C I T V Holcim India Limited
Abstract……..(Plain text)……
Commissioner of Income Tax-IV Versus Holcim India P. Ltd. – Income Tax – DELHI HIGH COURT – HC – Dividend on income disallowed u/s 14A – Whether the Tribunal was right in deleting the disallowance u/s 14A holding that no dividend income was earned by the assessee ignoring the provisions u/s 14A – Held that:- The Tribunal rightly observed that there was a contradiction in the submissions made by the revenue that the assessee had acquired shares for earning of dividends – relying upon Additional Commissioner of Income-tax, Circle 1(1) Versus Spray Engineering Devices Ltd. [2012 (7) TMI 587 - ITAT CHANDIGARH] – Income exempt u/s 10 in a particular AY, may not have been exempt earlier and can become taxable in future years – 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 AY – LTCG 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 – assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. The entire or whole expenditure has been disallowed as if there was no expenditure incurred by the assessee for conducting business – CIT(A) has positively held that the business was set up and had commenced – Expenditure had to be also incurred to protect the investment made – genuineness of the expenses and the fact that it was incurred for business activities was not doubted by the AO and has also not been doubted by the CIT(A) – Decided against revenue. – 2014 (9) TMI 434 – DELHI HIGH COURT – TMI – ITA No. 486/2014 & ITA No. 299/2014 – - Dated:- 5-9-2014 – Sanjiv Khanna And V. Kameswar Rao,JJ. For the Petitioner : Mr. Kamal Sawhney, Sr.Standing Counel with Mr.Sanjay Kumar, Jr.Standing Counsel For the Respondent : Mr. Satyen Sethi, Advocate with Mr.Arta Trana Panda, Advocate ORDER Sanjiv Khanna, J. (Oral) 1. The following substantial question of law is proposed in these two appeals by the appellant-Revenue which pertain to the Assessment Years 2007-08 and 2008-09:- Whether the Income Tax Appellate Tribunal was right in deleting the disallowance under Section 14A of the Income Tax Act, 1961 amounting to ₹ 8,61,50,315/- in Assessment Year 2007-08 and ₹ 6,60,93,678/- in assessment year 2008-09 holding that no dividend income was earned by the assessee ignoring the provisions under Section 14A. 2. At the outset, we notice that the Income Tax Appellate Tribunal ( Tribunal , in short) has also examined the question whether disallowance under Section 14A of the Income Tax Act, 1961 ( Act in short), could have been made for the first time by the Commissioner of Income Tax (Appeals) ( CIT(A) , in short), but, we need not issue notice on the said aspect in case we agree with the second finding recorded by the Tribunal in the impugned order dated 27.09.2013. 3. The respondent-assessee, a subsidiary of Holderind Investments Ltd., Mauritius, was formed as a holding company for making downstream investments in cement manufacturing ventures in India. In the return of income filed for the Assessment Year 2007-08, the respondent-assessee declared loss of ₹ 8.56 Crores approximately. The respondent-assessee had declared revenue receipts of ₹ 18,02,274/- which included interest of ₹ 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of ₹ 16,52,225/-. As against this, the respondent assessee had claimed administrative and miscellaneous expenses expenditure written off amounting to ₹ 8.75 Crores. For the Assessment Year 2008-09, the assessee had filed return declaring loss of ₹ 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of ₹ 12,46,595/-. It had claimed expenses amounting to ₹ 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses. 4. In the two assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. The respondent-assessee, after receiving approval of Foreign Investment Promotion Board (FIPB) dated 20.12.2000 acquired shares capital of Ambuja Cement India Ltd. This, the Assessing Officer felt, was not sufficient to indicate or hold that the respondent-assessee had started their business. He accordingly disallowed the entire expenditure of ₹ 8.75 Crores for the Assessment Year 2007-08 and ₹ 7.02 Crores for the Assessment Year 2008-09. 5. The CIT(A), by two separate orders did not agree with the findings recorded by the Assessing Officer that the business of the respondent- assessee had not been set up or commenced. The CIT(A) observed that the respondent-assessee had been set up with the business objective of making investment in cement industry after due approval given by the Government of India, Ministry of Commerce and Industry vide letter dated 18.12.2002 and 20.12.2012. In fact, the respondent-assessee was not to undertake any manufacturing activity themselves. He referred to the FIPB approval vide letter dated 30.03.2005 granted by Government of India, Ministry of Finance permitting them to make investment in Ambuja Cement Ltd. by acquiring majority stake from the earlier shareholders. Thereupon, the respondent-assessee had purchased shares in the said company of ₹ 1850.91 Crores. Reference was then made to the expenditure as per the financial statement. Section 3 of the Act was elucidated upon to observe that business would be established when the assessee was ready to commence. Revenue expenditure incurred after setting up business should be allowed under Section 37 of the Act but expenditure incurred prior to setting up of business cannot be allowed. The CIT (A) accordingly held:- 5.6 In view of the above discussions, I hold that the appellant is engaged in the business of holding of investment is entitled to claim expenditure provided there is a direct connection between expenditure incurred and business of the assessee company. In the instant case. the expenditure incurred is on salaries of employees of the assessee company and other operating expenses of the company. The appellant has also admitted that the said expenditure have been incurred in order to protect their investment as well as exploration of new investments . 6. For the Assessment Year 2008-09, the same reasoning was adopted and followed. 7. However, the CIT(A) issued notice and called upon assessee, why Section 14A should not be invoked? The Section postulates that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred in relation to income which does not form part of the total income. Since the business of the respondent-assessee was to act as a holding company for downstream investments and as it was an accepted fact that they had incurred expenses to protect their investments and explore new avenues of investments, the provisions of Section 14A were applicable. The exact reasoning given by the CIT(A) in this regard in respect of the Assessment Year 2007-08 is as under:- 5.8….Thus, as admitted by the appellant; since business of the appellant exclusively is to act as a holding company for downstream investment in order (sic) companies and the admitted fact that they incurred the expenses to protect their investments and to explore new avenues of investments clearly show, that in the facts of the appellant's case the provision of Section 14A of the Act are clearly applicable . [underlining is as per the original order of CIT(A)] 8. The aforesaid reasoning given by CIT(A) was ambiguous and unclear, hence, clarity was sought from the counsel for the appellant-Revenue on their stand and stance. Learned senior standing counsel for the appellant-Revenue was asked to elucidate and has stated that the stand of the assessee contained a contradiction to the extent that on the issue of setting up of business, it was stated that the assessee had incurred expenditure on acquiring the shares, therefore, the assessee could not now take a different stand than the one taken in the first issue . (The aforesaid submission has been recorded verbatim). 9. The said statement has left us equally confused and perplexed. Is it the Revenue s contention that expenditure made by investment companies should be disallowed under Section 14A of the Act as income or investment is not taxable? This is not clearly stated. We proceeded to read and examine the subsequent observations and findings of the CIT(A). 10. Thereafter, the CIT(A) has referred to the contentions of the assessee that they had not earned dividend income and therefore, Section 14A of the Act was not applicable. The CIT(A) did not agree that as no exempt income was claimed , no disallowance under Section 14A was warranted. The CIT(A) relied on the decision of Special Bench of the Tribunal (Delhi) in the case of Cheminvest Ltd. Vs. ITO., [2009] 317 ITR (A.T.) 86. Reference was made to Maxopp Investment Ltd. Vs. CIT, [2012] 347 ITR 272 to observe that Rule 8D of the Income Tax Rules, 1962 was not applicable in the assessment year 2007-08. Judgment of the Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd.Vs. DCIT, [2010] 328 ITR 81 was also quoted. As per Maxopp Investment Ltd. (supra), the correctness of the claim of the assessee in respect of expenditure incurred in relation to the income which did not form part of total income had to be first ascertained and in case, the assessee claimed that no expenditure was incurred, the Assessing Officer should verify the correctness of the claim. Where the Assessing Officer was satisfied that no expenditure was incurred, no disallowance should be made under Section 14A. In other cases, the Assessing officer would have to determine the amount of expenditure incurred in relation to the income which did not form part of the total income and the said basis had to be reasonable and based on the acceptable method of apportionment. Expounding the expression in relation to appearing in Section 14A as interpreted in Maxopp Investment Ltd. (supra), the CIT(A) held that the said ………………
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