Dy CIT, Circle-2(1), Vijayawada V. Radhakrishna Automobiles Pvt.Ltd., Vijayawada

ITA 511/VIZ/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 6523 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2013-2014
• Appeal Filed On: 12-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T S N MURTHY
• Keywords: Revision of order; Earning of tax free income; Assessment record
• Section: 143(3); 14A; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO , HONBLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , HONBLE ACCOUNTANT MEMBER ITA NO. 5 1 1 / VIZ /201 7 (ASST. YEAR : 20 13 - 14 ) DCIT, CIRCLE - 2 (1), VIJAYAWADA. V S . M/S. RADHAKRISHNA AUTOMOBILES PVT. LTD., D.NO. 27 - 33 - 46, GUDAVALLIVARI STREET, GOVERNORPET, VIJAYAWADA. PAN NO. AADCR 2845 J (APPELLANT) (RESPONDENT) ASSESSEE BY : NONE . DEPARTMENT BY : SHRI T.S.N . MURTHY SR. DR DATE OF HEARING : 30 / 1 0 /201 7 . DATE OF PRONOUNCEMENT : 22 / 1 1 /201 7 . O R D E R PER V. DURGA RAO, JUDICIAL MEMBER TH IS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) , VIJAYAWADA , DATED 2 8 /0 6 /201 7 FOR THE ASSESSMENT YEAR 20 13 - 14 . 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'ACT'). 2 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) 3 . FACTS OF THE CASE ARE IN BRIEF ARE THAT , IN THE ASSESSMENT ORDER , THE ASSESSING OFFICER HAS OBSERVED THAT THE MAIN PURPOSE OF INTRODUCTION OF SECTION 14A IS THAT THE EXPENDITURE WHICH IS RELATABLE TO EARNING OF EX EMPT INCOME HAS TO BE CONSIDERED FOR DISALLOWANCE , IRRESPECTIVE OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YEAR OR NOT . IN THE PRESENT CASE, THE INVESTMENTS MADE BY THE ASSESSEE IN SHARES ARE UNLISTED COMPANIES ARE TO BE TREATED AS QUALIFYING INVESTMENTS FOR INVOKING THE PROVISIONS OF SECTION 14A. ACCORDINGLY, THE EXPENDITURE RELATABLE TO EXEMPT INCOME IS TO BE COMPUTED AS PER RULE 8D (2) OF THE INCOME TAX RULES, 1962 (FOR SHORT , RULES) . ACCORDINGLY, AN AMOUNT OF RS. 7,37,080/ - IS DISALLOWED UNDER SECTION 14A OF THE ACT. 4 . ON APPEAL, LD. CIT(A) BY FOLLOWING THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S. REDINGTON (INDIA) LTD. VS. ADDL. CIT (392 ITR 633) , DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION . FOR THE SAKE OF CONVENIENCE, THE RELEVANT PORTION OF THE ORDER IS EXTRACTED AS UNDER: - 10.2. IN REVISED GROUND OF APPEAL NO.2, APPELLANT CONTENDED THAT ASSESSING OFFICER ERRED IN MAKING DISALLOWANCE OF RS.7,37,080/ - U/S.14A R.W. RULE 8D, WHEN THE APPELLANT DID NOT RECEIVE ANY EXEMPTED INCOME DURING THE RELEVANT PERIOD. 10.2.1. IN THIS REGARD, I HAVE PERUSED ALL RELEVANT 3 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) SUBMISSIONS. 10.2.2. THE ADMITTED POSITION IS THAT NO EXEMPT INCOME HAS BEEN EARNED BY THE APPELLANT IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR IN ISSUE. THE ORDER OF ASSESSMENT RECORDS A FINDING OF FACT TO THAT EFFECT (I.E.) IN PARA 4.2 OF ASSESSMENT ORDER, ASSESSING OFFICER HELD THAT DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2013 - 14, THE APPELLANT DID NOT RECEIVE ANY DIVIDENDS WHICH ARE OTHERWISE EXEMPT FROM THESE INVESTMENTS. IN THE REMAND REPORT ALSO, ASSESSING OFFICER ADMITTED THAT APPELLANT DID NOT RECEIVE ANY DIVIDENDS WHICH ARE OTHERWISE EXEM PT FROM THE INVESTMENTS MADE IN THE SISTER CONCERN. 10.2.3. HON BLE MADRAS HIGH COURT IN THE CASE OF M/S. REDINGTON (INDIA) LTD. VS. ADDL. CIT, COMPANY RANGE - V, CHENNAL IN T.C.A.NO.520 OF 2016 IN ITS ORDER DATED 23.12.2016, 392 ITR 633 (MADRAS) HELD THAT SEC.4 OF THE ACT BRINGS TO TAX, THAT INCOME, WHICH IS RELATABLE TO THE ASSESSMENT YEAR IN ISSUE. THE DIVISION BENCH, THUS, HELD THAT WHERE NO EXEMPT INCOME IS EARNED IN THE PREVIOUS YEAR, RELEVANT TO THE ASSESSMENT YEAR IN ISSUE, PROVISIONS OF SEC. 14A OF THE ACT R.W.RULE 8D COULD NOT BE INVOKED. THE REASONING OF THE DIVISION BENCH IS CONTAINED IN THE FOLLOWING PART OF THE JUDGMENT: 4. THE AD MI TTED POSITION IS THAT NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR IN ISSUE. THE ORDER OF ASSESSMENT RECORDS A FINDING OF FACT TO THAT EFFECT. THE ISSUE TO BE DECIDED THUS LIES WITHIN THE SHORT COMPASS OF WHETHER A DISALLOWANCE IN TERMS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES CAN BE CONTEMPLATED EVEN IN A SITUATION WHERE NO EXEMPT INCOME HAS ADMITTEDLY BEEN EARNED BY THE ASSESSEE IN THE RELEVANT FINANCIAL YEAR. 7. PER CONTRA, SHRI T. RAVIKUMAR APPEARING ON BEHALF OF THE RE VENUE DREW OUR ATTENTION TO THE MARGINAL NOTES OF SECTION 14A POIN T IN G OUT THAT THE PROVISION WOULD APPLY NOT ONLY WHERE EXEMPTED INCOME IS INCLUDED IN THE TOTAL INCOME, BUT ALSO WHERE EXEMPT INCOME IS INCLUDABLE IN TOTAL 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 SE. 14A WAS INTENDED TO COVER EVEN THOSE 4 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) SITUATIONS WHETHER THERE IS A POSSIBILITY OF EXEMPT INCOME BEING EARNED IN FUTURE. TH E CIRCULAR, AT PARAGRAPH 4, STATES THAT IT IS NOT NECESSARY FOR EXEMPT INCOME TO HAVE BEEN INCLUDED IN THE INCOME OF A PARTICULAR YEAR FOR THE DISALLOWANCE TO BE TRIGGERED. ACCORDING TO THE LEARNED STANDING COUNSEL, THE PROVISIONS OF SEC. 14A ARE MADE APPL ICABLE, IN TERMS OF SUB - SECTION (1)/HEREOF TO INCOME 'UNDER THE ACT' AND NOT 'OF THE YEAR' AND A DISALLOWANCE U/S. 14A R. W. RULE 8D CAN THUS BE EFFECTED EVEN IN A SITUATION WHERE A TAXPAYER HAS NOT EARNED ANY TAXABLE INCOME IN A PARTICULAR YEAR. 9. WE ARE UNABLE TO SUBSCRIBE TO THE AFORESAID VIEW. THE PROVISIONS OF SEC. 14A WERE INSERTED AS A RESPONSE TO THE JUDGMENTS OF THE SUPREME COURT IN CIT VS. MAHARASHTRA SUGAR MILLS LIMITED (1971) 82 ITR 452 AND RAJASTHAN STATE WARE HOUSING CORPORATION VS. CIT (2002) 242 ITR 450 IN TERMS OF WHICH, EXPENDITURE INCURRED BY AN ASSESSEE CARRYING ON A COMPOSITE BUSINESS GIVING RISE TO BOTH TAXABLE AS WELL AS NON - TAXABLE INCOME, WAS ALLOWABLE IN ENTIRETY WITHOUT APPORTIONMENT. IT WAS THUS THAT SEC. 14A WAS INSERTED P ROVIDING THAT NO DEDUCTION SHALL BE ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF INCOME EXEMPT FROM TAXATION. AS OBSERVED BY THE SUPREME COURT IN THE JUDGMENT IN THE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS (P)LTD. (201 0) 326 ITR 1. '.... THE MANDATE OF SEC. 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF AN EXEMPTION OF EX EMPT INCOME WITHOUT MAKING ANY APPORTIONMENT 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 E FFECT THAT SEC. 14A WOULD BE ATTRACTED EVEN TO EXEMPT INCOME 'INCLUDABLE' IN TOTAL INCOME WOULD ENTAIL THE ASSESSMENT OF NOTIONAL INCOME, ASSUMED TO BE EXEMPT IN THE FUTURE, IN THE PRESENT ASSESSMENT YEAR. THE COMPUTATION OF TOTAL INCOME IN TERMS OF SEC. 5 OF THE ACT IS ON REAL INCOME AND THERE IS NO SANCTION IN LAW FOR THE ASSESSMENT OF ADMITTEDLY NOTIONAL INCOME, PARTICULARLY IN THE CONTEXT OF AFFECTING A DISALLOWANCE IN CONNECTION THEREWITH. 11. THE COMPUTATION OF DISALLOWANCE IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT 5 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESULT IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. WE BELIEVE THIS WOULD BE CARRYING THE ARTIFICE TOO FAR. 10.2.4. HON'BLE MADRAS HIGH COURT IN THE CASE OF CI T , CENTRAL - 1, CHENNAI VS. CHETTINAD LOGISTICS (P) LTD., IN ITS ORDER DATED 13.3.2017 (2017) 80 TAXMANN.COM 221 (MADRAS) HELD THAT RULE 8D CANNOT BE READ IN A MANNER, WHICH TAKES IT BEYOND THE SCOPE AND CONTENT OF THE MAIN PROVISION, WHICH IS, SEC. 14A OF THE ACT. RESPECTFULLY FOLLOWING ABOVE DECISIONS AND THE FACT THAT THERE IS NO EXEMPT INCOME EARNED IN THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR, I HOLD THAT NO DISALLOWANCE U/S.14A R.W.RULE 8D IS WARRANTED. I, THEREFORE, DIRECT ASSESSING OFFICER TO DELETE ADDITION OF RS.7,37,080 / - . REVISED GROUND OF APPEAL NO.2 (ORIGINAL GROUND OF APPEAL NO. 1) IS ALLOW ED. 5. NONE APPEARED ON BEHALF OF THE ASSESSEE. LD. DEPARTMENTAL REPRESENTATIVE HAS SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 6 . IN THIS CASE, ADMITTEDLY , NO EXEMPT INCOME IS EARNED BY THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION . H OWEVER, THE ASSESSING OFFICER IS OF THE OPINION THAT WHETHER THERE IS AN EXEMPT INCOME OR NOT AS PER SECTION 14A, THE EXPENDITURE WHICH IS RELATABLE TO EARNING OF EXEMPT INCOME HAS TO BE CONSIDERED FOR DISALLOWANCE, IRRESPECTIVE OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YEAR OR NOT. THE LD. CIT(A) BY FOLLOWING THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S. REDINGTON (INDIA) LTD. (SUPRA) HAS D I RECTED THE ASSESSING OFFICER TO DELETE THE ADDITION. A SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF D. VEERABHADRA REDDY (HUF) VS. DCIT IN ITA NO. 6 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) 263/VIZ/2014 , BY ORDER DATED 23/06/2017 FOR THE ASSESSMENT YEAR 2009 - 10 , WHEREIN THE TRIBUNAL HAS HELD THAT NO DISALLOWANCE CAN BE MADE WHEN THERE IS EXPENSES INCURRED IN RELATI O N TO EXEMPT INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED AS UNDER: - 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. TH E ASSESSEE HAS RENTAL INCOME FROM GODOWNS AND THE BUSINESS LOSS. THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT U/S 143(3) BY ORDER DATED 04.11.2011. THE LD.CIT HAS CALLED FOR THE RECORD U/S 263 AND ISSUED THE NOTICE FOR REVISION FOR INCORRECT SET OFF OF BUSINESS LOSS AGAINST THE RENTAL INCOME. AFTER VERIFICATION OF THE MATERIAL ON RECORD, THE LD.CIT HAS DROPPED THE ISSUE WITH REGARD TO INCORRECT SET OFF OF BUSINESS LOSS AGAINST THE INCOME FROM PROPERTY WHICH WAS EXAMINED BY THE ASSESSING OFFICER. DU RING THE COURSE OF REVISION PROCEEDINGS, IT HAS COME TO THE NOTICE OF LD.CIT THAT THE ASSESSEE HAS MADE INVESTMENTS IN SHARES AND BONDS AND DID NOT MAKE DISALLOWANCE WHICH WAS REQUIRED TO BE MADE U/S14A OF IT ACT. THE ASSESSEE EXPLAINED THAT THERE WERE NO EXPENSES INCURRED IN RELATION TO THE EXEMPT INCOME WHICH WAS CLAIMED AS DEDUCTION FOR THE ASSESSMENT YEAR 2009 - 10. HENCE, THE ASSESSEE ARGUED BEFORE THE LD.CIT THAT SECTION 14A IS NOT APPLICABLE IN ASSESSEES CASE. AS PER THE OBSERVATION OF THE LD.CIT, THE ASSESSEE MADE THE INVESTMENTS TO THE TUNE OF RS.19,90,625/ - IN SHARES AND BONDS FROM THE BORROWED FUNDS AND THE INTEREST EXPENDITURE RELATING TO THE EARNING OF DIVIDEND INCOME IS REQUIRED TO BE DISALLOWED U/S 14A. THOUGH CIT OPINED THAT THE EXPENDITUR E RELATING TO THE EARNING OF DIVIDEND INCOME REQUIRED TO BE DISALLOWED, THERE WAS NO FINDING GIVEN BY THE CIT IN HIS ORDER WITH REGARD TO EARNING OF DIVIDEND INCOME. THE CIT ALSO DID NOT REBUT THE EXPLANATION OFFERED BY THE ASSESSEE STATING THAT NO EXPEND ITURE WAS INCURRED FOR MAKING THE INVESTMENTS. THE LD.DR DID NOT MAKE ANY CLARIFICATION WITH REGARD TO THE QUANTUM OF DIVIDEND INCOME EARNED BY THE ASSESSEE. THE LD.AR SUBMITTED PAPER BOOK ENCLOSING THE COPY OF STATEMENT OF COMPUTATION, RETURN OF INCOME, BALANCE SHEET AND PROFIT AND LOSS ACCOUNT. IT IS SEEN FROM THE PROFIT AND LOSS ACCOUNT AND THE STATEMENT OF COMPUTATION OF INCOME THAT THE ASSESSEE HAS NOT DERIVED ANY DIVIDEND INCOME. WHEN THE ASSESSEE HAS NO EXEMPT INCOME, THE QUESTION OF DISALLOWANCE U/S14A R.W.RULE 8D IS NOT 7 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) CALLED FOR. THE SAME VIEW IS EXPRESSED BY THE DECISION OF HONBLE MADRAS HIGH COURT IN REDINGTON (INDIA) LTD. VS. ADDL.CIT, 77 TAXMAN.COM 257, HONBLE DELHI HIGH COURT IN CHEM INVESTMENTS VS. CIT, 61 TAXMAN.COM 118 AND THE HONBL E GUJARAT HIGH COURT IN PRINCIPAL CIT VS. SINTEX INDUSTRIES LTD., 82 TAXMAN.COM 171 HELD THAT NO DISALLOWANCE IS CALLED FOR WHEN ASSESSEE MAKES SMALL INVESTMENT FROM THE SURPLUS FUNDS. THERE WAS NO DIVIDEND INCOME EARNED BY THE ASSESSEE AND THE CASE WAS T AKEN FOR REVISION TO DISALLOW THE BUSINESS LOSS CLAIMED AGAINST THE PROPERTY INCOME WHICH WAS EXAMINED BY THE AO AND DROPPED THE ASSESSMENT PROCEEDINGS AND THE LD.CIT ALSO SATISFIED THAT THERE IS NO CASE FOR REVISION ON ACCOUNT OF INCORRECT SET OFF OF BUSI NESS LOSS. WITH REGARD TO THE ISSUE OF DISALLOWANCE U/S 14A AS PER THE JUDICIAL PRONOUNCEMENTS NO DISALLOWANCE IS CALLED FOR WHEN THERE IS NO EXEMPT INCOME. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO CASE FOR REVISION OF ORDER U/S 263 AND ACCORDINGLY WE SET ASIDE THE ORDERS OF THE CIT AND ALLOW THE APPEAL OF THE ASSESSEE. LD. DEPARTMENTAL REPRESENTATIVE HAS NOT BROUGHT ANY DECISION OF THE JURISDICTIONAL HIGH COURT OR ANY OTHER HIGH COURT WHICH IS CONTRARY TO THE DECISION OF THE HON'BLE MADRAS HIGH COURT . 7 . WE , T HEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S. REDINGTON (INDIA) LTD. (SUPRA) AND ALSO THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF D. VEERABHADRA REDDY (HUF) (SUPRA) , THIS APPEAL FILED BY THE REVENUE IS DISMISSED. 8 . IN THE RESULT APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON TH IS 2 2 N D DAY OF NOV., 201 7 . S D / - S D / - ( D.S. SUNDER SINGH ) ( V. DURGA RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 2 2 N D NOVEMBER , 201 7 . 8 ITA NO. 511/VIZ/2017 ( M/S. RADHAKRISHNA AUTOMOBILES P. LTD. ) VR/ - COPY TO: 1. THE ASSESSEE - M/S. RADHAKRISHNA AUTOMOBILES PVT. LTD., D.NO. 27 - 33 - 46, GUDAVALLIVARI STREET, GOVERNORPET, VIJAYAWADA. 2. THE REVENUE DCIT, CIRCLE - 2(1), VIJAYAWADA. 3. THE P CIT , VIJAYAWADA. 4. THE CIT(A) , VIJAYAWADA. 5. THE D.R . , VISAKHAPATNAM. 6. GUARD FILE. BY ORDER SR. PRIVATE SECRETARY, ITAT, VISAKHAPATNAM.