DCIT 7(1), MUMBAI V. PIRAMAL ENTERPRISES LTD, MUMBAI

ITA 6645/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2177 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2015
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 09-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 01-11-2012
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.4137/MUM/2012 ITA NO.6645/MUM/2012 ASSESSMENT YEARS: 2008-09 & 2009-10 ASST. CIT 7(1) R.NO.622 M.K. RD. MUMBAI -400020 / VS. PIRAMAL E NTERPRISES LTD. NICHOLAS PIRAMAL TOWER, 8 TH FLOOR, GANPATRAO KADAM MARG, LOWER PAREL, MUMBAI-400 013 ( REVENUE ) ( RESPONDENT ) P.A. NO. AAACJ5669J REVENUE BY SHRI O.P. MEENA (DR) RESPONDENT BY SHRI YOGESH THAR (AR) ! ' # / DATE OF HEARING : 17/11/2015 ' # / DATE OF ORDER: 09/12/2015 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THESE APPEALS HAVE BEEN FILED BY THE REVENUE AGAINS T THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-1 3, PIRAMAL ENTERPRISES LTD. 2 MUMBAI {(IN SHORT LD. CIT(A)} DATED 27.02.2012 FOR THE ASSESSMENT YEARS 2008-09 & 2009-10, AGAINST THE ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER (IN SHORT AO ) U/S 143(3) OF THE ACT. FIRST WE TAKE UP ITA NO.4137/MUM/2012 2. THE REVENUE HAS FILED FOLLOWING GROUND OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN PARTLY ALLOWING TH E DISALLOWANCE U/S.36(1)(III) OF RS.1,27,70,417/- MAD E BY THE ASSESSING OFFICER WITHOUT APPRECIATING THE FACT OBSERVED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER, THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THE EXACT AMOUNT OF INVESTMENT IN DEBENTURES, THE INTER EST EARNED ON THESE DEBENTURES, AND ALSO THE AMOUNT OF SUBSCRIPTION MONEY PENDING ALLOTMENT. 3. IN THIS GROUND, THE REVENUE HAS CHALLENGED THE ACT ION OF LD. CIT(A) IN PARTLY ALLOWING THE DISALLOWANCE U/S 36(1 )(III) OF RS.1,27,70,417/- MADE BY THE ASSESSING OFFICER WITH OUT APPRECIATING THE FACTS OBSERVED BY THE ASSESSING OF FICER. 3.1. DURING THE COURSE OF HEARING IT HAS BEEN ARGUED BY THE LD. DR THAT INTEREST IS TO BE ALLOWED ONLY ON THE A MOUNT OF LOAN OR CAPITAL WHICH HAS BEEN USED FOR THE PURPOSE OF BUSINESS, AMOUNT INVESTED IN SHARE APPLICATION MONE Y PENDING FOR ALLOTMENT IS NOT FOR THE PURPOSE OF THE BUSINESS AND THEREFORE, LD. CIT(A) HAS WRONGLY ALLOWED THE C LAIM OF THE ASSESSEE. PIRAMAL ENTERPRISES LTD. 3 3.2. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE HAS SUPPORTED THE ORDER OF LD. CIT(A) AND HAS SUBMITTED THAT THE ASSESSEE HAS MADE INVESTMENT IN INDIA REIT FUND. DU RING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE WAS A SKED TO EXPLAIN THE AMOUNT WHICH PERTAINED TO THE AMOUNT IN VESTED FOR TAXABLE UNITS AND AMOUNT INVESTED FOR TAX-FREE UNITS. AFTER TAKING INTO ACCOUNT ALL THE FACTS AND FIGURES THE A PPROPRIATE AMOUNT HAS BEEN ALLOWED BY THE LD. CIT(A) AND BALAN CE AMOUNT OF DISALLOWANCE HAS BEEN SUSTAINED BY HIM, T HEREFORE, THE ORDER OF LD. CIT(A) IS FACTUALLY CORRECT. HE HA S FURTHER PLACED RELIANCE ON THE JUDGMENT OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF RAINY INVESTMENT PVT. LTD. ITA NO.5491/MUM/2011 DATED 16.01.2013, AND M/S. MSA SECURITIES SERVICES (P.) LTD. 33 TAXMANN.COM 508 (C HENNAI TRIB). 3.3. WE HAVE GONE THROUGH THE ORDERS OF LOWER AUTHORITI ES AND SUBMISSIONS MADE BY BOTH THE SIDES. THE BRIEF FACTS ARE THAT IN THE RETURN FILED BY THE ASSESSEE, THE ASSESSEE HAS DISALLOWED THE INTEREST AMOUNT TO RS.1,01,00,417/-, SUO-MOTO. THE BACKGROUND OF THE FACT IS THAT THE ASSESSEE HAD MAD E INVESTMENTS IN SCHEME I AND SCHEME III OF INDIA REI T FUND ('IRF'). IRF IS A VENTURE CAPITAL FUND REGISTE RED WITH SEBI. IRF IS ALSO A CONTRIBUTORY TRUST WHO REC EIVES CONTRIBUTIONS FROM VARIOUS CONTRIBUTORS/INVESTORS. IRF HAS IN TURN, USED THESE FUNDS FOR MAKING INVESTMENT IN VCU'S SHARES, MUTUAL FUNDS, DEBENTURES AND PIRAMAL ENTERPRISES LTD. 4 SUBSCRIPTION MONEY PENDING ALLOTMENT ETC ON BEHALF OF THE VARIOUS INVESTORS/ BENEFICIARIES AND THE ASSESSEE COMPANY IS ONE OF THE INVESTORS/ BENEFICIARIES. IRF IS A CONTRIBUTORY AND DETERMINAT E TRUST. IRF DOES NOT PAY TAX ON THE INCOME EARNED AS IT ENJOYS A PASS THROUGH STATUS AND TAXES ARE PAID AT THE BENEFICIARY LEVEL. THE INCOME OF IRF WILL BE TAXABL E IN THE HANDS OF BENEFICIARY IN THE SAME CHARACTER AND SAME MANNER AS IF IT WERE THE INCOME OF THE BENEFIC IARY HAD IT DIRECTLY MADE THE INVESTMENTS IN VCUS. 3.4. THE ASSESSEE, BEING BENEFICIARY, IS LIABLE TO TAX FOR ITS SHARE IN THE INCOME EARNED BY IRF IN THE SAME CHARACTER AND SAME MANNER AS IN THE CASE OF A TRUST AND HENCE IT HAD CALCULATED DISALLOWANCE U/S 14A IN THE SAME MANNER AND THE SAME EXTENT BY APPLYING PERCENT AGE OF INVESTMENTS MADE BY IRF IN THE SHARES/MUTUAL FUN DS TO ITS TOTAL ASSETS AS AT THE YEAR END AND HAS SUO- MOTO DISALLOWED INTEREST OF RS.1,01,00,417/- WHILE COMPU TING TOTAL INCOME. 3.5. FROM THE INVESTMENTS MADE IN IRF, THE ASSESSEE DER IVES TAXABLE AS WELL NON-TAXABLE INCOME AND OFFERS TAXAB LE INCOME UNDER THE HEAD 'INCOME FROM BUSINESS AND PROFESSION '. DURING THE YEAR UNDER CONSIDERATION, IRF HAD INVEST ED CERTAIN PORTION OF ITS TOTAL ASSETS IN DEBENTURE AN D SUBSCRIPTION MONEY PENDING ALLOTMENT MAINLY OF DEBENTURE/SECURITIES AND HANK FIXED DEPOSIT. INCOME FROM PIRAMAL ENTERPRISES LTD. 5 THESE, PORTION OF INVESTMENTS MADE BY IRF WILL GENE RATE TAXABLE INTEREST INCOME. HENCE INTEREST OF RS.1,27,70,4L7/- INCURRED ON THESE PORTION OF INVES TMENT WAS CLAIMED AS ALLOWABLE. 3.6. APART FROM THIS, IRF HAD ALSO INVESTED CERTAIN POR TION OF ITS TOTAL INVESTMENTS IN SHARES AND MUTUAL FUNDS, INCOM E FROM WHICH IS EXEMPT U/S. 10(34) OF THE ACT. FURTHE R, CONSIDERING THE PROVISION OF SECTION 14A OF THE ACT , SUO- MOTO DISALLOWANCE OF INTEREST EXPENDITURE RS.1,01,00,417/- WAS MADE BY THE ASSESSEE AS IT WAS RELATABLE TO EARN EXEMPT INCOME AND THE BALANCE INT EREST OF RS.1,27,70,417 /- INCURRED FOR THE PURPOSE OF BUSIN ESS WAS CLAIMED AS ALLOWABLE U/S 36(1)(III) OF THE ACT ON T HE GROUND THAT INTEREST PAID WAS INEXTRICABLY RELATED TO THE EARNING OF INCOME. 3.7. DURING THE COURSE OF HEARING, IT WAS ARGUED ON BEH ALF OF THE ASSESSEE THAT NO FURTHER DISALLOWANCE U/S 14A W AS WARRANTED AS INTEREST EXPENDITURE WAS CLAIMED ONLY FOR THAT PORTION OF INVESTMENT MADE BY THE ASSESSEE IN IRF, WHICH IN TURN INVESTED THE SAME IN THOSE ITEMS WHICH GENERAT E TAXABLE INCOME. AFTER CONSIDERING DETAILED SUBMISSION OF TH E ASSESSEE, LD. CIT(A) REWORKED THE DISALLOWANCE AFTER RECORDIN G DETAILED FINDINGS AS UNDER: AS REGARDS SUO-MOTO CALCULATION OF DISALLOWANCE OF INTEREST OF RS 1.01 CRORES BY THE APPELLANT U/S1 4A, PIRAMAL ENTERPRISES LTD. 6 I FIND THAT THE SAID DISALLOWANCE WAS MADE ON THE BASIS OF INVESTMENTS BALANCE AS ON 31.03.2008 AS APPEARING THE AUDITED BALANCE SHEET OF THE IRF SCHEME I AND SCHEME III. AS THE APPELLANT HAS INVESTED IN IRF DURING THE YEAR AND THE IRF HAS IN TURN INVESTED IN SHARES, MUTUAL FUND, DEBENTURES, APPLICATION MONEY ETC., I FIND THAT THE DISALLOWANC E OF INTEREST SHOULD BE MADE BASED ON THE MONTHLY BALANCE IN INVESTMENTS IN SHARES, MUTUAL FUNDS, DEBENTURES, APPLICATION MONEY AS APPEARING IN THE BOOKS OF IRF SCHEME I AND SCHEME III. THE APPELLANT WAS ASKED TO RECALCULATE THE DISALLOWANCE OF INTEREST BASED ON THE MONTHLY BALANCE IN INVESTMENT WHICH GENERATE TAX FREE INCOME AND INVESTMENTS WHICH GENERATE TAXABLE INVESTMENTS AS PER THE BOOKS OF IRF SCHEME I AND SCHEME I. THE APPELLANT HAS SUBMITTED THE INTEREST CALCULATION AS PER MONTHLY BALANCE IN INVESTMENTS A PER THE BOOKS AS CERTIFIED BY CFO OF IRF SCHEME I AND III WHICH WORKS OUT TO RS.1.07 CRORES. THE DISALLOWANCE U/S.14A IS RS. 1,07,16,861/- CRORES AS AGAINST RS.1,01,00,417/- CRORES OFFERED BY APPELLANT. THE AO SHALL THEREFORE REVISE THE INTEREST DISALLOWABLE U/S.14A AT RS.1,07,16,861/. DISALLOWANCE U/S.14A WORKS OUT TO RS.1,07,16,861 CORES. THE BALANCE INTEREST IN ANY CASE IS ALLOWABL E EITHER U/S.36(1)(III) OR U/S. 57(III) DEPENDING UPO N WHETHER PIRAMAL ENTERPRISES LTD. 7 THE INVESTMENTS ARE BY WAY OF STOCK-IN-TRADE OR INV ESTMENT (THOUGH FOR WHICH NO WORKING/FINDINGS HAS BEEN GIVE N BY THE AO.) ACCORDINGLY, THERE IS NO REASON FOR DISALLOWANCE OF BALANCE INTEREST WITHOUT ANY ADVERSE MATERIAL ON RECORD. 2.3 THIS GROUND OF APPEAL IS THEREFORE, PARTLY ALLO WED AS PER AFORESAID DIRECTIONS. 3.8. WE HAVE GONE THROUGH THE DETAILED FINDINGS OF LD. CIT(A) AND ALSO GONE THROUGH THE JUDGMENT RELIED UPON BY T HE LD. COUNSEL IN THE CASE OF RAINY INVESTMENT PVT. LTD.,( SUPRA), THE RELEVANT PORTION OF THE SAME IS REPRODUCED BELOW: WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIA L ON RECORD. SECTION 14A R/W R. 8D IS MANDATORY IN ITS APPLICATION WHERE THE ASSESSEE EARNS INCOME WHICH I S CLAIMED TAX-EXEMPT, AS DIVIDEND INCOME IN THE INSTA NT CASE. IN FACT, THERE IS NO DOUBT WITH REGARD TO THI S; THE ASSESSE ITSELF CONCEDING TO THE SAME BEFORE US AND, BESIDES, BEING ENGAGED IN THE BUSINESS OF MAKING INVESTMENTS AND EARNING DIVIDEND INCOME AS AN INTEG RAL PART THEREOF. THE ONLY OPTION, THEREFORE, IF IT CO NSIDERS THE APPLICATION OF THE PROVISION AS OPERATING TO ITS DE TRIMENT, IS TO FORFEIT ITS RIGHT TO EXEMPTION FROM TAX IN ITS R ESPECT. QUA MERITS, WE FIND MUCH FORCE IN THE ASSESSEES AR GUMENT THAT SHARE APPLICATION MONEY, TO THE EXTENT IT IS ACTUALLY SO, SO THAT IT ONLY REPRESENTS AMOUNT/S PAID BY WAY OF APPLICATION FOR ALLOTMENT OF SHARES, THE SAME CANNO T BE REGARDED AS AN INVESTMENT IN SHARES, OR AN ASSET (O R ASSET PIRAMAL ENTERPRISES LTD. 8 CLASS) YIELDING TAX-FREE INCOME, AND NEITHER IS IT CAPABLE OF YIELDING ANY TAX-FREE INCOME. THE SAME WOULD, THERE FORE, IN OUR CLEAR VIEW, HAVE TO BE EXCLUDED IN WORKING OUT THE DISALLOWANCE U/R. 8D. FURTHER, THOUGH THE REVENUE H AS NOT DISPUTED THE SUMS REFLECTED AS SHARE APPLICATION M ONEY IN THE ASSESSEES BALANCE-SHEET, THE AO, TO WHOM THE M ATTER IS TO BE IN ANY CASE RESTORED FOR WORKING OUT THE DISA LLOWANCE BY EXCLUDING THE SAME, SHALL, IN THE SET ASIDE PROC EEDINGS, ALSO EXAMINE THE VERACITY OF THE ASSESSEES CLAIM W ITH REGARD TO THE SAME BEING SHARE APPLICATION MONEY. THIS IS IN VIEW OF THE PERTINENT QUESTIONS RAISED BY THE BE NCH IN ITS RESPECT, TO WHICH NO SATISFACTORY ANSWER WAS FORTHC OMING DURING HEARING, NOR TO BE FAIR TO THE LD. AR, COU LD POSSIBLY BE IN THE ABSENCE OF ANY DETAILS ON RECORD. WE STAT E SO AS THE SHARE APPLICATION MONEY WOULD ORDINARILY ONLY BE PUBLIC MONEY AND, THUS, EXCEPT PERHAPS WHERE TOWA RD SHARES OF PRIVATE LIMITED COMPANIES, SUBJECT TO STR INGENT PROCEDURE, AS IS GENERALLY IN PLACE FOR SUCH FUNDS. WE MAY FURTHER CLARIFY THAT THE EXCLUSION OF SHARE APPLIC ATION MONEY, AS OPINED BY US, IS NOT IN THE LEAST FOR TH E REASON THAT IT DID NOT YIELD ANY TAX-FREE INCOME FOR THE R ELEVANT YEAR, BUT FOR THE REASON THAT IT IS INCAPABLE OF AN Y SUCH INCOME. THE SAME IS ONLY IN THE NATURE OF APPLICATI ON (OFFER) MONEY, WHICH WOULD THOUGH, ON ALLOTMENT, GET ADJUST ED AGAINST THE COST OF THE SAID SHARES, AND ONLY WHERE UPON ANY RIGHTS IN THE INVESTEE COMPANY INURE TO THE ALL OTTEE. NO RIGHTS, NOT EVEN INCHOATE, IN THE SHARE CAPITAL OF THE ISSUING COMPANY ARISE ON THE PAYMENT OF THE SHARE APPLICATI ON PIRAMAL ENTERPRISES LTD. 9 MONEY, IRRESPECTIVE OF THE TIME PERIOD FOR WHICH IT MAY OUTSTAND. THE SAME MAY AT BEST YIELD INTEREST INCOM E (FOR WHICH A SPECIAL PROCEDURE THOUGH HAS TO BE FOLLOWED BY THE COMPANY CONCERNED), WHICH IS IN ANY CASE TAXABLE, S O THAT THERE IS NO SCOPE FOR APPLICATION OF SEC. 14A THERE ON. AS SUCH, UPON VERIFICATION OF THE ASSESSEES CLAIM WITH REGARD TO THE SHARE APPLICATION MONEY AS ON 31.03.2 007 AND 31.03.2008, AS APPEARING IN ITS BALANCE-SHEET/B OOKS OF ACCOUNT, SO THAT NO SHARES HAD ACTUALLY BEEN ALLOTT ED IN ITS RESPECT AS AT THE RELEVANT DATES, THE SAME SHALL BE EXCLUDED BY THE AO FROM THE QUALIFYING AMOUNT IN RECKONING T HE AVERAGE INVESTMENT IN WORKING OUT THE DISALLOWANCE UNDER RULES 8D (II) AND 8D(III). THE A.O. WILL DECIDE THE MATTER PER A SPEAKING ORDER, ALLOWING THE ASSESSEE A REASONABLE OPPORTUNITY TO PRESENT ITS CASE BEFORE HIM. 3.9. IN OUR CONSIDERED OPINION, THE LD. CIT(A) HAS FOLL OWED CORRECT APPROACH, BOTH ON LAW AND FACTS. THE DISALL OWANCE HAS BEEN SUSTAINED TO THE EXTENT IT PERTAINS TO INVESTM ENT IN SECURITIES ENJOYING TAX-FREE INCOME AND THE DISALLO WANCE HAS BEEN DELETED VIS--VIS INVESTMENT IN THE SECURITIES ENJOYING TAXABLE INCOME. NOTHING WRONG COULD BE POINTED IN T HE FINDINGS OF THE LD. CIT(A), AND THEREFORE ORDER OF LD. CIT(A) IS UPHELD. THUS, GROUND RAISED BY THE REVENUE IS DISMI SSED. 4 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. PIRAMAL ENTERPRISES LTD. 10 ITA NO.6645/MUM/2012 FOR A.Y. 2009-10 5. IN THIS APPEAL ALSO, GROUNDS ARE IDENTICAL TO THE GROUNDS IN THE APPEAL OF A.Y. 2008-09, AND THEREFORE FOLLOWING OUR ORDER FOR A.Y. 2008-09, GROUND RAISED BY THE REVENUE FOR A.Y. 2009- 10 ARE DISMISSED. 6 . IN THE RESULT, THESE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH DECEMBER, 2015. SD/- (JOGINDER SINGH) SD/- (ASHWANI TANEJA) ! / JUDICIAL MEMBER ' ! / ACCOUNTANT MEMBER ! MUMBAI; % DATED ;09 /12/2015 CTX? P.S/. .. #$%&'(')% / COPY OF THE ORDER FORWARDED TO : 1. '() / THE APPELLANT 2. *+() / THE RESPONDENT. 3. , , - ( ' ) / THE CIT, MUMBAI. 4. , , - / CIT(A)- , MUMBAI 5. 01 *2 , , '# 2 3 , ! / DR, ITAT, MUMBAI 6. 45 6! / GUARD FILE. / BY ORDER, +0' * //TRUE COPY// / (DY./ASSTT. REGISTRAR) , ! / ITAT, MUMBAI