DCIT - 3(3)(1), MUMBAI V. RB HOLDINGS PVT. LTD., MUMBAI

ITA 6461/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8420 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 03-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL
• Keywords: Earning of tax free income; Question of law
• Section: 143(3); 14A; 144; 10

Judgement Text

1 ITA NO. /MUM/201 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI SKTIJIT DEY (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO. 6461/MUM/2016 (ASSESSMENT YEAR: 2012-13) DY.CIT-3(3)(1), MUMBAI VS M/S RB HOLDINGS PVT LTD 9 TH FLOOR, MAKER CHAMBERS IV, 222, NARIMAN POINT, MUMBAI-21 PAN : AADCR98902B APPELLANT RESPONDEDNT APPELLANT BY SHRI RAJAT MITTAL RESPONDENT BY NONE DATE OF HEARING 07-11--2017 DATE OF PRONOUNCEMENT 10-11-2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-7, NEW DELHI DATED 19-08-2016 AND IT PERTAINS TO AY 20 12-13. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- '1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT (A) HAS ERRED IN NOT APPRECIATI NG THE FACT THAT THE AMOUNT OF DISALLOWANCE U/S. 14A OF THE I.T.ACT, 196 1 HAS TO BE COMPUTED AS PER RULE 8D OF I.T. RULES, 1962 AS HELD IN THE ORDER OF THE HON'BLE HIGH COURT OF BOMBAY IN THE CA SE OF M/S. GODREJ & BOYCE MANUFACTURING CO. LTD. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN 2 ITA NO. /MUM/201 LAW, THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING T HE CBDT CIRCULAR NO. 5 OF 2014 DATED 11/02/2014 LAYING DOWN THE CONDITION THAT IT IS NOT NECESSARY THAT EXEMPT INCO ME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCO ME FOR THE DISALLOWANCE U/S. 14A OF THE I.T. ACT, 1961 TO BE T RIGERRED. 3. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFIC ER BE RESTORED. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY HAD FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012-13 ON 18-09- 2012 DECLARING TOTAL INCOME OF RS.5,89,41,360. THE CASE HAS BEEN SELECTED FOR SCRUTINY AND ASSESSMENT WAS COMPLETED U/S 143(3) ON 17-03-2015 DETERMINING TOTA L INCOME AT RS.7,13,90,895 INTERALIA MAKING ADDITION TOWARDS DISALLOWANCE U/S 14A R.W.R. 8D(2)(III) @0.5% OF AVERAGE VALUE OF INVESTMENTS FOR RS.1,24,49,534. A GGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 3. BEFORE THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS TO ARGUE THAT THE AO WAS ERRED IN DISALLOWING EXPENDIT URE INCURRED IN RELATION TO EXEMPT INCOME BY INVOKING RULE 8D(2)(III) @0.5% OF AVERAGE VALUE OF INVESTMENTS AS THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME DU RING THE RELEVANT FINANCIAL YEAR. IN THIS REGARD THE ASSESSEE RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMIVEST LTD VS CIT (2015) 37 8 ITR 33 (DEL). THE CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSES SEE AND ALSO RELYING UPON THE 3 ITA NO. /MUM/201 DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMIVEST LTD VS CIT (SUPRA) OBSERVED THAT THE DISALLOWANCE MADE BY THE AO IS NO T SUSTAINABLE AS THERE WAS NO EXEMPT INCOME EARNED DURING THE YEAR. THE RELEV ANT PORTION OF THE ORDER OF CIT(A) IS EXTRACTED BELOW:- 4 1. THE AO COMPUTED DISALLOWANCE U/S 14A READ WITH RULE 8D(2)(1II) AT RS.1,24,49,535L- ON THE AVE RAGE INVESTMENTS OF RS.3,08,98,14,1901- APPEARING IN THE BALANCE SHEET. THE LD. AR HAS STATED THAT AS NO DIVIDEND IS RECEIV ED DURING THE YEAR AND CLAIMED AS EXEMPT, THE PROVISIONS OF SECTI ON 14A ARE NOT APPLICABLE. 4,2. IN THE RECENT PAST IN A NUMBER OF DECISIONS PR ONOUNCED BY THE HON'BLE COURTS AND TRIBUNALS, IT HAS BEEN RULED THAT PROVISIONS OF SECTION 14A CANNOT BE INVOKED WHERE N O EXEMPT INCOME HAS BEEN EARNED IN THE PREVIOUS YEAR. THE HO N'B!E DELHI HIGH COURT IN THE CASE OF CIT VS. HOLCIM INDIA (P) LTD. REPORTED IN ITA NO. 486/2014 & ITA NO. 299/2014 HAS OBSERVED AS UNDER: 1 THE FOLLOWING SUBSTANTIAL QUESTION OF LAW IS PROP OSED IN THESE TWO APPEALS BY THE APPELLANT-REVENUE WHICH PE RTAIN TO THE ASSESSMENT YEARS 2007-08 AND 2008-09:- 'WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGH T IN DELETING THE DISALLOWANCE UNDER SECTION 14,4 OF THE INCOME TAX ACT, 1961 AMOUNTING TO PS. 8,61,50,3151- IN ASS ESSMENT YEAR 2007-08 AND PS. 6,60,93,6781- IN ASSESSMENT YE AR 2008- 09 HO/DING THAT NO DIVIDEND INCOME WAS EARNED BY TH E ASSESSEE IGNOR'IRIG THE PROVISIONS UNDER SEC NON 14 4.................... 14. ON THE ISSUE WHETHER THE RESPONCIENT-ASSESSEE COULD HAVE EARNED DIVIDEND INCOME AND EVEN IF NO DIVIDEND INCOME WAS EARNED, YET SECTION 144 CAN BE INVOKED AND DISALLOW ANCE OF EXPENDITURE CAN BE MADE, THERE ARE THREE DECISIONS OF THE DIFFERENT HIGH COURTS DIRECTLY ON THE ISSUE AND AGA INST THE APPELLANT-REVENUE. NO CONTRARY DECISION OF A HIGH C OURT HAS BEEN 4 ITA NO. /MUM/201 SHOWN TO US. THE PUNJAB AND HARYANA HIGH COURT IN COMMISSIONER OF INCOME LAX, FARIDABAD VS. 44/S. LAK HANI MARKETING INCL., ITA NO. 97012008, DECIDED ON 02.04 .2014, MADE REFERENCE TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT VS. HERO CYCLES LIMITED, [2010] 323 ITR 518 AND CIT VS. WINSOME TEXTILE INDUSTRIES LIMITED, [2009] 319 ITR 204 TO HOLD THAT SECTION 144 CANNOT BE INVOKED WHEN NO EXEMPT I NCOME WAS EARNED THE SECOND DECISION IS OF THE 6UJARAT HIGH C OURT IN COMMISSIONER OF INCOME TAX-I VS. CORI-TECH ENERGY ( P.) LTD. [2014] 223 TAXMANN 130 (CUJ.). THE THIRD DECISION I S OF THE ALLAHABAD HIGH COURT IN INCOME TAX APPEAL NO. 88 OF 2014, COMMISSIONER OF INCOME TAX (II) KANPUR, VS. MIS. SH IVARN MOTORS (P) LTD. DECIDED ON 0505.2014. IN THE SAID D ECISION IT HAS BEEN HELD: AS REGARDS THE SECOND QUESTION, SECTION 144 OF THE ACT PROVIDES THAT FOR THE PURPOSES OF COMPUTING THE TOT AL INCOME UNDER THE CHAPTER, NO DEDUCTION SHALL BE ALL OWED IN RESPECT OF EXPENDITURE INCURRED' BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT. HENCE, WHAT SECT ION 144 PROVIDES V THAT IF THERE IS ANY INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT, THE EXPENDITURE WH,CH IS INCURRED FA R' EARNING THE INCOME IS NOT AN ALLOWABLE DEDUCTION, FOR THE Y EAR IN QUESTION, THE FINDING OF FACT IS THAT THE ASSESSEE HAD NOT EARNED ANY TAX FREE INCOME. HENCE, IN THE ABSENCE O F ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE COULD NO T BE WORKED OUT FOR DISALLOWANCE. THE VIEW OF THE CIT(4) , WHICH HAS BEEN AFFIRMED BY THE TRIBUNAL, HENCE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HENCE, THE DELETION OF THE DISALLOWANCE OF PS. 2,03,752/- MADE BY THE ASSESSIN G OFFICER WAS IN ORDER'. 15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSE SSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECO ME TAXABLE 5 ITA NO. /MUM/201 II-,FUTURE YEARS. FURTHER, WHETHER INCOME EARNED IN A SUBSEQUENT YEAR WOULD OR WOULD NOT BE TAXABLE, MAY DEPEND UPON THE NATURE OF TRANSACTION ENTERED INTO IN THE SUBSEQUENT ASSESSMENT YEAR. FOR EXAMPLE, LONG TERM CAPITA/ GAI N ON SALE OF SHARES IS PRESENTLY NOT TAXABLE WHERE SECURITY TRAN SACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF M ARKET TRANSACTION ATTRACTS CAPITAL GAINS TAX. IT IS AN UN DISPUTED POSITION THAT RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILI TY OF SOLE OF SHARES BY PRIVATE PLACEMENT ETC. CANNOT BE RULED OU T AND IS NOT AN IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED: DIVIDEND IS DECLARED BY THE COMPANY ARID' STRICTLY IN LEGAL SEN SE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAY MENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJECTED TO DIVIDEN D DISTRIBUTION TAX. 16. WHAT IS ALSO NOTICEABLE IS THAT THE ENTIRE OR WHOLE EXPENDITURE HAS BEEN DISALLOWED AS IF THERE WAS NO EXPENDITURE INCURRED BY THE RESPONDENT-ASSESSEE FOR CONDUCTING BUSINESS THE CIT(A) HAS POSITIVELY HELD THAT THE BUSINESS WAS SE T UP AND HAD COMMENCED THE SAID FINDING IS ACCEPTED. THE RESPOND ENT-ASSESSEE, THEREFORE, HAD TO INCUR EXPENDITURE FOR THE BUSINES S IN THE FORM OF INVESTMENT IN SHARES OF CEMENT COMPANIES AND TO FURTHER EXPAND AND CONSOLIDATE THEIR BUSINESS. EXPENDITURE HAD TO BE ALSO INCURRED TO PROTECT THE INVESTMENT MADE. THE G ENUINENESS OF THE SAID EXPENDITURE AND THE FACT THAT IT WAS IN CURRED FOR BUSINESS ACTIVITIES WAS NOT DOUBTED BY THE ASSESSIN G OFFICER AND HAS ALSO NOT BEEN DOUBTED BY THE CIT(A.) 17. IN THESE CIRCUMSTANCES, WE DO NOT FIND ANY MERIT IN THE PRESENT APPEALS. THE SAME ARE DISMISSED IN LIMINE.' 4 3. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHE MINVEST LTD. VS. CIT - VI (LTA 749/2014) DECIDED ON 02.09.2 014 HAS RULED THAT SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED 6 ITA NO. /MUM/201 DURING THE RELEVANT PREVIOUS YEAR. THE HON'BLE COUR T RULED AS UNDER: '23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINB E FORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING TH AT THE EXPRESSION 'DOES NOT FORM PART OF THE TOTAL INCOME' IN SECTION 14,4 OF THE ENVISAGES THAT THERE SHOULD BE AN ACTUA L 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.' 4.4. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE HIGH COURT OF DELHI, THE DISALLOWANCE MADE BY THE AO IS NOT SUSTAINABLE AS THERE WAS NO EXEMPT INCOME EARNED BY THE APPELLANT DURING THE YEAR. THE DISALLOWANCE OF RS.1 ,24,49,5351- MADE BY THE AG IS, THEREFORE, DELETED. THIS GROUND OF AP PEAL IS RULED IN FAVOUR OF THE APPELLANT. 4. NONE APPEARED ON BEHALF OF THE ASSESSEE. WE HAVE H EARD THE LD.DR. FACTS REMAIN UNCHANGED. THE LD.DR FAILED TO BRING ON RECORD ANY CONTRARY DECISION TO CONTROVERT THE FINDINGS OF FACT RECORDE D BY THE CIT(A). THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A) WAS RIGHT IN DEL ETING THE ADDITION MADE BY THE AO TOWARDS DISALLOWANCE U/S 14A R.W.R. 8D(2)(II I). HENCE, WE ARE INCLINED TO UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE APPE AL FILED BY THE REVENUE. 7 ITA NO. /MUM/201 5. IN THE RESULT, APPEAL OF THE REVENUE FAILS. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH NOVEMBER, 2017. SD/- SD/- (SAKTIJIT DEY) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 10 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