M/s United Telecom Ltd., Bangalore V. DCIT, Bangalore

ITA 498/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85994 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 18-11-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 15-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 115JB; 263; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI , JUDICIAL MEMBER A ND SHRI JASON P.BOAZ, ACCOUNTANT MEMBER ITA NO. 260 / BANG/20 14 (ASSESSMENT YEAR: 20 1 0 - 11 ) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 12(5), BANGALORE. APPELLANT VS. M/S.UNITED TELECOM LTD. 18A/19, DODDANEKUNDI INDUSTRIAL AREA, MAHADEVAPURA POST, WHITEFIELD, BANGALORE - 560048. RESPONDENT PAN: AAACU2228H AND ITA NO. 498/BANG/2014 (ASSESSMENT YEAR: 2010 - 11 ) (BY THE ASSESSEE) ***** REVENUE BY: DR.K.SHANKAR PRASAD, JCIT(DR). ASSESSEE BY: SHRI S.GANESH, ADVOCATE. DATE OF HEARING : 01/01/2015. DATE OF PRONOUNCEMENT: 23 /01/2015. O R D E R PER SMT.P.MADHAVI DEVI, JM: THESE ARE CROSS APPEALS FILED BY BOT H THE ASSESSEE AND THE REVENUE AGAINST THE ORDER OF THE CIT(A) - III, BANGALORE, DATED 27/11/2013 FOR THE ASSESSMENT YEAR 2010 - 11. ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 2 OF 9 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE - COMPANY FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR DE CLARING A TOTAL INCOME OF NIL AFTER SET OFF OF BROUGHT FORWARD LOSSES UNDER REGULAR PROVISIONS AND BOOK PROFIT OF RS.23,00,23,288/ - U/S 115JB OF THE INCOME - TAX ACT, 1961[HEREINAFTER REFERRED TO AS 'THE ACT']. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) , THE ASSESSING OFFICER ( AO ) OBSERVED THAT THE ASSESSEE HAS CLAIMED EXEMPTION OF CERTAIN INCOME SUCH AS DIVIDEND AS NOT FORMING PART OF THE TOTAL INCOME. ON A QUERY RAISED BY THE AO, THE ASSESSEE STATED THAT THERE ARE NO DIRECT EXPENSES INCURRED TOWARDS E ARNING OF THE EXTRA DIVIDEND. THE AO, HOWEVER, OBSERVED THAT AS PER RULE 8D OF THE INCOME - TAX RULES, ( RULES FOR SHORT) THE DISALLOWANCE IS TO BE MADE. THUS, THE AO MADE DISALLOWANCE OF 1,18,20,645/ - IN TERMS OF RULE 8D READ WITH SEC.14A OF THE ACT OF B OTH INTEREST AS WELL AS 0.5% OF AVERAGE VALUE OF INVESTMENT. FURTHER , WHILE COMPUTING THE INCOME U/S 115JB OF THE ACT, THE AO HELD THAT THE EXPENDITURE DISALLOWED U/S 14A OF THE ACT HAS TO BE ADDED TO THE BOOK PROFIT AS PER CLAUSE (F) OF EXPLANATION 1 TO SEC.115JB. HE ACCORDINGLY MADE THE ADDITION TO THE BOOK PROFIT AND BROUGHT IT TO TAX. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO DELETED THE ADDITION OF INTEREST UNDER RULE 8D READ WITH SEC. 14A OF THE ACT BUT HE SUSTAINED THE ADDITION OF THE ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 3 OF 9 ADMINISTRATIVE EXPENSES UNDER RULE 8D READ WITH SEC.14A OF THE ACT. AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES MADE U/S 14A OF THE ACT, HE UPHELD THE ACTION OF THE AO IN RE - WORKING THE PROFIT U/S 115JB OF THE ACT BY ADDING THE SAID AMOUNT TO THE BOOK PROFIT. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US WHILE THE ASSESSEE IS IN APPEAL BEFORE US AGAINST CONFIRMATION OF THE ADDITION BY THE AO. 4. IN THE REVENUE S APPEAL (ITA NO.260/ BANG/2014) , THE ONLY GRIEVANCE IS AGAINST THE DELETION OF DISALLOWANCE OF INTEREST U/S 14A READ WITH RULE 8D AMOUNTING TO RS.72,55,845/ - . IT IS THE CASE OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS NOT MADE ANY INVESTMENT DURING THE YEAR BUT THAT THE INVESTMENT WHICH HAS RESULTED IN EARNING OF EXEMPT INCOME IN THE NATURE OF DIVIDEND WAS MADE IN EARLIER YEARS . HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS POINTED OUT FROM PARA.5.2 OF THE ASSESSMENT ORDER THAT THERE WAS AN INCREASE I N INVESTMENT DURING THE RELEVANT FINANCIAL YEAR. THUS, THERE IS A DISCREPANCY BETWEEN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE AND THE FINDINGS OF THE AO. THE CIT(A) HAS FURTHER GIVEN A FINDING THAT THE ASSESSEE HAD STATED BEFORE HER THAT SURPLUS FINDS WERE AVAILABLE WITH THE ASSESSEE IN THE YEAR 2003 - 04 AND THERE IS NO INTEREST EXPENDITURE INCURRED DURING THE YEAR WHICH CAN BE CO - RELATED WITH THE INVESTMENT. THE CIT(A) ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 4 OF 9 HAS FURTHER GIVEN A FINDING THAT THE AO HAS NOT REBUTTED THE ASSESSEE S CONTENTION AND POINTED OUT HOW INVESTMENT WHICH HAS RESULTED IN EARNING OF DIVIDEND INCOME HAS BEEN MADE OUT OF INTEREST - BEARING FUNDS. WE FIND THAT NONE OF THESE CONTENTIONS HAVE BEEN PROPERLY APPRECIATED BY THE AO OR THE CIT(A). IN VIEW OF THE SAME, WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO THE FILE OF THE AO FOR VERIFICATION AND DE NOVO CONSIDERATION IN THE LIGHT OF THE JUDICIAL PRECEDENTS ON THE ISSUE. THEREFORE, THE REVENUE S APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES . 5. AS REGARDS THE ASSESSEE S APPEAL , IT IS THE CASE OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DISALLOWANCE U/S 14A IS ONLY A NOTIONAL DISALLOWANCE AND HAS NOT BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS REQUIRED UNDER SEC.115JB OF THE ACT AND THEREFORE IT CANNOT BE ADDED TO THE BOOK PROFIT UNDER CLAUSE (F) OF EXPLANATION 1 TO SEC.115JB OF THE ACT. IN SUPPORT OF THIS CONTENTION, THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF THE CO - ORDINATE BENCH OF THE TR IBUNAL IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT (2009) 32 SOT 101 (DEL). THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT(A) AND PLACED RELIANCE UPON THE DECISION OF THE TRIBUNAL AT MUMBAI IN THE CASE OF ITO VS. RBK SHARE BROKING (P) LTD. (37 TAXMANN.COM128) WHEREIN IT HAS BEEN HELD THAT THE AMOUNT DISALLOWABLE U/S 14A IS ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 5 OF 9 ALWAYS PART OF THE EXPENSES SPECIFICALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT AND IT IS AXIOMATIC THAT UNLESS ANY EXPENDITURE IS INCURRED AND CLAIMED AS DEDUCTION, THERE CAN BE NO QUESTION OF ANY HYPOTHETICAL DISALLOWANCE U/S 14A AND THEREFORE IT FOLLOWS THAT THE AMOUNT DISALLOWABLE U/S 14A IS COVERED UNDER CLAUSE (F) OF EXPLANATION (1) TO SEC.115JB(2) OF THE ACT. 5.1 HAVING REGARD TO THE RIVAL CONTENTIONS AND THE JUDICIAL PRECEDENTS RELIED UPON BY BOTH THE SIDES, WE FIND THAT THE ASSESSEE HAS PLACED RELIANCE UPON THE FOLLOWING JUDGMENTS IN FAVOUR OF HIS CONTENTION: I. MANIPAL TECHNOLOGIES LTD. VS. DCIT (ITA NO.1222/BANG/2012 DT.25/07/2014) RE PORTED IN 2014(8) TMI 59. II. ACIT VS. SPRAY ENGINEERING DEVICES LTD. (2012)(23 TAXMANN. COM267(CHD. III. GOETZE (INDIA) LTD. VS. CIT (2009) 32 SOT 101 (DEL). 5.2 WE FIND THAT IN THE CASE OF GOETZE (INDIA) LTD (CITED SUPRA) CO - ORDINATE BENCH OF THE TRIBU NAL AT DELHI WAS DEALING WITH THE CASE OF AN ASSESSEE FOR ASSESSMENT YEAR 2000 - 01 AND IT WAS IN THESE CIRCUMSTANCES THAT IT WAS HELD THAT ONLY EXPENDITURE WHICH WAS RELATABLE TO THE EARNING OF DIVIDEND INCOME WAS DISALLOWABLE U/S 14A AND SINCE IT WAS HELD THAT THERE WAS NO EXPENDITURE INCURRED BY THE ASSESSEE THEREIN FOR EARNING OF THE DIVIDEND INCOME, NO DISALLOWANCE U/S 14A COULD BE MADE ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 6 OF 9 TO THE BOOK PROFITS U/S 115JA OF THE ACT. FURTHER, IT IS SEEN THAT THE TRIBUNAL WAS DEALING WITH THE ORDER U/S 263 OF THE ACT AND HAVING OBSERVED THAT THERE WAS CONTROVERSY WITH REGARD TO THE APPLICABILITY OF RULE 8D OF THE IT RULES RETROSPECTIVELY, IT WAS HELD THAT THE ORDER U/S 263 REVISING THE ORDER OF ASSESSMENT WAS NOT JUSTIFIED. THEREFORE, IN OUR ONION, THE SAID DE CISION IS NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE US AS THE ASSESSMENT YEAR BEFORE US IS 2010 - 11 WHEREIN RULE 8D IS VERY MUCH APPLICABLE AND THE DISALLOWANCE U/S 14A READ WITH RULE 8D WAS JUSTIFIED. 5.3 IN THE CASE OF MANIPAL TECHNOLOGIES LTD. (CITED SUPRA) WHICH IS FOR THE ASSESSMENT YEAR 2009 - 10 WHEREIN RULE 8D WAS VERY MUCH APPLICABLE, WE FIND THAT THE TRIBUNAL HAS MERELY FOLLOWED THE DECISION OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF GOETZE (INDIA) LTD (CITED SUPRA) WITHO UT OBSERVING THE DIFFERENCE IN LAW APPLICABLE FOR THE RELEVANT ASSESSMENT YEAR. IN THE CASE O F SPRAY ENGINEERING DEVICES LTD . (CITED SUPRA), THE CO - ORDINATE BENCH OF THE TRIBUNAL HAD NOT CONSIDERED THE APPLICABILITY OF SEC.14A READ WITH RULE 8D TO THE REL EVANT ASSESSMENT YEAR AND THE EFFECT THEREOF ON THE COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT. THEREFORE, THE SAID JUDGMENT ALSO DOES NOT COME TO THE HELP OF THE ASSESSEE. 5.4 ON THE OTHER HAND, WE FIND THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL AT MUMBAI IN THE CASE OF ITO VS. RBK SHARE ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 7 OF 9 BROKING (P) LTD. REPORTED IN [2013] 137 TAXMANN.COM 128 HAS, AT PARA.6 OF ITS ORDER HAS ELABORATELY DEALT WITH THE ISSUE AFTER CONSIDERING THE APPLICABILITY OF RULE 8D AND ALSO THE PROVISIONS OF SEC.115J B OF THE ACT. FOR THE SAKE OF CONVENIENCE, THE SAID PARA IS REPRODUCED IS HEREUNDER: 6. BE THAT AS IT MAY, WE WILL PROCEED TO DECIDE THIS GROUND ON MERITS AS WELL BECAUSE IT INVOLVES A PURE LEGAL ISSUE AS TO WHETHER THE AMOUNT DISALLOWED U/S 14A CAN BE A DDED WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. THE LEARNED AR RELIED ON CERTAIN DECISIONS TO BRING HOME THE POINT THAT THE AMOUNT DISALLOWED U/S 14A CANNOT BE ADDED TO NET PROFIT FOR COMPUTING `BOOK PROFIT U/S 115JB. ON THE OTHER HAND, THE LEA RNED DEPARTMENTAL REPRESENTATIVE TOOK US THROUGH THE LANGUAGE OF CLAUSE (F) OF EXPLANATION (1) TO SECTION 115JB, AS PER WHICH THE AMOUNT OF EXPENDITURE RELATABLE TO ANY EXEMPT INCOME IS TO BE ADDED BACK TO THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUN T. AT THIS JUNCTURE, IT WOULD BE RELEVANT TO NOTE THAT `BOOK PROFIT U/S 115JB IS COMPUTED AS PER EXPLANATION (1) TO SUB - SECTION (2) OF SECTION 115JB. THIS EXPLANATION PROVIDES THAT BOOK PROFIT MEANS NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB - SECTION (2) AS INCREASED BY CERTAIN AMOUNTS SPECIFIED UNDER CLAUSES (A) TO (I) IF DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CLAUSE (J) IF NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT. THE AMOUNT SO DETERMINED IS FURTHER ADJUSTED BY REDUCING THE AMOUNTS SPECIFIED IN CLAUSES (I) TO (VII). THE AMOUNT WHICH EVENTUALLY RESULTS IS THE AMOUNT OF `BOOK PROFIT ON WHICH TAX LIABILITY IS DETERMINED U/S 115JB. CLAUSE (F) TO EXPLANATION (1) PROVIDES THAT THE NET PROFIT SHO WN IN THE PROFIT AND LOSS ACCOUNT SHALL BE INCREASED BY : (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE 38 THEREOF) OR SECTION 11 OR SECTION 12 APPLY; . A BARE PERUSAL O F CLAUSE (F) OF EXPLANATION (1) MAKES IT ABUNDANTLY CLEAR THAT THE AMOUNT OF EXPENDITURE RELATABLE TO ANY EXEMPT INCOME, OTHER THAN SECTION 10(38), IS LIABLE TO BE ADDED BACK TO THE AMOUNT OF NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT. WHEN WE T URN TO THE LANGUAGE OF SECTION 14A, IT TRANSPIRES THAT IT TALKS OF DISALLOWING ANY EXPENDITURE INCURRED `IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOME. SUB - SECTION (1) OF THIS PROVISION PROVIDES THAT : FOR THE PURPOSES OF COMPUTING THE TOTAL I NCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. THE ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 8 OF 9 EXPRESSION IN RELATION TO USED FOR MAKING DISALLOWANCE U/S 14A HAS BEEN EMPLOYED IN EXPLANATION (1) TO SECTION 115JB(2) AS EXPENDITURE RELATABLE TO , IN MORE OR LESS THE SAME FORM. IT IS MANIFEST THAT THE AMOUNT OF DIVIDEND IS EXEMPT U/S 10(33) [NOT SECTION 10(38)] OF THE ACT. THUS ANY EXPENDITURE `RELATABLE TO THE EXEMPT DIVIDEND INCOME WOULD FALL UNDER CLAUSE (F). THE