ACIT Corporate Circle 3(1), CHENNAI V. TCP Limited, CHENNAI

ITA 3124/CHNY/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4085 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 20-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S VIDYA
• Keywords: Earning of tax free income; Proportionate interest; Question of law; TDS; Rule 8D
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A BENCH, CHENNAI , . , BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.3124 TO 3126/CHNY/2017 ( / ASSESSMENT YEARS: 2012-13 TO 2014-15) THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(1), CHENNAI. VS M/S. TCP LIMITED, NO.4, OLD NO.10, TCP SAPTHAGIRI BHAVAN, KARPAGAMBAL NAGAR, MYLAPORE, CHENNAI 600 004. PAN: AAACT3615K ( /APPELLANT) ( /RESPONDENT) / APPELLANTS BY : SHRI AR.V. SREENIVASAN, JCIT / RESPONDENT BY : MS. S. VIDYA, CA /DATE OF HEARING : 14.02.2019 /DATE OF PRONOUNCEMENT : 08.05.2019 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-18, CHENNAI, DATED 18.09.2017 IN ITA NO.1151/14-15 FOR THE ASSESSMENT YEAR 2012-13 AND THE COMMON ORDER DATED 28.09.2017 IN ITA NO.12 & 343/2016-17 FOR THE ASSESSMENT YEARS 2013-14 & 2014-15, ALL PASSED U/S. 250(6) R.W.S. 143(3) OF THE ACT. 2 ITA NOS.3124 TO 3126/CHNY/2017 2. THE REVENUE HAS RAISED FOUR IDENTICAL GROUNDS IN ITS APPEALS HOWEVER THE CRUXES OF THE ISSUES ARE THAT (I) THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE LD.AO AMOUNTING TO RS.4,47,37,892/-, RS.4,22,13,104/- AND RS.3,18,67,156/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY TOWARDS DISALLOWANCE U/S.14A R.W.R. 8D OF THE RULES. (II) THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE LD.AO AMOUNTING TO RS.26,25,530/-, RS.24,08,632/- & RS.43,02,591/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY TOWARDS DISALLOWANCE U/S.36(1)(II) OF THE ACT BEING THE COMMISSION PAID TO THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING IN CHEMICALS AND GENERATION OF POWER, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 ON 29.09.2012, 29.09.2013 & 29.10.2014 ADMITTING TOTAL INCOME OF RS.28,23,52,700/-, RS.27,30,84,750/- & RS.40,03,33,290/- RESPECTIVELY. THE CASES WERE SELECTED FOR SCRUTINY AND NOTICE 3 ITA NOS.3124 TO 3126/CHNY/2017 U/S.143 (2) OF THE ACT WAS ISSUED. FINALLY ASSESSMENT ORDER WAS PASSED U/S. 143(3) OF THE ACT ON 27.03.2015, 29.03.2016 & 22.12.2016 FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY, WHEREIN THE LD.AO MADE SEVERAL DISALLOWANCE. 4. GROUND NO.2(I) : DISALLOWANCE U/S.14A R.W.R. 8D OF THE RULES:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD MADE INVESTMENTS EARNING EXEMPT INCOME AS ON 31.03.2012, 31.03.2013 & 31.03.2014 AMOUNTING TO RS.141,80,25,481/-, RS.141,89,30,121/- & RS.161,52,78,695/- RESPECTIVELY. DURING THE RELEVANT ASSESSMENT YEARS, THE DIVIDEND INCOME EARNED BY THE ASSESSEE WHICH IS EXEMPT FROM TAX WAS RS.3,83,730/-, RS.2,65,815/- & RS.1,19,410/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY. THEREFORE THE LD.AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND & 8D OF THE RULES AND COMPUTED THE DISALLOWANCE AT RS.4,47,37,892/-, RS.4,22,13,104/- & RS.3,18,67,156/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY. 4 ITA NOS.3124 TO 3126/CHNY/2017 4.1 BEFORE THE LD.CIT(A), THE LD.AR HAD MADE THE FOLLOWING SUBMISSIONS:- (I) THE ASSESSEE HAD COMPUTED THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME AS RS.53,950/-, RS.1,08,805/- & RS.8,23,331/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY AND OFFERED THE SAME FOR DISALLOWANCE. (II) HOWEVER THE LD.AO HAS SIMPLY REJECTED THE COMPUTATION MADE BY THE ASSESSEE WITHOUT EXAMINING THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME AND WORKED OUT THE DISALLOWANCE AT RS.4,47,37,892/-, RS.4,22,13,104/- & RS.3,18,67,156/- FOR THE ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 RESPECTIVELY BY INVOKING RULE 8D OF THE RULES. (III) THE ENTIRE INVESTMENT WAS MADE OUT OF THE NON-INTEREST BEARING FUNDS OF THE ASSESSEE COMPANY AS ITS EQUITY SHARE CAPITAL, GENERAL RESERVES, AND SURPLUS FROM P&L ACCOUNT EXCEEDED THE TOTAL INVESTMENT WHICH EARNS EXEMPT INCOME. THEREFORE NO INTEREST EXPENSES COULD BE ATTRIBUTED TOWARDS THE INVESTMENT MADE FOR EARNING EXEMPT INCOME. 5 ITA NOS.3124 TO 3126/CHNY/2017 4.2 THE LD.CIT(A) AFTER CONSIDERING THE ABOVE SUBMISSIONS DELETED THE ADDITION MADE BY THE LD.AO INVOKING THE PROVISIONS OF SECTION 14A R.W.R.8D OF THE RULES, BECAUSE THE LD.AO HAD MADE SUCH ADDITION WITHOUT ENQUIRING & EXAMINING THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME BY RELYING ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE CIT VS. HERO MANAGEMENT SERVICES PVT. LTD., REPORTED IN 360 ITR 0068 FOR THE ASSESSMENT YEAR 2012-13. SIMILARLY THE LD.CIT(A) DELETED THE ADDITION INVOKING SECTION 14A R.W.R.8D OF THE RULES FOR THE ASSESSMENT YEARS 2013-14 & 2014-15 ALSO. 4.3 BEFORE US THE LD.DR ARGUED IN SUPPORT OF THE ORDER OF THE LD.AO WHILE AS THE LD.AR RELIED ON THE ORDER OF THE LD.CIT(A) AND PRAYED FOR SUSTAINING THE SAME. 4.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. PROVISIONS OF SECTION 14A(2) MAKES IT ABUNDANTLY CLEAR THAT THE ASSESSING OFFICER IS EMPOWERED TO COMPUTE THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE RULES ONLY IF HE IS SATISFIED THAT THE COMPUTATION MADE BY THE ASSESSEE WITH RESPECT TO THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME 6 ITA NOS.3124 TO 3126/CHNY/2017 IS NOT APPROPRIATE OR CANNOT BE RELIED UPON. THEREFORE IT IS MANDATORY FOR THE ASSESSING OFFICER TO RECORD SUCH SATISFACTION AS TO WHY THE COMPUTATION MADE BY THE ASSESSEE IS TO BE REJECTED. IN THE CASE OF THE ASSESSEE, IT IS APPARENT THAT THE LD.AO HAD NOT EVEN VENTURED TO EXAMINE THE COMPUTATION MADE BY THE ASSESSEE WITH RESPECT TO THE EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME FOR ALL THE RELEVANT ASSESSMENT YEARS. THEREFORE FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT, THE LD.CIT(A) HAS HELD THE ISSUE IN FAVOUR OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2012-13 BY OBSERVING AS UNDER:- 6. I HAVE GONE THROUGH THE ASSESSMENT ORDER, GROUNDS OF APPEAL, WRITTEN SUBMISSIONS AND CASE LAWS RELIED ON BY THE APPELLANT AND THE ISSUES ARE DECIDED AS UNDER: A) AS REGARDS THE DISALLOWANCE U/S. 14A RWR 8D OF RS. 4,47,37,892, AS POINTED OUT BY THE APPELLANT THE FIRST AND FOREMOST PRE-REQUISITE FOR INVOKING THE PROVISIONS OF SECTION 14(A) READ WITH RULE 8D IS THAT THE AO BEFORE EMBARKING ON SUCH AN ACT SHOULD RECORD HIS REASONS FOR INVOKING THE ABOVE PROVISIONS AND THE SAME SHOULD BE CONVEYED TO THE APPELLANT AND ITS OBJECTIONS IF ANY, SHOULD BE OBTAINED. INASMUCH AS THIS PRE-REQUISITE CONDITION HAS NOT BEEN FULFILLED THE AO'S ACTION IS LEGALLY NOT TENABLE. IN THIS REGARD RELIANCE IS PLACED ON THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS HERO MANAGEMENT SERVICES PVT. LTD REPORTED IN 360 ITR 0068 (DELHI) WHEREIN IT HAS BEEN OBSERVED AS UNDER: FURTHER TO INVOKE RULE 8D, THE ASSESSING OFFICER HAS TO FIRST RECORD A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM FOR EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO INCOME, WHICH DID NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. NO SUCH SATISFACTION HAS BEEN RECORDED BY THE ASSESSING OFFICER. 7 ITA NOS.3124 TO 3126/CHNY/2017 BASED ON THE ABOVE CITED DISCUSSION THE ADDITION MADE BY THE AO U/S 14A IS HEREBY DELETED. ACCORDINGLY, THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED. FURTHER FOR THE ASSESSMENT YEAR 2013-14 & 2014-15, THE LD.CIT(A) HELD THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS FOLLOWS:- 7.3 GROUND RELATING DISALLOWANCE U/S.14A RWR 8D: THE AO INVOKING THE ABOVE SAID PROVISIONS MADE A DISALLOWANCE FOR BOTH THE YEARS. CONTESTING THE DISALLOWANCE, THE APPELLANT SUBMITTED THAT IT HAD EARNED A DIVIDEND OF RS.2,65,815/- FOR AY 2013- 14 AND RS.1,19,410/- FOR AY 2014-15. THE APPELLANT COMPANY HAD DISALLOWED A SUM OF RS.1,08,805/- FOR AY 2013-14 AND RS.8,23,331 FOR AY 2014-15. IGNORING THE SAID DISALLOWANCES MADE BY THE APPELLANT, THE AO PROCEEDED TO MAKE THE SAID DISALLOWANCES. THE AO WHILE RESORTING TO ACTION U/S.14A RWR 8D HAS OMITTED TO SEE THAT THE APPELLANT WAS IN POSSESSION OF ITS OWN FUNDS TO MAKE INVESTMENTS AND THERE BEING NO BORROWED FUNDS WAS INVESTED TO EARN EXEMPTED INCOME. IN THE CIRCUMSTANCES, THE ACTION OF THE AO IS INCORRECT AND THE SAID DISALLOWANCE FOR BOTH THE YEARS IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL FOR BOTH THE A.YS IS ALLOWED. SINCE THE LD.CIT(A) HAD FOLLOWED THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE CIT VS. HERO MANAGEMENT SERVICES PVT. LTD., REPORTED IN 360 ITR 0068, WHEREIN THE FACTS ARE SIMILAR TO THAT EXTENT WE FIND MERIT IN THE ORDER OF LD.CIT(A) FOR ALL THE RELEVANT ASSESSMENT YEARS, HOWEVER THE AMOUNT OF EXPENDITURE DISALLOWED BY THE ASSESSEE SHALL STANDS DISALLOWED BY VIRTUE OF SECTION 14A OF THE ACT, SUBJECT TO THE VERIFICATION OF THE FACT THAT THE SHARE CAPITAL, GENERAL RESERVES, AND SURPLUS FROM P&L ACCOUNT EXCEEDS THE TOTAL 8 ITA NOS.3124 TO 3126/CHNY/2017 INVESTMENT MADE WHICH EARNS EXEMPT INCOME IN ORDER TO ESTABLISH THAT THE ASSESSEE HAD MADE SUCH INVESTMENTS OUT OF ITS NON- INTEREST BEARING FUNDS FOR THE RELEVANT ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15. HOWEVER IF IT IS FOUND THAT THE SHARE CAPITAL, GENERAL RESERVES, AND SURPLUS FROM P&L ACCOUNT DOES NOT EXCEEDS THE TOTAL INVESTMENT WHICH EARNS EXEMPT INCOME THEN THE PROPORTIONATE INTEREST ATTRIBUTABLE TOWARDS INVESTMENT MADE OUT OF INTEREST BEARING FUND SHALL ALSO BE DISALLOWED ALONG WITH THE EXPENDITURE COMPUTED BY THE ASSESSEE FOR EARNING EXEMPT INCOME BY VIRTUE OF SECTION 14A OF THE ACT. IT IS ORDERED ACCORDINGLY. 5. GROUND NO.2(II) : DISALLOWANCE U/S.36(1)(II) OF THE ACT BEING COMMISSION PAID TO THE MANAGING DIRECTOR OF THE COMPANY:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE COMPANY HAD PAID REMUNERATION TO ITS MANAGING DIRECTOR DURING THE RELEVANT ASSESSMENT YEARS 2012-13, 2013-14 & 2014-15 IN THE FORM OF COMMISSION AMOUNTING TO RS.26,25,530/-, RS.24,08,632/- & RS.43,02,591/- RESPECTIVELY. ON QUERY THE ASSESSEE HAD MADE THE FOLLOWING SUBMISSIONS BEFORE THE LD.AO:- 9 ITA NOS.3124 TO 3126/CHNY/2017 (I) AS PER THE TERMS & CONDITIONS OF THE APPOINTMENT OF MANAGING DIRECTOR WHICH IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 309 OF THE COMPANIES ACT, 1956, ONE PERCENT OF THE NET PROFIT IS TO BE PAID TO THE MANAGING DIRECTOR AS COMMISSION. (II) THE COMMISSION OF 1% ON NET PROFIT OF THE COMPANY COULD BE DETERMINED ONLY AFTER THE COMPLETION OF THE FINALIZATION OF THE ACCOUNTS AND AUDIT OF THE ASSESSEE COMPANYS ACCOUNT WHEREBY THE NET PROFIT IS FINALLY ARRIVED. (III) THE PAYMENT OF COMMISSION IS TREATED AS SALARY PAID TO MANAGING DIRECTOR OF THE COMPANY AND TAX IS DEDUCTED AT SOURCE IN ACCORDANCE WITH SECTION 192 OF THE ACT. HOWEVER THE LD.AO REJECTED THE SUBMISSIONS MADE BY THE ASSESSEE AND OPINED THAT THE PROVISIONS OF SECTION 36(1)(II) OF THE ACT WOULD BE ATTRACTED TOWARDS THE COMMISSION PAYMENT MADE BY THE ASSESSEE COMPANY TO ITS DIRECTOR AND ACCORDINGLY DISALLOWED THE SAME. 5.1 ON APPEAL, THE LD.CIT(A) FOR THE ASSESSMENT YEARS 2012- 13, 2013-14 & 2014-15 DELETED THE ADDITION BY RELYING ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE AMD METPLAST 10 ITA NOS.3124 TO 3126/CHNY/2017 PVT. LTD., VS. DCIT REPORTED IN 341 ITR 563 WHEREIN IT WAS HELD AS FOLLOWS:- 6. B) ISSUE OF DISALLOWANCE U/S. 36(1)(II) OF RS. 26,25,530/-: ON GOING THROUGH THE SUBMISSIONS MADE BY THE APPELLANT IT IS SEEN THAT THE NECESSITY TO PAY THE COMMISSION TO THE MANAGING DIRECTOR ARISES CONSEQUENT TO THE TERMS AND CONDITIONS, WHEREIN IT HAS BEEN STIPULATED THAT 1% OF THE NET PROFITS SHOULD BE PAID. ACCORDINGLY, THE APPELLANT HAS PAID THE SAID AMOUNT FULFILLING SAID TERMS AND CONDITIONS. IN THE CIRCUMSTANCES, THE ACTION OF THE AD IN DISALLOWING THE SAID EXPENDITURE IS NOT JUSTIFIED. FURTHER RELIANCE IS PLACED ON THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF AMD METPLAST PVT. LTD. VS DCIT IN 341 ITR 563 (DELHI) WHEREIN IT HAS BEEN AS UNDER: WE FAIL TO UNDERSTAND HOW THE AFORESAID OBSERVATIONS ASSIST AND HELP THE REVENUE IN THE FACTUAL MATRIX OF THE PRESENT CASE. ASHOK GUPTA IS THE MANAGING DIRECTOR AND IN TERMS OF THE BOARD RESOLUTION IS ENTITLED TO RECEIVE COMMISSION FOR SERVICES RENDERED TO THE COMPANY. IT IS A TERM OF EMPLOYMENT ON THE BASIS OF WHICH HE HAD RENDERED SERVICE. ACCORDINGLY, HE WAS ENTITLED TO THE SAID AMOUNT. COMMISSION WAS TREATED AS A PART AND PARCEL OF SALARY AND TDS HAS BEEN DEDUCTED. ASHOK GUPTA WAS LIABLE TO PAY TAX ON BOTH THE SALARY COMPONENT AND THE COMMISSION. PAYMENT OF DIVIDEND IS MADE IN TERMS OF THE COMPANIES ACT, 1956. DIVIDEND HAS TO BE PAID TO LLSHAREHOLDERS EQUALLY. THIS POSITION CANNOT BE DISPUTED BY THE REVENUE. DIVIDEND IS A RETURN ON INVESTMENT AND NOT SALARY OR PART THEREOF. HEREIN THE CONSIDERATION IN THE FORM OF COMMISSION WHICH WAS PAID TO ASHOK GUPTA WAS FOR SERVICES RENDERED BY HIM AS PER TERMS OF APPOINTMENT AS A MANAGING DIRECTOR. IN VIEW OF THE AFORESAID POSITION, WE ANSWER THE QUESTION OF LAW IN NEGATIVE AND IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BASED ON THE ABOVE CITED DISCUSSION THE ADDITION MADE BY THE AD U/S 36 (1) (II) IS HEREBY DELETED. ACCORDINGLY, THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED. 11 ITA NOS.3124 TO 3126/CHNY/2017 5.2 SINCE THE LD.CIT(A) HAS FOLLOWED THE DECISION OF THE HONBLE DELHI HIGH COURT WHEREIN THE FACTS ARE IDENTICAL TO THE CASE OF THE ASSESSEE WE DO NOT FIND IT NECESSARY TO INTERFERE IN HIS ORDER ON THIS ISSUE ALSO. ACCORDINGLY THE GROUND RAISED BY THE REVENUE IS DEVOID OF MERITS. 6. IN THE RESULT THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON THE 8 TH MAY, 2019 AT CHENNAI. SD/- SD/- /CHENNAI, /DATED 8 TH MAY, 2019 RSR /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF ( ) (GEORGE MATHAN) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) /ACCOUNTANT MEMBER