DCIT, Circle- 4(1), Gurgaon V. Zaroopa Foods Pvt. Ltd., Gurgaon

ITA 3008/DEL/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2444 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2014-2015
• Appeal Filed On: 27-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: F, NEW DELHI BEFORE SMT. BEENA A PILLAI, JUDICIAL ME MBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBE R ITA NO. 3008/DEL/2018 AY: 2014-15 DCIT CIRCLE 4(1) GURGAON VS . ZAROOPA FOODS PVT. LTD. REGUS-I-TECH BUSINESS CENTRE PVT. LTD., 9 TH FLOOR, SPAZE I-TECH PARK, A-1, TOWER, SOHNA ROAD, SECTOR 49, GURGAON, HARYANA AAACZ5673P (APPELLANT) (RESPONDE NT) REVENUE BY : SH. SURENDER PAL, SR. DR ASSESSEE BY : NONE DATE OF HEARING : 06/11/2018 DATE OF PRONOUNCEMENT : 14/11/2018 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY REVENUE AGAINST OR DER DATED 27/02/18 PASSED BY LD. CIT (A)-2, GURGAON, FO R ASSESSMENT YEAR 2014-15 ON FOLLOWING GROUNDS OF APP EAL: 1. LD. CIT(A) HAS ERRED ON FACT AND IN LAW IN DELETIN G THE DISALLOWANCE OF RS. 2,08,97,302/- MADE BY THE ASSES SING OFFICER U/S 14A OF THE INCOME TAX ACT, 1961. 2. LD. CIT(A) HAS ERRED ON FACT AND IN LAW IN IGNORING CBDT CIRCULAR NO. 5 OF 2014 DATED 11.02.2014 CLARIFYING THAT DISALLOWANCE UNDER RULE 8D READ WITH SECTION 14A OF THE INCOME TAX ACT IS TO BE MADE EVEN WHERE TAXPAYER IN A PARTICULAR HAS NOT EARNED ANY EXEMPT INCOME. ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 2 3. THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD , DELETE OR AMEND GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 2. BRIEF FACTS OF THE CASE ARE AS UNDER: ASSESSEE FILED ITS RETURN OF INCOME ON 29/09/14 DEC LARING TOTAL INCOME OF RS.2,07,06,576/-. THE RETURN WAS PROCESSE D UNDER SECTION 143 (1) OF THE ACT AND WAS PICKED UP FOR SC RUTINY. NOTICES UNDER SECTION 143 (2) OF THE ACT WAS ISSUED AND NOT ICE UNDER SECTION 142 (1) OF THE ACT ALONG WITH QUESTIONNAIRE WAS SERVED UPON ASSESSEE. SUBSEQUENTLY, IN RESPONSE TO STATUT ORY NOTICES, REPRESENTATIVES OF ASSESSEE APPEARED BEFORE THE LD. AO AND FILED VARIOUS DETAILS AS CALLED FOR. 2.1 LD.AO OBSERVED THAT ASSESSEE OPERATES AS A HOLD ING COMPANY FOR INVESTMENT MADE IN DOWNSTREAM COMPANIES OPERATING IN QUICK SERVICE AND CASUAL DINING RESTAU RANTS CATEGORY. IT WAS OBSERVED THAT FOR THE YEAR UNDER C ONSIDERATION, ASSESSEE ADDED BACK SUM OF RS.19,743/-AS DISALLOWAN CE UNDER SECTION 14A READ WITH RULE 8D. 2.2 IT WAS OBSERVED THAT ASSESSEE IS HOLDING COMPAN Y OF VRINDA FOODS AND HOSPITALITY PVT. LTD., AND TMA HOSPITALIT Y SERVICES PVT. LTD., IT WAS SUBMITTED BY ASSESSEE THAT ASSESSEE MA DE INVESTMENT IN CUMULATIVE CONVERTIBLE PREFERENCE SHA RES OF THESE COMPANIES. IT WAS SUBMITTED THAT OBJECTIVE OF ASSES SEE WAS TO MAKE INVESTMENT IN OTHER COMPANIES. LD.AO, COMPUTED DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D AT RS.2,21,73,295/-. ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 3 3. AGGRIEVED BY ORDER OF LD.AO, ASSESSEE PREFERRED APPEAL BEFORE THE LD.CIT (A) WHO DELETED THE ADDITION BY F OLLOWING DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. LAKHANI MARKETING REPORTED IN (2014) 49 TAXMANN.COM 257 . 4. AGGRIEVED BY ORDER OF LD.CIT (A) REVENUE IS IN A PPEAL BEFORE US. 5. NONE HAS APPEARED ON BEHALF OF ASSESSEE BEFORE U S TODAY. CONSIDERING SMALLNESS OF ISSUE INVOLVED, IT IS DEEM ED TO BE FIT AND PROPER NOT TO KEEP THE APPEAL PENDING. ACCORDINGLY, WE ARE DECIDING THE ISSUE IN HAND, EX PARTE ASSESSEE. 6. THE ONLY ISSUE INVOLVED IN PRESENT APPEAL IS IN RESPECT OF DISALLOWANCE MADE BY LD.AO UNDER SECTION 14 A READ WITH RULE 8D. ADMITTEDLY, ASSESSEE HAS INVESTED IN ITS SUBSID IARIES. 7. LD.SR. DR SUBMITTED THAT THE SAID ISSUES STANDS COVERED WITH DECISION OF HONBLE SUPREME COURT IN CASE OF MAXXOP INVESTMENTS VS CIT REPORTED IN [2018] 91 TAXMANN.COM 154 (SC). 8. WE HAVE PERUSED THE ORDER PASSED BY LD. AO. HON BLE SUPREME COURT IN MAXXOP INVESTMENTS VS CIT (SUPRA) DECIDED AS UNDER: 34. HAVING CLARIFIED THE AFORESAID POSITION, THE FIRST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS T O WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SE RVICE BY THE ASSESSEES WOULD APPLY WHILE INTERPRETING SEC TION 14A OF THE ACT OR WE HAVE TO GO BY THE THEORY OF APPORTIONMENT. WE ARE OF THE OPINION THAT THE DOMIN ANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MAD E BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSE SSEE 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 RELE VANT FACTOR IN DETERMINING THE ISSUE AT HAND. FACT REMAI NS THAT ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 4 SUCH DIVIDEND INCOME IS NON-TAXABLE. IN THIS SCENAR IO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INC OME, 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 OBJEC TIVE BEHIND SECTION14A OF THE ACT IN MIND, THE SAID PROV ISION HAS TO BE INTERPRETED, PARTICULARLY, THE WORD 'IN R ELATION TO THE INCOME' THAT DOES NOT FORM PART OF TOTAL INCOME . CONSIDERED IN THIS HUE, THE PRINCIPLE OF APPORTIONM ENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPLE W HICH IS ENGRAINED IN SECTION 14A OF THE ACT. THIS IS SO HEL D IN WALFORT SHARE & STOCK BROKERS (P.) LTD., RELEVAN T PASSAGE WHEREOF IS ALREADY REPRODUCED ABOVE, FOR TH E SAKE OF CONTINUITY OF DISCUSSION, WE WOULD LIKE TO QUOTE THE FOLLOWING FEW LINES THERE FROM. 'THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH D OES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT ME ANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOM E, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT O F THE APPLICABILITY OF SECTION 14A.. THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A.' 35. THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBSERVE D THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE AC T, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMENTS OF BOTH TAX ABLE AND NON-TAXABLE INCOME, THE ENTIRE EXPENDITURE IN R ESPECT OF SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE , THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE RELAT ING 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 M ADE IT RETROSPECTIVE, I.E., 1962 WHEN THE INCOME TAX AC T ITSELF CAME INTO FORCE. THE AFORESAID INTENT WAS EXPRESSED LOUDLY AND CLEARLY IN THE MEMORANDUM EXPLAINING THE PROVIS IONS 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 W HICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 5 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 INVES TEE COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSE D. 8.1 THUS, RESPECTFULLY FOLLOWING THE SAME WE REVERS ED OBSERVATIONS OF LD.CIT (A) AND HOLD THAT, FOR PURPO SES OF COMPUTING DISALLOWANCE UNDER SECTION 14A UNDER RULE 8D, EVEN INVESTMENTS MADE BY ASSESSEE IN ITS SUBSIDIARY COMP ANY WOULD BE CONSIDERED. 9. WE HAVE PERUSED COMPUTATION PROVIDED BY LD.AO FO R DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. I N OUR OPINION, NO DISALLOWANCE COULD BE MADE UNDER RULE 8 D (I) AND (II) IN PRESENT FACTS OF CASE, AS THESE ARE NOT IS INCUR RED IN RELATION TO INVESTMENTS MADE BY ASSESSEE. WE, THEREFORE, SET AS IDE THIS ISSUE TO LD. AO AND DIRECT RESTRICT DISALLOWANCE UNDER SE CTION 14A READ WITH RULE 8D (III) ONLY. ACCORDINGLY GROUNDS RAISED BY REVENUE STAND PARTLY ALLOWED. IN THE RESULT APPEAL FILED BY REVENUE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14/11/2018 SD/- SD/- (PRASHANT MAHARISHI) (BEENA A PILLAI) ACCOUNTANT MEMBER JU DICIAL MEMBER DT. 14 TH NOVEMBER,2018 *KAVITA ARORA ITA NO. 3008/DEL/2018 A.Y. 2014-15 ZAROOPA FOODS PVT. LTD. 6 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT - TRUE COPY - BY ORDER, ASSISTANT REGISTRAR ITAT DELHI BENCHES DATE DRAFT DICTATED ON 13.11.2018 DRAFT PLACED BEFORE AUTHOR 13.11.2018 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS 14.11.2018 KEPT FOR PRONOUNCEMENT ON & ORDER UPLOADED ON : 14.11.2018 FILE SENT TO THE BENCH CLERK 14.11.2018 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.