M/s. Leather Crafts India Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 2541/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4759 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 28-02-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 31-08-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: B S PURUSHOTHAMC A
• Keywords: Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , ! ' . #$ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER . / I.T.A.NO.2541/MDS./2016 / ASSESSMENT YEAR : 2012-13 M/S.LEATHER CRAFTS INDIA PVT LTD., D.NO.11, KONDI CHETTY STREET, CHENNAI 600 001, VS. THE DCIT, CORPORATE CIRCLE-4, CHENNAI 600 034. [PAN AAACL 0493 R ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.B.S.PURUSHOTHAM,C.A /RESPONDENT BY : MR.SHIVA SRINIVAS JCIT DR / DATE OF HEARING : 28 - 0 2 - 201 7 / DATE OF PRONOUNCEMENT : 26 - 04 - 2017 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-8,CHENNAI DATED 26.07.2016 PERTAINING TO ASSESSMENT YEAR 2012-13. 2. THE MAIN GRIEVANCE OF THE ASSESSEE IS WITH REGA RD TO SUSTENANCE OF DISALLOWANCE U/S.14A R.W.RULE 8D OF I NCOME TAX RULES, 1962. ITA NO.2541/MDS./2016 :- 2 -: 3. THE FACTS OF THE CASE ARE THAT THE AO MADE DISA LLOWANCE OF ` 66,56,694/- U/S.14A R.W.R.8D. THE CONTENTION OF THE ASSESSEE IS THAT OWN FUNDS WERE UTILIZED FOR MAKING STRATEGIC INVEST MENTS AND MUTUAL FUNDS WHICH YIELDED EXEMPT INCOME. THE ASSESSEE FU RTHER CLAIMED THAT AN AMOUNT OF 1,53,86,804/- WAS INVESTED AS CU RRENT INVESTMENT IN SUBSIDIARIES BEING STRATEGIC INVESTMENT AND AN A MOUNT OF 57,26,91,924/- WAS INVESTED AS NON-CURRENT INVESTM ENT IN OTHERS. AS THE ASSESSEE REITERATED THE SAME POINTS BEFORE THE LD.CIT(A) ALSO, LD.CIT(A) AFTER CAREFULLY GOING THROUGH THE SUBMISS IONS OF LD.A.R AND FOLLOWING THE DECISIONS OF BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO LTD. IN 328 ITR 81 (BOM.) AND OF CHEN NAI TRIBUNAL IN THE CASE OF ACIT VS. SUN TV NETWORKS LTD., IN ITA N O.1515 TO 1520/MDS./2013 DATED 31.10.2013, CONFIRMED THE ACTI ON OF THE AO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 4. LD.A.R DREW OUR ATTENTION TO THE FOLLOWING POIN TS FOR OUR CONSIDERATION. NO DISALLOWANCE WHEN INVESTMENT IS MADE IN SUBSIDIA RY COMPANIES. I) S. 14A: DISALLOWANCE OF EXPENDITURE - EXEMPT IN COME INVESTMENT IN FOREIGN SUBSIDIARY - PROVISIONS WOULD NOT BE APPLIC ABLE. THE TRIBUNAL HELD THAT THE INVESTMENTS WERE MADE IN 100 PERCENT FOREIGN SUBSIDIARY COMPANIES FOR THE ASSESSMENT YEARS 2006- 07 AND 2008-09. NO FRESH INVESTMENT HAD BEEN MADE IN THE FINANCIAL YEARS 2008-09 AND 2009-10. SINCE THE INVESTMENT WAS MADE IN THE S UBSIDIARY ITA NO.2541/MDS./2016 :- 3 -: COMPANIES IN THE FORM OF EQUITY, THE COMMISSIONER ( APPEALS) FOUND THAT SUCH INVESTMENT WAS OUTSIDE THE SCOPE OF SECTI ON 14A OF THE ACT. WHEN THE FUNDS WERE INVESTED IN SUBSIDIARY COMPANIE S, ADMITTEDLY, THE INTENTION OF THE ASSESSEE WAS NOT TO EARN EXEMP T INCOME BUT BECAUSE OF COMMERCIAL EXPEDIENCY. THE COMMISSIONER (APPEALS) WAS RIGHT IN HOLDING THAT THE PROVISIONS OF SECTION 14A WOULD NOT BE APPLICABLE FOR THE ASSESSMENT YEARS 2006-07 AND 200 8-09. (AY. 2006- 07, 2008-09, 2009-10, 2010-11) ( DCIT V. HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD. (2016) 46 ITR 172 (CHEN NAI) (TRIB)) II) S. 14A : DISALLOWANCE OF EXPENDITURE - EXEMPT INCOME DISALLOWANCE CANNOT EXCEED EXEMPT DIVIDEND INCOME. THE ASSESSEE WAS IN THE BUSINESS OF TRADING OF SHARES, CLOTH, CO MMISSION AND REAL ESTATE RENT, AND MAINTAINED THE SAME BOOKS OF ACCOU NTS FOR ALL THE BUSINESSES. DUE TO THE EXEMPT DIVIDED INCOME AND IN TEREST EXPENSES INCURRED, THE AO MADE DISALLOWANCE U/S 14A. THE ITA T OBSERVED THAT THE DIVIDEND WAS EARNED IN THE NORMAL COURSE OF BUS INESS, AND IF ONE ASSUMED THAT SOME EXPENDITURE WAS INCURRED TO EARN THE EXEMPT INCOME, THEN THE DISALLOWANCE COULD NOT EXCEED THE AMOUNT OF EXEMPT INCOME. (AY 2008-09) K. RATANCHAND AND CO. V . ITO (2016) 45 ITR6O8 (AHD)(TRIB) B. DISALLOWANCE CANNOT EXCEED EXEMPT INCOME (I) S. 14A:DISALLOWANCE OF EXPENDITURE-EXEMPT INCOM E-THE DISALLOWANCE OF EXPENDITURE CANNOT EXCEED THE AMOUNT OF TAX-FREE DIVIDEND. ( PCIT ITA NO.2541/MDS./2016 :- 4 -: V. EMPIRE PACKAGE PVT. LTD( 2016) 136 DTR 342/ 286 CTR 457 (P&H)(HC) (II) S. 14A: DISALLOWANCE OF EXPENDITURE - EXEMPT INCOME DISALLOWANCE TO BE RESTRICTED TO THE AMOUNT OF DIVI DEND INCOME RECEIVED. THE ASSESSEE HAD RECEIVED DIVIDEND INCOME DURING THE YEAR FROM INVESTMENTS IN ITS SUBSIDIARIES. THE AO APPLIE D RULE 8D AND DISALLOWED CERTAIN AMOUNT U/S 14A. THE ITAT HELD TH AT THE DISALLOWANCE U/S 14A WAS TO BE RESTRICTED TO THE AM OUNT OF DIVIDEND RECEIVED BY THE ASSESSEE AND ALSO OBSERVED THAT THE INVESTMENTS IN SUBSIDIARIES WERE STRATEGIC INVESTMENTS. ((AY. 2009 -10) NIMBUS COMMUNICATIONS LTD. V. ACIT (2016)47 ITR 496 (MUM) (TRIB). 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THERE IS NO EVIDENCE REGARDING STRATEGIC INVESTMENTS. HENCE THI S ARGUMENT CANNOT BE CONSIDERED BY THIS TRIBUNAL AT THIS STAGE. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF LOWER AUTHORITIES. THERE WAS NO DISCUSSION WHATSOEVER BY THE AO IN HIS ORDER AND HE STRAIGHTAWAY INVOKED THE PROVISIONS OF THE SECTION 14A R.W.RULES 8D. THE LD.CIT(A) AT HIS LEVEL ALSO THERE IS NO DISCUSS ION ABOUT THE INVESTMENTS IN SUBSIDIARY COMPANY AND NECESSITIES O F INVESTMENTS IN THOSE COMPANIES. HENCE, WE ARE NOT IN A POSITION TO APPRECIATE THE ITA NO.2541/MDS./2016 :- 5 -: FINDINGS OF THESE AUTHORITIES. HENCE, WE REMIT THE ENTIRE ISSUE IN DISPUTE TO THE FILE OF AO FOR FRESH CONSIDERATION T O BRING ALL MATERIAL FACTS OF THE CASE ON RECORD. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES ORDER PRONOUNCED ON 26 TH APRIL, 2017, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 26 TH APRIL, 2017. K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF