Swelect Energy Systems Ltd., CHENNAI V. DCIT Corporate Circle 6(2), CHENNAI

ITA 2652/CHNY/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 6022 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 07-04-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 14-09-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R ANITA
• Assessee Lawyers: S SRIDHAR
• Keywords: Principle of natural justice; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . , , BEFORE SHRI DUVVURU RL REDDY, JUDICIAL MEMBER & SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NO.2652/CHNY/2018 / ASSESSMENT YEAR: 2014-15 M/S. SWELECT ENERGY SYSTEM LTD., NO. 5, NUMERIC HOUSE, SIR P.S. SIVASAMI SALAI, MYLAPORE, CHENNAI - 600 004. [PAN: AAACN2366F] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -6(2), CHENNAI. ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE / RESPONDENT BY : MS. R. ANITA, JCIT / DATE OF HEARING : 07.04.2021 /DATE OF PRONOUNCEMENT : 19.04.2021 / O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI, DATED 29.06.2018 RELEVANT TO THE ASSESSMENT YEAR 2014-15. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 15, CHENNAI DATED 29.06.2018 IN I.T.A.NO.517/2016-17//CIT(A)-15 FOR THE ABOVE MENTIONED ASSESSMENT YEAR IS CONTRARY TO LAW, FACTS, AND IN THE CIRCUMSTANCES OF THE CASE. 2. THE CIT (APPEALS) ERRED IN SUSTAINING THE DISALLOWANCE OF NOTIONAL EXPENSES AGGREGATING TO RS.2,49,84,018/- (RS.2,51, 76,518 - RS.1,92,500) FOR MAINTAINING TAX FREE PORTFOLIO/FOR EARNING TAX FREE INCOME TO THE EXTENT OF RS,3,74,62,711/- ON THE APPLICATION OF SECTION 14A OF THE ACT READ WITH RULE 8D I.T.A. NO. 2652/CHNY/18 2 OF THE INCOME TAX RULES, 1962 IN THE COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 3. THE CIT (APPEALS) FAILED TO APPRECIATE THAT THE PROVISIONS OF SECTION 14A OF THE ACT HAD NO APPLICATION TO THE FACTS OF THE CASE AND OUGHT TO HAVE APPRECIATED THAT HAVING NOT RECORDED THE REQUISITE SATISFACTION ON THE INADEQUACY OF THE SUO MOTO DISALLOWANCE OF EXPENSES TO THE EXTENT OF RS.1,92,500/-, THE CONSEQUENTIAL APPLICATION OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 WAS WRONG, ERRONEOUS, UNJUSTIFIED, INCORRECT AND NOT SUSTAINABLE IN LAW. 4. THE CIT (APPEALS) FAILED TO APPRECIATE THAT IN ANY EVENT THE SUSTENANCE OF THE NOTIONAL EXPENSES AS PER RULE 8D OF THE INCOME TAX RULES, 1962 ON VARIOUS FACETS WAS WRONG, ERRONEOUS, UNJUSTIFIED, INCORRECT AND NOT SUSTAINABLE IN LAW. 5. THE CIT (APPEALS) FAILED TO APPRECIATE THAT HAVING NOTICED THE INVESTMENTS IN SHARES OF SUBSIDIARY/ASSOCIATE COMPANIES OUT OF NON INTEREST BEARING FUNDS/INTERNAL ACCRUALS, THE CONSEQUENTIAL QUANTIFICATION OF NOTIONAL EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES, 1962 WAS WHOLLY INCORRECT AND OUGHT TO HAVE APPRECIATED THAT SUCH INVESTMENTS FROM NON INTEREST BEARING FUNDS/INTERNAL ACCRUALS SHOULD BE RECKONED OUTSIDE THE SCOPE OF THE QUANTIFICATION PROCESS AS ENVISAGED IN THE SAID RULE 8D OF THE INCOME TAX RULES, 1962 FOR MAKING THE DISALLOWANCE OF NOTIONAL EXPENSES. 6. THE CIT (APPEALS) FAILED TO APPRECIATE THAT THE FINANCIAL STATEMENTS AND RELEVANT FACTS PERTAINING TO THE ISSUE ON HAND WERE COMPLETELY OVERLOOKED AND BRUSHED ASIDE AND OUGHT TO HAVE APPRECIATED THAT THE QUANTIFICATION OF NOTIONAL EXPENSES FOR MAKING DISALLOWANCE IN THE COMPUTATION OF TAXABLE TOTAL INCOME WAS WRONG, ERRONEOUS, UNJUSTIFIED, INCORRECT AND NOT SUSTAINABLE IN LAW. 7. THE CIT (APPEALS) WENT WRONG IN RECORDING THE FINDINGS IN THIS REGARD FROM PARA 4.3 OF THE IMPUGNED ORDER WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 8. THE CIT (APPEALS) FAILED TO APPRECIATE THAT THERE WAS NO PROPER OPPORTUNITY GIVEN BEFORE PASSING OF THE IMPUGNED ORDER AND ANY ORDER PASSED IN VIOLATION OF THE PRINCIPLES NATURAL JUSTICE WOULD BE NULLITY IN LAW. 9. THE APPELLANT CRAVES LEAVE TO FILE ADDITIONAL GROUNDS/ARGUMENTS AT THE TIME OF HEARING. 