Sundaram Clayton Ltd., CHENNAI V. DCIT, CHENNAI

CO 137/CHNY/2014

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1176 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 17 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-08-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 02-12-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R VIJAYARAGHAVAN
• Assessee Lawyers: A V SREEKANTH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! # , $ & BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A.NO . 2612/MDS/2014 & C.O.NO.137/MDS/2014 (IN ITA NO.2612/MDS/2014) (ASSESSMENT YEAR: 2010-11) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-VI(4) AAYAKAR BHAVAN, 7 TH FLOOR, CHENNAI-34. VS M/S. SUNDARAM CLAYTON LTD. JAYALAKSHMI ESTATES, 29, HADDOWS ROAD, NUNGAMBAKKAM, CHENNAI-600 006. PAN: AAACS4920J ( /APPELLANT) ( /RESPONDENT/CROSS OBJECTOR) / APPELLANT BY : MR. A.V.SREEKANTH, JCIT /RESPONDENT BY : MR. R.VIJAYARAGHAVAN, ADVOCATE /DATE OF HEARING : 2 ND JULY, 2015 /DATE OF PRONOUNCEMENT : 19 TH AUGUST, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THE APPEAL AND CROSS OBJECTION ARE FILED BY THE REVENUE AND THE ASSESSEE RESPECTIVELY AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)- VI, CHENN AI DATED 30.07.2014 FOR THE ASSESSMENT YEAR 2010-11. T HE ISSUE IN THE APPEAL OF THE REVENUE IS THAT COMMISSI ONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE DISALLOW ANCE MADE ON THE COMPONENT OF INTEREST AMOUNT OF ` 2,66,89,000/- OUT OF TOTAL DISALLOWANCE UNDER SECTION 14A OF THE ACT. 2 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 2. BRIEF FACTS ARE THAT THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED ` 3,02,07,000/- UNDER SECTION 14A AS EXPENSES ATTRIBUTABLE FOR EARNING D IVIDEND INCOME OF ` 13,95,75,006/-. THE SAID AMOUNT OF ` 3,02,07,000/- COMPRISES OF INTEREST OF ` 2,66,89,000/- UNDER RULE 8D(II) AND ` 35,18,000/- BEING 0.5% OF AVERAGE INVESTMENTS UNDER RULE 8D(2)(III). ON APPEAL, COMMI SSIONER OF INCOME TAX (APPEALS) DELETED THE INTEREST COMPON ENT OF ` 2,66,89,000/- HOLDING THAT NONE OF THE BORROWED FUN DS HAVE BEEN USED DIRECTLY OR INDIRECTLY FOR MAKING INVESTM ENTS, ALL THE INVESTMENTS WERE MADE IN EARLIER YEARS AND THE COMP ANY HAS SUFFICIENT OWN FUNDS FOR MAKING INVESTMENTS. THE RE VENUE CAME UP IN APPEAL BEFORE US CHALLENGING THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E INTEREST COMPONENT OF ` 2,66,89,000/- MADE UNDER SECTION 14A OF THE ACT. 3. THE ASSESSEE FILED CROSS OBJECTION FOR SUSTAINI NG THE DISALLOWANCE TO THE EXTENT OF 0.5% OF AVERAGE INVES TMENTS DISALLOWED UNDER SECTION 14A READ WITH RULE 8D(2)( III) OF THE ACT. 3 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 4. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING ` 3.02 CRORES INVOKING PROVISIONS OF SECTION 14A READ WITH RULE 8 D OF THE ACT. 5. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSI ONS MADE BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS ) AND SUBMITS THAT INVESTMENTS ARE NOT MADE OUT OF BO RROWED FUNDS AND THEY WERE MADE IN EARLIER YEARS OUT OF OW N FUNDS, THEREFORE HE SUBMITS THAT NO DISALLOWANCE IS WARRAN TED TO THE EXTENT OF INTEREST COMPONENT. COMING TO THE DISALLO WANCE IN RESPECT OF RULE 8D(2)(III) I.E. 0.5% OF AVERAGE INV ESTMENTS AT ` 35,18,000/- COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE ITSELF HAS DISALLOWED ` 27,87,500/- AS EXPENSES ATTRIBUTABLE FOR EARNING DIVIDEND INCOME WHICH IS R EASONABLE. 6. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES. THE ISSUE IN APPEAL HAS BEEN ELABORATELY CONSIDERED BY THE COMMISSIONER OF INCOME TAX (APPEALS) WITH REFERENCE TO THE SUBMISSIONS MADE BY THE ASSESSEE AND THE OBSERVATIO NS OF THE ASSESSING OFFICER AND PARTLY SUSTAINED THE DISA LLOWANCE 4 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 TO THE EXTENT OF ` 35,18,000/- AND DELETING THE INTEREST COMPONENT OF ` 2,66,89,000/- OBSERVING AS UNDER:- 5.2.2 THE AR OF THE APPELLANT ALSO DRAWN TO MY ATTENTION THE ORDER PASSED BY CIT(A) IN ITA NO.39 & 394/2011-12 DATED 28.03.2013 FOR THE A.Y. 2009-10 IN THE APPELLANT'S OWN CASE WHEREIN THE DISALLOWANCE OF INTEREST EXPENSE UNDER RULE 8D(II) WAS DELETED BY MY PREDECESSOR ON THE GROUND THAT OWN FUNDS WERE DEPLOYED FOR MAKING INVESTMENTS. I HAVE CONSIDERED THE FINDINGS OF THE AO AS WELL AS THE SUBMISSIONS MADE BY THE AR OF THE APPELLANT ON THIS ISSUE CAREFULLY. I HAVE ALSO GONE THROUGH THE COMMISSIONER (APPEALS) ORDER FOR THE ASST. YEAR 2009- 10 IN ITA NOS 39&394/2011-12 DATED 28.03.2013 RELIED ON BY THE APPELLANT. I FIND THAT THERE IS CONSIDERABLE FORCE IN THE SUBMISSIONS OF THE APPELLANT. THE APPELLANT SUBMITTED THAT NONE OF THE BORROWED FUNDS HAVE BEEN USED DIRECTLY OR INDIRECTLY FOR MAKING THE INVESTMENTS. THE APPELLANT ALSO SUBMITTED THAT FOR ALL THE INVESTMENTS MADE IN EARLIER YEARS, THE COMPANY HAS SUFFICIENT OWN FUNDS FOR MAKING THE INVESTMENTS. THE APPELLANT HAS CLEARLY ESTABLISHED WITH THE FINANCIAL STATEMENTS FOR THE PERIOD FROM 2001-02 TO 2009-10 THAT (A) IT HAD SUFFICIENT FUNDS TO MAKE THE INVESTMENTS (B) IT HAD SUFFICIENT PROFITS IN THE EARLIER YEARS WHEN THE INVESTMENTS WERE MADE (C) AND IN ALL THE YEARS THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF THE BUSINESS AND (D)THE BORROWED FUNDS WERE ACTUALLY REDUCED TO RS.28869.44 LAKHS AS ON 31.03.2010 COMPARED TO RS.33929.88 LAKHS AS ON 31.03.2009. 5 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 ON THE OTHER HAND, THE AO ESTIMATED THE DISALLOWANCE OF INTEREST AMOUNT WITHOUT ANY MATERIAL PLACING ON THE RECORD. THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF HDFC BANK LTD. CITED (SUPRA) EXPLAINED THE LEGAL POSITION OF LAW IN PARA 5 OF THE ORDER DATED 27.03.2014 AS UNDER: 'WE FIND THAT FACTS OF THE PRESENT CASE ARE SQUARELY COVERED BY THE JUDGEMENT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA). THE FINDING OF THE FACT GIVEN BY THE ITAT IN THE PRESENT CASE IS THAT THE ASSESEE'S OWN FUNDS AND OTHER NON-INTEREST BEARING FUNDS WERE MORE THAN THE INVESTMENT IN TAX FREE SECURITIES. THIS FACTUAL POSITION IS NOT ONE THAT IS DISPUTED. IN THE PRESENT CASE, UNDISPUTEDLY THE ASSESEE'S CAPITAL, PROFIT AND RESERVE, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN THE TAX FREE SECURITIES. IN VIEW OF THIS FACTUAL POSITION, AS PER THE JUDGEMENT OF THIS COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD.(SUPRA), IT WOULD HAVE TO BE PRESUMED THAT INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESEE.' APPLYING THE ABOVE PRINCIPLES TO THE FACTS OF THE CASE, IT IS PRESUMED THAT THE APPELLANT HAD MADE INVESTMENTS ONLY OUT OF THE SURPLUS FUNDS AVAILABLE FROM THE EARLIER YEARS. RESPECTFULLY FOLLOWING THE DECISION OF THE HIGH COURT OF BOMBAY IN THE CASE OF HDFC BANK LTD. CITED (SUPRA), DECISION OF THE LEARNED CIT(APPEALS) IN THE APPELLANT'S OWN CASE FOR THE A.Y. 2009-10, I AM FULLY CONVINCED THAT THE AO HAS LEGALLY ERRED IN MAKING DISALLOWANCE ON THE COMPONENT OF INTEREST. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND LEGAL POSITION, I AM OF THE CONSIDERATE VIEW 6 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 THAT THERE CAN BE NO DISALLOWANCE IN SO FAR AS INTEREST OF BORROWINGS IS CONCERNED U/S 14A. THE AO, THEREFORE, IS DIRECTED TO DELETE THE INTEREST AMOUNT OF RS.2,66,89,000/- OUT OF THE TOTAL AMOUNT OF RS.3,02,07,000/-. HENCE, THIS GROUND OF APPEAL IS ALLOWED. 5.2.3 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE AR OF THE APPELLANT WAS REQUIRED TO GIVE EXPLANATION AS TO BASIS OF ALLOCATION OF EXPENSE OF RS.27,87,500/- IN RELATION TO EXEMPT INCOME. TO THIS QUERY, THE AR OF THE APPELLANT FAILED TO GIVE BASIS FOR ALLOCATION OF THE EXPENSE. HOWEVER, IN THE ANNUAL ACCOUNTS, THE APPELLANT CLAIMED HUGE EXPENSE FOR EARNING EXEMPT INCOME AND NON-EXEMPT INCOME. NO SEPARATE ACCOUNTS ARE MAINTAINED FOR EARNING EXEMPT INCOME. THE SIZE OF THE INVESTMENT PORTFOLIO WAS RS.73.43 CRORES WHICH IS HUGE. I AM OF THE VIEW THAT THE AO HAS CORRECTLY APPLIED THE PROVISIONS OF SEC.14A READ WITH RULE 8D AND APPLIED 0.5% OF AVERAGE INVESTMENTS WHICH WORK OUT TO RS.35,18,000/- WHICH IS REASONABLE AND JUSTIFIABLE. THIS GROUND OF APPEAL, AS IT RELATES TO DISALLOWANCE OF 0.5% OF AVERAGE INVESTMENTS AS EXPENDITURE IS CONFIRMED. THE TOTAL DISALLOWANCE U/S 14A IS RESTRICTED TO RS.35,18,000/-. HENCE GROUND NO.2 OF THE APPEAL RELATING TO DISALLOWANCE OF EXPENDITURE FOR EARNING THE EXEMPT INCOME U/S 14A IS TREATED AS PARTLY ALLOWED. 7. ON GOING THROUGH THE ABOVE ORDER OF THE COMMISSI ONER OF INCOME TAX (APPEALS), WE DO NOT FIND ANY VALID R EASON TO INTERFERE WITH HIS FINDINGS IN PARTLY DELETING THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. THE REVENUE ALSO DID NOT REBUT THE FINDINGS OF THE COMMISSIONER OF INCOME TA X 7 ITA NO.2612/MDS/2014 & C.O. NO.137/MDS/2014 (APPEALS) WITH EVIDENCES. THUS, WE SUSTAIN THE ORDE R OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND REJECT THE GROUNDS OF APPEAL RAISED BY THE REVENUE. 8. AS WE HAVE SUSTAINED THE ORDER OF THE COMMISSION ER OF INCOME TAX (APPEALS), THE CROSS OBJECTION FILED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER IN SUSTAINI NG THE DISALLOWANCE TO THE EXTENT OF 0.5% OF AVERAGE INVES TMENTS IS ALSO DISMISSED. 9. IN THE RESULT, BOTH THE APPEAL OF THE REVENUE A ND CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH AUGUST, 2015. SD/- SD/- ( ) ( ' $ ) ( CHANDRA POOJARI ) ( CHALLA NAGENDRA PRASAD ) & / ACCOUNTANT MEMBER $' & / JUDICIAL MEMBER $ /CHENNAI, ) /DATED 19 TH AUGUST, 2015 SOMU ',- .- /COPY TO: 1. ASSESSEE 2 ASSESSING OFFICER 3. / () /CIT(A) 4. / /CIT 5. - ''3 /DR 6. 6 /GF .