Esbee Holdings Private Limited, Hyderabad, Hyderabad V. ITO, Ward-17(2), Hyderabad, Hyderabad

ITA 724/HYD/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 6444 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 06-11-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 27-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A V RAGHURAM
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B - SMC, HYDERABAD BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.724/HYD/2017 ASSESSMENT YEAR: 2012 - 13 M/S. ESBEE HOLDINGS PRIVATE LIMITED, 8 - 2 - 580/B/2, ROAD NO.8, BANJARA HILLS, HYDERABAD. PAN: AAACE 4388 A VS. INCOME TAX OFFICER, WARD - 17(2), SIGNATURE TOWERS, OPP. BOTANICAL GARDENS, KONDAPUR ROAD, HYDERABAD - 084. (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI A.V. RAGHURAM REVENUE BY: SMT. MATTA PADMA, DR DATE OF HEARING: 06/11/2019 DATE OF PRONOUNCEMENT: 03 / 0 2 /2020 ORDER THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A) - 5, HYDERABAD IN APPEAL NO. 0057/2015 - 16/CIT(A) - 5, DATED 27/02/2017 PASSED U/S. 143(3) R.W.S 250(6) OF THE ACT FOR THE A.Y. 2012 - 13. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS AND THEY ARE EXTRACTED HEREIN BELOW FOR REFERENCE: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ORDER OF THE LD CIT (A) ERRED IN DISMISSING THE APPEAL OF THE APPELLANT. 2. THE LD CIT (A) ERRED IN SUSTAINING ADDITION OF RS. 1,37,879 MADE BY THE AO. THE CIT (A) FAILED TO APPRECIATE THAT THE STAND OF THE APPELLANT IS THAT IT HAD NOT INCURRED ANY EXPENDITURE IN RESPECT OF EXEMPT INCOME AND THEREFORE THE PROVISIONS OF SECTION 14A OF THE ACT AND THE RULE 8D OF RULES COULD NOT HAVE BEEN INVOKED ON THE FACTS OF THE PRESENT CASE. 2 3. THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT THE O N US IS ON THE AO TO PROVE THAT THE APPELLANT HAD INCURRED EXPENDITURE FOR EARNING EXEMPTED I N COME, AND SINCE IN THE PRESENT CASE, THE AO FAILED TO DISPROVE THE STAND OF THE APPELLANT THAT IT HAD NOT INCURRED EXPENDITURE FOR E ARNING EXEMPTED INCOME, THE DISALLOWANCE MADE /SUSTAINED IS UNSUSTAINABLE IN LAW. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE OF EXPENDITURE BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE RULES IS ILLEGAL AS THE APPELLANT HAS NOT INCURRED ANY EXPENDITURE EITHER DIRECTLY OR INDIRECTLY, ON THE INVESTMENTS MADE WHICH FETCHED EXEMPTED INCOME. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ENTIRE FUNDS ARE OWN FUNDS OF THE APPELLANT AND SINCE THERE IS NO OTH ER EXPENDITURE INCURRED FOR MAKING INVESTMENTS, THE PROVISIONS OF SECTION 14A OF THE ACT COULD NOT HAVE BEEN INVOKED. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHERE THERE WAS CONFLICTING VIEWS ON THE SUBJECT, THE VIEW WHICH IS IN FAVOUR OF THE APPELLANT SHOULD HAVE BEEN TAKEN BY THE COMMISSIONER (APPEALS) AND THE AO AS PER THE LAW HANDED DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF VEGETABLE PRODUCTS. 3. BRIEF FACTS OF THE CASE ARE THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF FINANCE, INVESTMENT ETC., FILED ITS RETURN OF INCOME FOR RELEVANT AY ON 27/09/2012. THEREAFTER, THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT WHEREIN THE LD. AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE ASSESSEE HAD MADE SEVERAL INVESTMENTS IN EQUITY SHARE CAPITAL OF OTHER COMPANIES WHEREIN THE DIVIDEND INCOME EARNED DURING THE RELEVANT AY WAS RS. 5 , 10 ,880/ - WHICH IS EXEMPT FROM TAX. SINCE, THE ASSESSEE COMPANY HAD NOT COMPUTED THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME , THE LD. AO ARRIVED AT RS. 1,37,879/ - AS THE DISALLOWANCE OF EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME IN ACCORDANCE WITH RULE 8D OF THE RULES . ON APPEAL, 3 THE LD. CIT (A) DISMISSED THE APPEAL OF THE ASSESSEE BY AGREEING WITH THE VIEW OF THE LD. AO. 4. THE LD. AR ARGUED BEFORE US STATING THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE TOWARDS THE INVESTMENT MADE AND THE REFORE PROVISIONS OF SECTION 14A IS NOT APPLICABLE. HE THEREFORE PLEADED THAT THE ADDITION MADE BY THE LD. AO WHICH IS FURTHER SUSTAINED BY THE LD. CIT (A) MAY BE DELETED OTHERWISE THE MATTER MAY BE REMITTED BACK TO THE FILE OF LD. CIT(A) AS HE HAD PASSED EX - PARTE ORDER . 5. I HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE IT IS APPARENT THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 5,10,880/ - WHICH IS EXEMPT FROM TAX. FURTHER, IN THE CASE OF THE ASSESSEE IT IS APPARENT THAT FOR THE PROCESS OF DECISION MAKING AS TO WHICH SHARES THE ASSESSEE HAS TO INVEST, DISINVEST AND AT WHAT POINT OF RELEVANT TIME ETC., WILL INVOLVE COST. SUCH EXPENDITURE INCURRED TOWARDS EARNING DIVIDEND INCOME WHICH IS EXEMPT FROM TAX CANNOT BE CLAIMED AS DEDUCTION FROM THE TAXABLE INCOME OF THE ASSESSEE - COMPANY. AS PER THE PROVISIONS OF SECTION 14A OF THE ACT, THE ASSESSEE IS BOUND TO COMPUTE THE ACTUAL EXPENSES INCURRED BY IT TOWARDS INVESTMENT THAT WOULD EARN EXEMPT I NCOME AND SUO MOTTO DISALLOW THE SAME AS ALLOWABLE EXPENDITURE . HOWEVER , I N THE CASE OF THE ASSESSEE COMPANY , SUCH EXERCISE IS NOT CARRIED OUT AND THEREFORE, THE LD. AO HAD COMPUTED THE DISALLOWANCE IN ACCORDANCE 4 WITH RULE 8D OF THE RULES. FURTHER ON EXAMINING THE STATEMENT OF ACCOUNTS SUBMITTED BY THE ASSESSEE BEFORE ME , IT IS APPARENT THAT THE ASSESSEE HAS INCURRED ONLY AN AGGREGATE AMOUNT OF RS. 36,90,974/ - TOWARDS EMPLOYEE COST AND OTHER AGGREGATE RELEVANT EXPENSES OF RS.13,69,433/ - WITH RESPECT TO THE ENTIRE ACTIVITIES CONDUCTED BY THE ASSESSEE COMPANY DURING THE RELEVANT AY . PRIMARILY, FOR THE PURPOSE OF DISALLOWANCE OF EXPENDITURE U/S.14A OF THE AC T., FROM THE ENTIRE ABOVE - MENTIONED EXPENSES , THE EXPENSES ATTRIBUTABLE WITH RESPECT TO THE ACTIVITIES INVOLVED BY THE ASSESSEE TOWARDS EARNING EXEMPT INCOME HAS TO BE COMPUTED. FURTHER F ROM THE ABOVE FACTS, IT WOULD BE REASONABLE TO ESTIMATE THAT , THE ASSESSEE COMPANY WOULD HAVE INCURRED NOT MORE THAN AGGREGATE AMOUNT OF RS. 4 LAKHS (APROX.10% OF THE AGGREGATE EMPLOYEE COST OF RS. 36,90,974/ - ) TOWARDS THE ENTIRE WORK PERFORMED BY THE FINANCE STAFF DURING THE RELEVANT ASSESSMENT YEAR , WHO WOULD ALSO HAVE PARTICIPATE D IN THE DECISION - MAKING PROCESS FOR MAKING INVESTMENT EARNING DIVIDEND INCOME WHICH IS EXEMPT FROM TAX . FURTHER , IT CAN BE ESTIMATED THAT ONLY 5% OF THE ENTIRE TIME DEVOTED BY THE FINANCE STAFF WAS UTILIZED FOR SUCH DECISION - MAKING PROCESS . THEREFORE ONLY 5% OF THE TOTAL EXPENDITURE INCURRED ON THE ABOVE - MENTIONED STAFF CAN ONLY BE APPORTIONED TOWARDS THE EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME WHICH WILL WO RK OUT TO RS. 2 0,000/ - ( 5 % ON RS.4,00,000/ - ) . FURTHER, 10% ON THE AMOUNT OF RS.20,000/ - WOULD BE REASONABLE TO ESTIMATE THE AMOUNT THAT IS TO BE APPORTIONED FROM THE OTHER 5 OVE R HEADS/OTHER EXPENDITURE INCURRED OF RS. 13,69,433/ - ON THE FINANCE STAFF WHICH W ORKS OUT TO RS. 2 ,000/ - (10% ON RS.20,000/ - ) . THUS, THE TOTAL EXPENDITURE ATTRIBUTABLE FOR EARNING EXEMPT INCOME CANNOT EXCEED BEYOND RS. 22 ,000/ - SAY RS.25,000/ - . IN THESE CIRCUMSTANCES, THE ADDITION MADE IN THE HANDS OF THE ASSESSEE FOR RS. 1,37,879/ - INVOKING RULE 8D OF THE RULES IS NOT JUSTIFIABLE EVEN THOUGH THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 5,10,880/ - WHICH IS EXEMPT FROM TAX. NEEDLESS TO MENTION THAT THE EXPENDITURE INCURRED FOR EARING EXEMPT INCOME FROM TAX (THOUGH APPORTIONED OR OTHERWISE) DOES NOT HAVE ANY BEARING ON THE ACTUAL EXEMPT INCOME EARNED WHICH IS PURELY FACTUAL. WHILE ARRIVING AT THE ABOVE DECISION , I STRONGLY RELY ON THE DECISION OF THE HO BLE APEX COURT IN THE CASE CIT V/S WALFORT AND STOCK BROKERS P.LTD., REPORTED IN 326 ITR 1 WHEREIN IT IS HELD THAT THE MANDATE OF SECTION 14A IS CLEAR THAT IT DESIRES TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT I NCOME AGAINST TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVE BY WAY OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOME I S NOT INCLUDABLE WHILE COMPUTING THE TOTAL INCOME BECAUSE THESE ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE ACT. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS EXPENDITURE. ON THE SAME ANALOGY, EXEMPT INCOME IS ALSO IN RESPECT OF NET INCOME. THE THEORY OF APPORTIONMENT OF EXPENDITURE 6 BETWEEN TAXABLE AND NON - TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S. 14A OF THE ACT. THEREFORE, IN THE INTEREST OF JUSTICE, WE HEREBY SUSTAIN THE ADDITION OF RS. 25 ,000/ - IN THE HANDS OF THE ASSESSEE AS AGAINST THE ADDITION MADE BY THE LD. AO FOR RS. 1,37,879/ - WHICH WAS FURTHER CONFIRMED BY THE LD. CIT (A) AND THE BALANCE AMOUNT OF RS. 1, 12 ,879/ - (RS. 1,37,879 RS. 25,000) STANDS DELETED. I ALSO MAKE IT CLEAR THAT THE ABOVE APPORTION MENT OF EXPENDITURE INCURRED TOWARDS EARNING EXEMPT INCOME IS COMPUTED (THOUGH NOT WITH PRECISION) BASED ON THE STATEMENT OF ACCOUNTS SUBMITTED BY THE ASSESSEE BEFORE ME AND TAKING INTO CONSIDERATION OF THE FACTS IN THE CASE OF THE ASSESSEE . I HAVE ALSO REFRAINED FROM REMITTING THE MATTER BACK TO THE FILE OF THE LD. CIT (A) CONSIDERING THE LOW MONETARY EFFECT AND TO AVOID UNNECESSARY PROTRACTED LITIGATION , IN THE INTEREST OF BOTH THE PARTIES. IT IS ALSO PERTINENT TO MENTION THAT THE ASSESSEE HAS FAILED TO COMPUTE THE DISALLOWANCE SUE - MOTO THOUGH SEVERAL OPPORTUNITIES WERE BEFORE IT TO DO SO ACCURATELY AS THE DETAILS OF THE EMPLOYEE COST AND OTHER OVERHEAD S ARE ONLY AVAILABLE WITH IT . 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON 03 RD FEBRUARY , 2020 . SD / - ( A. MOHAN ALANKAMONY ) ACCOUNTANT MEMBER HYDERABAD, DATED: 03 RD FEBRUARY, 2020 . 7 OKK COPY TO: - 1) M/S. ESBEE HOLDINGS PRIVATE LIMITED, D.NO.8 - 2 - 580/B/2, ROAD NO.8, BANJARA HILLS, HYDERABAD 0 3 4. 2) INCOME TAX OFFICER, WARD - 17(2), SIGNATURE TOWERS, OPP. BOTANICAL GARDENS, KONDAPUR ROAD, HYDERABAD 500084. 3) THE CIT(A) - 5, HYDERABAD 4) THE PR. CIT - 5, HYDERABAD 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE