The Tamilnad Road Ddevelopment Company Limited, CHENNAI V. DCIT Corporate Circle 3(1), CHENNAI

ITA 2721/CHNY/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5596 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 24-09-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: M VISWANATHAN
• Keywords: Business expenditure; Earning of tax free income
• Section: 142(1); 14A

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . , . , BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I T.A. NO. 2721/CHNY/2018 / ASSESSMENT YEAR :2014-15 THE TAMILNADU ROAD DEVELOPMENT COMPANY LIMITED, NO. 171, II FLOOR, SOUTH KESAVA PERUMAL PURAM, PASUMPON MUTHURAMALINGAM ROAD (GREENWAYS ROAD), R.A. PURAM, CHENNAI 600 028. [PAN:AABCT3389H] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 3(1), CHENNAI 600 034. ( /APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI M. VISWANATHAN, C.A. / RESPONDENT BY : SHRI AR.V. SREENIVASAN, JCIT / DATE OF HEARING : 21.01.2019 /DATE OF PRONOUNCEMENT : 31.01.2019 / 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) 11, CHENNAI DATED 29.06.2018 RELEVANT TO THE ASSESSMENT YEAR 2014-15. THE ONLY EFFECTIVE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF .17,02,500/- MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 [ACT IN SHORT]. I.T.A. NO.2721/CHNY/18 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2014-15 ON 25.09.2014 DECLARING AN AMOUNT OF .8,10,00,146/-. THE CASE WAS SELECTED FOR SCURITNY UNDER CASS AND A NOTICE UNDER SECTION 143(2) OF THE ACT DATED 03.09.2015 WAS SERVED ON THE ASSESSEE AND FURTHER A NOTICE UNDER SECTION 142(1) OF THE ACT WAS ALSO ISSUED. FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT IN THE INVESTMENT PORTFOLIO OF THE ASSESSEE AS ON 31.03.2014 STANDS AT AN AGGREGATE VALUE OF .34,05,00,000/-. HOWEVER, THE ASSESSEE HAS NOT QUANTIFIED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W. RULE 8D. THE ASSESSEE WOULD NECESSARILY HAVE TO INCUR EXPENDITURE OF ADMINISTRATIVE/MANAGERIAL NATURE TO MONITOR THE HUGE VOLUME OF INVESTMENT PORTFOLIO. ACCORDINGLY, THE ASSESSING OFFICER DETERMINED THE EXPENDITURE TO EXTENT OF .17,02,500/- UNDER SECTION 14A OF THE ACT R.W. RULE 8D AND BROUGHT TO TAX. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING THE LATEST DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT TAXSUTRA SC 2018 [IN CIVIL APPEAL NOS. 104-109 OF 2015 DATED 12.02.2018], THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. I.T.A. NO.2721/CHNY/18 3 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. BY RELYING UPON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD. V. ADDL. CIT 392 ITR 633, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME AND THEREFORE, NO DISALLOWANCE COULD BE MADE AND PRAYED THAT THE DISALLOWANCE SHOULD BE DELETED. 5. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND RELIED UPON THE LATEST DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT (SUPRA). 6. WE HAVE HEARD BOTH THE SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THIS CASE, ADMITTEDLY, THE ASSESSEE HAS MADE INVESTMENT IN SUBSIDIARY AND AS PER PRIVATE PUBLIC PARTNERSHIP AGREEMENT, THE STRATEGIC INVESTMENT CANNOT YIELD ANY DIVIDEND INCOME. HOWEVER, THE ASSESSEE HAS NOT QUANTIFIED THE EXPENDITURE REQUIRED FOR MONITORING THE HUGE VOLUME OF INVESTMENT PORTFOLIO. ACCORDINGLY, THE ASSESSING OFFICER DETERMINED THE EXPENDITURE AND DISALLOWED THE SAME. BY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT (SUPRA), THE LD. CIT(A) CONFIRMED THE DISALLOWANCE. WE HAVE ALSO PERUSED THE DECISION IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT (SUPRA), WHEREIN, THE HONBLE SUPREME COURT HAS OBSERVED AND HELD AS UNDER: I.T.A. NO.2721/CHNY/18 4 31) WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE ARGUMENT OF COUNSEL FOR THE PARTIES ON BOTH SIDES, IN THE LIGHT OF VARIOUS JUDGMENTS WHICH HAVE BEEN CITED BEFORE US, SOME OF WHICH HAVE ALREADY BEEN TAKEN NOTE OF ABOVE. 32) IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNISED THAT AS PER SECTION 14A(1) OF THE ACT, DEDUCTION OF THAT EXPENDITURE IS NOT TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDIBLE IN TOTAL INCOME THAT HAS TO BE DISALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WITH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELATED TO THE INCOME THAT IS EXEMPTED FROM TAX, AND SUCH EXPENDITURE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFERENTLY, SUCH EXPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED AS PART OF THE TOTAL INCOME. 