Skanda Aerosapce Private Limited, Hyderabad, Hyderabad V. ITO, Ward-3(3), Hyderabad, Hyderabad

ITA 661/HYD/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2632 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 11-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SREEKAR
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A; 10

Judgement Text

ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A (SMC) BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA NO.661/HYD/2017 (ASSESSMENT YEAR: 2012-13) M/S. SKANDA AEROSPACE PRIVATE LIMITED HYDERABAD PAN: AAOCS 8278 B VS INCOME TAX OFFICER WARD 3(3) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI V. RAGHAVENDRA RAO FOR REVENUE : SHRI V. SREEKAR, DR O R D E R THIS IS ASSESSEES APPEAL FOR THE A.Y 2012-13. IN T HIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF T HE CIT (A)-3, HYDERABAD, DATED 23.01.2017 CONFIRMING THE DISALLOW ANCE MADE BY THE AO U/S 14A R.W. RULE 8D(2) OF THE ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, WHICH IS IN THE BUSINESS OF FABRICATION OF AEROSPAC E COMPONENTS, FILED ITS RETURN OF INCOME FOR THE A.Y 2012-13 ON 28 .09.2012 ADMITTING LOSS OF RS.24,51,652. DURING THE ASSESSME NT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO NOTICED T HAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.25,16,407 WHICH IS EXEMPT FROM THE TAX U/S 10 OF THE ACT. THE AO THERE FORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE DISALLOWANCE SHOULD NOT BE MADE U/S 14A R.W. RULE 8D(2). THE ASSESSEE, VIDE LE TTER DATED DATE OF HEARING : 24.08.2017 DATE OF PRONOUNCEMENT : 30.08.2017 ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 2 OF 6 16.12.2014, SUBMITTED THAT THE ASSESSEE HAS NOT INC URRED ANY EXPENDITURE FOR EARNING THE DIVIDEND INCOME WHICH I S EVIDENT FROM THE P&L A/C. IT WAS SUBMITTED THAT THE EXPENDITURE INCURRED AND SHOWN IN THE P&L A/C IS TOWARDS OPERATIONS OF THE F ACTORY I.E. EMPLOYEE BENEFIT AND DEPRECIATION. IT IS ALSO SUBMI TTED THAT THE PROVISIONS OF SECTION 14A R.W. RULE 8D(2) CANNOT BE INVOKED IN ASSESSEES CASE AS THE INVESTMENTS ARE NOT FROM THE BORROWED FUNDS AND THEY ARE FROM SHARE APPLICATION MONEY REC EIVED FROM THE PROMOTERS. THE AO WAS, HOWEVER, NOT CONVINCED W ITH THE CONTENTIONS OF THE ASSESSEE AND MADE THE DISALLOWAN CE OF RS.14,82,009 BEING 0.5% OF THE AVERAGE INVESTMENT DU RING THE YEAR AMOUNTING TO RS.29,64,01,897. AGGRIEVED, THE A SSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO CONFIRME D THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 3, HYDERABAD [CIT (A) HAS ERRED ON FACTS AND IN LAW. 2. THE TOTAL EXPENDITURE CONSIDERED IN THE APPELLATE ORDER IS RS.11,91,582/- AND THE DISALLOWANCE MADE BY APPLYING RULE 8D(2)(III) IS RS.14,82,009/-. THE SATISFACTION IF ANY PRESUMED TO HAVE BEEN REACHED IS TOTALLY UNJUSTIFIED, AND WITHOUT APPLICATION OF MIND. 3. THE PROPORTION OF INCOME BETWEEN THE DIVIDEND INCOME AND NON-EXEMPT INCOME CANNOT BE DETERMINATIVE FOR THE EXPENDITURE INCURRED. 4. NONE OF THE ITEMS OF EXPENSES COMPRISED IN RS.LL,91,582/- RELATES TO TAX FREE/EXEMPTED INCOME, I.E. DIVIDEND INCOME. DIVIDEND INCOME GETS AUTOMATICALLY CREDITED TO THE DESIGNATED ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 3 OF 6 BANK ACCOUNT SO THAT NO EXPENSES ARE INCURRED IN RELATION TO DIVIDEND INCOME. 5. LEARNED CIT(A) ERRED IN CONSIDERING THE VOLUME OF INVESTMENTS AS CRITERION FOR APPLICATION OF RULE 8D(2)(III). 6. ALTERNATIVELY, INVESTMENTS THAT YIELDED DIVIDEND ONLY SHOULD BE CONSIDERED FOR COMPUTATION OF DISALLOWANCE U/R 8D(2)(III), WHEREAS THE AO HAS INCLUDED (A) SHARE CAPITAL IN SIGMA MICROSYSTEMS (P) LTD FROM WHICH THERE IS NO DIVIDEND INCOME AND (B] SHARE APPLICATION MONIES WHICH DOES NOT YIELD ANY DIVIDEND INCOME. 6. FOR THESE AND ANY OTHER GROUNDS THAT MAY BE RAISED AT / BEFORE THE DATE OF HEARING, IT IS RESPECTFULLY PRAYED THAT THE DISALLOWANCE OF EXPENDITURE SUSTAINED BY THE LEARNED CIT (A) MAY PLEASE BE DELETED AND THE DISALLOWED EXPENDITURE OF RS.14,82,009/-BE ALLOWED. 3. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE REIT ERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUT HORITIES BELOW HAS SUBMITTED THAT THE AO HAS NOT RECORDED HI S SATISFACTION THAT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSE E ARE NOT RELIABLE BEFORE EMBARKING UPON MAKING THE DISALLOWA NCE U/S 14A OF THE ACT. IN SUPPORT OF HIS ABOVE CONTENTIONS, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I) HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. OM PRAKASH KHAITAN REPORTED IN (2015) 376ITR 390 (DEL. ) II) ITAT MUMBAI BENCH IN THE CASE OF JUSTICE SAM P BHARUCHA VS. ACIT IN ITA NO.3889/MUM/2011 DATED 25.07.2012. ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 4 OF 6 III) HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V S. TELETRONICS DEALING SYSTEMS P LTD IN APPEAL NO.1296 DATED 25.09.2014 IV) ITAT HYDERABAD BENCH IN THE CASE OF SRINIVASA C YSTINE PVT LTD VS. ITO IN ITA NO.1846/HYD/2014 DATED 18.01.2017. 4. THE LEARNED DR, ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE DISALLOWANCE U/S 14A R.W.S RULE 8D(2)(III) IS MANDA TORY PARTICULARLY WHEN THE ASSESSEE HAS REPORTED THAT IT HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING OF THE DIVIDEND INCOME. HE SUBMITTED THAT THE AO HAS CLEARLY BROUGH T OUT THE EXPENDITURE THAT IS TO BE DISALLOWED UNDER RULE 8D( 2)(III) OF THE ACT. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, I FIND THAT WHEN THE AO FOUND THAT THE A SSESSEE HAS EARNED DIVIDEND INCOME, HE HAS ASKED THE ASSESSEE T O SHOW CAUSE AS TO WHY THE PROVISIONS OF SECTION 14A R.W. RULE 8 D(2) SHOULD NOT BE INVOKED. THE ASSESSEE HAD SUBMITTED THAT IT HAD NOT INCURRED ANY EXPENDITURE IN EARNING OF THE DIVIDEND INCOME. SUB-SECTION 3 OF SECTION 14A PROVIDES THAT THE PROVISIONS OF SUB- SECTIONS THEREOF SHALL ALSO APPLY IN RELATION TO THE CASE WHERE AN A SSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN REL ATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THEREFORE, THE PROVISIONS OF SECTION 14A ARE C LEARLY APPLICABLE TO THE CASE OF THE ASSESSEE BEFORE ME. ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 5 OF 6 6. IN THE DECISIONS RELIED UPON BY THE LEARNED COUN SEL FOR THE ASSESSEE, I FIND THAT THE DECISION OF THE COORD INATE BENCH OF ITAT AT MUMBAI IN THE CASE OF JUSTICE SAM P BHARUCH A (CITED SUPRA) WAS FOR THE A.Y 2006-07 AND IT WAS HELD THAT IN ORDER TO DISALLOW THE EXPENDITURE, THERE MUST BE A NEXUS BET WEEN THE EXPENDITURE INCURRED AND THE INCOME FORMING PART OF TOTAL INCOME AND ALSO THAT THE PROVISIONS OF RULE 8D ARE NOT APP LICABLE TO THE A.Y UNDER CONSIDERATION. THE HON'BLE DELHI HIGH COUR T IN THE CASE OF OM PRAKASH KHAITAN (CITED SUPRA) HAS CONSIDERED THE ABOVE DECISION OF THE TRIBUNAL FOR A.Y 2006-07 TO HOLD THA T THERE MUST BE A NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME FORMING PART OF TOTAL INCOME. I AM OF THE VIEW THAT BOTH OF THESE DECISIONS ARE NOT APPLICABLE TO THE FACTS OF THE CA SE BEFORE ME. IN THE CASE OF PRIYA EXHIBITORS (P) LTD, THE COORDINAT E BENCH OF THE TRIBUNAL AT DELHI HAS FOLLOWED THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD (2010) 194 TAXMAN 203 TO ALLOW THE ASSESSEES APPEAL. BUT, IN THE CASE BEFORE ME, THE AO HAS RECORDED HIS SATISFACTION FOR INVOKING THE PROVISIONS OF SECTION 14A R.W.R 8D(2)(III) OF THE A CT. HENCE, IN MY OPINION, THIS DECISION IS ALSO NOT APPLICABLE TO AS SESSEES CASE. 7. COMING TO THE ASSESSEES ARGUMENT THAT THE DIVID END INCOME (WHICH IS EXEMPT FROM TAX) EARNED BY THE ASS ESSEE IS ONLY RS.25,33,403, WHILE THE DISALLOWANCE IS OF RS.14,82 ,009 AND IS, THEREFORE, EXCESSIVE, WE FIND THAT THE COORDINATE B ENCH OF THIS TRIBUNAL (TO WHICH I AM A SIGNATORY) IN THE CASE OF SRINIVASA CYSTINE PRIVATE LIMITED (CITED SUPRA), HAS HELD THA T THE DISALLOWANCE U/S 14A SHALL BE RESTRICTED TO 0.5% OF THE INVESTMENT WHICH YIELDED TAX FREE INCOME DURING THE RELEVANT A .Y. RESPECTFULLY FOLLOWING THE SAME, I DIRECT THE AO TO COMPUTE THE ITA NO.661 OF 2017 SKANDA AEROSPACE PVT LTD HYDERABAD PAGE 6 OF 6 DISALLOWANCE UNDER RULE 8D(2)(III) BY TAKING ONLY T HE AVERAGE OF THE INVESTMENTS WHICH YIELDED TAX FREE INCOME DURIN G THE RELEVANT PREVIOUS YEAR. 8. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH AUGUST, 2017. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 30 TH AUGUST, 2017. VINODAN/SPS COPY TO: 1 M/S. SKANDA AEROSPACE PVT. LTD, PLOT NO.18, SOFTW ARE UNITS LAYOUT, ILABS CENTRE BUILDING-3, MADHAPUR, HYDERABA D 500081 2 INCOME TAX OFFICER WARD 3(3) HYDERABAD 3 CIT (A)-3 HYDERABAD 4 PR. CIT 3 HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER