No Disallowance U/s. 14A on strategic investments out of Commercial expediency

Dy. CIT Vs. Alpha G. Corp Development Ltd. (ITAT Delhi)

The intention of the appellant to invest in the subsidiary companies was never to earn dividend but the same was made to acquire land to meet the minimum requirement of Haryana Town and Country Planning Act and to overcome the restrictions put by the Haryana Urban Land Ceiling Act, 1995. The investments in the subsidiaries were for development of business and for the commercial expediency. These investments were to get the strategic advantage to gain the benefit of synergies in the different markets. Therefore, dis allowance under section 14A was not called for in relation to such strategic investments.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

1. These are the appeals filed by the revenue against the order of the learned Commissioner (Appeals)-I, New Delhi dated 21-8-2015 and Commissioner (Appeals)-42, New Delhi dated 18-8-2015 for the assessment year 2008-09, 2011-12 and 2012-13, wherein the dis allowance on account under section 14A were deleted.

2. The Revenue has raised the following grounds of appeal for assessment year 2008-09:-

“1 The learned Commissioner (Appeals) has erred in law and on facts in directing the assessing officer to exclude investments in Subsidiary Companies for the purpose of calculating dis allowance under section 14A and allowing consequential relief thereof.

2. The learned Commissioner (Appeals) has erred in law and on facts in directing the assessing officer to exclude investments in mutual funds which generate exempt income for the purpose of calculating dis allowance under section 14A holding it as temporary phenomena and allowing consequential relief thereof.

3. The learned Commissioner (Appeals) has erred in placing reliance on the decision of the Hon’ble High Delhi Court in CIT v. Oriental Structural Engineering Pvt. Ltd. as the facts of which case are different from the facts of instant case.

4. The learned Commissioner (Appeals) has failed to appreciate the fact that in the case of Oriental Structural Engineering Pvt. Ltd., investments were made in Special Purpose Vehicles whereas in the present assessee investments were made in the subsidiaries that too not on account of commercial expediency but to circumvent the Land Ceiling Act, 1975 of the State of Haryana.”

3. The Revenue has raised the following grounds of appeal for assessment year 2011-12:-

1. The learned Commissioner (Appeals) has erred in law and on facts in deleting the addition of Rs. 97,84,132 made by the assessing officer on account of dis allowance under section 14A read writ Rule 8D.

2. The learned Commissioner (Appeals) has erred in placing reliance on the decision of the Hon’ble High Delhi Court in CIT v. Oriental Structural Engineering Pvt. Ltd. as the facts of which case are different from the facts of instant case.

3. The learned Commissioner (Appeals) has failed to appreciate the fact that in the case of Oriental Structural Engineering Pvt. Ltd., investments were made in Special Purpose Vehicles whereas in the present assessee investments were made in the subsidiaries that too not on account of commercial expediency but to circumvent the Land Ceiling Act, 1975 of the State of Haryana.”

4. The Revenue has raised the following grounds of appeal for assessment year 2012-13:-

“1. The learned Commissioner (Appeals) has erred in law and on facts in directing the assessing officer to exclude investments in subsidiary companies for the purpose of calculating dis allowance under section 14A and allowing consequential relief thereof.”

5. The brief facts of the case is that the assessee is a company engaged in the business of real estate management and development of real estate. For assessment year 2008-09 it filed its return of income. The assessment under section 143(3) of the Act was completed and subsequently, the case was reopened under section 147 of the Act for making dis allowance under section 147 of the Act. During the year the assessee has earned dividend income of Rs. 11.66 crores which is claimed as exempt income but no dis allowance was made. Therefore, the learned assessing officer disallowed sum of Rs. 16350876 applying Rule 8D of the Income Tax Rules and dis allowance 0.5% of the average investment of the assessee. The assessee preferred appeal before the learned Commissioner (Appeals) against the above dis allowance. The learned Commissioner (Appeals) deleted the same. Therefore, the revenue is in appeal before us.

6. The learned Departmental Representative vehemently supported orders of the learned assessing officer. He stated that the assessee has made huge investment and also has earned huge dividend which is exempt. No dis allowance has been by the assessee. He submitted that the assessing officer has not disallowed any amount on account of interest but on account of other expenses. He therefore stated that dis allowance has correctly been made.