33) THERE IS NO QUARREL IN ASSIGNING THIS MEANING TO SECTION 14A OF THE ACT. IN FACT, ALL THE HIGH COURTS, WHETHER IT IS THE DELHI HIGH COURT ON THE ONE HAND OR THE PUNJAB AND HARYANA HIGH COURT ON THE OTHER HAND, HAVE AGREED IN PROVIDING THIS INTERPRETATION TO SECTION 14A OF THE ACT. THE ENTIRE DISPUTE IS AS TO WHAT INTERPRETATION IS TO BE GIVEN TO THE WORDS IN RELATION TO IN THE GIVEN SCENARIO, VIZ. WHERE THE DIVIDEND INCOME ON THE SHARES IS EARNED, THOUGH THE DOMINANT PURPOSE FOR SUBSCRIBING IN THOSE SHARES OF THE INVESTEE COMPANY WAS NOT TO EARN DIVIDEND. WE HAVE TWO SCENARIOS IN THESE SETS OF APPEALS. IN ONE GROUP OF CASES THE MAIN PURPOSE FOR INVESTING IN SHARES WAS TO GAIN CONTROL OVER THE INVESTEE COMPANY. OTHER CASES ARE THOSE WHERE THE SHARES OF INVESTEE COMPANY WERE HELD BY THE ASSESSEES AS STOCK-IN-TRADE (I.E. AS A BUSINESS ACTIVITY) AND NOT AS INVESTMENT TO EARN DIVIDENDS. IN THIS CONTEXT, IT IS TO BE EXAMINED AS TO WHETHER THE EXPENDITURE WAS INCURRED, IN RESPECTIVE SCENARIOS, IN RELATION TO THE DIVIDEND INCOME OR NOT. 34) HAVING CLARIFIED THE AFORESAID POSITION, THE FIRST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS TO WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SERVICE BY THE ASSESSEES WOULD APPLY WHILE INTERPRETING SECTION 14A OF THE ACT OR WE HAVE TO GO BY THE THEORY OF APPORTIONMENT. WE ARE OF THE OPINION THAT THE DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSESSEE LIKE MAXOPP INVESTMENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GAIN CONTROL OF THE INVESTEE COMPANY. HOWEVER, THAT DOES NOT APPEAR TO BE A RELEVANT FACTOR IN DETERMINING THE ISSUE AT HAND. FACT REMAINS THAT SUCH DIVIDEND INCOME IS NON- TAXABLE. IN THIS SCENARIO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INCOME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. KEEPING THIS OBJECTIVE BEHIND SECTION14A OF THE ACT IN MIND, THE SAID PROVISION HAS TO BE INTERPRETED, PARTICULARLY, THE WORD IN RELATION TO THE INCOME THAT DOES NOT FORM PART OF TOTAL INCOME. CONSIDERED IN THIS HUE, THE I.T.A. NO.2721/CHNY/18 5 PRINCIPLE OF APPORTIONMENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPLE WHICH IS ENGRAINED IN SECTION 14A OF THE ACT. THIS IS SO HELD IN WALFORT SHARE AND STOCK BROKERS P LTD., RELEVANT PASSAGE WHEREOF IS ALREADY REPRODUCED ABOVE, FOR THE SAKE OF CONTINUITY OF DISCUSSION, WE WOULD LIKE TO QUOTE THE FOLLOWING FEW LINES THEREFROM. THE NEXT PHRASE IS, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. XXX XXX XXX THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14 A. 35) THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBSERVED THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE ACT, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMENTS OF BOTH TAXABLE AND NON-TAXABLE INCOME, THE ENTIRE EXPENDITURE IN RESPECT OF SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. THE PRINCIPLE OF APPORTIONMENT WAS MADE AVAILABLE ONLY WHERE THE BUSINESS WAS DIVISIBLE. IT IS TO FIND A CURE TO THE AFORESAID PROBLEM THAT THE LEGISLATURE HAS NOT ONLY INSERTED SECTION 14A BY THE FINANCE (AMENDMENT) ACT, 2001 BUT ALSO MADE IT RETROSPECTIVE, I.E., 1962 WHEN THE INCOME TAX ACT ITSELF CAME INTO FORCE. THE AFORESAID INTENT WAS EXPRESSED LOUDLY AND CLEARLY IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2001. WE, THUS, AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT, AND ARE NOT INCLINED TO ACCEPT THE OPINION OF PUNJAB & HARYANA HIGH COURT WHICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID REASONING WOULD BE APPLICABLE IN CASES WHERE SHARES ARE HELD AS INVESTMENT IN THE INVESTEE COMPANY, MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTEREST THEREIN. ON THAT REASONING, APPEALS OF MAXOPP INVESTMENT LIMITED AS WELL AS SIMILAR CASES WHERE SHARES WERE PURCHASED BY THE ASSESSEES TO HAVE CONTROLLING INTEREST IN THE INVESTEE COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSED. 6.1 FROM THE ABOVE JUDGEMENT OF THE HONBLE SUPREME COURT, IT IS AMPLY CLEAR THAT ANY INVESTMENTS MADE IN THE SUBSIDIARY, WHICH MAY NOT BE FOR THE PURPOSE OF EARNING DIVIDEND AND MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTEREST THEREIN, SHALL ATTRACT THE PROVISIONS OF SECTION 14A READ WITH RULE 8D. I.T.A. NO.2721/CHNY/18 6 6.2 THE RELIANCE PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF REDIGNTON INDIA LTD., WHEREIN, IT WAS HELD THAT NO DISALLOWANCE COULD BE MADE WHEN NO EXEMPT INCOME IS EARNED BY THE ASSESSEE HAS NO LEGS TO STAND ONCE THE HONBLE SUPREME COURT HAS SUBSEQUENTLY GIVEN A DETAILED JUDGEMENT IN THE MATTERS OF SECTION 14A OF THE ACT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT (SUPRA), WHICH AUTOMATICALLY SUPERSEDES ALL EXISTING DECISIONS OF THE HONBLE HIGH COURTS. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE SUSTAIN THE DISALLOWANCE CONFIRMED BY THE LD. CIT(A). THUS, THE GROUND RAISED BY THE ASSESSEE STANDS DISMISSED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 31 ST JANUARY, 2019 AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (DUVVURU RL REDDY) JUDICIAL MEMBER CHENNAI, DATED, THE 31.01.2019 VM/- /COPY TO: 1. / APPELLANT, 2. / RESPONDENT, 3. ( ) /CIT(A), 4. /CIT, 5. /DR & 6. /GF.