Srinivas Rao Kalagara, Nizambad, Hyderabad V. ACIT, Circle-1, Nizamabad, Nizamabad

ITA 735/HYD/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2666 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 28-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SREEKAR
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER I.T.A. NO. 735/HYD/2017 ASSESSMENT YEAR: 2012-13 SRINIVAS RAO KALAGARA, NIZAMABAD [PAN: AJAPK4065A] VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-I, NIZAMABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.A. SAI PRASAD, AR FOR REVENUE : SHRI V. SREEKAR, DR DATE OF HEARING : 04-09-2017 DATE OF PRONOUNCEMENT : 07-09-2017 O R D E R PER INTURI RAMA RAO, A.M. : THIS APPEAL FILED BY ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD, DATED 28-02-2017 FOR THE AY. 2012-13. THE APPELLANT RA ISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX, APPEAL IS NOT CORRECT EITHER ON FACTS OR IN LAW AND IN BOTH. 2. THE LEARNED COMMISSIONER OF INCOME TAX, APPEAL I S NOT JUSTIFIED IN CONFIRMING THE ADDITION OF RS. 4,53,521/- MADE U/S. 14A OF THE I.T ACT. 3. THE LEARNED COMMISSIONER OF INCOME TAX, FAILED T O APPRECIATE THE FACT THAT SINCE THE INVESTMENT IN SHARE APPLICATION MONE Y IS NOT CAPABLE OF EARNING ANY TAX FREE INCOME, THE PROVISIONS OF DISA LLOWANCE U/S. 14A ARE NOT APPLICABLE TO THE FACTS OF THE CASE. I.T.A. NO. 735/HYD/2017 :- 2 - : 4. THE APPELLANT CRAVES LEAVE TO ADD AMEND OR ALTER ANY OF THE GROUNDS AT THE TIME OF HEARING OF THE APPEAL. 2. BRIEFLY, FACTS OF THE CASE ARE THAT THE APPELLANT IS A N INDIVIDUAL, ENGAGED IN EXECUTION OF CIVIL CONTRACTS. THE RETURN OF INCOME FOR THE AY. 2012-13 WAS FILED ON 04-10-2012 D ISCLOSING TOTAL INCOME OF RS. 25,93,540/-. AGAINST THE SAID RETU RN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE ACIT, CIRCLE-I, NIZAMABAD UNDER THE PROVISIONS OF SECTION 143(3) OF THE INCOME T AX ACT [ACT] VIDE ORDER DT. 31-03-2015 AT A TOTAL INCOME OF RS. 41, 37,360/-. WHILE DOING SO, THE ASSESSING OFFICER (AO) MADE ADD ITION OF RS. 8,56,870/- UNDER THE PROVISIONS OF SECTION 14A R.W. 8 D OF INCOME TAX RULES [RULES] ON THE INVESTMENTS MADE ON SHARE APP LICATION MONEY OF RS. 1,28,95,000/- MADE WITH BHAGYA LAXMI AG RO PROJECTS, KARIMNAGAR, THE AO BY APPLYING THE PROVISIO NS OF RULE 8D HAD DISALLOWED INTEREST OF RS. 8,56,870/-, OUT OF THE TOTAL INTEREST OF RS. 66,96,052/-. ON APPEAL BEFORE THE CIT(A), THE SAME WAS CONFIRMED. BEING AGGRIEVED, APPELLANT PREFERRED AN APPEAL BEFORE US. 3. IT WAS CONTENDED ON BEHALF OF THE APPELLANT THAT THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED IN THE ABS ENCE OF ANY EXEMPT INCOME IN SUPPORT OF THIS PROPOSITION, RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: I. PRINCIPAL COMMISSIONER OF INCOME TAX VS. IL & FS EN ERGY DEVELOPMENT COMPANY LTD., [84 TAXMANN.COM 186] (DELHI) ; I.T.A. NO. 735/HYD/2017 :- 3 - : II. CO-ORDINATE BENCH DECISION OF ITAT IN ITA NO. 1609/HYD/2016 IN THE CASE OF ACIT VS. M/S. NEKKANTI S EA FOODS, DT. 13-03-2017. 4. ON THE OTHER HAND, LD.DR VEHEMENTLY ARGUED THAT THE PROVISIONS OF SECTION 14A CAN BE APPLIED IN CASE EVE N IN THE ABSENCE OF EXEMPT INCOME BUT IN CASE, WHERE THE INVESTM ENT HAS POTENTIAL TO YIELD EXEMPT INCOME. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT APPEAL IS WHETHER THE PROVISIONS OF SECTION 14A OF THE ACT CAN BE APPLIED EVEN IN THE ABSENCE OF EXEMPT INCOME. THIS ISSUE IS NO LONGER RES INTEGRA AS THE SEVERAL HIGH COURTS HAVE HELD THAT FOR THE PURPOSE OF INVOKING THE PROVISIONS OF SECTION 14A, IT IS SINE QUA NON THAT THERE SHOULD BE AN EXEMPT INCOME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF PRINCIPAL CIT VS. IL & FS ENERGY DEVELOPMENT COMPANY LTD., [84 TAXMANN.COM 186] (DELHI] AFTER REFERRING TO ITS EARLIE R DECISION IN THE CASE OF CHEMINVEST LTD., VS. CIT [378 ITR 33] (DEL ) HELD AS FOLLOWS: 12. SECTION 14A OF THE ACT, WHICH WAS INSERTED WIT H RETROSPECTIVE EFFECT FROM 1ST APRIL 1962, PROVIDES FOR DISALLOWANCE OF T HE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPTED FROM TAX. FROM 11 TH MAY 2001, A PROVISO WAS INSERTED IN SECTION 14A TO CLARIFY THAT IT COUL D NOT BE USED TO REOPEN OR RECTIFY A COMPLETED ASSESSMENT. SUB-SECTIONS (2) AN D (3) OF SECTION 14A WERE INSERTED WITH EFFECT FROM 1ST APRIL, 2007 TO P ROVIDE FOR METHODOLOGY FOR COMPUTING OF DISALLOWANCE UNDER SECTION 14A. HO WEVER, THE ACTUAL METHODOLOGY WAS PROVIDED IN TERMS OF RULE 8D ONLY F ROM 24TH MARCH 2008. THERE WAS A FURTHER AMENDMENT TO RULE 8D WITH EFFECT FROM 2ND JUNE 2016 LIMITING THE DISALLOWANCE THE AGGREGATE O F THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AND AN AMOUNT EQUAL TO ONE PER CENT OF THE A NNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF I.T.A. NO. 735/HYD/2017 :- 4 - : INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS ALSO PROVIDED THAT THE AMOUNT SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. 13. IN THE ABOVE BACKGROUND, THE KEY QUESTION IN TH E PRESENT CASE IS WHETHER THE DISALLOWANCE OF THE EXPENDITURE WILL BE MADE EVEN WHERE THE INVESTMENT HAS NOT RESULTED IN ANY EXEMPT INCOME DU RING THE A Y IN QUESTION BUT WHERE POTENTIAL EXISTS FOR EXEMPT INCO ME BEING EARNED IN LATER A Y S. 14. IN THE EXPLANATORY MEMORANDUM TO THE FINANCE AC T 2001, BY WHICH SECTION 14A WAS INSERTED WITH EFFECT FROM 1 ST APRI L 1962, IT WAS CLARIFIED THAT 'EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNED INCOME OF TAXABLE INCOME'. THE OBJECT BEHIND SECTION 14A WAS TO PROVIDE THAT 'NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATIO N TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IN COME TAX ACT'. 15. WHAT IS TAXABLE UNDER SECTION 5 OF THE ACT IS T HE 'TOTAL INCOME' WHICH IS NEITHER NOTIONAL NOR SPECULATIVE. IT HAS TO BE ' REAL INCOME'. THE SUBSEQUENT AMENDMENT TO SECTION 14A DOES NOT PARTIC ULARLY CLARIFY WHETHER THE DISALLOWANCE OF THE EXPENDITURE WOULD A PPLY EVEN WHERE NO EXEMPT INCOME IS EARNED IN THE A Y IN QUESTION FROM INVESTMENTS MADE, NOT IN THAT A Y, BUT EARLIER A Y S. 16. RULE 8D (1) OF THE RULES IS HELPFUL, TO SOME EX TENT, IN UNDERSTANDING THE ABOVE ISSUE. IT READS AS UNDER: '8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH- (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MAD E BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN REL ATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2).' 