STCI FINANCE LTD, MUMBAI V. DCIT RG (OSD) 1(2), MUMBAI

ITA 6321/MUM/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9459 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 05-04-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 13-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Assessee Lawyers: KARTHIK NATRAJAN; HETAL VORA
• Keywords: Earning of tax free income
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH E, MU MBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.6321/MUM/2014 (ASSESSMENT YEAR- 2010-11) STCI FINANCE LIMITED A/B 1-802, A WING, 8 TH FLOOR, MARATHON INNOVA, MARATHON NEXTGEN COMPOUND, OFF GANPATRAO KADAM MARG, LOWER PAREL (W), MUMBAI-400013 PAN: AAGCS9709K VS. THE DCIT (OSD) -1(2) , AAYAKAR BHAVAN, CHURCHGATE, MUMBAI-400020. (APPELLANT) (RESPONDENT) ITA NO.6125/MUM/2014 (ASSESSMENT YEAR- 2010-11) THE DCIT (OSD) -1(2) , AAYAKAR BHAVAN, CHURCHGATE, MUMBAI-400020. VS. STCI FINANCE LIMITED A/B 1-802, A WING, 8 TH FLOOR, MARATHON INNOVA, MARATHON NEXTGEN COMPOUND, OFF GANPATRAO KADAM MARG, LOWER PAREL (W), MUMBAI-400013 PAN: AAGCS9709K (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KARTHIK NATRAJAN AND MS. HETAL VORA, (AR) REVENUE BY : SHRI V. JUSTIN (SR. DR) DATE OF HEARING : 22.08.2017 DATE OF PRONOUNCEMENT : 29.09.2017 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER: 1. THESE TWO APPEAL U/S 253 OF THE INCOME-TAX ACT (THE ACT) ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A)-2, MUMBAI DATED 14.06.2014 FOR THE ASSESSMENT YEAR (AY) ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 2 2010-11. THE ASSESSEE IN ITA NO. 6321/MUM/2014 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISS IONER OF INCOME TAX (APPEALS) - 2, MUMBAI (HEREINAFTER REFERRED TO AS ' THE CIT(A)') UNDER SECTION 250 OF THE INCOME TAX ACT, 1961 ('THE ACT'), THE AP PELLANT SUBMITS THE FOLLOWING GROUNDS OF APPEAL FOR YOUR CONSIDERATION: 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE AO IN MAKING DISALLOWANCE OF INR 1,18,58,000/- UNDER SECTION 14A OF THE ACT R.W. RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTIO N OF THE AO IN MAKING DISALLOWANCE OF INR 1,18,58,000/- UNDER RULE 8D(2)( III) ON ENTIRE INVESTMENT MADE BY THE APPELLANT, WITHOUT EXCLUDING STRATEGIC INVESTMENT MADE WHICH WERE NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME. 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE UNDER SECTION 14A WITHOUT APPRECIATING THE FACT THAT THE AO WHILE APP LYING RULE 8D HAD NOT RECORDED ANY FINDING THAT THE CLAIM OF THE APPELLAN T OF NOT INCURRING ANY EXPENDITURE IN EARNING DIVIDEND INCOME WAS INCORREC T. 2. THE REVENUE IN ITA NO. 6125/MUM/2014 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT SECTION 14A(2) AND 14A (3) OF THE I.T. ACT AND RULE 8D OF I.T. ACT CANNOT BE IMPORTED INTO SECTION 115JB OF THE I.T. ACT AND THE BOOK PROFIT CANNOT BE INCREASED ACCORDINGLY? 3. BRIEF FACTS NECESSARY FOR DISPOSAL OF THE GROUNDS O F APPEAL RAISED BY RESPECTIVE PARTIES ARE THAT ASSESSEE IS A NON-BANKING FINANCE COMPANY, FILED ITS RETURN OF INCOME FOR RELEVANT AY ON 23.09.2010 DECLARING TOTA L INCOME AT RS. NIL. THE ASSESSEE-COMPANY HAS PAID TAX ON BOOK PROFIT UNDER SECTION 115JB AT RS.28,76,22,310/-. THE ASSESSMENT WAS COMPLETED ON 12.03.2013 UNDER SECTION 143(3). DURING THE YEAR, THE ASSESSEE HAS SHOWN THE EXEMPT INCOME OF RS.83,32,692/-. THE ASSESSING OFFICER (AO) WHILE FR AMING ASSESSMENT ORDER INVOKED THE PROVISION OF SECTION 14A AND APPLIED RULE 8D AND WORKED OUT THE ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 3 DISALLOWANCE OF RS. 1,18,58,00/- BEING .5% OF THE A VERAGE INVESTMENT. THE AO FURTHER ADDED THE SAME AMOUNT TO THE BOOK PROFIT UN DER SECTION 115JB OF THE ACT. ON APPEAL BEFORE THE LD. CIT(A), THE ADDITION UNDER SECTION 14A WAS SUSTAINED. HOWEVER, ON THE BOOK PROFIT UNDER SECTION 115JB, TH E AO WAS DIRECTED NOT TO CONSIDER THE DISALLOWANCE UNDER SECTION 14A FOR THE PURPOSE OF BOOK PROFIT. THUS, BEING AGGRIEVED BY THE ORDER OF LD. CIT(A), BOTH TH E PARTIES HAVE FILED THEIR CROSS APPEAL. THE ASSESSEE HAS CHALLENGED THE VALIDITY OF DISALLOWANCE UNDER SECTION 14A. SIMILARLY, THE REVENUE HAS CHALLENGED THE ACTI ON OF LD. CIT(A) THAT RULE 8D CANNOT BE IMPORTED INTO SECTION 115JB OF THE ACT. 4. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE (AR ) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENTATIVE (DR) FOR THE REVENUE AN D PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. AR OF THE ASSESSEE ARG UED THAT APPLICATION OF SECTION 14A READ WITH RULE (R.W.R) 8D IS NOT MANDATORY. TH E APPLICATION OF SECTION CANNOT BE APPLIED PRIOR TO RECORDING THE REASONS FOR DISSA TISFACTION OF CLAIM MADE BY ASSESSEE IN SUPPORT OF HIS SUBMISSION, THE LD. AR O F THE ASSESSEE RELIED UPON THE DECISION OF GODREJ & BOYCE VS. DCIT (328 ITR 81 (BO M. H.C.), CIT VS. HERO CYCLES (323 ITR 518) (P & H HIGH COURT), MAXOPP INV ESTMENT LTD. (2012) (374 ITR 272) (DELHI HC). IT WAS FURTHER ARGUED THAT THE INVESTMENTS MADE BY ASSESSEE ARE STRATEGIC IN NATURE AND HAVE BEEN HELD FOR MORE THAN DECADE. THE DIVIDEND HAS BEEN DIRECTLY CREDITED TO THE ECS ACCOUNT AND DECLA RATION OF DIVIDEND IS NOT UNDER STCI INFLUENCE. THUS, STRATEGIC INVESTMENT OUGHT TO BE EXCLUDED WHILE COMPUTING DISALLOWANCES UNDER SECTION 14A R.W.R 8D OF THE ACT . ASSESSEE HAS NOT EXPENSES INCURRED ANY EXPENSES DURING THE IMPUGNED AY FOR EA RNING THE DIVIDEND INCOME. ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 4 FOR SUPPORTING HIS SUBMISSION, THE LD. AR RELIED U PON THE DECISION OF FIDUCIARY EUROMAX GLOBAL MARKETS LTD. (ITA NO. 1349/M/2012) ( MUMBAI ITAT), VIDEOCON INDUSTRIES (2017) (49 CCH 0057) (MUM. ITAT ), GARWARE WALL ROPES LTD. (2014) (65 SOT 86) (MUM. ITAT), JM FINANCIAL L TD. (ITA NO. 4521/M/2012) (MUM. ITAT) AND VAKRANGEE LTD. (ITA NO . 6988/M/2014 (MUM. ITAT). 5. IN ALTERNATIVE PLEA, THE LD. AR OF THE ASSESSEE SUB MITTED THAT THE ONLY INVESTMENTS WHICH HAVE YIELDED DIVIDEND INCOME DURING THE YEAR OUGHT TO BE CONSIDERED FOR THE PURPOSE OF RULE 8D OF THE ACT. THE REVENUE HAS DISALLOWED THE AMOUNT HOLDING THAT ALL INVESTMENT HELD BY ASSESSEE SHALL BE CONSIDERED FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE UNDER SECTION 14A R.W. R 8D OF THE ACT. HOWEVER, THE CONTENTION OF LD. AR OF THE ASSESSEE IS THAT AVERAG E OF THE VALUE OF INVESTMENT WHICH HAS GIVEN RISE TO THE INCOME WHICH FORM PART OF TOTAL INCOME TO BE CONSIDERED AND NOT THE TOTAL INVESTMENT AT THE BEGI NNING OF THE YEAR AND AT THE END OF THE YEAR. IN SUPPORT OF HIS SUBMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF ACB INDIA LTD. VS. ACIT (TS-176-HC-2015 DEL-O) AND REI AGRO LTD. VS. DCIT (2014) 160 TTJ 107 (KOL. TRIB). IN TH IRD ALTERNATIVE ARGUMENT, THE LD. AR SUBMITS THAT THE DISALLOWANCE OUGHT TO BE RE STRICTED TO THE ACTUAL DIVIDEND RECEIVED DURING THE YEAR. THE LD. AR OF THE ASSESSE E ARGUED THAT DISALLOWANCE UNDER SECTION 14A R.W.R 8D CANNOT EXCEED THE DIVIDE ND RECEIVED DURING THE YEAR TO BUTTRESS HIS SUBMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISIONS OF CHEMINVEST LTD. VS. CIT(ITA NO. 749/2014 (DEL.HC), JOINT INVESTMENTS VS. ACIT (TS-92-HC-2015 DEL.O), DAGA GLOBAL CHEMICALS P VT. LTD. ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 5 VS. ACIT (MUM. ITAT), TATA INDUSTRIES VS. ITO (MUM. ITAT) (181 TTJ 0600) AND CIT VS. EMPIRE PACKAGE PVT. LTD. (P & H HIGH CO URT). ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF AUTHO RITIES BELOW. IT WAS ARGUED THAT FOR EARNING THE EXEMPT INCOME, THE ASSESSEE MU ST HAVE INCURRED SOME EXPENSES FOR EARNING SUCH EXEMPT INCOME. THE ASSESS EE HAS INVESTED SUBSTANTIAL AMOUNT IN SHARE AND SECURITIES. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE AO WHILE WORKING T HE DISALLOWANCE UNDER SECTION 14A R.W.R 8D OBSERVED THAT ASSESSEE HAS MADE THE SU BSTANTIAL INVESTMENT IN SHARE AND SECURITIES. THE ASSESSEE HAS SHOWN THE DIVIDEND INCOME OF RS. 83.33 LAKHS WHICH WAS CLAIMED EXEMPTED UNDER SECTION 10(34) OF THE ACT. THE ASSESSEE WAS ISSUED SHOW-CAUSE NOTICE DATED 28.08.2012 AS TO WHY THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D BE NOT MADE AND BE ADDED TO TH E BOOK PROFIT UNDER (MINIMUM ALTERNATE TAX (MAT) UNDER SECTION 115JB OF THE ACT. THE ASSESSEE FURNISHED ITS REPLY DATED 18.10.2012. AFTER CONSIDE RING THE CONTENTION OF THE ASSESSEE, THE AO MADE THE FOLLOWING WORKING OF DISA LLOWANCE UNDER SECTION 14A R.W.R 8D: SR. NO. PARTICULARS AMOUNT (RUPEES IN LAKHS) AMOUNT (RUPEES IN LAKHS) AMOUNT (RUPEES IN LAKHS) I. RULE 8D(2)(I) DIRECTS EXPENDITURES DEMAT CHARGES ETC. NIL NIL II. RULE 8D(2(II) INTEREST EXPENDITURE INCURRED DURING THE YEAR (STATED THAT INVESTMENT OUT OF WON FUNDS) AMOUNT OF EXPENDITURE BY WAY OF INTEREST NIL TOTAL FINANCE CHARGES (STATED RELATED WITH THE FINANCE BUSINESS ONLY) A NIL NIL AVERAGE VALUE OF INVESTMENT B 23716.00 ON FIRST DAY OF BALANCE SHEET 19679.00 ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 6 ON LAST DAY OF BALANCE SHEET 27753.00 AVERAGE VALUE OF ASSETS C ON FIRST DAY OF BALANCE SHEET 82119.39 ON LAST DAY OF BALANCE SHEET 110188.93 A X B /C (O X 237.16 / 96154.16) NIL III. RULE 8D(2)(III) AN AMOUNT OF EQUAL TO ONE HALF PERCENT OF AVERAGE OF THE VALUE OF INVESTMENT. AVG. VALUE OF INVESTMENT 23716.00 ON FIRST DAY OF BALANCE SHEET 29679.00 ON LAST DAY OF BALANCE SHEET 27753.00 % OF 23716.00 LAKHS 1,18,58,000 TOTAL DISALLOWANCE EXPENDITURES U/S. 14A 1,18,58,000 7. THE AO FURTHER ADDED THE DISALLOWANCE UNDER SECTION 14A TO THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. THE LD. CIT(A) SUSTAINED THE ADDITION UNDER SECTION 14A R.W. RULE8D HOLDING THAT ASSESSEE HAS SHOWN THE INV ESTMENT OF RS. 296.79 CRORE FOR EARNING DIVIDEND INCOME OF RS. 83.32 LAKHS AND IT IS NECESSARY TO HAVE MANPOWER TO MAINTAIN THESE INVESTMENT. THE ASSESSEE IS MAKING EXPENSES LIKE TELEPHONE, STATIONARY, AND BANK CHARGES ETC. FOR MA INTAINING THESE INVESTMENTS AND EARNING DIVIDEND INCOME FROM THE ACCOUNT MAINTA INED BY ASSESSEE. IT IS NOT POSSIBLE TO FIND OUT SUCH EXPENDITURE AND WHILE FOL LOWING THE DECISION OF HIS PREDECESSOR IN AY 2009-10 UPHELD THE ADDITION. 8. WE HAVE SEEN THAT NEITHER THE AO NOR THE LD. CIT(A) RECORDED FOR THE REASONS FOR THEIR DISSATISFACTION FOR THE CLAIM MADE BY THE ASS ESSEE. THERE IS NO DISPUTE THAT THE ASSESSEE HAS MADE INVESTMENT OF RS. 296.79 CROR E FOR EARNING DIVIDEND INCOME OF RS. 83.32 LAKHS. THE LOWER AUTHORITIES HA S NOT DISPUTED THAT THE INVESTMENT MADE BY ASSESSEE ARE NOT STRATEGIC IN NA TURE. THE LOWER AUTHORITY HAS NOT DISPUTED THAT INVESTMENT HAVE BEEN MADE FOR MOR E THAN DECADE. FROM THE PROFIT & LOSS A/C WE HAVE SEEN THAT THE ASSESSEE HA S SURPLUS FUND THAN THE INVESTMENT AS ON 31.03.2010. THE AO HAVE NOT MADE ANY DISALLOWANCE ON ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 7 ACCOUNT OF INTEREST EXPENSES AS INVESTMENT MADE FOR EARNING THE EXEMPT INCOME IS LESS THAN THE INTEREST FREE FUNDS AVAILABLE WITH AS SESSEE. THE AO HAS NOT DISPUTED THE EXEMPT INCOME. THE HONBLE DELHI HIGH COURT IN CASE OF JOINT INVESTMENTS PVT. LTD. VS. CIT IN ITA NO. 117/2015 DATED 25.02.2 015 HELD THAT BY NO STRETCH OF IMAGINATION SECTION 14A OR RULE 8D BE INTERPRETED S O AS TO MEAN THAT ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR D ISALLOWANCE IS INDICATED IN SECTION 14A IS ONLY TO THE EXTENT OF DISALLOWING EX PENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME . THE PROPORTIONATE OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT. HENCE, WE ACCEPT THE THIRD ALTERNATIVE PLEA OF THE LD. AR OF THE ASSESSE E THAT DISALLOWANCE OUGHT TO HAVE BEEN RESTRICTED TO THE ACTUAL EXEMPT INCOME EARNED DURING THE RELEVANT AY. THUS, CONSIDERING THE FACTS OF THE PRESENT CASE AND THE S UBMISSION MADE BY LD. AR OF THE ASSESSEE, WE RESTRICT THE DISALLOWANCE UNDER SECTIO N 14A FOR TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE. THE AO IS DIR ECTED ACCORDINGLY. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO. 6125/MUM/2015 BY REVENUE 10. THE GROUND OF APPEAL RAISED BY REVENUE RELATES TO N OT ALLOWING THE ADDITION OF DISALLOWANCE OF SECTION 14A IN THE BOOK PROFIT UNDE R SECTION 115JB. THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF AO. IT WAS A RGUED THAT DISALLOWANCE UNDER SECTION 14A WAS NOT REQUIRED TO BE ADDED IN THE BOO K PROFIT UNDER SECTION 115JB OF THE ACT. THE DIRECTION OF LD. CIT(A) TO AO NOT T O CONSIDER THE DISALLOWANCE UNDER SECTION 14A FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB OF THE ACT IS WRONG. IN SUPPORT OF THIS SUBMI SSION, THE LD. DR FOR THE ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 8 REVENUE RELIED UPON THE DECISION OF TRIBUNAL IN DCI T VS. VIRAJ PROFILES LIMITED (ITA NO. 4439/MUM/2013) DATED 21.10.2015. ON THE OT HER HAND, THE LD.AR OF THE ASSESSEE ARGUED THAT THE SPECIAL BENCH OF DELHI TRI BUNAL IN ACIT VS. VIREET INVESTMENT PVT. LTD. (ITA NO. 502/DEL/2012) DATED 1 6.06.2017 HELD THAT THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D CANNOT BE A DDED WHILE COMPUTING BOOK PROFIT AS PER SECTION 115JB. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES. WE HAVE NOTED THAT THE SPECIAL BENCH OF DELHI TRIBUNAL IN VIREET INVESTMEN T PVT. LTD. (SUPRA) HELD THAT WHILE MAKING COMPUTATION UNDER CLAUSE (F) OF EXPLAN ATION 1 TO SECTION 115JB(2), IS TO BE MADE WITHOUT RESORTING TO COMPUTATION AS C ONTEMPLATED UNDER SECTION 14A READ WITH RULE 8D. THE DECISION RELIED BY LD. DR FO R THE REVENUE IS NOT HELPFUL IN VIEW OF THE LATEST DECISION OF THE SPECIAL BENCH IN VIREET INVESTMENT PVT. LTD. (SUPRA). HENCE, WE DIRECT THE ASSESSING OFFICER TO APPLY THE DECISION OF SPECIAL BENCH IN CASE OF VIREET INVESTMENT (SUPRA) AND REDE TERMINE THE AMOUNT AS PER CLAUSE (F) OF EXPLANATION (1) TO SECTION 115JB OF T HE ACT. HENCE, THE GROUND OF APPEAL RAISED BY REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 12. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED AND APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DAY OF SEPTEMBER 2017. SD/- SD/- (G.S. PANNU) (PAWAN SINGH) ACCOUNTNAT MEMEBR JUDICIAL MEMBER MUMBAI; DATED 29/09/2017 S.K.PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT ITA NO.6321 & 6 125/M/2014- STCI FINANCE LIMITED 9 BY ORDER, (ASSTT.REGISTRAR) ITAT, MUMBAI 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY/