M/s. KPR Mill Ltd., CHENNAI V. DCIT, Coimbatore

ITA 2886/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7503 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 07-10-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: A S SRIRAMAN
• Keywords: Earning of tax free income; Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 14A; 115JB

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 2886/MDS/2016 / ASSESSMENT YEAR :20 12 - 13 M/S. KPR MILL LIMITED, NO. 9, GOKUL BUILDINGS, A.K.S. NAGAR, THADAGAM ROAD, COIMBATORE 641 001. [PAN: A A CCK0893N ] VS. THE DEPUTY COMMISSIONER OF INCOME TAX , CORPORATE CIRCLE 2 , C OIMBATORE . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI A.S. SRI RAMAN , ADVOCATE / RESPONDENT BY : S HRI S HIVA SRINIVAS , J CIT / DATE OF HEARING : 2 7 . 12 .201 6 / DATE OF P RONOUNCEMENT : 15 . 0 3 .201 7 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : TH I S APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMIS SIONER OF INCOME TAX (APPEALS) 1 , C OIM BATORE DATED 3 1 . 0 8 .201 6 RELEVANT TO THE ASSESSMENT YEAR 20 12 - 13 . THE ASSESSEE HAS RAISED THE FOLLOWING TWO EFFECTIVE GROUNDS: (I) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF NOTIONAL EXPENSES UNDER SECTION 14A R.W. RULE 8D. I.T.A. NO . 2886 / M/ 1 6 2 (II) THE LD. CI T(A) HAS ERRED IN SUSTAINING THE ADJUSTMENT MADE IN RESPECT OF DISALLOWANCE OF EXPENSES NOTIONALLY QUANTIFIED UNDER SECTION 14A OF THE ACT IN THE BOOK PROFIT COMPUTATION UNDER SECTION 115JB OF THE ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF TEXTILES AND FILED ITS RETURN OF INCOME ON 30.09.2012 DECLARING NIL INCOME UNDER NORMAL PROVISIONS. THE ASSESSEE PAID TAXES UNDER SECTION 115JB OF THE ACT ON THE BOOK PROFITS. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED. IN RESPONSE TO THE NOTICE, THE ASSESSEE FURNISHED THE BOOKS OF ACCOUNT CALLED FOR AND SUBMITTED THE RELEVANT DOCUMENTS AND DETAILS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND VE RIFICATION OF DOCUMENTS FURNISHED BY THE ASSESSEE, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ASSESSING TOTAL LOSS TO THE EXTENT OF . 38,77,16,356/ - AGAINST THE LOSS RETURNED BY THE ASSESSEE AT .39,09,45,659/ - AFTER MAKING VARIOUS DISALL OWANCES. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND THE LD. CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. WITH REGARD TO THE DISALLOWANCE OF EXPENSE S UNDER SECTION 14A R.W. RULE 8D, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE INVESTMENTS I.T.A. NO . 2886 / M/ 1 6 3 HAVE BEEN MADE BY THE ASSESSEE ARE EQUITY SHARES IN ITS WHOLLY OWNED 100% SUBSIDIARIES OUT OF THEIR SURPLUS FUNDS AND THEREFORE, NO EXPENSE WAS INCURRED B Y THE ASSESSEE NOR COULD BE DISALLOWED . BY RELYING ON THE DECISION OF THE TRIBUNAL IN THE CASE OF EIH ASSOCIATED HOTELS LTD. V. DCIT IN I.T.A. NOS. 1503 & 1624/MDS/2012 DATED 17.07.2013, WHICH WAS FOLLOWED IN MANY CASES, THE LD. COUNSEL HAS PLEADED TO DELE TE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 5. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE ASSESSEE HAS EARNED EXEMPT INCOME OUT OF HUGE INVESTMENTS WITHOUT ADMITTING ANY EXPENSES AND THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY WORKED O UT EXPENDITURE COMPONENT TO EARN THE EXEMPT INCOME BY APPLYING SECTION 14A OF THE ACT R.W. RULE 8D, WHICH SHOULD BE SUSTAINED. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE A SSESSING OFFICER HAS OBSERVED THAT D URING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS EARNED DIVIDEND TO THE EXTENT OF . 3,60,31,720/ - FROM THEIR INVESTMENTS. SINCE , THE ASSESSEE HAS NOT ADMITTED ANY EXPENDITURE TO EARN THE DIVIDEND INCOME , THE ASSESSING OFFICER DETERMINED THE EXPENDITURE COMPONENT UNDER SECTION 14A R.W. RULE 8D . THOUGH THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED BEFORE THE LD. CIT(A) AS WELL AS THE TRIBUNAL THAT THE INVESTMENTS AS ON 01.04.2011 AND INVESTMENT AS ON 31.03.2012 ARE NOTHING BUT EQUITY I.T.A. NO . 2886 / M/ 1 6 4 SHARES INVESTMENT IN ITS 100% SUBSIDIARIES OF KPR MILL LTD. VIZ (I) KPR SUGAR MILLS LTD. AND (II) QUANTUM KNITS (P) LTD. FURTHER, THE LD. COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE ASSESSEE HAS MADE THE INVESTMENT OUT OF THEIR SURPLUS FUNDS AND NOT FROM THE BORROWED FUNDS BEARING INTEREST AND SUBMITTED THAT THE SAME COULD BE VERIFIED FROM THE AUDITED CASH FLOW STATEMENT FOR THE YEAR ENDED 31.03.2012 . HE FURTHER ARGUED THAT WHEN THE ASSESSING OFFICER HAS ACCEPTED THE INTEREST EXPENDITURE ON BORROWED CAPITAL ARE GENUINE AND IT WAS INCURRED FOR BUSINESS PURPOSE AND ALLOWED THE INTEREST UNDER SECTION 36(1)(III) OF THE ACT, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT COULD BE MADE BY THE ASSESSING OFFICER IN VIEW OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF HOL C IM INDIA (P) LTD., IN ITA NO. 486/2014 & ITA NO. 299/2014. THE LD. COUNSEL FURTHER SUBMITTED THAT THAT THE ASSESSEE MADE THE INVESTMENTS IN 100% SUBSIDIARY COMPANIES AND NO DIVIDEND INCOME HAS BEEN EARNED DURING THE YEAR FROM THE ABOVE INVESTMENTS HELD IN THE GROUP COMPANIES FOR STRATEGIC PURPOSE AND NOT FOR BUYING AND S ELLING SHARES FREQUENTLY. HE HAS FURTHER SUBMITTED THAT WHEN THERE IS NO EXEMPT INCOME, NO EXPENDITURE COULD BE MADE. WE FIND FORCE IN THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE. IN THE ASSESSMENT ORDER, WE FIND THAT BEFORE QUANTIFICATION O F EXPENDITURE COMPONENT, THE ASSESSEE WAS NOT GIVEN AN OPPORTUNITY TO EXPLAIN AS TO WHY THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D SHOULD NOT MADE OR THE ASSESSING OFFICER HAS RECORDED ANY I.T.A. NO . 2886 / M/ 1 6 5 REASONS FOR MAKING SUCH DISALLOWANCE. EVEN THOUGH THE ASSESSEE MADE THE ABOVE SUBMISSIONS BEFORE THE LD. CIT(A) DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LD. CIT(A) HAS NOT GIVEN ANY FINDINGS WITH REGARD TO THE OBJECTIONS OF THE ASSESSEE, BUT SIMPLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER. UNDER THE ABOV E FACTS AND CIRCUMSTANCES, WE REMIT THE MATTER BACK TO THE ASSESSING OFFICER WITH A DIRECTION TO GIVE AN OPPORTUNITY OF HEARING TO THE ASSESSEE AND THEREAFTER RECORD HIS SATISFACTION . FURTHER, THE ASSESSING OFFICER IS DIRECTED TO VERIFY AS TO WHETHER THE I NVESTMENTS MADE BY THE ASSESSEE IS IN ITS OWN SUBSIDIARIES OUT OF COMMERCIAL EXPEDIENCY, AND IF SO, NO EXPENDITURE CAN BE DETERMINED AND DISALLOWED IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF EIH ASSOCIATED HOTELS LTD. V. DCIT (SUPRA). THE RATIO LAID DOWN IN THE RECENT JUDGEMENT IN THE CASE OF REDINGTON (INDIA) LTD. V. ADDL. CIT IN T.C.A. NO. 520 OF 2016 DATED 23.12.2016, WHEREIN, THE HON BLE JURISDICTIONAL HIGH COURT HAS HELD THAT WHEN THERE IS NO EXEMPT INCOME THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE, SHALL BE KEPT IN MIND WHILE DECIDING THE ISSUE AFRESH BY PASSING DETAILED SPEAKING ORDER AFTER ALLOWING SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. THE NEXT GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) ERRED I N SUSTAINING THE ADJUSTMENT MADE IN RESPECT OF DISALLOWANCE OF EXPENSES NOTIONALLY QUANTIFIED UNDER SECTION 14A OF THE ACT IN THE BOOK PROFIT COMPUTATION UNDER SECTION 115JB OF THE ACT. ON PERUSAL OF THE APPELLATE I.T.A. NO . 2886 / M/ 1 6 6 ORDER, WE FIND THAT THE LD. CIT(A) HAS NOT RECORDED ANY EXPLICIT FINDINGS WHILE SUSTAINING SUCH ADDITION . WE FIND THAT NO ADJUSTMENT COULD BE MADE IN RESPECT OF THE DISALLOWANCE OF EXPENSES QUANTIFIED UNDER SECTION 14A OF THE ACT IN THE BOOK PROFIT COMPUTATION UNDER SECTION 115JB OF THE ACT AND FO R MORE CLARITY, ANY DISALLOWANCE MADE U NDER SECTION 14A R.W. RULE 8D CANNOT BE ADDED WHILE COMPUTING BOOK PROFIT U NDER SECTION 115JB OF THE ACT SINCE THE DISALLOWANCE IS ONLY DISALLOWANCE FOR THE PURPOSE OF COMPUTING TAXABLE INCOME OF THE ASSESSEE IN THE NO RMAL COURSE. THERE IS NO PROVISION IN THE ACT TO ADD THIS KIND OF DISALLOWANCE WHILE COMPUTING BOOK PROFIT U NDER SECTION 115JB OF THE ACT AND IT CANNOT CHANGE THE BOOK PROFIT ON THIS COUNT. SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE BENCHES OF THE TRIBUNAL IN THE CASE OF SHRIRAM CAPITAL LIMITED V. ACIT IN I.T.A. NOS. 512 & 513/MDS/2015 DATED 26.06.2015 FOR THE ASSESSMENT YEAR 2010 - 11 & 2011 - 12, WHEREIN, THE TRIBUNAL HAS OBSERVED AS UNDER: 22. WE HAVE HEARD BOTH THE PARTIES. THIS ISSUE OF DISALLOWANCE MADE BY THE ASSESSING OFFICER FOR THESE TWO ASSESSMENT YEARS BY INVOKING PROVISION U/S.14A R.W. RULE 8D, WAS ALREADY ADJUDICATED BY US IN OUR EARLIER PARA OF THIS ORDER. IN OUR OPINION, DIS ALLOWANCE MADE U/S.14A R.W. RULE 8D CANNOT BE ADDED WHILE COMPUTING BOOK PROFIT U/S.115JB OF THE ACT THAT THE DISALLOWANCE IS ONLY DISALLOWANCE FOR THE PURPOSE OF COMPUTING TAXABLE INCOME OF THE ASSESSEE IN THE NORMAL COURSE. THERE IS NO PROVISION IN THE ACT TO ADD THESE KIND OF DISALLOWANCE WHILE COMPUTING BOOK PROFIT U/S.115JB AND IT CANNOT CHANGE THE BOOK PROFIT ON THIS COUNT. THEREFORE EVEN IF THERE IS AN ADDITION IN VIEW OF PROVISION U/S.14A R.W. RULE 8D, THAT CANNOT BE ADDED BACK TO COMPUTE THE BOOK PROFIT U/S.115JB. THIS GROUND IS ALLOWED. I.T.A. NO . 2886 / M/ 1 6 7 8. IN VIEW OF THE ABOVE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL , THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL P URPOSES. ORDER PRONOUNCED ON THE 15 TH MARCH , 201 7 AT CHENNAI. SD/ - SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 15 . 0 3 .201 7 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.