSESSEE FOR ALL THE THREE ASSESSMENT YEARS WERE TAKEN UP FOR SCRUTINY AND ASSESSMENTS WERE COMPLETED, WHEREIN THE LEARNED ASSESSING OFFICER MA DE DISALLOWANCE INVOKING SECTION 14A OF THE ACT. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LEARNED ASSESSING OFFICER THAT THE A SSESSEE HAD MADE INVESTMENTS IN SHARES IN ITS SUBSIDIARY CO MPANY FOR THE ASSESSMENT YEAR 2004-05, 2005-06 AND 2006-0 7. SINCE THE INVESTMENT WAS MADE IN EQUITY SHARE CAPIT AL AND SHARE APPLICATION MONEY THE LEARNED ASSESSING OFFI CER OPINED THAT PROVISIONS OF SECTION 14A WILL BE APPLI CABLE AND ITA NOS.2169 TO 2172 /MDS/2015 5 ACCORDINGLY INVOKED THE SAME FOR ALL THE THREE ASSE SSMENT YEARS. THE LEARNED CIT(A) UPHELD THE VIEW OF THE L EARNED ASSESSING OFFICER IN ALL THE THREE ASSESSMENT YEARS . 5. AT THE OUTSET, LEARNED AR SUBMITTED BEFORE US TH AT ALL THE INVESTMENTS WERE MADE IN SISTER COMPANY OF THE ASSESSEE AND THEREFORE SECTION 14A OF THE ACT WILL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE. 6. LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORD ERS OF THE REVENUE. 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PER USED THE MATERIALS AVAILABLE ON RECORD. IT IS A NORMAL P RACTICE TO MAKE INVESTMENT IN SISTER COMPANIES DUE TO COMMERCI AL EXIGENCIES. WHILE DOING SO, NO EXPENSE CAN BE ATTR IBUTABLE OTHER THAN INTEREST EXPENSE FOR MAKING SUCH INVESTM ENTS BECAUSE ALL MANAGEMENT COSTS WILL BE ABSORBED FOR STRATEGIC DECISION MAKING PROCESS WHICH IS ALLOWABL E AS BUSINESS EXPENDITURE. IN THE CASE OF THE ASSESSEE IT IS SUBMITTED THAT NO INTEREST COST WAS INCURRED AS THE ENTIRE ITA NOS.2169 TO 2172 /MDS/2015 6 INVESTMENTS WERE MADE OUT OF OWN FUNDS. FURTHER IN THE DECISION OF THE TRIBUNAL IN ITA NO.115/MDS/2015 DA TED 06.01.2016, EXTRACTED HEREIN BELOW, IT HAS BEEN HEL D THAT SECTION 14A OF THE ACT WILL NOT BE APPLICABLE WHEN INVESTMENTS ARE MADE IN SISTER COMPANIES. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL IS SUE AS POINTED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL I N ITA NO.156/MDS/2013 VIDE ORDER DATED 20/08/13 FOR THE A SSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASS ESSING OFFICER TO DECIDE THE MATTER ONCE AGAIN AFRESH BASED ON THE FI NDINGS WHETHER THE ASSESSEE HAD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS: - I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, WHICH DOES NO T FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF ANY FINDING THAT EXPENDI TURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME PROVISIONS 14A CANNOT BE APPLIED.. II) INTEGLOBE ENTERPRIESES LTD., VS. DCIT REPOTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INTEREST EXPENDI TURE WAS INCURRED FOR MAKING INVESTMENTS. WHERE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR MAKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIES, WHI CH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AND WHICH WAS FOR STRATEGI C PURPOSES ONLY, NO DISALLOWANCE OF INTEREST WAS REQUIRED TO BE MADE UN DER RULE 8D(I) & 8D(II) ITA NOS.2169 TO 2172 /MDS/2015 7 AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). III) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 2 014-TIOL-202-ITAT- MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSIDIARY COMPA NIES OF THE ASSESSEE AND, THEREFORE, THE PURPOSE OF INVESTMENT IS NOT FO R EARNING THE DIVIDEND INCOME BUT HAVING CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXP ENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 98% OF THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES, THEREFORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED, ACCORDIN GLY THE SAME IS DELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON-INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND RESERVES A ND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSEE AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CALLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPOR TED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WER E GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM SUBSTANT IAL SHAREHOLDERS FUND, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUND S AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS . (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013-TIOL-796- ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SU BSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GA INS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS N OT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASS ESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENT AL. THEREFORE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY I S NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASSESSING OFFICE R IS DIRECTED TO RE- COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE P ROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. ITA NOS.2169 TO 2172 /MDS/2015 8 TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISI ON OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS/13 CITED SU PRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APP ROPRIATE ORDER AS PER LAW AND MERITS AND IN THE LIGHT OF THE DECISION S CITED HEREIN ABOVE. WHILE DOING SO, WE ALSO DIRECT THE LD. ASSES SING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M /S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS H ELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. MOREOV ER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIAR Y COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMO TE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSI DIARY. THIS FACT SUPPORTS THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNE D BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INC IDENTAL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE- COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE P ROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE RESTRAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. 8. THEREFORE, FOLLOWING THE AFORESAID DECISION OF T HE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE ON ACCOUNT OF SECTION 14A WHERE ITA NOS.2169 TO 2172 /MDS/2015 9 INVESTMENTS ARE MADE IN SISTER CONCERNS SUCH AS EQU ITY SHARES AND SHARE APPLICATION MONEY. HOWEVER, IF THE INVESTMENTS ARE MADE FROM BORROWED FUNDS, SECTION 1 4A OF THE ACT WOULD BE APPLICABLE AND LEARNED ASSESSING O FFICER SHALL COMPUTE THE DISALLOWANCE UNDER SECTION 14A RE AD WITH RULE 8D IN ACCORDANCE WITH LAW. 9. IN THE RESULT, APPEALS OF THE ASSESSEE AND REVEN UE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON 3 RD FEBRUARY, 2016 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 3 RD FEBRUARY, 2016. K S SUNDARAM. % )*+ ,+ /COPY TO: 1. . /APPELLANT 2. )/. /RESPONDENT 3. 0 () /CIT(A) 4. 0 /CIT 5. + )4 /DR 6. ! /GF