M/s Shristi Housing Development Ltd.(Formerly known as Shristi Housing Development Pvt. Ltd.) (Now amalgamated with Shristi Infrastructure Development Corporation Ltd.), Kolkata V. D.C.I.T.,Circle-7, Kolkata

ITA 60/KOL/2020

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9194 (ITAT-KOLKATA)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 15-01-2020
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL LD
• Assessee Lawyers: S M SURANA LD
• Keywords: Earning of tax free income; Revenue expenditure; Rule 8D
• Section: 14A; 201

Judgement Text

1 IT A NO . 60/KOL/2020 AY 201 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (FORMERLY, KNOWN AS SHRISTI HOUSING DEV. P.LTD) , C , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOLKATA [BEFORE SHRI J. SUDHAKAR REDDY, AM AND SHRI A. T. VARKEY, JM ] ITA NO. 60 /KOL/20 20 ASSESSMENT YEAR: 20 1 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (AMALGAMATED WITH SHRISTI INFRASTRUCTURE DEV. CORPRN LTD) (FORMERLY KNOWN AS SHRISTI HOUSING DEVELOPMENT P.LTD) PAN: AAMCS 2124A VS. D.C.I.T CIR - 7, KOLKAT A APPELLANT RESPONDENT DATE OF HEARING 20 .07 .20 20 DATE OF PRONOUNCEMENT 11 . 0 8 .20 20 FOR THE APP ELLANT SHRI S.M. SURANA, ADVOCATE, LD.AR FOR THE RESPONDENT SHRI SUPRIYO PAL, LD. JCIT /DR ORDER SHRI A. T. VARKEY, JM THIS IS AN APPEAL PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A) - 1 7 , KOLKATA DATED 01 - 08 - 2019 FOR THE ASSESSMENT YEAR 201 1 - 12 . 2. FIRST GROUNDS OF APPEAL OF ASSESSEE IS AGAINST THE ACTION OF THE LD. CIT(A) IN CONFIRMING THE ADDITION OF RS. 25,90,000/ - . 3. THE AO HAS MADE THE ADDITION BY OBSERVING AS UNDER: - EXPENSES IN RESPECT OF INCREASE OF SHARE CAPITAL - THE ASSESSEE COMPANY HAS PAID RS. 25,90,000/ - AS FEE FOR INCREASE IN THE SHARE CAPITAL OF THE COMPANY TO ROC. AS IT RELATES TO EXPANSION OF CAPITAL BASE, IT IS NOT ALLOWABLE. THE ASSESSEE HAS SUBMITTED THAT IT WAS INCURRED TO FILE FORM NO. 5 WITH REGISTRAR OF COMPANIES TO INCREASE THE SHARE CAPITAL OF THE COMPANY. THE SAID INCREASE WAS DONE TO CAPITALIZE THE FREE RESERVES OF THE COMPANY AND NOT FOR ANY EXPANSION OR CAPITAL INVESTMENT. ACCORDINGLY, THE SAME MAY BE TREATED AS REVENUE IN NATURE AND NOT CAPITAL EXPENSES. HOWEVER, THIS REPLY IS NOT ACCEPTABLE, AS THE FEE PAID RELATES TO THE CAPITAL EXPANSION. HENCE, IT IS ADDED BACK TO THE INCOME OF THE COMPANY. [ ADDRS. 25,90,000/ - ] 2 IT A NO . 60/KOL/2020 AY 201 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (FORMERLY, KNOWN AS SHRISTI HOUSING DEV. P.LTD) 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. C IT(A), WHO WAS PLEASED TO DISPOSE OF THE APPEAL BY HOLDING AS UNDER: - 4.3 GROUND NO. 3 IS AGAINST DISALLOWANCE OF RS. 25,90,000/ - WITH REGARD TO EXPENSES INCURRED IN CONNECTION WITH THE INCREASE IN AUTHORIZED SHARE CAPITAL. AS THERE IS NO MERIT IN THE SUB MISSION OF THE APPELLANT, THIS GROUND OF THE APPEAL OF THE APPELLANT IS HEREBY DISMISSED. 5. AGGRIEVED, THE ASSESSEE IS BEFORE US. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE COMPANY HAD ISSUE D BONUS SHARES TO THE EXISTING SHAREHOLDERS AND FOR THAT INCREASED THE AUTHORIZED SHARE CAPITAL FROM RS. ( INR ) 30,00,000 TO RS. ( INR ) 51,00,00,000. FOR THIS ACTIVITY , THE ASSESSEE CLAIMED TO HAVE INCURRED AN AMOUNT OF RS. 25,90,000/ - TOWARDS ROC FILING FEES , WHICH THE ASSESSEE CLAIMED AS REVENUE EXPENSES. HOWEVER, THE AO DID NOT ACCEPT THE ASSESSEES CLAIM AND DISALLOWED THE SAME. O N APPEAL THE LD. CIT(A) DISMISSED THIS GROUND OF ASSESSEES APPEAL. 6. SHRI S.M. SURANA, ADVOCATE, LD. AR OF THE ASSESSEE DREW OUR ATTENTION TO PAGE - 10 OF THE P.B, WHE REIN AS PER BALANCE SHEET AS ON 31 - 03 - 2011 IN SCEHDULE - 1, IT HAS BEEN MENTIONED IN ( B) 499,50,000 EQUITY SHARES OF RS. 10/ - EACH ALLOTTED AS FULLY PAID UP BONUS SHARES BY CAPITALIZATION OF BUSINESS DEVELOPMENT RESERVE OF RS. 495,764,855/ - AND CREDIT BALANC E OF PROFIT & LOSS ACCOUNT AS ON 31 - 03 - 2010 AMOUNTING TO RS. 37,35,145/ - . THUS, ACCORDING TO LD. AR AS PER SAID SCHEDULE, SHARE CAPITAL WAS INCREASED FROM RS. 30,000,000/ - TO RS. 51,000,000/ - . THE LD. AR SUBMITTED BEFORE US THAT THE ISSUE OF BONUS SHARE S BY CAPITALIZATION OF RESERVES IS MERELY A REALLOCATION OF COMPANYS FUNDS AND THEREBY T HERE IS NO INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED. ACCORDING TO HIM, I T REMAINS THE SAME. A ND FURTHER ACCORDING TO LD.AR, THE ISSUE OF BONUS SHARES WILL NOT RESULT IN ANY CHANGE IN THE CAPITAL STRUCTURE OF THE COMPANY. HE SUBMITTED THAT THE ISSUE OF BONUS SHARES DOES NOT RESULT IN THE EXPANSION OF CAPITAL BASE OF THE ASSESSEE AND, THEREFORE, THE INCREASE IN AUTHORIZED SHARE CAPITAL WAS NOT FOR ANY C APITAL EXPANSION OR CAPITAL INVESTMENTS. THEREFORE, HE PLEADED THAT THE SAID EXPENSES INCURRED IN CONNECTION WITH ISSUE OF BONUS SHARES SHOULD BE TREATED AS REVENUE EXPENDITURE. 7. LEARNED D.RS OBJECTION IS THAT NOWHERE BEFORE THE AO THE ASSESSEE HAS CONTENDED THAT EXPENDITURE INCURRED WAS FOR ISSUANCE OF BONUS SHARES. IN HIS REJOINDER, THE LD. AR 3 IT A NO . 60/KOL/2020 AY 201 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (FORMERLY, KNOWN AS SHRISTI HOUSING DEV. P.LTD) SUBMITTED THAT FOR THE LIMITED PURPOSE OF VERIFICATION AS TO WHETHER THE EXPENSES WAS INCURRED FOR ISSUANCE OF BONUS SHARES , THE MATTER MAY BE REMANDED TO AO . 8. HAVING HEARD BOTH THE PARTIES, WE NOTE THAT THE ASSESSEE CLAIMED TO HAVE INCURRED AN EXPENDITURE OF RS. 25,90,000/ - AS FILING FEES OF R.O.C IN RESPECT OF ISSUE OF BONUS SHARES TO ITS EXISTING SHARE - HOLDERS . ACCORDING TO ASSESSEE, F OR ISSU ANCE OF BONUS SHARES TO ITS EXISTING SHAREHOLDERS THERE IS NO INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED AND BY THE ISSUE OF BONUS SHARES DOES NOT RESULT IN THE EXPANSION OF CAPI TAL BASE OF THE ASSESSEE AND, THEREFORE, THE INCREASE IN AUTHORIZED SHARE CAPITAL WAS NOT FOR ANY EXPANSI ON OF CAPITAL INVESTMENTS. THE REFORE, THE ASSESSEE CLAIMED THAT THE EXPENSES INCURRED IN CONNECTION WITH ISSUE OF BONUS SHARES SHOULD BE TREATED AS RE VENUE EXPENDITURE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. GENERAL INSURANCE CORPORATION REPORTED IN (2006) 286 ITR 232 (SC) AS UNDER: 18. ISSUANCE OF BONUS SHARES DOES NOT RESULT IN ANY INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED, THE CAPITAL EMPLOYED REMAINS THE SAME . ISSUANCE OF BONUS SHARES BY CAPITALIZATION OF RESERVES IS MERELY A REALLOCATION OF COMPANYS FUND. 19. IF T HAT BE SO, THEN IT CANNOT BE HELD THAT THE COMPANY HAS ACQUIRED A BEN OR ADVANTAGE OF ENDURING NATURE. THE TOTAL FUNDS AVAILABLE WITH THE COMPANY WILL REMAIN THE SAME AND THE ISSUE OF BONUS SHARES WILL NOT RESULT IN ANY CHANGE IN THE CAPITAL STRUCTURE OF T HE COMPANY. 20. THE CASE WOOD CRAFT PRODUCTS LTD. 'S CASE (SUPRA) OF THE CALCUTTA HIGH COURT IS SIMILAR OF THE CASE TO THE RESPONDENT. IN THAT CASE AS WELL THERE WAS INCREASE OF AUTHORIZED SHARE CAPITAL BY THE ISSUE OF FRESH SHARES AND A SEPARATE ISSUE OF BONUS SHARES. THE CALCUTTA HIGH COURT DREW A DISTINCTION BETWEEN THE RAISING OF FRES H CAPITAL AND THE ISSUE OF BONUS SHARES AND HELD THAT EXPENDITURE ON T H E FORMER WAS CAPITAL IN NATURE AS IT CHANGED THE CAPITAL BASE. ON TILE OTHER HAND, IN THE CASE OF BO NUS SHARES, WAS HELD TO BE REVENUE EXPENDITURE FOLLOWING THE DECISION OF THE SUPREME COURT IN DALMIA INVESTMENT CO. LTD.'S CASE (SUPRA) ON THE GROUND THAT THERE WAS NO CHANGE IN THE CAPITAL STRUCTURE AT ALL. 21. IN O U R CONSIDERED OPINION, THE VIEW TAKEN B Y THE BOMBAY AND CA L C UTTA HIGH COURTS IS CORRECT TO TIRE EFFECT THAT THE EXPENDITURE ON ISSUANCE OF BONUS SHARES IS REVENUE EXPENDITURE. 9. IN THE LIGHT OF THE AFORESAID DECISION OF THE HONBLE SUPREME COURT, WE ARE OF THE OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IF IT IS FOR ISSUANCE OF BONUS OF SHARES TOWARDS FILING FEES IN THE R.O.C TO THE TUNE OF RS. 25,90,000/ - , THEN IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE . HOWEVER, THE AO MAY VERIFY WHETHER THE EXPENDITURE CLAIMED BY 4 IT A NO . 60/KOL/2020 AY 201 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (FORMERLY, KNOWN AS SHRISTI HOUSING DEV. P.LTD) THE ASSESSEE HAS BEEN INCURRED FOR ISSUANCE OF BONUS SHARE BEFORE ALLOWING THE SAME. IF IT IS FOUND THAT ASSESSEE HAS RIGHT LY CLAIM ED THE EXPENDITURE AS DISCUSSED, THEN THE SAID EXPENDITURE MAY BE ALLOWED SUBJECT TO VERIFICATION AS DISCUSSED. 10. SECOND GROUND OF AS SESSEES APPEAL IS AGAINST THE ACTION OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS. 1,33,03,278/ - U/S. 14A READ WITH RULE 8D I NCOME T AX RULES, 1962, (HEREINAFTER REFERRED TO AS THE RULES ) . 11. THE AO NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND OF RS.1,02,89,995/ - , WHICH ARE EXEMPT FROM TAX. THE ASSESSEE HAS NOT DISALLOWED ANY EXPENSES FOR EARNING DIVIDEND INCOME . SO WHEN CONFRONT ED BY THE AO, THE ASSESSEE EXPLAINED THAT THE INVESTMENTS WERE MADE IN THE SUBSIDIARIES TO ACQUIRE THE INVES TMENT AND NOT TO EARN DIVIDEND FROM SUCH INVESTMENTS AND HENCE, DISALLOWANCE U/S. 14A OF THE ACT WOULD NOT APPLY. HOWEVER, THE AO DID NOT AGREE. ACCORDING TO HIM, THE EXPLANATION OF THE LD.AR WAS CAREFULLY CONSIDERED AND HE FOUND NO SUBSTANCE IN IT. ACCO RDING TO AO, T HE EARNING OF DIVIDEND INCOME CANNOT BE AN AUTOMATIC PROCESS BUT ON THE OTHER HAND THE ASSESSEE IS REQUIRED TO BE MORE VIGILANT AND THERE MUST BE SOME EXPENSES INCURRED FOR ADMINISTRATIVE AND OFFICIAL EXPENSES ATTRIBUTABLE TO EARNING THE E XEMPT INCOME IN THE NATURE OF DIVIDEND . AND THEREFORE, THE AO WAS OF THE OPINION THAT EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME NEED TO BE DETERMINED AND DISALLOWED U/S. 14A OF THE ACT AND THERE AFTER , THE AO COMPUTED THE DISALLOWANCE U/S. 14A READ WITH R ULE 8D, WHEREIN THE AO HAD NOT MADE ANY ADDITION ON ACCOUNT OF RULE 8D(2)(I) OR RULE 8D(2)(II). HOWEVER, HE WAS PLEASED TO MAKE ADDITION UNDER RULE 8D(2)(III) I.E . AVERAGE VALUE OF INVESTMENT, WHICH IS CALCULATED AT RS. 1,33,03,278/ - I .E. % OF RS.(2607454600 + 2713856600= RS. 53,213,11,200/2 ) . AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO WAS PLEASED TO DISMISS THE SAME BY HOLDING AS UNDER: - 4.3 GROUND NO. 4 OF THE APPEAL IS AGAINST DISALLOWANCE OF RS. 1, ,33,0 3,270/ - MADE BY THE A.O. U/S. 14A R. W. RULE - 8D. DURING APPELLATE PROCEEDINGS, THE APPELLANT HAS SUBMITTED THAT THE INVESTMENTS WHICH WERE MADE IN SUBSIDIARIES TO ACQUIRE CONTROLLING STAKE AND NOT TO EARN DIVIDEND INCOME AND ALSO SUBMITTED THAT THE LD. A.O . DID NOT CONSIDER ONLY THOSE INVESTMENTS FROM WHICH EXEMPT INCOME HAVE BEEN EARNED DURING THE YEAR. THE APPELLANT DID NOT GIVE ANY PROOF WITH RESPECT TO THE COMPUTATION OF 14A ALONG WITH INVESTMENTS MADE WITH SUBSIDIARY COMPANIES. THE APPELLANT RELIED ON VARIOUS CASE JAWS WITHOUT ANY DOCUMENTARY EVIDENCE 5 IT A NO . 60/KOL/2020 AY 201 1 - 12 M/S. SHRISTI HOUSING DEVELOPMENT LTD (FORMERLY, KNOWN AS SHRISTI HOUSING DEV. P.LTD) WITH REGARD TO COMPUTATION OF EXEMPT INCOME EARNED OR NOT EARNED IN RESPECT OF INVESTMENTS MADE IN SUBSIDIARY COMPANIES. ACCORDINGLY, THE DISALLOWANCE MADE BY THE LD. A.O. OF RS.L,33,OJ,270/ - U/S. 14A R .W. RULE - 8D OF THE J. T. ACT IS HEREBY CONFIRMED. 12. BEFORE US THE ASSESSEE HAS CONTENDED THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO THE INVESTMENTS MADE FROM WHICH ONLY THE ASSESSEE HAD EARNED YIELD/DIVIDEND INCOME AND RELIED UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. REI AGRO LIMITED ( GA 3022 OF 2013 ITAT 161 OF 2013) AND THE JUDGMENT OF THE SPECIAL BENCH OF DELHI TRIBUNAL IN THE CASE OF CHEMINVEST LTD. V. ITO [2009] 121 ITD 318 (DELHI)(SB). WE NOTE THAT THE AO HAS MADE ONLY DISALLOWANCE UNDER RULE 8D(2)(III) . THEREFORE, APPLYI NG THE PRINCIPLE LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF REI AGRO (SUPRA), WE DIRECT THE AO TO COMPUTE THE DISALLOWANCE ( %) OF ACTUAL INVESTMENT MADE IN SHARES, WHICH YIELD ED DIVIDEND INCOME. WITH THE AFORESAID DIRECTION , THIS GROUND OF ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSE . 1 3. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER IS PRONOUNCED IN THE OPEN COURT ON 11 AUG. 2020 . SD/ - SD/ - ( J. SUDHAKAR REDDY) ( ABY. T. VARKEY ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 11 AUG. 2020 **PP (SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1. APPELLANT M/S. SHRISTI INFRASTRUCTURE DEVELOPMENT CORP LTD PLOT NO. X - 1,2 AND 3, BLOCK EP, SECTOR - V, SALT LAKE, KOLKATA - 91. 2 RESPONDENT DCIT, CIR - 7, KOLKATA . 3. 4. 5. CIT(A) - 4 , KOLKATA (SENT THROUGH E - MAIL) CIT - , KOLKATA. DR, ITAT, KOLKATA. (SENT THROUGH E - MAIL) BY ORDER, / TRUE COPY, ASSISTANT REGISTRAR