2. THE APPEAL FILED BY THE ASSESSEE IS DELAYED BY NINE DAYS, FOR WHICH, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED A PETITION IN SUPPORT OF AN AFFIDAVIT I.T.A. NO. 2652/CHNY/18 3 FOR CONDONATION OF THE DELAY, TO WHICH; THE LD. DR HAS NOT RAISED ANY SERIOUS OBJECTION. CONSEQUENTLY, SINCE THE ASSESSEE WAS PREVENTED BY SUFFICIENT CAUSE, THE DELAY OF NINE DAYS IN FILING OF THE APPEAL STANDS CONDONED AND ADMITTED THE APPEAL FOR ADJUDICATION. 3. FACTS LEADING THE GROUND OF DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ACT IN SHORT] ARE THAT THE ASSESSEE GAS EARNED A DIVIDEND INCOME OF .37,50,000/- AND DISALLOWED AN AMOUNT OF .1,92,500/- AS EXPENDITURE TO EARN THE EXEMPTED INCOME. THE ASSESSEE HAS NONCURRENT INVESTMENTS AMOUNTING TO .107,03,85,843/- AND CURRENT INVESTMENTS AMOUNTING TO .285,97,20,313/- AS ON 31.03.2014. AFTER RECORDING THE SATISFACTION ON THE VOLUNTEER DISALLOWANCE OF THE ASSESSEE THAT IT WAS UNREALISTIC TO STATE THAT ONLY .1,92,500/- WAS MADE AS EXPENSES TO MAINTAIN THE INVESTMENT AMOUNT OF .393,01,06,156/-, BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D, THE ASSESSING OFFICER DETERMINED THE DISALLOWANCE OF EXPENSES AT .2,51,76,518/- AND DISALLOWED .2,49,84,018/- AFTER REDUCING THE AMOUNT DISALLOWED BY THE ASSESSEE. ON APPEAL, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE UNDER SECTION 14A R.W. RULE 8D. 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. BY RELYING ON THE GROUNDS OF APPEAL, THE LD. COUNSEL FOR THE ASSESSEE HAS I.T.A. NO. 2652/CHNY/18 4 SUBMITTED THAT THE ASSESSEE HAS VOLUNTARILY DISALLOWED THE EXPENDITURE ATTRIBUTABLE FOR MAINTAINING THE INVESTMENTS OF PREVIOUS YEAR AS WELL AS MAKING CURRENT YEAR INVESTMENTS, THE LD. CIT(A) HAS ERRONEOUSLY CONFIRMED THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT AND PRAYED FOR DELETING THE ADDITION BY FILING COPY OF THE ORDER OF THE TRIBUNAL IN I.T.A. NO. 2533/CHNY/2017 DATED 05.10.2020 IN THE CASE OF KOLLUR SREENIVASAN KANNAN V. ITO. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 5. WE HAVE HEARD BOTH THE SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW INCLUDING THE BALANCE SHEET FILED BY THE ASSESSEE. IT IS AN ADMITTED FACT THAT THE ASSESSEE MADE THE INVESTMENTS OUT OF RESERVES AND SURPLUS AND THE SAME WAS NOT DISPUTED. THE ASSESSEE HAS EARNED EXEMPTED INCOME OF . 37,50,000/- AND THE ASSESSEE HAS ALSO VOLUNTARILY DISALLOWED THE EXPENDITURE OF .1,92,500/- TO EARN THE EXEMPTED INCOME. THE ASSESSING OFFICER HAS NOT DISCUSSED ANYTHING AS TO WHY THE EXPENDITURE DECLARED BY THE ASSESSEE WAS NOT REALISTIC FOR MAINTAINING THE INVESTMENTS. THERE MAY NOT BE MUCH DIFFERENCE ON THE QUANTUM OF WORK FOR MAKING ONE RUPEE INVESTMENT OR ONE HUNDRED CRORES OR MAINTAINING THE EXISTING INVESTMENTS. ONCE THE ASSESSEE HAS ADMITTED THE EXPENSES FOR EARNING THE EXEMPT INCOME AND IT WAS NOT EXPLAINED AS TO HOW THE SAID EXPENSES MAY NOT BE REALISTIC, THE ASSESSING I.T.A. NO. 2652/CHNY/18 5 OFFICER WAS NOT CORRECT TO MAKE DISALLOWANCE UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES AND ACCORDINGLY, THE DISALLOWANCE MADE UNDER RULE 8D(2)(II) STANDS DELETED. 6. SO FAR AS DISALLOWANCE UNDER RULE 8D(2)(III) IS CONCERNED, THE ASSESSING OFFICER IS DIRECTED TO CONSIDER ONLY THOSE INVESTMENTS FOR COMPUTING AVERAGE VALUE OF INVESTMENT WHICH YIELDED EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION AS PER RULE 8D(2)(III) IN VIEW OF THE DELHI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. VIREET INVESTMENT (P) LTD. (2017) 165 ITD 27 (DELHI)(SB) AND TO PASS DETAILED ORDER. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 19 TH APRIL, 2021 IN CHENNAI. SD/ - SD/ - (S. JAYARAMAN) ACCOUNTANT MEMBER (DUVVURU RL REDDY) JUDICIAL MEMBER CHENNAI, DATED, 19.04.2021 VM/- /COPY TO: 1. / APPELLANT, 2. / RESPONDENT, 3. ( ) /CIT(A), 4. /CIT, 5. /DR & 6. /GF.