SIDD Life Sciences Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 3044/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4928 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 04-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 28-10-2016
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: MUKESH KUMAR M
• Keywords: Business expenditure; Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! ' . #$ , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.3044/MDS/2016 ( / ASSESSMENT YEAR: 2012-13) M/S. SIDD LIFE SCIENCES PRIVATE LIMITED, PLOT NO.4, NH-7, MMDA INDUSTRIAL ESTATE, MARIMALAI NAGAR, CHENNAI 603 209 VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE WARD 6(2), CHENNAI. PAN: AAECS9251J ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI MUKESH KUMAR.M, CA /RESPONDENT BY : SHRI A.V. SREEKANTH, JCIT /DATE OF HEARING : 04.04.2017 ! /DATE OF PRONOUNCEMENT : 10.04.2017 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEA LS)-15, CHENNAI DATED 31.08.2016 IN ITA NO.128/CIT(A)/2015- 16 FOR THE ASSESSMENT YEAR 2012-13 PASSED U/S.250(6) R.W.S 143 (3) OF THE ACT. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD. CIT(A ) HAS ERRED IN INVOKING THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D OF THE RULES AND THEREBY DISALLOWED THE EXPENDITURE OF RS. 58,26,308/-. 2 ITA NO.3044/MDS/2016 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSME NT YEAR 2012- 13 ON 28.09.2012 ADMITTING TOTAL LOSS OF RS.1,22,02 ,940/-. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE WAS ISSUED. THEREAFTER THE ASSESSMENT WAS COMPLETED U/S .143(3) OF THE ACT BY THE LD.AO ON 26.03.2015 WHEREIN HE INVOK ED PROVISIONS OF SECTION 14A OF THE ACT R.W.R 8D OF TH E RULES BECAUSE THE ASSESSEE HAD INVESTED RS.81,60,90,842/- ON SHAR ES WHICH YIELDED EXEMPT INCOME OF RS.2,72,00,000/- DURING TH E RELEVANT ASSESSMENT YEAR. ON APPEAL, THE LD.CIT(A) ALSO CONF IRMED THE ORDER OF THE LD. AO CITING VARIOUS DECISIONS OF HIG HER JUDICIARY. 4. BEFORE US, THE LD.AR SUBMITTED THAT THE ENTIRE I NVESTMENT MADE BY THE ASSESSEE FOR RS.81,60,00,000/- WAS IN I TS ASSOCIATE CONCERNS DUE TO STRATEGIC REASONS AND HENCE PROVISI ONS OF SECTION 14A CANNOT BE INVOKED. THE LD.DR STRONGLY OPPOSED TO THE SUBMISSION OF THE LD.AR AND ARGUED IN FAVOUR OF THE ORDERS OF THE REVENUE AUTHORITIES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS AVAILABLE ON RECORD. RELYING ON VARIO US DECISIONS OF 3 ITA NO.3044/MDS/2016 THE HIGHER JUDICIARY THIS BENCH OF THE TRIBUNAL ON THE EARLIER OCCASION IN THE CASE OF LAKSHMI ELECTRICAL DRIVES L TD IN ITA NO.3114/MDS/2016 VIDE ORDER DATED 23.03.2017 HAS HE LD AS FOLLOWS:- THE ASSESSEE HAD INVESTED RS.18.01 CRORES WHICH WO ULD YIELD EXEMPT INCOME. THEREFORE THE LD. AO INVOKED THE PROVISION S OF SECTION 14A AND RULE 8D OF THE RULES AND MADE ADDITION WHICH WA S SUBSEQUENTLY CONFIRMED BY THE LD. CIT(A). AT THE OUTSET, THE LD . AR SUBMITTED BEFORE US THAT, THE ENTIRE INVESTMENTS, FOR STRATEGICALLY REASONS, WAS MADE IN SUBSIDIARY COMPANIES AND IT WAS SOURCED FROM INTERE ST FREE FUNDS. THE LD. AR FURTHER ARGUED THAT ON SEVERAL OCCASIONS, TH E CHENNAI BENCH OF THE TRIBUNAL HAS HELD THAT IF SUCH INVESTMENTS ARE MADE IN SISTER /SUBSIDIARY COMPANIES, THE PROVISIONS OF SECTION 14 A CANNOT BE INVOKED. HE THEREFORE PLEADED THAT THE ADDITION MA DE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT, MAY BE DELETE D. THE LD. DR THOUGH OPPOSED TO THE SUBMISSION OF THE LD. AR COUL D NOT SUCCESSFULLY CONTROVERT TO THE SUBMISSIONS. AFTER HEARING BOTH SIDES, WE FIND MERIT IN THE ARGUMENTS OF THE LD. AR. ON SEVERAL INSTANC E THIS BENCH OF THE TRIBUNAL HAS HELD AS WHAT WAS ARGUED BY THE LD. AR. FOR INSTANCE IN THE CASE OF M/S. DATA SOFTWARE RESEARCH COMPANY (IN TERNATIONAL) PVT. LTD. V. ACIT, ITA NOS.2169 & 2170/MDS/2015 AND ACIT V. M/S. DATA SOFTWARE RESEARCH COMPANY (INTERNATIONAL) PVT. LTD. , ITA NOS. 2171& 2172/MDS/2015 VIDE ORDER DATED 03.02.2016, THIS BEN CH OF THE TRIBUNAL HAS HELD AS FOLLOWS: 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. IT IS A NORMAL P RACTICE TO MAKE INVESTMENT IN SISTER COMPANIES DUE TO COMMERCIAL EXIGENCIES. WHILE DOING SO, NO EXPENSE CAN BE ATTRIBUTABLE OTHER THAN INTEREST EXPENSE FOR MAK ING SUCH INVESTMENTS BECAUSE ALL MANAGEMENT COSTS WILL BE ABSORBED FOR STRATEGIC DECISION MAKING PROCESS WHIC H IS ALLOWABLE AS BUSINESS EXPENDITURE. IN THE CASE OF THE ASSESSEE IT IS SUBMITTED THAT NO INTEREST COST WAS INCURRED AS THE ENTIRE INVESTMENTS WERE MADE OUT OF OWN 4 ITA NO.3044/MDS/2016 FUNDS. FURTHER IN THE DECISION OF THE TRIBUNAL IN I TA NO.115/MDS/2015 DATED 06.01.2016, EXTRACTED HEREIN BELOW, IT HAS BEEN HELD THAT SECTION 14A OF THE ACT WILL NOT BE APPLICABLE WHEN INVESTMENTS ARE MADE IN SIST ER COMPANIES. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICA L ISSUE AS POINTED OUT BY THE LD. A.R. THE CHENNAI BENCH OF TH E TRIBUNAL IN ITA NO.156/MDS/2013 VIDE ORDER DATED 20/08/13 FO R THE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTE R TO THE LD. ASSESSING OFFICER TO DECIDE THE MATTER ONCE AGA IN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE HAD ACTU ALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND IN COME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN B ELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLL OWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF ANY F INDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. II) INTEGLOBE ENTERPRIESES LTD., VS. DCIT REPOTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INTEREST EXPEN DITURE WAS INCURRED FOR MAKING INVESTMENTS. WHERE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR MAKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIES, WHI CH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AND WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWANCE OF INTEREST WAS REQU IRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PURPOSE OF ARRIVING AT DISALLOWANCE UN DER RULE 8D(III). III) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 2 014-TIOL-202- ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSI DIARY COMPANIES OF THE ASSESSEE AND, THEREFORE, THE PURPO SE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME B UT HAVING CONTROL 5 ITA NO.3044/MDS/2016 AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESS EE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 98% OF THE INVESTMENT MADE IN T HE SUBSIDIARY COMPANIES, THEREFORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMP T INCOME, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT J USTIFIED, ACCORDINGLY THE SAME IS DELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON- INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND R ESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSEE AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CALLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPOR TED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL Y EAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS E STABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INT EREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013-TIOL- 796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SU BSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOT EL INDUSTRY. THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFO RE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY IS NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASSESSING OFFICE R IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER TH E PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSE SSEE IN SUBSIDIARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISI ON OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW AND ME RITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOVE. W HILE DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDE R THE 6 ITA NO.3044/MDS/2016 DECISION OF THE TRIBUNAL IN THE CASE M/S AGILE ELEC TRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. M OREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS F OLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MAD E BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOT EL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CA SE OF THE ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACC OUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE AS SESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENT AL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDI ARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVE STMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAV OUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQ UIRING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDING LY WE RESTRAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD .CIT(A) ON THIS REGARD. 8. THEREFORE, FOLLOWING THE AFORESAID DECISION OF T HE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OFFICER TO DELETE THE ADDITION MADE ON ACCOUNT OF SECTION 14A WHERE INVESTMENTS ARE MADE IN SISTER CONCERNS SUCH AS EQUITY SHARES AND SHARE APPLICATIO N MONEY. HOWEVER, IF THE INVESTMENTS ARE MADE FROM BORROWED FUNDS, SECTION 14A OF THE ACT WOULD BE APPLICABLE AND LEARNED ASSESSING OFFICER SHALL COMP UTE THE DISALLOWANCE UNDER SECTION 14A READ WITH RULES 8D IN ACCORDANCE WITH LAW. 7 ITA NO.3044/MDS/2016 6.1 ACCORDINGLY WE HEREBY REMIT BACK THE MATTER TO THE FILE OF THE LD. AO TO CONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE ABOVE ORDER OF THE TRIBUNAL AND PASS APPROPRIATE ORDER IN ACCORDAN CE WITH MERITS AND LAW. WE ALSO MAKE IT CLEAR THAT FOR THE INVEST MENTS MADE IN MUTUAL FUNDS, PROVISIONS OF SECTION 14A READ WITH R ULE 8D WILL BE APPLICABLE SINCE THE ASSESSEE WOULD INCUR SOME EXPE NDITURE AT LEAST FOR THE DECISION MAKING PROCESS AS TO IN WHICH MUTU AL FUND THE INVESTMENT HAS TO BE MADE AND AT WHAT POINT OF TIME EXIT FROM SUCH FUNDS. IT IS ORDERED ACCORDINGLY. ACCORDINGLY IN THIS CASE OF THE ASSESSEE ALSO, WE H EREBY REMIT THE MATTER BACK TO THE FILE OF THE LD. AO FOR FRESH CONSIDERATION SO AS TO PASS APPROPRIATE ORDER AS PE R MERIT AND LAW AND IN THE LIGHT OF THE ABOVE ORDER OF THE TRIB UNAL. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED IN THE COURT ON THE 10 TH APRIL, 2017. SD/- SD/- ( ! ' . #$ ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) ' #$ /JUDICIAL MEMBER #$ / ACCOUNTANT MEMBER %' /CHENNAI, &# /DATED 10 TH APRIL, 2017 JR # () *) /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. - ( )/CIT(A) 4. - /CIT 5. )./ 0 /DR 6. /1 /GF