DCIT, CHENNAI V. M/s. Gemini Communications Ltd., CHENNAI

ITA 2854/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4801 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 22-03-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 03-10-2016
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: G MOORTHY
• Keywords: Earning of tax free income; Question of law
• Section: 143(3); 14A; 115JB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , ' # BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 2854/MDS/2016 & C.O. NO. 19/MDS/2017 / ASSESSMENT YEAR : 2012-13 DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(1), CHENNAI - 600 034. VS. M/S. GEMINI COMMUNICATIONS LIMITED, NO. 1, DR. RANGA ROAD, ALWARPET, CHENNAI - 600 018. [PAN: AAACG 2531K] (APPELLANT) (RESPONDENT/ CROSS O BJECTOR) % & / APPELLANT BY : SHRI A.V. SREEKANTH, JCIT )*% & / RESPONDENT BY : SHRI G. MOORTHY, ADVOCATE & /DATE OF HEARING : 22.03.2017 & /DATE OF PRONOUNCEMENT : 21.04.2017 /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER: THE REVENUE HAS FILED AN APPEAL AND THE ASSESSEE HAS FILED CROSS OBJECTION AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-6, CHENNAI IN ITA NO. 180/CIT(A)-6/2015-16 DATED 27.07 .2016. :-2-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 2.1 THE CIT(A) ERRED IN DELETING THE DISALLOWANCE M ADE U/S 14A READ WITH RULE 8D. 2.2 THE CIT(A) ERRED IN EXCLUDING THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY COMPANY FOR THE PURPOSE OF DETERM INATION OF DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE ACT. 2.3 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE I NVESTMENTS MADE BY THE ASSESSEE COMPANY IN ITS SUBSIDIARY COMPANY IS A LSO ENTITLED FOR DIVIDEND AND HENCE THE SAME SHOULD BE TREATED ON PA R WITH THE OTHER INVESTMENTS MADE. 2.4 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THER E IS NO EXCEPTION PROVIDED IN RULE 8D(II) IN RESPECT OF THE INVESTMEN TS MADE IN THE SUBSIDIARY COMPANIES. 2.5 THE CIT(A) ERRED IN DELETING THE DISALLOWANCE U /S 14A HOLDING THAT FREE FUNDS IN THE FORM OF RESERVES AND SURPLUS HELD BY T HE ASSESSEE IS MORE THAN THE INVESTMENT MADE IN ASSETS YIELDING EXEMPT INCOME, WHEN THE ASSESSEE WAS MAINTAINING MIXED BAG OF FUNDS AND FAI LED TO SUBSTANTIATE THAT SUCH INVESTMENT IN ASSETS YIELDIN G EXEMPT INCOME ARE OUT OF INTEREST FREE FUNDS. 2.6 THE RELIED UPON DECISION IN THE ASSESSEE'S OWN CASE FOR THE A.Y. 2010- 11 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND FURT HER APPEAL IS PENDING BEFORE THE HON'BLE HIGH COURT. :-3-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 2.7 THE SIMILAR DECISION IN THE CASE OF M/S. EIH AS SOCIATED HOTELS LIMITED (2013-TOIL-796-ITAT-MAD, DT.17.07.2013) HAS NOT BEE N ACCEPTED BY THE DEPARTMENT AND FURTHER APPEAL IN TCA NO. 227 OF 2014 IS PENDING BEFORE THE HON'BLE HIGH COURT. 2.8 THE RELIED UPON DECISION IN THE CASE OF M/S. DA TA SOFTWARE RESEARCH COMPANY (INTERNATIONAL) PRIVATE LIMITED HAS NOT BEE N ACCEPTED BY THE DEPARTMENT ON MERITS-AND FURTHER THE ASST. YEARS IN VOLVED IN THIS CASE ARE PRIOR TO A.Y.2008-09 AND THE CASE IS THEREFORE DISTINGUISHABLE. 2.9 THE CIT (A) ERRED IN DELETING THE DISALLOWANCE U/S 14A BY HOLDING THAT NO EXEMPT INCOME HAS BEEN EARNED FROM INVESTMENTS I N SHARES. AS PER CBDT CIRCULAR NO. 5/2014 DATED 11.02.2014, DISALLOW ANCE U/S 14A IS EXIGIBLE EVEN WHEN THERE IS NO EXEMPT INCOME EARNED DURING THAT THE RELEVANT PREVIOUS YEAR. 2.10 THE RELIED UPON DECISION IN THE CASE OF M. BHA SKARAN HAS NOT BEEN ACCEPTED BY THE DEPARTMENT ON MERITS. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS IN THE BUSINESS OF TELECOMMUNICATION NETWORKING, SYSTEM IN TEGRATION, SOFTWARE SALES AND SERVICES AND FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012-13 ON 21.09.2013 WITH LOSS OF RS. 2,56,97,124/- AND COMPL IED THE PROVISIONS OF SECTION 115JB OF THE ACT AND ENTITLED FOR REFUND OF RS. 2,3 8,13,420/-. SUBSEQUENTLY, THE ASSESSEE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED. IN COMPLIANCE TO THE NOTICE, LD. AR APPEAR ED FROM TO TIME AND FILED :-4-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 DETAILS CALLED FOR. THE ASSESSING OFFICER ON PERUS AL OF THE FINANCIAL STATEMENT FOUND THE ASSESSEE COMPANY HAS DISCLOSED NON-CURREN T INVESTMENTS OF 5588.85 LAKHS AS ON 31.03.2012 AND SUCH NON-CURRENT INVESTM ENTS ARE MADE IN THE ASSESSEE'S SUBSIDIARIES COMPANY OF M/S. GEMINI TRAZ E GEOSS ENERGY PVT. LTD AND MUTUAL FUNDS. FURTHER, THE ASSESSEE HAS NOT CLAIME D ANY EXPENDITURE AND HAS NOT DEBITED ANY EXPENSES TO THE PROFIT & LOSS ACCOU NT. THE LD. AO IS OF THE OPINION THAT THE ASSESSEE MUST HAVE INCURRED MINIMU M EXPENDITURE OF MANAGEMENT EXPENSES AND INDIRECT EXPENDITURE FOR MA NAGING THESE INVESTMENTS. WHEREAS, THE ASSESSING OFFICER ON PERUSAL OF THE FA CTS RELIED ON ITAT DELHI DECISION AND OBSERVED THAT THE ASSESSEE COMPANY MUS T HAVE INCURRED INDIRECT MANAGEMENT AND ADMINISTRATIVE EXPENSES AND THE LD. AR EXPLAINED THAT INVESTMENTS ARE MADE OUT OF OWN FUNDS AND NO BORROW ED FUNDS ARE UTILISED. THE ASSESSING OFFICER DEALT ON THE AMENDMENTS IN THE FI NANCIAL ACT, 2006 AND THE PROVISIONS OF SECTION 14A R.W.R. 8D AND CALCULATED DISALLOWANCE CONSIDERING THE INVESTMENTS IN SUBSIDIARY COMPANIES AND WORKED OUT RS. 91,33,142/- AND WITH OTHER DISALLOWANCES ASSESSED THE TOTAL INCOME OF RS 19,82,75,990/- AND PASSED ORDER U/S. 143(3) OF THE ACT DATED 27.03.2015. 4. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN AP PEAL WITH THE CIT(A). IN THE APPELLATE PROCEEDINGS, THE LD. AR ARGUED THE GROUNDS AND SUBSTANTIATED WITH THE SUBMISSIONS ON THE APPLICABILITY OF PROVIS IONS OF SEC. 14A OF THE ACT IN RESPECT OF INVESTMENTS MADE IN THE SUBSIDIARY COMPA NIES. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT RECEIVED ANY EXEM PTED INCOME AND MADE :-5-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 INVESTMENTS IN SUBSIDIARY COMPANIES OUT OF OWN FUND S AND NO BORROWED FUNDS WERE UTILISED FOR STRATEGIC INVESTMENTS IN SUBSIDIA RIES COMPANIES. THE LD. AR ALSO RELIED ON THE CO-ORDINATE BENCH DECISION OF TR IBUNAL IN ASSESSEE'S OWN CASE OF EARLIER YEARS. THE LD. CIT(A) FOLLOWED THE DECI SION OF ASSESSEE'S OWN CASE IN ITA NO. 1933/MDS/2015 DATED 18.03.2016 AND ALLOWED THE APPEAL OF THE ASSESSEE AND DELETED THE ADDITION AND PARTLY ALLOWE D THE APPEAL. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E HAS FILED AN APPEAL WITH THE TRIBUNAL. BEFORE US, THE LD. DR ARGUED TH AT THE CIT(A) ERRED IN DELETING DISALLOWANCE U/S. 14A OF THE ACT R.W.R. 8D(II) OF T HE INCOME TAX RULES, IRRESPECTIVE OF THE FACT THAT THE ASSESSEE HAS MADE INVESTMENTS IN SUBSIDIARY COMPANIES AND ALSO THE PROVISIONS OF SECTION 14A R. W.R. 8D OF THE INCOME TAX RULES SHALL APPLY ON PAR WITH OTHER INVESTMENTS FUR THER, ASSESSEE COMPANY HAS NOT SUBSTANTIATED AND DEMONSTRATED THAT NO EXPENDIT URE HAS BEEN INCURRED FOR MAINTAINING INVESTMENTS AND THE DECISIONS RELIED BY THE ASSESSEE ARE CONTESTED BY THE REVENUE AT HIGH FORUMS AND PRAYED FOR SET AS IDE THE ORDER OF CIT(A). CONTRA, THE LD. AR OF THE ASSESSEE RELIED ON THE OR DERS OF THE CIT(A) AND JUDICIAL DECISIONS AND FILED WRITTEN SUBMISSIONS. 6. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE SOLE CRUX OF THE ISSUE BEI NG DISALLOWANCE U/S. 14A R.W.R. 8D OF THE INCOME TAX RULES, WHERE THE ASSESSEE HAS MADE INVESTMENTS IN THE SUBSIDIARY COMPANIES IN THE EARLIER YEARS AND ALSO NO BORROWED FUNDS WERE :-6-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 UTILISED FOR THE PURPOSE OF INVESTMENT. THE LD. AR OF THE ASSESSEE WAS CALLED TO SUBMIT CASH FLOW STATEMENT AND TO DEMONSTRATED THAT THE ASSESSEE COMPANY HAS UTILISED OWN FUNDS FOR STRATEGIC INVESTMENTS. THE LD. AR SUBMITTED THE ANNUAL REPORT DISCLOSING THE FACTS ON INVESTMENTS MADE IN THE FINANCIAL YEAR 2008-09 AND 2011-12. ON PERUSAL OF THE ANNUAL REPORT, WE F OUND THE ASSESSEE COMPANY HAS RESERVES AND SURPLUS BUT, WHETHER OWN FUNDS WER E UTILISED DIRECTLY FOR THE INVESTMENT AND THE LD. AR COULD NOT GIVE SATISFACTO RY EXPLANATIONS. WE FOUND THE DISPUTED ISSUE WAS CONSIDERED BY THE CO-ORDINAT E BENCH OF TRIBUNAL FOR THE EARLIER YEARS IN ITA NO. 1933/MDS/2015 HELD AT PARA 7 PAGE 5 AND DIRECTED THE ASSESSING OFFICER TO VERIFY THE INVESTMENTS. IN TH E PRESENT CASE, THE ASSESSEE HAS MADE INVESTMENTS IN SUBSIDIARY COMPANIES AND TH ESE INVESTMENTS SHOULD BE OUT OF THE OWN FUNDS FOR OBTAINING CONTROLLING INTE REST WITH COMPANY. WE FIND SIMILAR DECISION OF CONTROLLING INTEREST OF HONBLE HIGH COURT OF KARNATAKA M/S.UNITED BREWERIES LTD. V. DCIT [2016] 72 TAXMANN .COM 102, HELD AT PARA 8 & 9 WHICH READ AS UNDER: 8. SO FAR AS SECOND QUESTION OF APPLICABILITY OF SEC. 14A OF THE ACT TO THE EXPENSES INCURRED BY THE APPELLANT TOWARDS INTE REST AND OTHERS ON THE LOAN BORROWED IS CONCERNED, THE FINDING OF THE TRIBUNAL IS AT PARAGRAPH11 WHICH READS AS UNDER : '11. THE REVENUE IS IN APPEAL AND WE HAVE CONSIDERE D THE RIVAL CONTENTIONS. IN OUR VIEW, THE RECENT JUDGMENT OF THE SPECIAL BENCH IN BOMBAY IN ITO V. DAGA CAPITAL MANAGEMENT PVT. LTD. (2009) 312 ITR (AT) 1, IS APPL ICABLE TO THE FACTS OF THE PRESENT CASE. IN THIS ORDER, IT HA S BEEN HELD THAT SECTION 14A IS APPLICABLE EVEN WHERE THE MOTIV E IN :-7-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 ACQUIRING THE SHARES WAS TO OBTAIN CONTROLLING INTE REST IN THE COMPANIES. THE FINDING OF THE COMMISSIONER OF INCOM E-TAX (APPEALS) CANNOT, THEREFORE, BE UPHELD AS IT IS CON TRARY TO THE DECISION OF THE SPECIAL BENCH. WE, ACCORDINGLY, UPHOLD IN PRINCIPLE THE APPLICABILITY OF SECTION 14A. HOWEVER , IT IS FOR THE ASSESSING OFFICER TO ASCERTAIN FROM THE FACTS O F THE CASE AS TO HOW MUCH INTEREST BEARING BORROWINGS WAS UTIL IZED TO ACQUIRE SHARES IN THE COMPANIES. IT IS ALSO NECESSA RY TO SEE AS TO WHETHER ANY INTEREST BEARING BORROWED FUNDS W ERE USED IN MAKING THE ADVANCES AND EXPENDITURE IN THE CASE OF CASTLE BREWERIES. THIS FACTUAL EXERCISE HAS TO BE C ARRIED OUT BY THE ASSESSING OFFICER AFTER GIVING DUE OPPORTUNI TY TO THE ASSESS OF BEING HEARD. THE ASSESSING OFFICER MAY MA KE THE DISALLOWANCE OF INTEREST U/S.14A ONLY IF IT IS FOUN D THAT INTEREST BEARING BORROWED FUNDS WERE USED TO ACQUIR E SHARES IN THE COMPANIES OR FOR MAKING ADVANCES TO CASTLE BREWERIES. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH THE ABOVE DIRECTIONS. THE GR OUND IS TREATED AS PARTLY ALLOWED.' 9. THE AFORESAID SHOWS THAT THE TRIBUNAL AFTER HOLDIN G IN PRINCIPLE THE APPLICABILITY OF SEC. 14A, HAS FURTHER DIRECTED THE ASSESSING OFFICER TO ASCERTAIN FROM THE FACTS OF THE CASE AS TO HOW MUCH INTEREST BEARING BORROWINGS WAS UTILIZED TO ACQUIRE SHARES IN THE CO MPANIES AND THE MATTER IS RELEGATED TO THE ASSESSING OFFICER. AS PE R THE LANGUAGE IN SEC.14A, THE ENQUIRY HAS TO BE UNDERTAKEN BY THE AS SESSING OFFICER WHICH HAS BEEN SO ORDERED BY THE TRIBUNAL. HENCE, I T CAN BE SAID THAT THE TRIBUNAL HAS EXERCISED THE DISCRETION WHERE RIG HTS OF BOTH SIDES ARE KEPT OPEN FOR ADMISSIBLE DEDUCTION UNDER SEC.14A. W HEN SUCH A DISCRETION IS EXERCISED AND THE RIGHTS OF THE APPEL LANT-ASSESSEE IS ALSO KEPT OPEN TO SATISFY THE ASSESSING OFFICER, IT CANN OT BE SAID THAT ANY :-8-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 SUBSTANTIAL QUESTIONS OF LAW WOULD ARISE FOR CONSID ERATION, AS SOUGHT TO BE CANVASSED. IN OUR VIEW, AT THE STAGE OF ENQUIRY UNDER SEC.14A, IT IS OPEN TO THE ASSESSING OFFICER TO INDEPENDENTLY CONS IDER THE MATTER FOR ADMISSIBILITY OF THE INTEREST ON BORROWINGS AND IF YES TO WHAT EXTENT. HENCE, WHEN THE QUESTION AT LARGE IS FURTHER TO BE CONSIDERED BY THE ASSESSING OFFICER, WE DO NOT FIND THAT ANY FURTHER OBSERVATIONS ARE REQUIRED TO BE MADE IN THIS REGARD. IN ANY CASE, TH E QUESTION OF LAW AS SOUGHT TO BE CANVASSED WOULD NOT ARISE FOR CONSIDER ATION AT THIS STAGE ON THE SAID ASPECTS AS SOUGHT TO BE CANVASSED. ' CONSIDERING THE JUDICIAL DECISIONS, WE ARE OF THE OPINION THAT THE DISPUTED ISSUE HAS TO BE REMITTED TO THE FILE OF ASSESSING OFFICER TO VERIFY WHETHER INVESTMENTS ARE MADE OUT OF THE OWN FUNDS AND NO BORROWED FUNDS WERE UTILISED FOR THE PURPOSE OF INVESTMENTS AND APPLY THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE IT RULES AND ACCORDINGLY WE REMIT THE DISPUTED ISSU E TO THE FILE OF THE ASSESSING OFFICER FOR LIMITED PURPOSE AND THE ASSESSEE SHALL BE PROVIDED AN OPPORTUNITY TO SUBSTANTIATE HIS CLAIM BEFORE PASSING THE ORDER ON MERITS AND GROUNDS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSE. 7. THE ASSESSEE HAS FILED CROSS OBJECTIONS, CO NO. 19/MDS/2017, AT THE TIME OF HEARING, THE ASSESSEE HAS NOT PRESSED THE C O AND MADE ENDORSEMENT. ACCORDINGLY, THE CO IS DISMISSED. :-9-: I.T.A. NO. 2854/MDS/2016 C.O. NO. 19/MDS/2017 8. IN THE RESULT, REVENUE APPEAL IN ITA NO. 2857/MD S/2016 IS ALLOWED FOR STATISTICAL PURPOSE AND ASSESSEE'S CROSS OBJECTION CO NO. 19/MDS/2017 IS DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 21ST APRIL, 2017 AT CHENNAI. SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER SD/ - ( . ) (G. PAVAN KUMAR) /JUDICIAL MEMBER /CHENNAI, 0 /DATED: 21ST APRIL, 2017. JPV & )'23 43 /COPY TO: 1. %/ APPELLANT 2. )*% /RESPONDENT 3. 5 ( )/CIT(A) 4. 5 /CIT 5. 3 )'' /DR 6. 9 /GF