Vasantha Traders, Hyderabad, Hyderabad V. DCIT, Circle-8(1), Hyderabad, Hyderabad

ITA 343/HYD/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2652 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 27-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Assessee Lawyers: T CHAITANYA KUMAR
• Keywords: Business income; Earning of tax free income; Question of law
• Section: 143(3); 14A; 10; 2

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.343/HYD/2017 ASSESSMENT YEAR: 2012-13 M/S VASANTHA TRADERS, HYDERABAD. PAN- AAHFV8178M VS. DCIT, CIRCLE-8(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI T. CHAITANYA KUMAR REVENUE BY : SMT. SUMAN MALIK DATE OF HEARING : 22-01-2018 DATE OF PRONOUNCEMENT : 24-01-2018 ORDER PER P. MADHAVI DEVI, J.M.: THIS IS ASSESSEE APPEAL FOR THE A.Y 2012-13, AGAINST THE ORDER OF THE CIT(A)-5, HYDERABAD DATED 07-12-2016 IN THIS ASSESSMENT YEAR THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN CONFIRMING THE DISALLOWANCE MADE U/S 14A(2) OF THE IT ACT R.W.R 8D OF THE IT RULES. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE FIRM ENGAGED IN THE BUSINESS OF TRADING OF COTTON YARN AND LINT, FILED ITS RETURN OF INCOME FOR THE A.Y 2012-13 ON 27-09- 2012 DECLARING A TOTAL INCOME OF RS. 37,80,390/-. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE IT ACT, THE A.O OBSERVED THAT THE ASSESSEE HAS BORROWED SECURED LOANS 2 ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. FROM UCO BANK CC LIMIT WITH CLOSING BALANCE OF RS. 4,95,74,846/- AND KOTAK MAHINDRA BANK TO THE EXTENT OF RS. 10,09,19,392/- AND OUT THE SAME AMOUNT HAD INVESTED IN THE SHARES OF ASSOCIATE COMPANY. THE A.O ALSO OBSERVED THAT THE INCOME GENERATED FROM SUCH INVESTMENT IS EXEMPT FROM TAX U/S 115(O) OF THE IT ACT. HOLDING THAT THERE IS A DIRECT NEXUS BETWEEN THE SECURED LOANS OUTSTANDING AND INVESTMENT MADE IN THE ASSOCIATE COMPANY M/S VASANTHA SPINNERS LTD., HE PROPOSED TO DISALLOW THE EXPENDITURE BY WAY OF INTEREST PAID TO BANK. HE THUS, COMPUTED THE DISALLOWANCE U/S 14A(2) R.W.S 8D OF THE IT RULES AT RS. 30,19,473/-. ACCORDINGLY A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. 3. IN REPLY, THE ASSESSEE SUBMITTED THAT THE INVESTMENT MADE IN THE ASSOCIATE COMPANY WAS MADE TO HAVE CONTROLLING INTEREST IN THE SAID COMPANY AND THEREFORE THE INVESTMENTS ARE AN ACCOUNT OF BUSINESS EXPEDIENCY. FURTHER, IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS NOT RECEIVED ANY EXEMPT INCOME DURING THE RELEVANT FINANCIAL YEAR AND THEREFORE NO DISALLOWANCE U/S 14A(2) OF THE IT ACT IS CALLED FOR. THE A.O HOWEVER DISALLOWED THE SUM OF RS. 30,19,473/- COMPUTED IN ACCORDANCE WITH RULE 8D OF THE 3 ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. IT RULES. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), WHO CONFIRMED THE ORDER OF THE A.O. THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 4. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, THIS ISSUE IS COVERED BY FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S KARVY STOCK BROKING LIMITED, HYDERABAD IN ITA NOS. 1397 & 1398 OF HYD 2017 AND ALSO BY THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS MAX INDIA LIMITED DATED 06-09-2016IN ITA NO. 186 OF 2013 (O & M). COPIES OF THE SAID ORDERS ARE FILED BEFORE US. 5. THE LD. DR ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND ALSO PLACED RELIANCE UPON THE CBDT CIRCULAR NO. 5 OF 2014 DATED 11-02-2014. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATERIAL ON RECORD, WE FIND THAT THE TRIBUNAL IN THE CASE OF M/S KARVY STOCK BROKING LIMITED (CITED SUPRA) HAS CONSIDERED THE ISSUE AT LENGTH AND ALSO THE CBDT CIRCULAR NO. 5 OF 2014 DATED 11-02-2014, AND THE DECISION OF THE HONBLE HIGH COURT OF MADRAS IN THE CASE OF REDINGTON (INDIA) LTD. VS. ACIT REPORTED IN (2017) 77 TAXMANN 257 (MAD) TO HOLD THAT 4 ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. WHERE THERE IS NO EXEMPT INCOME EARNED DURING THE RELEVANT FINANCIAL YEAR, THERE CANNOT BE ANY DISALLOWANCE U/S 14A OF THE IT ACT. FOR THE SAKE OF READY REFERENCE, THE RELEVANT PARA IS REPRODUCED HEREUNDER: 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE PROVISIONS OF SECTION 14A ARE APPLICABLE TO EXPENDITURE WHICH HAS BEEN INCURRED FOR EARNING OF EXEMPT INCOME IRRESPECTIVE OF WHETHER THE INVESTMENT IS FOR BUSINESS OR NON BUSINESS PURPOSES. BUSINESS INCOME OF CERTAIN BUSINESS ENTITIES SUCH AS 10% EOU'S OR INDUSTRIES SET UP IN FREE TRADE ZONES ETC., ARE FULLY EXEMPT FROM TAX AND ANY EXPENDITURE INCURRED FOR EARNING OF SUCH INCOME IS TO BE DISALLOWED U/S 14 A OF THE ACT . THEREFORE, THE ASSESSEE'S CONTENTION THAT SINCE THE ASSESSEE HAS MADE THE INVESTMENT IN THE SUBSIDIARIES FOR GENERATING REVENUE AND NOT FOR EARNING OF DIVIDEND INCOME, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE IS NOT ACCEPTABLE. BUT, HOWEVER, IT IS SUBJECT TO THE ASSESSEE EARNING EXEMPT INCOME DURING THE RELEVANT PREVIOUS YEAR. IT IS SEEN THAT THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE RELEVANT F.Y. THE AO HAS RELIED UPON THE CIRCULAR OF CBDT TO MAKE THE DISALLOWANCE EVEN THOUGH, THE ASSESSEE HAS NOT EARNED ANY INCOME WHICH IS EXEMPT FROM TAX, BUT WE FIND THAT THE HON'BLE MADRAS HIGH COURT HAS CONSIDERED THE SAID CBDT CIRCULAR AND HAS HELD AS UNDER: 'THE ASSESSEE HAD INVESTMENTS IN COMPANIES TO THE TUNE OF RS. 177.56 CRORES THAT HAD NOT YIELDED ANY RETURNS IN THE PREVIOUS YEAR RELEVANT TO THE PRESENT ASSESSMENT YEAR. THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE UNDER SECTION 14A, READ WITH RULE 8D DESPITE OBJECTIONS THAT THE PROVISIONS OF THE ABOVE SAID SECTION WOULD NOT BE ATTRACTED IN A CASE WHERE NO ACTUAL EXEMPT INCOME HAD BEEN EARNED. ON FURTHER APPEAL, THE TRIBUNAL ALSO CONFIRMED THE DISALLOWANCE. ON APPEAL TO THE HIGH COURT: 5 ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. SECTION 14A WAS INSERTED PROVIDING THAT NO DEDUCTION SHALL BE ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF INCOME EXEMPT FROM TAXATION. THE SUPREME COURT IN THE JUDGMENT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROKERS (P .) LTD. [2010] 326 ITR 1/192 TAXMAN 211 HAS OBSERVED THAT SECTION 14A DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE PROVISION THUS IS CLEARLY RELATABLE TO THE EARNING OF ACTUAL INCOME AND NOT NOTIONAL OR ANTICIPATED INCOME. THE COMPUTATION OF TOTAL INCOME IN TERMS OF SECTION 5 IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSESSMENT OF ADMITTEDLY NOTIONAL INCOME, PARTICULARLY IN THE CONTEXT OF EFFECTING A DISALLOWANCE IN CONNECTION THEREWITH. [PARA 10] THE COMPUTATION OF DISALLOWANCE IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESULT IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. [PARA 11] NOTHING MUCH TURNS ON THE USE OF THE WORD 'INCLUDABLE' AND THE PHRASE 'UNDER THE ACT' IN SECTION 14A AND THE EMPHASIS LAID OR THE INTERPRETATION OF THE SAME BY THE REVENUE CANNOT BE ACCEPTED. AN ASSESSMENT IN TERMS OF THE INCOME-TAX ACT IS SPECIFIC TO AN ASSESSMENT YEAR AND THE RELATED PREVIOUS YEAR. [PARA 14] THE PROVISIONS OF SECTION 10 IN CHAPTER III DEALING WITH 'INCOMES NOT INCLUDED IN TOTAL INCOME' COMMENCES WITH THE PHRASE 'IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR, ANY INCOME FALLING WITHIN ANY OF THE FOLLOWING CLAUSES SHALL NOT BE INCLUDED........' [PARA 14] THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOULD RELATE ONLY TO THE PREVIOUS YEAR WHEN THE INCOME WAS EARNED AND NONE OTHER AND CONSEQUENTLY THE EXPENDITURE INCURRED IN CONNECTION THEREWITH SHOULD ALSO BE DEALT WITH IN THE SAME PREVIOUS YEAR. THUS, BY APPLICATION OF THE MATCHING CONCEPT, IN A 6 ITA NO. 343/HYD/2017 M/S VASANTHA TRADERS, HYDERABAD. YEAR WHERE THERE IS NO EXEMPT INCOME, THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASSUMED INCOME. THE LANGUAGE OF SECTION 14A(1) SHOULD BE READ IN THAT CONTEXT AND SUCH THAT IT ADVANCES THE SCHEME OF THE ACT RATHER THAN DISTORT IT. [PARA 15] IN CONCLUSION, THE PROVISIONS OF SECTION 14A , READ WITH RULE 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM I.E. IN THE ABSENCE OF EXEMPT INCOME. THE QUESTION OF LAW ARE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT AND THE APPEAL ALLOWED. [PARA 16]' WE FIND THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR TO THE FACTS BEFORE THE HON'BLE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD (CITED SUPRA) AND RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALLOW THE ASSESSEE'S APPEAL AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S 14A. THUS, ASSESSEE'S GROUNDS OF APPEAL NOS. 2, 3 & 5 ARE REJECTED AND GROUND OF APPEAL NO.4 IS ALLOWED. 6.1 RESPECTFULLY FOLLOWING THE ABOVE DECISION IN SIMILAR SET OF FACTS, THE ASSESSEES APPEAL IS ALLOWED. 7. IN THE RESULT, THE ASSESSEE APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2018. SD/- SD/- (B.RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 24 TH JANUARY, 2018 KRK 1 M/S VASANTHA TRADERS, C/O T. CHAITANYA KUMAR, ADV, FLAT NO. 102, GOURI APARTMENT, URDU LANE, HIMAYAT NAGAR, HYDERABAD. 2 DCIT, CIRCLE 8(1) HYDERABAD. 3 CIT(A)-5, HYDERABAD 4 PR.CIT, RANGE-2, HYDERABAD. 5 THE DR, ITAT HYDERABAD 6 GUARD FILE