LD. AR ARGUED THAT UNLESS AN AMOUNT IS SPECIFICALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT IN RESPECT OF AN EXEMPT INCOME, THE SAME CANNOT BE BROUGHT WITHIN THE PURVIEW OF CLAUSE (F) OF THE EXPLAN ATION 1 TO SECTION 115JB(2). HE STATED THAT SINCE THE DISALLOWANCE U/S 14A IS COMPUTED AS PER RULE 8D, THE ORIGIN OF THE EXPENSES DISALLOWED CANNOT BE TRACED TO THE PROFIT AND LOSS ACCOUNT AND HENCE IT CANNOT BE COVERED WITHIN THE MISCHIEF OF CLAUSE (F) OF THE EXPLANATION. WE FAIL TO FIND ANY LOGIC IN THIS SUBMISSION BECAUSE OF THE CLEAR LANGUAGE OF THE EXPLANATION 1, WHICH PROVIDES IN UNEQUIVOCAL TERMS THAT THE AMOUNT OF EXPENDITURE `RELATABLE TO THE EXEMPT INCOME SHALL BE ADDED BACK. NEITHER THE LANGUAGE OF CLAUSE (F) EXPRESSLY REFERS TO THE AMOUNT SPECIFICALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT NOR THERE CAN BE AN IMPLICATION IN THIS REGARD. WHAT HAS BEEN CONTEMPLATED BY THE PROVISION IS THE AMOUNT OF THE EXPENDITURE `RELATABLE TO THE EXEMPT INCOME . FURTHER, THE AMOUNT DISALLOWABLE U/S 14A IS ALWAYS PART OF THE EXPENSES SPECIFICALLY DEBITED TO THE PROFIT AND LOSS ACCOUNT. IT IS AXIOMATIC THAT UNLESS ANY EXPENDITURE IS INCURRED AND CLAIMED AS DEDUCTION, THERE CAN BE NO QUESTION OF ANY HYPOTHETICAL DI SALLOWANCE U/S 14A. IT, THEREFORE, FOLLOWS THAT THE AMOUNT DISALLOWABLE U/S 14A IS COVERED UNDER CLAUSE (F) OF EXPLANATION (1) TO SECTION 115JB(2). OUR VIEW IS FORTIFIED BY ANOTHER ORDER DATED 29 AUGUST, 2012 PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN T HE CASE OF ESQUIRE P. LTD, MUMBAI (ITA NO.5688/MUM/2011). AS THE ASSESSMENT YEAR UNDER CONSIDERATION IS ASSESSMENT YEAR 2008 - 2009 IN WHICH DISALLOWANCE U/S 14A IS REQUIRED TO BE COMPUTED AS PER RULE 8D AND FURTHER IT IS THIS AMOUNT WHICH HAS BEEN DISALLOWE D AND ALSO ADDED TO THE AMOUNT OF NET PROFIT FOR COMPUTING `BOOK PROFIT U/S 115JB, WE SEE NO REASON TO DISTURB THE IMPUGNED ORDER ON THIS ISSUE. THIS GROUND FAILS. THE ASSESSMENT YEAR IN THE CASE OF RBK SHARE BROKING P.LTD., IS 2008 - 09 DURING WHICH PE RIOD RULE 8D WAS VERY MUCH APPLICABLE AS HELD BY THE HON BLE BOMBAY HIGH CURT IN THE CASE OF GODREJ BOYCE MFG CO. (328 ITR 81). THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL AT MUMBAI IN THE CASE OF RBK SHARE ITA NO S . 260 & 498 /BANG/20 1 4 M/S.UNITED TELECOM LTD. PAGE 9 OF 9 BROKING P.LTD ., WE HOLD THAT THE DISALLOWANCE U/S 14A HAS TO BE ADDED TO THE NET PROFIT UNDER CLAUSE (F) OF EXPLANATION 1 TO SEC.115JB OF THE ACT . THE ASSESSMENT ORDER IS ACCORDINGLY UPHELD AND THE ASSESSEE S GROUND IS REJECTED. 5.5 IN THE RESULT, THE ASSESSEE S APPEAL IS PART LY ALLOWED FOR STATISTICAL PURPOSES. PRON OUNCED IN THE OPEN COURT ON 23 RD OF JANUARY, 201 5 . SD/ - SD/ - (JASON P BOAZ ) ( SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDI CIAL MEMBER EKSRINIVASULU COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALORE