Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & MS. ASTHA CHANDRA
O R D E R PER ASTHA CHANDRA, JM
It is a remand matter.
The appeal of the Revenue pertaining to AY 2008-09, 2011-12 and 2012-13 was disposed off by the Tribunal in favour of the assessee vide its order dated 22.11.2017 against which the Revenue filed appeal before the Hon’ble High Court of Delhi. Vide common order dated 25.04.2019 the Hon’ble High Court considered the following question of law framed by it vide order dated 30.05.2018:-
“Did the Income Tax Appellate Tribunal (ITAT) fall into error in holding that the disallowance under section 14A of the Income Tax Act was not warranted because the underlying investment was for strategic purposes?”
The Hon’ble High Court answered the above question of law in favour of the Revenue but subject to the following factual finding recorded by the Hon’ble Court:-
“It is apparent from the reading of the facts in the appeal that the CIT(A) formed an opinion based upon diverse reasoning having regard to the fact of each case, regarding the nature of expenditure and especially whether it was a one-time investment opportunity availed of by the assessee. This is relevant in the context of assessee’s assertion that in fact no expenditure was incurred while investing in the mutual fund that yielded substantial income. As to whether in fact no expenditure was incurred or attributable at all, in these circumstances, it becomes a factual controversy requiring further hearing and scrutiny. On this aspect, therefore, the Court is of the opinion that task is better performed by the ITAT.”
It is for the aforesaid reason that the Hon’ble High Court remitted the matter back to the ITAT for hearing and disposal afresh.
The appeal of the Revenue pertaining to AY 2011-12 and 2012-13 remanded by the Hon’ble Delhi High Court for fresh disposal has been dismissed by the Tribunal vide its order dated 19.11.2019 in as non maintainable because of tax effect being below Rs. 50 lakhs in view of Board’s Circular F. No. 279/Misc./142/2007/ITJ(Pt) dated 8th August 2019 r.w. clarification dated 20th August, 2019 F. No. 279/19-93/2018-ITJ. The remaining appeal of the Revenue pertaining to AY 2008-09 is taken up for consideration as per the direction of the Hon’ble Delhi High Court contained in its decision (supra).
The assessee company is engaged in the business of assets management and development of real estate. Its original assessment for AY 2008-09 framed under section 143(3) of the Income Tax Act, 1961 (the “Act”) vide order dated 30.04.2010 on loss of Rs. 9,44,28,286/- was reopened under section 147 of the Act and notice under section 148 of the Act was issued on 25.03.2013 which was duly served upon the assessee. The reasons recorded for reopening included, interalia that the assessee has earned dividend income of Rs. 11,66,20,012/- which is claimed as exempt but no disallowance has been made by the assessee under section 14A of the Act. On the other hand assessee has debited financial expenses of Rs. 53,33,209/- as interest on others. As per provision of section 14A of the Act r.w. Rule 8D the disallowance comes to Rs. 1,63,50,877/-. During the reassessment proceedings, the assessee was show-caused why the disallowance under section 14A read with Rule 8D for expenses incurred on investment of Rs. 229,23,71,031/- may not be made.
The assessee responded vide letter dated 22.02.2014, the relevant portion of which is reproduced by the Ld. Assessing Officer (“AO”) at para 5 of assessment order. The assessee submitted that it has not incurred any amount on interest to invest in the Investments. The investments has been acquired through an amalgamation as per the order of Hon’ble Delhi High Court dated October 3, 2007. By the said order the major investment became the property of the assessee on December 1, 2007 with the appointed date of 01.04.2006. The amalgamated company was Grandeur Real Estate Pvt. Ltd. It was further submitted that loans which have been borrowed were for specific purpose i.e. for the development of the project and were used for the purpose. It was also submitted that the assessee did not claim the expenditure on personnel cost to the tune of Rs. 9,83,916/- which was related to the subsidiaries of the assessee company. Hence, section 14A r.w. Rule 8D should not be made applicable to the case of the assessee.
The explanation of the assessee was not acceptable to the Ld. AO who was of the view that for taking decision to invest in shares of foreign subsidiary company, the assessee must have used resources entailing some expenditure. Therefore, expenses related to exempt income are to be disallowed under section 14A r.w. Rule 8D. Accordingly, the Ld. AO disallowed Rs. 1,63,50,876/- and added it to the income of the assessee in the assessment made on 28.02.2014 under section 148/143(3) of the Act.
Aggrieved, the assessee appealed before the Ld. CIT(A). During appellate proceedings the assessee reiterated the submissions made before the Ld. AO that the substantial investment has been made in the financial year (FY) 2005-06 (relevant to AY 2006-07) and FY 2006-07 (relevant to AY 2007-08) and not during the AY 2008-09 under consideration out of the Investment received by the assessee under FDI route from foreign investors in FY 2005-06 and 2006-07 and the money so received was invested in the Mutual Fund. The Mutual Fund Advisors do not charge any fee. Such charges, if any are deducted from the amount of investment itself. Therefore, the assessee cannot be said to have incurred any expenditure directly or indirectly for earning the exempt income. Moreover, the investment made by the assessee was due to commercial expediency which was explained in assessee’s submission dated 21.08.2015. Several decisions in support were relied upon.
The CIT(A) deleted the impugned disallowance for the reason that – (a) The Ld. AO has not recorded satisfaction under Rule 14A(2) of the Act about the correctness of the claim of the assessee about not incurring any expenditure for earning exempt income. In fact both the assessee and the Ld. AO has concurred that the assessee has not incurred any interest expenditure directly or indirectly for the earning of the exempt income.
(b) The assessee has made investment in the subsidiary company for the purposes of control and therefore these are strategic investment on which no disallowance under section 14A can be made. (c) Assessee has not incurred any expenditure on earning exempt income.
Dissatisfied, the Revenue appealed before the Tribunal. In the first round, the Tribunal decided the appeal of the Revenue against it. On appeal by the Revenue before the Hon’ble Delhi High Court, the matter has been remitted back to the Tribunal for hearing and disposal afresh in the light of the directions of the Hon’ble Delhi High Court. This is how, the matter is before the Tribunal once again.
The Revenue has raised the following grounds of appeal:-
“1. The Ld. CIT(A) has erred in law and on facts in directing the AO to exclude the investments in Subsidiary Companies for the purpose of calculating disallowance u/s 14A and allowing consequential relief thereof.
2. The Ld. CIT(A) has erred in law and on facts in directing the AO to exclude investments in mutual funds which generate exempt income for the purpose of calculating disallowance u/s 14A holding it as temporary phenomena and allowing consequential relief thereof.
3. The Ld. CIT(A) has erred in placing reliance on the decision of the Hon’ble High Delhi Court in CIT Vs. Oriental Structural Engineering Pvt. Ltd. as the facts of which case are different from the facts of instant case.
4. The Ld.CIT(A) has failed to appreciate the fact that in the case of Oriental Structural Engineering Pvt. Ltd., investments were made in Special Purpose Vehicles whereas in the present assesee investments were made in the subsidiaries that too not on account of commercial expediency but to circumvent the Land Ceiling Act, 1975 of the State of Haryana.”
The Ld. DR reiterated the same arguments which were advanced in the first round. He submitted that the disallowance has correctly been made by the Ld. AO.
The Ld. AR submitted that admittedly, the assessee did not incur any interest expenditure, directly or indirectly, for earning exempt income. Once the Revenue has conceded this fact and is also not seeking to post facto dispute its “concurrence” before the Ld. CIT(A) on the aspect of recording of satisfaction, nothing survives for consideration in this appeal.
14.1 The Ld. AR further stated that the assessee has demonstrated which was also accepted by the Ld. AO that funds used for making the investment were not borrowed monies, but its own equity. The Ld. AO having failed to appreciate that mutual funds do not charge any fee to create an investment, his finding that assessee must have incurred some expenditure is factually incorrect, since there is no dispute that mutual funds had been purchased. In any event, this was a finding on conjectures and surmises as the Ld. AO could not identify any actual expenditure from the accounts of the assessee, which could be stated to have actually been incurred by the assessee.
14.2 The Ld. AR also submitted that the assessee had pointed out to the Ld. AO that these are legacy investments acquired by the assessee through an amalgamation as per the order of the Hon’ble High Court of Delhi dated October 3, 2007. The Ld. AO, however, glossed it over, so the assessee reiterated this plea before the Ld. CIT(A) who was pleased to hold in favour of the assessee without even having examined this aspect.
14.3 According to the Ld. AR, invoking the provisions of section 14A and Rule 8D framed thereunder by the Ld. AO was not in accordance with the settled position of law. He pointed out that the decision of Hon’ble Delhi High Court in Maxopp Investment Ltd. vs. CIT 347 ITR 272 (Del) has been affirmed by the Hon’ble Supreme Court in Maxopp Investment Ltd. vs. CIT (2018) 15 SCC 523 wherein it is held that the expression “expenditure incurred” in section 14A means “actual expenditure and not to some imagined expenditure”. Therefore, if no expenditure is incurred in relation to the exempt income, no disallowance can be made. This squarely applies to the assessee’s case. The Hon’ble Supreme Court further added that if an expenditure incurred “has no casual connection” with the exempted income, then such expenditure would obviously be treated as not related to the income exempted from tax and such expenditure would be allowed as business expenditure.
14.4 According to Ld. AR this aspect is important as the case of the assessee has all along been that the legacy investment were acquired by it pursuant to an amalgamation order of Hon’ble Delhi High Court dated October 3, 2007. In the case of the assessee, thus the “casual connection” clearly stands broken.
14.5 The Ld. AR also submitted that in CIT vs. Taikisha Engg. India Ltd. 370 ITR 338 the Hon’ble Delhi High Court held that where the assessee has sufficient funds for making investments in shares and mutual funds, and there is a failure of the Assessing Officer to hold and record his satisfaction, it will clinch the issue in favour of the assessee. This squarely applies to the case of the assessee in the present appeal.
We have carefully considered the arguments advanced by the Ld. Representative of the parties and perused the records. It is observed that in the first round the Tribunal in its order dated 22.11.2017 in 6050, 6051/Del/2015 for AY 2008-09, 2011-12 and 2012-13 had taken up the appeal of the Revenue for AY 2008-09 as the lead case. Therefore, the directions of the Hon’ble Delhi High Court contained in its order dated 25.04.2019 in ITA No. 655 of 2018 have to be considered in the light of the factual matrix of the case pertaining to AY 2008-09.
Before the Ld. AO, in response to show cause why disallowance under section 14A r.w. Rule 8D for expenses incurred on investment be not made, the reply of the assessee has very succinctly been stated by the Hon’ble Delhi High Court in its order dated 25.04.2019 as follows:
“...during the assessment proceedings, it was contended that no expenditure was actually incurred on earning exempt income. The assessee also revealed that sums invested in mutual funds and in its subsidiary companies were initially brought in through Foreign Direct Investment (FDI) route and were awaiting use, for the purpose of township development. The assessee had to obtain several statutory and other clearances to launch this business activity. In the meanwhile, it had invested substantial amounts in mutual funds.”
The explanation offered by the assessee did not convince the Ld. AO who held that the assessee company was liable for disallowance under section 14A r.w. Rule 8D for the reason mainly that the assessee has made investments in shares and investment in foreign subsidiary company. First of all, the assessee must have taken decision to invest in shares for which Board resolution and necessary formalities would be required. For all these activities, the assessee must have used resources entailing some expenditure. Therefore, he is satisfied that the assessee has incurred expenses in earning exempt income which needs to be disallowed under section 14A r.w. Rule 8D.
The Ld. CIT(A) did not accept the above contention of the Ld. AO and recorded the following finding (page 23 of appellate order):-
“...however it is seen that dividend income has been earned by the appellant from the mutual funds and no direct or indirect expenditure seems to be incurred by the appellant. The money was received from the foreign investor and till the same was invested in the projects, the same was invested in the mutual funds. Therefore, no cost expenditure seems to be incurred by the appellant for making these investments. It is also seen that the making investment in these mutual funds was a single day activity and appellant was not involved in frequent buying and frequent selling, therefore, no expenditure was incurred by the appellant.”
Again at page 24 of his appellate order, the Ld. CIT(A) recorded as under:- “...in view of the fact that no specific nexus has been established by the Assessing Officer about the receipt of the exempt income and incurring of expenses, hence, no disallowance of expenses is called for. Further, the investment in mutual funds was a temporary phenomena and same was stop gap arrangement till the money was invested in projects. Accordingly, disallowance of Rs. 1,63,50,876/- made by the Assessing Officer as expenses pertaining to earning exempt income is deleted.”
None of the above findings of the Ld. CIT(A) could be assailed before us by the Revenue by bringing on record any cogent material.
It is an admitted position that the assessee has not incurred any interest expenditure, directly or indirectly for the earning of exempt income.
The finding of the Ld. AO that for investing in mutual funds, the assessee must have incurred some expenditure is not based on facts. It is nothing but conjecture and surmise. No actual expenditure could be identified by the Ld. AO. Hon’ble Supreme Court in Maxopp Investment Ltd. (supra) has held that the expression “expenditure incurred” in section 14A means “actual expenditure and not to some imagined expenditure”. If no expenditure is incurred in relation to the exempt income, no disallowance can be made. The decision (supra) of the Hon’ble Supreme Court squarely applies to the facts of the assessee’s case.
In our humble opinion, the order of the Ld. CIT(A) is still maintainable de-hors his finding on strategic investment.
We, therefore, hold that on the facts and in law as set out above, the Ld. CIT(A) was perfectly justified in deleting the impugned disallowance under section 14A r.w. Rule 8D. The remanded matter is disposed of accordingly.
In the result, the appeal of the Revenue being devoid of merit is dismissed.