VAKRANGEE SOFTWARE LTD, MUMBAI V. DCIT CEN CIR 4(2), MUMBAI

ITA 5834/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8473 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 30-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Keywords: Earning of tax free income
• Section: 14A; 115JB

Judgement Text

1 ITAS NO.5792 & 5834/MUM/2016 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE SHRISAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO. 5792 & 5834 /MUM/2016 (ASSESSMENT YEAR: 2012-13 & 2013-14) VIKRANGEE LTD VIKRANGEE HOUSE MAROL CO-OP INDL ESTATE OFF M.V. ROAD, ANDHERI (E) MUMBAI 400 059 PAN : AAACV9920D VS THE DY.CIT, CENT.CIR.4(2), MUMBAI APPELLANT RESPONDEDNT APPELLANT BY SHRI DHAVAL SHAH RESPONDENT BY SHRI M.C . OMI NINGSHEN DATE OF HEARING 02 - 11 - 2017 DATE OF PRONOUNCEMENT 0 8 - 1 1 - 2017 O R D E R PER G MANJUNATHA, AM : THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST SEPARATE, BUT IDENTICAL ORDERS OF THE CIT(A)-52, MUMBAI DATED 01-06-2016 AN D 12-07-2016 FOR THE ASSESSMENT YEARS 2012-13 AND 2013-14. SINCE THE FACTS ARE IDE NTICAL AND ISSUES ARE COMMON, THESE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL FO R BOTH THE ASSESSMENT YEARS. FOR THE SAKE OF BREVITY, GROUNDS OF APPEAL RAISED B Y THE ASSESSEE FOR AY 2012-13 ARE 2 ITAS NO.5792 & 5834/MUM/2016 REPRODUCED BELOW:_ 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. COMM. OF INCOME TAX (APPEALS) LEGALLY ERRED IN CONFIRMING TH E ACTION OF THE ASSESSING OFFICER FOR THE DISALLOWANCE MADE U/S 14A AT RS.2,88,93,452/- OF THE ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. COMM. OF INCOME TAX (APPEALS) FURTHER ERRED IN NOT APPRECIATING THE FACT THAT THE INVESTM ENTS ARE MADE FOR THE STRATEGIC PURPOSES IN - THE ASSOCIATE AND GROUP COMPANIES TO TAKE OVER THE CONTROL/MANAGEMENT AND NO DISALLOWANCE U/S 14A IS APPLICABLE ON THE SAID INVESTMENTS. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IT ENABLED SERVES, FILE D ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012-13 ON 29-09-2012 DECLARING TOT AL INCOME OF RS.19,04,19,240. THE CASE WAS SELECTED FOR SCRUTINY AND WHILE COMPLETING THE ASSESSMENT, THE AO MADE ADDITION OF RS.2,88,93,452 BY PARTLY DISALLOWING TH E EXPENSES CLAIMED BY THE ASSESSEE AS PER THE PROVISIONS OF SECTION 14A OF THE ACT, R.W.R . 8D OF I.T. RULES. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEAL BEF ORE THE CIT(A). BEFORE CIT(A), ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS AN D ALSO RELIED UPON CERTAIN JUDICIAL PRECEDENTS TO ARGUE THAT IT HAS NOT EARNED ANY EXEM PT INCOME FROM ITS INVESTMENT; THEREFORE, THE QUESTION OF DISALLOWANCE OF EXPENDIT URE U/S 14A R.W.R.8D DOES NOT ARISE. THE CIT(A), CONSIDERING THE EXPLANATION OF THE ASSE SSEE AND ALSO RELYING UPON THE DECISION OF ITAT, DELHI SPECIAL BENCH IN THE CASE O F CHEMIVEST LTD VS ITO (2009) 121 ITD 3 ITAS NO.5792 & 5834/MUM/2016 318 (DEL)(SB) AND ALSO THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD 328 ITR 81 (BOM) UPHELD ADDITION M ADE BY THE AO TOWARDS DISALLOWANCE OF EXPENDITURE U/S 14A R.W.R.8D OF IT RULES. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, F-BENC H, MUMBAI IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12 IN ITA NO. 5786 & 5787/MUM/2014 DATED 26- 07-2016. THE CO-ORDINATE BENCH, AFTER CONSIDERING THE RELEVANT PROVISIONS HELD THAT WHEN THERE IS NO EXEMPT INCOME OF WHATSOEVER FROM T HE INVESTMENT, THEN THE QUESTION OF DISALLOWANCE OF EXPENDITURE U/S 14A BY INVOKING RULE 8D DOES NOT ARISE. 5. THE LD.DR ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A). THE LD.DR FURTHER SUBMITTED THAT WHETHER THERE IS AN EX EMPT INCOME OR NOT ONCE, THERE IS INVESTMENT IN EARNING EXEMPT INCOME, THE AO IS BOUN D TO WORK OUT THE DISALLOWANCE IN RESPECT OF EXPENDITURE DIRECTLY ATTRIBUTABLE TO EAR NING OF EXEMPT INCOME AND ADMINISTRATIVE AND OTHER EXPENSES AS PER THE PROVIS IONS OF RULE 8D. THE LD.DR FURTHER SUBMITTED THAT THE CBDT, VIDE CIRCULAR NO.5 OF 2014 DATED 11-02-2014 HAS CLARIFIED THAT DISALLOWANCE U/S 14A IS TO BE MADE EVEN IF NO EXEMP T INCOME HAD BEEN EARNED BY THE ASSESSEE DURING THE YEAR. THEREFORE, THE AO HAS RI GHTLY DISALLOWED EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME BY INVOKING RULE 8D AN D HIS ORDER SHOULD BE UPHELD. 6. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA LS AVAILABLE ON RECORD AND 4 ITAS NO.5792 & 5834/MUM/2016 GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE LIMITED ISSUE THAT CAME UP FOR OUR CONSIDERATION IS WHETHER THE AO WAS RIGHT IN DISALL OWING EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME EVEN THOUGH THE ASSESSEE HAS NOT E ARNED ANY EXEMPT INCOME FOR THE YEAR UNDER CONSIDERATION. A SIMILAR ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH OF ITAT, MUMBAI F BENCH IN ASSESSEES OWN CASE FO R THE ASSESSMENT YEAR 2010-11 IN ITA NO.5786/MUM/2014. THE CO-ORDINATE BENCH, AFTER CONSIDERING THE RELEVANT PROVISIONS AND ALSO RELYING UPON THE DECISION OF HO NBLE DELHI HIGH COURT IN THE CASE OF CIT VS CHEMIVEST LTD REPORTED IN (2015) 378 ITR 33 (DEL) HELD THAT NO DISALLOWANCE U/S 14A CAN BE MADE IF THERE IS NO EXEMPT INCOME EARNED DURING THE YEAR. THE CO-ORDINATE BENCH FURTHER OBSERVED THAT THERE WOULD BE NO ADJUS TMENT OF DISALLOWANCE U/S 14A CAN BE MADE ON THIS SCORE IN THE BOOK PROFIT U/S 115JB OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW:- 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERU SAL OF THE IMPUGNED ORDER AND MATERIAL ON RECORD, WE FIND THAT IT IS AN ADMITTED FACT THAT NO EXEMPT INCOME WHATSOEVER HAS BEEN EARNED BY THE ASSESSEE DURING THE YEAR. THE AO HAS MADE DISALLOWANCE UNDER SECTION 14A AFTER FOLLOWING THE DECISION OF ITAT SPECIAL BENCH IN CHEMINVEST LTD. HOWEVER, THIS DECISION OF SPECIAL BENCH HAS BEEN SP ECIFICALLY TURNED DOWN / REVERSED BY HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS CIT, REPORTED IN 2015] 378 JTR 33 (DEL), WHEREIN THE HON 'BLE HIGH COURT HAS, OPINED THAT, IF NO EXEMPT INCOME HAS BEEN EARNED BY THE AS SESSEE IN THE RELEVANT ASSESSMENT YEAR THEN, NO DISALLOWANCE SHOULD BE MAD E. THE RELEVANT OBSERVATION OF THE HON'BLE HIGH COURT, REVERSING TH E DECISION OF THE SPECIAL BENCH READ', AS UNDER:- 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD (SUPRA) AND IN VIEW , OF THE ADMITTED FACTUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE STRATEGIC INVESTMENT IN SHARES OF 5 ITAS NO.5792 & 5834/MUM/2016 MAX INDIA LTD.; THAT NO EXEMPTED INCOME WAS EARNED BY THE ASSESSEE IN . THE RELEVANT AY AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT IN DOUB T, THE QUESTION FRAMED IS REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DEC ISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSU E BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXPE NDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES'. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF M AKING OR EARNING SUCH INCOME. THE SUPREME COURT EXPLAINED TH AT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INC OME, DID NOT MEAN THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNE D AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. T HE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APP LICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EA RNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPO SE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR D EDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIB LE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTH ING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BE NEFIT .BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NAT URAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESIST IBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECT ION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA.T HAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD .M OODY (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECTION 57(III) OF THE ACT, WHERE T HE EXPRESSION USED IS FOR THE PURPOSE OF MAKING OR EA RNING SUCH 6 ITAS NO.5792 & 5834/MUM/2016 INCOME. SECTION 14A OF THE ACT ON THE OTHER HAND C ONTAINS THE EXPRESSION IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME. THE DECISION IN RAJENDRA PRASAD M OODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISA LLOWED UNDER SECTION 14A OF THE ACT. 22. IN THE IMPUGNED ORDER, THE ITAT HAS REFERRED TO THE DECISION IN MAXOPP INVESTMENT LTD. (SUPRA) AND REMA NDED THE MATTER TO THE AO FOR RECONSIDERATION OF THE ISSUE A FRESH. THE ISSUE IN MAXOPP INVESTMENT LTD. (SUPRA)WAS WHETHER THE EXPENDITURE (INCLUDING INTEREST ON BORROWED FUNDS) IN RESPECT OF INVESTMENT IN SHARES OF OPERATING COMPANIES FOR ACQ UIRING AND RETAINING A CONTROLLING INTEREST THEREIN WAS DISALL OWABLE UNDER SECTION 14 A OF THE ACT. IN THE SAID CASE ADMITTEDL Y THERE WAS DIVIDEND EARNED ON SUCH INVESTMENT. IN OTHER WORDS, IT WAS NOT A CASE, AS THE PRESENT, WHERE NO EXEMPT INCOME WAS EARNED IN THE YEAR IN QUESTION. CONSEQUENTLY, THE S AID DECISION WAS NOT RELEVANT AND DID NOT APPLY IN THE CONTEXT O F THE ISSUE PROJECTED IN THE PRESENT CASE. 7 ITA NO.5792 & 5834/MUM/2016 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREIN B EFORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT T HE EXPRESSION DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF THE ACT ENVISAGES THAT THERE SHOULD BE AN AC TUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME , DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWI NG ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME . IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCO ME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR'. 6. THUS, RESPECTFULLY FOLLOWING THE AFORESAID DECIS ION OF HONBLE DEHI HIGH COURT WE HOLD THAT, NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE, BECAUSE THERE IS NO EXEMPT INCOME DURING THE YEAR AND ACCORDINGLY, THE PROVISIONS OF SECTION 14A (1) WILL NOT GET TRIGGERED. ACCORDINGLY, THE GROUNDS RAISED BY THE . ASSESSEE ARE ALLOWED. SIMILARLY, THERE WOULD BE NO ADJUSTMENT OF DISALLOWANCE ON THIS SCORE IN THE BOOK PROFIT UNDER SECTION 1 15JB. 7. IN THIS VIEW OF THE MATTER AND ALSO CONSISTENT WITH THE VIEW TAKEN BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE EA RLIER YEAR, WE ARE OF THE VIEW THAT THERE CANNOT BE ANY DISALLOWANCE U/S 14A R.W.R. 8D, IF THERE IS NO EXEMPT INCOME EARNED DURING THE RELEVANT FINANCIAL YEAR. THEREFORE, WE DIRECT THE AO TO DELETE ADDITION MADE U/S 14A R.W.R. 8D OF I.T. RULES, 1962. 8. COMING TO APPEAL FOR AY 2013-14, IN THIS CASE, FACT S ARE IDENTICAL TO THE ASSESSMENT ORDER FOR AY 2012-13, EXCEPT TO THE EXTE NT OF EXEMPT INCOME. DURING THE FINANCIAL YEAR RELEVANT TO AY 2013-14, T HE ASSESSEE HAS EARNED EXEMPT INCOME OF RS.30,524 FROM INVESTMENTS. THE L D.AR REFERRING TO THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CAS E FOR THE ASSESSMENT YEAR 8 ITA NO.5792 & 5834/MUM/2016 2011-12 IN IT NO.5787/MUM/2014 SUBMITTED THAT DISAL LOWANCE U/S 14A CANNOT EXCEED THE EXEMPT INCOME WHICH IN THIS YEAR IS ONLY RSW.30,524. WE FIND THAT THE CO-ORDINATE BENCH HAS CONSIDERED A SIMILAR ISSU E FOR THE PRECEDING YEAR IN ASSESSEES OWN CASE IN ITA NO.5787/MUM/2014 WHEREIN AFTER CONSIDERING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMIVEST LTD VS CIT (SUPRA) HELD THAT THE DISALLOWANCE U/S 14A CANNOT EXCEED TH E EXEMPT INCOME. WE FURTHER NOTICE THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PVT LTD VS CIT (2015) 372 ITR 694 (DEL) HAS TAKEN A SIMILAR VIEW. AFTER CONSIDERING THE RELEVANT PROVISIONS OBSERVED THAT THE WINDOW FOR DISALLOWANCE WAS INDICATED IN SECTION 14A AND WAS O NLY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION OF THE EXEMPT I NCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT. THEREFORE, CONSIDERING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMIVEST LTD VS CI T (SUPRA), WE ARE OF THE VIEW THAT DISALLOWANCE U/S 14A CANNOT EXCEED THE EXEMPT INCOME. IN THIS CASE, THE ASSESSEE HAS EXEMPT INCOME OF RS.30,524 AS AGAINST WHICH THE AO HAS DISALLOWED RS.2,43,49,537. THEREFORE, WE DIRECT TH E AO TO RESTRICT DISALLOWANCE U/S 14A TO THE EXTENT OF EXEMPT INCOME EARNED BY TH E ASSESSEE. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN ITA NO5792/MUM/2016 IS ALLOWED AND APPEAL IN ITA NO.5834/MUM/2016 IS PARTL Y ALLOWED. 9 ITA NO.5792 & 5834/MUM/2016 ORDER PRONOUNCED IN THE OPEN COURT ON 08 TH NOVEMBER, 2017. SD/- SD/- ( SAKTIJIT DEY) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 08 TH NOVEMBER, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI