Arumugam Olaganathan v. Commissioner of Income-tax 1, Chennai
[Citation -2020-LL-1008-17]

Citation 2020-LL-1008-17
Appellant Name Arumugam Olaganathan
Respondent Name Commissioner of Income-tax 1, Chennai
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 08/10/2020
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags income from business or profession • apportionment of expenditure • disallowance of expenditure • computation of disallowance • interest on borrowed funds • disallowance of interest • allowable expenditure • expenditure incurred • dividend income • exempt income • income earned • remuneration • satisfaction • no deduction
Bot Summary: Unfortunatley, the Revenue Authority and the Tribunal have read Rule 8D without context and as an independent provision of disallowance, as if it was an island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the exempted income itself and can be added as a taxable income in the hands of the Assessee. In Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai merely to somehow make more disallowance and impose tax on the hypothetical income of the Assessee, in contrast to the concept of real income to be taxed as per Section 5 of the Income Tax Act, the authorities under the Income Tax Act keep on adopting such absurd procedures. Section 14A has been introduced not to allow expenditure incurred to earn such exempted income in the form of dividend as an allowable expenditure against the exempted income of the Assessee and therefore, obviously the disallowance too cannot exceed the extent of dividend itself. The Tribunal itself in many such cases has upheld the disallowance under Section 14A only to the extent of 2 of the Dividend income or other exempted income even if Assessee claimed that no expenditure was incurred to earn such Dividend income and even appeals filed by the Assessee against such 2 disallowance have been dismissed by this Court. The contention raised on behalf of the Revenue by Mr.Karthik Ranganathan that even if the dividend income is not earned in the present year, since the investment is made for the strategic purposes to have control over the subsidiary companies, whenever in future a huge dividend can be declared, it will be earned by the Assessee and in that future year, the Assessee will not have incurred any expenditure to earn that income and therefore, a larger disallowance under Rule 8D should be allowed, is only an ingenuity of argument covered by the absurdity thereof. If no dividend income is declared by the investee company or subsidiary company as the case may be, the disallowance computed under Rule 8D cannot be taxed as a hypothetical income of the Assessee, by providing a negative figure beyond the dividend income earned during that year, to be added to the taxable income of the Assessee. As per the provisions of section 14A of the Income Tax Act, 1961, no deduction shall be allowed in respect of expenditure incurred in relation to such income which does not form part of the total income.


Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 08.10.2020 CORAM : HON'BLE DR. JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE M.S.RAMESH TAX CASE (APPEAL) NO.355 OF 2017 Shri Arumugam Olaganathan 12/A, Spartan Nagar, Mugappair, Chennai 600050. Appellant -vs- Commissioner of Income Tax 1 Chennai. .. Respondent PRAYER: Tax Case Appeal filed under Section 260A of Income Tax Act, 1961, against order of Income Tax Appellate Tribunal 'B' Bench, Chennai, dated 12.05.2016 passed in ITA Nos.1563/Mds/2015, for Assessment Year 2010-2011. 1/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai For Appellant : Ms.N.V.Lakshmi for Mr.N.V.Balaji For Respondent : Ms.R.Hemalatha Senior Standing Counsel JUDGMENT (Judgment of Court was made by Dr. VINEET KOTHARI, J.) This Tax Case Appeal has been filed by Assessee, challenging order passed by Income Tax Appellate Tribunal, 'B' Bench, Chennai, dated 12.05.2016, for Assessment Year 2010-11, by raising following substantial questions of law: 1.Whether under facts and circumstances of case, Income Tax Appellate Tribunal was right in upholding disallowance made under Section 14A of Income Tax Act? 2/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 2.Whether under facts and circumstances of case, Tribunal could have concluded that appellant had incurred expenditure in relation to income not includable in total income warranting application of Section 14A read with Rule 8D? 3.Whether under facts and circumstances of case, disallowance under Section 14A could be made without any satisfaction that appellant had incurred expenditure in relation to income not includable in total income? 4.Whether under facts and circumstances of case, disallowance under Section 14A could exceed income not includable in total income? 5.Whether based on materials available before Income Tax Appellate Tribunal, tribunal could have concluded that expenditure incurred by appellant is in relation to income not includable in total income? 3/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 6.Whether under facts and circumstances of case, Income Tax Appellate Tribunal was right in not following order of coordinate bench in appellant's case on same issue for earlier year? 2.Both learned counsel submitted that issues raised in present appeal filed by Assessee is covered by recent Division Bench judgment of this Court to which one of us [Dr.Vineet Kothari, J.] is Party in case of M/S. MARG LIMITED VS. COMMISSIONER OF INCOME TAX, CHENNAI [TCA NOS.41 TO 43 OF 2017 DECIDED ON 30.09.2020]. Division Bench of this Court in aforesaid judgment has held as under: 13. provisions of Section 14A themselves are very clear and without recording satisfaction by Assessing Authority that expenditure incurred to earn exempted income, as computed by Assessee is not acceptable for specified reasons, Assessing Authority cannot even resort to computation of such 4/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai disallowance under Rule 8D of Rules. Despite this being position of law crystal clear and there being no other contrary view from any other High Court, one fails to understand how Tribunal in impugned order could still take view contrary to this legal position and uphold disallowance under Rule 8D read with Section 14A of Act, much beyond quantum of exempted income of dividend earned by Assessee in this year. misconception of Assessing Authority as well as Tribunal appear to have arisen because they have read Rule 8D providing for computation method of disallowance in isolation, as if it were island provision or stand alone charging provision and they assumed that disallowance as computed under Rule 8D is to be taxed as notional income of Assessee. This is absolutely impermissible in law. reach of computation provision, namely Rule 8D cannot be read beyond parent provision of Section 14A itself, which itself is not charging provision, but restriction on allowance of expenditure incurred to earn exempted income. Assessing Authority has to mandatorily record his satisfaction with regard to 5/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai proportionate disallowance of expenditure under Section 14A of Act as made by Assessee that it is not satisfactory for such cogent reasons as specified and therefore, same is liable to be rejected and therefore, computation method under Rule 8D can be invoked as legislative way out to compute quantum of disallowance. Unfortunatley, Revenue Authority and Tribunal have read Rule 8D without context and as independent provision of disallowance, as if it was island provision of law and disallowance computed as per Rule 8D of Rules can go beyond exempted income itself and can be added as taxable income in hands of Assessee. Such interpretation put by Revenue Authorities is pathetic, to say least. 14. It is well settled that Rule cannot go beyond main parent provision. Therefore, what has been provided as computation method in Rule 8D cannot go beyond roof limit of Section 14A itself under any circumstances. Courts have time and again reiterated this correct, reasonable and clear position of law. But, 6/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai merely to somehow make more disallowance and impose tax on hypothetical income of Assessee, in contrast to concept of "real income" to be taxed as per Section 5 of Income Tax Act, authorities under Income Tax Act keep on adopting such absurd procedures. disallowance to this extent, if it was to have its way, will constitute hypothetical 'income' taxable in hands of Assessee, which could never be intention of Section 14A of Act, providing for proportionate disallowance of expenditure incurred to earn exempted income. 