M/s. Chayadeep Ventures LLP, Bangalore V. The Income Tax Officer, Ward - 4(3)(3), Bangalore

ITA 677/BANG/2019

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9702 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 05-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATYASAI RATH BENGALURU
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT ITA NO. 6 77 /BANG/2019 ASSESSMENT YEAR : 20 1 4 - 1 5 M/S. CHAYADEEP ENTERPRISES LLP, STAR-2, OPP. IIMB BANGALORE, BANNERGHATTA ROAD, BILEKAHALLI, BANGALORE 560 076, PAN: AAGFC 8 4 06 J VS. THE INCOME TAX OFFICER, WARD 4(3)(3), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SMT. SHEETAL BORKAR , ADVOCATE RESPONDENT BY : SHRI SATYASAI RATH, ADDL CIT(DR)(ITAT), BENGALURU. DA TE OF HEARING : 25.06 .2019 DATE OF PRONOUNCEMENT : 28 .0 6 . 201 9 O R D E R THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 07.02.2019 OF THE CIT(APPEALS), BANGALORE-12, BANGA LORE RELATING TO ASSESSMENT YEAR 2014-15. 2. THE ASSESSEE IS A LIMITED LIABILITY PARTNERSHIP (LLP) FIRM CARRYING ON THE BUSINESS OF INVESTMENTS IN VARIOUS START-UP VENTURES AND INVESTMENTS IN SHARES AND SECURITIES. THE ASSESSEE FILED RETURN OF INCOME FOR AY 2014-15 DECLARING TOTAL INCOME OF 27,26,134. THE COMPUTATION OF TOTAL INCOME DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME IS AS FOLLOWS:- ITA NO. 677/BANG/2019 PAGE 2 OF 6 COMPUTATION OF INCOME I INCOME FROM BUSINESS: NET PROFIT AS PER P&L A/C 26,89,285 ADD: SHARE OF LOSS FROM PARTNERSHIP FIRM 36,850 LESS: STCG 31,32,622 (4,06,488) II. INCOME FROM CAPITAL GAIN 31,32,622 TAXABLE INCOME 27,26,134 3. THE AO WAS OF THE VIEW THAT SINCE SHARE INCOME ( LOSS) FROM THE PARTNERSHIP FIRM WAS DEBITED IN THE PROFIT & LOSS A CCOUNT, THERE WAS EXEMPT INCOME WHICH FORMED PART OF THE TOTAL INCOME UNDER THE ACT AND THEREFORE THE AO WORKED OUT THE DISALLOWANCE IN TERMS OF SEC. 14A OF THE INCOME TAX ACT, 1961(ACT) AT RS.14,53,484/-. THE MANNER IN WH ICH SUCH DISALLOWANCE WAS COMPUTED BY THE AO IS NOT DISCERNIBLE FROM THE ORDER OF ASSESSMENT. 4. THE SHARE OF LOSS FROM THE PARTNERSHIP FIRM OF WHICH THE ASSESSEE WAS A PARTNER WAS NO DOUBT DEBITED IN THE PROFIT AN D LOSS ACCOUNT, BUT HAD BEEN EXCLUDED FROM THE TOTAL INCOME IN THE COMPUTAT ION OF TOTAL INCOME. THIS WOULD BE CLEAR FROM THE EARLIER PART OF THIS O RDER WHEREIN, I HAVE SET OUT THE COMPUTATION OF TOTAL INCOME BY THE ASSESSEE IN THE RETURN OF INCOME FILED. THE ASSESSEE THEREFORE SUBMITTED BEFORE CIT (A) THAT THERE WAS NO EXEMPT INCOME WHATSOEVER EARNED BY THE ASSESSEE AND THEREFORE THERE COULD BE NO DISALLOWANCE OF EXPENSES INCURRED IN EA RNING EXEMPT INCOME WHICH CALLS FOR DISALLOWANCE U/S.14A OF THE ACT. 5. THE CIT(A) HOWEVER PLACED RELIANCE ON CBDT CIRC ULAR NO.5/2014 DATED 11-2.-2014 WHICH CLARIFIED THAT SECTION 14A W OULD APPLY EVEN WHEN EXEMPT INCOME WAS NOT EARNED IN A PARTICULAR ASSESS MENT YEAR AND CONFIRMED THE ACTION OF THE AO IN MAKING DISALLOWAN CE U/S.14A OF THE ACT. ITA NO. 677/BANG/2019 PAGE 3 OF 6 THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AGAIN ST THE DISALLOWANCE U/S.14A OF THE ACT AND CONSEQUENT ADDITION TO THE T OTAL INCOME. 6. AT THE TIME OF HEARING OF THIS APPEAL, IT WAS B ROUGHT TO OUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADMITTED FACTUAL POSITION IN THE PRESENT CASE IS THAT THERE WAS NO DIVIDEND INCOME O R OTHER EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DECISION OF THE BANGALORE BENCH OF ITAT IN THE CASE OF M/S UB INFRASTRUCTURE PROJECTS LTD., VS. DCIT 2098/BANG/2016 (ASST. YEAR 2012-13) ORDER DATED 22/ 12/2017 , WHEREIN THIS TRIBUNAL TOOK THE VIEW THAT THERE CAN BE NO DISALLO WANCE OF EXPENSES U/S 14A OF THE ACT, IF THERE IS NO EXEMPT INCOME EARNED DURING THE RELEVANT PREVIOUS YEAR. THE FOLLOWING ARE THE RELEVANT OBSE RVATIONS OF THE TRIBUNAL IN THIS REGARD:- 3. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHOR ITIES BELOW, WE FIND THAT UNDISPUTEDLY THE ASSESSEE HAS N OT EARNED ANY EXEMPTED INCOME. NOW IT IS SETTLED POSITION OF LAW THAT WHENEVER ASSESSEE DID NOT EARN ANY EXEMPT INCOME, NO DISALLO WANCE COULD BE MADE U/S. 14A OF THE ACT. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. V. CIT, 378 ITR 33 (DEL ) HAS CATEGORICALLY HELD THAT SECTION 14A ENVISAGES THAT THERE SHOULD BE ACTUAL RECEIPT OF INCOME WHICH WAS NOT INCLUDIBLE I N THE TOTAL INCOME DURING THE RELEVANT PREVIOUS YEAR FOR THE PU RPOSE OF DISALLOWING ANY EXPENDITURE IN RELATION TO THE SAID INCOME. WHEREVER THERE IS NO EXEMPT INCOME INCLUDIBLE IN TH E TOTAL INCOME OF THE ASSESSEE, THE PROVISIONS OF SECTION 1 4A CANNOT BE INVOKED. THE RELEVANT OBSERVATIONS OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT ARE EXTRACTED HEREUNDER:- 15. TURNING TO THE CENTRAL QUESTION THAT ARISES FO R CONSIDERATION, THE COURT FINDS THAT THE COMPLETE AN SWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HO LOLCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014, IN I.T. A. NO. 486 OF 2014). IN THAT CASE, A SIMILAR QUESTIO N AROSE, VIZ., WHETHER THE INCOME-TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTIO N 14A OF ITA NO. 677/BANG/2019 PAGE 4 OF 6 THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY T HE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR ? THE COUR T REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL IN THIS V ERY CASE, I.E., CHEMINVEST LTD. V. CIT [2009] 317 ITR ( AT) 86 (DELHI) [SB]. THE COURT ALSO REFERRED TO THREE DECI SIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN CIT V. LAKHANI MARKETING INCL. (DECISION DATED APRIL 2, 201 4, OF THE HIGH COURT OF PUNJAB AND HARYANA IN I. T. A. NO. 970 OF 2008)--SINCE REPORTED IN [2015] 4 ITR-OL 246 (P&H )-- WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LTD. [2010] 323 ITR 518 (P&H) AND CIT V. WINSOME TEXTILE INDUSTRIES LTD. [20 09] 319 ITR 204 (P&H). THE SECOND WAS OF THE GUJARAT HIG H COURT IN CIT V. CORRTECH ENERGY (P.) LTD. [2014] 22 3 TAXMANN 130 (GUJ) ; [2015] 372 1TR 97 (GUJ) AND THE THIRD OF THE ALLAHABAD HIGH COURT IN CIT V. SHIVAM MOTORS (P) LTD. (DECISION DATED 5TH MAY, 2014, IN T .A. NO. 88 OF ITA NO.1 1071BANG12016 2014). THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSE SSEE HAD NOT EARNED ANY TAXABLE INCOME IN THE RELEVANT ASSESSMENT YEAR IN QUESTION 'CORRESPONDING EXPENDIT URE COULD NOT BE WORKED OUT FOR DISALLOWANCE.' 4. THIS WAS ALSO EXAMINED BY THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2010-11 AND HELD THAT WHEN THERE IS NO EXEMPT INCOME, PROVISION OF SECTIO N 14 OF THE ACT CANNOT BE APPLIED. 5. IN THE LIGHT OF THE AFORESAID JUDGMENT, THE PROV ISIONS OF SECTION 14A CANNOT BE INVOKED AS THERE IS NO EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(APPEALS) WHO HAS RIGHTLY DELET ED THE ADDITION 7. THE LEARNED DR, HOWEVER, PLACED RELIANCE ON THE ORDER OF THE CIT(A) AND THE CIRCULAR OF THE CBDT ON WHICH THE CIT(A) HA D PLACED RELIANCE. ITA NO. 677/BANG/2019 PAGE 5 OF 6 8. I AM OF THE VIEW THAT IN THE LIGHT OF THE DECISI ON OF THE TRIBUNAL REFERRED TO EARLIER WHICH IN TURN IS BASED ON DECIS IONS OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. (SUPRA) THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT DESERVES TO BE DELET ED. I MAY ALSO ADD THAT THE HIGH COURT OF DELHI IN THE CASE OF PRL.CIT VS. IL & FS ENERGY DEVELOPMENT CO.LTD. (2017) 84 TAXMANN.COM 186(DELHI ) HAS HELD THAT CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLAC ED BY REVENUE DOES NOT REFER TO RULE 8D(1) AT ALL BUT ONLY REFERS TO T HE WORD 'INCLUDIBLE' OCCURRING IN THE TITLE TO RULE 8D AS WELL AS THE TITLE TO SEC TION 14A. THE CIRCULAR CONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCO ME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR THE D ISALLOWANCE TO BE TRIGGERED. THE COURT HELD THAT THE PROCESS OF INTER PRETATION ADOPTED BY THE CBDT WILL BE A TRUNCATED READING OF SECTION 14A AND RULE 8D PARTICULARLY WHEN RULE 8D(1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES NOT ACCOUNT FOR THE CONCEPT OF 'REAL INCOME'. IT DO ES NOT NOTE THAT UNDER SECTION 5, THE QUESTION OF TAXATION OF 'NOTIONAL IN COME' DOES NOT ARISE. FOR ALL OF THE AFOREMENTIONED REASONS, THE COURT HELD T HAT THE CBDT CIRCULAR DATED 11-5-2014 CANNOT OVERRIDE THE EXPRESSED PROVI SIONS OF SECTION 14A, READ WITH RULE 8D. 9. I MAY HOWEVER ADD THAT SPECIAL BENCH ITAT AHMED ABAD IN THE CASE OF VISHNU ANAND MAHAJAN V. ACIT (TS-396-ITAT-2012) (AH D) (SB) HAD TO CONSIDER THE ISSUE, WHETHER GIVEN THAT A F IRM PAYS TAX ON ITS PROFITS, WHETHER THE SHARE OF PROFIT RECEIVED BY A PARTNER F ROM THE FIRM, WHICH IS EXEMPT IN HIS HANDS U/S 10(2A), CAN BE SAID TO BE NOT TAX-FREE SO AS TO NOT ATTRACT S. 14A. THE SPECIAL BENCH HELD THAT THOUGH A FIRM AND ITS PARTNERS ARE NOT DIFFERENT ENTITIES IN GENERAL LAW, UNDER TH E ACT, THEY ARE TREATED AS SEPARATE ENTITIES. THE SALARY AND INTEREST PAID BY THE FIRM TO THE PARTNERS IS DEDUCTIBLE IN THE HANDS OF THE FIRM AND TAXABLE IN THE HANDS OF THE PARTNERS U/S 28(V). THE BALANCE PROFITS ARE TAXED IN THE HAN DS OF THE FIRM AND EXEMPT ITA NO. 677/BANG/2019 PAGE 6 OF 6 IN THE HANDS OF THE PARTNERS U/S 10(2A). AS S. 10(2 A) PROVIDES THAT THE SHARE OF PROFIT OF THE PARTNER SHALL NOT BE INCLUDE D IN HIS TOTAL INCOME, IT IS NOT POSSIBLE TO HOLD THAT THE SHARE INCOME IS NOT E XCLUDED FROM THE TOTAL INCOME OF THE PARTNER BECAUSE THE FIRM HAS AL READY BEEN TAXED THEREON . WHEN S. 10(2A) SPEAKS OF ITS EXCLUSION FROM THE T OTAL INCOME IT MEANS THE TOTAL INCOME OF THE PERSON WHOSE CASE IS UNDER CONSIDERATION I.E. THE PARTNER. AS THE SHARE INCOME IS EXCLUDED FROM HIS TOTAL INCO ME, S. 14A WOULD APPLY AND ANY EXPENDITURE INCURRED TO EARN THE SHARE INCOME WILL HAVE TO BE DISALLOWED. 10. IN THE RESULT, APPEAL BY THE ASSESSEE IS ALLOW ED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF JUNE, 2019. SD/- ( N.V. VASUDEVAN ) VICE PRESIDENT BANGALORE, DATED, THE 28 TH JUNE, 2019. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.