Macmillan Publishers India Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 388/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9320 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 19-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GURU BHASHYAM
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . , ! . % , & ! ' BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMB ER AND SHRI V.DURGA RAO, JUDICIAL MEMBER ./ I.T.A.NO.388/MDS/2016 ( / ASSESSMENT YEAR: 2009-10) M/S. MACMILLAN PUBLISHERS INDIA PVT.LTD., (FORMERLY MACMILLAN PUBLISHERS INDIA LTD.) 21, PATULLOS ROAD, CHENNAI-600 002. VS THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-IV(1) CHENNAI-600 034. PAN: AAFCM5564R ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. K.R.VASUDEVAN, ADVOCATE /RESPONDENT BY : MR. GURU BHASHYAM, JCIT /DATE OF HEARING : 9 TH MAY, 2016 /DATE OF PRONOUNCEMENT : 12 TH MAY, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APP EALS)- 8, CHENNAI DATED 12.11.2015 IN ITA NO.25/2011-12 PASSED UNDER SECTION 143(3) R.W.S. 250(6) OF THE ACT. 2. THE ASSESSEE HAS RAISED ONE ELABORATE GROUND IN ITS APPEAL, HOWEVER, THE CRUX OF THE ISSUE IS THAT THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WHO HAS UPHELD THE ORDER OF TH E LEARNED ASSESSING OFFICER DISALLOWING AN AMOUNT OF 2 ITA NO.388/MDS/2016 RS.20,69,465/- INVOKING THE PROVISIONS OF SECTION 1 4A OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PRINTING & PUBLI SHING FILED ITS RETURN OF INCOME ON 29.09.2009 FOR THE AS SESSMENT YEAR 2009-10 DECLARING ITS INCOME AS RS.2,00,44,690 /-. SUBSEQUENTLY, THE CASE WAS TAKEN UP SCRUTINY AND ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E ACT ON 13.11.2011 WHEREIN THE LEARNED ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND COMPUT ED THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE RULE S AND THEREBY MADE AN ADDITION OF RS.20,69,465/-. THE REA SON FOR INVOKING THE PROVISIONS OF SECTION 14A IS BECAUSE T HE ASSESSEE COMPANY WHICH HAS COME INTO EXISTENCE OUT OF DEMERGER HAD AN INVESTMENT OF RS.41,38,93,000/- WHE REIN IT EARNED A DIVIDEND OF RS.35,47,000/- THAT IS EXEMPT FROM TAX UNDER SECTION 10(38) OF THE ACT DURING THE RELEVANT ASSESSMENT YEAR. THE ASSESSEES CONTENTION THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR MAKING SUCH INVESTMENT WAS REJECTED BY THE LEARNED ASSESSING OFFICER. THEREAFT ER THE ASSESSEE WENT ON APPEAL BEFORE THE LEARNED COMMISSI ONER 3 ITA NO.388/MDS/2016 OF INCOME TAX (APPEALS) WHO SUSTAINED THE ORDER OF THE LEARNED ASSESSING OFFICER BY OBSERVING AS UNDER:- I HAVE CONSIDERED THE APPELLANTS SUBMISSIONS. IT IS THE CONTENTION OF THE ASSESSING OFFICER THAT THE APPELLANT RECEIVED A SUBSTANTIAL AMOUNT OF RS.35,47 ,000/- AS DIVIDEND, CLAIMED AS EXEMPTED INCOME U I S.1 0 (38), WHICH WOULD NOT HAVE BEEN POSSIBLE BUT FOR CONSIDERABLE EXPENSES BEING INCURRED ON MANAGERIAL AND SUPERVISORY ACTIVITIES. THEREFORE, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS.20,69,465/- U/S. 14A READ W ITH RULE 8D(2)(III) BEING 0.5% OF THE AVERAGE INVESTMENTS. ON THE OTHER HAND, THE APPELLANT CONTENDS THAT NO EXPENDITURE HAS BEEN INCURRED. SINCE THE DIVIDENDS WERE RECEIVED FROM LONG TERM INVESTMENTS IN MUTUAL FUNDS. THE APPELLANT'S SUBMISSION THAT THE ASSESSING OFFICER HAS DISALLOWED INTEREST EXPENDITURE IS NOT CORRECT BECAUSE NO EXPENDITURE HAS BEEN DISALLOWED UNDER RULE 8D(2)(I) AND RULE 8D(2L(II). THE SECOND ARGUMENT OF THE APPELLANT THAT THE ASSESSING OFFICER IS NOT RECORDED HIS DISSATISFACTION IS ALSO NOT CORRECT SINCE THE ASSESSING OFFICER CLEARLY SAYS IN THE ASSESSMENT ORDER THAT THE APPELLANT'S REPLY - THAT NO EXPENSES WERE INCURRED FOR EARNING THE EXEMPTED INCOME - CANNOT BE ACCEPTED. THE JURISDICTIONAL BENCH OF THE ITAT IN THE CASE OF SOUTHERN PETRO CHEMICAL INDUSTRIES 12005] 3 SOT 157 (CHENNAI) OBSERVED AS FOLLOWS IN A SIMILAR CASE: WHETHER TO INVEST OR NOT TO INVEST AND WILE/HER TO RERAIN THE INVESTMENTS OR TO LIQUIDATE THE SAME ARE VERY STRATEGIC DECISIONS WHICH THE MANAGEMENT IS CALLED UPON TO TAKE. THESE ARE MIND BOGGLING DECISIONS AND TOP MANAGEMENT IS INVOLVED IN TAKING THESE DECISIONS. T HIS DECISION-MAKING PROCE SS IS VERY COMPLICATED AND REQUIRES VERY CAREFUL ANALYSIS. MOREOVER, THE ASSESSEE HA D TO KEEP TRACK OF VARIOUS DIVIDEND INCOMES DECLARED BY THE INVESTEE COMPANIES AND ALSO 10 K EEP TRACK OF THE DIVIDEND INCOME HAVING BEEN REGULARLY RECEIVED BY THE ASSESSEE. THAT ACTIVITY ITSELF CALLED FOR CONSIDERABLE MANAGEMENT ATTENTION AND COULD NOT BE LEFT TO A JUNIOR CLERK. THUS, THE DECISION TO INVEST OR NOT TO INVEST OR TO CONTINUE WITH THE INVESTMENTS ALREADY MADE, LAST BUT NOT LEAST, WHERE TO INVEST, OR DECISION THAT AR E 4 ITA NO.388/MDS/2016 TAKEN AT THE HIGHER ECHELONS OF THE MANAGEMENT AND SUPPORTED BY THE EXECUTIVE STAFF. ADMITTEDLY THE APPELLANT HAS INVESTMENTS TO THE TUNE OF RS.41,38,93,000/- THE INVESTMENT OF WHICH WOULD NEVER BE LEFT TO THE CLERICAL STAFF, BUT WILL BE HANDED BY SENIOR EXECUTIVES AND TOP MANAGEMENT. THE APPELLANT'S CONTENTION THAT ONCE INVESTED THERE IS NO EXPENDITURE INCURRED IN COLLECTING THE DIVIDEND INCOME WHICH IS ELECTRONICALLY CREDITED DOES NOT ADDRESS THE ISSUE AT ALL. RULE 8D(2)(III) EXCLUSIVE LY DEALS WITH NON-INTEREST EXPENSES INCURRED BY THE APPELLANT. THE ASSESSING OFFICER HAS RIGHTLY RESTRICTED THE DISALLOWANCE TO RULE 8D(2)(III). THE DISALLOWANCE MADE U/S. 14A READ WITH RULE 8D IS CONFIRMED. THE APPELLANT FAILS ON THIS GROUND. 4. AT THE OUTSET THE LEARNED AUTHORIZED REPRESENTAT IVE SUBMITTED BEFORE US THAT MOST OF THE INVESTMENTS MA DE BY THE ASSESSEE COMPANY ARE IN SUBSIDY COMPANIES FOR S TRATEGIC REASONS. IT WAS THEREFORE SUBMITTED THAT WHILE COMP UTING THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D OF THE ACT THE INVESTMENTS MADE IN SISTER CONCERNS HAS TO BE EXCLU DED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND, VEHEMENTLY OPPOSED TO THE SUBMISSIONS OF THE LEARNED AUTHORIZED REPRESENTATIVE AND ARGUED IN SUPPORT OF THE ORDERS OF THE REVENUE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS PLACED BEFORE US. ON THE EARL IER 5 ITA NO.388/MDS/2016 OCCASION, IN THE CASE OF RANE HOLDINGS LTD. VS. ACI T IN ITA NO.115/MDS/2015 VIDE ORDER DATED 06.01.2016, EXTRA CTED HEREIN BELOW, WE HAVE HELD THAT WHERE INVESTMENTS ARE MADE IN SISTER CONCERNS FOR STRATEGIC REASONS, NO E XPENSES CAN BE INFERRED TO HAVE BEEN INCURRED IF SUCH INVES TMENTS ARE MADE OUT OF NON-INTEREST BEARING FUNDS OF THE ASSES SEE. THE GIST OF THE RELEVANT ORDER IN ITA NO.115/MDS/2015 D ATED 06.01.2016 OF THIS TRIBUNAL IS REPRODUCED HEREIN BE LOW FOR REFERENCE:- 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL ISSUE AS POIN TED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /2013 VIDE ORDER DATED 20/08/13 FOR THE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASSESSING OFFICER TO DECIDE THE M ATTER ONCE AGAIN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE H AD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2 014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- II) 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 A NY FINDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. III) INTEGLOBE ENTERPRISES LTD., VS. DCIT REPORTED 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 INT EREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENTS.WHE RE 6 ITA NO.388/MDS/2016 THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR M AKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIE S, WHICH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AN D WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWA NCE OF INTEREST WAS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). IV) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 201 4- 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 AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE 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 ASSESSE E AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CA LLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPORT ED 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 B Y THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTEREST 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 IN 2013- TIOL-796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUB SIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEE N MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS NOT INTOTHE BUSINESS OF I NVESTMENT 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 I S NOT TO BE 7 ITA NO.388/MDS/2016 RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASS ESSING 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. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISION 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 ABOV E. WHILE DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M /S AGILE ELECTRIC 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 APPLICABL E. MOREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. D CIT 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 FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN T HE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVE STMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIAR Y COMPANY INTO THE HOTEL 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 CASE OF TH E ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVES TMENT 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 INCIDENT AL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY 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 INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAVOUR 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 ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE REST RAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. THEREFORE, FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE BY INVOKING THE PROVISI ONS OF 8 ITA NO.388/MDS/2016 SECTION 14A R.W. RULE 8D OF THE ACT, SUBJECT TO VERIFICATION THAT INVESTMENTS ARE MADE BY THE ASSES SEE IN ITS SISTER CONCERNS ONLY AND FROM ITS INTEREST F REE FUNDS. 7. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OFFICER TO VERIFY WHET HER THE INVESTMENT MADE BY THE ASSESSEE COMPANY ARE IN ITS SISTER CONCERN / SUBSIDY COMPANY AND OUT OF NON-INTEREST B EARING FUNDS AND IF FOUND SO, EXCLUDE THEM FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE UNDER SECTION 14A READ W ITH RULE 8D OF THE ACT. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 12 TH MAY, 2016 SD/- SD/- ( . % ) ( . ) (V.DURGA RAO) ( A.MOH AN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 12 TH MAY, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF