Ita/569/2015 Of The Commissioner Of Income Tax v. M/S. Chaitanya Properties Pvt Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 15 DAY OF JUNE 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK 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. oD THE JOINT COMMISSIONBR OF INCOME-TAX 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, BANGALOREPAN: AAACC 59OO0OA_. 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|"27.03.2015PASSEDIN|ITA|No.o2/Bang/2013—feS.P.No.148/Bang/2014, FOR THE ASSESSMENT YEAR 2009-10, |PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OFLAW STATEBD ABOVE AND BIC. 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., THESE APPEALS COMING ON FOR ADMISSION, THIS|DAY,Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. K.V.Aravind ,|Adv. for Appellants - RevenueMr. A.Shankar and Mr. M.Lava ,Advs. for Respondent- Assessee 1.The Revenue has filed these appeals under|section 260-A of the Income Tax Act, 1961, purportedlyraising a substantial question of law arising from theorder of the learned Income Tax Appellate Tribunal vide Annexure-Cdated27.03.20151N I.T.A.No.52/ Bang/201forA.Y. 2ZQQ9-1which wasfiled by the Assessee,|M/s. Chaitanya Properties Pvt.Ltd., V/s. Joint Commissioner of Income Tax ,Bengaluru a2The alleged substantial question of lawsought to be raised by the present appellants is actuallycovered by two decisions of this Court on the issue ofdisallowance 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 Actread with Rule SD of the Rules. 3.The relevant findings and reasons given bythe learned Tribunal to hold in favour of the Assessee|that the disallowance to the extent ofRs.1,93,730/-could not be made by the Assessing Authority to earnexempted income by way of dividends from equityshares of Andhra Bank to the extent otRs.18,400/-are quoted below for ready reference: 6.3.3)ThelearnedAuthorisedRepresentative submits that, from the above.break up of investments, it is clear that out of|the total amount of Rs.3,87,46,000,_ theassessee’s investment in associate / group|company to the extent of Rs.3,87,00,000/- 1smade not with a view to earn exempt income.but|forstrategicbusinessPurposes.Therefore, the investment of Rs.46,000 made|in other companies t1.e., Andhra Bank onlycould be considered as investments made§with a view to earn exempt income. It 1s. 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 quoted below for ready reference: 6.3.3)ThelearnedAuthorisedRepresentative submits that, from the above.break up of investments, it is clear that out of|the total amount of Rs.3,87,46,000,_ theassessee’s investment in associate / group|company to the extent of Rs.3,87,00,000/- 1smade not with a view to earn exempt income.but|forstrategicbusinessPurposes.Therefore, the investment of Rs.46,000 made|in other companies t1.e., Andhra Bank onlycould be considered as investments made§with a view to earn exempt income. It 1s. 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 Croresin Trichy Steel Rolling Mills, Rs.1,87,00,000|was invested in the financial year ending 31[Sf]March, 2003. It is contended by the learnedAuthorisedRepresentativethattheseinvestments are long term investments, which|form a part of the record before the ITDepartment and that no expenditure has beenincurred 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...ThelearnedAuthorisedRepresentative contends that it is not onlyexcessive but also absurd that the assessee|hashadTo suffer|(Odisallowanceof|Rs.1,93,730/- as expenditure incurred onearning 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 Inithiscontext,the|learnedAuthorised Representative placed _ reliancupon the decision of the Hon’ble_ ITAT,Mumbai Bench in the case of J.M. FinancialLtd.,V/s.Addl.CIT|in|ITANo.4521/ Mum/ 2012 dated 26.03.2014. Thlearned Authorised Representative submitted|that in this order the Tribunal has held thatwhere the investment its 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 earndividend income from such investments and|therefore it cannot be said that the assessee|1S|incurringadministrativeEXPeENnseTo monitor these investments. Further, in the|case where investments are long term in|nature, it cannot be said that expenditure isbeing incurred to maintain the portfolio. The|learned Authorised Representative further|Submits that the MumbatITAT in theaforesaid order has also stated that similar|view has been held by the ITAT, Mumbat|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 tn ITA No.5408/ Mum/ 2012The learned Authorised Representative prays|that in view of the facts and circumstances ofthe case and the judicial pronouncements on|this issue on similar facts, the addition of|Rs.1,93,730/- made under Section 14A rws.Rule &D ought to be deleted. 6.3.5)ThelearnedAuthorisedRepresentative alternatively placed relianceon the decision of the ITAT, Mumbai Bench in|the case of Daga Global Chemicals Pvt. Ltd.,|V/s.ACITin|ITANo.5592/ Mum/ 201wherein it was stated to be held that thedisallowance under Section 14¢A r.w. Rule 8Dcannot exceed the exempt income. It i1sSubmittedby|thelearnedAuthorisedRepresentative that since the exempt income.earned in the case on hand is Rs.18,400, themaximum amount that could be disallowed is|Rs. 165,400 6/14 Vs. Addl. CIT tn ITA No.5408/ Mum/ 2012The learned Authorised Representative prays|that in view of the facts and circumstances ofthe case and the judicial pronouncements on|this issue on similar facts, the addition of|Rs.1,93,730/- made under Section 14A rws.Rule &D ought to be deleted. 6.3.5)ThelearnedAuthorisedRepresentative alternatively placed relianceon the decision of the ITAT, Mumbai Bench in|the case of Daga Global Chemicals Pvt. Ltd.,|V/s.ACITin|ITANo.5592/ Mum/ 201wherein it was stated to be held that thedisallowance under Section 14¢A r.w. Rule 8Dcannot exceed the exempt income. It i1sSubmittedby|thelearnedAuthorisedRepresentative that since the exempt income.earned in the case on hand is Rs.18,400, themaximum amount that could be disallowed is|Rs. 165,400 6.4Percontra,thelearnedDepartmental 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 Wehave|heardtherivalcontentions 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 heldthat 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 thecorrectness 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|havingregardTo theaccounts|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|exemptincome|of|Rs. 18,400buthasproceeded to apply the provisions of Rule 8Dto arrive at the disallowance of Rs.1,93,730|asthe expenditure deemed to be incurredfor earning exempt income. 6.5.2 Further, as contended by thelearnedAuthorisedRepresentative,thejudicial pronouncements relied on by theassessee 1.e., JU.M.Financtial Ltd (supra), applto 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 theShares ofAndhra 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 _ factuacircumstances of the case as discussed and|for the reasons stated above, we delete thedisallowance of Rs.1,93,730 made by the|Assessing Officer under Section 14A r/w.Rule SD.” 4The said controversy with regard to Section14-A read with Rule 8D ot the Rules has been decided|by this Court in the following two judgments which arequoted below for ready reference. (1)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. 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 _ factuacircumstances of the case as discussed and|for the reasons stated above, we delete thedisallowance of Rs.1,93,730 made by the|Assessing Officer under Section 14A r/w.Rule SD.” 4The said controversy with regard to Section14-A read with Rule 8D ot the Rules has been decided|by this Court in the following two judgments which arequoted below for ready reference. (1)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. 40. We|have.heardtherivalsubmissions. A copy of the avatability offunds and investments made was filed|before us which is at pages 38 to 42 ofthe assessee’s paperbook and the same is enclosed asANNEXURE1ITI to thisorder. itis clearfrom the said statementthat the availability ofprofit, share capital| Date of Order 15-06-2018, ITA.Nos.569/2015 & 229/2016 10/14 and reserves & surplus was much more|than investments made by the assesseewhich could yield tax free income. 41.)The Hon’ble Bombay High Courtin Reliance Utilities & Power Ltd. 313 ITR|340 (Bom) has held that where _ thinterest free funds far exceed the value ofinvestments, it should be considered that|investments have been made out ofinterest free funds and no disallowanceu/s.[IAtowards|interestexpenditure can be made. This view was|again confirmed by the Hon’ble Bombay|High Court in CIT v. HDFC Bank Ltd., ITANo.330 of 2012, judgment dated 23.7. 14,wherein|it|Washeldthatwheninvestments are made out of common pool|of funds and non-interest bearing fundswere more than the investments in tax|free securities, no disallowance of interestexpenditure u/s. 14A can be made. 4? |In|thelightofabove|saiddecisions, we are of the view thatdisallowance of interest expenses in the|present case of Rs.49,42,473 made under (11) 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 S&D(2)(ii) of the I.T. Rules should bedeleted. We order accordingly.” The aforesaid shows that the Tribunal hasfollowed a decision of the Bombay High Court inthe case ofCIT v. HDFC Bank Ltd., (ITA|No.330/2012 disposed of on 23/7/2014)When the issue is already covered by a decisionof the High Court of Bombay with which weconcur, we do notfind any substantial question oflaw would arise for consideration as canvassed. 6. In view of the above observations,the appeal is dismissed... M/s.Pragatht Krishna Gramin Bank vs.Joint Commissioner of Income Tax (ITANos.100001/2018as100002/2018decided on 28.05.2018 by the DivisionBench of this Court at Dharwad Bench. “13. The manner in which the aforesaiddisallowance has been made by the assessingauthority and has been upheld by the appellate|authorities leques much to the desired aqnd thesame 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 theAssessing Authority. 6. In view of the above observations,the appeal is dismissed... M/s.Pragatht Krishna Gramin Bank vs.Joint Commissioner of Income Tax (ITANos.100001/2018as100002/2018decided on 28.05.2018 by the DivisionBench of this Court at Dharwad Bench. “13. The manner in which the aforesaiddisallowance has been made by the assessingauthority and has been upheld by the appellate|authorities leques much to the desired aqnd thesame 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 theAssessing Authority. 14.We make it clear that the expenditurefor earning exempted income has to have areasonable proportion to the income, so earned,goingbytheCOMmmonfinancialprudence.Therefore, even if the Assessing Authority has tomake an estimate of such an_ expenditureincurred to earn exempted income, it has to havea rational nexus with the amount of incomeearned itself. Disallowance under Section 14A ofRs.2,48,85,000/- as expenses to earn exemptedDwidend income of Rs.1,80,30,965/- is per seabsurd and hypothetical. The disallowanceunder Section 8D cannot exceed the expensesclaimed by assessee under the Proviso to Rule&D. Therefore, where the assessee claimed thatassessee did not incur any such expenditureduring the year in question to earn Dividends ofRs.1,80,30,965/-, the burden was upon theassessing authority to compute the interest onsuch borrowed funds which were dedicatedlyused for investment in securities to earn suchexempted Dividend income. The disallowanceunder Section 14A cannot be a wild guessworkbereft 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 factuallyincurred expenses. It is not deemed disallowance —under Section 14A of the Act but an enablingprovision for assessing authority to compute thesame on the given facts and figures in theregularly maintained Books of Accounts. Theassessing authority also could not have calledupon the Assessee himself to undertake theexercise of computing the disallowance undersection SD of the Rules. Such abdication of dutyin not permissible in law. Since no such exercisehas been undertaken by the assessing authority,the case calls for a remand. 1S.In this view of the matter, thefindings of all the three authorities below forsection 14A of the Act are set aside and thematter is remanded back to the AssessingAuthority for re-computing the disallowance ofexpenditure, if any, under Section 14A of the Act,in accordance with law.” 5.In view of the aforesaid issue being coverednow by the two decisions of this Court, we are satisfiedthat 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 bedismissed and is accordingly dismissed. No order as tocosts. 6.In view of the aforesaid order, the connected I.T.A.No.229/2016arisingOUToT| S.P.No.148/Bang/2014>.thestayApplication1nI.T.A.No.52/ Bang/201is also hable to be rejected andthe same is accordingly rejected. AN/-, NC Sd/-.JUDGE. Sd/-.JU DGE