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Garware Wall Ropes Ltd. v. Additional Commissioner of Income-tax Range -5(1)

Income Tax Appellate Tribunal

Jan 15, 2014

Judgment

Subsequent
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Tribunal Order Summary — Cross Appeals against CIT(A) order dated 9.5.2012 (Assessment Year 2009-10)

Factual and Procedural Background

This order, delivered by Vijay Pal Rao, Judicial Member, deals with cross appeals arising from the CIT(A)'s order dated 9.5.2012 for assessment year 2009-10. The assessee appealed against disallowances made by the Assessing Officer (AO) under section 14A read with Rule 8D and consequential adjustments to book profit under section 115JB. The revenue filed a separate appeal challenging the manner in which written down value (WDV) and depreciation were to be reworked for earlier years.

Key factual points taken from the record: the assessee received exempt dividend income of Rs. 36,90,456/-. The assessee itself computed and added back a Rule 8D disallowance of Rs. 1,03,915/-. The AO, applying Rule 8D, disallowed administrative expenses amounting to Rs. 8,83,569/-. CIT(A) confirmed the AO's disallowance. The assessee contested both the substantive disallowance under section 14A/Rule 8D and the addition to book profit under section 115JB; the revenue contested certain WDV/depreciation adjustments.

Legal Issues Presented

Whether a disallowance under section 14A read with Rule 8D can be made where the assessee contends that no expenditure (direct or indirect) was incurred in relation to earning the exempt dividend income.
Whether any amount disallowed under section 14A should be added back to the book profit for the purposes of computing tax under section 115JB.
Whether the assessing officer was required to allow depreciation by reworking the WDV for earlier years (i.e., depreciation to be allowed on WDV after giving effect to prior years' appellate orders) as contended by the revenue.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee conceded and added back Rs. 1,03,915/- computed under Rule 8D, but challenged any further disallowance because it did not incur any expenditure for earning the exempt dividend income.
The investments yielding the exempt dividend were held in group concerns as passive investments to maintain controlling stakes (not acquisitions to earn dividend income) and were made in prior years (long ago), so no fresh or ongoing expenditure was incurred to hold them.
Shares were held in the assessee's demat account and dividends were credited directly to the assessee, indicating no administrative expense specifically incurred to earn that exempt income.
Rule 8D cannot expand the scope of section 14A; disallowance under section 14A is limited to expenditure actually incurred (directly or indirectly) in relation to exempt income.
On the book-profits point, the assessee relied on this Tribunal's earlier decisions in the assessee's own case (AY 2008-09) in support of its position on non-inclusion of notional disallowance in book profit.

Respondent's (Revenue's) Arguments

The Departmental Representative (DR) submitted that the issue was covered against the assessee by the Tribunal's decision in the assessee's own case for AY 2008-09.
On the book-profit point, the DR relied on the Tribunal decision in ITO v. RBK Share Broking (P.) Ltd. [2013] 60 SOT 61, which held that the adjustment/disallowance can be made while computing book profit under section 115JB.
In the revenue's separate appeal on depreciation/WDV, the contention was that depreciation had to be allowed from gross total income and that the CIT(A)'s direction to rework WDV (as given by appellate authorities for earlier years) was incorrect.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211	Establishes that a proximate relationship between the expenditure and the tax-exempt income is required to attract section 14A disallowance.	The Tribunal relied on this principle to hold that section 14A requires a proximate causal relationship; absent any evidence of expenditure incurred in relation to the exempt income, section 14A could not be applied.
Goetze (India) Ltd. v. CIT [2009] 32 SOT 101 (Delhi)	Cited by the assessee in grounds as a precedent the assessee believed relevant to treatment of disallowance/additions to book profit.	The opinion records that the assessee referred to this decision in its grounds, but the Tribunal did not base its primary decision on this precedent in the text of the order.
QUIPPO Telecom Infrastructure Ltd. v. ACIT (ITA No. 4931/Del/2010) (Del)	Cited by the assessee in grounds as supportive authority on the point relating to section 115JB treatment.	Recorded as relied upon by the assessee in its grounds; the Tribunal's reasoning in the order does not explicitly adopt or distinguish this authority in arriving at its final decision.
ITO v. RBK Share Broking (P.) Ltd. [2013] 60 SOT 61 / 37 taxmann.com 128 (Mum.)	Held that adjustment/disallowance under section 14A can be taken into account while computing book profit under section 115JB.	The DR relied on this decision. The Tribunal noted divergent views on this point but, because the primary disallowance under section 14A was deleted, treated the book-profit issue as consequentially resolved in favour of the assessee.
Tribunal's own earlier decisions and subsequent High Court dismissal of revenue's appeal (various assessment years, incl. decisions for AY 2004-05, 2007-08, 2008-09)	Principle that depreciation cannot be thrust upon an assessee and that WDV must be reworked in accordance with earlier appellate orders (i.e., give effect to coordinate-bench/earlier orders when computing WDV).	The Tribunal applied its own earlier findings and the High Court dismissal of the revenue appeal to reject the revenue's contention and directed that WDV/depreciation be reworked as per earlier appellate directions.

Court's Reasoning and Analysis

The Tribunal considered the rival submissions and the record in a two-step approach addressing (A) the substantive disallowance under section 14A/Rule 8D and (B) the consequential book-profit adjustment under section 115JB, followed by (C) the revenue's appeal on depreciation/WDV.

(A) Disallowance under section 14A read with Rule 8D

The Tribunal acknowledged an earlier adverse finding in the assessee's own case for AY 2008-09 on a related point but noted that the assessee had advanced a new factual plea for the year under consideration: that no expenditure (direct or indirect) was incurred in relation to the exempt dividend income.
The Tribunal examined the factual matrix presented by the assessee: investments were passive, held in group concerns to maintain control (not to generate dividend income); investments were made in prior years; shares were held in demat account and dividends were credited directly; AO produced no material showing expenditure incurred in relation to that exempt income.
Applying the legal principle that a proximate relationship between the expenditure and the tax-exempt income is necessary to invoke section 14A (as stated in CIT v. Walfort Share & Stock Brokers), the Tribunal concluded that section 14A/Rule 8D cannot be invoked where there is no finding or material showing any expenditure incurred in relation to the exempt income.
Because the AO did not demonstrate that any expenditure had been incurred for earning the exempt income, the Tribunal found the disallowance unsustainable and deleted the disallowance/ addition made u/s 14A read with Rule 8D.

(B) Addition to Book Profit under section 115JB

The Tribunal observed that there are divergent views in different decisions on whether a notional disallowance under section 14A should be added back while computing book profit under section 115JB.
Rather than resolving the broader legal controversy, the Tribunal treated the book-profit issue as consequential: because it had deleted the underlying disallowance under section 14A, the addition to book profit of Rs. 8,83,569/- was deleted accordingly.

(C) Revenue's Appeal on Depreciation/WDV

The Tribunal relied on its own earlier findings in the assessee's case for preceding years (and the High Court's dismissal of the revenue's appeal in relation to one earlier assessment year) to conclude that depreciation must be allowed after reworking WDV consistent with earlier appellate orders.
The Tribunal reproduced and reaffirmed the reasoning from earlier paragraphs (quoted in the order) that the AO must give effect to coordinate-bench ITAT directions from earlier years and determine WDV accordingly; accordingly, the revenue's contention had no merit and was dismissed.

Holding and Implications

Holding: The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal. Specifically:

DISALLOWED ADDITION/ DISALLOWANCE UNDER SECTION 14A r.w. RULE 8D: Deleted. The Tribunal deleted the disallowance of Rs. 8,83,569/- made by the AO under section 14A read with Rule 8D, on the ground that the AO failed to bring any material showing expenditure incurred in relation to the exempt dividend income and that section 14A requires a proximate relationship between expenditure and exempt income.
BOOK-PROFIT ADJUSTMENT UNDER SECTION 115JB: Deleted (consequential). The addition of Rs. 8,83,569/- to book profit under section 115JB was deleted as consequential to the deletion of the underlying section 14A disallowance.
REVENUE APPEAL ON DEPRECIATION/WDV: Dismissed. The Tribunal held that the WDV/depreciation must be reworked by giving effect to prior years' appellate orders (as previously directed by the Tribunal and upheld by the High Court), and therefore dismissed the revenue's challenge.

Implications:

The direct consequences are the deletion of the impugned disallowance under section 14A/Rule 8D and the deletion of the related book-profit addition, resulting in relief to the assessee for AY 2009-10.
The revenue's appeal regarding WDV/depreciation was also dismissed, meaning the assessing officer must rework WDV and allow depreciation consistent with earlier appellate directions.
The Tribunal applied existing precedents (including the proximate-causation principle from CIT v. Walfort). The order treats the section 14A disallowance as inapplicable where the AO cannot show expenditure in relation to exempt income; the Tribunal did not purport to lay down a novel legal principle or overrule earlier binding decisions. Therefore, no new precedent was expressly framed by this order beyond its application to the facts before the Tribunal.

Result in brief: The assessee's appeal is allowed; the revenue's appeal is dismissed.

Show all summary ...

ORDER

Vijay Pal Rao, Judicial Member - These cross appeals are directed against the order dated 9.5.2012 of CIT(A) for the assessment year 2009-10. The assessee in this appeal has raised following grounds;—

1. Additional disallowance u/s 14A. r.w. Rule 8D by Rs. 7,79,654/-

1.1 The Ld. CIT (Appeals) - 9, Mumbai, erred in confirming an additional disallowance of Rs. 7,79,654/- u/s 14A r.w. Rule 8D, ignoring the fact that the appellant has voluntarily disallowed a sum of Rs. 1,03,915/- as worked out U/R 8D at ½ % of the average value of investment on which dividend is received.

1.2 The Ld. CIT (A) erred in not considering the fact that disallowance U/R 8D cane be made on value of investments from where tax-free dividend income is received and not on the total value of investments. Therefore the further addition of Rs. 7,79,654/- is not warranted for.

2. Addition u/s 14A of Rs. 8,83,569/- to the Book Profit u/s 115JB:

2.1 The Ld. CIT(A) erred in confirming the addition u/s 14A of Rs. 8,83,569/- to the Book Profit u/s 115JB ignoring the Explanation 1 to section 115JB(2) which provides to increase the book profit by expenditure debited to the profit and loss account as referred to in clause (a) to (i) and therefore, no notional disallowance U/R 8D can be made @ ½ % of the average value of investments.

2.2 The said CIT(A) erred in not following the decision of ITA Tribunal in the cases of Goetze (India) Ltd. v. CIT [2009] 32 SOT 101 (Delhi) and QUIPPO Telecom infrastructure Ltd. v. ACIT (ITA No. 4931/Del/2010) (Del).

2.3 Without prejudice, the addition cannot exceed disallowance u/s. 14A for Rs. 1,03,915/- for the reason stated above.

3. The appellant craves leave to add, any new grounds or to amend, alter, modify, delete/or change all or any of the above grounds on or before the date of hearing.

2. The first ground raised is regarding disallowance u/s 14A r.w. Rule 8D of the Income Tax Act. The assessee received dividend income of Rs. 36,90,456/- which is exempt from the Income Tax. The assessee worked out the disallowance u/s 14A at Rs. 103915/- and added back the same in the statement of the total income. The AO asked the assessee to explain as to why the expenditure be not disallowed as per provisions of section 14A. r.w. Rule 8D. The assessee in reply has submitted that it has not incurred any expenditure to earn this dividend income and, therefore, no expenditure be disallowed u/s 14A. Since no borrowed funds was used and the interest expenditure is on the bank term loans, therefore, there is no nexus between the interest expenditure and the investment in shares. The AO did not accept the contention of the assessee and disallowed the administrative expenses by applying Rule 8D. The AO accordingly worked out the disallowance at Rs. 8,83,569/- on administrative expenses.

2.1 On appeal, CIT(A) has confirmed the disallowance made by the AO.

2.2 Before us at the very outset the Ld. AR of the assessee pointed out that though the issue of disallowance u/s 14A has been decided by this Tribunal against the assessee for the assessment year 2008-09 vide order dated 21.12.2012 in ITA no. 7599/mum/2011. However the Ld. AR of the assessee has submitted that the crucial fact that the assessee has not incurred any expenditure in respect of the investment in question and for earning tax free income has not been considered in the earlier years. He further submitted that the assessee did not raise this issue in the earlier years and the decision of the Tribunal is only on the point whether the disallowance u/s l4A can be made when there is no dividend income. Thus the learned AR has submitted that in the assessment year under consideration the assessee has not incurred any expenditure in respect of the investment and dividend income in question. He has referred to the details at page 20 of the paper book and submitted that no fresh investment was made in the year under consideration and all the investment were made in the earlier years that too long back. The Ld. AR has further pointed out that these investments are in the group concerned of the assessee, therefore, these are only passive investment made for the purpose of holding controlling stake in the group concern and not for the purpose of earning any dividend or active investment, therefore, the assessee was not required to incur any expenditure in keeping these investments. He has further contended that shares are held in DMAT account of the assessee and the dividend is received directly in the account of the assessee. Therefore, there is no direct or indirect expenditure incurred for earning exempt income in question. The Ld AR has vehemently argued that when there is no expenditure direct or indirect incurred for the purpose of earning the exempt income then no disallowance can be made under the provisions of section 14A. Rule 8D cannot expand the scope of section 14A in which disallowance can be made only with respect to the expenditure which has been incurred for earning the exempt income and claimed by the assessee.

2.3 Ld. DR on the other hand has submitted that the issue is now covered against the assessee by the decision of the Tribunal in the assessee's own case in assessment year 2008-09.

2.4 We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee's own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee has raised the new plea in the year under consideration that no expenditure had been incurred by the assessee for earning the exempt income or for the investment in question. We find merit and substance in the contention of the assessee on this point because the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure incurred to earn the exempt income. In the case in hand it is not the case of the revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- "there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon'ble Supreme Court in case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 . Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D.

3. The second ground is regarding disallowance/adjustment made while computing the book profit u/s 115JB in respect of disallowance made u/s 14A.

3.1 We have heard both the parties and carefully considered the material on record. The Ld. AR has submitted that the issue has been decided in favour of the assessee by this Tribunal in assessee's own case in assessment year 2008-09.

3.2 The Ld. DR on the other hand relied upon the decision of this Tribunal in case of ITO v. RBK Share Broking (P.) Ltd. [2013] 60 SOT 61/37 taxmann.com 128 (Mum.) and submitted tat the Tribunal held that the adjustment/disallowance can be made while computing the book profit u/s 115Jb in respect of the amount disallowed u/s 14A.

3.3 Having considered the rival submissions carefully and gone through the various decisions relied upon by both the parties we note that there are divergent views of the Tribunal on this point. Without going into the controversy of the quantum of adjustment, we find that in view of our finding in respect of disallowance u/s 14A in ground no. 1, the ground no. 2 of the assessee's appeal is allowed being consequential. Accordingly we delete the addition made while computing the book profit in respect of the disallowance of Rs. 8,83,569/- made u/s 14A.

4. Now we take up the revenue's appeal in ITA no. 4957/Mum/2012 the only ground raised by the revenue in its appeal is as under:—

"Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the assessing officer to allow the depreciation at Rs. 35,22,140/- after working out the WDV of the assets for earlier years as decided by the appellate authorities without appreciating the facts that before any allowance of deduction under chapter VIA of the IT Act, 1961, the depreciation has to be allowed from the gross total income".

4.1 We have heard both the Ld. AR and Ld. DR and have considered the relevant material on record. At the outset we note that this issue is covered against the revenue by the decision of this Tribunal in assessee's own case in assessment year 2007-08 as well as in assessment year 2008-09. For the assessment year 2008-09 the Tribunal has considered and decided this issue in para 21 and 22 which is reproduced as under:—

"21. We have heard the argument from either side, From the facts. We find that the assessee had not claimed the depreciation till assessment year 2000-01. In these years, the AO allowed the depreciation. The matter traveled to the Income-tax Appellate Tribunal, wherein the coordinate Bench, in the assessee's own case held that depreciation cannot be thrust upon the assessee. This decision of the coordinate Bench was later on sustained by the Hon'ble Bombay High court as well, dismissing revenue's appeal on this issue. From assessment year 2001-02 to 2007-08, the AO allowed the depreciation as claimed by the assessee, without giving effect to the order of the ITAT, which resulted in the difference in the opening WDV, which has been added by the AO in the instant case. This addition on account of difference has been deleted by the CIT(A), directing the AO to give effect to the orders of the higher authorities. Since the issue is travelling from the preceding years, we confirm the direction of the CIT(A) to rework the WDV, after giving effect to the Income-tax Appellate Tribunal in the earlier year(s)..

22. We, therefore, reaffirm the direction to the AO, to determine the WDV, as per earlier year's directions by the coordinate Bench of the ITAT."

4.2 We further note that the appeal filed by the revenue against the decision of this Tribunal has been dismissed by the Hon'ble High Court vide decision dated 22nd December 2011 for the assessment year 2004-05. Thus it is clear that the depreciation has to be allowed on written down value (WDV) after reducing the actual depreciation allowed in the earlier years. In view of the earlier years order of this Tribunal, we do not find any substance in the appeal of the revenue. Accordingly we decide this issue against the revenue.

5. In the result the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

SUNIL