GENESIS FOODS & BEVERAGES LTD, THANE V. ITO WD 8(1)(4), MUMBAI

ITA 6902/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2535 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 17-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 27-11-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUBODH RATNAPARKHI
• Keywords: Earning of tax free income; Question of law
• Section: 143(3); 14A; 10

Judgement Text

M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G , MUMBAI , , BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI RAMIT KOCHAR , ACCOUNTAN T MEMBER ITA NO. : 6902 /MUM/20 1 3 ( ASSESSMENT YEAR: 200 8 - 0 9 ) ITA NO. : 6901 /MUM/20 13 ( ASSESSMENT YEAR: 2008 - 09 ) M/S GENESIS FOODS & BEVERAGES LTD , A - 47, ROAD NO. 11, WAGLE INDUSTRIAL ESTATE, THANE (WEST) - 400 604 .: PAN: A ABCG 5674 N VS INCOM E TAX OFFICER, WARD - 8(1)(4), ROOM NO. 206/26, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBODH RATNAPARKHI RESPONDENT BY : SHRI ABANI KANTA NA YAK /DATE OF HEARING : 17 - 11 - 201 5 / DATE OF PRONOUNCEMENT : 17 - 11 - 201 5 ORDER , . . : PER AMIT SHUKLA, J M : THE AFORESAID APPEAL S HAVE BEEN FILED BY THE ASSESSEE AGAINST SEPARATE IMPUGN ED ORDERS OF EVEN DATE 23.08.2013 PASSED BY CIT(A) - 16, MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) AND FOR THE PENALTY PROCEEDINGS U/S 271(1)(C) FOR THE ASSESSMENT YEAR 2008 - 09 . 2. WE WILL FIRST TAKE - UP THE QUANTUM APPEAL BEING ITA NO. 6902/MU M/2013 WHEREIN THE ASSESSEE IS MAINLY AGGRIEVED ON ADDITION OF RS. 22,71,215/ - MADE U/S 14A ON ACCOUNT OF INTEREST EXPENDITURE INCURRED ON FUNDS BORROWED FOR THE PURPOSES OF BUSINESS. M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 2 3. AT THE OUTSET, THE LD. COUNSEL SUBMITTED THAT SIMILAR ISSUE OF DISAL LOWANCE HAD COME - UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007 - 08, IN ITA NO. 7947/MUM/2013 WHEREIN THE TRIBUNAL HAS DELETED THE DISALLOWANCE BY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE O F CHEM INVEST LTD., THEREFORE, IN THIS YEAR ALSO ON SAME FACTS AND ON SIMILAR INVESTMENT, NO DISALLOWANCE U/S 14A CAN BE MADE. 4. THE LD. DR ON THE OTHER HAND, RELIED UPON THE ORDER OF THE CIT(A) AND FURTHER POINTED OUT THAT, ASSESSEE HAD NOT APPEARED BEF ORE THE CIT(A) DESPITE SEVERAL NOTICES. 5. THE BRIEF FACTS ARE THAT, ASSESSEE HAD SECURED A LOAN OF RS. 1.43 CRORES FROM THE RUPEE CO - OP BANK LTD FOR PURCHASING THE SHARES OF M/S AMBER DISTILLERIES LTD. ON SUCH LOAN, THE ASSESSEE HAD CLAIMED INTEREST EX PENSES OF RS. 22,71,215/ - . THE AO HELD THAT SUCH A N INTEREST EXPENSES CANNOT BE ALLOWED AS THE SAME IS FOR NON - BUSINESS PURPOSE. 6. THE LD. CIT(A) TOO CONFIRMED THE SAID DISALLOWANCE ON THE GROUND THAT, ADDITION HAS TO BE MADE U/S 14A, BECAUSE THE INTERES T EXPENDITURE HAS BEEN INCURRED ON THE LOAN FROM WHICH THE SHARES HAVE BEEN PURCHASED AND THE INCOME FROM DIVIDEND INCOME AND LONG - TERM - CAPITAL - GAIN WOULD ULTIMATELY BE EXEMPT FROM TAX. 7. WE FIND THAT EXACTLY SIMILAR ISSUE WAS THERE IN THE EARLIER YEARS WHEREIN ON THE PURCHASE OF SHARES OF M/S AMBER DISTILLERIES LTD., THE INTEREST WAS DISALLOWED U/S 14A. THE DISALLOWANCE OF INTEREST PERTAINS TO THE SAME INVESTMENT, THEREFORE, THE FACTS OF THE AY 2007 - 08 AND THIS YEAR ARE EXACTLY THE SAME. THE TRIBUNAL IN THE EARLIER YEARS HAD DECIDED THE ISSUE AFTER FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEM INVEST LTD. VIDE ORDER DATED 02.09.2015 IN ITA NO. 749 OF 2014 AND IN THE FOLLOWING MANNER : M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 3 6. AFTER CONSIDERING THE RIVAL CONTENTION S AND ON PERUSAL OF THE IMPUGNED ORDERS, WE FIND THAT THE DISALLOWANCE U/S 14A HAS BEEN MADE ON THE GROUND THAT ASSESSEE COMPANY HAS UTILIZED THE LOAN FUND FOR INVESTING INTO SHARES OF THE SUBSIDIARY COMPANY FOR ACQUIRING CONTROLLING INTEREST AND FOR THE PURPOSE OF BUSINESS OF THE SUBSIDIARY COMPANY. IT IS EQUALLY AN UNDISPUTED FACT THAT NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE I.E. IN THIS YEAR FROM SUCH INVESTMENT. THOUGH, THERE ARE QUITE A FEW DECISION IN FAVOUR OF THE ASSESSEE ON THE FIRST PROP OSITION THAT, IF STRATEGIC INVESTMENT HAS BEEN MADE IN THE SUBSIDIARY COMPANY THEN NO DISALLOWANCE OF INTEREST OR OTHER EXPENSES SHOULD BE MADE U/S 14A, HOWEVER ON SECOND ASPECT THAT, IF NO EXEMPT INCOME HAS BEEN EARNED, THEN NO DISALLOWANCE U/S 14A CAN B E MADE, WE FIND THAT IN THE LATEST DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LIMITED, VIDE ORDER DATED 02.09.2015 IN ITA 749 OF 2014, HAS DECIDED THIS ISSUE IN A VERY ELABORATE MANNER, WHICH WAS ARISING OUT OF THE ORDER OF THE SPECIAL BENCH DECISION OF ITAT. THE HONBLE DELHI HIGH COURT AFTER ADMITTING THE FOLLOWING SUBSTANTIAL QUESTION OF LAW : - WHETHER DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSE E. DECIDED THE QUESTION IN FAVOUR OF THE ASSESSEE AFTER DISCUSSING VARIOUS JUDICIAL PRECEDENCE INCLUDING THOSE RELIED UPON BY THE ASSESSEE ON THIS ISSUE. THE RELEVANT OBSERVATION AND THE RATIO LAID DOWN BY THE HONBLE HIGH COURT IS AS UNDER : - 15. TU RNING TO THE CENTRAL QUESTION THAT ARISES FOR CONSIDERATION, THE COURT FINDS THAT THE COMPLETE ANSWER IS PROVIDED BY THE DECISION OF THIS COURT IN CIT V. HOLCIM INDIA (P) LTD. (DECISION DATED 5TH SEPTEMBER 2014 IN ITA NO. 486/2014). IN THAT CASE A SIMILAR QUESTION AROSE, VIZ., WHETHER THE ITAT WAS JUSTIFIED IN DELETING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WHEN NO DIVIDEND INCOME HAD BEEN EARNED BY THE ASSESSEE IN THE RELEVANT AY? THE COURT REFERRED TO THE DECISION OF THIS COURT IN MAXOPP INVESTMENT LTD. (SUPRA) AND TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THIS VERY CASE I.E. CHEMINVEST LTD. V. CIT (2009) 317 ITR 86. THE COURT ALSO REFERRED TO THREE DECISIONS OF DIFFERENT HIGH COURTS WHICH HAVE DECIDED THE ISSUE AGAINST REVENUE. THE FIRST WAS THE DECISION IN COMMISSIONER OF INCOME TAX, FARIDABAD V. M/S. LAKHANI MARKETING INCL . (DECISION DATE D 2ND APRIL 2014 OF THE HIGH COURT OF PUNJAB AND HARYANA IN ITA NO. 970/2008) WHICH IN TURN REFERRED TO TWO EARLIER DECISIONS OF THE SAME COURT IN CIT V. HERO CYCLES LIMITED [2010] 323 ITR 518 AND CIT V. WINSOME TEXTILE INDUSTRIES LTD . [2009] 319 ITR 204. THE SECOND WAS OF THE GUJARAT HIGH COURT IN COMMISSIONER OF INCOME TAX - I V. CORRTECH ENERGY (P) LTD . [20 14] 223 TAXMANN 130 (GUJ.) AND THE THIRD OF THE ALLAHABAD HIGH COURT IN COMMISSIONER OF INCOME TAX, KANPUR V. SHIVAM MOTORS (P) LTD. (DECISION DATED 5TH MAY 2014 IN ITA NO. 88/2014). THESE THREE DECISIONS REITERATED THE POSITION THAT WHEN AN ASSESSEE HAD N OT EARNED ANY TAXABLE INCOME IN THE RELEVANT AY IN QUESTION 'CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANCE.' 16. IN CIT V. HOLCIM INDIA (P) LTD. (SUPRA), THE COURT FURTHER EXPLAINED AS UNDER: '15. INCOME EXEMPT UNDER SECTION 10 IN A PARTICULAR ASSESSMENT YEAR, MAY NOT HAVE BEEN EXEMPT EARLIER AND CAN BECOME TAXABLE IN FUTURE YEARS. FURTHER, WHETHER M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 4 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 CAPITAL GAIN ON SALE OF SHARES IS PRESENTLY NOT TAXABLE WHERE SECURITY TRANSACTION TAX HAS BEEN PAID, BUT A PRIVATE SALE OF SHARES IN AN OFF MARKET TRANSACTION ATT RACTS CAPITAL GAINS TAX. IT IS AN UNDISPUTED POSITION THAT RESPONDENT ASSESSEE IS AN INVESTMENT COMPANY AND HAD INVESTED BY PURCHASING A SUBSTANTIAL NUMBER OF SHARES AND THEREBY SECURING RIGHT TO MANAGEMENT. POSSIBILITY OF SALE OF SHARES BY PRIVATE PLACEME NT ETC. CANNOT BE RULED OUT AND IS NOT AN IMPROBABILITY. DIVIDEND MAY OR MAY NOT BE DECLARED. DIVIDEND IS DECLARED BY THE COMPANY AND STRICTLY IN LEGAL SENSE, A SHAREHOLDER HAS NO CONTROL AND CANNOT INSIST ON PAYMENT OF DIVIDEND. WHEN DECLARED, IT IS SUBJE CTED TO DIVIDEND DISTRIBUTION TAX.' 17. ON FACTS, IT WAS NOTICED IN CIT V. HOLCIM INDIA (P) LTD. (SUPRA) THAT THE REVENUE HAD ACCEPTED THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN THAT CASE AND THAT EXPENDITURE HAD BEEN INCURRED TO PROT ECT INVESTMENT MADE. 18. IN THE PRESENT CASE, THE FACTUAL POSITION THAT HAS NOT BEEN DISPUTED IS THAT THE INVESTMENT BY THE ASSESSEE IN THE SHARES OF MAX INDIA LTD. IS IN THE FORM OF A STRATEGIC INVESTMENT. SINCE THE BUSINESS OF THE ASSESSEE IS OF HOLDIN G INVESTMENTS, THE INTEREST EXPENDITURE MUST BE HELD TO HAVE BEEN INCURRED FOR HOLDING AND MAINTAINING SUCH INVESTMENT. THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS IN RELATION TO SUCH INVESTMENTS WHICH GIVES RISE TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. 19. IN LIGHT OF THE CLEAR EXPOSITION OF THE LAW IN HOLCIM INDIA (P) LTD. (SUPRA) AND IN VIEW OF THE ADMITTED FACTUAL POSITION IN THIS CASE THAT THE ASSESSEE HAS MADE STRATEGIC INVESTMENT IN SHARES OF MAX INDIA LTD.; THAT NO EXEMPTED INC OME WAS EARNED BY THE ASSESSEE IN THE RELEVANT AY AND SINCE THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT IN DOUBT, THE QUESTION FRAMED IS REQUIRED TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 20. SINCE THE SPECI AL BENCH HAS RELIED UPON THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE W AS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. UNDER SECTION 57 (III) OF THE ACT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME, DID NOT MEAN THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT TH E EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57( III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 5 DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MA DE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. T HE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECTION 57(III) OF THE ACT, WHERE THE EXPRESSION USED IS FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE DECISION IN RAJENDRA PRASAD MOODY (SUPRA) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT. 22. IN THE IMPUGNED ORDER, THE ITAT HAS REFERRED TO THE DECISION IN MAXOPP INVESTMENT LTD. (SUPRA) AND REMANDED THE MATTER TO THE AO FOR RECONSIDERATION OF THE ISSUE AFRESH. THE ISSUE IN MAXOPP INVESTMENT LTD . (SUPRA)WAS WHETHER THE EXPENDITURE (INCLUDING INTEREST ON BORROWED FUNDS) IN RESPECT OF INVESTMENT IN SHARES OF OPERATING COMPANIES FOR ACQUIRING AND RETAINING A CONTROLLING INTEREST THEREIN WAS DISALLOWABLE UNDER SECTION 14 A OF THE ACT. IN THE SAID CASE ADMITTEDLY THERE WAS DIVIDEND EARNED ON SUCH INVESTMENT. IN OTHER WORDS, IT WAS NOT A CASE, AS THE PRESENT, WHERE NO EXEMPT INCOME WAS EARNED IN THE YEAR IN QUESTION. CONSEQUENTLY, THE SAID DECISION WAS NOT RELEVANT AND DID NOT APPLY IN THE CONTEXT OF THE ISSUE PROJECTED IN THE PRESENT CASE. 23. IN THE CONTEXT OF THE FACTS ENUMERATED HEREINBEFORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXPRESSION DOES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF THE ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDIT URE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. THUS, RESPECTFULLY FOLLOWING THE R ATIO UPHELD BY THE HONBLE DELHI HIGH COURT AND ON IDENTICAL COROLLARY, WE HOLD THAT THE DISALLOWANCE OF INTEREST MADE BY THE AO AND CONFIRMED BY THE CIT(A) U/S 14A STANDS DELETED. ACCORDINGLY, GROUND RAISED BY THE ASSESSEE STANDS ALLOWED . THUS, CONSISTE NT WITH THE VIEW TAKEN IN THE EARLIER YEAR, WHICH APPLIES MUTATE MUTANDIS IN THIS YEAR ALSO, ACCORDINGLY THE DISALLOWANCE MADE U/S 14A STANDS DELETED. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. 9. ONCE THE DISALLOWANCE U/S 14A HAS BEEN DELETED IN THE QUANTUM PROCEEDINGS THEN LEVY OF PENALTY U/S 271(1)(C) ON SAME DISALLOWANCE HAS NO LEGS TO STAND ACCORDINGLY, THE SAME IS DIRECTED M/S GENESIS FOODS & BEVERAGES LTD ITA NO. 6902 /MUM/20 1 3 ITA NO. 6901/MUM/2013 6 TO BE DELETED. ACCORDINGLY APPEAL IN ITA NO. 6901/MUM/2 0 13 STANDS ALLOWED. 10. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE IN ITA NO. 6902/MUM/2013 AND 6901/MUM/2013 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH NOVEMBER , 2015. SD/ - SD/ - ( ) ( ) (RAMIT KOCHAR ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 17 TH NOVEMBER , 2015 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT . 3) THE CIT (A) - 16 , MUMBAI. 4 ) THE CIT 8 , MUMBAI. 5 ) , , / THE D.R. G BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRA R I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS