M/S SPINCOTECH PRIVATE LIMITED, CHENNAI V. DCIT CORP CIRCLE 6 (2), CHENNAI

ITA 470/CHNY/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4031 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 8 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 09-02-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Rule 8D; Capital Gains
• Section: 14A; 13

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI , . , & BEFORE SHRI MAHAVIR SINGH, VICE-PRESIDENT AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.470/CHNY/2018 ( / ASSESSMENT YEAR: 2012-13) M/S. SPINCOTECH PVT.LTD., NEW NO.4, VAIDYARAM STREET, T.NAGAR, CHENNAI-600 017. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -6(2), CHENNAI-600 034. PAN:AAFCS9992P ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. R.VIJAYARAGHAVAN, ADVOCATE /RESPONDENT BY : MR. AR.V.SREENIVASAN , ADDL.CIT /DATE OF HEARING : 27.10.2020 /DATE OF PRONOUNCEMENT : 27.10.2020 / O R D E R PER G.MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AG AINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS)-15, CHENNAI DATED 27.11.2017 AND IT PERTAINS TO ASSESS MENT YEAR 2012-13. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS CONTRARY TO LAW, FACTS AND CIRCUMSTANC ES OF THE CASE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE U/S.14A OF ` 9,06,067/-. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT NO PART OF THE BORROWED FUNDS WERE UTILISED FOR MAKING INVESTMENTS AND HENCE NO PART OF THE INT EREST PAYABLE ON BORROWING CAN BE DISALLOWED. 2 ITA NO.470/CHNY/2018 4. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT INVESTMENT OF RS.7,35,02,8951 - WAS IN A FIRM M/S.CHIRAL SOLUTIONS IN WHICH THE ASSESSEE HAD MADE INITIAL INVESTMENT OF RS.1, 50,00,0001 - FOR THE ASSESSMENT YEAR 2009- 10 AND OTHER INCREMENTS WERE ON ACCOUNT OF SHARE OF PROFIT OF THE FIRM ACCRUING TO THE APPELLANT AND NO T FRESH INVESTMENT. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT INVESTMENT IN THE FIRM WAS FOR STR ATEGIC REASONS AND HENCE THERE CANNOT BE DISALLOWANCE U/S.14A IN RESPECT OF STRATEGIC INV ESTMENTS. 6. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT INVESTMENTS IN MUTUAL FUNDS WERE O UT OF OWN FUNDS AND IN FACT PROFIT FOR THE YEAR WAS MORE THAN THE INVESTMENTS MADE IN MUTUAL FUNDS AND HENCE NO PART OF THE INTEREST CAN BE DISALLOWED UNDER SECTIO N 14A. 7 . THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO H AVE APPRECIATED THAT AS THE APPELLANT HAD NOT SPENT ANY AMOUNT FOR RECEIVING INCOME FROM THE FIRM OR MUTUAL FUND A ND HENCE THERE CAN BE NO DISALLOWANCE OF EXPENDITURE FOR EAR NING THE EXEMPTED INCOME . 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS CARRYING BUSINESS OF SUPPLIERS OF SPECIALIZED SC IENTIFIC & LABORATORY EQUIPMENTS FILED ITS RETURN OF INCOME FOR THE ASSE SSMENT YEAR 2012- 13 ON 28.09.2012 DECLARING TOTAL INCOME OF ` 12,34,51,680/-. THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE COU RSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASS ESSEE HAS EARNED EXEMPT INCOME FROM UNITS TO THE TUNE OF ` 22,43,917/-, HOWEVER, NOT MADE ANY DISALLOWANCE TOWARDS EXPENS ES RELATABLE TO EXEMPT INCOME, THEREFORE