DCIT CENT. CIR. 1(2), MUMBAI V. MEHUL C. CHOKSI, MUMBAI

ITA 5335/MUM/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8743 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 16-03-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 30-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B B RAJENDRA PRASAD
• Keywords: Business expenditure
• Section: 143(3); 153A; 14A

Judgement Text

SHRI MEHUL C. CHOKSI, MUMBAI. ITA NOS. 5334, 5335 & 5336/MUM/2016. 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI BEFORE SHRI JOGINDER SINGH, VICE-PRESIDENT AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA NOS. : 5334, 5335 & 5336/MUM/2016 (ASSESSMENT YEARS: 2009-10, 2010-11 & 2011-12) DCIT, CENTRAL CIRCL E 1(2) ROOM NO. 906, 9 TH FLOOR, OLD CGO BUILDING, MUMBAI - 400020 VS MEHUL C. CHOKSI, 9 TH FLOOR, GOKUL, 99, WALKESHWAR, CHOWPATTY. MUMBAI 400 006. .: PAN: AABPC1451E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.B. RAJENDRA PRASAD (DR) RESPONDENT BY : NONE /DATE OF HEARING : 20-12-2018 / DATE OF PRONOUNCEMENT : 20-12-2018 ORDER PER M. BALAGANESH, AM : 1. THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-47, MUMBAI DATED 24.06.2016 FOR THE A.YS 2009-10, 2010-2011 & 2011-12, WHICH IN ITSELF DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER (FOR SHORT THE A.O) U/S. 143(3) R.W.S 153A OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT). 2. SINCE THE IDENTICAL ISSUE IS INVOLVED IN ALL THESE APPEALS, THEY ARE TAKEN UP TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ONLY IDENTICAL ISSUE TO BE DECIDED IN ALL THESE APPEALS IS AS TO WHETHER THE DISALLOWANCE U/S 14A OF THE ACT COULD VALIDLY BE MADE IN RESPECT OF INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY / GROUP COMPANIES. 4. NONE APPEARED ON BEHALF OF THE ASSESSEE AND NO ADJOURNMENT PETITION WAS EVEN PREFERRED BY THE ASSESSEE. ON SHRI MEHUL C. CHOKSI, MUMBAI. ITA NOS. 5334, 5335 & 5336/MUM/2016. 2 LAST OCCASION, THE NOTICE WAS SOUGHT TO BE SERVED THROUGH THE DEPARTMENT AND THE REVENUE HAD PLACED EVIDENCE ON RECORD THAT NOTICE OF HEARING OF ALL THESE APPEALS WERE SERVED ON THE ASSESSEE BY AFFIXTURE BY THE INSPECTOR OF INCOME TAX IN THE PRESENCE OF TWO WITNESSES ON 05.12.2018. THE REVENUE HAS ALSO PLACED THE INSPECTORS REPORT TOGETHER WITH THE PHOTOGRAPHS OF THE WITNESSES IN SUPPORT OF ITS CONTENTION THAT NOTICE HAS BEEN SERVED ON THE ASSESSEE BY AFFIXTURE. IN THIS SCENARIO, WE PROCEED TO DISPOSE OFF THESE APPEALS ON HEARING THE LD. DR. 5. WE FIND THAT THE ISSUE UNDER DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE REVENUE BY THE RECENT DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT REPORTED IN 402 ITR 640 (SC), WHEREIN THE HONBLE SUPREME COURT REJECTED THE DOMINANT PURPOSE THEORY FOR WHICH INVESTMENTS IN SHARES WERE MADE IN GROUP COMPANIES OR SUBSIDIARY COMPANIES. THE HONBLE SUPREME COURT FURTHER HELD THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE APPLICABLE IRRESPECTIVE OF THE FACT WHETHER THE INVESTMENTS WERE MADE IN ORDER TO GAIN CONTROL OR HELD AS STOCK-IN-TRADE. THE RELEVANT OPERATIVE PORTION OF THE SAID JUDGMENT IS REPRODUCED HEREUNDER: 33) THERE IS NO QUARREL IN ASSIGNING THIS MEANING TO SECTION 14A OF THE ACT. IN FACT, ALL THE HIGH COURTS, WHETHER IT IS THE DELHI HIGH COURT ON THE ONE HAND OR THE PUNJAB AND HARYANA HIGH COURT ON THE OTHER HAND, HAVE AGREED IN PROVIDING THIS INTERPRETATION TO SECTION 14A OF THE ACT. THE ENTIRE DISPUTE IS AS TO WHAT INTERPRETATION IS TO BE GIVEN TO THE WORDS IN RELATION TO IN THE GIVEN SCENARIO, VIZ. WHERE THE DIVIDEND INCOME ON THE SHARES IS EARNED, THOUGH THE DOMINANT PURPOSE FOR SUBSCRIBING IN THOSE SHARES OF THE INVESTEE COMPANY WAS NOT TO EARN DIVIDEND. WE HAVE TWO SCENARIOS IN THESE SETS OF APPEALS. IN ONE GROUP OF CASES THE MAIN PURPOSE FOR INVESTING IN SHARES WAS TO GAIN CONTROL OVER THE INVESTEE COMPANY. OTHER CASES ARE THOSE WHERE THE SHARES OF INVESTEE COMPANY WERE HELD BY THE ASSESSEES AS STOCK-IN-TRADE (I.E. AS A BUSINESS ACTIVITY) AND NOT AS INVESTMENT TO EARN DIVIDENDS. IN THIS CONTEXT, IT IS TO BE EXAMINED AS TO WHETHER THE EXPENDITURE WAS INCURRED, IN RESPECTIVE SCENARIOS, IN RELATION TO THE DIVIDEND INCOME OR NOT. 34) HAVING CLARIFIED THE AFORESAID POSITION, THE FIRST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS TO WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SERVICE BY THE ASSESSEES SHRI MEHUL C. CHOKSI, MUMBAI. ITA NOS. 5334, 5335 & 5336/MUM/2016. 3 WOULD APPLY WHILE INTERPRETING SECTION 14A OF THE ACT OR WE HAVE TO GO BY THE THEORY OF APPORTIONMENT. WE ARE OF THE OPINION THAT THE DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSESSEE LIKE MAXOPP INVESTMENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GAIN CONTROL OF THE INVESTEE COMPANY. HOWEVER, THAT DOES NOT APPEAR TO BE A RELEVANT FACTOR IN DETERMINING THE ISSUE AT HAND. FACT REMAINS THAT SUCH DIVIDEND INCOME IS NON-TAXABLE. IN THIS SCENARIO, IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INCOME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO THE DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. KEEPING THIS OBJECTIVE BEHIND SECTION14A OF THE ACT IN MIND, THE SAID PROVISION HAS TO BE INTERPRETED, PARTICULARLY, THE WORD IN RELATION TO THE INCOME THAT DOES NOT FORM PART OF TOTAL INCOME. CONSIDERED IN THIS HUE, THE PRINCIPLE OF APPORTIONMENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPLE WHICH IS ENGRAINED IN SECTION 14A OF THE ACT. THIS IS SO HELD IN WALFORT SHARE AND STOCK BROKERS P LTD., RELEVANT PASSAGE WHEREOF IS ALREADY REPRODUCED ABOVE, FOR THE SAKE OF CONTINUITY OF DISCUSSION, WE WOULD LIKE TO QUOTE THE FOLLOWING FEW LINES THEREFROM. THE NEXT PHRASE IS, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A .. XXX XXXXXX THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14 A. 35) THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBSERVED THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE ACT, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMENTS OF BOTH TAXABLE AND NON-TAXABLE INCOME, THE ENTIRE EXPENDITURE IN RESPECT OF SAID BUSINESS WAS DEDUCTIBLE AND, IN SUCH A CASE, THE PRINCIPLE OF APPORTIONMENT OF THE EXPENDITURE RELATING TO THE NON-TAXABLE INCOME DID NOT APPLY. THE PRINCIPLE OF APPORTIONMENT WAS MADE AVAILABLE ONLY WHERE THE BUSINESS WAS DIVISIBLE. IT IS TO FIND A CURE TO THE AFORESAID PROBLEM THAT THE LEGISLATURE HAS NOT ONLY INSERTED SECTION 14A BY THE FINANCE (AMENDMENT) ACT , 2001 BUT ALSO MADE IT RETROSPECTIVE, I.E., 1962 WHEN THE INCOME TAX ACT ITSELF CAME INTO FORCE. THE AFORESAID INTENT WAS EXPRESSED LOUDLY AND CLEARLY IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2001. WE, THUS, AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT, AND ARE NOT INCLINED TO ACCEPT THE OPINION OF PUNJAB & HARYANA HIGH COURT WHICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID REASONING WOULD BE APPLICABLE IN CASES WHERE SHARES ARE HELD AS INVESTMENT IN THE INVESTEE COMPANY, MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTEREST THEREIN. ON THAT REASONING, APPEALS OF MAXOPP INVESTMENT LIMITED AS WELL AS SIMILAR CASES WHERE SHARES WERE PURCHASED BY THE ASSESSEES TO HAVE CONTROLLING INTEREST IN THE INVESTEE COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSED. SHRI MEHUL C. CHOKSI, MUMBAI. ITA NOS. 5334, 5335 & 5336/MUM/2016. 4 6. RESPECTFULLY FOLLOWING THE AFORESAID DECISION WE ALLOW THE APPEALS OF THE REVENUE. 7. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH DECEMBER, 2018 SD/- SD/- (JOGINDER SINGH) (M. BALAGANESH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATE: 20TH DECEMBER, 2018 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) THE CIT/DRP -11, MUMBAI. 4) THE CIT/DIT CONCERNED , MUMBAI. 5) , , / THE D.R. K BENCH, MUMBAI. 6) [ \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *RAVI KUMAR. PS