Income Tax Appellate Tribunal - Bangalore
Deputy Commissioner Of Income Tax ... vs M/S Sterling Developers Pvt Ltd , ... on 31 August, 2018
ITA.1361 to 1363/Bang/2018 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BENGALURU BENCH 'C', BENGALURU
BEFORE SHRI. JASON P BOAZ, ACCOUNTANT MEMBER
AND
SHRI. LALIET KUMAR, JUDICIAL MEMBER
I.T.A Nos.1361 to 1363/Bang/2018
(Assessment Year : 2010-11, 2011-12 & 2014-15)
Deputy Commissioner of Income-tax,
Circle -6(1)(2), Bengaluru .. Appellant
v.
M/s. Sterling Developers P. Ltd,
8, Prestige Nebula, Level -5, Cubbon Road,
Bengaluru 560 001 .. Respondent
PAN : AACCS0304G
Assessee by : Shri. V. Srinivasan, Advocate
Revenue by : Dr. P. V. Pradeep Kumar, Addl. CIT
Heard on : 27.08.2018
Pronounced on : 31.08.2018
ORDER
PER BENCH :
These are appeals filed by the Revenue against the separate orders of the CIT (A), Bengaluru-6, dt.30.11.2017, for the assessment year 2010-11, 2011-12 and 2014-15, on the following common effective ground of appeal :
ITA.1361 to 1363/Bang/2018 Page - 2
2. On the facts and in the circumstances of the case, the learned CIT (A) erred in directing the Assessing Officer to delete the addition since the assessee should have made disallowances even if the company did not earn any tax exempt income in a particular year. The Board vice circular no. 5/2015 has clarified that disallowance have to be made u/s.14 r.w. Rule 8D even when the assessee in a particular year did not earn any exempt income.
02. In this regard, the CIT (A) in para 4, 4.1 and 4.2 has noted the submissions of the assessee to the following effect :
4. The next issue in appeal relates to the disallowance made by the learned A. 0. by invoking the provisions of section 14A of the Act. The total disallowance made by the learned A.O. is Rs.
3,81,32,243/-. Initially, while filing the return of income, the appellant computed the aforesaid disallowance at Rs. 88,97,809/- and has revised the same to Rs. 1,06,18,0881- in the revised computation of income filed in course of assessment proceedings. It is relevant at this stage to point out that the appellant had made the following investments in shares of other companies or capital in partnership firms, income whereof is exempt from tax. Apart from the following there are no other investments made in tax exempt income. The relevant particulars are given as under:
SI. Name of the Company / Investment as on Investment as on No Concern 31st March 2009 31st March 2010 1 Shares of Sterling Urban 85,00,000 85,00,000 Developments Private Limited 2 Shares in Sterling Gera 44,00,000 44,00,000 Residence Private 3 Limited in Sterling Urban Shares 29,99,00,000 29,99,00,000 Infraprojects Private Limited 4 Shares in Janadhar 1,00,000 1,00,000 Construction Private Limited 5 Capital of M/s. Padmavathi 4,24,05,832 1,99,05,832 Associates 6 M/s. Sterling Century -- [-]5,13,13,599 [-] 6,22,72,089 Association of Persons [AOP] Total 30,39,92,233 27,05,33,743 4.1 As can be seen from the above, the entire investment made in earning tax exempt income primarily comprises of investments in ITA.1361 to 1363/Bang/2018 Page - 3 shares of certain group companies and the investment in the capital of a partnership firm. Infact, there is only a reduction in the extent of investment made during the year under consideration and there is no fresh investment made during the year under consideration. It is relevant to highlight here that, in respect of the investment made in capital of the partnership firm M/s. Padmavathy Associates, there is a major reduction in the extent of investment made as compared to the earlier financial year. This is the factual position relating to the investments made by the appellant in earning tax free income.
4.2 In course of assessment proceedings for the earlier assessment years starting with assessment year 2006-07, the issue relating to the deployment of borrowed funds for making the investment in both, earning tax exempt income as well as for non-
business purposes was considered in ex-tenso. Ultimately, while concluding the assessment proceedings for the assessment year 2008-09, the following disallowances out of the interest claimed by the appellant under the head "Business" were made:
Interest paid pertaining to investment in capital account 86,12,500/- of M/s. Padmavathi Associates Interest paid pertaining to the amount advanced to M/s. 67,40,024/- Sastri Family Benefit Trust Interest paid pertaining to the investment made in share of 11,26,250/- Sterling Urban Development Pvt. Ltd.
Interest paid pertaining to the investment made in the 2,52,41,251/- debenture of Sterling Urban Development Total Interest disallowed under the head "Business" 4,17,20,025/- for the assessment year 2008-09 Total Interest allowed as a deduction under the head 2,69,01,799/-
"Business" for the assessment year 2008-09
03. Thereafter in para 12, had adjudicated the issue in the following manner :
12. Disallowance u/s.14A amounting to Rs.2,75,14,155/- : It has been held by the Hon'ble ITAT Bangalore in appellant's own case for assessment year 2009-10 in ITA No.1417/Bang/2012 dated 23.06.2015 that in the absence of exempt income, no disallowance made u/s.14A of the Act can be made. In the light of the above judicial decision of Hon'ble jurisdictional ITAT which is squarely applicable in the instant appeal, and in view of the fact that the decision is ITA.1361 to 1363/Bang/2018 Page - 4 binding, and since judicial discipline requires that wisdom of higher authorities prevail, the AO is directed to recomputed deduction allowable to appellant by following above judicial decision.
04. At the outset, the Ld AR for the Revenue has submitted that this issue has been adjudicated by the Tribunal in favour of the assessee, by decision dt.23.06.2015, wherein at para 15, it was held as under :
15. We have heard the contentions and perused the orders. CIT (A) relied on his own order for A. Y. 2008-09 in directing the AO to set off the loss from 80IB unit with the profits of non-80IB projects. This Tribunal on appeal filed by the Revenue, in its order dt 31.01.2013, held as under :
5.3.1 We have heard both parties and have carefully perused and considered the material on record. At the outset it must be mentioned here that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) was concerned with tot withstanding anything contained in any other provisions of Section 80 I(6) of the Act, as it existed at that relevant point of time and the same is extracted hereunder for clarity :
" Section 80 I (6) - Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an industrial undertaking on a ship or the business of a hotel (or the business of repairs to ocean going vessels or other powered craft) to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or business of the hotel (or the business of repairs to ocean going vessels or other powered craft) were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made."
ITA.1361 to 1363/Bang/2018 Page - 5 Let us also peruse and consider the provisions of section 80 IA(5) of the Act which is relied on by the Assessing Officer which is also extracted hereunder :
"Section 80-IA(5) - Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."
5.3.2 From a perusal and comparison of both these provisions, namely sections 80 I(6) and 80 IA(5) of the Act, it is seen that the provisions of section 80 IA(5) of the Act, it is seen that the provisions of section 80 IA(5) of the Act are couched in similar language to the erstwhile provisions of section 80 I(6) of the Act. In other words, the restriction contemplated under section 80 I (6) of the Act, is the same as the restriction contemplated under section 80 IA(5) of the Act. It is in this context that the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) held after an elaborate analysis of the provisions at paras 12 and 13 of its order which are extracted and reproduced hereunder :
" 12. The contention that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Section 80-I(1) lays down that where the gross total income of the assessee includes any profits derived from the priority undertaking / unit / division, then in computing the total income of the assessee, a deduction from such profits of an amount equal to 20 per cent has to be made. Section 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other ITA.1361 to 1363/Bang/2018 Page - 6 hand section 80-I(6) deals with determination of the quantum of deduction - section 80- I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words "includes any profits" used by the legislature in section 80-I(1) are very important which indicate that the gross total income of an assessee shall include profits from a priority undertaking. While computing the quantum of deduction under section 80- I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI- A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80- I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of section 80A(2) of the Act nugatory and therefore the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under section 80-I(6) for the purpose of calculating the deduction, the loss sustained in one of the units, cannot be taken into account because sub-section (6) contemplates that only the profits shall be taken into account as if it was the only source of income. However, section 80A(2) and section 80B(5) are declaratory in nature. They apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and therefore the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. As observed earlier section 80-I(6) deals with actual computation of deduction whereas section 80-I(1) deals with ITA.1361 to 1363/Bang/2018 Page - 7 the treatment to be given to such deductions in order to arrive at the total income of the assessee and therefore while interpreting section 80-I(1), which also refers to gross total income one has to read the expression 'gross total income' as defined in section 80B(5). Therefore, this court is of the opinion that the High Court was justified in holding that the loss from the oil division was required to be adjusted before determining the gross total income and as the gross total income was 'Nil' the assessee was not entitled to claim deduction under Chapter VI-A which includes section 80-I also.
13. The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is 'Nil' the assessee would not be entitled to deductions under Chapter VI-A of the Act."
5.3.3 The above decision of the Hon'ble Apex Court squarely supports the case of the assessee that the provisions of section 80 IA(5) of the Act would not restrict the operation of the provisions of section 70(1) of the Act with respect to the set off of the loss. The operation of the provision of section 80 IA(5) of the Act is restricted to the computation of the quantum of deduction for which it has to be considered that the eligible business is the only source of income. That restriction, however, cannot be applied to ITA.1417/Bang/2012 & ITA.168/Bang/2013 Page - 11 render the concept of gross total income in terms of section 80 B(5) to be determined before the set off of the losses under section 70(1) of the Act. We are, therefore, of the view that the learned CIT(Appeals) has rightly applied the decision of the Hon'ble Apex Court in the case of Synco Industries Ltd (supra) and that there is no merit in the plea of revenue that the said judgment is not applicable to the facts of the present case of the assessee. 5.3.4 That apart, the learned counsel for the assessee has rightly contended that the provisions of section 80 IA (5) of the Act applies in computing the profits of an eligible business for the purposes of working out the quantum of deduction for the initial assessment year and for every subsequent year thereafter. The incentive deductions both under section 80 IA and 80 IB of the Act have the concept of initial assessment year in respect of almost all ITA.1361 to 1363/Bang/2018 Page - 8 eligible business. However, with respect to the eligible business to which the provisions of section 80 IB(10) of the Act apply, there is no concept of "initial assessment year." The deduction is granted to undertakings engaged in the business of developing and building housing projects on certain conditions being fulfilled. The provisions of section 80 IB (13) of the Act, that makes the provisions of section 80 IA(5) applicable to section 80 IB also, applies only 'so far as may be'. Thus, by virtue of the fact that there is no concept of initial assessment year under section 80IB(10) of the Act, we are also of the view that the provisions of section 80 IA(5) of the Act would not be applicable to the deduction claimed under section 80 IB(10) of the Act. From this angle of the matter also, we find no merit in the view taken by revenue. Following the above view, we dismiss the appeal filed by Revenue.
05. On the other hand the Ld. DR supported the order passed lower authorities .
06. We have heard the rival contentions and perused the record. In the present case, there is no change in facts as facts are similar to the facts of the earlier decision rendered by the Tribunal in the case of the assessee for AY 2009-10, where the Tribunal has deleted the disallowance on the premise that no exempt income has accrued to the assessee from the investment made in the sister concerns. Therefore, following the decision of the coordinate bench in the case of the assessee, for earlier year and also following the judgment of the Hon'ble Delhi High Court, in the matter of Chem Chem Investment [2015] 61 taxmann.com 118 (Delhi) we dismiss the appeals of the Revenue. Chem Investment(supra) it was held as under :
ITA.1361 to 1363/Bang/2018 Page - 9
15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28. In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd's. case (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO [2009] 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc . [2014] 226 Taxman 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd . [2009] 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxman 130/45 taxmann.com 116 and the third of the Allahabad High Court in CIT v. Shivam Motors (P.) Ltd . [2015] 230 Taxman 63/55 taxmann.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question "corresponding expenditure could not be worked out for disallowance."
16. In Holcim India (P.) Ltd's. case (supra), the Court further explained as under:
"15. Income exempt under Section 10 in a particular assessment year, may not have been exemptearlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an ITA.1361 to 1363/Bang/2018 Page - 10 improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."
17. On facts, it was noticed in Holcim India (P.) Ltd's. case (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.
18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.
19. In light of the clear exposition of the law in Holcim India (P.) Ltd's. case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.
20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody's case (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against dividend incomeassessable under the head "income from other sources". Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income', did not mean that any income should in fact have been earned as a ITA.1361 to 1363/Bang/2018 Page - 11 condition precedent for claiming the expenditure. The Court explained:
"What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody's case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.
22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question.
ITA.1361 to 1363/Bang/2018 Page - 12 Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
07. In the result, appeals of the Revenue are dismissed.
Order pronounced in the open court on 31st day of August, 2018.
Sd/- Sd/-
(JASON P BOAZ) (LALIET KUMAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bengaluru
Dated : 31.08.2018
MCN*
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income-tax
4. Commissioner of Income-tax(A)
5. DR
6. GF, ITAT, Bangalore
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.