Agile Electric Sub Assembly Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

CO 82/CHNY/2015

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1382 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 28-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 13-07-2015
• Court: TRIBUNAL
• Department Lawyers: T BANUSEKAR
• Assessee Lawyers: V VIVEKANANDAN
• Keywords: Capital asset; Wholly owned subsidiary; Deemed dividend
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.1272 /MDS./2015 & C.O. NO.82/MDS/2015 ( ! '! / ASSESSMENT YEAR :2010-11) THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI 600 034. VS. M/S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD., (FORMERLY AGILE ELECTRIC DRIVES TECHNOLOGIES AND HOLDINGS PVT. LTD.) A-33, A34, & A36 PHASE-1, MEPZ- SEZ, TAMBARAM,CHENNAI 600 045. PAN AABCI 3929 C ( / APPELLANT ) ( RESPONDENT & CROSS - OBJECTOR ) #$ % & / APPELLANT BY : MR.V. VIVEKANANDAN, CIT DR '(#$ % & /RESPONDENT BY : MR.T. BANUSEKAR, CA ) * % +, / DATE OF HEARING : 28.10.2015 -' % +, /DATE OF PRONOUNCEMENT : 27.11.2015 ITA NO.1272 /MDS/2015 2 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER:- THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-1, CHENNA I DATED 28.01.2015 IN ITA NO.176/13-14/A-1 PASSED UNDER SEC .143(3) READ WITH SECTION SEC. 250 OF THE ACT. THE ASSESSEE HA S ALSO FILED CROSS OBJECTION AGAINST THE VERY SAME ORDER OF THE CIT(A) . 2. THE REVENUE HAS RAISED FOUR ELABORATE GROUNDS I N ITS APPEAL; HOWEVER THE CRUX OF THE ISSUES IS CONCISED HEREIN B ELOW FOR ADJUDICATION;- (1) THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO TAKE ONLY INVESTMENTS RS.7.72 CRORES WHILE WORKING OUT AVERAG E INVESTMENT FOR THE PURPOSE OF LIMB (III). (2) THE LEARNED CIT(A) ERRED IN DELETING THE INVES TMENTS MADE IN THE SUBSIDIARY COMPANIES WHILE ARRIVING AT THE A VERAGE INVESTMENTS IS NOT ACCEPTABLE AS SUCH INVESTMENTS A RE CAPABLE OF EARNING DIVIDEND INCOME. ITA NO.1272 /MDS/2015 3 (3) THE LEARNED CIT(A) ERRED IN DIRECTING THE AO T O WITHDRAW THE ADDITION MADE U/S. 2(22)(E) STATING THAT THE PR OVISIONS OF SEC.2(22)(E) ARE NOT ATTRACTED IN THE INSTANT CASE. 2.1. THE ASSESSEE HAS RAISED SEVEN GROUNDS IN ITS C ROSS OBJECTION, HOWEVER, THE CRUX OF THE ISSUE IS THAT THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) FOR HAVING FAILED T O APPRECIATE THAT THE PROVISIONS OF SECTION 14A READ WITH RULE 8D CANNOT BE INVOKED IN THE CASE OF THE ASSESSEE CONSIDERING THE FACTS AND CIRC UMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY ENGAGED IN MANUFACTURE OF COMPONENT S AND SUB ASSEMBLY FOR D.C. MOTORS, FILED ITS RETURN OF INCOM E FOR THE ASSESSMENT YEAR 2010-11 ON 12.10.2010 ADMITTING LOS S OF ` 2,48,37,432/-. SUBSEQUENTLY, THE RETURN WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED VIDE ORDER DATED 1 1.03.2013 WHEREIN THE LD. AO MADE DISALLOWED THE EXPENDITURE OF ` 2,64,09,499/- BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT ITA NO.1272 /MDS/2015 4 AND ALSO MADE ADDITION OF ` 7,26,03,874/- ON ACCOUNT OF SECTION 2(22)(E) OF THE ACT. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD. A.O THAT THE ASSESSEE-COMPANY HAD OBTAIN ED LOAN OF RS.15 CRORES FROM ITS SUBSIDIARY COMPANY M/S AGILE ELECTRICAL SUB ASSEMBLY PVT. LTD. IN ORDER TO REPAY THE LOAN RECEI VED FROM M/S IGARASHI MOTORS INDIA LTD.. THE ASSESSEE HAD OBTAIN ED THIS LOAN FOR PURCHASE OF 100% SHARES OF M/S AGILE ELECTRICAL SUB ASSEMBLY PVT. LTD AND M/S AGILE ELECTRICAL TECHNOLOGIES PVT. LTD. FROM M/S IGARASHI MOTORS INDIA LTD., DURING THE FINANCIAL YEAR 2008-0 9. AT THE TIME OF ASSESSMENT PROCEEDINGS THE LD. A.O INVOKED THE PROV ISIONS OF SECTION 14A READ WITH RULE 8D FOR HAVING INCURRED T HE EXPENDITURE ON INTEREST OF ` 74,39,591/- AGAINST THE LOAN TAKEN FROM THE SUBSIDI ARY COMPANY FOR RS.15 CRORES AND INTEREST PAYMENT OF RS .85,95,549 TO M/S IGARASHI MOTORS INDIA LTD., TOWARDS DEFERRED SE TTLEMENT OF DUES FOR THE PURCHASE OF THE SHARES. FURTHER THE LD.A.O ALSO INVOKED SECTION 2(22)(E) OF THE ACT SINCE THE ASSESSEE-COMP ANYS SUBSIDIARY COMPANY AGILE ELECTRICAL SUB ASSEMBLY PVT. LTD., FR OM WHOM THE ITA NO.1272 /MDS/2015 5 ASSESSEE-COMPANY HAD OBTAINED THE LOAN OF ` 15 CRORES HAD RESERVES AND SURPLUS TO THE TUNE OF ` 7,26,03,874/- AND THE ASSESSEE-COMPANY WAS THE BENEFICIAL SHAREHOLDER OF AGILE ELECTRICAL SUB ASSEMBLY PVT. LTD. 5.1 ON APPEAL WITH RESPECT TO THE DISALLOWANCE U/S 14A OF THE ACT, THE LD. CIT(A) DIRECTED THE LD. A.O TO REWORK THE D ISALLOWANCE BY DELETING THE INVESTMENT MADE IN THE ASSOCIATE COMPA NIES FOR ` 7.72 CRORES FOR THE PURPOSE OF WORKING OUT THE AVERAGE I NVESTMENT WHILE APPLYING RULE 8D(2)(III) BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SOUTHERN PETROCHEMICAL INDUSTRIES REPORTED IN 93 TTJ 161 AND ESCORTS LTD. REPORTED IN 102 TTJ 522. 5.2 WITH RESPECT TO THE INVOKING OF PROVISIONS OF S ECTION 2(22)(E) OF THE ACT THE LD. CIT(A) DELETED THE ADDITION BASED O N THE FINDING THAT THE ADVANCES GIVEN BY M/S AGILE ELECTRICAL SUB ASSE MBLY PVT. LTD. TO THE ASSESSEE-COMPANY IS UNDOUBTEDLY AN ADVANCE IN T HE ORDINARY COURSE OF BUSINESS. ITA NO.1272 /MDS/2015 6 6. LD. DR VEHEMENTLY ARGUED BEFORE US BY STATING TH AT THE PROVISIONS OF SECTION 14A AND RULE 8D WILL BE APPLI CABLE IN THE CASE OF THE ASSESSEE-COMPANY AND PLEADED THAT THE COMPUT ATION WORKED OUT BY THE LD. A.O MAY BE UPHELD. HE ALSO ARGUED O N THE APPLICABILITY OF SECTION 2(22)(E) OF THE ACT BY CIT ING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 7.1 WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PE RUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE I T IS APPARENT THAT THE ASSESSEE-COMPANY HAD ACQUIRED THE COMPANYS VIZ., M /S AGILE ELECTRICAL SUB ASSEMBLY PVT. LTD., AND M/S AGILE EL ECTRICAL TECHNOLOGIES WHICH ARE IN THE RELATED FIELDS OF BUS INESS TO THAT OF THE ASSESSEE COMPANYS BUSINESS. THE ENTIRE PROCESS OF CONSOLIDATION OF BUSINESS OF ALL THE THREE COMPANIES WAS MADE WIT H AN INTENTION FOR DERIVING STRATEGICAL BENEFITS. THESE FACTS ARE NOT DISPUTED. IN SIMILAR CIRCUMSTANCE, HONBLE KARNATAKA HIGH COURT IN M/S B AGMANE CONSTRUCTIONS PVT. LTD. V. CIT DATED 16 TH SEPTEMBER, 2014 HAS HELD AS UNDER:- ITA NO.1272 /MDS/2015 7 DEEMED DIVIDEND - TRADE ADVANCES - RECEIPT OF ADVA NCES FROM SISTER CONCERN - WHETHER ANY PAYMENT BY A COMPANY BY WAY O F ADVANCE OR LOAN TO A SHAREHOLDER OR TO ANY CONCERN MADE UNDER SECTION 2(22) (E) OF THE INCOME TAX ACT, 1961, TO THE EXTENT TO WHICH THE COMPANY P OSSESSED THE ACCUMULATED PROFITS INCLUDES A TRADE ADVANCE AND CO NSTITUTES DEEMED DIVIDEND - HELD THAT: PURPOSE OF THE INSERTION OF S UB-CLAUSE (E) OF SECTION 2(22) OF THE ACT WAS TO BRING WITHIN THE TAX NET AC CUMULATED PROFITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO HIS SHAREH OLDERS IN THE FORM OF LOANS TO AVOID PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115-0 OF THE ACT. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOS ELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MANNER THAT T HEY ASSIST THE SHAREHOLDERS IN AVOIDING PAYMENT OF TAX BY HAVING THESE COMPANIE S PAY OR DISTRIBUTE MONEY IN THE FORM OF ADVANCE OR LOAN. LOAN OR ADVAN CE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, UNDER NORMAL CIRCUMST ANCES WOULD NOT QUALIFY AS DIVIDEND, IF SUCH LOAN OR ADVANCE IS GIVEN TO SU CH SHAREHOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION WHICH IS B ENEFICIAL TO THE COMPANY RECEIVED FROM SUCH A SHAREHOLDER, IN SUCH CASE, SUC H ADVANCE OR LOAN CANNOT BE SAID TO A DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPA NIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN W HICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BE HALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER, IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. IT IS SO MADE BY LEGAL FICTION CREATED UNDER SECTION 2(22)(E ) OF THE ACT. EVEN IF THE ACCUMULATED PROFIT WHICH OUGHT TO HAVE BEEN PAID TO THE SHAREHOLDERS AS THE DIVIDEND PAID TO A SISTER CONCE RN FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSETS OR AS A CONSIDERATION FOR THE GOODS RECEIVED WHICH IS REQUIRED FOR CARRYING ON THE BUSINESS, IT WOULD HOT FALL WITHIN THE ITA NO.1272 /MDS/2015 8 DEFINITION OF SECTION 2(22)(E) OF THE ACT AS THE OB JECT WAS NOT TO PAY THE SAID AMOUNT TO THE SHAREHOLDERS AFTER AVOIDING PAYMENT O F DIVIDEND DISTRIBUTION TAX UNDER SECTION 115-0 OF THE ACT. IN THAT VIEW OF THE MATTER, IT IS NOT POSSIBLE TO ACCEPT THE INTERPRETATION SOUGHT TO BE PLACED BY TH E REVENUE. HAVING REGARD TO THE PLAIN WORDS USED IN CLAUSE (E) TO ANY CONCERN, WHEN THE AMOUNT IS PAID OR WHEN ANY PAYMENT IS MADE TO A CONCERN, THE TAX IS LEVIED ON THE CONCERN AND NOT ON THE SHAREHO LDERS. AS FAR AS THIS QUESTION IS CONCERNED, THIS COURT FOLLOWING THE JUD GMENT OF THE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TA X VS UNIVERSAL MEDICARE (P) LIMITED REPORTED IN [2010 (3) TMI 323 - BOMBAY HIGH COURT] HAS CATEGORICALLY HELD THAT WHEN ANY PAYMENT IS MADE BY A COMPANY TO ANY CONCERN, WHICH FALLS UNDER CLAUSE (E ), THE TAX IS LEVIABLE ON THE SHAREHOLDER ONLY AND NOT ON THE CONCERN - TH EREFORE, THE FINDING RECORDED BY THE TRIBUNAL THAT, THESE ADVANCES MADE BY THE BDPL TO THE SISTER CONCERN AS WELL AS TO ITS SHAREHOLDER DO NOT CONSTITUTE DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, IS LEGA L AND VALID AND DO NOT CALL FOR ANY INTERFERENCE. - DECIDED IN FAVOUR OF A SSESSEE. THE JURISDICTIONAL HIGH COURT IN THE CASE CIT V. MA DURAI CHETTIYAR KARTHIKEYAN REPORTED IN 223 TAXMAN 350, IT HAS BEEN CATEGORICALLY HELD THAT TRADE ADVANCE IN RELATION TO BUSINESS TRA NSACTION CANNOT BE TREATED AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT . IN THE PRESENT CASE BEFORE US, THE ENTIRE TRANSACTION HAS BEEN MAD E WITH A VIEW TO CONSOLIDATE THE BUSINESS OF THE ASSESSEE AND THEREB Y DERIVE BENEFIT BY STALLING COMPETITION. FURTHER, IN THE CASE FARI DA HOLDINGS PVT. LTD. ITA NO.1272 /MDS/2015 9 V. DCIT DECIDED BY THE CHENNAI BENCH OF THE TRIBUNA L REPORTED IN 51 SOT 452, IT HAS BEEN HELD THAT REGULAR BUSINESS TRA NSACTION CARRIED ON BY THE ASSESSEE IN ITS ORDINARY COURSE OF BUSINE SS CANNOT BE TREATED DEEMED DIVIDEND FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT. FOLLOWING THE ABOVE CITED DECISIONS, WE HEREB Y HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 2(22 )(E) OF THE ACT WILL NOT BE APPLICABLE BECAUSE THERE IS A CLOSE NEXUS BE TWEEN THE BUSINESS ACTIVITY OF THE ASSESSEE-COMPANY AND ITS S ISTER CONCERN AND THE LOAN RECEIVED FROM THE ASSESSEES SISTER CONCER N IS UTILIZED FOR THE VERY PURPOSE OF ACQUIRING THE SHARES OF THE SISTER CONCERN ITSELF IN ORDER TO HAVE A STRATEGICAL EDGE OVER THE COMPETING BUSINESS ENVIRONMENT. THE BENEFIT OF THE ENTIRE TRANSACTION HAS FLOWED TO THE ASSESSEES SISTER COMPANY ALSO BECAUSE THE ASSESSEE HAD OBTAINED THE LOAN FROM ITS SISTER COMPANY IN ORDER TO PURCHA SE THE SHARES OF THE VERY SAME SISTER COMPANY AND THUS AVOID THE PER ILS OF THOSE SHARES BEING HELD BY TWO ENTITIES THUS ENDANGERING ITS EXISTENCE. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. ITA NO.1272 /MDS/2015 10 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF TH E ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. M OREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOW S:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBS IDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITA L GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASS ESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL I NVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF THE ASS ESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXP EDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVES TMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED F OR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED T O RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE REST RAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. ITA NO.1272 /MDS/2015 11 8. ACCORDINGLY, ALL THE GROUNDS RAISED BY THE REVEN UE ARE HELD AGAINST IT AND CONSEQUENTIALLY THE GROUNDS RAISED I N THE CROSS OBJECTION BY THE ASSESSEE ARE DECIDED IN ITS FAVOUR . 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D AND THE CROSS-OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 27 TH NOVEMBER, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . !' # ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED 27 TH NOVEMBER,2015. K S SUNDARAM. % '+./ 0 /'+ /COPY TO: 1. #$ /APPELLANT 2. '(#$ /RESPONDENT 3. ) 1+ () /CIT(A) 4. ) 1+ /CIT 5. /4 '+5 /DR 6. 6! 7* /GF