ASST CIT CEN CIR 2(4), MUMBAI V. TWINKLE ENVIRO TECH P.LTD, MUMBAI

ITA 5052/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9344 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 15-10-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAM TIWARI
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO.5052 /MUM/201 5 ASSESSMENT YEAR: 2011 - 12 ACIT - 2(4) ROOM NO. 802, 8 TH FLOOR, OLD CGO BUILDING, ANNEX M.K. ROAD MUMBAI - 400020. VS. TWINKLE ENVIRO TECH P. LTD. 317/318 PARVATIINDL. ESTATE, SUNMILL COMPOUND, LOWER PAREL(W) MUMBAI - 400013 PAN NO. AAACT4038N (APPELLANT) (RESPONDENT) REVENUE BY : SHRI RAM TIWARI , D R ASSESSEE BY : NONE DATE OF HEARING : 12/07 /2017 DATE OF PRONOUNCEMENT: 27/09/2017 ORDER PER N.K. PRADHAN, A.M . THIS IS AN APPEAL FILED BY THE REVENUE . THE REL EVANT ASSESSMENT YEAR IS 2011 - 12 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS) - 48 , MUMBAI AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3 ) OF THE INCOME TAX ACT 1961, (T HE ACT). 5052/MUM/2015 2 2. THE GROUND OF APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF THE LD. CIT(A) IN DIRECTING THE AO TO RE - COMPUTE THE DISALLOWANCE U/S 14A R.W. RULE 8D BY EXCLUDING AVERAGE VALUE OF SHARES OF STRATEGIC INVESTMENT MADE IN GROUP CONCERNS. 3. BRIEFLY STATED, THE FACTS OF THE C ASE ARE THAT THE ASSESSEE HAD EARNED DIVIDEND OF RS.31,00,880/ - AND CLAIMED IT AS U/S 10(34) . IN RESPONSE TO A QUERY RAISED BY THE ASSESSING OFFICER ( AO ) TO EXPLAIN WHY PROPORTIONATE DISALLOWANCE U/S 14A R.W. RULE 8D SHOULD NOT BE MADE, THE ASSESSEE SUBMIT TED THAT (I) IT HAS NOT MADE ANY INVESTMENT WITH A VIEW TO EARNING EXEMPT INCOME, (II) THE ASSESSEE - COMPANY AS A PART OF ITS BUSINESS ACTIVITY HAS ACQUIRED A STR ATEGIC STA K E IN OTHER COMPANIES TO HOLD BUSINESS INTEREST WITH A VIEW TO EARNING PROFIT, (III) THE ASSESSEE - COMPANY HAD SUFFICIENT CAPITAL, RESERVES AND INTERNAL ACCRUALS , (IV) THE FUNDS BORROWED INCLUDING TERM LOANS HAVE BEEN SPECIFICALLY AND CATEGORICALLY UTILIZED FOR SPECIFIC PURPOSE AND NOT FOR MAKING INVESTMENT. THUS THE ASSESSEE SUBMITTED BE FORE THE AO THAT NO DISALLOWANCE U/S 14A R.W. RULE 8D SHOULD BE MADE. 3.1 HOWEVER, THE AO WAS NOT CONVINCED WITH THE ABOVE EXPLANATION OF THE ASSESSEE AND HE WORKED OUT THE DISALLOWANCE U/S 14A R.W RULE 8D AND IT COMES TO RS.1,01,33,182/ - . 4. AGGRIEVED B Y THE ORDER OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) FOLLOWING THE ORDER OF THE ITAT IN ASSESSEE S OWN CASE I.E. M/S TWINKLE ENVIRO TECH LTD. VS. DCIT (ITA NO. 5052/MUM/2015 3 1752 TO 1754/MUM/2013) DIRECTED THE AO TO RE - COMPUTE THE DISALLOWANCE UNDER RULE 8D BY EXCLUDING AVERAGE VALUE OF SHARES OF STRATEGIC INVESTMENT MADE IN THE GROUP CONCERNS OR GROUP COMPANIES. 