15. expenditure incurred to earn any income has to be always below extent of income itself and bear reasonable proportion thereto, as commercial prudence does not permit any one to spend more and earn less. investment in shares of which dividend is earned and dividend being exempted income, expenditure incurred for earning such dividend in form of interest on borrowed funds, which are employed to buy such shares can obviously be not more than dividend itself and 7/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai even if interest paid on such borrowed funds is more than actual dividend earned during year in question, disallowance of interest cannot go beyond amount of dividend itself. As such, interest paid on borrowed funds by Assessee does not constitute 'income of Assessee for that year'. Section 14A has been introduced not to allow expenditure incurred to earn such exempted income in form of dividend as allowable expenditure against exempted income of Assessee and therefore, obviously disallowance too cannot exceed extent of dividend itself. Tribunal itself in many such cases has upheld disallowance under Section 14A only to extent of 2% of Dividend income or other exempted income even if Assessee claimed that no expenditure was incurred to earn such Dividend income and even appeals filed by Assessee against such 2% disallowance have been dismissed by this Court. Therefore, such inconsistent approach on part of Tribunal cannot be sustained. 8/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 16. contention raised on behalf of Revenue by Mr.Karthik Ranganathan that even if dividend income is not earned in present year, since investment is made for strategic purposes to have control over subsidiary companies, whenever in future huge dividend can be declared, it will be earned by Assessee and in that future year, Assessee will not have incurred any expenditure to earn that income and therefore, larger disallowance under Rule 8D should be allowed, is only ingenuity of argument covered by absurdity thereof. disallowance of expenditure incurred for year in question only can be considered under Section 14A of Act and no such hypothetical earning in future as against no expenditure incurred for that, is envisaged under Section 14A of Act. 17. With respect to learned counsel for Revenue, we cannot accept such unfounded and imaginary situtations and submissions. nature of investment has nothing to do with Section 14A of Act. It is exempted income in form of dividend which forms cap or roof limit for disallowance. Firstly, Assessee has 9/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai to apportion expenditure incurred in form of interest on borrowed funds if any or expenditure incurred by him to earn such dividend income, which is exempt from tax and if at all Assessing Authority is not satisfied with that declaration of assessee, after recording such reasonable and cogent satisfaction only, he can resort to computation method under Rule 8D of Rules and compute such disallowance with caveat that under no circumstances, disallowance can exceed amount of dividend income earned, received or accrued to Assessee in present year, which was taxable but for exemption as per provisions of Act. If no dividend income is declared by investee company or subsidiary company as case may be, disallowance computed under Rule 8D cannot be taxed as "hypothetical income" of Assessee, by providing negative figure beyond dividend income earned during that year, to be added to taxable income of Assessee. That will make mockery of concept of "real income" of Assessee being taxed and it is bedrock of Income Tax Act itself. 10/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 18. computation of disallowance made by Assessing Authority and upheld by Tribunal, as given in paragraph 6 of its impugned order, are quoted below for ready reference: "6. We have heard both parties and perused material on record. assessee made total investment in assessment year 2009-10 as follows: Subsidiaries Rs. 2,38,89,48,500/- UTI Infrastructure Advantage Fund Rs. 10,00,000/- Series Investment in sister concerns Rs. 1,59,39,000/- 6.1. For assessment year 2010-11, total investment is as follows: Subsidiaries Rs. 4,35,42,53,360/- UTI Infrastructure Advantage Fund Rs. 10,00,000/- Series Investment in sister concerns Rs. 1,59,39,000/- 6.2. For assessment year 2011-12, total investment is as follows: Subsidiaries Rs. 5,17,41,16,895/- UTI Infrastructure Advantage Fund Rs. 8,53,000/- Series Investment in sister concerns Rs. 1,59,39,000/- 11/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 6.3. In this case, assessee made average investment which yields no income or exempted income is as follows: 2009-10 Rs. 1,96,32,20,750/- 2010-11 Rs. 3,39,69,83,166/- 2011-12 Rs. 4,78,02,04,127/- AO disallowed 0.5% of average investment as follows: 2009-10 Rs. 98,16,104/- 2010-11 Rs. 1,69,84,915/- 2011-12 Rs. 2,39,01,020/- assessee divident income received and claimed as exempt for these assessment years are as follows: 2009-10 Rs. 41,024/- 2010-11 NIL 2011-12 Rs. 74,00,00/- 19. Obviously such disallowance has far exceeded exempted income in form of dividends even though computed at rate of 0.5% of average investment made by Assessee. In our opinion, same is not permissible at all, because this average disallowance as computed under Rule 8D could be disallowed only if Assessee had actually earned Dividend income in excess of 12/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai such amount of disallownace, that too after recording reasons for rejecting apportionment of expenditure so incurred or claim that no such expenditure was incurred to earn that much of Dividend income was validly rejected by Assessing Authority. We do not find any such reasons even recorded by Assessing Authority in present case. 3.The learned counsel for Assessee Ms.N.V.Lakshmi, also urged that Assessing Authority in assessment order AY 2009-10 has recorded reasons for invoking Section 14-A of Income Tax Act, 1961 (Shortly Act ) which do not makes any sense. Assessee is only Proprietorship concern, whereas Assessing Authority has sought to disallow even Directors' remuneration under Section 14-A of Act, which is not even fact situation of legal jurisprudence. 4.We have perused order of Assessing Authority. relevant extract of same is quoted below: 13/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai 2. Disallowance u/s.14A:- assessee accounted amount of Rs.1,21,166/- as dividend during year and claimed same as exempt u/s 10(34). As per provisions of section 14A of Income Tax Act, 1961, no deduction shall be allowed in respect of expenditure incurred in relation to such income which does not form part of total income. assessee was asked to clarify as to why disallowance shall not be made u/s.14A. assessee has made submissions that no expenditure has been made for earning said divided income. contention of assessee is not acceptable for following reasons: i.It is logical to conclude that portion of routine expenditure to maintain its establishment and administration can be attributable towards activity of making investments to earn dividend. Further, it is fact that managerial staff and Directors are involved in making decisions on investments. Hence, portion of this managerial remuneration and Directors remuneration definitely be attributable towards earning such exempt income. 14/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai ii.Reliance is placed on decision of Bombay High Court in case of Godrej & Boyce Vs. DCIT, wherein it has been held that disallowance under Sec.14A r.w. Rule 8D is fair and reasonable . To determine expenses attributable to earning such exempt income, Finance Act, 2006 had brought in provisions of Section 14A(2) which requires Assessing Officer to determine expenses relating to exempt income in accordance with Rule 8D. iii.For reasons stated above, undersigned is satisfied that without any ambiguity and with certainty, it can be stated that assessee would have definitely incurred expenses towards earning exempt income. iv.As there is no direct expense relatable to exempted income and no interest expenses relatable to direct income, % of average investments as provided in 3rd limb of Rule 8D worked out as under is disallowed u/s.14A and added back to income under head income from business or profession : 15/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai % OF AVERAGE INVESTMENTS YIELDING EXEMPT INCOME 986841 INVESTMENTS AS ON 31.3.2010 212191624 INVESTMENTS AS ON 31.3.2009 182544674 AVERAGE INVESTMENTS 197368149 DISALLOWANCE U/S 14A 986841 5.We find some force in submission of learned counsel for Assessee. 6.However, since both learned counsel are agreeing that matter should go back to Assessing Authority for deciding case again on aspect of Section 14-A of Act in accordance with Division Bench judgment of this Court in M/s.Marg (cited supra), appeal is accordingly disposed of, by answering questions of law in favour of Assessee and against Revenue and matter is remitted back to Assessing Authority for passing fresh orders on limited issue under Section 14-A of Act, by complying with directions of this Court in aforesaid judgment with regard to satisfaction, for invoking Section 14A read with Rule 8D also, in accordance with law. 7.The Tax Case Appeal is accordingly disposed of. No costs. 16/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai (V.K., J.) (M.S.R., J.) 08.10.2020 Index : Yes/No Internet : Yes/No Speaking / Non-speaking order TK To Commissioner of Income Tax 1 Chennai. 17/18 http://www.judis.nic.in Judgment dated 08.10.2020 in TCA No.355 of 2017 Shri Arumugam Olaganathan Vs. CIT, Chennai Dr.VINEET KOTHARI, J. and M.S.RAMESH, J. TK TAX CASE (APPEAL) NO.355 OF 2017 08.10.2020 18/18 http://www.judis.nic.in Arumugam Olaganathan v. Commissioner of Income-tax 1, Chennai
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