Kamadhenu Sukrit Private Limited (formerly known as Quintessentials and Corp Services Pvt. Ltd), Hyderabad, Hyderabad V. ITO, Ward-1(4), Hyderabad, Hyderabad

ITA 460/HYD/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2387 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 09-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P V SUBBA RAJU
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 460/HYD/2017 ASSESSMENT YEAR: 2012-13 M/S. KAMADHENU SUKRIT PVT. LTD., (FORMERLY QUINTESSENTIALS AND CORP SERVICES PVT LTD) (EARLIER CAPITAL FORTUNES FINANCIAL SERVICES LTD) HYDERABAD [PAN: AAACC8147K] VS INCOME TAX OFFICER, WARD-1(4), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI V. SIVA KUMAR, AR FOR REVENUE : SHRI P.V. SUBBA RAJU, DR DATE OF HEARING : 09-11-2017 DATE OF PRONOUNCEMENT : 22-11-2017 O R D E R THE ONLY ISSUE IN THIS APPEAL BY ASSESSEE AGAINST THE ORDER OF LD.CIT(A) DATED 29-11-2016 IS THE CONFIRMATION OF AN AMOUNT OF RS. 6,35,829/- U/S. 14A R.W.S. 8D(III) OF THE INCOM E TAX ACT [ACT] ON AN EXEMPT DIVIDEND INCOME OF RS. 8,100/-. 2. BEFORE ADVERTING TO THE MERITS OF THE ISSUE, IT IS TO BE NOTED THAT ASSESSEE WAS FORMERLY KNOWN AS CAPITAL FORTUNES F INANCIAL SERVICES LTD., (AT THE TIME OF FILING OF RETURN OF INCOM E). THE ASSESSMENT WAS COMPLETED ON THAT NAME. THE APPEAL BE FORE THE LD.CIT(A) WAS FILED ON 09-03-2015 IN THE NAME OF QUI NTESSENTIALS I.T.A. NO. 460/HYD/2017 :- 2 - : AND CORP SERVICES PVT LTD., AFTER CHANGE OF NAME (THE A CTUAL DATE OF CHANGE IS NOT ON RECORD). HOWEVER, THE PRESENT APPEA L BY ASSESSEE WAS FILED ON 09-03-2017 IN THE NAME OF M/S. KAMADHEN U SUKRIT PVT. LTD., AND WHEN ENQUIRED, FILED THE CERTIFICATE FR OM ROC ABOUT CHANGE OF NAME FROM 18-11-2014 ITSELF. THIS INDICA TES THAT BY THE TIME APPEAL WAS FILED BEFORE LD.CIT(A), THE PRESENT NA ME CHANGE HAS HAPPENED. THIS SHOULD HAVE BEEN VERIFIED BY THE LD.CIT(A) BEFORE ENTERTAINING THE APPEAL. 3. THE PRESENT APPEAL WAS FILED WITH A DELAY OF 12 DA YS. THE DELAY WAS ATTRIBUTED TO THE MANAGER, WHO WAS ENTRUSTED F OR WITH THE APPEAL WORK, BEING OUT OF STATION AND CONSEQUENT DE LAY IN FILING APPEAL. THE AFFIDAVIT OF THE CONCERNED MANAGER WAS AL SO FILED. CONSIDERING THE EXPLANATION, THE DELAY OF 12 DAYS IS CONDONED AND APPEAL IS ADMITTED. 4. BRIEFLY THE FACTS ARE THAT THE AO ON NOTICING THAT ASSE SSEE HAD INVESTMENTS TO AN EXTENT OF RS. 12.71 CRORES, ASKED ASSESSEE WHY PROVISIONS OF 14A CANNOT BE INVOKED. EVEN THOUG H ASSESSEE CONTENDED THAT IT HAD NO DIVIDEND INCOME, THE AO NOTED TH AT RS. 8,100/- WAS EARNED WHICH WAS CLAIMED EXEMPT. AS THER E WAS NO CLAIM OF INTEREST, AO GAVE A FINDING THAT RULE 8D(II) D OES NOT APPLY. ONLY DISALLOWANCE MADE WAS UNDER RULE 8D(III) I.E., 0.5% ON AVERAGE INVESTMENT AT RS. 6,35,829/- OUT OF TOTAL EXPEND ITURE OF RS. 16.50 LAKHS CONSIDERED BY AO. 5. EVEN THOUGH IT WAS CONTENDED BEFORE LD.CIT(A), THE C IT(A) DISMISSED THE APPEAL STATING THE FOLLOWING REASONS: I.T.A. NO. 460/HYD/2017 :- 3 - : 5.2 IT IS SEEN THAT THE APPELLANT MADE NON-CURRENT INVESTMENTS OF RS.12.71 CRORES IN THE EQUITY SHARES OF MIS. NAGARJ UNA CONSTRUCTION COMPANY LTD., M/S. AMRITHJAL VENTURES PVT. LTD., M/ S. CAPITAL FORTUNE PVT. LTD., AND M/S. INTERCONTINENTAL INFRASTRUCTURA L LID. DURING THE YEAR AS PER COMPUTATION OF INCOME, UNDER 'OTHER INCOMES', A PPELLANT HAS SHOWN RECEIPT OF RS.3,61,980/-, WHICH IS TERMED AS INTERE ST INCOME. THIS IS ALSO REFLECTED IN PROFIT & LOSS ACCOUNT. THE ASSESSEE CO NTENDED THAT NONE OF THE EXPENDITURES HAS ANY NEXUS TO THE INVESTMENT AC TIVITY. THIS WAS NOT PROVED BEFORE ME. I DO NOT AGREE THAT NO EXPENDITUR E OR EFFORTS WERE SPENT TO EARN THIS INCOME. RETURNS/ INCOME MAY VARY EVERY YEAR, HENCE HAS NO RELEVANCE TO THE QUANTUM OF INVESTMENT. INCOME IS R ESULT OF MUCH THOUGHT AND FINANCIAL EXPERIMENT. AND IT IS THIS, THAT THE LAW OPINES TO RECOGNIZE U/S 14A. BESIDE, AS PER FACTS- (1) THE APPELLANT IS INCORRECT IN SHOWING THAT THER E IS NO NON-TAXABLE INCOME DURING THE YEAR. (2) THE SOURCE OF INVESTMENT OF ANALYSIS HAS NOT BE EN SUBMITTED. HENCE, THE 'ASSESSING OFFICER IS CORRECT IN SHOWING THAT THERE SHOULD BE A 'COST' FOR 'INVESTMENT. HENCE, I UPHOLD THE ADDITIO N MADE BY THE ASSESSING OFFICER. 6. IT WAS THE CONTENTION THAT ASSESSEE HAS OWN FUNDS AND ALSO IN THE BUSINESS OF FINANCIAL SERVICES AND NO EXPEND ITURE WAS INCURRED FOR EARNING A SMALL DIVIDEND. MOREOVER, RE LYING ON CO-ORDINATE BENCH DECISION IN THE CASE OF SAHARA INDI A FINANCIAL CORPN. LTD., VS. DCIT [41 TAXMANN.COM 251 (DELHI-TRIB .)], IT WAS THE SUBMISSION THAT DISALLOWANCE SHOULD NOT EXCEED THE INCOME CLAIMED EXEMPT. LD. COUNSEL RELIED ON VARIOUS CASE LAW AND THE RELEVANT AMENDMENT TO THE PROVISIONS THAT THE DISALLOWA NCE SHOULD NOT EXCEED THE INCOME CLAIMED EXEMPT; AS DISALLOWANCE OF EXPENDITURE INVOKING RULE 8D(III) HAS RESULTED IN ABS URD DISALLOWANCE IN SOME CASES. 7. LD.DR REITERATED THE FACTS AND ARGUMENTS OF AO. I.T.A. NO. 460/HYD/2017 :- 4 - : 8. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE RECORD. AS CAN BE SEEN, ASSESSEE IS IN FINANCIAL A DVISORY SERVICES AND INVESTING OWN FUNDS, SO THERE IS NO CLAIM OF INTE REST EXPENDITURE. AS CONSIDERED BY AO THERE IS NO DISALL OWANCE UNDER RULE 8D(II). THE ARGUMENT OF COST BY CIT(A) IS DEV OID OF FACTS. IT IS ALSO A FACT THAT ASSESSEE HAD EARNED ONLY A SMALL AMO UNT OF RS. 8,100/- AS DIVIDEND AND CLAIMED EXEMPTION. THE AO TO OK EXPENDITURE OF RS. 16.50 LAKHS FOR DISALLOWING THE AM OUNT. AS SEEN FROM THE P&L A/C, THE EMPLOYEE COST AT RS. 3 LAKHS AND FINANCE COST AT 5.7 LAKHS WERE ALSO CONSIDERED. FIN ANCE COST IS NOT FOR INVESTMENT, AS THE AO GAVE A FINDING ABOUT RULE 8D (II). THE ONLY EXPENDITURE INCURRED BY ASSESSEE IS OTHER EXPEND ITURE AT RS. 7,79,500/- IN SCH. 21. THE DETAILS ARE AS UNDER: PARTICULARS FIGURES AS AT THE END OF THE CURRENT REPORTING PERIOD FIGURES AS AT THE END OF THE PREVIOUS REPORTING PERIOD (RS. IN HUNDREDS) (RS. IN HUNDREDS) A) BUSINESS PROMOTION -- 11 B) CONVEYANCE 955 743 C) ELECTRIC ITY CHARGES -- 116 D) GENERAL EXPENSES -- 9 E) IRRECOVERABLE DUES WRITTEN OFF -- 5,000 F) MISCELLANEOUS EXPENSES 220 159 G) OFFICE MAINTENANCE 1,267 1,140 H) RATES AND TAXES 1,685 48,805 I) LEGAL AND PROFESSIONAL 500 1,82,153 J) PAYMENTS TO AUDITORS 83 83 K) TELEPHONE CHARGES 193 348 L) TRAVELLING EXPENSES 1,093 -- M) VEHICLE HIRE CHARGES 1,800 1,800 I.T.A. NO. 460/HYD/2017 :- 5 - : 8.1. AS CAN BE SEEN FROM THE NATURE OF EXPENDITURE, TH ERE IS NO INDICATION EVEN THAT THE ABOVE EXPENDITURE IS EXPENDED FOR EARNING DIVIDEND INCOME. AO WITHOUT GIVING ANY SATISFACTORY REASON, JUST INVOKED RULE 8D(III) AND DISALLOWED THE AMOUNT. 9. THE CO-ORDINATE BENCH IN THE CASE OF SAHARA INDIA FINANCIAL CORPN. LTD., VS. DCIT (SUPRA) HAS HELD IN PARA 81 AS UNDER: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPUTED THAT THE ADMINISTRATION, EXPENSES AND BOOKS OF ACCOUNT OF INVESTMENT DIVISIO N ARE SEPARATELY CARRIED OUT AND MAINTAINED BY THE ASSESSEE. NO INFI RMITY HAS BEEN FOUND BY THE DEPARTMENT IN THIS BEHALF. ONE OF THE MAIN I SSUE IS ON WHOM LIES THE ONUS TO ESTABLISH NEXUS OF AVAILABLE FUNDS WITH FREE AND TAXABLE INCOME. SIMILARLY COURTS HAVE HELD THAT A FINDING I N OBJECTIVE TERMS ABOUT ASSESSEE WORKING BEING UNSATISFACTORY IS TO BE RECO RDED BY AO IN THE ORDER. CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF PUNJAB STATE CO-OP. & MARKETING FED. LTD. (SUPRA) HAS HELD THAT IN ANY CASE THE DISALLOWANCE U/S 14A CANNOT EXCEED TAX FREE INCOME OF THE ASSESS EE. IF MECHANICAL METHOD OF RULE 8D IS APPLIED, IT LEADS TO MANIFESTL Y ABSURD RESULTS IN AS MUCH AS FOR TAX FREE INCOME OF RS.68,37,583/- DISAL LOWANCE OF RS.2,16,51,917 (ENHANCED BY CIT(A) AT RS. 2,19,47,7 72) IS MADE U/S 14A WHICH IS WAY TOO MUCH THAN THE EXEMPT INCOME. AS TH E INTERPRETATION OF PROVISIONS OF SEC. 14A R/W RULE 8D IS LEADING TO UN ANTICIPATED ABSURDITIES WHICH CANNOT BE THE INTENTION OF LEGISLATURE. UNDER THESE CIRCUMSTANCES HELP OF EXTERNAL AIDS OF CONSTRUCTION FOR INTERPRET ATION OF STATUTE IS CALLED FOR. LOOKING AT THE VARYING INTERPRETATION OFFERED BY VARIOUS COURTS AND BENCHES OF TRIBUNAL IN RELATION TO SEC. 14A, IT IS QUITE ARDUOUS TO PRECISELY DECIDE THE ISSUE. IN GIVEN FACTS AND CIRCUMSTANCES WITHOUT GOING INTO ALL THE ISSUES, IN OUR VIEW IT IS APPROPRIATE TO TAKE G UIDANCE FROM CHANDIGARH BENCH JUDGMENT IN THE CASE OF PUNJAB STATE CO-OPT M ARKETING FED. LTD. (SUPRA) HOLDING THAT THE DISALLOWANCE OF EXPENDITUR E IN ANY CASE CANNOT EXCEED THE INCOME EARNED. IN OUR VIEW THIS JUDGMENT TAKES A HOLISTIC VIEW THAT DISALLOWANCE IN TERMS OF SEC. 14A CAN BE MAXIM UM TO THE EXTENT OF EXEMPT INCOME, THERE IS NO DISPUTE THAT IN THIS CAS E WHICH IS AT RS. 68,37,583/-. THIS JUDGMENT IMPLIES THAT REASONABLE EXPENDITURE LESS THAN THE EXEMPT INCOME CAN BE DISALLOWED. IN OUR CONSIDE RED OPINION, IN THE INTEREST OF JUSTICE, IT WILL BE REASONABLE TO ESTIM ATE AND DISALLOW, 50% OF EXEMPT) INCOME (RS.68,37,583/-) AS RELATABLE TO EXE MPT INCOME U/S 14A R/W RULE 8D. WE DO NOT GO INTO VARIOUS PLEA TAKEN B Y BOTH SIDES OFFERING DIVERSE VIEWS BASED ON JUDICIAL CITATIONS. THIS GRO UND OF THE ASSESSEE IS PARTLY ALLOWED. I.T.A. NO. 460/HYD/2017 :- 6 - : 10. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES, AS TH E DISALLOWANCE MADE BY AO HAS RESULTED IN ABSURD SITUA TION OF DISALLOWING GENUINE OTHER BUSINESS EXPENDITURE, ON WH ICH ASSESSEE EARNED MORE THAN RS. 19 LAKHS INCOME (AS AGAINST RS. 8,100/- OF DIVIDEND), I AM SATISFIED THAT THE DISALLOWANCE U/S. 1 4A SHOULD BE RESTRICTED TO THE INCOME EARNED OF RS. 8,100/-. AO IS DIRECTED ACCORDINGLY. 11. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED PARTL Y. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND NOVEMBER, 2017 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 22 ND NOVEMBER, 2017 TNMM I.T.A. NO. 460/HYD/2017 :- 7 - : COPY TO : 1. M/S. KAMADHENU SUKRIT PVT. LTD., (FORMERLY QUINTESSENTIALS AND CORP SERVICES PVT LTD) (EARLIER CAPITAL FORTUNES FINANCIAL SERVICES LTD) 8-2-698, 5 TH FLOOR, M.J. TOWERS, ROAD NO. 12, BANJARA HILLS, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-1(4), HYDERABAD. 3. CIT (APPEALS)-1, HYDERABAD. 4. PR.CIT-1, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.