ACIT 3(1)(1), MUMBAI V. BHARAT SERUMS & VACCINES LTD, MUMBAI

ITA 3577/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0545 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2011-2012
• Appeal Filed On: 24-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BEENA SANTOSH MS POOJA SWAROOP
• Assessee Lawyers: P P BHANDARI
• Keywords: Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER ITA NO.3577/MUM/2016 (AY. 2011-12) THE ACIT-3(1)(1), ROOM NO.607,6 TH FLOOR, AAYKAR BHAVAN,M.K.ROAD, MUMBAI - 40020 ...... APPELLANT VS. M/S. BHARAT SERUMS & VACCINES LTD. 17 TH FLOOR, HOECHST HOUSE, NARIMAN POINT, MUMBAI 400021 PAN:AAACB 2431M .... RESPONDENT APPELLANT BY : MS. BEENA SANTOSH/ MS. POOJA SWAROOP RESPONDENT BY : SHRI P.P.BHANDAR I DATE OF HEARING : 18/05/2017 DATE OF PRONOUNCEMENT : 24 /05/2017 ORDER PER G.S.PANNU,A.M: THE CAPTIONED APPEAL FILED BY THE ASSESSEE PERT AINING TO ASSESSMENT YEAR 2011-12 IS DIRECTED AGAINST AN ORDER PASSED BY CIT(A)-8, MUMBAI DATED 26/02/2016, WHICH IN TURN, ARISES OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 15/03/2014. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 2 ITA NO.3577/MUM/2016 (AY. 2011-12) 1. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.15,19,000/- MADE BY THE AO WITHOUT APPRECIATING THE FACT THAT PRIOR PERIOD EXPENSES ARE NOT ALLOWAB LE AS PER THE PROVISIONS OF INCOME TAX ACT AS THE ASSESSEE IS FOLLOWING THE MER CANTILE SYSTEM OF ACCOUNTING AND SERVICES WERE RECEIVED IN EARLIER YEAR, WHICH F ACT THE ASSESSEE WAS AWARE OF.' 2. 'WITHOUT PREJUDICE TO GROUND NO.L, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DIS ALLOWANCE OF RS.15,19,000/- MADE BY THE AO ON TREATING SUCH SUM AS CAPITAL EXPENDITU RE. IN DOING SO, THE AO HAD RELIED ON THE DECISION OF THE APEX COURT IN THE CAS E OF BROOKE BOND INDIA LTD. V/S CIT [225 ITR 798 (SC)].' 3. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S.14A OF THE I.T.ACT AT RS.47,74,689/- MADE BY THE AO WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS NEITHER ESTABLISHED THAT NO PART OF INTEREST-BEARING FUND AS WELL AS EXPENSES SO CLA IMED HAS FOUND ITS WAY INTO THE INVESTMENTS IN SHARES NOR ADDUCED ANY DOCUMENTARY E VIDENCES DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE A.O.' 4. 'THE APPELLANT PRAYS THAT THE ORDER OF CIT (A) O N THE ABOVE GROUND BE SET ASIDE AND THAT OF ASSESSING OFFICER BE RESTORED.' 3. THE RESPONDENT ASSESSEE IS A COMPANY INCORPORATE D UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS, INTER -ALIA, ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PHARMACEU TICALS, BIOLOGICAL, ETC. IN SO FAR AS THE FIRST ISSUE IS CONCERNED, IT RELATES TO AN EXPENDITURE OF RS.15,19,000/- DEBITED IN THE P&L ACCOUNT ON ACCOU NT OF PROFESSIONAL FEE. THE ASSESSING OFFICER NOTED THAT THE PROFESSIONAL F EE WAS PAID IN RELATION TO MATTERS RELATING TO THE BUY-BACK OF THE SHARES, WHI CH TOOK PLACE IN EARLIER YEAR. THEREFORE, THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE ON TWIN REASONS, VIZ, FIRSTLY, THAT IT WAS A PRIOR PERIOD EXPENDITURE AND, SECONDLY, THAT SINCE THE EXPENDITURE RELATED TO BUY-BACK OF S HARES IT WAS CAPITAL IN NATURE. THE CIT(A) HELD THAT THE PROFESSIONAL FEE BILLS IN QUESTION WERE RECEIVED BY THE ASSESSEE DURING THE YEAR UNDER CONS IDERATION, WHICH RELATED TO THE ADVICE AND DOCUMENTATION RENDERED TO THE AS SESSEE REGARDING THE BUY-BACK OF SHARES. ACCORDING TO CIT(A), SINCE THE BILLS WERE RECEIVED IN THE INSTANT YEAR, THE LIABILITY CRYSTALLIZED DURING THE YEAR. THE CIT(A) HAS ALSO HELD 3 ITA NO.3577/MUM/2016 (AY. 2011-12) THAT EXPENDITURE PERTAINING TO BUY-BACK OF SHARES W AS DEDUCTIBLE AS A REVENUE EXPENDITURE. ACCORDINGLY, THE CIT(A) DISAG REED WITH THE ASSESSING OFFICER ON BOTH THE REASONS AND ALLOWED THE CLAIM O F THE ASSESSEE. 4. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE H AS REITERATED THE STAND OF THE ASSESSING OFFICER, WHICH WE HAVE ALREA DY NOTED IN THE EARLIER PARAS AND THE SAME IS NOT BEING REPEATED FOR THE SA KE OF BREVITY. 5. ON THE OTHER HAND, THE LD.REPRESENTATIVE FOR THE ASSESSEE DEFENDED THE ORDER OF THE CIT(A) AND POINTED OUT THAT THE HY DERABAD BENCH OF THE TRIBUNAL IN THE CASE OF DECCAN CHRONICLES HOLDINGS LTD. VS. DCIT, ITA NO.219,517/HYD/2014 ORDER DATED 16 TH SEPTEMBER, 2014, HAS HELD THAT EXPENDITURE INCURRED IN RELATION TO BUY-BACK OF SHA RES IS NOT A CAPITAL EXPENDITURE, BUT WAS ALLOWABLE AS A BUSINESS EXPEND ITURE IN TERMS OF SECTION 37(1) OF THE ACT. ON THIS BASIS, THE DECISION OF T HE CIT(A) IS SOUGHT TO BE DEFENDED. 6. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND NO REASONS TO INTERFERE WITH THE DECISION OF THE CIT(A) WHICH IS BASED ON THE DECISION OF OUR CO-ORDINATE BENCH IN THE CASE OF DECCAN CHRONICLE HOLDINGS LTD. (SUPRA). IN SO FAR AS THE OBJECTION OF THE ASSESSING OFFICER TH AT IT WAS A PRIOR PERIOD EXPENDITURE, IN OUR VIEW, THE SAME HAS BEEN CORRECT LY NEGATED BY THE CIT(A). OSTENSIBLY, THE IMPUGNED EXPENDITURE MAY PERTAIN TO AN ACTIVITY OF AN EARLIER YEAR, SO HOWEVER, THE CIT(A) HAS RECORDED A CATEGOR ICAL FINDING THAT THE LIABILITY FOR THE SAME HAS CRYSTALLIZED DURING THE INSTANT YEAR AS REQUISITE BILLS WERE RECEIVED DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. FOR THE SAID REASONS, WE FIND NO INFIRMITY IN THE 4 ITA NO.3577/MUM/2016 (AY. 2011-12) ULTIMATE DECISION OF THE CIT(A) IN DELETING THE ADD ITION. ACCORDINGLY, THE ORDER OF THE CIT(A) IS AFFIRMED AND REVENUE FAILS O N THIS ASPECT. 7. THE SECOND ISSUE IS WITH REGARD TO A DISALLOWANC E OF RS.47,74,689/- MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT ON THE GROUND THAT ASSESSEE HAS MADE INVESTMENTS IN SHARES AND SE CURITIES, WHICH IS CAPABLE OF GENERATING EXEMPT INCOME. NOTABLY, THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE BY APPLYING THE FORMULA C ONTAINED IN RULE 8D(2) OF THE INCOME TAX RULES,1962 (IN SHORT THE RULES ). IN THIS CONTEXT, THE CIT(A) HAS DELETED THE ADDITION BY HOLDING AS UNDER :- 5.2.5 THE GUIDING PRINCIPLES ENSHRINED IN THE ABO VE JUDICIAL DECISIONS CONSTITUTE AN EFFECTIVE AND OBJECTIVE LITMUS TEST TO APPLY TO ANY CASE FOR DETERMINING BOTH THE APPLICABILITY OF SECTION 14A OF THE ACT AS WELL AS THAT OF RULE 8D OF THE INCOME TAX RULES. THE FACTS OF EACH CASE HAVE TO BE CAREFULLY SUBJECTED TO THE LITMUS TEST OF THE FOLLOWING QUESTIONS AND ANSWERED OBJECTIVELY: 1. WHETHER THERE IS ANY INCOME EARNED BY THE ASSESS EE WHICH IS CLAIMED TO BE EXEMPT? (ANSWER HAS TO BE YES) 2. WHETHER INVESTMENTS WERE MADE IN SUBSIDIARY/SIS TER COMPANY AND WERE FOR FURTHERING BUSINESS OF ASSESSEE? (IF YES THEN N O DISALLOWANCE OF INTEREST PAID.) 3. WHETHER INTEREST FREE FUNDS WERE AVAILABLE SUFFI CIENT TO MEET ITS INVESTMENTS? (IF YES, IT CAN BE PRESUMED THAT THE I NVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE.) 4. WHETHER THE NEXUS BETWEEN BORROWED FUNDS AND IN VESTMENT HAS BEEN ESTABLISHED (ONLY WHERE IT IS SHOWN THAT INTEREST F REE FUNDS ARE NOT AVAILABLE WITH THE ASSESSEE)? (IF NO, NO DISALLOWANCE OF INTE REST PAID.) 5. WHETHER THERE IS A FINDING OF FACT THAT ANY EXPE NDITURE WAS INCURRED WHICH IS TO BE DISALLOWED? (ANSWER HAS TO BE YES FO R APPLICATION OF R. 8D.) 6. WHETHER THERE IS ANY EXPENDITURE, WHICH HAS BEE N ESTABLISHED TO HAVE BEEN INCURRED IN RELATION TO THE EARNING OF TAX FRE E INCOME? (ANSWER HAS TO BE YES FOR APPLICATION OF R. 8D.) 7. WHETHER THE AO HAS PLACED ANY MATERIAL ON RECOR D TO CONTROVERT THE CONTENTION OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME? (ANSWER HAS TO BE YES FO R APPLICATION OF R.8D.) 5 ITA NO.3577/MUM/2016 (AY. 2011-12) 8. WHETHER RULE 8D WAS AUTOMATICALLY INVOKED BY THE AD WITHOUT EXAMINING AND GIVING A FINDING OF FACT ABOUT THE NATURE OF EX PENDITURE FOR CORRECTNESS OF DISALLOWANCE? (ANSWER HAS TO BE NO FOR APPLICATI ON OF R. 8D.) 5.2.6 APPLYING THE RATIO OF THE CASE LAWS CITED ABO VE AND THE PARAMETERS TO BE EXAMINED FOR DETERMINING APPLICABILITY OF SECTION 1 4A READ WITH RULE 8D, I FIND THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY COGENT OR S PECIFIC REASON FOR DISSATISFACTION WITH THE APPELLANT'S CONTENTION. ALTHOUGH HE HAS HI MSELF STATED THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS NOT REC EIVED ANY EXEMPT DIVIDEND INCOME, HE HAS MADE THE DISALLOWANCE ON THE PREMISE THAT THE INVESTMENT HAS A POTENTIAL OF EARNING TAX EXEMPT INCOME IN FUTURE. HE HAS ALSO NOT DEALT WITH THE FACT THAT THE APPELLANT HAD AMPLE INTEREST FREE OW N FUNDS OR THAT THE INVESTMENTS ARE EITHER IN FOREIGN COMPANIES WHICH HAVE TO BE EX CLUDED OR IN INDIAN COMPANIES WHICH ARE FOR STRATEGIC PURPOSE. 5.2.7 IN VIEW OF THE ABOVE FACTS AND IN VIEW OF TH E CITATIONS GIVEN ABOVE, I DO NOT FIND THAT THE DISALLOWANCE OF RS. 47,74,689/- MADE UNDER SECTION 14A READ WITH RULE 8D IS SUSTAINABLE, ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED. 8. ON THIS ASPECT, THE ONLY POINT MADE BY THE LD. D EPARTMENTAL REPRESENTATIVE IS THAT CIT(A) ERRED IN DELETING THE DISALLOWANCE BECAUSE ASSESSEE COULD NOT ESTABLISH THAT NO PART OF INTERE ST BEARING FUND WAS USED TO MAKE THE IMPUGNED INVESTMENT. 9. ON THE OTHER HAND, THE LD.REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ORDER OF THE CIT(A) IS QUITE JUSTIFIED, IN ASMUCH AS, DURING THE YEAR UNDER CONSIDERATION NO EXEMPT INCOME WAS RECEIVED A ND, THEREFORE, IN TERMS OF THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT, 378 ITR 33(DEL) NO DISALLOWANCE IS MA INTAINABLE. APART THEREFROM, IT IS ALSO SOUGHT TO BE EXPLAINED THAT T HE CIT(A) IN PARA-5.2.2 OF HIS ORDER HAS CLEARLY NOTED THAT ASSESSEE HAD ENOUGH IN TEREST FREE FUNDS IN THE SHAPE OF SHARE CAPITAL AND RESERVES & SURPLUS TO CO VER THE IMPUGNED INVESTMENT AND THEREFORE, IN TERMS OF THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIE S AND POWER LTD., 313 ITR 340(BOM) IT IS TO BE PRESUMED THAT THE INVESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS. LD.REPRESENTATIVE FOR THE ASSESSEE POI NTED OUT THAT SUCH A 6 ITA NO.3577/MUM/2016 (AY. 2011-12) PROPOSITION HAS ALSO BEEN FOUND APPLICABLE IN THE C ONTEXT OF SECTION 14A OF THE ACT BY THE HON'BLE BOMBAY HIGH COURT IN THE CAS E OF CIT VS. HDFC BANK LTD., 366 ITR 505(BOM) AND IN THE CASE OF HDFC BAN K LTD. VS. DCIT,383 ITR 529 (BOM). FOR ALL THE ABOVE REASONS, THE DECISI ON OF THE CIT(A) HAS BEEN SOUGHT TO BE DEFENDED. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. FACTUALLY SPEAKING, THERE IS NO DISPUTE TO THE FACT THAT DURI NG THE YEAR UNDER CONSIDERATION ASSESSEE HAS NOT RECEIVED ANY EXEMPT INCOME AND, THEREFORE, ON THIS COUNT ALONE NO DISALLOWANCE UNDER SECTION 1 4A OF THE ACT IS MERITED FOLLOWING THE RATIO OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. (SUPRA). THE OTHER FINDING OF THE CIT(A) WI TH REGARD TO THE AVAILABILITY OF SUFFICIENT INTEREST FREE FUNDS IS ALSO QUITE JUSTIF IED AND IS BORNE OUT OF RECORD AS THERE IS NO MATERIAL LED BY THE REVENUE TO CONTR OVERT THE SAME. FOR THE SAID REASON ALSO THE DISALLOWANCE OF INTEREST EXPEN DITURE UNDER SECTION 14A OF THE ACT IS QUITE UNJUSTIFIED. CONSIDERING THE AF ORESAID, WE THEREFORE, DEEM IT FIT AND PROPER TO AFFIRM THE ACTION OF THE CIT(A ) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. THUS, ON THIS ASPECT, REVENUE FAILS. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 /05/2017 SD/- SD/- (SANDEEP GOSAIN) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER MUMBAI, DATED 24/05/2017 VM , SR. PS 7 ITA NO.3577/MUM/2016 (AY. 2011-12) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. 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