7. The learned authorized representative submitted that the assessee has not incurred any expenditure on account of interest as agreed by the learned assessing officer. He further submitted that the assessee has not incurred any expenditure as for the personal cause as the staff cost of Rs. 9.83 lacs have been related to the subsidiary company and they have reimbursed it. He however submitted that on the explanation of the assessee no satisfaction has been recorded by the learned assessing officer. He further stated that the learned Commissioner (Appeals) has deleted the addition on the basis of decision of Hon’ble Punjab and Haryana High Court as well as decision of the Hon’ble Allahabad High Court. He further stated that amount of investment made by the assessee is also for strategic control and business expediency on such advance no dis allowance can be made.

8. We have carefully considered the rival contentions and also perused various orders of the lower authorities. The learned Commissioner (Appeals) dealt with this issue at para 21 to 24 as under:-

“Decision:

I have considered the submission of the appellant and observation of the assessing officer in the assessment order. It is seen that assessing officer has disallowed expenses of Rs. 1,63 50,876 under section 14A read with Rule 8D of the Income Tax Rules, 1962 as expenses attributable to earning of exempt income. The appellant company is engaged in the business of development of integrated townships, Malls, development of management services. The area of operation of the appellant company is mainly in the state of Haryana, Gurjarat and Punjab. In the state of Haryana, if a company intend to develop a township, the minimum area required is 50 acres, however, as per section 4 of Haryana Urban Land Ceiling Act 1975, holding of Haryana Urban Land Ceiling Act, 1975, holding of the land in urban areas restricted to Rs. 7.25 hectares i.e. 17.915 acres by a single entity.

In view of the above restrictions of the Haryana Urban Land Ceiling Act, the appellant company had invested in the subsidiary companies for acquiring the land in the name of subsidiary companies so that minimum requirement of 50 acres of land required for developing township can be met by acquiring land in the name of various subsidiary companies. Once the land is acquired in the name of subsidiary companies, the development rights were transferred by the subsidiary companies to the holding companies. Due to this, the income generated out of the development of the acquired land has been taxed in the hands of the appellant company i.e. holding company. The appellant company has shown total investment as on 31-3-2008 of Rs. 1,66,68,29,250 in various subsidiary and joint venture companies which is as under:

It is submitted by the appellant that the investments made in the above mentioned companies has been made with the intention to obtain the license and to arrange 50 acres of land with the help of subsidiary companies for developing a township. It is further submitted by the appellant that all these subsidiaries have transferred their development rights to the holding companies for the land bought in their name. Therefore, the intention of the appellant to invest in the subsidiary companies was never to earn dividend but the same was made to acquire land to meet the minimum requirement of Haryana Town and Country Planning Act and to overcome the restrictions put by the Haryana Urban Land Ceiling Act, 1995. The investments in the subsidiaries were for development of business and for the commercial expediency. These investments were to get the strategic advantage to gain the benefit of synergies in the different markets. It is submitted by the appellant that investment held by way of shares in such companies cannot be subject to dis allowance under section 14A of the Income Tax Act. On going through the investment table reproduced above, it is seen that these investments were made in the subsidiary companies of the appellant which are engaged in the business of acquiring land for development of townships and malls etc. It is also seen that appellant is holding almost entire shares in these subsidiary companies and 50% shares in the joint venture companies. It is also seen that all these subsidiary companies acquired land to help the appellant company in its business. The entire share capital of these subsidiary companies has been contributed by the appellant. It is also seen that appellant has claimed financial expenses during the year of Rs. 20,11,080 which includes guarantee commission and charges for acquiring bank guarantee to be submitted to various authorities of the State Government. The appellant has also claimed interest on vehicle loans of Rs. 2,42,761 and interest on others of Rs. 29,300. From the above it is seen that the appellant has not paid any interest for making investments in the subsidiary companies. On going through the Balance Sheet of the company, it is seen that appellant has received exempt income of Rs. 11,54,07,071 from the non-trade investments made in the mutual funds. It is explained by the appellant that during the financial year 2006-07 appellant company has received investment from SSIII Investments One Limited under the Foreign Direct Investment of Rs. 287 crores and in the financial year 2007-08, an investment of Rs. 344 crores from Wyndford Investments Ltd. This money was received by way of share capital and share premium account. Till the money was utilized by the appellant company for making investments in the project, it was invested in the mutual funds. From that investment these dividends were received by the appellant. It was contended by the appellant that for making these investments appellant did not incur any financial cost and administration cost. He has stated that it has deployed the funds in mutual funds and for investment in mutual funds advisor do not charge any fee and whatever fee or other charges are charged they are deducted from the amount of investment itself. Therefore, it was submitted by the appellant that no financial or administration expenses directly or indirectly have been incurred by the appellant for earning the dividend income. It is also submitted by the appellant that the dividend distributed by the mutual funds is after deduction of tax under section 115R, therefore, these dividends are not tax-free income to the appellant. The Revenue has already collected the tax on the income earned on the investments in terms of the dividend tax, hence, the same cannot be taxed twice.

In the assessment order, the assessing officer held that dividend earned from such investment is not includable in the total income of the appellant-company, therefore, expenses relating to such exempt income has to be disallowed. However, it is seen that dividend income has been earned by the appellant from the mutual funds and no direct or indirect expenditure seems to be incurred by the appellant. The money was received from the foreign investor and till the same was invested in the projects, the same was invested in the mutual funds. Therefore, no cost expenditure seems to be incurred by the appellant for making these investments. It is also seen that the making investment in these mutual funds was a single day activity and appellant was not involved in frequent buying and frequent selling, therefore, no expenditure was incurred by the appellant. The appellant has submitted that it has made investment in the shares of subsidiary companies as mentioned above not for earning dividend but the investment was made on account of business expediency. It was also submitted by the appellant that provisions of Section 14A are not applicable in the appellant’s case as the exempt income from the investment made in mutual funds was a temporary phenomena till the money received from FDI was invested in the projects. The intention of the appellant was not to earn dividend income but till the finalization of the project the money was kept temporarily in the mutual funds. It was also contended by the appellant that it has not debited any expenditure relating to investments in its Profit & Loss A/c, therefore, no dis allowance of expenses is called for under section 14A read with Rule 3D. In support of its contention, the appellant has relied upon the judgment of Hon’ble Delhi High Court in the case of CIT v. Oriental Structural Engineers Pvt. Ltd. ITA No. 605/2012 wherein the Court has held that in case of strategic investment no dis allowance is warranted under section 14A of the Income Tax Act. The appellant has submitted that in the number of judicial pronouncement it has been held that provisions of section 14A are not applicable when investment is made in a group company for strategic control and for business expediency. The Hon’ble Mumbai ITAT in the case of J.M. Financial Ltd. v. ACIT, ITA No.4521/Mum/2012 has held that no dis allowance could be made under section 14A for investment made in a subsidiary company for business expediency. The Tribunal also held that where assessee brings on record that no expenditure has been incurred on investment made in subsidiary company, the assessing officer has to record his satisfaction for not accepting the claim of the assessee and he has to give his finding that the expenditure has been incurred by the assessee for earning exempt income. It is seen that no such finding has been given by the assessing officer in the instant case. In view of the discussion made above, that appellant has made investments in mutual funds and its subsidiary companies for business expediency, therefore, provisions of Section 14A are not applicable as held by various judicial pronouncements cited by the appellant in his submission like Swapna Murarka 58 taxman.com 369 Mumbai ITAT (2015), Fali S. Narivan 56 taxman.com 155 Mumbai Tribunal (2015) and Dy. CIT Circle 10(1), New Delhi v. DBH International Pvt. Ltd. 55 taxman.com 424 Delhi Tribunal (2015).

The appellant has further relied upon the judgment of Hon’ble Punjab & Haryana High Court and Allahabad High Court in the case of CIT v. Lakhani Marketing Incorporation (2014) 111 DTR (P&H) 149 and CIT v. Shivam Motors Pvt. Ltd. (2014) 111 DTR (All) 153 respectively. Therefore, respectfully following the above judgments and in view of the fact that no specific nexus has been established by the assessing officer about the receipt of the exempt income and incurring of expenses, hence, no dis allowance of expenses is called for. Further, the investment in mutual funds was a temporary phenomena and same arrangement till the money was invested in projects. Accordingly, dis allowance of Rs. 16350876 made by the assessing officer as expenses pertaining to earning exempt income is deleted.

9. We do not find any infirmity in the order of the learned Commissioner (Appeals) and therefore, we dismiss the appeal of the revenue.

10. On identical facts and circumstances respectfully following the decision in above ITA No. 6049/Del/2015, we also dismiss the appeals of the revenue for assessment year 2011-12 and 2012-13.

11. In the result all the three appeal of the Revenue are dismissed.