ACIT 8(1), MUMBAI V. CIBA RESEARCH (I) P. LTD, MUMBAI

ITA 6112/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8341 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTAT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER I.T.A. NO.6392/M/2011 (AY:2007-2008) M/S. CIBA RESEARCH (INDIA) LIMITED, (THROUGH THEIR SUCCESSORS BASF INDIA LTD.), 1 ST FLOOR, VIBGYOR TOWERS, UNIT NO.101, PLOT NO.C-62, G BLOCK, BANDRA COMPLEX, BANDRA (E), MUMBAI 400 051. PAN:AAACC2425N VS. ACIT-8(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI -400 020. (APPELLANT) (RESPONDENT) I.T.A. NO.6112/M/2011 (AY:2007-2008) ACIT-8(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI -400 020. VS. M/S. CIBA RESEARCH (INDIA) LIMITED, (THROUGH THEIR SUCCESSORS BASF INDIA LTD.), 1 ST FLOOR, VIBGYOR TOWERS, UNIT NO.101, PLOT NO.C-62, G BLOCK, BANDRA COMPLEX, BANDRA (E), MUMBAI 400 051. PAN:AAACC2425N (APPELLANT) (RESPONDENT) C.O. NO.142/M/2012 (ARISING OUT OF ITA NO.6112/M/2011) (AY:2007-2008) M/S. CIBA RESEARCH (INDIA) LIMITED, (THROUGH THEIR SUCCESSORS BASF INDIA LTD.), 1 ST FLOOR, VIBGYOR TOWERS, UNIT NO.101, PLOT NO.C-62, G BLOCK, BANDRA COMPLEX, BANDRA (E), MUMBAI 400 051. PAN:AAACC2425N VS. ACIT-8(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI -400 020. (APPELLANT IN APPEAL) (RESPONDENT) CROSS OBJECTOR ASSESSEE BY : SHRI MADHUR AGRAWAL REVENUE BY : SHRI RAJARSHI DWIVEDY, SR. DR DATE OF HEARING: 29.10.2012 DATE OF ORDER: 31.10.2012 O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE THREE APPEALS UNDER CONSIDERATION. OUT O F THEM ITAS NO.6392/M/2011 AND ITA NO.6112/M/2011 ARE THE CROSS APPEALS AND ASSESSEE FILED 2 M/S. CIBA RESEARCH (INDIA) LIMITED C.O.NO.142/M/2012 TOO. THESE THREE APPEALS ARE DIR ECTED AGAINST THE ORDER OF CIT (A)-16, MUMBAI DATED 9.6.2011 FOR THE ASSESSMENT YE AR 2007-2008. 2. THE APPEAL / CROSS OBJECTION WISE GROUNDS READ A S UNDER: IN ITA NO.6392/M/2011 , ASSESSEE HAS RAISED ONLY THE FOLLOWING GROUNDS: 1) A) THE CIT (A) 16 ERRED IN DIRECTING THE AO TO WO RK OUT DIRECT EXPENSES ATTRIBUTABLE TO EARNING DIVIDEND INCOME OF RS. 10,331,706/- PER SECTION 14A OF THE ACT. B) THE CIT (A) OUGHT TO HAVE HELD THAT THERE WAS NO EXPENDITURE INCURRED IN EARNING THE EXEMPT INCOME. IN ITA NO.6112/M/2011 , REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) FAILED TO INTERPRET THE PROVISIONS OF SECTI ON 14A OF THE IT ACT, 1961 AND RULE 8D IN ITS RIGHT PERSPECTIVE AND TRUE MEANING. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT (A) ERRED IN SETTING ASIDE THE ORDER OF THE AO AND RESTORING THE ISSUE BACK TO THE AO FOR PASSING A FRESH ORDER AFTER NECE SSARY RE- EXAMINATION, IN THE LIGHT OF THE JUDGMENT OF JURISD ICTIONAL HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81, WHICH HAS NOT BEEN ACCEPTED BY THE REVENUE. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT (A) ERRED IN OBSERVING THAT RULE-8D CANNOT B AP PLIED RETROSPECTIVELY IN THE LIGHT OF THE JUDGMENT OF GOD REJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81 WITHOUT APPRECIATING THE FACT THAT THEIR LORDSHIPS HAD UPHELD THE CONTENTION S OF THE UNION OF INDIA THAT RULE 8D IS REASONABLE IN ITS NATURE. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT (A) ERRED IN SETTING ASIDE THE ORDER OF THE AO AND RESTORING THE ISSUE BACK TO THE AO FOR PASSING A FRESH ORDER AFTE R NECESSARY RE- EXAMINATION, WITHOUT CONSIDERING THE DECISION OF TH E SPECIAL BENCH OF HONBLE ITAT, DELHI IN THE CASE OF CHEMINVEST INDIA LTD FOLLOWED BY HONBLE ITAT, MUMBAI IN THE CASE OF SHREE SHYAMKAMA L FINANCE AND LEASING CO. PRIVATE LIMITED VS. ITO 8(3)-1, MUMBAI IN ITA NO.433/M/2010- AY: 2004-2005 VIDE ORDER DATED 04.02 .2011, WHEREIN IT IS HELD THAT DISALLOWANCE U/S 14A HAS TO BE MADE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARN ED BY THE ASSESSEE OR NOT. IN CO NO.142/M/2012 THE ASSESSEE RAISED THE ONLY EFFECTIVE GROUND READ S AS UNDER: IN THE EVENT THE HIGHER AUTHORITIES REVERSE THE OB SERVATION OF THE CIT (A) THAT RULE 8D CANNOT BE APPLIED RETROSPECTIV ELY; BY HOLDING RULE 8D AS REASONABLE IN NATURE FOR DETERMINING THE EXPENDITURE ATTRIBUTABLE TO EARNING EXEMPT INCOME IN THE YEAR U NDER APPEAL, THE AO BE DIRECTED TO CONSIDER THE BOOK VALUE OF THE IN VESTMENTS IN CALCULATING THE AVERAGE VALUE OF THE INVESTMENTS FO R COMPUTING THE 3 M/S. CIBA RESEARCH (INDIA) LIMITED DISALLOWANCE UNDER RULE 8D(2) AS AGAINST THE MARKET VALUE OF INVESTMENTS CONSIDERED BY THE AO. 3. BRIEFLY STATED THE RELEVANT FACTS OF THE CASE AR E THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF INVESTING IN JOI NT VENTURES AND ALSO CARRYING ON RESEARCH ACTIVITIES. LD COUNSEL FOR THE ASSESSEE ME NTIONED THAT THE SOLITARY ISSUE WHICH IS A BONE OF CONTENTION IN ALL THESE THREE AP PEALS RELATES TO THE APPLICABILITY OF THE PROVISION OF SECTION 14A OF THE ACT. IN THIS R EGARD, LD COUNSEL MENTIONED THAT ASSESSEE RECEIVING THE TOTAL DIVIDEND OF RS. 1,03,3 1,706/-, OF WHICH THE ASSESSEES SUBSIDIARY CIBA INDIA LIMITED (FORMERLY CIBA SPECIA LTY CHEMICALS (INDIA) LTD). PAID THE DIVIDEND OF RS. 1,02,26,300/- AND THE BALANCE O F RS. 1,05,406/- WAS EARNED FROM INVESTMENT IN MUTUAL FUNDS. DURING THE ASSESSM ENT PROCEEDINGS, AO PROPOSED TO INVOKE PROVISIONS OF SECTION 14A OF THE ACT. IN REPLY, ASSESSEE MENTIONED THAT SO FAR AS CIBA SPECIALTY CHEMICALS (INDIA) LIMITED IS C ONCERNED, IT IS A CASE OF SINGLE CHEQUE AND REGARDING INVESTMENT IN THE MUTUAL FUND, THE ASSESSEE RECEIVED DIVIDEND BY WAY OF ECS. THEREFORE, NO COST WAS THERE AND THE PROVISION OF SECTION 14A HAS NO APPLICATION. HOWEVER, THE AO APPLIED THE SAID RULE 8D OF THE ACT AND DISALLOWED THE SUM OF RS. 29.54 LAKHS BY RELYING ON MUMBAI BENCH O F THE TRIBUNAL IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. (ITA NO.8057 /MUMBAI/2003 DATED SEPTEMBER, 2008). AGGRIEVED WITH THE SAME, ASSESSE E FILED THE APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4. BEFORE THE CIT (A), ASSESSEE REITERATED THE SUBM ISSIONS MADE BEFORE THE AO AND WAS CRITICAL OF THE APPLICABILITY OF RULE 8D AS PER DISCUSSION IN PARA 2.2.2 OF THE IMPUGNED ORDER. ON CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) RELIED ON THE BINDING JURISDICTIONAL HIGH COURT JUDGMENT IN T HE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT AS WELL AS THE ITAT DECISION IN T HE CASE OF M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. REPORTED IN 117 ITD 169 AND HE LD THAT THE RULE 8D HAS NO APPLICATION TO THE ASSESSMENT YEAR 2007-2008 I.E. T HE AY UNDER CONSIDERATION. HOWEVER, THE CIT (A) SET ASIDE THE ISSUE TO THE FIL ES OF AO BY STATING AS UNDER: HOWEVER, I FIND THAT SINCE THE APPELLANT DID NOT MA KE ANY APPORTIONMENT ON ITS OWN OF THE DIRECT EXPENSES WHICH ACCORDING T O ME HE SHOULD HAVE DONE AS IT CANNOT BE SAID THAT NO EXPENDITURE WAS I NCURRED FOR THE 4 M/S. CIBA RESEARCH (INDIA) LIMITED PURPOSES OF EARNING OF THE DIVIDEND. THE AO HAS TO APPLY THE APPORTIONMENT OF THE EXPENDITURE AFTER COMPLYING WI TH THE LEGAL REQUIREMENT OF SECTION 14A OF THE ACT. ACCORDINGLY , AO IS DIRECTED TO WORK OUT THE DISALLOWANCES AS PER THE DECISION OF THE JU RISDICTIONAL HIGH COURT AFTER AFFORDING AN OPPORTUNITY TO THE APPELLANT OF BEING HEARD. 5. AGGRIEVED WITH THE ABOVE DIRECTION OF THE CIT (A ), BOTH THE REVENUE AND THE ASSESSEE FILED APPEALS BEFORE US RAISING THE GROUND S / OBJECTIONS REPRODUCED AS ABOVE. 6. BEFORE US, SHRI MADHUR AGRAWAL, LD COUNSEL FOR T HE ASSESSEE MENTIONED THAT REVENUE AUTHORITIES HAVE NOT DISCUSSED THE FACT THA T THE ASSESSMENT YEAR 2007- 2008 HAS TO BE GOVERNED DIFFERENTLY VIS--VIS PROVI SIONS OF SECTION 14A OF THE ACT. FURTHER, HE MENTIONED THAT THIS IS A CASE WHERE ASS ESSEE NEVER SPENT ANY EXPENDITURE FOR EARNING OF THE DIVIDEND INCOME AND THEREFORE, THE PROVISIONS OF SECTION 14A AS WELL AS THE JUDGMENT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. HAS NO APPLICATION. REFERRING TO THE SPECIAL BENCH DECISION IN THE CASE OF CHEMINVEST INDIA LIMITED, LD COUNSEL MENTIONED THAT THESE ARE DISTINGUISHABLE ON THE FACT THAT THE DIVIDEND INCOME WAS NEVER EARNED IN THOSE CASES, WHEREAS IN THE ASSESSEES CASE, IT IS A CASE OF EARNING OF DIVIDEN D WITHOUT INCURRING ANY EXPENDITURE. 7. ON THE OTHER HAND, LD DR MENTIONED THAT THE ISSU E IN QUESTION RELATES TO WHETHER THE DIRECTIONS OF THE CIT (A) ARE PROPER AN D RELIED ON THE ARGUMENTATIVE GROUNDS. FURTHER, HE MENTIONED THAT NEITHER THE CI T (A) NOR THE ASSESSING OFFICER HAS EXAMINED THE ISSUES RELATING TO THE DISALLOWABI LITY OF EXPENDITURE, WHEN THE DIVIDEND IS EARNED WITHOUT INCURRING ANY EXPENDITUR E. THE ASSESSEE HAS NOT DEMONSTRATED IN FULL THAT THE EXPENDITURE INCURRED BY THE ASSESSEE DOES NOT CONTAIN DIRECT EXPENDITURE RELATED TO THE DIVIDEND. IN RESP ONSE TO THE QUERY FROM THE BENCH ON THE VERACITY OF THE DIRECTIONS BY THE CIT (A), L D COUNSEL STATED THAT WHOLE OF ISSUE MAY BE ADJUDICATED DE-NOVO ALSO CONSIDERING THE BINDING JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. (SUPRA). LD COUNSEL MENTIONED THAT HE HAS NO OBJECTION IF DIREC TIONS ARE GIVEN BY THE TRIBUNAL TO AO TO ADJUDICATE THE WHOLE ISSUE DE-NOVO BY PASSING A SPEAKING ORDER ATTENDING TO THE ARGUMENTS RAISED BY HIM. 5 M/S. CIBA RESEARCH (INDIA) LIMITED 8. WE HAVE CONSIDERED THE ABOVE ARGUMENTS OF BOTH T HE PARTIES AND PERUSED THE PAPERS FILED BEFORE US. IT IS AN UNDISPUTED FACT THAT THE GROUNDS/OBJECTIONS RAISED BY BOTH THE PARTIES OF THE LITIGATION REVOLV ES AROUND THE APPLICABILITY OF THE PROVISIONS OF RULE 8D OF THE IT RULES, 1962 AND THE SECTION 14A OF THE ACT. WE HAVE PERUSED THE ABOVE EXTRACTED PORTION FROM THE IMPUGN ED ORDER AND FIND THE AO IS DIRECTED TO WORK OUT THE DISALLOWANCES AS PER THE D ECISION OF THE JURISDICTIONAL HIGH COURT AFTER AFFORDING AN OPPORTUNITY TO THE APPELLA NT OF BEING HEARD. WE DO NOT FIND ANY MISTAKE IN THE SAID DIRECTION OF THE CIT (A). N EVERTHELESS, IT IS A FACT THAT THE CIT(A) HAS NOT ADDRESSED TO THE ARGUMENTS RAISED BY ASSESSEE. THUS, THE ORDER OF THE CIT(A) IS DEFICIENT TO THE EXTENT THAT HE HAS N OT ADDRESSED TO THE ISSUES I.E IF THE DISALLOWANCE ARE CALLED FOR AT ALL WHEN THE ASSESSE E HAS NOT SPENT ANY EXPENDITURE WHAT SO EVER FOR EARNING OF THE IMPUGNED DIVIDEND I NCOME AND IF THE EXPENDITURE AT ALL BE DISALLOWED IN VIEW OF THE AMENDMENTS TO THE SECTION 14A BY THE FINANCE ACT 2006. THE ORDER OF THE CIT(A) DOES NOT CONTAIN THE REASONS FOR REJECTIONS OF THE ASSESSEES CLAIMS ABOUT THE NON INCURRING OF ANY EX PENDITURE BEFORE INVOKING THE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF GODREJ BOYCE MAN CO LTD (SUPRA). THE SAID JUDGMENT SPECIFIES THAT THE AO IS UNDER OB LIGATION FIRST TO DISSATISFY HIMSELF ABOUT THE CLAIMS OF THE ASSESSEE ON THE TOPIC BEFOR E ANY REASONABLE METHOD FOR ANY DETERMINATION OF DISALLOWABLE SUM IS DETERMINED. WE HAVE ALSO FIND THAT THE DECISIONS OF CHEMINVEST INDIA LTD (SUPRA) SHREE SHY AMKAMAL FINANCE AND LEASING CO. PRIVATE LIMITED (ITA NO.433/M/2010) ARE DIFFERE NT ON FACTS. IT IS THE GRIEVANCE OF THE ASSESSEE THAT THE PROVISIONS OF SECTION 14A AS THEY STAND AT THE RELEVANT POINT OF TIME AS APPLICABLE TO AY 07-08 ARE NOT PROPERLY APP RECIATED BY THE REVENUE. IT IS THE PRAYER OF THE PARTIES THAT ALL THE GROUNDS RAISED B Y THEM MAY BE SET ASIDE TO THE FILES OF THE AO FOR DE NOVO ASSESSMENT ON THIS ISSUE. WE FIND MERIT IN THE ARGU MENTS OF THE PARTIES AND ORDER ACCORDINGLY. IN THE SET A SIDE PROCEEDINGS, AO SHALL CONSIDER ALL THE OBJECTIONS RAISED BY THE LD COUNSE L BEFORE US AND MEET OUT THE OBJECTIONS BY PASSING A SPEAKING ORDER. ACCORDINGL Y, ALL THE THREE APPEALS/CO ARE ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, ALL THE THREE APPEALS ARE ALLOWE D FOR STATISTICAL PURPOSES. 6 M/S. CIBA RESEARCH (INDIA) LIMITED ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2012. SD/- SD/- (VIVEK VARMA) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 31.10.2012 AT :MUMBAI OKK COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR C, BENCH, ITAT, MUMBAI. 6. GUARD FILE. // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI