Income Tax Appellate Tribunal - Mumbai
The Dcit vs Tata Investment Corporation Ltd. on 14 May, 2007
ORDER
Sushma Chowla, Judicial Member
1. This appeal filed by the revenue are against the order of CIT (A) - XXXIII, Mumbai, dated 28.08.2003 relating to Assessment Years 2000-01 against the order under Section 143(3) of the I.T. Act, 1961.
2. The only issue raised by the revenue is as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of Rs. 63. 74 Lakhs made by the Assessing Officer allocating 57.34 of Rs. 111.97 Lakhs out of the payments made to employees for salaries and personnel cost towards the expenditure related to earning of dividends, claimed exempt Under Section 10(33) of the Act, within the meaning of Section 14A of the Act.
3. Shri T. Diwakar Prasad, Departmental Representative appeared for the revenue and Shri Shri Dinesh Vyas with P.C. Tripathi, learned Counsel appeared for the assessee and put forward their rival submissions.
4. The brief facts of the case are that the assessee company is an investment Company, which is a non-banking company as defined by the Reserve Bank of India, and the sources of income are income from interest, dividend and long term/short term capital gain on sale investments. During the year under consideration, the assessee company had received gross dividend of Rs. 2679.29 Lakhs, which was claimed as exempt under the provisions of Section 10(33) of the I.T. Act. No part of expenditure had been allocated towards the earning of this income. The Assessing Officer invoking the provisions of Section 14A requisitioned the assessee company to explain why the expenditure incurred to earn the income including the interest expenditure should not be allowed. The assessee in reply submitted as under:
The Company had received dividends of Rs. 26,79,28,996/- during Assessment Year 2000-2001, which were exempt from tax under the provisions of Section 10 (33) of the I.T. Act, 1961.
The Company had incurred bank charges of Rs. 602/- for the collection of the dividends and hence the net amount of Rs. 26,79,28,394/- was the net tax free dividends for Assessment Year 2000-2001. Relinace has been placed on the decision of the Bombay High Court in the case of CIT v. General Insurance Corporation of India (No. 1) and (No.s) 254 ITR 203/204.
The Company has a net interest income of Rs. 124.56 Lakhs for the year ended 31.03.2000. The interest earned during the year was far higher than the interest paid and accordingly, no interest is attributable towards dividend income.
With prejudice to our contention, that the only expenses relatable to the earning of dividend income are the bank collection charges, we give below the details of expenditure attributable to the earning of dividend income following the method adopted by the department in the past.
(Rs. In Lacs)
Total Income 4672.76
Tax free dividends received 2679.29
% of tax free dividends to total income 57.34%
Total expenses as per P &L A/c. 710.50
Add: Depreciation admissible 30.73
741.23
Less: Depreciation as per P & LA/c. 58.93
Donations 29.11
Payment under Section 40A(9) 0.05
Long term diminution in value of Inv. 379.47
Amount under Section 43B not paid
(stamp duty) on issue of shares con-
sequent to amalgamation) 30.36 497.92
Total allowable expenses 243.31
57.34% of Rs. 243.31 Lacs, attributed to the earning of dividends 139.51
Should you propose to disallow any part of the expenses, then we should he permitted to capitalize such expenses and enhance the cost of acquisition of shares to which the said expenses pertain, as per details given in Nte No. (ii) in Statement No. 2 filed with the Return of Income for Assessment Year 2000-2001.
The expenditure of Rs. 139.51 Lakhs was disallowed by the Assessing Officer.
5. The CIT (A) applying the ratio of Hon'ble Bombay High Court in CIT v. General Insurance of India (No. 1) and CIT v. General Insurance of India (No. 2) (supra) held that no disallowance is merited out of salary expenditure and accordingly allowed a relief of Rs. 63.74 Lakhs. Revenue is aggrieved and hence this appeal.
