DCIT, CHENNAI V. M/s. India Shoes Exports Pvt. Ltd., CHENNAI

ITA 2582/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4769 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 28-02-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 06-09-2016
• Court: TRIBUNAL
• Department Lawyers: S VIDYA
• Assessee Lawyers: SHIVA SRINIVAS
• Keywords: Earning of tax free income; Question of law
• 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 . / ITA NO.2582/MDS/2016 / ASSESSMENT YEAR : 2013-14 THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-2(2), CHENNAI - 600 034. ( /APPELLANT) V. M/S. INDIA SHOES EXPORTS P. LTD . NO.151/4, MOUNT POONAMALLE ROAD, RAMAPURAM, CHENNAI 600 089. PAN AAACI5683A RESPONDENT) / APPELLANT BY : MS. S. VIDYA, CA / RESPONDENT BY : SHRI SHIVA SRINIVAS, JCIT ! / DATE OF HEARING : 28.02.2017 '# ! / DATE OF PRONOUNCEMENT : 26.04.2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF THE CIT(APPEALS) DATED 30.6.2016. 2. THE FIRST GROUND RAISED BY THE REVENUE IN THIS A PPEAL IS - - ITA 2582/MDS/16 2 THAT THE CIT(APPEALS) ERRED IN HOLDING THAT THE ASS ESSEE HAD INVESTED FUNDS OUT OF ITS RESERVES AND SURPLUS AND HENCE NO DISALLOWANCE ON ACCOUNT OF RULE 8D(2)(II) IS CALLED FOR. 3. THE FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT IS SEEN FROM THE AUDITED FINANCIAL STATEMENTS AND ITS ANNEXURES THAT THE ASSESSEE COMP ANY HAS NON-CURRENT INVESTMENTS OF 1,35,21,250/- AS AT 31.3.2013 IN EQUITY SHARES. AS PER THE PROVISIONS OF SEC.14A(1) FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THIS ACT. THUS, TO MAKE THE PROVISION OF ABOVE SECTION APPLICABLE THERE HAS TO BE INCOME WHI CH DOES NOT FORM PART OF TOTAL INCOME WHICH IN THIS CASE IS DIV IDEND INCOME OF 49,464/-, WHICH DOES NOT FORM PART OF TOTAL INCOME BEING EXEMPT FROM TAX U/S.10(34) OF THE ACT. NOW, AS REG ARDS WHAT WOULD BE QUANTUM OF DISALLOWANCE AND HOW THE SAME I S TO BE ARRIVED AT IS EXPLAINED IN SEC.14A(1) WHICH READS A S THE ASSESSING OFFICER SHALL DETERMINED THE AMOUNT OF EX PENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF - - ITA 2582/MDS/16 3 THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, IF THE ASSESSING OFFICER. HA VING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXP ENSE. FURTHER, AS PER SUB SECTION 3 OF SECTION 14A THE PROVISIONS OF SUCH SECTION (2) ABOVE SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BE EN INCURRED BY HIM RELATION OF INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THIS ACT. 3.1 IN VIEW OF THE ABOVE POSITION OF LAW, THE ASSES SEE WAS ASKED TO FURNISH COMPLETE DETAILS OF INVESTMENTS MA DE AND THE BIFURCATION OF THE INTEREST EXPENSES CLAIMED IN THE PROFIT AND LOSS ACCOUNT DULY SPECIFYING INTEREST EXPENSES ATTRIBUTA BLE TO EARNING OF SUCH EXEMPT INCOME AND TO SHOW CAUSE AS TO WHY P ROVISION OF SEC.14A MAY NOT BE APPLIED TO ITS CASE. IN RESP ONSE TO THIS, THE LD. AR SUBMITTED THAT THE ENTIRE INVESTMENTS WE RE NOT DONE DURING THE YEAR AND WERE INVESTED OUT OF OWN FUNDS. 3.2 THE AO OBSERVED THAT THE MANDATE OF SEC.14A OF THE ACT REQUIRES THE ASSESSEE TO MAINTAIN PROPER BOOKS OF A CCOUNT IN REGARD TO THE INVESTMENTS MADE, FROM WHICH THE INCO ME CAN - - ITA 2582/MDS/16 4 RAISE WHICH IS TAX-EXEMPT AND SUCH BOOKS OF ACCOUNT BE PRODUCED BEFORE THE AO TO ASCERTAIN THE EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCO ME OF THE ASSESSEE. THE AO FURTHER OBSERVED THAT THE ASSESSE E HAS NOT MAINTAINED ANY SEPARATE EXPENDITURE AND IN RELATION TO THE TAX FREE INCOME TO BE EARNED FROM ITS INVESTMENTS IS N OT SUPPORTED BY DOCUMENTARY EVIDENCE AS MANDATED IN SEC.14A(2)(D ) OF THE ACT. IN OTHER WORDS, UNDER THE GIVEN FACTS AND CIR CUMSTANCES OF THE CASE, THE ASSESSEE HAS NOT DISCHARGED THE ONUS CAST UPON IT. IN THE ABSENCE OF ACCOUNTS MAINTAINED BY THE ASSESS EE IN REGARD TO ITS INVESTMENTS, THE AO CANNOT BE EXPECTE D TO EXAMINE THE CLAIM OF THE ASSESSEE HAVING REGARD TO ITS ACCO UNTS. THE INCURRENCE OF ESTABLISHMENT EXPENSES OTHER ADMINIST RATIVE AND GENERAL EXPENSES, ETC. CANNOT BE RULED OUT IN REGAR D TO MAINTAINING OF INVESTMENT PORTFOLIO COUPLED WITH FA CT OF INVOLVEMENT OF KEY MANAGEMENT PERSONNEL, EXPERTS, E XECUTIVES, OFFICIALS, ETC. IN THE DECISION MAKING PROCESS AND MANAGEMENT OF INVESTMENT AND EARNING THE TAX FREE INCOME. THE USE OF INTEREST BEARING FUNDS CAN ALSO NOT BE RULED OUT. MOREOVER, THE ASSESSEE HAS NOT MAINTAINED ANY ACCOUNTS AS MANDATE D IN - - ITA 2582/MDS/16 5 SEC.14A(2)(3) OF THE ACT AND SUCH AN INACTION ON TH E PART OF THE ASSESSEE CANNOT AUTOMATICALLY SHIFT THE BURDEN TO T HE AO, WHICH OTHERWISE PLACED UPON THE ASSESSEE AT THE FIRST INS TANCE. THEREFORE, ACCORDING TO THE AO, THE PROVISIONS OF S EC.14A ARE DULY ATTRACTED IN THIS CASE AND DISALLOWED A SUM OF 7,16,792/- U/S.14A OF THE ACT R.W.RULE 8D OF THE IT RULES. AG AINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS), WH O RESTRICTED THE DISALLOWANCE UNDER RULE 8D(2)(III) TO THE EXTEN T OF EXEMPT INCOME I.E. 49,464/- BY FOLLOWING THE DECISION OF THE TRIBUNA L IN THE CASE OF KARMEN INTERNATIONAL IN M.P.NO.106/MDS/ 2015 AND ITA NO.57/MDS/2015 DATED 29.10.2015. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 4. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OP INION THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THE JURISD ICTIONAL HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD., IN T.C NO.520/16 DATED 23.12.2016 WHEREIN HELD THAT:- 13. RELIANCE IS ALSO PLACED ON A DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF BEACH MINE RALS COMPANY PVT. LTD. VS. ASSISTANT COMMISSIONER OF INCOME TAX IN TCA NO.681 OF 2013, DATED 2.12.2013. IN THAT CASE, PAYM ENTS OF INTEREST BY THE ASSESSEE WERE SOUGHT TO BE DISALLOW ED INVOKING THE PROVISIONS OF S.14A ON THE PREMISE THAT THE SAM E RELATED TO - - ITA 2582/MDS/16 6 BORROWINGS THAT HAD BEEN INVESTED AND WOULD YIELD E XEMPT RETURNS. THE ASSESSEE CONTESTED THE DISALLOWANCE U/ S 14A ON MULTIPLE GROUNDS. IT WAS CONTENDED THAT THERE WERE SUFFICIENT RESERVES AND SURPLUSES AVAILABLE FOR THE PURPOSE OF INVESTMENTS, AND BORROWED FUNDS, FOR WHICH THE PAYMENT OF INTERE ST HAD BEEN INCURRED, HAD NOT BEEN INVESTED. THE ASSESSEE SOUGHT TO DRAW A NEXUS BETWEEN THE BORROWED FUNDS AND THE INT EREST PAYMENTS, HIGHLIGHTING THE POSITION THAT THE QUANTU M OF AVAILABLE FREE FUNDS WAS FAR IN EXCESS OF THE INVES TMENTS MADE. THE BENCH, IN THE LIGHT OF THE ABOVE SUBMISSIONS, R EMANDED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO BE CO NSIDERED DE NOVO AND AFTER CONDUCTING A PROPER ENQUIRY. INTER A LIA A DIRECTION WAS ISSUED TO THE ASSESSEE TO TENDER A PR OPER EXPLANATION FOR THE INTEREST PAYMENTS. THE OPEN REM AND WAS MADE IN THE FACTS AND CIRCUMSTANCES OF THAT CASE AN D NO CONCLUSION WAS DRAWN BY THE BENCH ON THE POSITION O F LAW INVOLVED. IN FACT, THE SUBSTANTIAL QUESTION OF LAW RAISED IN THAT CASE FOR THE CONSIDERATION OF THE COURT WAS COUCHED IN GENERAL TERMS AS FOLLOWS WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE. THE INCOME TAR APPELLATE TRIBUNAL IS RIGHT IN LAW IN CONFIRMING THE DISALLOWANCE UNDER SECTION 11.1 OF T HE INCOME TAX ACT, OF AN AMOUNT OF RS.55,00.000/- IN R ELATION TO ASSESSMENT YEAR 2007- 2008? 14. NOTHING MUCH TURNS ON THE USE OF THE WORD INCL UDABLE AND THE PHRASE UNDER THE ACT IN S. 14A AND WE ARE NOT PERSUADED TO ACCEPT THE EMPHASIS LAID OR THE INTERPRETATION OF T HE SAME BY THE REVENUE. AN ASSESSMENT IN TERMS OF THE INCOME T AX ACT IS SPECIFIC TO AN ASSESSMENT YEAR AND THE RELATED PREV IOUS YEAR. S.4 OF THE ACT, WHICH IMPOSES THE CHARGE TO TAX REA DS THUS: CHARGE OF INCOME-TAX 4. (1) WHERE ANY CENTRAL ACT ENACTS THAT INCOME TA X SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATE S, INCOME- TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FO R THAT YEAR IN - - ITA 2582/MDS/16 7 ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS (INCL UDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) O F, THIS ACT IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON: PROVIDED THAT WHERE BY VIRTUE OF ANY PROVISION OF T HIS ACT INCOME-TAX IS TO BE CHARGED IN RESPECT OF THE INCOM E OF A PERIOD OTHER THAN THE PREVIOUS YEAR, INCOME TAX SHALL BE C HARGED ACCORDINGLY. THUS, WHERE THE STATUTE INDENTED THAT INCOME SHALL BE RECOGNIZED FOR TAXATION IN RESPECT OF ANY PREVIOUS OTHER THAN THAT IMMEDIATELY PRECEDING THE RELEVANT ASSESSMENT YEAR, THE PROVISION SHALL EXPRESSLY STATE SO. THE PROVISIONS OF S.1O IN CHAPTER III OF THE ACT DEALING WITH INCOMES NOT IN CLUDED IN TOTAL INCOME COMMENCES WITH THE PHRASE IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR, ANY INCOME FALLING WITHI N ANY OF THE FOLLOWING CLAUSES SHALL NOT BE INCLUDED. 15. THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOULD RELATE ONLY TO THE PREVIOUS YEAR WHEN THE INCOME WAS EARNE D AND NONE OTHER AND CONSEQUENTLY THE EXPENDITURE INCURRE D IN CONNECTION THEREWITH SHOULD ALSO BE DEALT WITH IN T HE SAME PREVIOUS YEAR. THUS, BY APPLICATION OF THE MATCHING CONCEPT, IN A YEAR WHERE THERE IS NO EXEMPT INCOME, THERE CANNO T BE A DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASS UMED INCOME. (MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (225 ITR 802). HE LANGUAE OF S.14A(1) SHOULD BE READ IN TH E CONTEXT AND SUCH THAT IT ADVANCES THE SCHEME OF THE ACT RAT HER THAN DISTORT IT. HENCE, IN OUR OPINION, DISALLOWANCE U/S.14A CANNOT EXCEED THE EXTENT OF EXEMPTED INCOME DISCLOSED BY THE ASSESSEE . ACCORDINGLY, WE DISMISS THIS GROUND OF APPEAL. - - ITA 2582/MDS/16 8 5. THE NEXT GROUND RAISED BY THE REVENUE IN THIS AP PEAL IS THAT THE CIT(A) ERRED IN ALLOWING THE PRIOR PERIOD EXPENSES BY HOLDING THAT THE EXPENSES WERE CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. 6. THE FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO PR ODUCE THE LEDGER COPIES OF THE COUNTER CHARGES CLAIMED. IN RESPONSE TO THE SAME, THE LD. AR VIDE LETTER DATED 14.9.2015 FILED THE SAME AND STATED THAT THE SERVICE TAX AMOUNT OF EARL IER PERIOD OF 42,65,205/- HAS BEEN CHARGED TO COURIER CHARGES. T HE LD. AR FURTHER STATED THAT 42,65,205/- BEING THE SERVICE TAX AMOUNT ON COURIER CHARGES OF EARLIER YEAR THAT HAS ALREADY BE EN PAID BEFORE THE DUE DATE WAS EXPECTED TO BE REIMBURSED BY THE GOVERNMENT. IN THE FINANCIAL YEAR 2012-13, IT WAS BROUGHT TO THE ATTENTION OF THE ASSESSEE COMPANY THAT THERE WILL B E NO REIMBURSEMENT OF THE ST CHARGES AND HENCE THE ASSES SEE COMPANY HAS CHARGED THE SERVICE TAX OF THE PRIOR PE RIOD TO THE COURIER CHARGES DURING THE YEAR UNDER CONSIDERATION . HOWEVER, THE AO DID NOT ACCEPT THE CONTENTION OF THE LD. AR AND OBSERVED THAT THE CLAIM OF 42,65,205/- RELATES TO EARLIER PERIOD AND DOES - - ITA 2582/MDS/16 9 NOT RELATE TO THE AY 2013-14. ACCORDING TO HIM, T HE PAYMENT HAS ALREADY BEEN MADE AND IT IS NOT THE CASE THAT T HE SAME IS CLAIMED ON PAYMENT BASIS U/S.43B OF THE ACT AND NO SUCH CLAIM IS ADMISSIBLE AS PER INCOME-TAX ACT. ACCORDINGLY, THE AO ADDED BACK 42,65,205/- TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE WENT TIN APPEAL BEFORE THE CIT(APPEALS). 7. THE CIT(A) OBSERVED THAT THE SAID LIABILITY CRYS TALLIZED IN ASSESSMENT YEAR UNDER CONSIDERATION AND TO BE ALLOW ED. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSEE HAS SHOWN THE SERVICE TAX AS REFUNDABLE IN ITS BALA NCE SHEET IN EARLIER YEARS. HOWEVER, IN THE ASSESSMENT YEAR UND ER CONSIDERATION, IT CAME TO THE KNOWLEDGE OF THE ASSE SSEE THAT THE SAID SERVICE TAX IS NOT PENDING WITH THE CONCERNED DEPARTMENT. AS SUCH, IT REVERSED THE SERVICE TAX REFUNDABLE TO THE P&L ACCOUNT AND CLAIMED AS DEDUCTION. IN OUR OPINION, THE BASIS ON WHICH THE ASSESSEE CLAIMED AS DEDUCTION IS NOT BROU GHT ON - - ITA 2582/MDS/16 10 RECORD BY EITHER PARTIES. HENCE, WE REMIT THE ISSU E TO THE FILE OF THE AO FOR FRESH CONSIDERATION AND THE ASSESSEE IS DIRECTED TO PLACE NECESSARY EVIDENCE TO SUPPORT THE CLAIM OF TH E ASSESSEE. ACCORDINGLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 26 TH APRIL, 2017 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 26 TH APRIL, 2017. K S SUNDARAM 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.