M/s. Medident India Pvt. Ltd., CHENNAI V. ITO, CHENNAI

ITA 2819/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7889 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 29-12-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 29-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K.JAYASHREE
• Keywords: Principle of natural justice; Earning of tax free income; Assessment record; Rule 8D
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI . . . , !'. . # $ % , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.2819/MDS/2016 * +* /ASSESSMENT YEAR: 2012-13 M/S.MEDIDENT INDIA PVT. LTD., NO.32, NELSON MANICKAM ROAD, AMINIJIKARAI, CHENNAI 600 029 VS. THE COMMISSIONER OF INCOME TAX (APPEALS)-8, CHENNAI. [PAN: AAACM 2421 J ] ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MS.K.JAYASHREE, CA ./,- 0 1 /RESPONDENT BY : MR.V. NANDAKUMAR, JCIT # 0 2' /DATE OF HEARING : 29.12.2016 34+ 0 2 ' /DATE OF PRONOUNCEMENT : 31.01.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DATED 26.07.2016 OF COMMISSIONER OF INCOME TAX (APPEALS) -8, CHENNAI, IN ITA NO.11/2015-16 FOR THE AY 2012-13 AND RAISED THE FOL LOWING GROUNDS: 1. THE ORDER OF THE ASSESSING OFFICER IS WITHOUT JURISD ICTION, IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE AND IS OPPOSED TO THE PRI NCIPLES OF NATURAL JUSTICE, EQUITY AND FAIR PLAY. ITA NO.2819/MDS/2016 :- 2 -: 2. FOR THAT THE ASSESSING OFFICER ERRED IN DISALLOWING RS 6,50,852 U/S.14A READ WITH RULE 8D WITH RESPECT TO INVESTMENTS MADE BY THE APPELLAN T COMPANY IN THE SHARES OF ANOTHER COMPANY WHEN THERE WAS NO EXEMPT INCOME CLA IMED BY THE ASSESSEE IN ITS INCOME TAX RETURNS FOR THE AY 2012-13. 3. FOR THAT WITHOUT PREJUDICE TO THE ABOVE, THE ASSESS ING OFFICER OUGHT NOT HAVE DISALLOWED THE ABOVE AMOUNT AS THERE WERE NO INVEST MENTS IN SHARES THAT WERE MADE DURING THE YEAR UNDER CONSIDERATION AND HENCE HAD N O NEXUS WITH THE INTEREST BEARING FUNDS USED BY THE COMPANY DURING THE CURRENT YEAR. 4. FOR THESE GROUNDS AND SUCH OTHER GROUNDS THAT MAY B E ADDUCED BEFORE OR DURING THE HEARING OF THIS APPEAL WITH THE LEAVE OF THIS RESPE CTFUL AUTHORITY, IT IS PRAYED THAT THIS RESPECTFUL AUTHORITY MAY BE PLEASED TO A) DELETE THE DISALLOWANCE OF RS 6,50,852 U/S 1 4A REA D WITH RULE 8D B) PASS SUCH OTHER ORDERS AS THIS RESPECTFUL AUTHORITY MAY DEEM FIT. 2.0 ALL THE GROUNDS OF THE APPEAL ARE RELATED TO THE D ISALLOWANCE OF RS.6,50,852/- U/S.14A OF THE INCOME TAX ACT (IN SHO RT THE ACT) R.W. RULE 8D OF INCOME TAX RULES. DURING THE ASSESSMENT PROC EEDINGS, THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS AO) FOUND THAT THE ASSESSEE HAD INVESTED AN AMOUNT OF RS.2,60,00,000/- AS SHARE S IN M/S.MAHTANI CLOTHING COMPANY PVT. LTD. BUT NOT DISALLOWED THE E XPENDITURE RELATABLE TO INVESTMENT MADE IN SHARES. SINCE THE INVESTMENT IN SHARES YIELDS DIVIDEND INCOME WHICH IS EXEMPT U/S14A, THE A.O INVOKED THE PROVISIONS OF SEC.14A R.W. RULE 8D(2)(II) OF INCOME TAX RULES AND DISALLOWED A SUM OF RS.6,50,852/- RELATING TO THE INTEREST. 3.0 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WE NT ON APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) [HEREINAFTER REFERRED TO AS LD.CIT(A)] AND THE LD.CIT(A) CONFI RMED THE ADDITION PLACING RELIANCE ON THE DECISIONS OF THE HONBLE HI GH COURT OF BOMBAY IN ITA NO.2819/MDS/2016 :- 3 -: THE CASE OF GODREJ & BOYCE MFG. CO. LTD (SUPRA) AND THE JURISDICTIONAL BENCH OF THE HONBLE ITAT IN THE CASE OF ACIT VS. S UN TV NETWORKS LIMITED. 4.0 DURING THE APPEAL THE LEARNED AUTHORIZED REPRESENT ATIVE (HEREINAFTER REFERRED TO AS LD.AR) ARGUED THAT TH E AO DISALLOWED A SUM OF RS.6,50,852/- DURING PERIOD OF INVESTMENT THERE WER E NO BORROWED FUNDS AND THE ASSESSEE HAS NOT INVESTED THE BORROWED FUND S FOR THE PURPOSE OF INVESTMENTS, SHE ARGUED THAT SINCE THE INVESTMENT W AS MADE OUT OF ASSESSEES OWN FUNDS NO DISALLOWANCE U/S.8D OF INCO ME TAX RULES IS CALLED FOR. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL R EPRESENTATIVE (HEREINAFTER REFERRED TO AS LD.DR) RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 5.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MA TERIAL PLACED ON RECORD. THE LD. CIT(A) CONFIRMED THE ADDITION AS PE R THE FOLLOWING OBSERVATIONS. 4.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT. THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD ., (328 ITR 81)(BOM.) WHEREIN WHILE UPHOLDING THE CONSTITUTIONAL VALIDITY OF SECTION 14 A READ WITH RULE 8D ALSO OBSERVED THAT THE ARGUMENT THAT INVESTMENT YIELDING TAX FREE DIVI DEND INCOME HAS BEEN MADE OUT OF THE OWN FUNDS, SO THAT NO INTEREST EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE DIVIDEND INCOME, WAS NO LONGER DISPOSITIVE OF THE MATTER, AN D THAT, EVEN SO, A DISALLOWANCE IN RESPECT OF INTEREST WOULD HAVE TO BE MADE, AND NO P RESUMPTION OF INVESTMENT OF OWN FUNDS, ON GROUND OF ITS SUFFICIENCY, COULD BE DRAWN , DISTINGUISHING ITS OWN DECISION IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. [200 9] 313 ITR 340/178 TAXMAN 135 (BORN.) ITS RE1EVAT OBSERVATIONS (AT PLACITUM 5, PG. 135) R EADING AS UNDER: IN ALL THESE DECISIONS, THE TRIBUNAL HELD THAT NO N EXUS HAD BEEN ESTABLISHED BETWEEN BORROWED FUNDS AND INVESTMENTS BY THE ASSES SEE IN DIVIDEND-YIELDING SHARES/INCOME-YIELDING MUTUAL FUNDS. NOW ASSUMING T HAT THIS IS SO, THE ONLY ITA NO.2819/MDS/2016 :- 4 -: CONCLUSION WHICH EMERGES IS THAT THE ASSESSEE HAD U TILIZED ITS OWN FUNDS FOR THE PURPOSE OF MAKING THE INVESTMENTS. THE FACT THAT TH E ASSESSEE HAS UTILIZED ITS OWN FUNDS IN MAKING THE INVESTMENTS WOULD NOT BE DISPOS ITIVE OF THE QUESTION AS TO WHETHER THE ASSESSEE HAD INCURRED EXPENDITURE IN RE LATION TO THE EARNING OF SUCH INCOME. EVEN IF THE ASSESSEE HAS UTILIZED ITS OWN F UNDS FOR MAKING INVESTMENTS WHICH HAVE RESULTED IN INCOME WHICH DOES NOT FORM P ART OF THE TOTAL INCOME UNDER THE ACT, THE EXPENDITURE WHICH IS INCURRED IN THE E ARNING OF THAT INCOME WOULD HAVE TO BE DISALLOWED. THAT IS EXACTLY A MATTER WHICH TH E AO HAS TO DETERMINE. SECONDLY, AS REGARDS THE ARGUMENT THAT THE INVESTME NTS HAVE BEEN MADE FOR STRATEGIC PURPOSES IN APPELLANTS GROUP ENTITIES IS CONCERNED, IT IS PERTINENT TO REFER TO THE DECISION OF THE JURISDICTIONAL BENCH OF HON BLE ITAT IN THE CASE OF ACIT VS. SUN TV NETWORKS LIMITED IN ITA NOS.1515 TO 1520/ MD S/2013 DATED 31/10/2013. THE CHENNAI A BENCH IN ITS DECISION OBSERVED AS F OLLOWS: IN THE APPEALS THERE IS ANOTHER ISSUE WITH RESPECT TO DISALLOWANCE U/S. 14A READ WITH RULE 8D. THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE INVESTMENTS WERE NOT MADE BY THE ASSESSEE FOR BUSINESS PURPOSES AND THEREFORE, ARE NOT BEING TREATED AS TRADE INVESTMENTS. MOREOVER, THE INVESTM ENTS IN SUBSIDIARY COMPANIES WERE MADE OUT OF THE FUNDS RAISED THROUGH PUBLIC IS SUE AND NOT OUT OF BORROWED FUNDS. THE ID. DR HAS CONTENDED THE ASSESSEE HAS MA DE HUGE INVESTMENT DURING THE YEAR UNDER CONSIDERATION; THE ASSESEE MUST HAVE INCURRED CERTAIN EXPENDITURE TOWARDS ADMINISTRATIVE EXPENSES, CONSULTING CHARGES AND MANAGERIAL EXPENSES. THE ASSESSING OFFICER HAS RIGHTLY INVOKED THE PROVISIONS OF RULE 8D(III) OF THE ACT. WE ARE OF THE CONSIDERED OPINION THAT WHETHER THE I NVESTMENTS HAVE BEEN MADE FOR STRATEGIC PURPOSES OR OTHERWISE, THE ASSESSEE MUST HAVE INCURRED SOME EXPENDITURE ON MANAGING THE INVESTMENT PORTFOLIO AN D THE DIVIDENDS EARNED FROM THE SAME. EVEN, IF THE APPLICATION OF RULE 8D IS NO T AUTOMATIC BUT THE EXPENDITURE INCURRED ON THE INVESTMENTS MADE HAS TO BE DISALLOW ED. RESPECTFULLY FOLLOWING THE DECISIONS OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD (SUPRA) AND THE JURISDI CTIONAL BENCH OF THE HONBLE ITAT IN THE CASE OF ACIT VS. SUN TV NETWORKS LIMITED (SUPRA), I HAVE NO HESITATION IN CONFIRMING THE DISALLOWANCE OF RS.6,50,852/- MADE BY THE ASSESSING OFFICER U/S.14A READ WITH RULE 8D. 6.0 ACCORDING TO THE LD.COUNSEL, THE INTEREST FREE FUN DS WERE USED FOR THE PURPOSE OF MAKING INVESTMENTS IN SHARES AND THE BORROWED FUNDS WERE DIRECTLY USED FOR THE PURPOSE OF PURCHASE OF V EHICLES AND OTHER FIXED ASSETS OF THE COMPANY AND HENCE AND NO DISALLOWANCE U/S.14A R/W SEC.8D OF THE INCOME TAX RULES WAS CALLED FOR. HER SECOND ARGUMENT WAS THAT THERE WAS NO EXEMPTED INCOME EARNED DURING THE YEAR UNDER CONSIDERATION AND NO DISALLOWANCE CAN BE MADE U/S.1 4A R/W SEC.8D OF THE INCOME TAX RULES. ON VERIFICATION OF THE BALANCE SH EET, IT IS SEEN THAT THERE WERE OUTSTANDING AMOUNTS OF UNSECURED LOANS I N THE BALANCE SHEET ITA NO.2819/MDS/2016 :- 5 -: AND THE ASSESSEE HAS INCURRED THE FINANCE CHARGES W HICH THE ASSESSEE EXPLAINED THAT THE LOANS AND FINANCE CHARGES RELATE D TO HIRE PURCHASE OF VEHICLES. ON FURTHER VERIFICATION OF BALANCE SHEET THE ADDITIONS TO THE BOOK VALUE OF MOTOR CARS AND GOODS CARRIER WAS ONLY RS.1 7.87 LACS AND THE OUTSTANDING SECURED LOANS WERE AT THE ORDER OF RS.1 04.15 LACS. THEREFORE, IT IS CLEAR THAT THE ENTIRE UNSECURED LOANS WERE NO T USED FOR PURCHASE OF VEHICLES AND THE BORROWED FUNDS WERE PARTLY UTILIZE D FOR THE PURPOSE OF INVESTMENTS. 7.0 THE ASSESSEES CONTENTION WAS, AS ON THE DATE OF M AKING INVESTMENT IN SHARES, THERE WERE NO BORROWED FUNDS AND THE COM PANY HAS USED ITS OWN FUNDS. EVEN IF THE ASSESSEE HAS MADE INVESTMEN TS IN SHARES, ACCORDING TO THE ASSESSEE, WHEN THE INVESTMENTS WER E MADE IN SHARES THERE WERE NO BORROWED FUNDS TO ATTRACT THE DISALLO WANCE U/S.14A OF INCOME TAX ACT. THIS TRIBUNAL HAS CONSISTENTLY F OLLOWED A DECISION THAT IF ASSESSEE PURCHASED SHARES FROM COMMON POOL OF FUNDS CONSISTING BOTH BORROWED AND OWN FUNDS, DISALLOWANCE OF INTEREST UN DER RULE 8D(2)(II) ATTRACTS AND THE AO IS BOUND TO DISALLOW THE PROPOR TIONATE INTEREST UNDER RULE 8D(2). EVEN IF THE ASSESSEE HAS NO EXEMPTED I NCOME STILL AS PER THE PROVISIONS OF SEC.14A, THE DISALLOWANCE U/R.8D(2) I S ATTRACTED. THE FACT REGARDING WHETHER THE ASSESSEE HAS INVESTED FROM CO MMON POOL OF FUNDS OR FROM THE INTEREST FREE FUNDS HAS TO BE VERIFIED FROM THE ASSESSMENT RECORDS. THEREFORE, WE REMIT THE MATTER BACK TO TH E FILE OF THE AO WITH A DIRECTION TO VERIFY WHETHER THE ASSESSEE HAS MADE I NVESTMENTS FROM ITA NO.2819/MDS/2016 :- 6 -: COMMON POOL OF THE FUNDS OR FROM THE INTEREST FREE FUNDS AND DECIDE THE ISSUE AFRESH ON MERITS. THE AO SHOULD GIVE OPPORTU NITY TO THE ASSESSEE FOR SUBMITTING HIS EXPLANATION. 8.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( !' . . # $ % ) (D.S.SUNDER SINGH) ' /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED: 31 ST JANUARY, 2017. TLN 0 .2$6 76+2 /COPY TO: 1. ,- /APPELLANT 4. # 82 /CIT 2. ./,- /RESPONDENT 5. 69 .2 /DR 3. # 82 ( ) /CIT(A) 6. '* < /GF