M/s. Sunrays Properties & Investment Co. Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 352/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7484 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 31-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 20-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIMA BARNWAL SENIOR
• Keywords: Earning of tax free income
• Section: 142(1); 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G : NEW DELHI) BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.352/DEL./2014 (ASSESSMENT YEAR : 2008-08) M/S. SUNRAYS PROPERTIES & INVESTMENT VS. DCIT, CIRC LE 9 (1), CO. PVT. LTD., NEW DELHI. 414/1, 4 TH FLOOR, DDA COMM. COMPLEX, DISTRICT CENTRE, JANAKPURI, NEW DELHI 110 058. (PAN : AAACS3655C) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANU GIRI, ADVOCATE REVENUE BY : SMT. ANIMA BARNWAL, SENIOR DR DATE OF HEARING : 31.05.2016 DATE OF ORDER : 03.06.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. SUNRAYS PROPERTIES & INVESTMENT CO . PVT. LTD. (HEREINAFTER REFERRED TO AS THE ASSESSEE), BY FIL ING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 03.10. 2013 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-XI, NEW DELHI QUA THE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTER ALIA T HAT :- 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL), ERRED IN REJECTING ASSESSEE'S CONTENTION THAT THE SECTIONS 14A R. W. RULE 8D WAS NOT APPLICABLE TO TH E APPELLANT COMPANY, BECAUSE THE COMPANY NEITHER BORROWED ANY AMOUNTS NOR EARNED ANY DIVIDEND INCOME DURING THE Y EAR BY ITA NO.352/DEL./2014 2 THE ASSESSEE COMPANY, THEREBY CONFIRMING THE ADDITI ON OF RS. 1,72,92,279/-, MADE BY THE ASSESSING OFFICER U/S 14 A OF THE INCOME TAX ACT, RESULTING IN REDUCTION TO RETURNED LOSS TO THAT EXTENT. 3. WITHOUT TO THE PREJUDICE TO APPELLANT CONTENTION THAT RULE 8D IS NOT APPLICABLE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT DISALLOW ANCE UNDER RULE BD HAS BEEN CORRECTLY WORKED OUT IN ACCO RDANCE WITH THE PROVISIONS OF RULE 8D. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) ERRED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX R ULES, 1962, SINCE THE ASSESSEE HAS NOT EARNED DIVIDEND IN COME DURING THE YEAR UNDER ASSESSMENT WHICH HAS BEEN CLA IMED AS EXEMPT U/S 10(34) OF THE I.T. ACT, 1961. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : IN R ESPONSE TO THE NOTICE ISSUED UNDER SECTION 143(2) AND 142(1) OF THE INCOM E-TAX ACT, 1961 (FOR SHORT 'THE ACT') ALONG WITH QUESTIONNAIRE ISSUED DU RING THE SCRUTINY PROCEEDINGS, SHRI ANIL SRIVASTAVA, FCA/AR PUT IN AP PEARANCE FROM TIME TO TIME AND FILED REQUISITE DETAILS, WHICH HAVE BEE N TEST CHECKED. FROM THE PERUSAL OF SCHEDULE 5 ANNEXED WITH BALANCE SHEE T, IT IS TRANSPIRED THAT AS ON 31.03.2008, ASSESSEE HAS MADE INVESTMENT TO THE TUNE OF RS.28,28,54,572/- IN EQUITY SHARES OF LISTED COMPAN IES. ASSESSEE CLAIMED THAT NO EXPENSES CAN BE APPORTIONED CONCERN ING EXEMPT DIVIDEND INCOME, WHICH IS FOUND TO BE NOT TENABLE B Y THE ASSESSING OFFICER. AO OBSERVED THAT THE ASSESSEE HAS CLAIMED NO EXPENDITURE FOR THE PURPOSE OF EARNING EXEMPT DIVIDEND INCOME AND T HEREBY COMPUTED THE DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME- ITA NO.352/DEL./2014 3 TAX RULES, 1962 (FOR SHORT THE RULES) TO THE TUNE OF RS.1,72,92,279/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSES SEE. 3. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT ( A) WHO HAS DISMISSED THE APPEAL. FEELING AGGRIEVED, THE ASSES SEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL BY WAY OF FILING THE PRE SENT APPEAL. 4. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS RELIED UP ON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN THE LIGHT OF TH E FACTS AND CIRCUMSTANCES OF THE CASE. 5. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNED ORDER CONTENDED INTER ALIA THAT SINCE THE ASSESSEE COMPAN Y IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES PROVISIONS CONTAINED U/S 14A ARE NOT APPLICABLE TO THE ASSESSEE COMPANY; THAT SINCE THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE YEAR UNDER AS SESSMENT TO BE EXEMPTED U/S 10 OF THE ACT, PROVISIONS CONTAINED U/ S 14A READ WITH RULE 8D OF THE RULES ARE NOT APPLICABLE. 6. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE C OMPANY WAS CALLED UPON TO FILE COPY OF ANNUAL ACCOUNTS, TAX AU DIT REPORT, COMPUTATION OF INCOME AND COPY OF ACKNOWLEDGEMENT F OR FILING THE RETURN OF INCOME QUA THE YEAR UNDER ASSESSMENT, WHI CH IT HAS FILED ALONG WITH FOLLOWING REPLY :- IT MAY BE RELEVANT TO MENTION THAT THE ASSESSEE COMPANY IS AN INVESTMENT AND FINANCE COMPANY AND IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND BO RROWING AND LENDING OF MONEY. DURING THE YEAR UNDER ASSESSM ENT, THE ITA NO.352/DEL./2014 4 ASSESSEE COMPANY HAS NOT BORROWED ANY MONEY WHICH H AVE BEEN INVESTED IN SHARES ALL WHICH DIVIDEND HAS BEEN RECEIVED BY THE ASSESSEE COMPANY. IN FACT NO DIVIDEND HAS BE EN RECEIVED BY THE ASSESSEE COMPANY DURING THE YEAR UN DER ASSESSMENT. FURTHER, A PART OF SHARES HELD BY THE A SSESSEE COMPANY ARE HELD AS STOCK IN TRADE. SINCE THE ASSES SEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING IN SH ARES, THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE ASSESSEE COMPANY. IT MAY FURTHER BE RELEVANT TO MENTION THAT THE ASSE SSEE COMPANY HAS NOT EARNED ANY DIVIDEND INCOME DURING T HE YEAR UNDER ASSESSMENT WHICH HAS BEEN CLAIMED AS EXEMPT U /S 10(34) OF THE INCOME TAX ACT AND SINCE NO INCOME HA S BEEN CLAIMED TO BE EXEMPT U/S 10 OF THE ASSESSEE COMPANY , THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 14A IS TOTALLY UNWARRANTED AND UNCALLED FOR AND REQUIRES TO BE DEL ETED. RELIANCE IS PLACED IN THIS REGARD ON THE/ALLOWING C ASE LAWS WHEREIN IT HAS BEEN HELD THAT THE DISALLOWANCE U/S 14A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. 7. UNDISPUTEDLY, ANNUAL ACCOUNTS, TAX AUDIT REPORT AND BOOKS OF ACCOUNT FURNISHED BY THE ASSESSEE COMPANY HAS NOT B EEN DISPUTED BY THE AO. IT IS ALSO NOT IN DISPUTE THAT ASSESSEE HAS AL SO CLAIMED NO EXPENDITURE INCURRED TO EARN THE EXEMPT DIVIDEND IN COME DURING THE YEAR UNDER CONSIDERATION, BUT THE AO WORKED OUT THE DISALLOWANCE U/S 14A INCOME-TAX ACT, 1961 (FOR SHORT 'THE ACT') ACCO RDANCE WITH SUB-RULE (2) AND (3) READ WITH RULE 8D OF THE RULES TO THE F OLLOWING EFFECTS :- AMOUNT A. DIRECTLY ATTRIBUTED EXPENSES-DEMAT CHARGES 30137 B. INTEREST EXPENSES 20738894 INTEREST OR OTHER EXPENSES WHICH CANNOT BE DIRECTLY ATTRIBUTED AVERAGE VALUE OF INVESTMENT RELATED TO TAX FREE INCOME OPENING INVESTMENT 282854572 CLOSING INVESTMENT 282854572 282854572 AVERAGE TOTAL ASSETS IN BS ITA NO.352/DEL./2014 5 OPENING TOTAL ASSETS 377518034 CLOSING TOTAL ASSETS 362782187 370150110 INTEREST EXPENSES 15847870 C. DEEMED EXPENSES AVERAGE VALUE OF INVESTMENT RELATED TO TAX FREE INCOME OPENING INVESTMENT 282854572 CLOSING INVESTMENT 282854572 0.5% OF AVERAGE INVESTMENT 1414272 D. TOTAL 14A DISALLOWANCE 17292279 8. LD. CIT (A) AFFIRMED THE FINDINGS RETURNED BY TH E AO BY MAKING FOLLOWING OBSERVATIONS :- 9.1. .ON EXAMINATION OF THE FACTS OF THE CASE, I T IS OBSERVED THAT THE APPELLANT COMPANY HAS RECEIVED DI VIDEND INCOME DURING IMMEDIATELY PRECEDING YEAR AS WELL AS IN THE NEXT ASSESSMENT YEAR SUCCEEDING THE YEAR UNDER CONSIDERATION. THE PERUSAL OF BALANCE SHEET OF THE APPELLANT COMPANY SHOWS THAT IT IS THE HOLDING COMPANY AND SH ARES OF ITS SUBSIDIARY COMPANY ARE HELD BY IT ON WHICH DIVI DEND IS RECEIVED ON REGULAR BASIS. FOR MANAGING THESE INVES TMENTS DIRECT EXPENSES IN THE SHAPE OF DEMAT CHARGES ARE P AID BY THE APPELLANT COMPANY ON ANNUAL BASIS. BESIDES THAT TH E COMPANY IS HAVING COMMON POOL OF FINANCIAL RESOURCE S SINCE BEGINNING, AND FROM SUCH COMMON HOTCH-POT, INVESTME NT IN THE SHARES OF SUBSIDIARY COMPANIES HAVE BEEN MADE F ROM WHICH THE EXEMPT INCOME IN THE SHAPE OF DIVIDEND IS RECEIVED BY IT. THEREFORE, A PORTION OF FINANCIAL EXPENSES C LAIMED BY THE APPELLANT COMPANY IS DEFINITELY ATTRIBUTABLE TO THE EXEMPT INCOME. THIRDLY, THE APPELLANT IS UTILIZING ITS ADM INISTRATIVE AS WELL AS MANAGERIAL MACHINERY TO MAINTAIN THE INVEST MENTS IN A PRUDENT MANNER. THESE ADMINISTRATIVE AND MANAGERI AL EXPENSES ARE ALSO INSEPARABLE FROM THE EXPENSES REL ATING TO EARNING OF TAXABLE INCOME. THUS, ALL THE THREE COMP ONENTS OF RULE 8D ARE APPLICABLE IN APPELLANT'S CASE. THE REL EVANT QUESTION TO DECIDE IS WHETHER DISALLOWANCE U/S 14A IS PERMISSIBLE, WHEN NO DIVIDEND INCOME IS RECEIVED DU RING THE YEAR. THE APPELLANT HAS RELIED UPON CERTAIN DECISIO NS AND BASED ON THE ANALOGY THAT THE DISALLOWANCE U/S 14A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. IT IS EMPHASIZE D THAT SINCE EXEMPT INCOME DURING THE YEAR IS NIL, NO DISA LLOWANCE U/S 14A SHOULD BE MADE. SUCH ANALOGY OF THE APPELLA NT FROM ITA NO.352/DEL./2014 6 THE CITED CASE DOES NOT HAVE MUCH FORCE SINCE ADMIT TEDLY THE APPELLANT HAS INCURRED DIRECT AND INDIRECT EXPENSES IN MANAGING THE INVESTMENTS WHICH SHALL YIELD EXEMPT D IVIDEND INCOME 9. NOW, THE SOLE QUESTION ARISES FOR DETERMINATION IN THIS CASE IS, AS TO WHETHER SECTION 14A READ WITH RULE 8D IS APP LICABLE WHEN THE ASSESSEE COMPANY HAS NEITHER BORROWED ANY MONEY TO BE INVESTED IN SHARES NOR EARNED ANY EXEMPT DIVIDEND INCOME DURING THE YEAR UNDER ASSESSMENT? 10. BARE PERUSAL OF THE IMPUGNED ORDER PASSED BY TH E LD. CIT (A) SHOWS THAT HE HAS AFFIRMED ASSESSMENT ORDER ON THRE E GROUNDS ONE : THAT THE ASSESSEE COMPANY HAS RECEIVED DIVIDEND INC OME DURING THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS WELL AS TH E NEXT ASSESSMENT YEAR I.E. 2009-10; TWO : THAT ASSESSEE COMPANY IS T HE HOLDING COMPANY AND SHARE OF ITS SUBSIDIARY COMPANIES ARE HELD BY I T ON WHICH DIVIDEND IS RECEIVED ON REGULAR BASIS; AND THIRD : THAT FOR MAN AGING THESE INVESTMENTS, DIRECT EXPENSES IN THE SHARE OF DEMAT CHARGES ARE PAID BY THE ASSESSEE COMPANY ON ANNUAL BASIS AND AS SUCH, T HE PORTION OF FINANCIAL EXPENSES CLAIMED BY ASSESSEE COMPANY IS A TTRIBUTABLE TO THE EXEMPT INCOME. 11. IDENTICAL ISSUE HAS COME UP FOR CONSIDERATION B EFORE THE HONBLE JURISDICTIONAL HIGH COURT IN CASE CITED AS CHEMINVEST LTD. VS. CIT - (2015) 378 ITR 33 (DELHI) WHEREIN IT IS HELD AS UNDER :- HELD, THAT NO EXEMPTED INCOME WAS EARNED BY THE AS SESSEE IN THE RELEVANT ASSESSMENT YEAR AND SINCE THE GENUI NENESS OF ITA NO.352/DEL./2014 7 THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT IN DOUBT, NO DISALLOWANCE COULD BE MADE UNDER SECTION 14A. 12. SIMILARLY, HONBLE JURISDICTIONAL HIGH COURT IN CASE CITED AS MAXOPP INVESTMENT LTD. & ORS. VS. CIT - (2012) 247 CTR 162 ALSO HELD THAT, THE EXPRESSION EXPENDITURE INCURRED REFERS TO AC TUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDITURE BU T THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER S.14A (1 ) IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPEND ITURE IS INCURRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER S.14A. 13. MERELY, ON THE BASIS OF FACT THAT DURING THE PR ECEDING YEARS AS WELL AS SUCCEEDING YEARS, ASSESSEE COMPANY HAS EARN ED THE DIVIDEND INCOME, THE DISALLOWANCE U/S 14A READ WITH RULE 8D CANNOT BE MADE BECAUSE EARNING OF DIVIDEND ON INVESTMENT IN SHARES DEPENDS UPON THE COMPANY PERFORMANCE ETC. AO, WITHOUT REJECTING THE BOOKS OF ACCOUNT, COMPUTED THE DEEMED EXPENSES AT 0.5% OF AVERAGE INV ESTMENT AND ALSO COMPUTED THE INTEREST EXPENSES IN THE FACE OF THE U NDISPUTED FACTS THAT ASSESSEE HAS NOT BORROWED ANY FUNDS FOR THE PURPOSE OF INVESTMENT IN SHARES DURING THE YEAR UNDER ASSESSMENT. 14. ADMITTEDLY, WHEN THE AO AND LD. CIT (A) HAVE NO T DISPUTED THE BOOKS OF ACCOUNT AS WELL AS TAX AUDIT REPORT AND CO MPUTATION OF INCOME WHICH APPARENTLY PROVED THE CONTENTION OF THE ASSES SEE THAT NO DIVIDEND INCOME HAS BEEN RECEIVED DURING THE YEAR UNDER ASSE SSMENT NOR IT HAS ITA NO.352/DEL./2014 8 BORROWED ANY FUNDS TO INVEST IN THE SHARE TO EARN T HE DIVIDEND INCOME, THE QUESTION OF MAKING DISALLOWANCE BY INVOKING PRO VISIONS U/S 14A READ WITH RULE 8D DOES NOT ARISE. 15. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W HEN THE ASSESSEE COMPANY HAS NOT INCURRED ANY EXPENDITURE TO EARN TH E EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES, HENCE THE IMPUGNED ORDER PASSED BY THE L D. CIT (A) IS NOT SUSTAINABLE IN THE EYES OF LAW. CONSEQUENTLY, PRES ENT APPEAL FILED BY THE ASSESSEE IS HEREBY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 3 RD DAY OF JUNE, 2016. SD/- SD/- (J.S. REDDY) (KULDIP SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 03 RD DAY OF JUNE, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT-XI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.