6. The learned DR for the revenue stated that the total income of the assessee, during the year was about Rs.47.00 Crores, which included dividend income of Rs. 27.00 Crores. The learned DR drew our attention to the reply filed by the assessee before the Assessing Officer, which is incorporated in the Assessment Order itself and accepting the contention of the assessee expenses worked out by the assessee had been disallowed. The learned DR further clarified that as the dividend income was 57.34% of the total income, proportionate income attributable to earning of income was worked out by the assessee. The Assessing Officer accepted the same and disallowed the expenditure. The learned DR further submitted that before CIT (A), the same was agitated that salary expenses of Rs. 139.51 Lakhs are not to be included. Drawing distinguishment, the learned DR stated that the ratio of CIT v. General Insurance of India (No. 2) is not applicable to the facts of the present case, as GIC is not an Investment company and income of assessee is that of investment company, which includes 57% of income from dividend. The learned DR placed reliance on Everplus Securities & Finance Ltd. v. DCIT 101 ITD 151 (Del.).
7. The Learned AR for the assessee relied upon the following cases:
1. CIT v. GIC (No. 2) 254 ITR 203/204 (Bom.)
2. DCIT v. Tata Hydro Electric Co. Ltd., Tata Power Co. Ltd., & Andhra Valley Power Supply Co. Ltd. ITA No. 5874/75/76/Mum/I997)(Mum.)
3. DCIT v.. Tata Power Co. Ltd., Tata Hydro Electric Co. Ltd.. & Andhra Valley Power Supply Co. Ltd. ITA No. 9393/94/95/Mum/1995)(Mum.)
4. DCIT v. Andhra Valley Power Supply Co. Ltd., Tata Hydro Electric Co. Ltd., & Tata Power Co. Ltd. ITA No. 3520/21/22/Mum/1996)(Mum.)
5. Tata Power Co. Ltd. v. Addl. CIT ITA No. 7487/Mum/2002) (Mum) The learned AR further submitted that the real question in the present appeal is what is the nature of expenditure and whether such expenditure can be regarded as incurred for earning of dividend income. The learned AR further submitted that whether the assessee is an investment company or any other company does not make a difference as the ratio laid down by the Hon'ble jurisdictional High Court is binding. The learned AR further stated that even after the introduction of Section 14A of the I.T.Act, no such disallowance can be made as the assessee was showing income from other sources being interest income and also because the shares were not held as stock in trade but the intra group shares were held by the assessee company for the purpose of control. Reliance was placed on the decision of Shaw Wallace & Co. Ltd. v. DCIT 80 ITD 156 (Cal.) wherein while deciding the issue of deduction under Section 80-M of the I.T.Act it has been held that only actual expenditure is to be disallowed and there is no scope for estimating. The learned AR further stated that the expenditure incurred by the assessee is on the acquisition of shares and not on the earning from shares. The learned AR further submitted that the ratio laid down by the Delhi Tribunal in Everplus Securities & Finance Ltd. v. DCIT (supra) is not applicable to the facts of the present case. The learned DR in rejoinder submitted that in case the expenditure incurred by the assessee is not for the earning of dividend then what is the purpose of expenditure in the case of the assessee company which is an investment company.
8. We have hard the rival submissions and perused the records. Under Chapter IV of the I.T. Act, heads of income are provided as enumerated in Section 14 of the I.T.Act. Section 14 of the I.T.Act provides the heads of income, which are chargeable to tax while computing the income of the assessee. Separate heads of income have been provided for computing the income under each head independently and separately and the heads of income are as under:
A - Salaries B. [***] C - Income from house property D - Profits and gains of business or profession E - Capital gains F - Income from other sources Section 14A of the I.T.Act was inserted by the Finance Act, 2001 with retrospective effect from 01.04.1962, which provided as under:
Section 14A - For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any Assessment Year beginning on or before the 1st day of April, 2001. [Proviso inserted by the Finance Act, 2002 w.e.f 11.05.2001] Section 2(24) defines income which in addition to all the other incomes also includes dividend as per clause (ii) to Section 2(24) of the I.T.Act. Section 2(45) defines total income as total amount of income referred to in Section 5 and computed in the manner laid down in this Act. Section 10 of the I.T. Act specifies the incomes' which shall not be included in total income. Section 10(33) provides that income received by way of dividend as referred to in Section 1150 of the I.T.Act are exempt from tax. Section 1150 of the I.T. Act talks of tax on distributed profits of domestic companies. In other words, the dividend distributed by domestic companies is not taxable in the hands of the recipient i.e., the shareholder of the domestic company by virtue of provisions of Section 10(33) of the I.T. Act, but, tax is charged on distribution of such profits by way of dividend on the domestic companies, as per the provisions of Section 1150 of the I.T. Act. In other words, tax is charged on the distributor of income and no tax is charged in the hands of the recipient by virtue of Section 10(33) of the I.T. Act.
9. Section 14A inserted by Finance Act. 2001 with retrospective effect from 01.04.1962 provides for disallowance of expenditure in relation to income which does not form part of total income. In view of the provisions of Section 14A, while allowing the claim of the expenditure, it is to be seen whether the aforesaid expenditure is relatable to any income forming part of total income assessable in the hands of the assessee.
10. The Hon'ble Bombay High Court in CIT v. General Insurance Corporation of India Ltd. (No. 1) and (No. 2) held as under:
That the expenses incurred by the assessee on account of salary paid to staff, stamp duty, transfer fee and safe custody charges were not directly relatable to earning of dividend for the purpose of computing special deduction under Section 80M of the I.T. Act, 1961.
All the other cases relied upon by the assessee in the case of sister-concerns of the assessee company are not relating to investment company though it has been held that no disallowance by way of estimation of certain expenses is warranted, though the dividend income was exempt and the provisions of Section 14A of the I.T. Act were invoked.
11. Similarly, in the case of Shaw Wallace & Co. Ltd. v. DCIT (supra), the issue was computation of deduction under Section 80M of the I.T.Act and it was held as under:
Having considered the rival submissions and deliberated upon the judicial precedents on the issue it was to be held that the deduction of expenditure incurred in earning dividend income, merely on notional or estimate basis and for the purpose of computing admissible deduction under Section 80M, was not sustainable in law. In case an expenditure was really incurred in earning the dividend income, such an expenditure should undoubtedly be deducted from gross dividend to arrive at the allowable deduction under Section 80M. However, in the instant case, the deduction for expenditure had been made on purely estimate basis. Such an allocation of expenditure, as made by the Assessing Officer in this case, was devoid of legally sustainable basis in the light of jurisdictional High Court's judgment in the case of CIT v. United Collieries Ltd. 203 TTR 857.
12. It may be noted that both the decisions of Hon'ble Bombay High Court in CIT v. General Insurance Corporation of India Ltd. (No. 1) & (No. 2)(cited Supra) and the decision of Calcutta Tribunal in Shaw Wallace & Co. Ltd. v. DCIT (supra), are before the insertion of Section 14A of the I.T.Act, though with retrospective effect from 01.04.1962.
13. The Delhi Bench of Tribunal in Everplus Securities & Finance Ltd. v. DC1T (supra) have held as under:
The assessee conceded that the main activity of the company for making investment in share of group company was to acquire and retain control of the group companies. The question that required to be considered was as to whether that activity itself constituted a business when the real intention of the company was not to earn profit but to acquire and exercise control of the group companies. In order to constitute activity of the assessee for carrying on the business, it is essential that such activity must be with a motive of earning profit. Such earning of profit should be by the company itself and not by the other group company. The issue came to be considered by the Delhi High Court in the case of Bharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470/[1980] 4 Taxman 58 wherein it was observed that the expression 'business' is a word of indefinite import....
It was further held as under:
It was conceded that object of making investment in the shares for earning dividend was only incidental but the activity carried on by the assessee could only involve earning of dividend income....Thus, the activity of the assessee though incidental could only be considered for earning of the dividend income incidental to the purchase of shares from the group companies.
The Delhi Bench of Tribunal in Everplus Securities & Finance Ltd. v. DCIT (supra) concluded as under:
The only income arising from the holding of the shares was dividend income which was exempt under Section 10(33). The assessee incurred expenditure for earning exempted dividend income. Section 14A had been inserted by the Finance Act, 2001 with effect from 1-4-1962 laying down that no deduction would be allowed in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under that head. The assessee was, therefore, not entitled to the said deduction of interest under Section 36(1)(iii). The authorities below, therefore, rightly disallowed the amount against the assessee.
14. The present assessee before us is an Investment Company whose object is to invest its fund in Group Concerns, income from which is earned by way of dividend income and interest income. The dividend income is exempt from tax under the provisions of Section 10(33) of IT Act. As admitted by the assessee during the course of assessment proceedings 57.34% of the total income is attributable to dividend income. Accordingly, the assessee had in its reply submitted the break up of the expenditure incurred during the year and also worked out "details of expenditure attributable to the earning of dividends following the method adopted by the Department in the past". Accordingly, a sum of Rs. 139.51 lakhs was determined as expenditure attributable to earning of dividends. The said expenditure of Rs. 139.51 lakhs include salary expenditure of Rs. 63.74 lakhs. The said expenditure was disallowed by the Assessing Officer but salary expenditure of Rs. 63.74 lakhs was allowed by the CIT(A) against which the Revenue has filed an appeal. No appeal of the assessee against the balance disallowance was pointed out during the course of hearing. In the case of an investment company where the business of the company is to invest its funds in the shares of sister concerns and other companies and also deposited the money with group concerns on which interest is received, the infrastructure of the company is utilized for the purpose of carrying out its objects i.e. investment in other concerns and also earning income on such investments. Though, the Courts have time and again held that no disallowance can be made on a estimate basis or in relation to any proportion to the receipts shown from various sources, but in the present case before us where the sole business activity carried on by the assessee is of an investment company, the expenses incurred on salary paid to the employees, whose services in turn are utilized for the attainment of the objects of assessee company, certain part of the said salary expenditure is attributable to the earning of dividend income. We find support from the Special Bench of Chandigarh Tribunal in Punjab State Industrial Development Corporation Ltd. v. DOT 102 ITD 1, Chandigarh, wherein it was held:
The Assessing Officer has to make deduction of actual expenses of such expenses which would be held to have been incurred by the assessee and thus, deductible from the dividend income under the head "Income from other Sources.
15. In the said case the claim of the assessee was allowed as no material was available on record to show that the assessee actually incurred expenses for earning dividend income. But in the facts of the present case before us where the sole activity of the assessee company is that of an investment company, the total infrastructure is used for the purpose of attainment of its objects which include investment in group concerns and other companies. The income earned on such investments by way of dividend income is exempt under the provisions of Section 10(33) of the IT Act and by invoking the provisions of Section 14A of the IT Act, such expenditure attributable to earning of dividend income is to be disallowed under the provisions of the Act, Therefore, we direct the Assessing Officer to disallow the portion of salary expenditure incurred during the year under consideration which in turn has been incurred for the purpose of carrying out the objects of the assessee company. The assessee is directed to furnish the break up of salary expenditure incurred during the year under consideration, where services of such employees have been utilized for the purpose of carrying out the objectives of the assessee company. Incase of failure on the part of the assessee to furnish the requisite details, the AO is left with no option but to estimate such expenditure which is attributable to earning of dividend income, which in turn can be limited to the extent of percentage of dividend income earned vis-a-vis the total income earned during the year under consideration. Thus the ground of appeal raised by the Revenue is allowed for statistical purpose.
16. In the result, the appeal of the Revenue is allowed for statistical purpose.
Order pronounced on the 14th day of May, 2007.