Commissioner Of Income Tax-I, Ludhiana v. M/S Vardhman Holdings Ltd., Chandigarh Road, Ludhiana

ITA No. 50 of 2012 -1- PUNJAB AND HARYANA HIGH COURT AT CHANDIGARH ITA No. 50 of 2012Date of Decision: 25.01.2013 Commissioner of Income Tax-I, Ludhiana ........ Appellant Versus M/s Vardhman Holdings Ltd., Chandigarh Road, Ludhiana. ...... Respondent 2. ITA No. 51 of 2012 Commissioner of Income Tax-I, Ludhiana ........ Appellant Versus M/s Vardhman Holdings Ltd., Chandigarh Road, Ludhiana. ...... Respondent 3. ITA No. 52 of 2012 Commissioner of Income Tax-I, Ludhiana ........ Appellant Versus M/s Vardhman Holdings Ltd., Chandigarh Road, Ludhiana. ...... Respondent AND 4. ITA No. 73 of 2012 Commissioner of Income Tax-I, Ludhiana ........ Appellant Versus M/s Vardhman Holdings Ltd., Chandigarh Road, Ludhiana. ...... Respondent ITA No. 50 of 2012 CORAM:HON'BLE MR. JUSTICE SURYA KANTHON'BLE MR. JUSTICE R.P. NAGRATH 1. Whether Reporters of local papers may be allowed to see thejudgment? 2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present:-Mr. Rajesh Katoch, Advocatefor the appellant (in all cases). Ms. Radhika Suri, Advocatefor the respondent (in all cases) R.P. NAGRATH, J. ITA Nos. 50, 51, 52 and 73 of 2012 arise out of the commonorder dated 30.08.2011 (Annexure A-VI) passed by Income Tax AppellateTribunal, Chandigarh, Bench 'B', Chandigarh (ITAT), disposing of fourappeals for the assessment years 1994-95, 1995-96, 2000-2001 and 1997-98 respectively of the assessee, on the issue of deduction under Section80M of the Income Tax Act, 1961 (for brevity 'IT Act'). The identicalquestions of fact and law arise in these appeals filed under Section 260Aof IT Act and therefore, taken up together for disposal. 2.For convenience, facts are taken from the ITA No. 50 of2012, relating to the assessment year 1994-1995. The respondent-assessee declared total taxable income of ` 13,45,07,470/- for the saidAssessment Year. 3.The respondent-assessee claimed deduction under Section80M of the IT Act, on the 'gross dividend' of ` 87,50,490/-received by it. The Assessing Officer (AO) noted that as per Section80AA of the IT Act, deduction under Section 80M is admissible ITA No. 50 of 2012 on the quantum of 'net dividend' received during the year. Initially the AOin the assessment order dated 29.11.1996 (Annexure A-I) reduced theproportionate amount out of personnel, administrative & miscellaneousand financial expenses to determine the 'net dividend' permissible fordeduction under Section 80M of the IT Act. The said amount wasdetermined at ` 11,81,025/-, which was reduced from the elible dividendof ` 81.99 lacs and deduction was allowed to the respondent-assessee tothe tune of ` 70,18,975/- under Section 80M of the IT Act as the 'netdividend' income. 4.In appeal the Commissioner of Income Tax (Appeals) [CIT(A)] held that only the financial expenses incurred by the assessee couldbe taken into consideration for working out the deduction and not thepersonnel and administrative & miscellaneous expenses. Thedisallowance by the CIT(A) was calculated at ` 5,49,000/- instead of` 11,81,025/-. In these terms, the appeal was partly allowed. The ITATin the appeal filed by the Revenue as well as the respondent-assessee videorder dated 31.01.2007 (Annexure A-III) restored the matter to the AOwith a direction to determine the issue in the light of decision of SpecialBench, Income Tax Appellate Tribunal, Chandigarh in the case ofPunjabState Industrial Development Corporation Ltd. v. DCIT, Special Range-II, Chandigarh(2006) 102 ITD 1 (Chd.) (SB). 5.Now, AO on reconsideration of the matter redetermined thedisallowance, proportionate to the personnel and administrative & otherexpenses and not on the amount of financial expenses, to the tune of` 6,66,035/- vide order dated 26.12.2007 (Annexure A-IV). CIT(A) ITA No. 50 of 2012 -4- 5.Now, AO on reconsideration of the matter redetermined thedisallowance, proportionate to the personnel and administrative & otherexpenses and not on the amount of financial expenses, to the tune of` 6,66,035/- vide order dated 26.12.2007 (Annexure A-IV). CIT(A) ITA No. 50 of 2012 -4- accepted the appeal partly, restricting disallowance to the extent of ` 1lac, taking into account similar amount of disallowance to the assessee forthe assessment year 2002-03. The Revenue filed appeals before ITATwhich determined the disallowance for different years at ` 1 lac forassessment year 1994-95; ` 1.5 lacs for 1995-96 and ` 2 lacs for each ofthe assessment years 1997-98 and 2000-01. Accordingly the appeals weredisposed of. Against the order of ITAT dated 30.08.2011 (Annexure A-VI) and the order of CIT(A) dated 01.02.2010 (Annexure A-V), theRevenue has preferred these appeals. 6.Revenue has proposed the following substantial question oflaw:- “Whether on the facts and circumstances of the case, theIncome Tax Appellate Tribunal is justified in restricting thedisallowance u/s 80M to the extent of ` 1,00,000/- instead ofupholding the total disallowance of ` 6,66,035/- made by theA.O. being proportionate expenses?” Similar question has been proposed in the other connected appeals. 7.It was vehemently contended by learned counsel for theRevenue that the gross dividend income of respondent-assessee variesexorbitantly in each of the assessment years, in question, and thusdetermination of allowance by the authorities below, by estimation orguess work, is absolutely illegal and that AO was quite correct indetermining the disallowance, based on sound reasons by taking intoaccount the amount, proportionate to the personnel and administrative &miscellaneous expenses. 8.It is indisputable that the dividend income for the assessment ITA No. 50 of 2012 -5- years in question was received from the investments made in the earlieryears. There is also no quarrel with the proposition of law that thededuction under Section 80M of IT Act is to be allowed on the 'netdividend' and not the 'gross dividend'. This was so held by Apex Court inDistributors Baroda Pvt. Ltd.v. Union of India, (1985) 155 ITR 120,that the deduction required to be allowed under Section 80M(1) of the ITAct is liable to be calculated with reference to the amount of dividendcomputed in accordance with the provisions of the Act, and forming partof the gross total income, and not with reference to the full amount ofdividend received by the assessee. 9.In Punjab State Industrial Tribunal Development Corporation's case(supra), the Special Bench of the Tribunal held asunder:- “46. (i)That deduction under s. 80M is to be allowed onnet dividend income computed as per provisions of ss. 57 to59 of the IT Act. The deduction is not to be allowed on grossdividend receipt. (ii) That net dividend income is to becomputed under the head “Other sources” after deduction ofexpenditure incurred for purposes of earning, making orrealizing dividend income. (iii) The deduction to be allowedout of dividend income are as per specified provision of thestatute. These cannot be allowed on general commercialconsiderations. (iv) That actual expenditure incurred are tobe taken into consideration. There is no question of takingexpenditure on estimate or presumption basis whilecomputing dividend income or while allowing deductionunder s. 80M of the IT Act. (v) That where shares areacquired out of borrowed funds, on which dividend isreceived, deduction of interest paid can be allowed under s. 57, provided loan was taken for making and earningdividend income. There is no question of deduction of anyamount paid as interest, to which provisions of s. 36(1)(iii)are applicable, while computing deduction under s. 80M ofthe IT Act. (emphasis supplied) 57, provided loan was taken for making and earningdividend income. There is no question of deduction of anyamount paid as interest, to which provisions of s. 36(1)(iii)are applicable, while computing deduction under s. 80M ofthe IT Act. (emphasis supplied) 47.In the light of above propositions, I am unable to agreewith the order of the Tribunal for asst. year 1990-91 to 1992-93 in the case of the assessee. There is no material to holdthat assessee spent any amount on earning or making orrealizing any dividend. There is further no evidence to showthat borrowed funds were utilized for acquiring shares onwhich dividend was paid to the assessee. No evidence ofincurring of any actual expenditure has been shown. In thecircumstances, when no expenditure has been shown to havebeen incurred for earning, making or realizing dividendincome, there is absolutely no question of deducting any partof interest or management expenses or expenses allowed as adeduction to the assessee under s. 36(1)(viii) or any otherprovision of the IT Act, while computing dividend income. I,therefore, direct that deduction under s. 80M be allowed tothe assessee as claimed by the assessee in all the assessmentyears under appeal.” 10.In CITv. Metalman Auto (P) Ltd.(2011) 336 ITR 434 (P&H)AO held that for earning dividend income, the assessee must bepresumed to have incurred some expenditure which had been disallowedunder Section 14A. On appeal CIT (A) held that in the absence ofevidence of any expenditure having been shown to have been incurred,disallowance under Section 14A was not justified. The Tribunal observedthus:- “25. Ground No. 4 is regarding disallowance under Section14A of the Act in relation to the exempt income earned by the Assessee. In this regard, the facts are that the Assessee hadearned income by way of interest on UTT Bonds anddividend of Rs. 54,000 and Rs. 93,08,912 respectively whichwas exempted from tax. The AO estimated a sum ofRs. 1,00,000 having been incurred by the Assessee forearning such exempt income and accordingly, made anaddition under Section 14A of the Act. Out of the sum ofRs. 1,00,000, Rs. 65,000 was considered as interestexpenditure relatable to the borrowed capital used forinvestment in the securities yielding exempt income andRs. 35,000 was estimated out of the administrative expenses.The CIT(A) has deleted the addition on the ground that theinvestments have been made from funds on which no interesthas been paid. The CIT(A) also noticed that the AO has notbacked his assertion that investments were made fromcombined funds of the Assessee which could not bebifurcated. Against the deletion of addition, the Revenue is inappeal before us. 26. Obviously, the issue is to be decided in the light of thejudgment of the Hon'ble jurisdictional High Court in the caseof Hero Cycles Ltd. (supra). As per the Hon'ble jurisdictionalHigh Court, the disallowance under Section 14A requires afinding of incurrence of expenditure for earning the exemptincome. In case no expenditure has been incurred, thedisallowance under Section 14A is not justified. In otherwords, there cannot be a presumption that certainexpenditure is bound to be incurred for earning the exemptincome. Considered in this light, we find that there is nomistake in the order of the CIT(A). Quite clearly, the AO hadonly made a presumption that certain expenditures have beenincurred for earning the impugned exempt incomes.Therefore, following the parity of reasoning laid down by theHon'ble jurisdictional High Court in the case of Hero CyclesLtd. (supra), we affirm the decision of the CIT(A) and ITA No. 50 of 2012 accordingly, ground raised by the Revenue is dismissed.”This Court held that for disallowance under Section 14A presumptiveexpenditure in the absence of actual expenditure could not be taken intoaccount. ITA No. 50 of 2012 accordingly, ground raised by the Revenue is dismissed.”This Court held that for disallowance under Section 14A presumptiveexpenditure in the absence of actual expenditure could not be taken intoaccount. 11.No authority taking a contrary view that the Revenue isentitled to reduce from 'gross dividend' received, the presumptiveexpenditure in the absence of actual expenditure for determining the 'netdividend' income, has been cited. The Revenue did not conduct anenquiry to determine the actual expenditure incurred in earning thedividend income by the assessee, which is a manufacturing concern andalso deals in trading of the hosiery goods. It is not an investmentcompany. It has been the categorical stand of the respondent-assesseethat the investment, on which the dividend income is earned, was old andthe total dividend warrants received by the assessee were only 2 to 3 onthe shares held of the sister concern. The appellant's counsel urged thatthe ITAT or for that matter CIT(A) had no basis before them to determinethe expenses incurred in earning dividend income by approximation butwe find that for that matter the grievance could be raised by respondent-assessee and not the Revenue which has come in appeal. 12.We do not find that any substantial question of law arises inthese appeals, therefore, the same are dismissed. ( SURYA KANT ) JUDGE JUDGE ( R.P. NAGRATH ) JUDGE JUDGE January , 2013 jk