Brilliant Bio Pharma Ltd., Hyd, Secunderabad V. DCIT, Circle-1(3), Hyd, Hyderabad

ITA 875/HYD/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6020 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 16-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 30-06-2015
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Assessee Lawyers: K K GUPTA
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ES A , HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER I.T.A. NO. 8 7 5 /H YD /20 15 ASSESSMENT YEAR : 200 9 - 1 0 M/S . BRILLIANT BIO PHARMA LTD., HYDERABAD [PAN: A A ACB7874L ] VS THE DEPUTY C OMMISSIONER OF INCOME TAX , CIRCLE - 1 ( 3 ), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.K. GUPTA , AR FOR REVENUE : SHRI M. SITARAM, DR DATE OF HEARING : 1 6 - 0 2 - 201 6 DATE OF PRONOUNCEMENT : 23 - 0 2 - 201 6 O R D E R PER S.S. VISWANETHRA RAVI , J .M. : THIS APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 0 2 - 0 6 - 201 5 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - I , HYDERABAD FOR AY. 200 9 - 1 0 FRAMED U/S. 143(3) OF THE INCOME TAX ACT [ACT] . 2. T HE ASSESSEE RAISED THE FOLLOWING GROUNDS: 1. THE DISALLOWANCE OF INTEREST IS NOT CORRECT ON THE FACTS AND THE PROVISIONS OF SEC.14A DO NOT APPLY TO THE APPELLANTS CASE, WHEN THE NET OWN ED FUNDS ARE MORE THAN THE VALUE OF INVESTMENTS. I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 2 - : 2. ON THE ABOVE AND OTHER GROUNDS THAT MAY ARISE DURING THE APPEAL, THE APPELLANT REQUESTS FOR ORDER OF DELETION OF THE ADDITION MADE. 3. THE ONLY ISSUE IN THIS APPEAL IS AS TO WHETHER THE DISALLOWANC E MADE UNDER THE PROVISIONS CONTEMPLATED U/S. 14A OF THE ACT IS APPLICABLE OR NOT IN THE CIRCUMSTANCES OF THE CASE? 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF VETERINARY VACCINES & MEDICINES. THE ASSESSEE FILED ITS RETURN OF INCOME ADMITTING A GROSS TOTAL INCOME OF RS. 35,14,791/ - ON 30 - 09 - 2009. 5. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) FOUND THAT ASSESSEE HAS INVESTMENTS AND ALSO THE ASSESSEE DEBITED THE EXPENDITURE TOWARDS INTEREST OF RS. 30.09 LAKHS. THE ASSESSEE PAID RS. 20,96,112/ - TOWARDS INTEREST ON SECURED LOANS AND RS. 9,13,003/ - TOWARDS INTEREST ON UNSECURED LOANS. AS THE ASSESSEE FAILED TO EXPLAIN THE NEXUS BETWEEN THE BORR OWERS AND INVESTMENTS, THE AO COMPUTED THE DISALLOWANCE U/S. 14A OF THE ACT UNDER RULE 8D AND ADDED RS. 12,96,909/ - TO THE INCOME OF THE ASSESSEE. 6. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE FILED FIRST APPEAL BEFORE THE CIT(A) CONT EN DING THAT THE MAIN OBJECTS OF THE ASSESSEE COMPANY IS THAT I T ACQUIRES SHARES AND SELLS THE SAME AND ON SUCH ACQUISITIONS IT DOES NOT INVOLVE THE PROCESS OF EARNING THE DIVIDEND INCOME. THE LD. CIT(A) DELETED THE ADDITION OF RS. 4,82,000/ - MADE UNDER RULE 8D(2)(II) OF RULES BY FOLLOWING THE CASE OF IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD., [313 ITR I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 3 - : 304] OF BOMBAY HIGH COURT AND SUSTAINED THE ADDITION OF RS. 7,94,909/ - MADE BY THE AO UNDER RULE 8D(2)( I II) OF RULES BY FOLLOWING THE ORDER OF A BENCH OF ITAT , HYDERABAD IN THE CA S E OF M/S. BELLWETHER MICROFINANCE FUND PVT. L T D., IN ITA NO. 1743/HYD/2013 DT. 27 - 06 - 2014 . 7. THE ASSESSEE BEFORE US CHALLENGING THE ORDER OF THE CIT(A) ON THE GROUND THAT THE SECTION 14A OF THE ACT I S NOT APPLICABLE TO THE PRESENT CASE. WHEN THE SECTION 14A OF THE ACT IS NOT APPLICABLE, THE DISALLOWANCE OF RULE 8D(2)(III) OF RULES IS NOT IN PURSUANCE OF THE ORDER PASSED IN THE CASE OF HDFC BANK LIMITED VS. DY.CIT BY THE HON'BLE HIGH COURT . 8. THE LD. DR RELIED ON THE ORDER OF THE ITAT D BENCH, MUMBAI IN THE CA S E OF HDFC BANK LIMITED VS. DCIT DT. 23 - 09 - 2015 WHICH CONSIDER THE WHOLE GAMUT OF JUDGMENTS TO SUPPORT THE ORDER OF THE CIT. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. EVEN THOUGH ASSE SSEE SUBMITTED BEFORE LD. CIT(A) THAT IT ACQUIRED SHARES FOR TRADING, NO SUCH INCOME WAS DISCLOSED NOR ASSESSEE SUPPORTED BY STATEMENT OF ACCOUNTS BEFORE US THAT THE SHARES ARE STOCK IN TRADE. AS FAR AS INVOKING THE PROVISIONS OF SECTION 14A ARE CONCERN ED, WE HAVE SEEN FROM THE ORDER OF THE AO, ASSESSEE WAS SPECIFICALLY ASKED TO EXPLAIN ABOUT THE EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME, ASSESSEE HAS STATED THAT IT HAS NOT INCURRED ANY EXPENDITURE BUT AO INVOKED THE PROVISIONS OF SECTION 14A TO DIS ALLOW THE AMOUNT OF RS. 4,82,000/ - UNDER RULE 8D(2)(II) AND FURTHER DISALLOWANCE OF 0.5% OF AVERAGE VALUE OF INVESTMENTS UNDER RULE 8D(2)(III) OF RS. 7,94,909/ - . ON I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 4 - : SUBMISSIONS FROM ASSESSEE AND EXAMINING THE FACTS ON RECORD, LD. CIT(A) DELETED THE DISALL OWANCE UNDER RULE 8D(2)(II) ON WHICH REVENUE IS NOT AGGRIEVED. THE ASSESSEE IS NOW CONTESTING THE DISALLOWANCE AS PER RULE 8D(2)(III). LD. CIT(A) WHILE CONFIRMING THE AMOUNT, HAS RELIED ON THE CO - ORDINATE BENCH DECISION IN THE CASE OF M/S. BELLWETHER MIC ROFINANCE FUND PVT. LTD., IN ITA NO. 1743/HYD/2013 DT. 27 - 06 - 2014 (WRONGLY MENTIONED IN CIT(A)S ORDER AS 18 - 08 - 2014) TO CONFIRM THE DISALLOWANCE. LD. DR EVEN THOUGH RELIED ON VARIOUS CASE LAW HAS RIGHTLY SUBMITTED BY THE LD. DR THESE WERE CONSIDERED IN H DFC BANK LTD., VS. DY. CIT IN ITA NO. 371/MUM/2012 DT. 23 - 09 - 2015. THEREFORE, RELIANCE ON THE DECISION OF HDFC BANK LTD., OF HON'BLE BOMBAY HIGH COURT BY THE AR COULD NOT BE CONSIDERED. THE FACTS VARY FROM CASE TO CASE. IN THE CASE OF M/S. BELLWETHER MI CROFINANCE FUND PVT. LTD., IN ITA NO. 1743/HYD/2013 DT. 27 - 06 - 2014 (SUPRA), THE CO - ORDINATE BENCH HAS CONSIDERED THE ISSUE AS UNDER: 7.1 ON CAREFUL READING OF THE AFORESAID PROVISION, IT WOULD BE EVIDENT THAT IT IS IN THREE PARTS. THE FIRST PART CONTAINE D IN SUB - RULE D(2)(I), SPEAKS OF DISALLOWANCE OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. SECOND PART UNDER SUB - RULE 8D(2)((II) DEALS WITH DISALLOWANCE TO BE COMPUTED ON THE BASIS OF FORMULA GIVE N THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE THIRD PART AS PROVIDED UNDER SUB - RULE 8D(2)(III) IS AN ARTIFICIAL FIGURE I.E. ONE - HALF PER CENT OF THE AVERAGE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. AGGREGATE OF THESE THREE COMPONENTS WOULD CONSTITUTE EXPEND ITURE IN RELATION TO EXEMPT INCOME AND WOULD BE DISALLOWED U/S 14A OF THE ACT. THEREFORE, IF WE EXAMINE THE FACTS OF THE PRESENT CASE IN THE CONTEXT OF THE AFORESAID STATUTORY PROVISION, IT IS QUITE CLEAR THAT AO WHILE WORKING OUT DISALLOWANCE UNDER RULE 8D(2)(I) HAS TAKEN THE TOTAL INVESTMENT IRRESPECTIVE OF THE FACT WHETHER THEY HAVE YIELDED INCOME OR NOT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THE REASONING OF THE AO IN THIS REGARD IS ACTUAL EARNING OR RECEIPT OF INCOME WILL NOT BE A CONDITION F OR DISALLOWANCE OF SUCH EXPENDITURE UNDER THE PROVISIONS OF SECTION 14A AS IT SPEAKS ABOUT EXPENDITURE IN RELATION TO I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 5 - : INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HE WAS OF THE VIEW THAT EVEN IF NO INCOME WAS RECEIVED, EXPENDITURE INCURRED CAN BE D ISALLOWED U/S 14A. HOWEVER, RULE 8D(2)(I) SPEAKS OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THE TERM TOTAL INCOME HAS NOT BEEN DEFINED EITHER U/S 14A OR UNDER RULE 8D. THEREFORE, ONE HAS TO LOOK TO THE DEFINITIO N OF TOTAL INCOME AS APPEARING IN SECTION 2(45) OF THE ACT, WHICH READS AS UNDER: 'TOTAL INCOME' MEANS THE TOTAL AMOUNT OF INCOME REFERRED TO IN SECTION 5 , COMPUTED IN THE MANNER LAID DOWN IN THIS ACT ; SECTION 5 OF THE ACT READS AS UNDER: - SCOPE OF TOTAL INCOME. 5. (1) SUBJECT TO THE PROVISIONS OF THIS ACT, THE T OTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ( A ) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR ( B ) ACCRUES OR ARISES OR IS DEEME D TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR ; OR ( C ) ACCRUES OR ARISES 57 TO HIM OUTSIDE INDIA DURING SUCH YEAR : PROVIDED THAT, IN THE CASE OF A PERSON NOT ORDINARILY RESIDENT IN INDIA WITHIN THE MEANING OF SUB - SECTION (6) * OF SECTION 6 , THE INCOME WHICH ACCRUES OR ARISES TO HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLESS IT IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFES SION SET UP IN INDIA. (2) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A NON - RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ( A ) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH Y EAR BY OR ON BEHALF OF SUCH PERSON ; OR ( B ) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. EXPLANATION 1. INCOME ACCRUING OR ARISING OUTSIDE INDIA SHALL NOT BE DEEMED TO BE RECEIVED 57 IN INDIA WITHIN THE MEANING OF THIS SECTION BY REASON ONLY OF THE FACT THAT IT IS TAKEN INTO ACCOUNT IN A BALANCE SHEET PREPARED IN INDIA. EXPLANATION 2. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT INCOME WHICH HAS BEEN INCLUDED IN THE TOTAL INCOME OF A PERSON ON THE BASIS THAT IT HAS ACCRUED OR ARISEN OR IS DEEMED TO HA VE ACCRUED OR ARISEN TO HIM SHALL NOT AGAIN I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 6 - : BE SO INCLUDED ON THE BASIS THAT IT IS RECEIVED OR DEEMED TO BE RECEIVED BY HIM IN INDIA. 7.2 AS CAN BE SEEN, DEFINITION OF TOTAL INCOME U/S 2(45) REFERS TO SECTION 5 WHICH ENVISAGES SCOPE OF TOTAL INCOME. ON A READING OF SECTION 5 OF THE IT ACT, IT WOULD BE EVIDENT THAT AS PER THIS SECTION TOTAL INCOME IS OF ANY PREVIOUS YEAR AND WHICH INCLUDES INCOME FROM WHATEVER SOURCE DERIVED WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEH ALF OF SUCH PERSON OR ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISES TO HIM IN INDIA DURING SUCH YEAR OR ACCRUES OR ARISE TO HIM OUTSIDE INDIA DURING SUCH YEAR. CONSIDERED IN AFORESAID CONTEXT, EXPRESSION TOTAL INCOME REFERRED TO IN RULE 8D(2)(I) CAN NOT BE IN ABSTRACT. IT MUST RELATE TO A PREVIOUS YEAR INCOME OF WHICH IS SOUGHT TO BE ASSESSED. THEREFORE, AS A NATURAL COROLLARY IT FOLLOWS THAT ONLY EXPENDITURE DIRECTLY RELATING TO INCOME WHICH IS EARNED EITHER ON RECEIPT BASIS OR ON ACCRUAL BASIS AND WHICH DOES NOT FORM PART OF TOTAL INCOME OF A PARTICULAR ASSESSMENT YEAR CAN BE DISALLOWED UNDER CLAUSE (I) OF RULE 8D(2). RULE 8D(2)(I) DOES NOT REFER TO THE INVESTMENT MADE BY THE ASSESSEE. ON A CONJOINT READING OF CLAUSE (I) AND CLAUSE (III) OF RULE 8D (2), THE DIFFERENCE BETWEEN THEM IS CLEARLY DISCERNIBLE. WHILE CLAUSE (I) SPEAKS OF DISALLOWANCE OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, CLAUSE (III) PROVIDES FOR DISALLOWANCE OF EXPENDITURE OF THE AVERAGE VALU E OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR. THEREFORE, WHILE DISALLOWANCE OF EXPENDITURE UNDER CLAUSE (I) IS RELAT ED TO INCOME EARNED WHICH DOES NOT FORM PART OF TOTAL INCOME, CLAUSE (III) RELATES TO THE AVERAGE OF THE VALUE OF INVESTMENT APPEARING IN THE BALANCE SHEET. ON A PLAIN READING OF RULE 8D(2) AS A WHOLE THE LEGISLATIVE INTENT BECOMES CLEAR THAT THE DISALL OWANCE OF EXPENDITURE CONTEMPLATED UNDER SUB - RULE(I) MUST RELATE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THAT YEAR. THEREFORE, INVESTMENT, WHICH HAS NOT RESULTED IN ANY INCOME CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDE R RULE 8D(2)(I). HOWEVER, WHILE COMPUTING DISALLOWANCE UNDER RULE 8D(2)(III), THE AVERAGE OF THE TOTAL INVESTMENT OF THE ASSESSEE AS APPEARING IN THE BALANCE SHEET ON THE FIRST DAY AND LAST DAY OF THE YEAR IRRESPECTIVE OF THE FACT WHETHER IT HAS YIELDED I NCOME OR NOT CAN BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE. THE USE OF THE WORDS DOES NOT OR SHALL NOT IN RULE 8D(2)(III) CONNOTES THAT INCOME NOT ONLY DOES NOT FORM PART OF TOTAL INCOME DURING THE YEAR BUT IT ALSO SHALL NOT FORM PART OF TOTAL INCOME A T ANY TIME. HAD IT BEEN THE INTENTION OF THE RULE FRAMING AUTHORITIES TO DISALLOW UNDER RULE 8D(2)(I) EXPENDITURE RELATING TO TOTAL VALUE OF INVESTMENT OR INCOME WHICH IS NOT EARNED DURING THE RELEVANT PREVIOUS YEAR, THEN, THEY WOULD HAVE USED THE EXPRESSI ON DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME AS APPEARING IN RULE 8D(2)(III) INSTEAD OF WORDS DOES NOT FORM PART OF TOTAL INCOME. THAT BEING THE CASE, AO CANNOT DISALLOW EXPENDITURE RELATING TO INVESTMENT WHICH HAS NOT YIELDED ANY EXEMPT INCOME DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE. THEREFORE, WE DIRECT THE AO TO DISALLOW THE EXPENDITURE I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 7 - : RELATING TO INVESTMENTS RESULTING IN INCOME EARNED/ACCRUED WHICH DOES NOT FORM PART OF TOTAL INCOME OF THE IMPUGNED ASSESSMENT Y EAR. HOWEVER, SO FAR AS AOS COMPUTATION OF EXPENDITURE TO BE DISALLOWED UNDER RULE 8D(2)(III), THE SAME IN OUR VIEW, IS IN CONFORMITY WITH RULE 8D(2)(III), HENCE, DO NOT CALL FOR ANY INTERFERENCE . 10. IN VIEW OF THE ABOVE, SINCE ASSESSEE HAS INVESTMENTS AND SHARES WHICH ARE YIELDING EXEMPT INCOMES, WE HAVE NO OPTION THAN TO CONFIRM THE AMOUNT UNDER RULE 8D(2)(III). ACCORDINGLY, THE ORDER OF CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. WE REJECT ASSESSEES CONTENTIONS. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD FEBRUARY, 2016 SD/ - SD/ - (B. RAMAKOTAIAH) (S.S. VISWANETHRA RAVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 23 RD FEBR UARY, 2016 TNMM I.T.A. NO. 8 7 5 / HYD / 20 15 M/S. BRILLIANT BIO PHARMA LIMITED : - 8 - : COPY TO : 1. M/S. BRILLIANT BIO PHARMA LIMITED , 6 - 2 - 1012, 5 TH FLOOR, TGV MANSION, KHAIRATHABAD, HYDERABAD. C/O. SRI K.K. GUPTA, CHARTERED ACCOUNTANT, 3464, DUNDOO VIHAR, R.P. ROAD, SECUNDERABAD. 2 . THE DEPUTY COMMISSIONE R OF INCOME TAX, CIRCLE - 1 ( 3 ), AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3 . CIT ( APPEAL S ) - I , HYDERABAD. 4. THE PR. CIT - I , HYDERABAD. 5 . D.R. ITAT, HYDERABAD. 6 . GUARD FILE.