CALLED UPON THE ASSESSE E TO FILE NECESSARY DETAILS OF EXEMPT INCOME INCLUDING EXP ENSES INCURRED IN RELATION TO EXEMPT INCOME. THE ASSESSEE HAS ALS O SUBMITTED THE 3 ITA NO.470/CHNY/2018 DETAILS OF EXEMPT INCOME AND HAS ALSO FURNISHED TOTAL INVESTMENTS AS ON 31.03.2012 AT RS. 9.91 CRORES AND TOTAL VALUE OF ASSETS ON 31- 03-2012 WHICH WAS AT RS. 39.09 CRORES/-. THE ASSES SING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT ALTHOUGH THE ASSESSEE HAS EARNED HUGE EXEMPT INCOM E BUT HAS FAILED TO DISALLOW EXPENSES RELATING TO EXEMPT INCO ME AND HENCE WAS OF THE OPINION THAT IT IS UNREALISTIC TO STATE THAT NONE OF THE EXPENSES INCLUDING SALARY, ADMINISTRATIVE EXPENSES CAN BE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME AND ACCORD INGLY INVOKED RULE 8D OF INCOME TAX RULES AND DETERMINED THE DISA LLOWANCE OF INTEREST OF ` 49,96,777/- UNDER RULE 8D(2),(II) AND ` 4,09,920/- UNDER RULE 8D(2)(III) AND THUS MADE TOTAL DISALLOWA NCE OF ` 9,06,067/- 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT(A). BEFO RE THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE HAS CHALLENGED THE DISALLOWANCES COMPUTED BY THE ASSESS ING OFFICER U/S.14A TOWARDS INTEREST EXPENDITURE ON THE GROUND THAT THE ASSESSEE IS HAVING INTEREST FREE FUNDS BEING EQUI TY SHARE CAPITAL AND FREE RESERVES AS ON 31.12.2012 AT ` 25,77,00,000/- AS AGAINST TOTAL VALUE OF INVESTMENTS AS ON 31.03.2012 WAS AT ` 9.9 CRORES, 4 ITA NO.470/CHNY/2018 WHICH IS FAR LESS THAN THE INTEREST FREE FUNDS AVA ILABLE WITH THE ASSESSEE AND THEREFORE NO DISALLOWANCE OF INTERES T EXPENDITURE IS CALLED FOR. AS REGARDS DISALLOWANCE OF OTHER EXPENS ES, IT WAS SUBMITTED THAT THE ASSESSING OFFICER HAS TAKEN TOTA L VALUE OF INVESTMENTS INCLUDING INVESTMENTS IN PARTNERSHIP FI RM AND INVESTMENTS IN MUTUAL FUNDS AND TO COMPUTE AVERAGE VALUE OF INVESTMENTS, BUT FACT REMAINS THAT THE VALUE OF INV ESTMENTS IN PARTNERSHIP FIRM IN THE YEAR WHEN IT MADE WAS AT R S.1.50 CRORES ONLY AND THE SAID INVESTMENT WAS FURTHER INCREASE D ON ACCOUNT OF PROFITS FROM THE INVESTMENTS ACCRUED ON EVERY YEAR. IT WAS FURTHER SUBMITTED THAT ALTHOUGH DIVIDEND IS EXEMPT FROM INV ESTMENTS IN MUTUAL FUNDS, BUT PROFIT FROM SALE OF INVESTMENTS I S TAXABLE UNDER THE HEAD CAPITAL GAINS AND HENCE NO DISALLOWANCE IS CAL LED FOR IN RESPECT OF INVESTMENTS MADE IN MUTUAL FUNDS UNDER RULE 8D (2)(III) OF I.T.RULES, 1962. THE LEARNED CIT(A) AFTER CONSIDERI NG THE SUBMISSIONS OF THE ASSESSEE AND HAS TAKEN NOTE OF CERTAIN JUDICIAL PRECEDENTS INCLUDING THE DECISION OF ITAT., CHANDIG ARH BENCH IN THE CASE OF ACIT VS.ANIL KUMAR SINGHANIA (2014) 51 IT R 98) OBSERVED THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE ASSESSING OFFICER TO DISALLOW THE INTEREST EXPENDITURE UNDER THE 2 ND LIMB OF RULE 8D ON PRO RATA BASIS BECAUSE FROM ASSESSMENT Y EAR 2008-09 5 ITA NO.470/CHNY/2018 ONWARDS DISALLOWANCE U/S.14A NEEDS TO BE COMPUTED IN ACCORDANCE WITH PRESCRIBED FORMULA PROVIDED UNDER RULE 8D OF I.T.RULES, 1962, WHETHER OR NOT THE ASSESSEE IS HAV ING INTEREST FREE FUNDS. SIMILARLY, AS REGARDS DISALLOWANCE UNDER 3 RD LIMB OF RULE 8D, THE LEARNED CIT(A) OBSERVED THAT WHEN THE ASSESSEE IS HAVING COMMON EXPENSES, IT CANNOT BE RULED OUT THE POSSIB ILITIES THAT CERTAIN PORTION OF EXPENDITURE WOULD HAVE BEEN INC URRED FOR THE PURPOSE OF INVESTMENTS WHICH YIELD EXEMPT INCOME, ACCORDINGLY REJECTED THE ARGUMENTS OF THE ASSESSEE AND CONFIRME D THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORD ER OF THE LEARNED CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US . 5. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT THE CIT(A) HAS ERRED IN CONFIRMING INTEREST DISALLOWANCE UNDER 8D( 2)(II) OF I.T.RULES, 1962, DESPITE THE FACT THAT THE ASSESSEE IS HAVING SUFFICIENT OWN FUNDS WHICH IS MORE THAN THE AMOUNT OF INVESTMENTS WHICH YIELD EXEMPT INCOME. IN THIS REGARD, HE RELIED ON THE JU DGEMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. (2014) 366 ITR 505. AS REGARDS DISALLOWANCE UNDER 3 RD LIMB OF RULE 8D, THE LEARNED AR SUBMITTED THAT INVESTMENTS IN PARTNERSHI P FIRM AND INVESTMENTS IN MUTUAL FUNDS WHICH ARE SHORT TERM A ND DEBT FUNDS 6 ITA NO.470/CHNY/2018 LIABLE FOR CAPITAL GAINS CANNOT BE CONSIDERED FOR T HE PURPOSE OF DETERMINING AVERAGE VALUE OF INVESTMENTS. 6. THE LEARNED DR ON THE OTHER HAND, SUBMITTED THAT FROM THE ASSESSMENT YEAR 2008-09 ONWARDS DISALLOWANCE CONTEM PLATED UNDER SECTION 14A SHOULD BE COMPUTED IN ACCORDANCE WITH PRESCRIBED METHOD PROVIDED UNDER RULE 8D OF I.T.RUL ES,1962 AND ACCORDINGLY THERE IS NO ERROR IN THE COMPUTATION OF DISALLOWANCE BY THE ASSESSING OFFICER AND HENCE, THE LEARNED CIT(A) WAS RIGHT IN CONFIRMING THE ADDITION TOWARDS DISALLOWANCE U/S.14 A OF THE ACT. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIAL ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. A S REGARDS DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D (2)(II), IT IS WELL SETTLED PRINCIPLE OF LAW THAT WHEN SUFFICIENT OWN F UND IS AVAILABLE, WHICH IS OVER AND ABOVE THE VALUE OF INVESTMENTS, THEN THE QUESTION OF DISALLOWANCE OF INTEREST EXPENDITURE DOES NOT AR ISE. THIS PRINCIPLE IS SUPPORTED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD.(SUPRA), WHERE IT WAS HEL D THAT ASSESSEES CAPITAL, PROFIT, RESERVES, SURPLUS AND C URRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENTS IN TAX F REE SECURITIES WOULD HAVE TO BE PRESUMED THAT INVESTMENTS MADE BY THE 7 ITA NO.470/CHNY/2018 ASSESSEE WOULD BE OUT OF INTEREST FREE FUNDS AVAI LABLE WITH THE ASSESSEE AND NO DISALLOWANCE WAS WARRANTED U/S.14A OF THE ACT. IN THIS CASE, THE ASSESSEE HAS MADE OUT A CASE WITH N ECESSARY EVIDENCE THAT IT HAS INTEREST INCOME FREE FUNDS BEI NG SHARE CAPITAL AND SURPLUS RESERVE IN EXCESS OF INVESTMENTS WHICH YIELD EXEMPT INCOME. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER AS WELL AS CIT(A) HAVE ERRED IN D ISALLOWING INTEREST EXPENDITURE UNDER RULE 8D(2) OF INCOME TAX RULES, 1962. ACCORDINGLY, WE DIRECT THE AO TO DELETE INTEREST DI SALLOWANCES UNDER RULE 8D(2)(II) OF IT RULES 1962. 8. AS REGARDS DISALLOWANCE OF EXPENDITURE @ 0.5% A VERAGE VALUE OF INVESTMENT UNDER 3 RD LIMB OF RULE 8D(2)(III), WE FIND THAT THE ASSESSEE HAS MADE AN ARGUMENT IN LIGHT OF INVESTMEN TS IN THE PARTNERSHIP FIRM IN THE YEAR 2008 AND FURTHER STAT ED THAT INITIAL INVESTMENT AT ` 1.50 CRORES ONLY TO BE TAKEN FOR COMPUTING AVERAGE VALUE OF INVESTMENTS. SIMILARLY AS REGARDS INVESTME NTS IN MUTUAL FUNDS, IT WAS THE CONTENTION OF THE ASSESSEE THAT WHEN GAIN FROM TRANSFER OF MUTUAL FUND IS TAXABLE UNDER THE HEAD CAPITAL GAINS EVEN THOUGH DIVIDEND IS EXEMPT FROM TAX, THOSE INVESTM ENTS SHOULD BE EXCLUDED FROM THE PURVIEW OF AVERAGE VALUE OF IN VESTMENTS . WE FIND THAT THE ASSESSING OFFICER HAS TAKEN VALUE OF INVESTMENTS IN 8 ITA NO.470/CHNY/2018 PARTNERSHIP FIRM AS ON 31.03.2012 ON THE BASIS OF AMOUNT DISCLOSED IN THE FINANCIAL STATEMENTS, WHEREAS TH E ASSESSEE CLAIMED THAT ORIGINAL INVESTMENT WAS AT ` 1.5 CRORES ONLY AND REMAINING BALANCE WAS OUT OF ACCRUED PROFIT OF THE FIRM WHICH NEEDS TO BE EXCLUDED WHILE COMPUTING AVERAGE VALU E OF INVESTMENTS. THIS ASPECT NEEDS VERIFICATION FROM T HE ASSESSING OFFICER BECAUSE THE FACTS ARE NOT CLEAR AS THE ASSESSING OFFICER STATED THAT INVESTMENTS IN PARTNERSHIP FIRM IS A T ` 7.35 CRORES, WHEREAS THE ASSESSEE CLAIMED INVESTMENT IN PARTNE RSHIP FIRM IS ` 1.5 CRORES. SIMILARLY, AS REGARDS INVESTMENTS IN MU TUAL FUNDS, THE ASSESSEE CLAIMS THAT INVESTMENT IN MUTUAL FUNDS WHI CH SUFFERS CAPITAL GAIN TAX NEEDS TO BE TAKEN OUT OF AVERAGE V ALUE OF INVESTMENTS. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERA TION TO ARGUMENTS OF THE ASSESSEE IN LIGHT OF PROVISIONS OF SECTION 14A OF THE ACT, AND WE ARE OF THE CONSIDERED VIEW THAT WHA T IS TO BE CONSIDERED IN EXEMPT INCOME IN FORM OF DIVIDEND REC EIVED BY AN ASSESSEE, BUT NOT CAPITAL GAIN DERIVED ON TRANSFER OF SUCH INVESTMENTS TO DECIDE APPLICABILITY OF DISALLOWANCE S OF EXPENDITURE. IF DIVIDEND FROM MUTUAL FUND IS EXEMPT FROM TAX, TH EN CERTAINLY EXPENDITURE RELATABLE TO SUCH EXEMPT INCOME NEEDS T O BE DISALLOWED. IN THIS CASE, THERE IS NO CLARITY WHETH ER ANY EXEMPT 9 ITA NO.470/CHNY/2018 INCOME IS RECEIVED FROM SUCH INVESTMENTS FROM MUTUA L FUNDS. FURTHER, RECEIPT OF EXEMPT INCOME IS A PRECONDITION FOR INCLUDING INVESTMENTS IN AVERAGE VALUE OF INVESTMENTS, BECAUS E INVESTMENTS WHICH DO NOT GENERATE EXEMPT INCOME FOR THE YEAR CA NNOT BE INCLUDED IN AVERAGE VALUE OF INVESTMENTS. IN THIS C ASE, THE FACT WITH REGARD TO NATURE OF INVESTMENTS AND WHETHER ANY EXE MPT INCOME WAS EARNED FROM INVESTMENT IS NOT CLEAR FROM THE OR DERS OF THE LOWER AUTHORITIES. THEREFORE, TO ASCERTAIN CORRECT FACTS WITH REGARD TO NATURE OF INVESTMENTS, THE ISSUE NEEDS TO BE GO BA CK TO THE FILE OF THE ASSESSING OFFICER. THEREFORE, WE REMIT ISSUE RELATABLE TO COMPUTATION OF DISALLOWANCES UNDER 3 RD LIMB OF RULE 8D REGARDING 0.5% OF AVERAGE VALUE OF INVESTMENTS TO THE FILE OF THE ASSESSING OFFICER TO RECONSIDER THE ISSUE. THE ASSESSING OF FICER, IS THEREFORE, DIRECTED TO CONSIDER THE INVESTMENTS MADE IN PART NERSHIP FIRM AS WELL AS MUTUAL FUNDS WHILE COMPUTING AVERAGE VALU E OF INVESTMENTS IN ACCORDANCE WITH LAW. 10 ITA NO.470/CHNY/2018 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH OCTOBER, 2020 SD/- SD/- ( ) ( . ) (MAHAVIR SINGH) (G. MANJUNATHA ) / VICE-PRESIDENT $ / ACCOUNTANT MEMBER & /CHENNAI, ' /DATED 27 TH OCTOBER, 2020 DS )* +* /COPY TO: 1. APPELLANT 2. RESPONDENT 3. , () /CIT(A) 4. , /CIT 5. * 1 /DR 6. /GF .