Vibgyor Scientific Research Pvt. Ltd., Ahmedabad V. The Dy.CIT, (OSD), Circle-8, Ahmedabad

ITA 2634/AHD/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9704 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 20-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 11-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K MADHUSUSAN
• Assessee Lawyers: TUSAR HIMANI
• Keywords: Earning of tax free income; Retrospective amendment; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD .. , , BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ./ I.T.A. NO.2634/AHD/2013 ( / ASSESSMENT YEAR : 2010-11) VIBGYOR SCIENTIFIC RESEARCH PVT. LTD., 608, ISCON ELEGANCE, OPP. KARNAVATI CLUB, S.G. HIGHWAY, AHMEDABAD. / VS. THE DCIT(OSD), CIRCLE-8, AHMEDABAD. ./ ./ PAN/GIR NO. : AACCV 2616 E ( ' / APPELLANT ) .. ( (' / RESPONDENT ) ' / APPELLANT BY : SHRI TUSAR HIMANI, A.R (' * / RESPONDENT BY : SHRI K. MADHUSUSAN, SR. D.R * . / DATE OF HEARING 20/12/2016 * . / DATE OF PRONOUNCEMENT 21/12/2016 / O R D E R PER SHRI MAHAVIR PRASAD, JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-I, AHMEDABAD, D ATED 26/09/2013 FOR THE ASSESSMENT YEAR (AY) 2010-11 AND FOLLOWING GROUNDS HAVE BEEN TAKEN. (I). THE LD.CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE ADDITION OF RS.1,47,153/- BEING EXPE NSES INCURRED IN ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 2 - CONNECTION WITH REDUCTION OF AUTHORIZED SHARE CAPIT AL BY TREATING THE SAME AS CAPITAL EXPENSES. (II). BOTH THE LOWER AUTHORITIES HAVE PASSED THE OR DER WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THEY FURTHER ERRED I N GROSSLY IGNORING VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION S UBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEE N CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF THE LOWE R AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINICIPLES OF NATURAL JUST ICE AND THEREFORE DESERVE TO BE QUASHED. (III). THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE LD.AO IS LEVYING INTEREST U/S 234A/B/C OF THE ACT. (IV). THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS O F THE CASE IN CONFIRMING ACTION OF THE LD.AO IN INITIATING PENALT Y U/S 271(1)(C) OF THE ACT. 2. THE FACTS OF THE CASE ARE - ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF CLINICAL RESEARCH AND CONDUCTS RESEARCH & EXPERIMENTAL WORKSHOP FOR MEDICAL, PHARMACEUTICAL, MOLECULAR BIO LOGY, BIOTECHNOLOGY, LIFE SCIENCE TECHNOLOGY, SCIENTIFIC & TECHNICAL RESEARCH, EXPERIMENTS & TESTS OF ALL KINDS. 3. IT WAS NOTICED BY THE AO THAT UPON GOING THROUGH THE DETAILS FURNISHED BY ASSESSEE IT WAS NOTICED THAT THE ASSES SEE HAS EARNED DIVIDEND INCOME OF RS.2,00,951/- WHICH IS EXEMPT UNDER THE A CT. THE ASSESSEE WAS ASKED TO SHOW CAUSE VIDE ORDER SHEET ENTRY DATE D 12-10-12 AS TO WHY ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 3 - DISALLOWANCE U/S.14A R.W.R. 8D SHOULD NOT BE MADE. THE ASSESSEE VIDE LETTER DATED 25-10-2012 FURNISHED ITS REPLY WHICH I S REPRODUCED AS UNDER: 'ASSESSED HAS DISALLOWED RS. 10,000/- ON AN AD HOC BASIS IN THIS RESPECT. IN TERM RULE 8D IT COMES TO RS. 23, 564/-. COMPUTATION IN THIS RESPECT IS ATTACHED HEREWITH. IT IS RELEVANT TO MENTION HERE THAT THE ASSESSEE'S SUBMISSION ON THIS POINT IS NOT TENABLE IN LAW IN VIEW OF THE CLEAR PROVISIONS OF S ECTION 14A OF THE LT. ACT R.W. RULE 8D. AS PER SECTION 14A NO DEDUCTION IS TO BE A LLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FROM PART OF THE TOTAL INCOME UNDER THE I.T. ACT. AS PER SECTION 14A (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART, OF THE TOTAL INCOM E UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED, I F THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS N OT SATISFIED WITH ARE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE PARLIAMENT IN ITS WISDOM HAD ENACTED SECTION 1 4A WITH RETROSPECTIVE EFFECT FROM1I-4-1962 IN ORDER TO CLAR IFY TIN: ALREADY EXISTING POSITION THAT ONLY THOSE EXPENSES COULD BE CLAIMED WHICH WERE RELATABLE TO THE TAXABLE INCOME. IN THE PAST, IT WAS SEEN THAT ASSESSEES WERE PUSHING THE EXPENSES RELATING TO EXEMPT INCOME WHICH WERE NOT T AXABLE TOWARDS TAXABLE INCOME AND THEREBY REDUCING THE TAXABLE INCOME WRON GLY. IT WAS IN CURB THIS MISCHIEF THAT THE PARLIAMENT ENACTED SECTION 14A AN D ALSO TO OVERCAME THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RA JASTHAN STATE WAREHOUSING CORPN. VS. CIT [20001 242 ITR 450, WHER EIN IT WAS HELD THAT IF THE EXEMPTED INCOME AND THE TAXABLE INCOME ARE EARN ED FROM ONE AND INDIVISIBLE BUSINESS THEN THE APPORTIONMENT OF EXPE NDITURE COULD NOT BE SUSTAINED. THE INTENTION OF THE LEGISLATURE, IS CLE ARLY EVIDENT FROM THE MEMORANDUM EXPLAINING THE PROVISIONS CONTAINED IN T HE FINANCE BILL WHEREIN IT WAS EXPLAINED THAT ONLY THOSE EXPENSES COULD HE CLAIMED AS DEDUCTION WHICH ARE INCURRED IN RELATION TO EARNING THE TAXABLE INC OME. THE USE OF THE EXPRESSION 'ONLY TO THE EXTENT' IN THE MEMORANDUM I S CLEAR INDICATOR THAT ONLY THAT PART OF EXPENSES CAN BE ALLOWED AS DEDUCTION W HICH IS RELATED TO THE EARNING OF TAXABLE INCOME. ACCORDINGLY, WHEN THE IN COME IS EXEMPT AND DOES ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 4 - NOT FORM PART OF THE TOTAL INCOME THEN, NO EXPENDIT URE WHETHER DIRECT OR INDIRECT IN RELATION TO THAT INCOME COULD BE CLAIME D AS DEDUCTION. WHETHER TO INVEST OR NOT TO INVEST AND WHETHER TO RETAIN THE INVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIO NS WHICH THE MANAGEMENT IS CALLED UPON TO LAKE. THESE ARE MIND-BOGGLING DECIS IONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. THIS DECISIO NS MAKING PROCESS IS VERY COMPLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOR EOVER, THE ASSCSSCE HAS TO KEEP TRACK OF THE DIVIDED INCOMES DECLARED BY THE I NVESTEE COMPANIES AND ALSO TO KEEP TRACK OF THE DIVIDEND INCOME HAVING BEEN RE GULARLY RECEIVED BY THE ASSESSES. THIS ACTIVITY ITSELF CALLED FOR CONSIDERA BLE MANAGEMENT ATTENTION AND CANNOT BE LEFT TO A JUNIOR CLERK. IN VIEW OF THE ABOVE NARRATED FACTS AND POINTS OF LAW DISALLOWANCE U/ S. 14A R.W.R. 8D IS MADE. DIRECT EXPENSES RS. NIL INTEREST EXPENSES RS. NIL ADMINISTRATIVE EXPENSES RS. 23564/- I.E. 1/2 % OF AVERAGE VALUE OF INVESTMENTS IN SHARE S/MF: (OPENING BALANCE 426956 + CLOSING BALANCE 8998750)/ 2= RS.4712853/- HOWEVER THE ASSESSEE HAS ALREADY DISALLOWED RS 10, 000/ - HENCE, AN AMOUNT OF RS. L3564/-IS DISALLOWED U/S. 14A R.W. RU LE 8D. RELIANCE IN THIS REGARD IS PLACED UPON THE FOLLOWING DECISIONS: 1. ITO VIS. DAGA CAPITAL MANAGEMENT PVT LTD. 1107 I TD 169 (MUM)(SB) 2. SOUTHERN PETROL CHEMICAL INDUSTRIES V/S. DC IT, 93 7TJ 161. 3. GODREJ & BOYCE MF G. CO. LTD. V/S. DC1T (ITA NO. 626 OF 20L0)(MUMBAI HIGH COURT)' 'DISALLOWANCE U/S 14AOF RS. 13,564 A. THE ASSESSEE HAD SURPLUS FUNDS WHICH WERE INVE STED IN SBI MUTUAL FUND- RETAIL WEEKLY DIVIDEND (RS. 16,91,665) AND SBI MUTU AL FUND-INSTITUTIONAL ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 5 - WEEKLY DIVIDEND (RS. 73,07,085). THE ASSESSEE HAD D ERIVED AN INCOME OF RS, 2,00,951 AS DIVIDEND FROM THE SAME, WHICH ARE EXEMP T. B. THE ASSESSEE HAD, AT THE TIME OF COMPUTING TAX ABLE INCOME, DISALLOWED AN AMOUNT OF RS. 10.000 AS EXPENDITURE RELATING TO THE SAID INCOME. THE AO APPLIED THE PROVISIONS OF SECTION 14A AND RULE 8D W ITHOUT LOOKING INTO THE FACTS OF THE CASE. C. THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF INVESTMENTS IN SHARES AND UNITS OF MUTUAL FUND. IT HAD SOME SURPLUS FUNDS WHI CH WERE NOT REQUIRED IMMEDIATELY AND HENCE WERE INVESTED IN THE UNITS OF MUTUAL FUND. D. FOR THE SAID PURPOSE, IT HAD AVAILED THE SERVI CES OF MARKETING EXECUTIVES OF THE CONCERNED MUTUAL FUNDS FOR DECIDING ABOUT THE T YPE OF MF TO BE INVESTED, COLLECTION OF CHEQUE, SUBMISSION OF FORM IN THIS R ESPECT ETC. IT IS COMMON PRACTICE AMONGST ALL THE MFS TO PROVIDE SUCH SERVICE. NO FEES ARE BEING CHARGED BY THE MF. C. AS CAN BE SEEN, THE ASSESSES HAS NOT INCURRED ANY EXPENDITURE AS SUCH FOR MAKING INVESTMENT IN MF HOWEVER,AS A MATTER OF ABUN DANT CAUTION IT HAD DISALLOWED IS 10,000 AND ADDED THE SAME TO ITS INCOME. F. IN THIS RESPECT, WE MAY POINT OUT THAT THE PRO VISIONS OF SECTION 14(2) REQUIRE THE AO TO EXAMINE THE FACTS OF THE CASE AND DETERMI NE THE AMOUNT OF EXPENDITURE TO BE DISALLOWED. IN THE EVENTUALITY OF IT BEING NOT POSSIBLE TO DO SO, TO APPLY THE PROVISIONS OF RULE 8D FOR COMPUTAT ION OF THE SAME. G. WE MAY POINT OUT THAT APPLICATION OF RULE 8D IS NOT AUTOMATIC. THE AO HAS TO LOOK INTO THE FACTS OF THE CASE. IT IS ONLY WHEN IT IS NOT POSSIBLE TO FIND OUT THE AMOUNT OF EXPENDITURE INCURRED FOR EARNING EXEMPT I NCOME, THE PROVISIONS OF RULE 8D ARE REQUIRED TO HE APPLIED. H. IN THE INSTANT CASE, THE AO HAS NOT LOOKED INT O THE MERITS OF THE AMOUNT TO BE DISALLOWED AND APPLIED THE PROVISION OF RULE 8SD . I. CONSIDERING THE FACTS OF THE CASE THE AMOUNT DISALLOWED BY THE ASSESSES IS REASONABLE. ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 6 - J. IN VIEW OF THIS, YOU ARE REQUESTED TO DELETE THE ADDITION MADE ON THIS COUNT.' 4. DURING THE ASSESSMENT PRECEDING, IT WAS NOTICED BY THE AO THAT THE DETAILS FILED BY THE ASSESSEE, IT WAS NOTICED FROM THE COMPUTATION OF INCOME THAT ASSESSEE HAS CLAIMED EXPENSES OF RS.1,47,153/- WHICH WAS INCURRED IN CONNECTION WITH REDUCTION OF AUTHORIZED SHARE CAPIT AL OF THE COMPANY. ACCORDINGLY, A SHOW CAUSE NOTICE WAS GIVEN TO THE A SSESSEE FILED ITS CONTENTION BUT NOT FOUND ACCEPTABLE. ADMITTEDLY THE ASSESSEE C OMPANY HAS INCURRED THE EXPENDITURE FOR REDUCTION IN EQUITY SHARE CAPITAL O F THE COMPANY. AS HAS BEEN HELD BY VARIOUS JUDICIAL DECISIONS ANY INCREASE IN THE AUTHORIZED SHARE CAPITAL HAS AN ENDURING BENEFIT TO THE ASSESSEE AND THEREFO RE THE CONVERSE IS ALSO TRUE I.E. THE EXPENDITURE FOR REDUCTION IN EQUITY SHARE CAPITAL OF THE COMPANY HAS ALSO AN ENDURING BENEFIT TO THE ASSESSEE. THEREFORE , THE EXPENDITURE IS OF CAPITAL RATHER THAN THAT OF REVENUE. THE ASSESSEE HAS DEBIT ED AN AMOUNT OF RS.1,47,153/- IN THIS YEAR. AS THE EXPENDITURE CANN OT BE CLAIMED AS REVENUE EXPENDITURE, THE SAME WAS DISALLOWED AS WELL AS PEN ALTY PROCEEDINGS U/S. 271(1)(C) R.W.S. 274 WERE ALSO INITIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS. 5. AND FINALLY, LD.AO MADE THE DISALLOWANCES OF RS. 1,01,065/- WERE ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE AND PENALTY PROCEEDINGS U/S. 271(1)(C) R.W.S. 274 WERE ALSO INITIATED. AGAINST T HE SAID ORDER APPELLANT PREFERRED FIRST STATUTORY APPEAL BEFORE THE LD.CIT( A), BUT LD.CIT(A) PARTLY ALLOWED THE APPEAL OF THE APPELLANT. 6. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMP UGNED ORDER CONFIRMING DISALLOWANCE OF RS.1,47,153/- BEING EXPE NDITURE INCURRED REDUCTION OF SHARE HAVE BEEN GIVEN IN PAGE NOS.5 & 6 AND PARA NO. 5 & 6 OF THE CIT(A) ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 7 - AND ASSESSEE COMPANY APPLIED TO THE GUJARAT HIGH CO URT FOR REDUCTION AUTHORIZED SHARE CAPITAL AND INCURRED AN EXPENDITUR E OF RS.1,47,153/- FOR REDUCTION OF AUTHORIZED SHARE OF THE COMPANY. 7. LD. AO RELIED ON DECISION HOLDING THAT EXPENDITU RE ON INCREASE IN SHARE CAPITAL IS A CAPITAL EXPENDITURE AND APPLYING THE S AME CONVERSELY AND AO DISALLOWED THE EXPENSE. 8. THEREAFTER, CIT(A) UPHELD THE DISALLOWANCE ON TH E BASIS THAT CHANGE IN SHARE CAPITAL ONLY AFFECTS CAPITAL OF THE COMPANY A ND DOES NOT AFFECT REVENUE. 9. LD.CIT(A) ALSO RELIED ON A JUDGMENT IN THE CONTE XT OF INCREASE IN SHARE CAPITAL TO DISALLOW THE EXPENSE AND EXPENSE INCURRE D IN REDUCTION OF SHARE CAPITAL IS A REVENUE EXPENSE AS IT DOES NOT GIVE TH E COMPANY A BENEFIT OF ENDURING NATURE. AS HELD IN THE MATTER OF CIT VS. A KME ELECTRONICS & CONTROL (P.) LTD. [2004] 137 TAXMAN 263 (GUJ.) IT IS HELD B Y THE HONBLE HIGH COURT, THE LEGAL EXPENSES CLAIMED BY ASSESSEE FOR AMALGAMA TION WITH ANOTHER COMPANY ARE REVENUE IN NATURE. IT HELD THAT THE EXP ENSES WERE ALLOWABLE AS REVENUE EXPENDITURE. 10. ITS PROCEDURE FOR REDUCTION IN SHARE CAPITAL (S ECTION 100-104 OF THE COMPANIES ACT, 1956) AND FOR AMALGAMATION (SECTION 390-394 OF THE COMPANIES ACT, 1956) ARE SIMILAR AS THEY BOTH REQUI RE APPLICATION TO AND SANCTION OF THE HIGH COURT AND REQUIREMENT WITH RES PECT TO DISCLOSURES ARE SIMILAR. EVEN THE POWERS OF THE HIGH COURT WITH RES PECT TO THE TWO PROCEDURES ARE SIMILAR. LD.AR ALSO SUBMITTED A COPY OF THE ITA T KOLKATA IN ACIT VS. BRITANNIA INDUSTRIES LTD. ITA NO.1789/KOL/2008 DATE D 31/08/2010 IT HAS BEEN HELD THAT EXPENSES INCURRED FOR BUY BACK OF SHARES ARE REVENUE EXPENSES BECAUSE THERE IS NO PERMANENT CHANGE IN THE CAPITAL STRUCTURE OF THE COMPANY, NOR A BENEFIT OF ENDURING NATURE AND THE PURCHASES ARE EFFECTED FOR COMPANYS ITA NO.2634/AHD /2013 VIBGYOR SCIENTIFIC RESEARCH PVT.LTD. VS. THE DCIT ASST.YEAR 2010-11 - 8 - FREE RESERVES WHICH ARE OTHERWISE CAPABLE OF BEING FREELY DISTRIBUTED TO THE SHAREHOLDERS. IT WAS FURTHER SUBMITTED THAT REDUCTI ON IN SHARE CAPITAL AND BUY BACK ARE ESSENTIALLY THE SAME AND NEITHER RESULT IN A BENEFIT OF ENDURING NATURE AS WELL AS SECTION 77 OF THE COMPANIES ACT, 1956 PR ESCRIBES THE SAME PROCEDURE FOR BUY BACK AND REDUCTION IN THE CASE OF LIMITED COMPANIES. FOR THESE REASONS, THE DECISION OF THE ITAT KOLKATA WOU LD BE APPLICABLE TO THE ASSESSEES CASE AS THERE IS NO PERMANENT CHANGE IN CAPITAL EXPENDITURE. 11. THEREFORE, ORDER OF THE CIT(A) IS SET ASIDE AND APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. THIS ORDER PRONOUNCED IN OPEN COURT ON 21/12/2016 SD/- SD/- .. ( ) ( ) ( N.K. BILLAIYA ) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 21/12/2016 !#$ %$ / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. (' / THE RESPONDENT. 3. 6 8 / CONCERNED CIT 4. 8 ( ) / THE CIT(A)-I, AHMEDABAD 5. 9 6 , . 6 , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, (9 //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD