DCIT, CHENNAI V. Chettinad Logistics Pvt. Ltd., CHENNAI

ITA 637/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8762 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R CLEMENT RAMESH KUMAR
• Assessee Lawyers: S SRIDHAR
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , . , # $ BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.637/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -I(2)., CHENNAI-600 034. VS M/S. CHETTINAD LOGISTICS PVT. LTD RANI SEETHAI HALL 5 TH FLOOR, 603, ANNA SALAI, CHENNAI-600 006. PAN: AABCC4551C ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. R.CLEMENT RAMESH KUMAR, ADDL.CIT /RESPONDENT BY : MR. S.SRIDHAR, ADVOCATE /DATE OF HEARING : 26 TH MAY,2016 /DATE OF PRONOUNCEMENT : 25 TH JULY, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE REVENUE AGGRIEVED BY TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS)- 1, CHENNAI DATED 09.12.2015 IN ITA NO.59/CIT(A)-1/2 014-15 PASSED UNDER SECTION 143(3) R.W.S. 250(6) OF THE AC T. 2. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEAL, HOWEVER, THE CRUX OF THE ISSUE IS AS FOLLOWS:- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DELETING THE ADDITION OF `86,62,748/- MADE BY THE LEARNED ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D. 2 ITA NO.637/MDS/2016 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF TRADING, CLEARIN G AND FORWARDING FILED ITS RETURN OF INCOME FOR THE ASSES SMENT YEAR 2011-12 ON 29.02.2012 ADMITTING INCOME OF `17,58, 71,418/. SUBSEQUENTLY, THE CASE WAS TAKEN UP SCRUTINY AND ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E ACT ON 10.03.2014, WHEREIN THE LEARNED ASSESSING OFFICE R INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AN D COMPUTED THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE RULES AND THEREBY MADE AN ADDITION OF RS.86,62, 748/-. THE REASON FOR INVOKING THE PROVISIONS OF SECTION 1 4A IS BECAUSE THE ASSESSEE COMPANY HAD MADE INVESTMENT OF RS.173,30,93,117/- FROM WHICH IT EARNED DIVIDEND INCOME DURING THE RELEVANT ASSESSMENT YEAR WHICH IS EXEMPT FROM TAX. THE ASSESSEES CONTENTION WAS THAT IT HAD NOT INCURRED ANY EXPENDITURE FOR MAKING SUCH INVESTMENT AND FOR EARNING EXEMPT INCOME WHICH WAS REJECTED BY THE LEARNED ASS ESSING OFFICER. 3 ITA NO.637/MDS/2016 4. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) DELETED THE ADDITION OF `86,62,748/- BY O BSERVING AS UNDER:- 5. I HAVE CAREFULLY CONSIDERED THE FACTS IN ISSUE, THE VIEW TAKEN BY THE AO, THE ARGUMENTS ADVANCED BY THE APPE LLANT AND MATERIAL ON RECORD. THE ONLY ISSUE WHICH ARISES FOR DETERMINATION IS ON THE SCOPE AND APPLICABILITY OF S.14A IN A CASE WHERE THE INCOME FROM DIVIDEND ITSELF IS NIL. IT IS THE APPELLANT'S CASE THAT AS THERE WAS NO INCOME AT ALL DURING THE YEAR, THE QUESTION OF DISALLOWING EXPENDITURE RELAT ING TO INCOME DOES NOT ARISE. IN OTHER WORDS, APPLICABILITY OF S. 14A WOULD BE TO SITUATIONS WHERE AN INVESTMENT YIELDS DIVIDEND AND CLAIMED EXEMPT BY THE ASSESSEE DURING THE RELEVANT YEAR AND NOT OTHERWISE. 6. IN ACIT V. M. BASKARAN (SUPRA) THE FACTS RELATED TO THE ASSESSEE WHICH HAD NOT RECEIVED ANY EXEMPT INCOME. THE ITAT HELD THEREIN THAT DISALLOWANCE U/S 14A COULD N OT BE SUSTAINED IN SUCH CIRCUMSTANCES. IN CHEMINVEST LTD V. CIT (SUPRA) THE HON'BLE DELHI HIGH COURT HELD THAT DISA LLOWANCE U/S 14A ENVISAGES THAT THERE SHOULD BE A ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE T OTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE O F DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, S.14A WILL NOT APPLY I F NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVAN T PREVIOUS YEAR(PARA 23). 7. TAKING THE SUM TOTALITY OF THE RATIOS IN THE FOR EGOING INTO ACCOUNT, I AM OF THE CONSIDERED VIEW THAT THE CASE OF THE APPELLANT HAS TO BE CONSIDERED IN THE LIGHT OF THE SAID RATIOS. AS THE APPELLANT HAS NOT EARNED ANY INCOME FROM DIV IDEND FROM ITS INVESTMENTS MADE DURING THE YEAR, NO DISAL LOWANCE CAN BE COMPUTED UNDER RULE 80. RESPECTFULLY FOLLOWI NG THE RATIOS ABOVE, IT IS HELD THAT THE DISALLOWANCE U/S 14A R.W. RULE 8D MADE BY THE AO OF RS.86,62,748 CANNOT BE UP HELD. THE AO IS DIRECTED TO DELETE THE ADDITION. THIS GRO UND OF APPEAL IS ALLOWED. 5. AT THE OUTSET, THE LEARNED AUTHORIZED REPRESENTA TIVE POINTED OUT THAT THIS BENCH OF THE TRIBUNAL ON THE EARLIER 4 ITA NO.637/MDS/2016 OCCASION HAD HELD THAT WHERE INVESTMENTS ARE MADE I N SISTER CONCERN OUT OF ITS INTEREST FREE FUNDS FOR STRATEGI C REASONS, PROVISIONS OF SECTION 14A CANNOT BE INVOKED. IT WAS THEREFORE PLEADED THAT THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR VERIFYING THE FACT TH AT WHETHER THE INVESTMENTS ARE MADE IN THE SISTER CONCERNS AND OUT OF ITS INTEREST FREE FUNDS FOR STRATEGIC PURPOSES AND THER EAFTER DECIDE THE MATTER IN PARITY WITH THE DECISION OF TH E TRIBUNAL. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, VEHEMENTLY ARGUED IN SUPPORT OF THE ORDER OF THE LEARNED ASSESSING OFFICER AND REQUESTED FOR SUSTAIN ING THE SAME. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LEAR NED AUTHORIZED REPRESENTATIVE HAS ARGUED BEFORE US BY S TATING THAT THE ASSESSEE HAD MADE INVESTMENTS ONLY IN ITS SISTER CONCERNS OUT OF ITS FREE FUNDS FOR STRATEGIC REASON S. ON THE EARLIER OCCASION, THIS BENCH OF THE TRIBUNAL HAS HE LD THE ISSUE IN FAVOUR OF THE ASSESSEE. THE GIST OF THE TRIBUNAL DECISION IN 5 ITA NO.637/MDS/2016 THE CASE OF RANE HOLDINGS LTD. VS. ACIT IN ITA NO.115/MDS/2015 DATED 06.01.2016 IS REPRODUCED HERE IN BELOW FOR REFERENCE:- 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL ISSUE AS POIN TED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /2013 VIDE ORDER DATED 20/08/13 FOR THE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASSESSING OFFICER TO DECIDE THE M ATTER ONCE AGAIN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE H AD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2 014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- II) WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF A NY FINDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. III) INTEGLOBE ENTERPRISES LTD., VS. DCIT REPORTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INT EREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENTS.WHE RE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR M AKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIE S, WHICH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AN D WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWA NCE OF INTEREST WAS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). IV) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 201 4- TIOL-202-ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSI DIARY COMPANIES OF THE ASSESSEE AND, THEREFORE, THE PURPO SE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME B UT HAVING 6 ITA NO.637/MDS/2016 CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 98% OF THE INVESTMENT MADE IN T HE SUBSIDIARY COMPANIES, THEREFORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMP T INCOME, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT J USTIFIED, ACCORDINGLY THE SAME IS DELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON- INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND R ESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSE E AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CA LLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPORT ED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL Y EAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS E STABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE B Y THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED IN 2013- TIOL-796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUB SIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEE N MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS NOT INTOTHE BUSINESS OF I NVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFO RE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY I S NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASS ESSING OFFICER IS DIRECTED 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. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS/13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW AND ME RITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOV E. WHILE DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M /S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7 ITA NO.637/MDS/2016 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABL E. MOREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. D CIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN T HE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVE STMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIAR Y COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF TH E ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVES TMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENT AL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE- COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE REST RAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. THEREFORE, FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE BY INVOKING THE PROVISI ONS OF SECTION 14A R.W. RULE 8D OF THE ACT, SUBJECT TO VERIFICATION THAT INVESTMENTS ARE MADE BY THE ASSES SEE IN ITS SISTER CONCERNS ONLY AND FROM ITS INTEREST F REE FUNDS. 8. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, WE REMIT BACK THE MATTER TO THE FILE OF THE LEARNED ASSESSIN G OFFICER TO VERIFY WHETHER THE INVESTMENTS ARE MADE BY THE ASSE SSEE OUT OF ITS INTEREST FREE FUNDS IN ITS SISTER CONCERN FO R STRATEGIC 8 ITA NO.637/MDS/2016 REASONS AND IF FOUND SO DELETE THE ADDITION AND IF FOUND OTHERWISE, PASS APPROPRIATE ORDERS AS PER MERIT & L AW. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH JULY, 2016 SD/- SD/- ( . ) ( . ) (G.PAVAN KUMAR) ( A.MOHAN ALANKAM ONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 25 TH JULY, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF