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Income Tax Appellate Tribunal, J Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Saktijit Dey
This appeal by the assessee is directed against the order of the CIT(A)- 48, Mumbai dated 19.03.2015 for A.Y. 2010-11.
The facts of the case, briefly, are as under: - 2.1 The assessee company, engaged in the business of land development and construction, filed its return of income for A.Y. 2010-11 on 12.10.2010 declaring loss or (-) `1,14,42,874/-. Subsequently, a revised return of income was filed on 27.11.2010 declaring NIL Income. The case was taken up for scrutiny and the assessment completed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 29.01.2013 wherein the assessee’s loss was determined at (-) `41,08,018/- in view of the disallowance of `36,88,797/- under section 14A r.w. Rule 8D of the Rules. 2.2 Aggrieved by the order of assessment dated 29.01.2013 for A.Y. 2010-11, the assessee preferred an appeal before the CIT(A) 48, Mumbai M/s. Lodha Hi-Rise Builders P. Ltd. challenging the disallowance under section 14A r/.w. Rule 8D. The learned CIT(A) disposed off the appeal vide the impugned order dated 19.03.2015. 3. The assessee being aggrieved by the order of the CIT(A)-48, Mumbai dated 19.03.2015, has preferred this appeal raising the following grounds:- “
1. On the facts and circumstances of the case and in law, the learned CIT(A)] erred in confirming the action of the AO in making disallowance of Rs.36,25,926/- u/s 14A.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs.36,25,926/- u/s. 14A ignoring the fact the Appellant had not incurred any expense for the purpose of earning of exempt income.
3. On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming the action of the AO in making disallowance u/s 14A for Rs.62,871/- being demat charges paid for preserving the investment.
4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs.36,25,926/- u/s 14A without appreciating the fact that the Appellant has not earned any exempt income.
5. On the facts and circumstances of the case and in law, the learned CIT (A) erred in not appreciating that fact that the investments have been made in the subsidiary company and associate concerns for the purposes of having strategic control therein and not for the purposes of earning of exempt income.
6. On the facts and circumstances of the case and in law, the learned CIT(A) erred holding that “If it was indeed a strategic investment and for the business purposes, it should have been reflected as business assets and current asset”.
7. On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming the action of the AO in confirming the action of the AO in denying the capitalization of interest paid of Rs.6,70,69,523/- towards the cost of the shares.
4. Ground Nos. 1 to 6 – Disallowance under section 14A r.w. Rule 8D – `36,88,797/- 4.1.1 In these grounds at 1 & 4 (supra), the assessee assails the impugned order of the learned CIT(A) in confirming the disallowance made by the Assessing Officer (AO) under section 14A of the Act without, inter alia, appreciating the fact that the assessee has not earned any exempt income during the year under consideration and no expenditure was M/s. Lodha Hi-Rise Builders P. Ltd. incurred in this regard and therefore no disallowance under section 14A of the Act could have been made. In support of this proposition, the learned A.R. of the assessee placed reliance on the following judicial pronouncements: - (i) Cheminvest Ltd. vs. CIT (378 ITR 33 (Del.) (ii) Garware Wall Ropes Ltd. vs. Add, CIT (ITA No. 5408/Mum/2012) (iii) Vakrangee Ltd. vs. ACIT (ITA No. 6988/Mum/2014 dated 10.08.2016) 4.12 It was also contended in ground Nos. 5 & 6 (supra) that the learned CIT(A) erred in not appreciating that since the investments were made in subsidiary group concerns for the purpose of control and not for the purpose of earning of exempt income and being strategic investment, these investments should be excluded for computing disallowance under section 14 of the Act. In support of this proposition, reliance was placed on the following judicial pronouncements:- (i) Cheminvest Ltd. vs. CIT (378 ITR 33 (Del.) (ii) Garware Wall Ropes Ltd. vs. Add, CIT (ITA No. 5408/Mum/2012) (iii) Vakrangee Ltd. vs. ACIT (ITA No. 6988/Mum/2014 dated 10.08.2016) 4.2 The learned D.R. placed strong support on the order of the learned CIT(A), on the issue of disallowance under section 14A of the Act. In written submissions dated 01.05.2017 Revenue contends as under: - “The above mentioned case came up for hearing today before the Hon'ble Bench wherein Ld. Counsel of the assessee relied on Delhi High Court judgement in the case of Cheminvest Ltd. as there was no exempt income received by the assessee during the year. Therefore, according to the Ld. Counsel of the assessee, no disallowance u/s. 14A of the Income Tax Act r.w. Rule 8D was to be made.
2. In this regard, it is submitted that as per the scheme of the Act as envisaged in sec. 14A related to disallowance of expenditure incurred in relation to income not includable in total income, there need not be actual receipt of exempt income for actual disallowance. This is a constant position of the Department as elucidated in CBDT's Circular No. 5/2014 dt.1l.2.2014. The relevant portion of the circular is reproduced as under:
M/s. Lodha Hi-Rise Builders P. Ltd. "Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not. The above position is further clarified by the usage of terms 'includible' in the heading to sec. 14A of the Act and also the Heading to Rule 8D of the IT. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be including in a particular year's income, for disallowance to be triggered. Also, sec. 14A of the Act does not use the word "income of the year" but "income under the Act"............... Thus, in the light of above, Central Board of Direct Taxes, in exercise of its powers under sec.119 of the Act hereby clarifies that Rule 8D r.w.s.14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income".
However, Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT has held that no disallowance u/s. 14A can be made in a year in which no exempt income has been earned or received by the assessee.
In this regard, it is submitted that Hon'ble Delhi High Court has not considered Hon'ble Supreme Court judgement in the case of Distributors (Baroda) (P) Ltd. Vs. Union of India (1985) 155 'TR 120/22 Taxman 49 (SC) wherein it was held that "Income by way of dividends" from domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of that Act. Hon'ble Supreme Court emphasises that it is the income that should be considered and not simply the receipt. It is further submitted that there is difference between receipt of dividend and income from dividend. Similarly, it is the income which does not form part of total income which is required to be considered u/s.14A of the I.T. Act. In sec.10(34) of the act it is income by way of dividend and not the receipt of dividend which is exempted.
Further, such income by way of dividend as is referred to in the provision of Sec.115-0 of the Act is exempt. It means not all the income by way of dividend is exempt, Sec. 115-0 of the I.T. Act deals with the additional income tax chargeable on domestic company on any amount declared, distributed, or paid by such company by way of dividend. For domestic company this is in the form of appropriation, while the same is receipt in the hands of the shareholder. Thus, Sec. 115-0 (5) of the act restricts any deduction under any other provision of the act to be allowed to shareholder in respect of such dividend receipt. It is, therefore, for computing income by way of dividend from the dividend receipt so as to claim exemption u/s. 10(34) of the Act, no expenditure can be allowed under any other provision.
M/s. Lodha Hi-Rise Builders P. Ltd.
In view of the above submissions, and the fact that Delhi High Court has not considered judgement of Supreme Court in the case of Baroda Distributors as cit above, it is respectfully prayed that order of the CIT(A) may kindly be upheld.” 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record. Admittedly, the assessee has not earned any exempt income in the year under consideration. This fact has been recorded by the AO at para 5 of the order of assessment for the year under consideration, after perusal of the assessee’s Profit & Loss account and also acknowledged by the learned CIT(A) at para 4-6 of the impugned order. In these circumstances, in our considered view, the ratio of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra) would squarely apply. The Hon'ble High Court in the aforesaid judgement held that no disallowance under section 14A of the Act can be made in the year in which no exempt income is earned. It was held that the expression ‘does not form part of the total income’ in section 14A of the Act envisages that there should be actual earning of income which is ot includible in the total income during the relevant year for the purpose of disallowing any expenditure incurred in relation to the said exempt income. 4.3.2 Similar finding has been rendered on identical facts by the jurisdictional High Court of Bombay in the case of Pr. CIT vs. M/s. Ballarpur Industries Ltd. which is extracted hereunder: - “On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the M/s. Lodha Hi-Rise Builders P. Ltd. assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income. The findings of facts recorded by both the Authorities do not give rise to any substantial question of law. Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs.” 4.3.2 In the factual and legal matrix of the case, as discussed above, we find that Revenue has not been able to controvert the findings rendered by the Hon'ble High Courts of Bombay (supra) and Delhi (supra). Therefore, respectfully following the decision of the Hon'ble Bombay High Court in the case of Ballarpur Industries Ltd. in of 2016 dated 13.10.2016, of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (378 ITR 33) (Del) and of the Coordinate Bench of this Tribunal in the case of Vakrangee Ltd. vs. ACIT (ITA No. 6988/Mum/2014 dated 10.08.2016), we hold that no disallowance under section 14A of the Act can be made in the case on hand for the year under consideration since the assessee has not earned any exempt income. We, therefore, set aside the decision of the authorities below and direct the AO to delete the disallowance of expenditure amounting to `36,25,926/- under section 14A of the Act. Accordingly, grounds 1 to 4 of assessee’s appeal are allowed. 4.4.1 Further, the learned A.R. of the assessee in respect of grounds 5 & 6 (supra) had contended that, even otherwise, the said disallowance under section 14A r.w. Rule 8D ought not have been made, as the entire investments in shares amounting to `72,51,85,340/- were strategic investments in its subsidiary group company, (i) M/s. Ajithnath Hi-Tech Builders P. Ltd. amounting to `1,00,258/- and (ii) in M/s. Macrotech Constructions P. Ltd. amounting to `72,50,85,082/- for control of these companies and not with the intention of earning tax exempt dividend income. On a perusal of the details on record, i.e. the impugned order of the learned CIT(A), the order of assessment and financial statements for the year under consideration, we find that the averments of the learned A.R. of the assessee that the entire shares held by the assessee are in M/s. Lodha Hi-Rise Builders P. Ltd. respect of its strategic investment in its subsidiaries, M/s. Ajithnath Hi- Tech Builders P. Ltd. and M/s. Macrotech Constructions P. Ltd. is factually correct. We find that a Coordinate Bench of this Tribunal in the case of M/s. Vakrangee Ltd. vs. ACIT (ITA No. 6988/Mum/2014 dated 10.08.2016, relied on by the assessee, at paras 3.5.1 and 3.5.2 thereof, on similar facts and following the decision of another Coordinate Bench of ITAT, Mumbai in the case of Fiduciary Euromax Global Markets Ltd. (ITA No. 1349/Mum/2012 dated 29.06.2016) held as under: - 3.5.1 Further the learned A.R. for the assessee has submitted that, even otherwise, the said disallowance under section 14A w.r. Rule 8D ought not to have been made as the entire investment in shares made by the assessee of `52,15,95,000/- was strategic investment in group companies for control over these companies and not for investment purpose with the intention of earning of tax exempt dividend income. On a perusal of the details on record, i.e. the impugned order of the learned CIT(A) and the order of assessment we find that the averments of the learned A.R. that the entire shares held by the assessee are in respect of its strategic investments in subsidiary/group concerns is factually correct. We find that a Coordinate Bench of this Tribunal in the case of Fiduciary Euromax Global Markets Ltd. in and others dated 29.06.2016, relied on by the assessee, at para 14 thereof on similar factual circumstances has held that: - “14. ...................... .......... strategic investment in group companies therefore cannot be held to be for investment purposes or with the object of earning of dividend/tax exempt income, but the same, in the light of above referred to judicial decisions can safely be said to be related to the business activity of the assessee and no disallowance, therefore, is attracted on such an income u/s 14A of the Act. In the light of the above referred to decisions and respectfully following the same, we direct the AO to exclude the strategic investments made by the assessee in group companies while calculating the disallowance under section 14A read with rule 8D of the Income Tax Act.” 3.5.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in the case of Fiduciary Euromax Global Markets Ltd. (supra), we hold and direct that the strategic entire investments made by the assessee in group companies are to be excluded while computing the disallowance under section 14A r.w. Rule 8D. 4.4.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in the case of M/s. Vakrangee Ltd. (supra) and Fiduciary