ITO, Ward-16(2), Hyderabad, Hyderabad V. Neuland Health Sciences Private Limited, Hyderabad, Hyderabad

ITA 41/HYD/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2302 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 06-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A SMC : HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT ITA.NO. 41 /HYD/2017 ASSESSMENT YEAR 2012 - 2013 INCOME TAX OFFICER, WARD - 16(2), HYDERABAD. VS. M/S. NEULAND HEALTH SCIENCES PVT LTD., SANLIO INFO PARK, A BLOCK, GROUND FLOOR, 8 - 2 - 120/113, ROAD NO.2, BANJARA HILLS, HYDERABAD - 500034. PAN: AACCS8130N (APPELLANT) (RESPONDENT) FOR ASSESSEE: SHRI K.C. DEVDAS FOR REVENUE : SMT. SUMAN MALIK, DR DATE OF HEARING : 27 .07 .2017 DATE OF PRONOUNCEMENT : 31 .07 .2017 ORDER PER D. MANMOHAN, VP. THIS IS AN APPEAL FILED AT THE INSTANCE OF THE ASSESSEE AND IT PERTAINS TO THE A.Y. 2012 - 13. THE FOLLOWING GROUNDS WERE URGED BEFORE THE TRIBUNAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U/S. 14A BY HOLDING THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO MAKE DISALLOWANCE U/S. 40(A)(IA) ONLY IN RESPECT OF AMOUNTS THAT ARE PAYABLE AND ON WHICH TAX IS NOT DEDUCTED AT SOURCE. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2. BRIEF FACTS GIVING RAISE TO THE ISSUE S IN DISPUTE ARE SET OUT HEREIN. ASSESSEE - COMPANY IS ENGAGED IN THE BUSINESS OF RESEARCH, INVESTIGATION, DEVELOPMENT, MARKETING AND RELATED SERVICES. THE ASSESSEE MADE INVESTMENTS TO THE TUNE OF RS. 5.41 CRORES BEING EQUITY IN M/S. NEULAND LABORATORIES LTD. I T CLAIMED EXPENDITURE OF RS. 63,84,665/ - ON ACCOUNT OF INTEREST ON VARIOUS LOANS. HOWEVER, THE ASSESSEE HAS NOT WORKED OUT THE AMOUNT DIS ALLOWABL E U/S. 14A OF THE ACT. WHEN CALLED UPON TO EXPLAIN IT WAS SUBMITTED THAT THE INVESTMENT WAS MADE OUT OF OWN FUNDS AND HAND LOANS ON WHICH NO INTE REST WAS PAID. FURTHER, IT WAS FOR THE PURPOSE OF GENERATING SIGNIFICANT INVESTMENT BUT NOT WITH THE SOLE INTENTION OF EARNING DIVIDEND INCOME WHICH 2 IS INCIDENTAL IN THIS CASE. IT WAS ALSO CONTENDED THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. 3. THE ASSESSING OFFICER WAS OF THE VIEW THAT RULE 8D OF THE I.T. RULES, 1962 LAID DOWN THE METHOD OF CALCULATING THE EXPENDITURE AND THE ASSESSEE HAVING INCURRED INTEREST EXPENDITURE, THE A.O. IS ENTITL ED TO INVOKE THE PROVISIONS OF S ECTION 14A R.W. RULE 8D AND ACCORDINGLY ARRIVED AT AN AMOUNT OF RS. 35,33,584/ - FOR THE PURPOSE OF DISALLOWANCE U/S. 14A OF THE ACT. 3.1. THE ASSESSEE DEBITED AN AMOUNT OF RS. 8,11,620/ - TO THE P&L ACCOUNT ON ACCOUNT OF LOAN PROCESSING CHARGES. OUT OF THE SAID EXPENDITURE, TDS WAS MADE ONLY ON AN AMOUNT OF RS. 5,95,620/ - . S INCE THERE WAS NO TDS ON THE BALANCE AMOUNT OF RS. 2,16,000/ - , A.O. INVOKED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND DISALLOWED THE SAME. 4. AGGRIEVED BY THE ABOVE OBSERVATIONS OF THE A.O., ASSESSEE PR EFERRED AN APPEAL BEFORE THE LD. CIT(A). I T WAS CONTENDED THAT ASSESSEE HAVING UTILISED OWN FUNDS AND INTEREST FREE LOANS FOR THE PURPOSE OF MAKING INVESTMENT IN M/S. NEULAND LABORATORIES LTD., NO EXPENDITURE IS ATTRIBUTABLE TO EARNING OF TAX FREE INCOME. IN FACT, THERE IS NOTHING ON RECORD TO PROVE THAT THE INVESTMENT WAS MADE FOR THE PURPOSE OF EARNING EXEMPT INCOME IN WHICH EVENT, THE PROVISIONS OF SECTION 14A R.W. RULE 8D CANNOT BE INVOKED. 5. WITH REGARD TO DISALLOWANCE OF RS. 2,16,000/ - , IT WAS SUBMITTED THAT THE DOCUMENTATION CHARGES CANNOT BE TREATED ON PAR WITH MANAGEMENT AND PROCESSING CHARGES AND HENCE, THERE IS NO OBLIGATION ON THE PART OF THE A SSESSEE TO DEDUCT TAX AT SOURCE; CONSE QUENTLY, THE PROVISIONS OF SECTION 40(A)(IA) OUGHT NOT TO HAVE BEEN APPLIED BY THE A.O. 6. DURING THE COURSE OF HEARING, THE ASSESSEE CONTENDED THAT IT HAD NOT RECEIVED ANY DIVIDEND FROM THE ABOVE SAID INVESTMENTS DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT WAS THUS PLEADED THAT THE QUESTION OF DISALLOWANCE COMES INTO PICTURE WHEN THERE IS SOME EXEMPT INCOME AS OTHERWISE, SECTION 14A R.W. RULE 8D ARE NOT APPLICABLE. THE EXPRESSION IN RELATION TO INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A PRE - SUPPOSES EARNING OF 3 INCOME TOWARDS DIVIDEND IN THE YEAR UNDER CONSIDERATION AND IN THE YEAR WHERE THERE IS NO DIVIDEND , DISALLOWANCE OF EXPENDITURE RELATABLE TO EXEMPT INCOME IS NOT PERMI SSIBLE. 7. LD. CIT(A) OBSERVED THAT THE ASSESSEE HAVING NOT EARNED INCOME OUT OF SUCH INVESTMENTS, NO DISALLOWANCE U/S. 14A CAN BE MADE AND IN THIS REGARD, HE RELIED UPON THE DECISION OF THE ITAT B BENC H, HYDERABAD IN THE CASE OF PRATHISTA INDUSTRIES LTD., VS. DCIT (ITA NO. 1302/HYD/2015 DATED 29 - 04 - 2016) WHICH IN TURN IS BASED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD., [ 2015 ] ( 378 ITR 33 ). 8. AS REGARDS THE SECOND ISSUE , LD. CIT(A) HAS NOT GONE INTO THE ISSUE AS TO WHETHER THE DOCUMENTATION CHARGES WOULD FORM PART OF THE SERVICES SO AS TO ATTRACT THE PROVISIONS OF SECTION 194J OR 194A OF THE ACT BUT MERELY PROCEEDED ON THE LINES OF THE DECISION OF THE ITAT , VISAKHAPATNAM IN THE CASE OF MERILYN SH IPPING AND TRANSPORT LTD VS . ACIT (16 ITR 1) TO HOLD THAT THE PROVISIONS OF SECTION 40(A)(IA) ARE A PPLICABLE ONLY WHEN TAX IS PAID AND IT DOES NOT APPLY TO A CASE WHERE TAX IS PAYABLE . 9. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), REVENUE PREFERRED AN APPEAL. 10. THE FIRST ISSUE IS WITH REGARD TO THE APPLICABILITY OF PROVISIONS OF SECTION 14A OF THE ACT. DURING THE COURSE OF HEARING, LD. DR SUBMITTED THAT THE EXPENDITURE PERTAINING TO THE EXEMPT INCOME HAS TO BE DISALLOWED AND SINCE WORKING IS DIFFICULT, RULE 8D PROVIDES FOR A PROCEDURE TO BE FOLLOWED BY THE A.O. THEREFORE, IT IS NOT CONNECTED TO THE EARNING OF INCOME. 10. ON THE OTHER HAND, LD. COUNSEL FOR ASSESSEE SUBMITTED THAT THE CAS E OF THE ASSESSEE RESTS ON TWO ISSUES I.E., (A) NO EXPENDITURE WAS INCURRED IN THIS CASE SINCE THE ASSESSEE HAS NOT UTILISED OWN FUNDS OR INTEREST FREE FUNDS FOR THE PURPOSE OF MAKING INVESTMENTS AND (B) THE FOLLOWING DECISION OF VARIOUS HIGH COURTS SHOW THAT THE PROVISIONS OF SECTION 14A ARE APPLICABLE ONLY WHEN THERE IS INCOME IN THE FORM OF DIVIDEND ETC., WHICH IS EXEMPT FROM TAX . I N OTHER WORDS, SECTION 14A WILL NOT APPLY WHERE EXEMPT INCOME IS NOT R ECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. 1. CIT VS. LAKHANI MARKETING INC. [2014] 226 TAXMAN 45 (PUNJAB & HARHANA) ; 2. CIT VS. CORRTECH ENERGY (P) LTD [2014] 45 TAXMANN.COM 116 (GUJARAT) ; 4 3. PRATHISTA INDUSTRIES LTD VS. DCIT (ITA NO.13 02/H/2015, DT 29.4.2016); 4. CIT VS. SHIVAM MOTORS (P) LTD [2015] 55 TAXMANN.COM 262 (ALLAHABAD); 5. CIT VS. DELITE ENTERPRISES BOMBAY HIGH COURT (IT A. NO. 110 OF 2009); 6. ACIT VS. DELITE ENTERPRISES (P.) LTD [2011] 128 ITD 146 (MUM.); 7. AVSHESH MERCANTILE (P.) LTD VS. DCIT [2012] 148 TTJ 607 (MUMBAI) AND 8. REDINGTON (INDIA) LTD VS. ADDL. CIT [2017] 392 ITR 633 (MAD.). HE FURTHER SUBMITTED THAT THERE ARE NO CONTRADICTORY DECISION S OF OTHER HIGH COURTS ON THIS ISSUE. 11. I HAVE CAREFULLY CONSI DERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE CASE OF THE ASSESSEE IS THAT NO EXPENDITURE WAS INCURRED FOR THE PURPOSE OF MAKING INVESTMENT IN M/S. NEULAND LABORATORIES LTD. NEITHER THE A.O. NOR THE LD. CIT(A) DISCUSSED THIS ISSUE. AT ANY RATE, THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT ASSESSEE HAS NOT EARNED ANY INCOME OUT OF SUCH INVESTMENTS DURING THE PREVIOUS YEAR RELATABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION , IN WHICH EVENT, THE AFOREMENTION ED CASES AND THE RATIO THEREIN DESERVE TO BE TAKEN INTO CONSIDERATION. UNDER THESE CIRCUMSTANCES, I HOLD THAT A.O. ERRED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND THUS, THE ORDER PASSED BY THE LD. CIT(A) IS AFFIRMED AND THE GROUND URGED BY THE REVENUE IS DISMISSED. 12. AS REGARDS THE SECOND ISSUE I.E., WITH REGARD TO DISALLOWANCE U/S. 40(A)(IA) , THE LD. CIT(A) APPLIED THE DECISION OF THE ITAT SPECIAL BENCH IN THE CASE OF MERILYN SHIPPING AND TRANSPORT LTD (SUPRA) WHICH IS NOW REVERSED BY THE HONBLE SUPREME COURT AND THEREFORE, THE ORDER PASSED BY THE LD. CIT(A) TO THAT EXTENT DESERVES TO BE SET ASIDE. HOWEVER, THE FACT REMAINS THAT THE ASSESSEE SPECIFICALLY CLAIMED THAT THERE IS NO NEED TO DEDUCT TAX ON AN AMOUNT OF RS. 2,16,000/ - IN WHICH EVENT THE PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE. THIS ASPECT WAS OVERLOOKED BY THE CIT(A). WE HOPE AND EXPECT THAT THE LD. CIT(A) WOULD PASS A SPEAKING ORDER ON THIS ISSUE SINCE THE MATTER IS SET ASIDE. 13. IN T HE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUN CED IN THE OPEN CO URT ON 3 1 S T DAY OF JULY, 2017. S D / - (D. MANMOHAN) VICE PRESIDENT HYDERABAD, DATED: 3 1 S T JULY , 2017 5 OKK, SR.PS COPY TO 1. M/S. NEULAND HEALTH SCIENCES PVT LTD., SANLIO INFO PARK, A BLOCK, GROUND FLOOR, 8 - 2 - 120/113, ROAD NO.2, BANJARA HILLS, HYDERABAD - 500034. 2. INCOME TAX OFFICER, WARD - 16(2), HYDERABAD. 3. CIT(A) - 4 , HYDERABAD. 4. PR. CIT - 4 , HYDERABAD. 5. D.R. ITAT A BENCH, HYDERABAD. 6. GUARD FILE