ACIT, CHENNAI V. Chettinad Software Services P Ltd., CHENNAI

ITA 579/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6369 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-08-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 07-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M S NETHRAPAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Transfer pricing; Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , ! ' ! # . $% & '( BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.579/MDS./2017 / ASSESSMENT YEAR : 2012-13 THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2), CHENNAI 600 034. VS. M/S. CHETTINAD SOFTWARE SERVICES P. LTD., 6 TH FLOOR, RANI SEETHAI HALL, 603, ANNASALAI, CHENNAI 600 006. [PAN AACCC 4134 G ] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : MR.M.S.NETHRAPAL, JCIT, DR /RESPONDENT BY : MR.S.SRIDHAR,ADVOCATE / DATE OF HEARING : 17 - 08 - 2017 / DATE OF PRONOUNCEMENT : 23 - 08 - 2017 - / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-1, CHENNAI DATED 27.12.2016 PERTAINING TO ASSESSMENT YEAR 2012-13. 2. THE ONLY GROUND IN REVENUES APPEAL IS WITH REG ARD TO DELETION OF DISALLOWANCE MADE U/S.14A OF THE ACT BY LD.CIT(A). ITA NO.579/MDS./2017 :- 2 -: 3. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY HAS MADE INVESTMENTS IN EQUITY SHARES OF ` 119,1,21,046/- AS ON YEAR ENDING 31.3.2012 AND ` 132,44,55,685/- AS ON YEAR ENDING 31.3.2011. THE AS SESSEE COMPANY HAS LOANS OUTSTANDING OF ` 113,65,30,332/-. ACCORDING TO AO, THE INVESTMENTS WERE MADE OUT INTEREST BEARING FUNDS. EVEN IF THE A SSESSEE COMPANY HAS INTEREST FREE FUNDS AND INTEREST BEARING FUNDS, IT CANNOT BE PRESUMED THAT, INVESTMENTS MADE OUT OF INTEREST FREE FUNDS ONLY OR THAT INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS ONLY. SINCE THER E ARE MIXED FUNDS (INTEREST BEARING AND INTEREST FREE) AND HENCE, PRO PORTIONATE DISALLOWANCE OF INTEREST WAS TO BE MADE. IT IS EMPHASIZED THAT, THE ENTIRE INTEREST EXPENDITURE HAS NOT BEEN DISALLOWED AS ENVISAGED IN SEC.36(1)(III) OF INCOME TAX ACT BUT THE DISALLOWANCE IS ON PROPORTIONATE BA SIS. HOWEVER, FROM THE DETAILS OF EXPENSES SUBMITTED BY THE ASSESSEE, IT W AS OBSERVED BY THE AO THAT CERTAIN EXPENSES SUCH AS PROFESSIONAL & CONSUL TANCY CHARGES, TENT, TRAVEL AND PRINTING AND STATIONERY, FUND MAINTENANC E, POSTAL AND COURIER ETC. COULD HAVE BEEN INCURRED IN RELATION TO INVESTMENT MADE IN EQUITY SHARES, OUT OF WHICH EXEMPT INCOME COULD BE REALIZED. FURTH ER, THE ASSESSEE ALSO MAY HAVE TO INCUR EXPENSE IN RELATION TO MANAGEMENT AND PROFESSIONAL FEE, SO AS TO MAKE INFORMED CHOICES FOR INVESTMENT IN EQ UITY SHARES BAED ON THE MARKET VALUE AND PERFORMANCE OF THE ECONOMY. SINCE ASSESSEE HAS MADE INVESTMENTS IN EQUITY SHARES, THERE WOULD BE A CERT AIN ELEMENT OF EXPENSES INCURRED TOWARDS MANAGING OF THOSE SHARES AND ALSO A TIME COT INVOLVED FOR UTITISING THE FUNDS INVESTED TO REALIZE MAXIMUM PRO FIT. ACCORDING TO AO, THE ASSESSEES CLAIM THAT NO DIVIDEND INCOME HAS BEEN E ARNED AND THAT NO ITA NO.579/MDS./2017 :- 3 -: INVESTMENTS ARE MADE IN THE FINANCIAL YEAR 20L1-12, WAS NOT CORRECT. RELIANCE IS PLACED IN THE CASE OF CHEMINVEST LTD VS. ITO REP ORTED IN 121 LTD 318 (2009), WHEREIN THE HONBLE DELHI TRIBUNAL HAS HELD THAT SUCH DISALLOWANCE UNDER SECTION 14A CAN BE MADE IN A YEAR IN WHICH AN EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. THEREFORE, THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE EXEMPT DIVI DEND INCOME IN RELATION TO THE MANDATORY PROVISIONS OF RULE 8D IS WORKED OUT B Y AO AS ` 62,90,942/- AND THE LD. ASSESSING OFFICER MADE DISALLOWANCE U/ S.14A AMOUNTING TO ` 62,90,942/-. AGGRIEVED BY THE ORDER OF LD. ASSESSI NG OFFICER, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 4. BEFORE THE LD.CIT(A), THE SUBMISSION OF THE AP PELLANT WAS THAT THE APPELLANT HAS NOT INCURRED EXPENDITURE TO EARN TAX FREE INCOME AS CONTEMPLATED IN SECTION 14A AND IT IS CLEARLY EVIDE NT THAT THERE ARE NO EXPENSES RELATING EXEMPT INCOME IN PROFIT AND LOSS ACCOUNT. SECTION 14A IS A DISALLOWANCE PROVISION AND NOT AN ADDITION PROV ISION. THIS MEANS BEFORE INVOKING IT, THE IMPUGNED EXPENDITURE MUST BE CLAIM ED AS DEDUCTION IN THE FIRST PLACE. THIS IS BASED ON THE SIMPLE PROPOSITIO N THAT WHAT HAS NOT BEEN CLAIMED AS DEDUCTION CANNOT BE DISALLOWED. THE TERM EXPENDITURE AS USED IN THE SECTION MEANS WHAT IS PAID OUT OR AWAY, SOME THING WHICH IS GONE IRRETRIEVABLY. EXPENDITURE MEANS SOMETHING THAT A T RADER PAYS OUT FROM HIS POCKET. EXPENSE HAS MANY FORMS, NAMELY, ACCRUED EXP ENSE, ADMINISTRATIVE EXPENSE, BUSINESS EXPENSE, CAPITA EXPENSE, CURRENT EXPENSE, DEFERRED EXPENSE, EDUCATIONAL EXPENSE, ENTERTAINMENT EXPENSE , EXTRAORDINARY EXPENSE, FIXED EXPENSE, GENERAL ADMINISTRATIVE EXPE NSE, MEDICAL EXPENSE, ITA NO.579/MDS./2017 :- 4 -: MOVING EXPENSE, OPERATING EXPENSE, ORDINARY AND NEC ESSARY EXPENSE, ORGANIZATIONAL EXPENSE, PUT-OF-POCKET EXPENSE, PREP AID EXPENSE, TRAVEL EXPENSE. THE TERM EXPENDITURE AS MENTIONED IN SEC TION 14A WOULD TAKE WITHIN ITS AMBIT NOT ONLY DIRECT EXPENDITURE BUT AL SO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER THEY ARE FIXED, VARIABLE, DIR ECT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FINANCIAL. 4.1 THE LD.CIT(A) RELIED ON VARIOUS CASE LAWS INCL UDING CO-ORDINATE BENCH OF CHENNAI IN THE CASE OF EIH ASSOCIATED HOTELS LTD VS DCIT IN ITA NOS.1503 & 1624/MDS./2012 DATED 17.07.2013 WHEREIN HELD THAT ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPA NY IS PURELY INCIDENTAL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W. RULE 8D. ACCORDINGLY, THE LD.CIT(A) DIRECTED THE AO TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVE STMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. AGAINST THE ORDER OF LD.CIT(A), NOW THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.A.R BEFORE US IS THAT THE INVESTMENT WAS MADE IN ASSOCIATED CONCERN BY NAME M/S.CHETTINAD CEMENT CORPORATION PVT. LTD., AND IT WAS A STRATEGIC INVESTMENT. AS SUCH, THERE CANNOT BE APPLICABILITY OF PROVISIONS OF THE SECTION 14A R.W. RULE 8D OF RULES . ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE ASSESSEE INVESTED THE BOR ROWED FUNDS, WHICH CARRIES INTEREST AND IN SUCH CIRCUMSTANCES, THE JUD GEMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. CHETTINAD LOGISTI CS PVT. LTD. IN (2017) 98 ITA NO.579/MDS./2017 :- 5 -: CCH 0151 AND M/S.REDINGTON (INDIA) LTD., VS. ACIT I N TCA NO.520 OF 2016(MAD.) CANNOT BE APPLIED. IN OUR OPINION, WHET HER M/S.CHETTINAD CEMENT CORPORATION PVT. LTD., IS AN ASSOCIATED ENTE RPRISE OF ASSESSEE OR NOT, WAS TO BE SEEN BY THE AUTHORITIES BELOW. HOWEVER, T HE LOWER AUTHORITIES HAVE NOT GONE INTO THE ABOVE FACT OF THE ASSOCIATED ENTERPRISE SHAREHOLDINGS PATTERN. FURTHER, WE ALSO MAKE IT CLEAR THAT THE AO SHOULD CONSIDER THE ORDER OF TRIBUNAL IN THE CASE OF MR.M.A.ALAGAPPAN VS. ACIT VIDE ORDER DATED 03.04.2017 REPORTED IN 165 ITD 401 (CHENNAI T RIBUNAL) WHEREIN HELD THAT:- 6 . WE CONSIDERED THE ARGUMENTS OF BOTH THE SIDES IN DETAIL. SEC.14A(1) DECLARES THE LAW THAT THE EXPENDITURE IN CURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF THE TOTAL INCOME UNDER THE ACT SHALL NOT BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE INCOME OF THE AS SESSEE. SEC.14A(2) PROVIDES FOR DETERMINING THE QUANTUM OF SUCH EXPENDITURE WHICH SHALL NOT BE ALLOWED AS A DEDUCTI ON. THAT IS THE MACHINERY PROVISION AS FAR AS SEC.14A IS CONCER NED. IN THAT PROVISION, IT HAS BEEN PROVIDED THAT IF THE ASSESSI NG OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE COMPUTATI ONS MADE BY AN ASSESSEE, HE SHALL COMPUTE THE QUANTUM IN ACCORD ANCE WITH THE METHOD THAT MAY BE PRESCRIBED. FOR THIS MATTER , RULE 8D HAS ALREADY BEEN PRESCRIBED. SUB-SEC.(3) FURTHER P ROVIDES THAT EVEN IN A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXP ENDITURE WAS INCURRED, THE ASSESSING AUTHORITY HAS TO PRESUM E THE INCURRING OF SUCH EXPENDITURE AS PROVIDED UNDER SUB -SEC.(2) READ WITH RULE PRESCRIBED. THEREFORE, IT BECOMES CLEAR THAT EVEN IN A CASE WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS SO INCURRED, THE STATUTE HAS PROVIDED FOR A PRESUMPTIV E EXPENDITURE WHICH HAS TO BE DISALLOWED BY FORCE OF THE STATUTE. IN A DISTANT MANNER, LITERALLY SPEAKING, IT MAY EVE N BE CONSIDERED FOR THE PURPOSE OF CONVENIENCE AS A DEEM ING ITA NO.579/MDS./2017 :- 6 -: PROVISION. WHEN SUCH DEEMING PROVISION IS MADE ON THE BASIS OF STATUTORY PRESUMPTION, THE REQUIREMENT OF FACTUAL E VIDENCE IS REPLACED BY STATUTORY PRESUMPTION AND THE ASSESSING OFFICER HAS TO FOLLOW THE CONSEQUENCES STATED IN THE STATUTE. IT MEANS THAT EVEN IN A CASE WHERE NO EXPENDITURE IS STATED TO HA VE BEEN INCURRED, THE ASSESSING AUTHORITY HAS TO APPLY RULE 8D. AS THE STATUTORY PRESUMPTION SUBSTITUTES THE REQUIREMENT O F FACTUAL EVIDENCE, THE QUESTION OF ENQUIRY DOES NOT ARISE. THEREFORE, WE ARE UNABLE TO AGREE WITH THE ARGUMENT OF THE LEARNE D A.R. HENCE, IN THE INTEREST OF JUSTICE, WE REMIT THE ISS UE IN DISPUTE TO THE FILE OF AO TO EXAMINE THE ISSUE AFRESH IN THE LIGHT OF JUDGEME NT OF ABOVE DECISION. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 23 RD AUGUST, 2017, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) & / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 23 RD AUGUST, 2017. K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF