Assistant Commissioner of Income Tax Central Circle-2(4), Bangalore V. Ms Allinace Infrastructure Projects Pvt Ltd , Bangalore

ITA 2402/BANG/2018

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8932 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 17-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUMAN KUMAR
• Keywords: Earning of tax free income
• Section: 14A; 6; 10; 2

Judgement Text

ITA.2402/BANG/2018 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'A', BENGALURU BEFORE SHRI. A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI. LALIET KUMAR, JUDICIAL MEMBER I.T.A NO.2402/BANG/2018 (ASSESSMENT YEAR : 2012-13) ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE -2(4), BENGALURU .. APPELLANT V. M/S. ALLIANCE INFRASTRUCTURE PROJECTS P. LTD, NO.85, KARTHIK NAGAR, MARATHAHALLI, K. R. PURAM, OUTER RING ROAD, BENGALURU 560 037 .. RESPONDENT PAN : AAFCA0404J ASSESSEE BY : SHRI. SUMAN KUMAR, CA REVENUE BY : SMT. SRI NANDINI DAS, ADDL. CIT HEARD ON : 05.12.2018 PRONOUNCED ON : 19.12.2018 O R D E R PER LALIET KUMAR, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT (A) -1, BENGAURU, DT.22.06.2018, FOR THE ASSESSMENT YEAR 2012-13, ON THE FOLLOWING GROUNDS : 2. THE CIT (A) ERRED IN DELETING THE DISALLOWANCE O F RS.2,37,26,680/- 14A R.W.R 8D IN RESPECT OF INVESTM ENTS IN ASSETS YIELDING TAX FREE INCOME, HOLDING THAT THE I NVESTMENT WAS MADE OUT OF INTEREST FREE FUNDS WITHOUT APPRECIATIN G THE ITA.2402/BANG/2018 PAGE - 2 PROVISIONS OF SECTION 14A READ WITH RULE 8D IN ITS TRUE SENSE AND RIGHT SPIRIT AND THE FACT THAT WHEN THE INTERES T EXPENSE INCURRED CANNOT BE DIRECTLY ATTRIBUTED TO ANY PARTI CULAR INCOME OR RECEIPTS, PROVISIONS OF RULE 8D ARE AUTOMATICALL Y APPLICABLE. 3. THE CIT (A) ERRED IN NOT CONSIDERING THE BOARDS CIRCULAR NO.5/2014 DATED 11.02.2014 WHICH HAS MADE IT CLEAR THAT THE DISALLOWANCE U/S.14A R.W.S. 8D HAS TO BE M ADE EVEN WHERE THE TAX PAYER IN A PARTICULAR YEAR HAS NOT EA RNED ANY EXEMPTED VIS-A-VIS DIVIDEND INCOME. 02. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS BORR OWED THE LOAN AND HAS PAID INTEREST ON THE SAID AMOUNT. DURING T HE ASSESSMENT PROCEEDINGS THE ASSESSEE WAS CALLED UPON TO PROVE T HE NEXUS BETWEEN THE BORROW OF LOAN AND MAKING THE INVESTMEN T FOR EARNING THE EXEMPT INCOME. HOWEVER THE ASSESSEE FAILED TO PROVE WITH DOCUMENTARY EVIDENCE AND ACCORDINGLY THE AO HAD MAD E DISALLOWANCE OF RS.2,37,26,680/-. OUR ATTENTION WA S DRAWN BY THE ASSESSEE TO THE DECISION OF THE ITAT, AMRITSAR BENC H IN THE MATTER OF LALLY MOTORS INDIA P. LTD V. PR. CIT [93 TAXMANN .COM 39] AND SUBMITTED THAT THIS DECISION IS ALSO APPLICABLE. 03. PER CONTRA THE LD. AR HAS DRAWN OUR ATTENTION T O PAGE 3 OF THE PAPER BOOK WHERE THE DESCRIPTION AS RS.49,90,457/- HAS BEEN MENTIONED AND IN SCHEDULE 10, WHERE THE PARTICULARS OF OTHER INCOME WAS GIVEN, WHERE THE INTEREST INCOME ON THE BANK DEPOSIT WAS MENTIONED TO BE RS.2,94,394/-. HOWEVER SAID INC OME WAS TAKEN CARE OF IN THE COMPUTATION AT PAGE 1 OF THE PAPER B OOK. IT WAS SUBMITTED THAT THE ASSESSEE DURING THE ASSESSMENT Y EAR HAS NOT EARNED ANY EXEMPT INCOME ON THE INVESTMENT MADE BY THE ASSESSEE. ITA.2402/BANG/2018 PAGE - 3 THE ASSESSEE RELIES UPON THE DECISION RENDERED IN T HE CASE OF THE ASSESSEE FOR AY 2011-12 AND HAS ALSO DRAWN OUR ATTE NTION TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE MAT TER OF CHEM INVESTMENT61 TAXMANN.COM 118 . 04. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE WHOLE BASIS OF THE FINDING RECORDED BY THE AO WAS THE DECISION OF THE HONBLE DELHI HIGH COURT IN CHEM IN VESTMENT [2015] 61 TAXMANN.COM 118 (DELHI) WHEREIN IT WAS HELD AS UNDER : 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FOR CO NSIDERATION, THE COURT FINDS THAT THE COMPLETE ANSWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HOLCIM INDIA (P.) LTD. [2015] 57 TAXMANN.COM 28 . IN THAT CASE A SIMILAR QUESTION AROSE, VIZ., WHET HER THE ITAT WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTIO N 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY THE ASSE SSEE IN THE RELEVANT AY? THE COURT REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD'S. CASE (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THIS VERY CASE I.E. CH EMINVEST LTD. V. ITO [2009] 121 ITD 318 . THE COURT ALSO REFERRED TO THREE DECISIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECID ED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN CIT V. LAKHANI MARKETING INC . [2014] 226 TAXMAN 45/49 TAXMANN.COM 257 OF THE HIGH COURT OF PUNJAB AND HARYANA WHICH IN TURN REFE RRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LTD. [2010] 323 ITR 518/189 TAXMAN 50 AND CIT V. WINSOME TEXTILE INDUSTRIES LTD . [2009] 319 ITR 204 . THE SECOND WAS OF THE GUJARAT HIGH COURT IN CIT V. CORRTECH ENERGY (P.) L TD. [2014] 223 TAXMAN 130/45 TAXMANN.COM 116 AND THE THIRD OF THE ALLAHABAD HIGH COURT IN CIT V. SHIVAM MOTORS (P.) LTD . [2015] 230 TAXMAN 63/55 TAXMANN.COM 262 . THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSESSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT AY IN QUESTION 'CORR ESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANC E.' 16. IN HOLCIM INDIA (P.) LTD'S. CASE (SUPRA), THE COUR T FURTHER EXPLAINED AS UNDER: '15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPTEARLIER AND CAN BECOM E TAXABLE IN ITA.2402/BANG/2018 PAGE - 4 FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A S UBSEQUENT YEAR WOULD OR WOULD NOT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSME NT YEAR. FOR EXAMPLE, LONG TERM CAPITAL GAIN ON SALE OF SHARES I S PRESENTLY NOT TAXABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAI D, BUT A PRIVATE SALE OF SHARES IN AN OFF MARKET TRANSACTION ATTRACT S CAPITAL GAINS TAX. IT IS AN UNDISPUTED POSITION THAT RESPONDENT A SSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANA GEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND S TRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSI ST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEN D DISTRIBUTION TAX.' 17. ON FACTS, IT WAS NOTICED IN HOLCIM INDIA (P.) LTD' S. CASE (SUPRA) THAT THE REVENUE HAD ACCEPTED THE GENUINENESS OF TH E EXPENDITURE INCURRED BY THE ASSESSEE IN THAT CASE AND THAT EXPE NDITURE HAD BEEN INCURRED TO PROTECT INVESTMENT MADE. 18. IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAS NOT BEEN DISPUTED IS THAT THE INVESTMENT BY THE ASSESSEE IN THE SHARES OF MAX INDIA LTD. IS IN THE FORM OF A STRATEGIC INVESTMENT . SINCE THE BUSINESS OF THE ASSESSEE IS OF HOLDING INVESTMENTS, THE INTE REST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING SUCH INVESTMENT. THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS IN RELATION TO SUCH INVESTMENTS WHICH GIVES RISE TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOL CIM INDIA (P.) LTD'S. CASE (SUPRA) AND IN VIEW OF THE ADMITTED FAC TUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE STRATEGIC INVE STMENT IN SHARES OF MAX INDIA LTD.; THAT NO EXEMPTED INCOME WAS EARN ED BY THE ASSESSEE IN THE RELEVANT AY AND SINCE THE GENUINENE SS OF THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT IN DOUB T, THE QUESTION FRAMED IS REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DECISI ON OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY'S CASE (SUPR A), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSU E BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXPE NDITURE UNDER SECTION 57(III) OF THE ACT COULD BE ALLOWED AS A DE DUCTION AGAINST ITA.2402/BANG/2018 PAGE - 5 DIVIDEND INCOMEASSESSABLE UNDER THE HEAD 'INCOME FR OM OTHER SOURCES'. UNDER SECTION 57(III) OF THE ACT DEDUCTIO N IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHO LLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SU CH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURR ED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN THAT ANY INCO ME SHOULD IN FACT HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITUR E THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE E XPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHA LL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN F ACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFI T BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CO NSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CO NCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSAR Y THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RES ULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY'S CAS E (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDU CTION UNDER SECTION 57(III) OF THE ACT, WHERE THE EXPRESSION US ED IS 'FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME'. SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION 'IN RELAT ION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME.' THE DECISION IN RAJENDRA PRASAD MOODY'S CASE (SUPRA) CA NNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HA S BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SE CTION 14A OF THE ACT. 22. IN THE IMPUGNED ORDER, THE ITAT HAS REFERRED TO TH E DECISION IN MAXOPP INVESTMENT LTD'S. CASE (SUPRA) AND REMAND ED THE MATTER TO THE AO FOR RECONSIDERATION OF THE ISSUE AFRESH. THE ISSUE IN MAXOPP INVESTMENT LTD'S. CASE (SUPRA) WAS WHETHE R THE EXPENDITURE (INCLUDING INTEREST ON BORROWED FUNDS) IN RESPECT OF INVESTMENT IN SHARES OF OPERATING COMPANIES FOR ACQ UIRING AND RETAINING A CONTROLLING INTEREST THEREIN WAS DISALL OWABLE UNDER ITA.2402/BANG/2018 PAGE - 6 SECTION 14A OF THE ACT. IN THE SAID CASE ADMITTEDLY THERE WAS DIVIDEND EARNED ON SUCH INVESTMENT. IN OTHER WORDS, IT WAS NOT A CASE, AS THE PRESENT, WHERE NO EXEMPT INCOME WAS EA RNED IN THE YEAR IN QUESTION. CONSEQUENTLY, THE SAID DECISION W AS NOT RELEVANT AND DID NOT APPLY IN THE CONTEXT OF THE ISSUE PROJE CTED IN THE PRESENT CASE. 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBEFOR E THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXP RESSION 'DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14A O F THE ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, W HICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WILL N OT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING T HE RELEVANT PREVIOUS YEAR. HOWEVER WE MAY RECORD THAT SUBSEQUENTLY THE HONBLE HIGH COURT REVERSED THE FINDING RECORDED BY THE SPECIAL BENCH AND HELD THAT IF THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME THERE IS NO OCCASION OF ANY DISALLOWANCE AS PER THE PROVISIONS OF SECTIO N 14A R.W. RULE 8D. 05. RESPECTFULLY FOLLOWING THE DECISION RENDERED BY THE HONBLE DELHI HIGH COURT AND ALSO IN THE FACTS OF THE CASE WHEN THE ASSESSEE HAS NOT EARNED ANY INCOME DURING THE ASSESSMENT YEA R, WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. WE DI SMISS THE SAME. 06. IN THE RESULT, APPEAL OF THE REVENE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DAY OF DECEMBER, 2018. SD/- SD/- (A. K. GARODIA) (LALIET KU MAR) ACCOUNTANT MEMBER JUDICIAL MEMBER BENGALURU DATED : 19.12.2018 MCN* ITA.2402/BANG/2018 PAGE - 7 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.