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1/14 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 15TH DAY OF JUNE 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.569/2015 & I.T.A.No.229/2016
BETWEEN : 1. THE COMMISSIONER OF INCOME-TAX
CIT [A], C.R. BUILDING
QUEENS ROAD, BANGALORE.
THE JOINT COMMISSIONER
OF INCOME-TAX [OSD]
CIRCLE- 11[2]
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE-560001.
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND : M/S. CHAITANYA PROPERTIES PVT. LTD., No.17, SANKEY ROAD, BANGALORE PAN: AAACC 5900A.
…RESPONDENT
(BY SRI A.SHANKAR AND SRI M.LAVA, ADVS.)
THESE APPEALS ARE FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961, ARISING OUT OF ORDER DATED 27.03.2015 PASSED IN ITA No.52/Bang/2013 & S.P.No.148/Bang/2014, FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ETC.
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
2/14
THESE APPEALS COMING ON FOR ADMISSION, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind , Adv. for Appellants - Revenue Mr. A.Shankar and Mr. M.Lava , Advs. for Respondent - Assessee
The Revenue has filed these appeals under Section 260-A of the Income Tax Act, 1961, purportedly raising a substantial question of law arising from the order of the learned Income Tax Appellate Tribunal vide Annexure-C dated 27.03.2015 in I.T.A.No.52/Bang/2013 for A.Y. 2009-10 which was filed by the Assessee, M/s. Chaitanya Properties Pvt. Ltd., V/s. Joint Commissioner of Income Tax [OSD], Bengaluru.
The alleged substantial question of law sought to be raised by the present appellants is actually covered by two decisions of this Court on the issue of disallowance of expenditure incurred by the Assessee to
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
3/14
earn exempted income under Section 14A of the Act read with Rule 8D of the Rules.
The relevant findings and reasons given by the learned Tribunal to hold in favour of the Assessee that the disallowance to the extent of Rs.1,93,730/- could not be made by the Assessing Authority to earn exempted income by way of dividends from equity shares of Andhra Bank to the extent of Rs.18,400/- are quoted below for ready reference: “6.3.3 The learned Authorised Representative submits that, from the above break up of investments, it is clear that out of the total amount of Rs.3,87,46,000, the assessee’s investment in associate / group company to the extent of Rs.3,87,00,000/- is made not with a view to earn exempt income but for strategic business purposes. Therefore, the investment of Rs.46,000 made in other companies i.e., Andhra Bank only could be considered as investments made with a view to earn exempt income. It is
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
4/14
further submitted that the investments (supra) in purchase of Andhra Bank shares was made in the financial year ended March, 2001 and of the investment of Rs.3.87 Crores in Trichy Steel Rolling Mills, Rs.1,87,00,000 was invested in the financial year ending 31st March, 2003. It is contended by the learned Authorised Representative that these investments are long term investments, which form a part of the record before the IT Department and that no expenditure has been incurred to either maintain or monitor these investments. It is submitted that the assessee has earned exempt income of Rs.18,400 only, out of the investment of Rs.46,000 invested in the shares of Andhra Bank and that no dividend income has been earned out of the investment of Rs.3.87 Crores made in its sister concern M/s. Trichy Steel Rolling Mills P. Ltd.. The learned Authorised Representative contends that it is not only excessive but also absurd that the assessee has had to suffer a disallowance of Rs.1,93,730/- as expenditure incurred on earning the exempt income of Rs.18,400.
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
5/14
6.3.4 In this context, the learned Authorised Representative placed reliance upon the decision of the Hon’ble ITAT, Mumbai Bench in the case of J.M. Financial Ltd., V/s. Addl. CIT in ITA No.4521/Mum/2012 dated 26.03.2014. The learned Authorised Representative submitted that in this order the Tribunal has held that where the investment is made in sister / associate concerns, it is so made for the purpose of having control or for business purposes and not with a view to earn dividend income from such investments and therefore it cannot be said that the assessee is incurring administrative expenses to monitor these investments. Further, in the case where investments are long term in nature, it cannot be said that expenditure is being incurred to maintain the portfolio. The learned Authorised Representative further submits that the Mumbai ITAT in the aforesaid order has also stated that similar view has been held by the ITAT, Mumbai Bench in the case of Garware Well Ropes Ltd.
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
6/14
Vs. Addl. CIT in ITA No.5408/Mum/2012. The learned Authorised Representative prays that in view of the facts and circumstances of the case and the judicial pronouncements on this issue on similar facts, the addition of Rs.1,93,730/- made under Section 14A rws Rule 8D ought to be deleted.
6.3.5
The learned Authorised Representative alternatively placed reliance on the decision of the ITAT, Mumbai Bench in the case of Daga Global Chemicals Pvt. Ltd., V/s. ACIT in ITA No.5592/Mum/2012 wherein it was stated to be held that the disallowance under Section 14A r.w. Rule 8D cannot exceed the exempt income. It is submitted by the learned Authorised Representative that since the exempt income earned in the case on hand is Rs.18,400, the maximum amount that could be disallowed is Rs.18,400.
6.4 Per contra, the learned Departmental Representative, in arguments and submissions put forth, has placed strong
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
7/14
reliance on the action and finding in the orders of the authorities below.
6.5.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial pronouncements placed reliance upon by the assessee. The Hon’ble Delhi High Court in the case of Maxopp Investments Ltd., V/s. CIT reported in 347 ITR 272 has held that by virtue of the provisions of sub-section (2) and (3) of Section 14A of the Act, if the Assessing Officer is not satisfied by the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon the determination of the amount of expenditure in accordance with Rule 8D. While rejecting the claim of the assessee, the Assessing Officer has to render cogent reasons for the same. In a case where the assessee states that no expenditure has been incurred by it to earn exempt income, the Assessing Officer has to verify the correctness of the assessee’s claim having regard to the accounts of the
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
8/14
assessee. In the case on hand, we find that the Assessing Officer has not given any cogent reason in the order of assessment for disbelieving the contention of the assessee that it has incurred no expenditure to earn the exempt income of Rs.18,400 but has proceeded to apply the provisions of Rule 8D to arrive at the disallowance of Rs.1,93,730 as the expenditure deemed to be incurred for earning exempt income.
6.5.2 Further, as contended by the learned Authorised Representative, the judicial pronouncements relied on by the assessee i.e., J.M.Financial Ltd (supra), apply to the factual matrix of the case on hand and in this view of the matter, it cannot be said that the assessee was incurring expenditure to maintain and / or monitor its long term investments of Rs.3,87,00,000 in its sister / associate concern M/s. Trichy Steel Rolling Mills P. Ltd., and Rs.46,000 invested in the shares of Andhra Bank.
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
9/14
In view of the legal and factual circumstances of the case as discussed and for the reasons stated above, we delete the disallowance of Rs.1,93,730 made by the Assessing Officer under Section 14A r/w. Rule 8D.”
The said controversy with regard to Section 14-A read with Rule 8D of the Rules has been decided by this Court in the following two judgments which are quoted below for ready reference. (i) Commissioner of Income Tax & Anr. Vs. Microlabs Ltd., [2016] 383 ITR 490 (Karn).
“39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2.
We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee’s paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
10/14
and reserves & surplus was much more than investments made by the assessee which could yield tax free income.
The Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon’ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.
In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
11/14
Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly.”
The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd., (ITA No.330/2012 disposed of on 23/7/2014). When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.
In view of the above observations, the appeal is dismissed.”
(ii) M/s.Pragathi Krishna Gramin Bank vs. Joint Commissioner of Income Tax (ITA Nos.100001/2018 & 100002/2018 decided on 28.05.2018 by the Division Bench of this Court at Dharwad Bench.
“13. The manner in which the aforesaid disallowance has been made by the assessing authority and has been upheld by the appellate authorities leaves much to the desired and the same cannot be sustained and therefore the
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
12/14
matter deserves to be remanded back to the Assessing Authority.
We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs.2,48,85,000/- as expenses to earn exempted Dividend income of Rs.1,80,30,965/- is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs.1,80,30,965/-, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted Dividend income. The disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
13/14
reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the Act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty in not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand.
In this view of the matter, the findings of all the three authorities below for Section 14A of the Act are set aside and the matter is remanded back to the Assessing Authority for re-computing the disallowance of expenditure, if any, under Section 14A of the Act, in accordance with law.”
In view of the aforesaid issue being covered now by the two decisions of this Court, we are satisfied that no substantial question of law arises from the
Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016
The Commissioner of Income-tax, CIT (A) and Another
-Vs.- M/s. Chaitanya Properties Pvt. Ltd.,
14/14
findings of the learned Tribunal quoted above. ITA No.569/2015 filed by the Revenue is liable to be dismissed and is accordingly dismissed. No order as to costs.
In view of the aforesaid order, the connected I.T.A.No.229/2016 arising out of S.P.No.148/Bang/2014, the Stay Application in I.T.A.No.52/Bang/2013 is also liable to be rejected and the same is accordingly rejected.
Sd/- JUDGE
Sd/- JUDGE
AN/-, NC