T.T.Krishnamachari & Co., CHENNAI V. ACIT, CHENNAI

ITA 879/CHNY/2016

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3978 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 06-04-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS JCITD R
• Assessee Lawyers: SAROJ KUMAR PANDA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . !' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NOS.880 & 879/MDS./2016 / ASSESSMENT YEARS : 2009-10 & 2008-09 M/S. T.T.KRISHNAMACHARI & CO . C/O . M/S. SUBBARAYA AIYAR PADMANABHAN & RAMAMANI, ADVOCATES NEW NO.114 (OLD NO.248), ROYAPETTAH HIGH ROAD, ROYAPETTAH, CHENNAI. VS. THE ACIT, NON CORPORATE CIRCLE 3, CHENNAI [PAN AAAFT0395D ] ( #$ / APPELLANT) ( %&#$ /RESPONDENT) ./ I.T.A.NO.1083/MDS./2016 / ASSESSMENT YEAR : 2008-09 THE ACIT, NON CORPORATE CIRCLE 3, CHENNAI VS. M/S. T.T.KRISHNAMACHARI & CO . C/O . M/S. SUBBARAYA AIYAR PADMANABHAN & RAMAMANI, ADVOCATES NEW NO.114 (OLD NO.248), ROYAPETTAH HIGH ROAD, ROYAPETTAH, CHENNAI. [PAN AAAFT0395D ] ( #$ / APPELLANT) ( %&#$ /RESPONDENT) ASSESSEE BY : MR.SAROJ KUMAR PANDA,ADVOCATE REVENUE BY : MR.SHIVA SRINIVAS, JCIT,D.R / DATE OF HEARING : 04 - 1 0 - 201 6 / DATE OF PRONOUNCEMENT : 23 - 11 - 2016 ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 2 -: ' / O R D E R PER BENCH ITA NO.879/MDS./2016 & ITA NO.1083/MDS./2016 ARE CROSS APPEALS OF THE ASSESSEE AND THE REVENUE RESPECTIV ELY DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (A PPEALS)-4, CHENNAI, DATED 01.01.2016 FOR ASSESSMENT YEAR 2008 -09. ITANO.880/MDS./2016 IS THE APPEAL FILED BY THE ASSE SSEE DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (A PPEALS)-4, CHENNAI, DATED 12.02.2016 FOR ASSESSMENT YEAR 2009 -10. SINCE ISSUES INVOLVED IN ALL THESE APPEALS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPO SED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. FIRST WE TAKE UP APPEALS FOR ASSESSMENT YEAR 2008-0 9 2. THE ONLY ISSUE IS WITH REGARD TO DISALLOWANCE O F DEDUCTION U/S.14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 AT 2% OF EXEMPTED INCOME AS DECLARED BY THE ASSESSEE. 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE FI LED AN APPEAL FOR THE SAME ASSESSMENT YEAR IN ITA NO.2087/MDS./20 11. IN THE FIRST ROUND, THE TRIBUNAL VIDE ITS ORDER DATED 25.05.2012 HAS SET ASIDE THE ORDER OF THE LOWER AUTHORITIES WITH RESPECT TO THE ISSUE OF DISALLOWANCE ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 3 -: OF ` 26,69,572/- EFFECTED UNDER RULE 84 R.W.S.14A OF THE ACT AND HAS REMITTED BACK THE ISSUE TO THE FILE OF THE AO FOR A DJUDICATION OF THE SAME AFRESH FOLLOWING THE TRIBUNAL DECISIONS IN THE CASE OF M/S.AUCHTEL PRODUCTS LTD. IN ITA NOS.3183,2649 & 3185/2011 DATE D 30.04.2012 AND M/S.LAKSHMI RING TRAVELLAER VS. ACIT IN ITANO.2 083/MDS./11 DATED 02.03.2012. AO COMPLETED THE ASSESSMENT FOLLO WING THE ABOVE CITED TWO JUDGEMENTS OF THE TRIBUNAL AND OBSERVED T HAT THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED IN RE LATION TO THE EXEMPT INCOME WAS NOT CORRECT. THEREFORE, THE AO PR OCEEDED FURTHER TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME AS PER THE METHOD PRESCRIBED UNDER RULE 8D AT ` 26,69,572/-, WHICH WAS DISALLOWED U/S.14A OF THE ACT. AGGRIEVED, THE A SSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 4. ON APPEAL, THE LD.CIT(A) OBSERVED THAT THE AO H AS RIGHTLY CONSIDERED THE DIRECTIVES OF THE HONOURABLE TRIBUNA L IN THE CASES REFERRED TO. HOWEVER, IT SEEMS THAT THE AO HAS NOT PROPERLY INTERPRETED THE SECOND CASE LAW I.E. M/S. LAKSHMI R ING TRAVELLER VS. ACIT IN ITA NO- 2083/2011 WHICH TALKS ABOUT THE APP LICABILITY OF RULE 8D, IN THE LIGHT OF THE PROVISIONS OF SECTION 14A ( 2) R.W. RULE 8D. AS RIGHTLY POINTED OUT BY THE ASSESSEE, THE PROVISIONS OF RULE 8D WERE NOTIFIED ON 24/3/2008 AND HENCE, IT WAS NOT APPLICA BLE TO THE INSTANT ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 4 -: CASE OF THE ASSESSEE PERTAINING TO A.Y2008-09. EVEN IF IT WAS APPLICABLE, IT SHOULD HAVE BEEN APPLIED FOR THE REM AINING PERIOD OF THE FINANCIAL YEAR. THE HONOURABLE TRIBUNAL (CHENNAL) I N THE CASE OF TVS INVESTMENTS LTD. IN ITA NO.160912012(AY 2008-09) HA S RIGHTLY HELD AS FOLLOWS: SINCE THE PRINCIPAL CONTENTION OF THE ASSESSEE IS THAT SECTION 14A (III) READ WITH RULE 8D OF THE RULES HAS BEEN W RONGLY APPLIED, WE PROPOSE TO DEAL WITH THE SAID CONTENTIO N. FOR THE SAID PURPOSE, WE CLARIFY THAT THE IMPUGNED ASSESSME NT YEAR IS 2008-09 AND THE RELEVANT ACCOUNTING PERIOD IS 01.04 .2007 TO 31.03.2008. IT IS ALSO CLEAR FROM A PERUSAL OF RULE 8D THAT THE SAME WAS NOTIFIED ON 24.03.2008. THE MOOT QUESTION ACCORDINGLY BEFORE US IS WHETHER RULE 8D AS INVOKED BY THE ASSESSING OFFICER AS WELL AS CIT(A) WOULD ALSO BE A PPLICABLE FOR THE PERIOD FROM 01.04.2007 TO 23.03.2008 OR NOT. WE NOTICE THAT IN THE CASE (SUPRA) HONBLE DELHI HIGH COURT H AS HELD THAT THE SAID PERIOD WOULD NOT BE COVERED NEITHER BY SEC TION 14A OF THE ACT NOR BY RULE 8D. FROM THE ABOVE DISCUSSION , IT IS CLEAR THAT, IN EFFECT, THE PROVISIONS OF SUBSECTIONS (2) AND (3) OF SECTION 14A WOULD BE WORKABLE ONLY WITH EFFECT FROM THE DATE OF INTRODUCTION OF RULE 8D.. IN THE LIGHT OF THE OB SERVATIONS OF THE HONBLE JURISDICTIONAL HIGH COURT, WE HOLD THAT IT WOULD BE REASONABLE AND APPROPRIATE IF THE DISALLOWANCE IS R ESTRICTED @ 2% OF THE EXEMPT INCOME AS RETURNED BY THE ASSESSEE . ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RES TRICT THE DISALLOWANCE IN QUESTION @ 2% OF THE EXEMPT INCOME IN HAND. ACCORDING TO LD.CIT(A), IN VIEW OF THE ABOVE TRIBUN AL DECISION, THE AO HAS ERRED IN INVOKING THE PROVISIONS OF RULE 8D IN THE INSTANT CASE ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 5 -: WHEN THE RELEVANT ASSESSMENT YEAR 2008-09 WAS NOT C OVERED UNDER RULE 8D. HENCE, THE LD.CIT(A) DELETED THE ADDITION OF RS.26,69,5721- AS WORKED OUT BY THE A.O UNDER RULE 8D R.W.S 14A. H OWEVER, RESPECTFULLY FOLLOWING THE ABOVE STATED JUDGEMENT O F THE HONOURABLE TRIBUNAL, THE LD.CIT(A) DIRECTED THE AO TO WORK O UT THE DISALLOWANCE @ OF 2% OF THE EXEMPT INCOME AS DECLARED BY THE ASS ESSEE IN THE RELEVANT INCOME TAX RETURN. FURHTER, LD.CIT(A) OBSE RVED THAT THE SUBMISSIONS OF THE APPELLANT REGARDING THE 10% OF T HE SALARY OF TWO EMPLOYEES WORKING IN THE ACCOUNTS OFFICE SHOULD BE ADOPTED AS DISALLOWANCE U/S 14A IS ALSO REJECTED. AGGRIEVED WI TH THE ORDER OF LD.CIT(A), BOTH THE PARTIES ARE APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSMENT YEAR INVOLVED HERE IS 2008-0 9. RULE-8D OF INCOME TAX RULES, 1962 WAS INTRODUCED WITH EFFECT F ROM 24.03.2008, WHICH WAS PROSPECTIVE IN OPERATION AND CANNOT BE TR EATED AS BEING RETROSPECTIVE AS HELD BY THE DELHI HIGH COURT IN TH E CASE OF MAXOPP INVESTMENT LTD. VS. CIT (347 ITR 272). HOWEVER, INC URRING CERTAIN ADMINISTRATIVE EXPENSES CANNOT BE RULED OUT. ACCOR DINGLY, BY PLACING RELIANCE ON THE JUDGEMENT OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF SIMPSON & CO. LTD IN T.C. NO.2621/2006,DATED 15. 10.2012, WE ARE OF THE OPINION THAT THE LD.CIT(A) IS JUSTIFIED IN D IRECTING THE AO TO ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 6 -: DISALLOW 2% OF THE EXEMPT INCOME. BEING SO, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD.CIT(A) AND THE SAME IS CONFIRMED. 6. IN THE RESULT, BOTH THE APPEALS FILED BY ASSESS EE AND REVENUE FOR ASSESSMENT YEAR 2008-09 ARE DISMISSED. NEXT WE TAKE UP ASSESSEES APPEAL IN ITA NO.880/MDS ./16 FOR ASSESSMENT YEAR 2009-10 7 . THE ONLY ISSUE IS WITH REGARD TO DISALLOWANCE OF EXPENSES OF ` 36,19,979/- RELATABLE TO EARNING THE DIVIDEND INCOM E BY APPLYING RULE 8D. 8. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE DE RIVED INCOME FROM DIVIDENDS OF ` 13,65,73,661/-, WHICH HAS BEEN CLAIMED AS EXEMPT/S.10(34) OF THE ACT. THE ASSESSEE HAS NOT DI SALLOWED ANY EXPENDITURE ATTRIBUTABLE TO DERIVING THE ABOVE INCO ME. THEREFORE, THE AO INVOKED THE RULE 8D OF INCOME TAX RULES, 1962. AS THE ASSESSEE HAS DEBITED A TOTAL INTEREST ON BORROWED FUNDS OF ` 14,55,975/-, THE SAME WAS CONSIDERED FOR THE PURPOSE OF ARRIVING EXP ENDITURE AS PER RULE 8D AND EXPENDITURE OF ` 36,19,979/- WAS DISALLOWED BY THE AO. AGGRIEVED THE ASSESSEE CARRIED THE APPEAL BEFORE TH E LD.CIT(A). ON APPEAL, LD.CIT(A) OBSERVED THAT NO EXPENDITURE INCU RRED IN MANAGING THE INVESTMENTS HELD EITHER WITH THE SUBSIDIARY COM PANIES OR OTHERWISE ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 7 -: IS NOT ACCEPTABLE ONE. FURTHER, LD.CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT PROVED BEFORE THE AO THAT THE SAID INVESTME NTS WERE MADE TO PROMOTE THE SUBSIDIARY COMPANIES. IN THE ABSENCE OF ANY EVIDENCE, THE ASSESSEE CANNOT CLAIM THE BENEFIT OF EXCLUSION OF INVESTMENT IN SUBSIDIARIES FOR CALCULATING THE AVERAGE VALUE OF I NVESTMENT UNDER RULE 8D. LD.CIT(A) FURTHER OBSERVED THAT THE AO SEEMS TO HAVE TAKEN INTO ACCOUNT ALL THE RELEVANT FACTORS WHILE CALCULATING THE DISALLOWANCE EU/S.14A INCLUDING THE AMOUNT OF INTEREST ON THE BO RROWED FUNDS. HENCE, THE LD.CIT(A) CONFIRMED THE ACTION OF THE LD . ASSESSING OFFICER. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY FOR THIS ASSESSMENT YEAR RULE-8D IS APPLICABLE AND THERE SHOULD BE DISALLOWANCE U/S.14A READ WITH RULE 8D. HOWEVER, WHILE CONSIDERING THE APPLICABILITY OF SEC.14A R.W .RULE 8D, THE INVESTMENT MADE BY THE ASSESSEE IN SUBSIDIARY COMPA NIES ARE NOT ON ACCOUNT OF INVESTMENTS FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME, BUT SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE THE SUBSIDIARY COMPANY ON ACCOUNT OF COMMERCIAL EXPEDIE NCY AND EARNING OF DIVIDEND INCOME FROM SUCH ACTIVITY IS ONLY INCID ENTAL. THEREFORE, INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY S HOULD NOT BE CONSIDERED WHILE APPLYING THE DISALLOWANCE U/S.14A R.W.RULE 8D. ITA NOS. 879, 880, 1083/MDS./2016 T T KRISHNAMACHARI & CO :- 8 -: BEING SO, WE DIRECT THE AO TO COMPUTE THE AVERAGE V ALUE OF THE INVESTMENT UNDER THE PROVISIONS OF RULE 8D AND DELE TE THE INVESTMENTS IN SUBSIDIARY WHILE CONSIDERING THE AVERAGE INVEST MENTS AND RECOMPUTED THE DISALLOWANCE U/S.14A R.W. RULES 8D. OUR VIEW IS SUPPORTED BY THE ORDER OF CO-ORDINATE BENCH IN THE CASE OF ACIT VS. EIH ASSOCIATED HOTELS LTD. IN ITA NO.1503/MDS./2012 FOR ASSESSMENT YEAR 2008-09 VIDE ORDER DATED 17.07.2013. ACCORDING LY THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 10. IN THE RESULT, THE APPEALS FILED BY ASSESSEE A S WELL AS REVENUE FOR ASSESSMENT YEAR 2008-09 ARE DISMISSED AND THE APPEA L FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2009-10 IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 23 RD NOVEMBER, 2016, AT CHENNAI. SD / - SD/ - ( . ) ( G.PAVAN KUMAR ) / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI ! / DATED: 23 RD NOVEMBER, 2016 K S SUNDARAM !' $%& '& / COPY TO: 1 . () / APPELLANT 3. * ( ) / CIT(A) 5. &-. $/ / DR 2. $0 () / RESPONDENT 4. * / CIT 6. .1 2 / GF