VAKRANGEE LTD, MUMBAI V. ASST CIT CEN CIR 29, MUMBAI

ITA 6988/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3796 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 14-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DHAMESH SHAH
• Keywords: Earning of tax free income
• Section: 143(3); 153A; 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ' F ' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN , JUDICIAL MEMBER ITA NO. 6988 /MUM/201 4 (ASSESSMENT YEAR: 2009 - 10 ) M/S. VAKRANGEE LIMITED VS. ACIT, CENTRAL CIRCLE - 29 (FORMARLLY VAKRANGEE SOFTWARES LTD.) VAKRANGEE HOUSE, PLOT NO. 66 MAROL CO - OP INDL. ESTATE OFF M.V. ROAD, ANDHERI (E) MUMBAI 400059 ROOM NO. 476, AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN - AAACV9920D APPELLANT RESPONDENT APPELLANT BY: SHRI DHAMESH SHAH RESPONDENT BY: SHRI G.M. DOSS DATE OF HEARING: 04 .08 .2016 DATE OF PRONOUNCEMENT: 10 .0 8 .2016 O R D E R PER JASON P. BOAZ, A.M . THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) - 4 0 , MUMBAI DATED 18 . 07 .201 4 FOR A.Y. 2009 - 10 . 2 . THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER: - 2.1 THE ASSESSEE, A COMPANY ENGAGED IN/RENDERING I.T. ENABLED SERVICES AND BPO SERVICES, FILED ITS RETURN OF INCOME FOR A.Y. 2009 - 10 ON 04.03.2010. PURSUANT TO SEARCH ACTION IN THE ASSESSEES CASE ON 13.0 2.2010 , A NOTICE UNDER SECTION 153A OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') WAS ISSUED TO THE ASSESSEE ON 07.12.2011. IN RESPONSE THERETO, THE ASSESSEE REQUESTED THAT THE RETURN FILED ON 04.03.2010 DECLARING NIL INCOME BE TREATED AS FILED IN RESPO NSE TO THE SAID NOTICE ISSUED UNDER SECTION 153A OF THE ACT. THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) R.W.S. 153A OF THE ACT VIDE ORDER DATED 28.03.2013 , WHEREIN THE ASSESSEES INCOME WAS ASSESSED AT NIL UNDE R THE NORMAL PROVISIONS DUE TO SET OFF OF BROUGHT FORWARD LOSSES AND BOOK PROFITS UNDER SECTION 115JB OF THE ACT WAS IT A NO. 6988/MUM/2014 M/S. VAKRANGEE LIMITED 2 COMPUTED AT ` 7,85,57,540/ - . THE ONLY DISALLOWANCE MADE WAS OF AN AMOUNT OF ` 74,31,010/ - UNDER SECTION 14A R.W. RULE 8D. 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR A.Y. 2009 - 10 DATED 28.03.2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) - 40, MUMBAI CHALLENGING THE DISALLOWANCE OF ` 74,31,010/ - MADE BY ASSESSING OFFICER (AO) UNDER SECTION 14A R.W. RULE 8D. THE LEARNED CIT(A) DISMISSE D THE ASSESSEES APPEAL VIDE THE IMPUGNED ORDER DATED 18.07.2014 , THEREBY UPHOLDING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT MADE BY THE AO. 3.1 AGGRIEVED BY THE ORDER OF THE CIT(A) - 40, MUMBAI DATED 18.07.2014 FOR A.Y. 2009 - 10, THE ASSESSEE HAS PREFER RED THIS APPEAL RAISING THE FOLLOWING GROUND: - THE COMMISSIONER OF INCOME TAX (APPEALS) - 40 MUMBAI HAS ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN RESPECT OF DISALLOWANCE U/S 14A AMOUNTING TO ` 74,31,1010/ - WHEREAS AS PER FACTS & CIRCUMSTANCES THE DISALLOWANCE SHOULD NOT BE MADE. 3.2.1 THE LEARNED A.R. FOR THE ASSESSEE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED. ACCORDING TO THE LEARNED A.R. NO DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D WAS WARRANTED IN THE FACTS AND CIRCUMSTANCES OF THE CASE FOR THE FOLLOWING REASONS. FIRSTLY, IT WAS SUBMITTED, THE ASSESSEE HAD EARNED NIL EXEMPT DIVIDEND INCOME IN THE YEAR UNDER CONSIDERATION AND THEREFORE NO DISALLOWANCE COULD HAVE BEEN MADE UNDER SECTION 14A R.W. RULE 8D. IN SUPPORT OF THIS PROPOSITION THE LEARNED A.R. PLACED RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN CHEMINVEST LTD. (2015) 378 ITR 33 (DEL) DATED 02.09.2015 WHICH HAS BEEN FOLLOWED BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF FAIR EXPORTS (INDIA) PVT. LTD. IN ITA NO. 1880, 1881 & 899/MUM/2011 AND OTHERS DATED 17.05.2016. 3.2.2 THE LEARNED A.R. FURTHER SUBMITTED THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W. RULE 8D OF THE I.T. RULES ALSO OUGHT NOT TO HAVE BEEN MADE BY THE AUTHORITIES BELOW SINCE THE ENTIRE INVESTMENTS IN SHARES/ SECURITIES MADE BY THE ASSESSEE AMOUNTING TO ` 52,15,95,000/ - WERE MADE ENTIRELY IN SUBSIDIARY COMPANIES AS STRATEGIC INVESTMENTS TO HAVE CONTROL OVER THOSE COMPANIES AND NOT FOR INVESTMENT PURPOSES OR WITH THE INTENTION OF EARNING OF DIVIDEND/TAX EXEMPT INCOME. IN SUPPORT OF THIS IT A NO. 6988/MUM/2014 M/S. VAKRANGEE LIMITED 3 PROPOSI TION, THE LEA RNED A.R. PLACED RELIANCE ON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF FIDUCIARY EUROMAX GLOBAL MARKETS LTD. IN ITA NO. 1349/MUM/2012 DATED 29.06.2016. 3.2.3 THE LEARNED A.R. FOR THE ASSESSEE CONTENDS THAT IN VIEW OF THE ABOVE FA CTUAL MATRIX OF THE CASE AND THE JUDICIAL PRONOUNCEMENTS CITED FOR BOTH PROPORTIONS PUT FORTH, IN PARA 3.2.1, THAT SINCE THERE IS NO EXEMPT DIVIDEND INCOME EARNED BY THE ASSESSEE IN THE PERIOD UNDER CONSIDERATIONS AND IN PARA 3.2.2 THAT SINCE THE ENTIRE IN VESTMENT IN SHARES WERE IN SUBSIDIARY CONCERNS AS STRATEGIC INVESTMENTS, NO DISALLOWANCE UNDER SECTION 14A W.R. RULE 8D WAS CALLED FOR AND THEREFORE, IT WAS PRAYED, THAT THE SAID DISALLOWANCE OF ` 74,31,010/ - BE DELETED. 3.3 PER CONTRA, THE LEARNED D.R. FOR REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 3.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED AND PLACED RELIANCE ON IN SUPPOR T OF PROPOSITIONS PUT FORTH BY THE ASSESSEE FOR DELETION OF THE DISALLOWANCE OF ` 74,31,010/ - UNDER SECTION 14A R.W. RULE 8D. ADMITTEDLY, THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME IN THE YEAR UNDER CONSIDERATION AND THIS FACT HAS NOT BEEN CONTROVERTED B Y THE LEARNED CIT(A). THE APPLICABILITY OF THE PROVISIONS OF SECTION 14A OF THE ACT IS IN RESPECT OF EXPENDITURE INCURRED IS IN RELATION TO THE EARNING OF INCOME NOT INCLUDIBLE IN TOTAL INCOME. A PLAIN READING OF THE PROVISIONS OF SECTION 14A OF THE ACT EN VISAGES THAT THERE SHOULD BE ACTUAL RECEIPT OF INCOME NOT INCLUDIBLE IN THE TOTAL INCOME. THEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT WILL NOT APPLY WHEN NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. THIS PROPOSITION HAS BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT (2015) 278 ITR 33 (DEL) VIDE ORDER DATED 02.09.2015 WHEREIN AT PARA 23 THEREOF THEIR LORDSHIPS HAVE HELD AS UNDER: - 23. IN THE CONTEXT OF THE FACTS EN UMERATED 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 ACT ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL I NCOME, DURING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF IT A NO. 6988/MUM/2014 M/S. VAKRANGEE LIMITED 4 DISALLOWING ANY EXPENDITURE 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. 3. 4.2 IN THE CASE ON HAND, ADMITTEDLY THE FACTUAL POSITION IS THAT THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME IN THE YEAR UNDER CONSIDERATION. IN THESE CIRCUMSTANCES, IN OUR CONSIDERED VIEW, THE RATIO OF THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. (SUPRA) WOULD SQUARELY APPLY. THE HON'BLE HIGH COURT IN THE AFORESAID JUDGEMENT HELD THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE IN THE YEAR IN WHICH NO EXEMPT INCOME IS EARNED. IT WAS HELD THAT THE EXPRESSION DO ES NOT FORM PART OF THE TOTAL INCOME IN SECTION 14A OF THE ACT ENVISAGES THAT THERE SHOULD BE AN ACTUAL EARNING OF INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME DURING THE RELEVANT YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELAT ION TO THE SAID EXEMPT INCOME. THEREFORE, IN THE FACTUAL MATRIX OF THE CASE ON HAND, AS DISCUSSED ABOVE, WE RESPECTFULLY FOLLOWING THE DECISIONS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. (SUPRA) AND THE COORDINATE BENCH OF THIS TRIBUNA L IN THE CASE OF FAIR EXPORTS (INDIA) PVT. LTD. (SUPRA) HOLD THAT NO DISALLOWANCE UNDER SECTION 14A OF THE ACT CAN BE MADE IN THE CASE ON HAND FOR THE YEAR UNDER CONSIDERATION SINCE THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME. WE THEREFORE SET ASIDE THE DECISION OF THE AUTHORITIES BELOW AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF EXPENDITURE AMOUNTING TO ` 74,31,010/ - UNDER SECTION 14A OF THE ACT. 3.5.1 FURTHER THE LEARNED A.R. FOR THE ASSESSEE HAS SUBMITTED THAT, EVEN OTHERWISE, THE SAID DISALLOWANCE UNDER SECTION 14A W.R. RULE 8D OUGHT NOT TO HAVE BEEN MADE AS THE ENTIRE INVESTMENT IN SHARES MADE BY THE ASSESSEE OF ` 52,15,95,000/ - WAS STRATEGIC INVESTME NT IN GROUP COMPANIES FOR CONTROL OVER THESE COMPANIES AND NOT FOR INVESTMENT PURPOSE WITH THE INTENTION OF EARNING OF TAX EXEMPT DIVIDEND INCOME. ON A PERUSAL OF THE DETAILS ON RECORD, I.E. THE IMPUGNED ORDER OF THE LEARNED CIT(A) AND THE ORDER OF ASSESSM ENT WE FIND THAT THE AVERMENTS OF THE LEARNED A.R. THAT THE ENTIRE SHARES HELD BY THE ASSESSEE ARE IN RESPECT OF ITS STRATEGIC INVESTMENTS IN SUBSIDIARY/GROUP CONCERNS IS FACTUALLY CORRECT. WE FIND THAT A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF FI DUCIARY EUROMAX IT A NO. 6988/MUM/2014 M/S. VAKRANGEE LIMITED 5 GLOBAL MARKETS LTD. IN ITA NO. 1349/MUM/2012 AND OTHERS DATED 29.06.2016, RELIED ON BY THE ASSESSEE, AT PARA 14 THEREOF ON SIMILAR FACTUAL CIRCUMSTANCES HAS HELD THAT: - 14. ...................... .......... STRATEGIC INVESTMENT IN GROUP COMPANIES THEREFORE CANNOT BE HELD TO BE FOR INVESTMENT PURPOSES OR WITH THE OBJECT OF EARNING OF DIVIDEND/TAX EXEMPT INCOME, BUT THE SAME, IN THE LIGHT OF ABOVE REFERRED TO JUDICIAL DECISIONS CAN SAFELY BE SAID TO BE RELATED TO THE BUSINESS ACTIVITY OF TH E ASSESSEE AND NO DISALLOWANCE, THEREFORE, IS ATTRACTED ON SUCH AN INCOME U/S 14A OF THE ACT. IN THE LIGHT OF THE ABOVE REFERRED TO DECISIONS AND RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO EXCLUDE THE STRATEGIC INVESTMENTS MADE BY THE ASSESSEE IN GROUP COMPANIES WHILE CALCULATING THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME TAX ACT. 3.5.2 FOLLOWING THE AFORESAID DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF FIDUCIARY EUROMAX GLOBAL MARKETS LTD. (SUPRA), WE HOLD AND DIRECT THAT THE STRATEGIC ENTIRE INVESTMENTS MADE BY THE ASSESSEE IN GROUP COMPANIES ARE TO BE EXCLUDED WHILE COMPUTING THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D. 4 . IN THE RESULT, THE ASSESSEES APPEAL FOR A.Y. 2009 - 10 IS ALLOWED . ORDER PRON OUNCED IN THE OPEN COURT ON 10 TH AUGUST , 2016. SD/ - SD/ - ( SANDEEP GOSAIN ) (JASON P. BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 10 TH AUGUST , 2016 COPY TO: 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) - 40 , MUMBAI 4 . THE CIT (C) - II , MUMBAI 5 . THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.