DCIT CEN CIR 8(2), MUMBAI V. UNITY REALTY & DEVELOPERS LTD, MUMBAI

ITA 496/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9794 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 23-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Assessee Lawyers: RAKESH MOHAN
• Keywords: Earning of tax free income; Assessment record
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.496/MUM/2017 (A.Y. 2012-13) DY. COMMISSIONER OF INCOME-TAX, CEN. CIR.8(2), 6 TH FLOOR, ROOM NO.658, AAYKAR BHAVAN,M.K.ROAD, MUMBAI 400 020 ...... APPELLA NT VS. M/S. UNITY REALTY & DEVELOPERS LTD., KK TOWER, PAREL TANK ROAD, G.D. AMBEDKAR MARG, PAREL VILLAGE, MUMBAI 400 012 ..... RESPONDENT APPELLANT BY : SHRI V. JUSTIN RESPONDENT BY : SHRI RAKESH MOHAN DATE OF HEARING : 21/08/2017 DATE OF PRONOUNCEMENT : 23/08/2017 ORDER PER G.S.PANNU,A.M: THE CAPTIONED APPEAL FILED BY THE REVENUE PE RTAINING TO ASSESSMENT YEAR 2012-13 IS DIRECTED AGAINST AN ORDER PASSED BY CIT(A)-50, MUMBAI DATED 07/10/2016, WHICH IN TURN, ARISES OUT OF ORDER P ASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 20/03/2015. 2. IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.3,39,44,749/- MA DE U/S 14A OF THE IT. ACT, BY 2 ITA NO.496/MUM/2017 (A.Y. 2012-13) HOLDING THAT NO DISALLOWANCE U/S 14A OF THE I.T. AC T, IS CALLED FOR, ONCE THERE IS NO EXEMPT INCOME RECEIVED OR RECEIVABLE BY THE ASSESSE E DURING THE RELEVANT PREVIOUS YEAR'. 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S 14A FOR A.Y.2012-1 3 WITHOUT APPRECIATING THE FACT THAT THE CIRCULAR NO.5 OF 2014 DATED 11 TH FEBRUARY, 2014, ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES CLEARLY PROVIDES FOR DISALLOWANCE O F THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EX EMPT INCOME'. 3. A PERUSAL OF THE GROUNDS OF APPEAL REVEAL THAT T HE GRIEVANCE OF THE REVENUE IS AGAINST THE DECISION OF THE CIT(A) IN HO LDING THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT IS NOT MERITED SINCE THERE I S NO EXEMPT INCOME EARNED OR RECEIVABLE BY THE ASSESSEE IN THE INSTANT YEAR. 4. IN BRIEF, THE RELEVANT FACTS ARE THAT THE RESPON DENT ASSESSEE IS ENGAGED IN THE REAL ESTATE BUSINESS AND FOR THE ASSESSMENT YEA R UNDER CONSIDERATION FILED THE RETURN OF INCOME DECLARING NIL INCOME. THE A SSESSING OFFICER NOTICED THAT ASSESSEE WAS HOLDING INVESTMENTS TO THE TUNE OF RS. 37,24,38,266/-; AND, ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE OUG HT TO HAVE MADE DISALLOWANCE OF THE EXPENDITURE IN RELATION TO THE EXEMPT INCOME AS REQUIRED UNDER SECTION 14A OF THE ACT. THE EXPLANATION OF T HE ASSESSEE WAS THAT IT HAS NOT EARNED ANY EXEMPT INCOME BY WAY OF DIVIDEND OR LONG TERM CAPITAL GAIN EXEMPT UNDER SECTION 10(38) OF THE ACT AND, THEREFO RE, NO DISALLOWANCE WAS REQUIRED TO BE MADE IN TERMS OF SECTION 14A OF THE ACT . FURTHER, ASSESSEE POINTED OUT THAT THE INVESTMENTS IN QUESTION WERE IN THE SPECIAL PURPOSE VEHICLES(SPVS)/JOINT VENTURES/ ASSOCIATES/SUBSIDIA RIES, WHICH WAS A PART OF THE BUSINESS ACTIVITY. THUS, THE CLAIM WAS THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT IS JUSTIFIED. HOWEVER, THE ASSESSI NG OFFICER DISAGREED WITH THE ASSESSEE AND APPLIED RULE 8D OF THE INCOME TAX RULE S, 1962 AND COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AT RS.3,3 9,44,790/-. AS A 3 ITA NO.496/MUM/2017 (A.Y. 2012-13) CONSEQUENCE THE ASSESSING OFFICER DETERMINED THE TO TAL INCOME AT RS.3,39,44,790/- AS AGAINST THE NIL INCOME DECLA RED BY THE ASSESSEE. THE CIT(A), HOWEVER, ACCEPTED THE PLEA OF THE ASSESSEE THAT IN THE ABSENCE OF ANY EXEMPT INCOME IN THE INSTANT YEAR, THERE CANNOT BE ANY DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF THE ACT. IN COMIN G TO SUCH A DECISION, THE CIT(A) RELIED UPON THE DECISION OF THE MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF DELITE ENTERPRISES (P) LTD VS. ITO IN ITA N OS.433,2983-4887 &5708/MUM/2005. ACCORDINGLY, THE CIT(A) DELETED T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 5. IN THIS BACKGROUND, THE RIVAL PARTIES HAVE BEEN HEARD. THE LD. REPRESENTATIVE FOR THE RESPONDENT ASSESSEE, AT THE OUTSET, POINTED OUT THAT THE VIEW OF THE CIT(A) IS SUPPORTED BY THE FOLLOWI NG JUDGMENTS OF THE HON'BLE MADRAS HIGH COURT :- (I) REDINGTON (INDIA) LTD. VS. ADDL. CIT, 77 TAXMA NN.COM 257. (II) CIT VS. CHETTINAD LOGISTICS (P) LTD., 80 TAXMA NN.COM 221. 6. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESEN TATIVE POINTED OUT THAT CBDT IN ITS CIRCULAR DATED 11/2/2014(SUPRA) HA S CLARIFIED THAT DISALLOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 1 4A OF THE ACT, EVEN IN CASES WHERE NO INCOME HAS BEEN EARNED BY THE ASSESSEE, WH ICH IS CLAIMED TO BE EXEMPT DURING A PARTICULAR YEAR. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. QUITE CLEARLY, THE CONTROVERSY BEFORE US IS DIRECTLY COVERED BY THE JU DGMENTS OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD.(SUPRA) AS WELL AS 4 ITA NO.496/MUM/2017 (A.Y. 2012-13) CHETTINAD LOGISTICS (P) LTD., (SUPRA). IN FACT, TH E CBDT CIRCULAR SOUGHT TO BE RELIED UPON BY THE LD. DEPARTMENTAL REPRESENTATIVE HAS ALSO BEEN TAKEN NOTE OF THE BY THE HONBLE HIGH COURT. PERTINENTLY, THE HON'BLE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD.(SUPRA) HAS TAKEN THE FOLLOWING REASONING:- 12.3 THE REASONING OF THE DIVISION BENCH IS CONTAIN ED IN THE FOLLOWING PART OF THE JUDGMENT: '4. THE ADMITTED POSITION IS THAT NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE IN THE FINANCIAL YEAR RELEVANT TO THE ASSE SSMENT YEAR IN ISSUE. THE ORDER OF ASSESSMENT RECORDS A FINDING OF FACT TO TH AT EFFECT. THE ISSUE TO BE DECIDED THUS LIES WITHIN THE SHORT COMPASS OF WHETH ER A DISALLOWANCE IN TERMS OF S.14A OF THE ACT READ WITH RULE 8D OF THE RULES CAN BE CONTEMPLATED EVEN IN A SITUATION WHERE NO EXEMPT INCOME HAS ADMITTEDLY B EEN EARNED BY THE ASSESSEE IN THE RELEVANT FINANCIAL YEAR. 7. PER CONTRA, SRI. T. RAVIKUMAR APPEARING ON BEHA LF OF THE REVENUE DREW OUR ATTENTION TO THE MARGINAL NOTES OF S.14 A POINTING OUT THAT THE PROVISION WOULD APPLY NOT ONLY WHERE EXEMPTED INCOME IS 'INCL UDED' IN THE TOTAL INCOME, BUT ALSO WHERE EXEMPT INCOME IS 'INCLUDABLE' IN TOT AL INCOME. 8. HE RELIED UPON A CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES IN CIRCULAR NO.5 OF 2014 DATED 11.2.2014 TO THE EFFECT THAT S.14A WAS INTENDED TO COVER EVEN THOSE SITUATIONS WHETHER THERE IS A POSS IBILITY OF EXEMPT INCOME BEING EARNED IN FUTURE. THE CIRCULAR, AT PARAGRAPH 4, STATES THAT IT IS NOT NECESSARY FOR EXEMPT INCOME TO HAVE BEEN INCLUDED I N THE INCOME OF A PARTICULAR YEAR FOR THE DISALLOWANCE TO BE TRIGGERE D. ACCORDING TO THE LEARNED STANDING COUNSEL, THE PROVISIONS OF S.14A ARE MADE APPLICABLE, IN TERMS OF SUB SECTION (1) THEREOF TO INCOME 'UNDER THE ACT' AND N OT 'OF THE YEAR' AND A DISALLOWANCE UNDER S.14A R.W.RULE 8D CAN THUS BE EF FECTED EVEN IN A SITUATION WHERE A TAX PAYER HAS NOT EARNED ANY TAXABLE INCOME IN A PARTICULAR YEAR. 9. WE ARE UNABLE TO SUBSCRIBE TO THE AFORESAID VIEW . THE PROVISIONS OF SECTION 14A WERE INSERTED AS A RESPONSE TO THE JUDGMENTS OF THE SUPREME COURT IN COMMISSIONER OF INCOME TAX V. MAHARASHTRA SUGAR MIL LS LIMITED [1971] 82 ITR 452 AND RAJASTHAN STATE WARE HOUSING CORPORATION V. COMMISSIONER OF INCOME-TAX [2002] 242 ITR 450 IN TERMS OF WHICH, EX PENDITURE INCURRED BY AN ASSESSEE CARRYING ON A COMPOSITE BUSINESS GIVING RI SE TO BOTH TAXABLE AS WELL AS NON-TAXABLE INCOME, WAS ALLOWABLE IN ENTIRETY WI THOUT APPORTIONMENT. IT WAS THUS THAT S.14A WAS INSERTED PROVIDING THAT NO DEDUCTION SHALL BE ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED IN REL ATION TO THE EARNING OF INCOME EXEMPT FROM TAXATION. AS OBSERVED BY THE SUP REME COURT IN THE 5 ITA NO.496/MUM/2017 (A.Y. 2012-13) JUDGMENT IN THE CASE OF COMMISSIONER OF INCOME TAX V. WALFORT SHARE AND STOCK BROKERS (P) LTD. [2010] 326 ITR 1 '.... THE MANDATE OF S.14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMP T INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENT IVE BY WAY OF AN EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPOR TIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME.' 10. THE PROVISION THIS IS CLEARLY RELATABLE TO THE EARNING OF ACTUAL INCOME AND NOT NOTIONAL OR ANTICIPATED INCOME. THE SUBMISSION OF THE DEPARTMENT TO THE EFFECT THAT S.14A WOULD BE ATTRACTED EVEN TO EXEMPT INCOME 'INCLUDABLE' IN TOTAL INCOME WOULD ENTAIL THE ASSESSMENT OF NOTIONA L INCOME, ASSUMED TO BE EXEMPT IN THE FUTURE, IN THE PRESENT ASSESSMENT YEA R. THE COMPUTATION OF TOTAL INCOME IN TERMS OF S.5 OF THE ACT IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSESSMENT OF ADMITTEDLY NO TIONAL INCOME, PARTICULARLY IN THE CONTEXT OF EFFECTING A DISALLOWANCE IN CONNE CTION THEREWITH. 11. THE COMPUTATION OF DISALLOWANCE IN TERMS OF RU LE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESULT IN THE I MPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOM E. WE BELIEVE THIS WOULD BE CARRYING THE ARTIFICE TOO FAR. (EMPHASIS I S OURS)' 7.1 THOUGH THE ASSESSMENT YEAR BEFORE THE HON'BLE MADRAS HIGH COURT WAS ASSESSMENT YEAR 2007-08, WHEN THE PROVISIONS OF RUL E 8D OF THE RULES WERE NOT APPLICABLE, SO HOWEVER, IN ITS LATTER JUDGMENT IN THE CASE OF CHETTINAD LOGISTICS (P) LTD., (SUPRA) THE SAID ASPECT HAS AL SO BEEN CONSIDERED BY THE HONBLE HIGH COURT. THE HON'BLE MADRAS HIGH COURT IN CHETTINAD LOGISTICS (P) LTD., (SUPRA) OBSERVED THAT THE PROVISIONS OF RULE 8D OF THE RULES DOES NOT COME TO THE RESCUE OF THE REVENUE IN ORDER TO MAKE DISALLOWANCE UNDER SECTION 14A IN THE ABSENCE OF ANY EXEMPT INCOME EAR NED BY THE ASSESSEE IN THE RELEVANT YEAR. IN OUR CONSIDERED OPINION, THE AFORESAID JUDGMENT OF THE HON'BLE MADRAS HIGH COURT CLEARLY MILITATES AGAINS T THE GROUNDS SOUGHT TO BE RAISED BY THE REVENUE BEFORE US.. APART THEREFROM, THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT, 378 I TR 33 (DEL) ALSO SUPPORTS THE PROPOSITION LAID DOWN IN THE TWO JUDGMENTS OF THE H ON'BLE MADRAS HIGH COURT. 6 ITA NO.496/MUM/2017 (A.Y. 2012-13) IN THIS BACKGROUND OF THE MATTER, WE FIND NO REASON S TO INTERFERE IN THE ULTIMATE CONCLUSION DRAWN BY THE CIT(A) TO DELETE T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. THE ORDER OF THE CIT(A) IS HEREBY AFFIRMED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D ORDER PRONOUNCED IN THE OPEN COURT ON 23/08/2017. SD/- SD/- (PAWAN SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 23/08/2017 VM , SR. PS 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. REGISTRAR) ITAT, MUMBAI