5. BEFORE US, THE LD. DR SUBMITS THAT THERE IS NO PROVISION IN SECTION 14A R.W RULE 8D TO EXCLUDE STRATEGIC INVESTMENT WHILE COMPUTING THE DISALLOWANCE. THUS HE SUBMITS THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THE ONE BY THE AO BE RESTORED. THERE IS NO COMPLIANCE BY THE ASSESSEE TO THE NOTICE ISSUED BY THE REGISTRY FIXING THE CASE FOR HEARING BEFORE T HE TRIBUNAL . 6 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISION ARE GIVEN BELOW. WE ARE OF THE CONSIDERED VIEW THAT STRATEGIC STAKE MADE BY THE ASSESSEE IN OTHER COMPANIES TO HOLD BUSINESS INT EREST AS SUBMITTED BEFORE THE AO BY THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE WHICH ARE CAPABLE OF YIELDING EXEMPT INCOME I.E. BY WAY OF DIVIDEND WHICH ARE EXEMPT FROM TAX SHALL BE INCLUDED WHILE COMPUTING DISALLOWANCE U/S 14A. THE INCOME TAX ACT DOES NOT GRANT ANY EXEMPTION TO SUCH STRATEGIC STAKE/INVESTMENT WHICH ARE CAPABLE OF YIELDING EXEMPT INCOME TO BE EXCLUDED WHILE COMPUTING DISALLOWANCE U/S 14A. WE ARE FORTIFIED IN OUR DECISION BY THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF UNITED BREWERIES LTD. VS. DCIT IN ITA NO. 419/2009 VIDE ORDER DATED 31.05.2016. 5052/MUM/2015 4 NOW WE TURN TO THE RELEVANT DECISIONS ON THE ISSUE AT HAND. THE RATIONALE FOR ENACTMENT OF SECTION 14A WAS EXPLAINED BY THE HONBLE BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD VS. DCIT (2010) 328 ITR 81 (BOM.) AS UNDER: SECTION 14A WAS ENACTED BY THE PARLIAMENT IN ORDER TO OVERCOME THE JUDGMENTS OF THE SUPREME COURT IN THE CASES OF CIT V. INDIAN BANK LTD. AIR 1965 SC 1473, CIT V. MAHARASHTRA SUGAR MILLS LTD. [1971] 82 ITR 452 AND RAJASTHAN STATE WAREHOUSING CORPN. V. CIT [2000] 242 ITR 450/109 TAXMAN 145 , IN WHICH IT WAS HELD THAT IN THE CASE OF A COMPOSITE AND INDIVISIBLE BUSINESS, WHICH RESULTS IN EARNING OF TAXABLE AND NON - TAXABLE INCOME, IT IS IMPERMISSIBLE TO APPORTION THE EXPENDITURE BETWEEN WHAT WAS LAID OUT FOR THE EARNING OF TAXABLE INCOME AS OPPOSED TO NON - TAXABLE INCOME. THE EFFECT OF SECTION 14A IS TO WIDEN THE THEORY OF THE AP PORTIONMENT OF EXPENDITURE. PRIOR TO THE ENACTMENT OF SECTION 14A, WHERE THE BUSINESS OF AN ASSESSEE WAS NOT A COMPOSITE AND INDIVISIBLE BUSINESS AND THE ASSESSEE EARNED BOTH TAXABLE AND NON - TAXABLE INCOME, THE EXPENDITURE INCURRED ON EARNING NON - TAXABLE I NCOME COULD NOT BE ALLOWED AS A DEDUCTION AS AGAINST THE TAXABLE INCOME. AS A RESULT OF THE ENACTMENT OF SECTION 14A, NO EXPENDITURE CAN BE ALLOWED AS A DEDUCTION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE, EVEN IN THE CASE OF A COMPOSITE AND INDIVISIBLE BUSINESS, WHICH RESULTS IN THE EARNING OF TAXABLE AND NON - TAXABLE INCOME, IT WOULD BE NECESSARY TO APPORTION THE EXPENDITURE INCURRED BY THE ASSESSEE. ONLY THAT PART OF THE EXPENDITURE, WHICH IS INCURRED IN RELAT ION TO INCOME WHICH FORMS PART OF THE TOTAL INCOME, CAN BE ALLOWED. THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE DISALLOWED. FROM THIS, IT WOULD FOLLOW THAT SECTION 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT. THE PRINCIPLE OF APPORTIONMENT WHICH PRIOR TO THE AMENDMENT OF SECTION 14A WOULD NOT HAVE APPLIED TO EXPENDITURE INCURRED IN A COMPOSITE AND INDIVISIBLE 5052/MUM/2015 5 BUSINESS WHICH RESULTS IN TAXABLE AND NON - TAXABLE INCOME, MUST, AFTER THE ENACTMENT O F THE PROVISIONS, APPLY EVEN TO SUCH A SITUATION. THE EXPRESSION 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. ALSO IN THE SAME JUDGMENT THEIR LORDSHI PS EXPLAINED RULE 8D AS UNDER: IN THE AFFIDAVIT - IN - REPLY THAT HAD BEEN FILED ON BEHALF OF THE REVENUE, AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IT HAD BEEN STATED WITH REFERENCE TO RULE 8D(2)( II ) THAT IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX - FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN EXCLUDING ANY EXPEND ITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE - ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY, ETC.). AS REGARDS RULE 8D(2)( III ), IT HAD BEEN SUBMITTED THAT SOME MECHANISM OR FORMUL A HAD TO BE ADOPTED FOR ATTRIBUTING PART OF THE ADMINISTRATIVE/MANAGERIAL EXPENSES TO TAX - EXEMPT INVESTMENT INCOME. THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO TAX - FREE INVESTMENT INCOME HAVE A FIXED COMPONENT AND A VARIABLE COMPONENT. A VIEW WAS TAKEN THA T THE DISALLOWANCE SHOULD ALSO BE LINKED TO THE VALUE OF THE INVESTMENT RATHER THAN THE AMOUNT OF EXEMPT INCOME. UNDER PORTFOLIO MANAGEMENT SCHEMES (PMS), THE FEE CHARGED RANGES BETWEEN 2 AND 2.5 PER CENT OF THE PORTFOLIO VALUE WHICH WOULD BE INCLUSIVE OF A PROFIT ELEMENT FOR THE PORTFOLIO MANAGER. WHILE THE FIXED ADMINISTRATIVE EXPENSES WERE EXCLUDED ON THE GROUND THAT IN THE CASE OF A LARGE CORPORATE TAXPAYER THEY WOULD BE SPREAD OVER A LARGE NUMBER OF VOLUMINOUS ACTIVITIES, THE VARIABLE EXPENSES WERE COM PUTED AT ONE - HALF PER CENT OF THE VALUE OF THE INVESTMENT. THE JUSTIFICATION 5052/MUM/2015 6 THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR RULE 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. 6 .1 IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. V. D CIT [2017] 81 TAXMANN.COM111 (SC), IT IS HELD THAT T HE LITERAL MEANING OF SECTION 14A, FAR FROM GIVING RISE TO ANY ABSURDITY, APPEARS TO BE WHOLLY CONSISTENT WITH THE SCHEME OF THE ACT AND THE OBJECT/PURPOSE OF LEVY OF TAX ON INCOME. 6 .2 IN HDFC BANK LTD. VS. DCIT [2016] 67 TAXMANN.COM 42 (BOM), THE HON'BLE BOMBAY HIGH COURT REFERRING TO THE DECISION IN CIT VS. HDFC BANK LTD. [2014] 366 ITR 505 (BOM) AND CIT V. RELIANCE UTILITIES & POWER LTD. [2009] 313 ITR 340 (BOM) HELD AS UNDER : 15. IT IS CLEAR THAT FOR THE FIRST TIME IN THE CASE OF HDFC BANK LTD. (SUPRA) THAT THIS COURT TOOK A VIEW THAT THE PRESUMPTION WHICH HAS BEEN LAID DOWN IN RELIANCE UTILITIES & POWER LTD . (SUPRA) WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASSESSEE'S OWN FUNDS IN CASE THE SAME ARE IN EXCESS OF THE INVESTMENTS MADE IN THE SECURITIES (NOTWITHSTANDING THE FACT THAT THE ASSESSEE CONCER NED MAY ALSO HAVE TAKEN SOME FUNDS ON INTEREST) APPLIES, WHEN APPLYING SECTION 14A OF THE ACT. THUS, THE DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) FOR THE FIRST TIME ON 23RD JULY, 2014 HAS SETTLED THE ISSUE BY HOLDING THAT THE TEST OF PRESUMPTION AS HELD BY THIS COURT IN RELIANCE UTILITIES AND POWER LTD . (SUPRA) WHILE CONSIDERING SECTION 36(1)(III) OF THE ACT WOULD APPLY WHILE CONSIDERING THE APPLICATION OF SECTION 14A OF THE ACT. THE AFORESAID DECISION OF THIS COURT IN HDFC BANK LTD. (SUPRA) ON THE ABOVE ISSUE HAS ALSO BEEN ACCEPTED BY THE REVENUE IN AS MUCH AS EVEN THOUGH THEY HAVE FILED AN APPEAL TO THE SUPREME COURT AGAINST THAT ORDER ON THE OTHER ISSUE THEREIN VIZ. BROKEN PERIOD INTEREST, NO APPEAL HAS BEEN PREFERRED BY THE REVENUE ON THE ISSUE O F INVOKING THE PRINCIPLES LAID DOWN IN RELIANCE UTILITIES & POWER LTD . (SUPRA) IN ITS APPLICATION TO SECTION 14A OF THE ACT. 5052/MUM/2015 7 6 .3 IN A RECENT DECISION IN PUNJAB TRACTORS LTD. VS. CIT (2017) 393 ITR, THE HONBLE PUNJAB & HARYANA HIGH COURT HAS HELD THAT METHOD LAID DOWN IN RULE 8D MUST BE FOLLOWED. 6 . 4 THE LD. COUNSEL HAS NOT FILED A COPY OF THE AUDITED ACCOUNTS OF THE ASSESSEE - COMPANY BEFORE THE TRIBUNAL. SO WE ARE NOT IN A POSITION TO VERIFY ITS OWN FUNDS VIS - A - VIS INVESTMENTS. NEITHER THE AO NOR THE LD. CIT(A) HAS DONE SO. 6 . 5 WE ARE OF THE CONSIDERED VIEW THAT THE PRESENT CONTENTIOUS ISSUE COULD BE SOLVED BY APPLYING THE RATIO LAID DOWN BY HONBLE SUPREME COURT AND HONBLE BOMBAY HIGH COURT IN THE DECISIONS MENTIONED ABOVE. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE AO TO MAKE A FRESH ASSESSMENT KEEPING IN MIND THE RATIO LAID DOWN IN DECISIONS AT PARA 6 ; 6 .1; 6 .2 AND 6 . 3 HEREINBEFO RE AND AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE DIRECT THE ASSESSEE TO FILE THE RELEVANT DETAILS /EVIDENCE BEFORE THE AO. 7 . IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN C OURT O N 27/09/2017. SD/ - SD/ - (MAHAVIR SI NGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER 5052/MUM/2015 8 MUMBAI ; DATED: 27/09/2017 RAHUL SHARMA, SR. P.S. 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