ITO (E) 2(1), MUMBAI V. NATIONAL VENTURE FUND FOR SOFTWARE & INFORMATION TEHCNOLOGY INDUSTRY, MUMBAI

ITA 7671/MUM/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3159 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 30-12-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SOFTWARE
• Keywords: Rule of consistency; Earning of tax free income; Rule 8D; Set aside; Capital Gains
• Section: 143(3); 14A

Judgement Text

ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI , , BEFORE HONBLE SHRI MAHAVIR SINGH, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ I.T.A. NO.7671/MUM/2016 ( / ASSESSMENT YEAR : 2012-13 ) INCOME TAX OFFICER (E ) - 2( 1 ) ROOM NO.512 PIRAMAL CHAMBERS, LALBAUG, PAREL, MUMBAI- 400 012. / VS. NATIONAL VENTURE FUND FOR SOFTWARE & INFORMATION TECHNOLOGY INDUSTRY GROUND FLOOR, C-11 G-BLOCK, SME DEVELOPMENT CENTRE, BKC, BANDRA (E), MUMBAI-400 051. $% ./ ./PAN/GIR NO. AAATN-1889-L ( %' /APPELLANT ) : ( ()%' / RESPONDENT ) ASSESSEE BY : SHRI NITESH JOSHI-LD. AR REVEN UE BY : MS. KAVITA P. KAUSHIK-LD. DR / DATE OF HEARING : 21/01/2020 / DATE OF PRONOUNCEMENT : 12/03/2020 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. AFORESAID APPEAL BY REVENUE FOR ASSESSMENT YEAR [IN SHORT REFERRED TO AS AY] 2012-13 CONTEST THE ORDER OF LD. COMMIS SIONER OF INCOME- TAX (APPEALS)-8, MUMBAI, [IN SHORT REFERRED TO AS CIT(A)], APPEAL NO. CIT(A)-8/IT-220/15-16 DATED 29/09/2016 ON FOLLOWING GROUNDS OF APPEAL:- 1. WHETHER ON THE FACTS OF THE CASE AND IN LAW THE LD. CIT(A)ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE ON ACCOUNT OF DISALLOWANCE O F EXPENDITURE U/S 57(III) OF THE ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 2 I.T.ACT, IGNORING THE FACT THAT DURING THE COURSE O F ASSESSMENT PROCEEDINGS THE ASSESSEE FAILED TO PROVIDE ANY PROOF TO A.O. TO PRO VE THAT THE EXPENSES CLAIMED WERE INCURRED FOR EARNING INTEREST ON FIXED DEPOSIT S UNDER THE HEAD INCOME FROM OTHER SOURCES. 2. WHETHER ON THE FACTS OF THE CASE AND IN THE CIRC UMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A)ERRED IN ALLOWING THE APPEAL, ON THIS ISSUE WHEN DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE ITSELF STATED T HAT THE EXPENSES HAVE BEEN INCURRED FOR EARNING INCOME FROM VENTURE CAPITAL FU ND INVESTMENTS WHICH HAS BEEN BROUGHT TO TAX UNDER THE HEAD LONG TERM CAPITAL GAI N AND NOT UNDER THE HEAD INCOME FROM OTHER SOURCES. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS)- 1, MUMBAI BE SET ASIDE AND THAT OF THE ASSESSING OF FICER BE RESTORED. AS EVIDENT, THE SOLE ISSUE THAT ARISES FOR OUR CONS IDERATION IS DISALLOWANCE OF INTEREST EXPENDITURE. 2. WE HAVE CAREFULLY HEARD THE ARGUMENTS ADVANCED B Y BOTH THE REPRESENTATIVES AND PERUSED RELEVANT MATERIAL ON RE CORD. WE HAVE ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS AS CITED BEFORE US. OUR ADJUDICATION TO THE SUBJECT MATTER OF APPEAL WOULD BE AS GIVEN IN SUCCEEDING PARAGRAPHS. 3.1 FACTS ON RECORD WOULD REVEAL THAT THE ASSESSEE BEING RESIDENT ASSESSEE WAS ASSESSED FOR YEAR UNDER CONSIDERATION U/S 143(3) ON 28/03/2015 WHEREIN THE INCOME WAS DETERMINED AT RS. 102.32 CRORES AFTER CERTAIN ADJUSTMENT AS AGAINST RETURNED INCOME OF RS.99.51 CRORES FILED BY THE ASSESSEE ON 28/09/2012. THE ASSESSEE I S STATED TO BE CLOSE- ENDED VENTURE CAPITAL FUND REGISTERED WITH SEBI AND INVEST IN SHARES AND DEBENTURES OF UNLISTED COMPANIES WITH A VIEW TO EAR N LONG-TERM CAPITAL APPRECIATIONS. PENDING SUITABLE OPPORTUNITIES, AVAI LABLE FUNDS ARE PARKED BY THE ASSESSEE IN FIXED DEPOSITS WITH THE BANK WHI CH GIVE RISE TO INTEREST INCOME. 3.2 DURING ASSESSMENT PROCEEDINGS, IT TRANSPIRED TH AT THE ASSESSEE EARNED EXEMPT DIVIDEND INCOME OF RS.9.34 LACS AND I NTEREST ON FIXED ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 3 DEPOSITS FOR RS.6.86 LACS. IT HAS ALSO EARNED INTER EST ON INCOME-TAX REFUND FOR RS.2.95 LACS. AGAINST GROSS INTEREST OF RS.9.82 LACS AS OFFERED UNDER THE HEAD INCOME FROM OTHER SOURCES , IT CLAIMED EXPENDITURE OF RS.285.16 LACS WHICH CONSIST OF MANA GEMENT & TRUSTEESHIP FEES FOR RS.280.74 LACS AND OTHER EXPEN SES FOR RS.4.41 LACS. THE BREAK-UP OF THE SAME HAS ALREADY BEEN GIV EN ON PAGE-6 OF THE IMPUGNED ORDER. AFTER ADJUSTING SUO-MOTO DISALLOWAN CE U/S 14A FOR RS.3.97 LACS, NET EXPENDITURE THUS CLAIMED WAS RS.2 81.19 LACS. FINALLY, THE LOSS UNDER THE HEAD INCOME FROM OTHER SOURCES H AS BEEN CLAIMED AS RS.271.37 LACS, THE SET-OFF OF WHICH HAS BEEN CLAIM ED FROM LONG-TERM CAPITAL GAINS. THE AMOUNT OF EXPENDITURE OF RS.281. 19 LACS AS CLAIMED BY THE ASSESSEE IS THE SOLE SUBJECT OF DISPUTE BEFO RE US. IT IS QUITE DISCERNIBLE THAT THE ASSESSEE HAS CLAIMED EXPENDITU RE EVEN AGAINST INTEREST ON INCOME-TAX REFUND AMOUNTING TO RS.2.95 LACS. FURTHER, THE DISALLOWANCE AS MADE U/S 14A IS WITH RESPECT TO EXE MPT DIVIDEND INCOME OF RS.9.34 LACS EARNED BY THE ASSESSEE DURING THE Y EAR. 3.3 UPON CONSIDERATION OF FACTUAL MATRIX, LD. AO FO RMED AN OPINION THAT THE EXPENSES WERE INCURRED FOR MEETING THE BASIC IN VESTMENT OBJECTIVE OF EARNING LONG-TERM CAPITAL APPRECIATION. HOWEVER, TH ESE EXPENSES WOULD NOT IN ANY WAY LEAD TO EARNING OF INTEREST INCOME. THE PROVISIONS OF SECTION-57(III) ALLOWS FOR DEDUCTION OF ANY EXPENDI TURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSES OF EARNING SUCH INCOME AND THEREFORE, THE DEDUCTION OF THE EXPENDITURE WAS NOT ALLOWABLE. IN DEFENSE, THE ASSESSEE SUBMITTED THAT SINCE VENTURE CAPITAL FUND GENERATES BOTH EXEMPT AS WELL AS TAXABLE INCOME, A DISALLOWANCE U/S 14A R.W.R. 8D HAS ALREADY BEEN MADE AND BALANCE POR TION OF EXPENDITURE ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 4 WHICH IS INCURRED TO EARN THE NON-EXEMPT INCOME HAS BEEN CLAIMED AS DEDUCTION. HOWEVER, GOING BY THE PROVISIONS OF SEC. 57(III), THE SUBMISSION WAS REJECTED AND THE DEDUCTION OF EXPEND ITURE OF RS.281.19 LACS WAS DISALLOWED. 4. BEFORE, LD. CIT(A), THE ASSESSEE, INTER-ALIA, SUBMITTED THAT THE ASSESSEE ACTS ONLY THROUGH INVESTMENT MANAGER AND T RUSTEES. THE INVESTMENT MANAGERS WERE APPOINTED BY THE TRUSTEE T O MANAGE THE ASSET OF THE TRUST. THE INVESTMENT MANAGER RAISES F UNDS FROM CONTRIBUTORS AT BEGINNING OF FUND LIFE, PARKS THE S AME FOR TIME BEING IN FDR WITH BANK, INVEST THE SAME IN INVESTEE COMPANY, REALIZES INCOME FROM INVESTMENT, MAKE EXIT AT APPROPRIATE TIME, PAR K SURPLUS MONEY IN BANK FDR AND DISTRIBUTES FUND AMONGST CONTRIBUTORS. THE ASSETS OF FUND WHICH THE INVESTMENT MANAGER IS SUPPOSED TO MANAGE ARE IN THE FORM OF LIQUID MONEY IN BANK, FDR WITH BANK AND INVESTMENT IN INVESTEE COMPANY. IN THE ABOVE BACKGROUND, IT WAS SUBMITTED THAT MANAGEMENT FEES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR EARNI NG INCOME FROM VENTURE CAPITAL INVESTMENT AS WELL AS BANK FDR. THE ASSESSEE ALSO PLACED ON RECORD THE POSITION OF DISALLOWANCE MADE IN PRECEDING AS WELL AS SUCCEEDING YEARS WHICH HAS ALREADY BEEN EXTRACTE D ON PAGE NOS.11- 12 OF THE IMPUGNED ORDER. THE PERUSAL OF THE SAME W OULD REVEAL THAT BESIDE THIS YEAR, DISALLOWANCE US 57(III) WAS MADE IN AY 2010-11. HOWEVER, THE ASSESSEE ALSO RAISED PLEA OF CONSISTEN CY. RELIANCE WAS PLACED ON SEVERAL JUDICIAL PRONOUNCEMENTS, IN SUPPO RT OF THE CLAIM. THE LD. CIT(A) RELIED UPON APPELLATE ORDER FOR AY 2010- 11. IT WAS ALSO NOTED THAT ADDITIONAL DISALLOWANCE AS MADE U/S 14A WAS DE LETED BY THE ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 5 TRIBUNAL FOR AY 2009-10. THEREFORE, THE AFORESAID D ISALLOWANCE WAS DELETED. AGGRIEVED, THE ASSESSEE IS UNDER FURTHER A PPEAL BEFORE US. 5. AFTER DUE CONSIDERATION OF FACTUAL MATRIX AS ENU MERATED IN PRECEDING PARAGRAPHS, IT IS QUITE EVIDENT THAT THE ASSESSEE HAD EARNED EXEMPT INCOME AGAINST WHICH IT HAS OFFERED DISALLOW ANCE U/S 14A IN TERMS OF RULE 8D. HOWEVER, BY IMPLICATION, IT COULD NOT BE SAID THAT REST OF THE EXPENDITURE WAS INCURRED TO EARN THE INTERES T INCOME. IT IS QUITE EVIDENT FORM ASSESSEES OWN SUBMISSIONS BEFORE LD. CIT(A) THAT THE PRIME OBJECTIVE OF THE ASSESSEE WAS TO MAKE INVESTM ENT AS VENTURE CAPITAL FUND. THE INCOME EARNED THEREFROM WAS ASSES SED AS CAPITAL GAINS. ONLY THE SURPLUS MONEY HELD BY THE ASSESSEE WAS KEPT AS FIXED DEPOSITS IN THE BANK. THE MANAGEMENT / TRUSTEESHIP FEES & OTHER EXPENDITURE WAS PRIMARILY DIRECTED TOWARDS VENTURE CAPITAL INVESTMENTS. NO BORROWING COSTS HAVE BEEN INCURRED BY THE ASSESS EE. IN OUR CONSIDERED OPINION, THE CLAIM OF THE ASSESSEE WAS T O BE ADJUDGED AT THE THRESHOLD OF SEC. 57(III) WHICH MANDATE THAT ANY EX PENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSES OF EARNING SUCH INCOME, WOULD BE ALLOWABLE. HOWEVER, IN THE PRESENT CASE, T HE MANAGEMENT / TRUSTEESHIP FEES AND OTHER EXPENSES WHICH MAINLY CO NSIST OF AUDIT FEES, PROFESSIONAL FEES ETC. WERE DIRECTED TOWARDS THE PR IME ACTIVITY I.E. VENTURE CAPITAL INVESTMENT, THE INCOME FROM WHICH H AS BEEN ASSESSED UNDER THE HEAD CAPITAL GAINS. THEREFORE, WE FIND THAT THERE WAS NO DIRECT NEXUS OF THESE EXPENDITURE VIS--VIS INTEREST INCOM E EARNED BY THE ASSESSEE. THE RULE OF CONSISTENCY WOULD NOT BE APPL ICABLE SINCE MATTER OF DISALLOWANCE U/S 57(III) AROSE IN AY 2010-11 ALS O. THE DECISION OF ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 6 TRIBUNAL FOR AY 2009-10 WAS CONCERNED WITH DISALLOW ANCE U/S 14A ONLY AND THEREFORE, THE SAME WOULD ALSO NOT BE APPLICABL E. 6. THE FACTS IN THE DECISION OF HYDERABAD TRIBUNAL IN ACIT V/S SMALL IS BEAUTIFUL (ITA NOS. 1004-05/HYD/2012 DATED 04/07 /2013) AS RELIED UPON BY LD. AR ARE QUITE DIFFERENT. UPON PERUSAL OF GROUNDS RAISED BY REVENUE, IT IS EVIDENT THAT REVENUE WAS UNDER APPEA L ON THE GROUND THAT LD. CIT(A) ALLOWED THE EXPENDITURE THOUGH THE ASSES SEE DID NOT FULFILL THE VENTURE CAPITAL FUND REGULATIONS. THE DEDUCTION U/S 57(III) WAS NOT THE ISSUE UNDER CONSIDERATION. IN THE DECISION OF CIT V/S RICHARDSON & CRUDDAS LTD. (202 ITR 350), THERE WAS NEXUS OF CUSTODIAN EXPENDITURE VIS--VIS INTEREST INCOME AND THEREFORE, THE SAME I S FACTUALLY DISTINGUISHABLE. 7. KEEPING IN VIEW THE TOTALITY OF FACTS AND CIRCUM STANCES, WE FIND THAT SINCE THERE WAS NO MATERIAL ON RECORD WHICH WOULD S UGGEST ANY NEXUS OF EXPENDITURE VIS--VIS INTEREST INCOME, THE EXPENDIT URE THUS CLAIM WOULD NOT BE ALLOWABLE TO THE ASSESSEE. THEREFORE, WE SET ASIDE THE IMPUGNED ORDER AND RESTORE THE COMPUTATIONS MADE BY LD. AO. 8. THE APPEAL STANDS ALLOWED IN TERMS OF OUR ABOVE ORDER. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2020. SD/- SD/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 12/03/2020 SR.PS, JAISY VARGHESE ITA NO.7671/MUM/2016 ASSESSMENT YEAR :2012-13 7 !'! / COPY OF THE ORDER FORWARDED TO : 1. %' / THE APPELLANT 2. ()%' / THE RESPONDENT 3. 0 ( ) / THE CIT(A) 4. 0 / CIT CONCERNED 5. 12(+3 , 3 , / DR, ITAT, MUMBAI 6. 2456 / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.