17. THE WORDS 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR' IN THE ABOVE RULE 8D(1) INDICATES A CORRELATION BETWEEN THE EXEMPT INCOME E ARNED IN THE A Y AND THE EXPENDITURE INCURRED TO EARN IT. IN OTHER WORDS , THE EXPENDITURE AS CLAIMED BY THE ASSESSEE HAS TO BE IN RELATION TO TH E INCOME EARNED IN 'SUCH PREVIOUS YEAR'. THIS IMPLIES THAT IF THERE IS NO EXEMPT INCOME EARNED IN THE A Y IN QUESTION, THE QUESTION OF DISALLOWANC E OF THE EXPENDITURE I.T.A. NO. 735/HYD/2017 :- 5 - : INCURRED TO EARN EXEMPT INCOME IN TERMS OF SECTION 14A READ WITH RULE 8D WOULD NOT ARISE. 18. THE CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLACED BY MR. HOSSAIN DOES NOT REFER TO RULE 8D (1) OF THE RULES AT ALL BUT ONLY REFERS TO THE WORD 'INCLUDIBLE' OCCURRING IN THE TITLE TO RUL E 8D AS WELL AS THE TITLE TO SECTION 14A. THE CIRCULAR CONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICUL AR YEAR'S INCOME FOR THE DISALLOWANCE TO BE TRIGGERED. 19. IN THE CONSIDERED VIEW OF THE COURT, THIS WILL BE A TRUNCATED READING OF SECTION 14 A AND RULE 8D PARTICULARLY WHEN RULE 8D (1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES N OT ACCOUNT FOR THE CONCEPT OF 'REAL INCOME'. IT DOES NOT NOTE THAT UND ER SECTION 5 OF THE ACT, THE QUESTION OF TAXATION OF 'NOTIONAL INCOME' DOES NOT ARISE. AS EXPLAINED IN COMMISSIONER OF INCOME TAX V. WALFORT SHARE AND STO CK BROKERS PVT. LTD [2010] 326 ITR 1 (SC), THE MANDATE OF SECTION 14A O F THE ACT IS TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME BEING TAXABLE INCOME AND AT THE SAME TIME AV AIL OF THE TAX INCENTIVES BY WAY OF EXEMPTION OF EXEMPT INCOME WIT HOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO E XEMPT INCOME. CONSEQUENTLY, THE COURT IS NOT PERSUADED THAT IN VI EW OF THE CIRCULAR OF THE CBDT DATED 11TH MAY 2014, THE DECISION OF THIS COURT IN CHEMINVEST LTD (SUPRA) REQUIRES RECONSIDERATION. 20. IN M/S. REDINGTON (INDIA) LTD V. THE ADDITIONAL COMMISSIONER OF INCOME TAX, COMPANY RANGE - V, CHENNAI (ORDER DATED 23RD DECEMBER, 2016 OF THE HIGH COURT OF MADRAS IN TCA NO. 520 OF 2016), A SIMILAR CONTENTION OF THE REVENUE WAS NEGATED. THE COURT TH ERE DECLINED TO APPLY THE CBDT CIRCULAR BY EXPLAINING THAT SECTION 14A IS 'CLEARLY RELATABLE TO THE EARNING OF THE ACTUAL INCOME AND NOT NOTIONAL I NCOME OR ANTICIPATED INCOME. ' IT WAS FURTHER EXPLAINED THAT, 'THE COMPUTATION OF TOTAL INCOME IN TERMS OF RULE 8 D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESUL T IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. WE BELIEVE THUS WOULD BE CARRYING THE ARTIFICE TOO FAR .' 21. THE DECISIONS IN CITV. MIS LAKHANI MARKETING IN C. 2014 SCC ONLINE P&H 20357, CIT V. WINSOME TEXTILE INDUSTRIES LIMITE D [2009] 319 ITR 204 (P&H), CIT V. SHIVAM MOTORS (P) LTD [2014]272 CTR ( ALL) 277 HAVE ALL TAKEN A SIMILAR VIEW. THE DECISION IN TAIKISHA ENGINEERIN G INDIA PVT. LTD (SUPRA) DOES NOT SPECIFICALLY DEAL WITH THIS ISSUE. 22. IT WAS SUGGESTED BY MR. HOSSAIN THAT, IN THE CO NTEXT OF SECTION 57(III), THE SUPREME COURT IN COMMISSIONER OF INCOME TAX, WE ST V. RAJENDRA I.T.A. NO. 735/HYD/2017 :- 6 - : PRASAD MOODY {1978] 115 ITR 519 (SC) EXPLAINED THAT DEDUCTION IS ALLOWABLE EVEN WHERE INCOME WAS NOT ACTUALLY EARNED IN THE A Y IN QUESTION. THIS ASPECT OF THE MATTER WAS DEALT WITH BY THIS COURT IN MIS CHEMINVEST LTD (SUPRA) WHERE IT REVERSED THE DECISI ON OF THE SPECIAL BENCH OF THE IT AT BY OBSERVING AS UNDER: '20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DE CISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY (SUPRA), IT IS CONSI DERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT I S NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE WAS 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. T HE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN THAT ANY INCOME SHOULD IN FAC T HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE M UST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT I S RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MU ST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPO SE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(I II) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FR UCTIFY INTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO TH E CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT A NY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA T HAT 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 O R EARNING SUCH INCOME.' SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS T HE EXPRESSION 'IN RELATION TO INCOME 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.' 23. THE DECISIONS OF THE ITAT IN ACITV. RATAN HOUSI NG DEVELOPMENT LTD (SUPRA) AND RELAXO FOOTWEAR LTD V. ADDL. CIT (SUPRA ), TO THE EXTENT THAT THEY ARE INCONSISTENT WITH WHAT HAS BEEN HELD HEREI NBEFORE DO NOT MERIT ACCEPTANCE. FURTHER, THE MERE FACT THAT IN THE AUDI T REPORT FOR THE A Y IN I.T.A. NO. 735/HYD/2017 :- 7 - : QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT THER E SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LEGAL P OSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO D ISALLOWANCE UNDER SECTION 14 A OF THE ACT WAS CALLED FOR IN THE A Y I N QUESTION BECAUSE NO EXEMPT INCOME WAS EARNED. 24. FOR ALL OF THE AFOREMENTIONED REASONS, THIS COU RT IS OF THE VIEW THAT THE CBDT CIRCULAR DATED 11 TH MAY 2014 CANNOT OVERRIDE THE EXPRESSED PROVISIONS OF SECTION 14A READ WITH RULE 8D. 5.1. THEREFORE, IN THE LIGHT OF THE ABOVE LEGAL POSITIO N, WE HOLD THAT IN THE ABSENCE OF EXEMPT INCOME, THE PROVISIONS OF SE CTION 14A CANNOT BE APPLIED. GROUNDS OF APPEAL ARE ALLOWED. 6. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH SEPTEMBER, 2017 SD/- SD/- (D. MANMOHAN) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMB ER HYDERABAD, DATED 7 TH SEPTEMBER, 2017 TNMM I.T.A. NO. 735/HYD/2017 :- 8 - : COPY TO : 1. SRINIVAS RAO KALAGARA, NIZAMABAD. C/O. CH. PARTHASARATHY & CO., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST.NO. 1, ASHOK NAGAR, HYDERABAD. 2. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, NIZAMABAD. 3. CIT (APPEALS)-5, HYDERABAD. 4. PR.CIT-5, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.