THE DCIT, Hyderabad V. M/s Sri Vasavi Industries Limited, Hyderabad

ITA 100/HYD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3331 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-05-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 22-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Keywords: Business expenditure; Notional interest; Revenue expenditure; Capital expenditure; Set aside
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.100/HYD/2010 ASSESSMENT YEAR : 2002-03 THE DY. CIT, CIRCLE 3(2), HYDERABAD VS M/S SRI VASAVI INDUSTRIES LTD., BANJARA HILLS, HYDERABAD PAN AADES 1262 L APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVAS RESPONDENT BY : SHRI MURALI MOHAN RAO ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE REVENUE IS DIR ECTED AGAINST THE ORDER PASSED BY THE CIT(A) TIRUPATHI DATED 30.10. 2009 AND PERTAINS TO THE ASSESSMENT YEAR 2002-03. 2. THE FIRST CONSTRUCTIVE GROUND IN THE REVENUE A PPEAL IS THAT THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER IN DISALLOWING THE FEE PAID TO ROC FOR INCREASE OF AUTHORISED CAPI TAL. 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSE E HAS PAID ROC FOR INCREASE OF AUTHORISED CAPITAL WHICH IS CLAIMED AS A REVENUE EXPENDITURE. THE ASSESSING OFFICER HAS DISALLOWED THE SAME. ON APPEAL, THE CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO CONSIDER THE ALLO WABILITY OF THIS EXPENDITURE U/S 35D OF THE INCOME TAX ACT, 1961. 4. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THIS ISSUE WAS SQUARELY COVERED BY THE JUDGEMENT OF HONBLE SUPREM E COURT IN THE CASE OF BROOK BOND INDIA LTD. VS. CIT (225 ITR 798) (SC) W HEREIN IT WAS HELD THAT ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD THE EXPENDITURE PAID TO THE REGISTRAR COMPANIES AS FILING FEE FOR ENHANCEMENT OF THE SHARE CAPITAL WAS NOT REVENUE EX PENDITURE THOUGH IT WOULD CERTAINLY HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELP IN PROFIT MAKING, IT STILL RETAINS THE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE WAS DIRECTLY RELATED TO THE EXPANSION O F THE CAPITAL BASE OF THE COMPANY AND THEREFORE, THE ISSUE WAS DECIDED IN FAV OUR OF THE REVENUE. 5. RESPECTFULLY, FOLLOWING THE ABOVE JUDGEMENT O F THE HONBLE SUPREME COURT, WE ARE INCLINED TO REVERSE THE ORDER OF THE CIT(A) ON THIS ISSUE. 6. THE NEXT GROUND IN REVENUE APPEAL IS THAT THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER IN A DDING THE ACCRUED INTEREST ON DEPOSIT. THE ASSESSING OFFICER HAS TREATED TH E INTEREST AT 1% OF RS.34,305/- ON DEPOSIT OF RS.34,30,550/- WITH APSEB . 7. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSING OFFICER HAS TAKEN A NOTIONAL INTEREST OF 1% ON THE DEPOSIT OF R S.34,30,550/- WHICH IS TO BE SUSTAINED. ON THE OTHER HAND, THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE HAS SUBMITTED THAT THE DEPOSIT IN APSEB IS NOT INTEREST BEARING DEPOSIT. AFTER CAREFUL EXAMI NATION OF THIS ISSUE, WE ARE OF THE OPINION THAT THE FACT WHETHER THE DEPOSIT WI TH APSEB IS BEARING INTEREST OR NOT, IS NOT EXAMINED BY THE LOWER AUTHO RITIES. THE NATURE OF THE DEPOSIT IS REQUIRED TO BE EXAMINED BY THE ASSESSING OFFICER. IF IT IS INTEREST BEARING DEPOSIT THEN ONLY THE ASSESSING OFFICER HAS TO CONSIDER FOR ADDITION. WITH THIS REMARK, WE SET ASIDE THE ISSUE TO THE FIL E OF ASSESSING OFFICER FOR FRESH CONSIDERATION. 8. THE NEXT GROUND IS THAT THE CIT(A) OUGHT TO H AVE UPHELD THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING THE I NTEREST CAPITALISED IN THE BOOKS OF ACCOUNT. ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD 9. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSIN G OFFICER HAS ADDED THE AMOUNT REPRESENTING INTEREST ON TERM LOANS AS T HE SAME WAS ORIGINALLY CAPITALISED TO THE TERM LOANS BUT LATER CLAIMED IT AS REVENUE EXPENDITURE. FOR THIS, THE ASSESSING OFFICER HAS RELIED UPON THE DECISION OF THE TRIBUNAL, HYDERABAD IN THE CASE OF M/S NAGARJUNA FINANCE LTD. IN ITA NO.2969/88 WHEREIN IT HAS BEEN LAID DOWN THAT IT IS NOT PERMIS SIBLE FOR THE ASSESSEE TO IGNORE HIS OWN METHOD OF ACCOUNTING AND TO RECOMPUT ED THE RESULTS., CONTESTING THIS, BEFORE THE CIT(A), THE LEARNED AU THORIZED REPRESENTATIVE HAS FILED A COPY OF THE ORDER OF THIS TRIBUNAL IN A SSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998-99 WHEREIN THE TRIBUNAL HAS PE RMITTED DEDUCTION ON CAPITALISED INTEREST. IN VIEW OF THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE, THE CIT(A) OBSERVED THAT THIS ISSUE WAS COVE RED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEARS 1998-99 AND DELETED THE ADDITION. AGAINST THIS DELETION, THE REVENUE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. ADMITTEDLY, THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNA L IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1998-99. THE TRIBUNAL VIDE ITS ORDER DATED 29.10.2004 IN ITA NO.1091/H/2002 AND 965/H/2003 WHE REIN HELD AS FOLLOWS: 19. COMING TO THE DECISION OF THIS BENCH IN THE CA SE OF ITC, BHADRACHALAM PAPER BOARDS IN ITA NO.919/H/98 AND ITR NO.846/H/98 , VIDE ORDER DATED 20.2.2001 WHICH WAS RELIED UPON BY THE REVENUE, WE FIND THAT THE BENCH HAD FOLLOWED THE DECISION OF CALCUTTA TRIBUNAL IN THE C ASE OF JCT VS. ACIT (65 ITD 169) (CAL.) WHEREIN IT WAS HELD THAT SINCE THE ASSE SSEE HAD CAPITALISED ITS EXPENDITURE IN ITS BOOKS, IT IS NOT OPEN FOR IT, TO CLAIM IT IN THE INCOME TAX RETURNS AS REVENUE EXPENDITURE AND THAT THE ASSESSE E WAS STOPPED FROM CLAIMING THE SAME AS REVENUE EXPENDITURE. 20. WE FIND THAT THE LATER JUDGEMENT OF THE HONBL E CALCUTTA HIGH COURT HAS TAKEN A VIEW CONTRARY TO THAT TAKEN IN THE CASE OF JCT VS. IAC SUPRA. THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF TETRON C OMMERCIAL LTD. VS. CIT(A) REPORTED IN 261 ITR 422 HELD AS FOLLOWS: ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD WHETHER THE DEDUCTION U/S 36(1)(III) IS AVAILABLE OR NOT IS DEPENDENT ON THE QUESTION WHETHER THE CAPITAL BORROWED IS FOR TH E PURPOSE OF THE BUSINESS OF THE ASSESSEE. IF IT IS FOUND THAT THE CAPITAL WAS BORROWED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, THE IN TEREST PAYABLE THEREON, IS ADMISSIBLE UNDER THE SAID SECTION. IT IS IMMATERIAL WHETHER THE SAME IS IN THE NATURE OF CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. IF THE EXPENDITURE IS A BUSINESS EXPENDITURE RELATE S TO ANY STAGE OF THE BUSINESS, ACTIVITY CARRIED ON BY THE ASSESSEE, WHET HER AN ISOLATED TRANSACTION OR NOT, IT IS ADMISSIBLE FOR DEDUCTION UNDER THE SAID SECTION. A BUSINESS COMMENCES WITH THE ACTIVITIES UNDERTAKEN EVEN AT THE PREPARATORY STAGE FOR SETTING UP OF THE BUSINESS. ACQUISITION OF IMMOVABLE PROPERTY FOR BEING USED IN THE BUSINESS B Y BORROWED CAPITAL ENTITLES THE ASSESSEE TO CLAIM BENEFIT OF THE SECTI ON ON THE INTEREST PAID THEREON, EVEN IF THE ASSET ACQUIRED IS NOT UTILISED FOR THE PURPOSE OF BUSINESS IN THE RELEVANT PREVIOUS YEAR. THE VIEW IN JCT VS. IAC SUPRA IS AT VARIANCE WITH T HE PRONOUNCEMENTS OF VARIOUS HIGH COURTS AS WELL AS THE HONBLE SUPREME COURT CITED ABOVE. THUS, WE PREFER TO FOLLOW THE JUDGEMENTS OF THE VARIOUS H IGH COURTS REFERRED TO ABOVE TO THE DECISION OF THE CO-ORDINATING BENCH OF THIS TRIBUNAL AND ALOOW THE CLAIM OF THE ASSESSEE. THUS, WE HOLD THAT THE AS SESSEE HAS PAID INTEREST IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSI NESS AND THUS HAS TO BE ALLOWED U/S 36(1)(III) IRRESPECTIVE OF THE ENTRIES MADE IN THE BOOKS OF ACCOUNTS. 11. IN VIEW OF THE ABOVE FINDINGS OF THE TRIBUNAL , IN OUR OPINION, THE ENTRIES MADE IN THE BOOKS OF ACCOUNT IS IMMATERIAL TO ALLOW DEDUCTION U/S 36(I)(III) OF THE ACT. IN THE CASE BEFORE US, THE MAIN REASON FOR DISALLOWANCE IS THAT, THE ASSESSEE HAS MADE CLAIM U/S 37(1) AND NOT MADE CLAIM U/S 36(1)(III). BEING SO, WE DIRECT THE ASSESSING OFFI CER TO EXAMINE THE ALLOWABILITY OF IMPUGNED INTEREST U/S 36(1) (III) OF THE IT ACT, IN THE LIGHT OF THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE C ITED SUPRA, IF THE FACTS OF THE PRESENT IS SIMILAR TO THAT ONE CONSIDERED BY TH E TRIBUNAL FOR THE ASSESSMENT YEAR 1998-99. THE ISSUE IS SET ASIDE T O THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION. 12. THE LAST GROUND IN REVENUES APPEAL IS THAT T HE CIT(A) OUGHT TO HAVE APPRECIATED THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST PAYMENT ATTRIBUTABLE TO THE INVESTMENT IN THE GROUP COMPANY. 13. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSI NG OFFICER HAS DISALLOWED THIS NOTIONAL INTEREST OUT OF TOTAL INTE REST INCOME CLAIMED AS EXPENDITURE REASONING THAT THE ASSESSEE COMPANY HAS UTILISED THE BORROWED ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD FUNDS FOR INVESTMENT IN THE EQUITY OF M/S VASAVI HO LDINGS AND INVESTMENTS LTD. BY APPLYING SEC.14A. IN RESPONSE TO THIS, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS SUBMITTED THAT THE INVESTMENT MADE IN M/S VASAVI HOLDINGS IS A SWAP INVESTMENT WHEREIN NO FUNDS ARE TRANSFERRED EITHER WAY. THE AR HAS EXPLAINED THAT IN ORDER TO AVAIL HIGHER CREDIT FACILITY THE EQUITY CAPITAL HAS BEEN ENHANCE D BY ALLOTTING SHARES TO M/S VASAVI HOLDINGS. M/S VASAVI HOLDINGS IN TURN H AS, INSTEAD OF TRANSFERRING FUNDS TOWARDS THIS EQUITY, HAVE ALLOTT ED SHARES IN ITS COMPANY TO THE ASSESSEE COMPANY. THUS, THE AR HAS PLEADED THAT IT IS ONLY A JOURNAL ENTRY CATEGORIZED AS SWAP INVESTMENT WITH NO OUTGO OF THE FUND. HE DREW OUR ATTENTION TO THE REMAND REPORT DATED 25.3.2009 OF THE ASSESSING OFFICER, WHILE THE ASSESSING OFFICER ACCEPTING THE PRINCIPLE OF SWAP INVESTMENT HAS QUESTIONED THE MORAL BASIS OF SUCH A TRANSACTION AN D CLAIMED THAT THE TRANSACTION IS PROHIBITED BY LAW. ACCORDING TO THE AR, IT IS A SWAP INVESTMENT AMONG THE GROUP COMPANIES, IN ORDER TO O BTAIN HIGHER LOAN FACILITIES FOR THE ASSESSEE COMPANY WHICH IS INCURR ING HEAVY LOSSES. SUCH A TRANSACTION IS NEITHER IMMORAL NOR PROHIBITED BY LA W AS THE ALLOTMENT OF EQUITY IN BOTH THE INSTANCES IS AS PER THE COMPANY LAW. THE OBJECTION OF THE ASSESSING OFFICER IS FRIVOLOUS. THE DR STRONGLY RE LIED ON THE ASSESSMENT ORDER AND THE REMAND REPORT OF THE ASSESSING OFFICE R. 14. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. ADMITTEDLY, IN THIS CASE, THE ASSESSEE HAS MADE INVESTMENTS IN THE SISTER CONCERN. IN RETURN THE SISTER CONCERN HAS MADE INVESTMENT IN TH E EQUITY SHARES OF THE ASSESSEE COMPANY. THE ASSESSING OFFICER HAS INVOKE D THE PROVISIONS OF SECTION 14A OF THE ACT. THE CIT(A) HAS NOT EXAMINE D THE APPLICABILITY OF THE SECTION 14A AND ALLOWED THE CLAIM OF THE ASSESSEE B Y HOLDING THAT THE INVESTMENTS MADE BY THE ASSESSEE IS NOT IMMORAL AN D PROHIBITED BY LAW. NEITHER THE ASSESSING OFFICER NOR THE CIT(A) IN THI S CASE HAS EXAMINED THE FACT WHETHER THE ASSESSEE COMPANY IS HAVING NON-INT EREST BEARING FUNDS AT ITS DISPOSAL TO INVEST IN THE SISTER CONCERN. THE ASSESSEE IS REQUIRED TO DEMONSTRATE THE AVAILABILITY OF NON INTEREST BEARIN G FUNDS TO INVEST WITH THE ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD SISTER CONCERN AND THE QUESTION OF THE SISTER CONCE RN IN RETURN MAKING INVESTMENTS IS A SEPARATE ISSUE. THE USAGE OF FUN DS IS LEFT TO THE WISDOM OF THE SISTER CONCERN. IF THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS TO THE SISTER CONCERN, THEN THIS IMPUGNED INTEREST IS LIABLE TO BE DISALLOWED. IN OTHER WORDS, IF THE ASSESSEE USED THE SISTER CONCER N AS A CONDUIT TO DIVERT INTEREST BEARING FUNDS TO THE SISTER CONCERN, THEN THIS INTEREST IS TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THERE IS NO PAYMENT OF INTEREST ON THE FUND DIVERTED BY THE ASSESSEE. FURTHER, ONCE IT IS BORNE OUT OF THE RECORD THAT THE ASSESSEE HAS BORROWED CE RTAIN FUNDS ON WHICH INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRY ING ANY INTEREST OR LESS INTEREST WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THAT EXTENT OF ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO B E DISALLOWED U/S 36(1) (III) OF THE ACT. SUCH BORROWINGS TO THAT EXTENT C ANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE C ASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. ACCORDINGLY THE AS SESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON THE BORROWINGS TO TH AT EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS OR OTHER PERSONS WITHOU T INTEREST. THE ESTABLISHMENT OF NEXUS OF FUNDS BORROWED VIS--VIS FUNDS DIVERTED TOWARDS THE SISTER CONCERNS ON INTEREST FREE BASIS IS CONCE RNED, IN OUR VIEW, THAT THE ONUS OF PROVING THE NEXUS OF FUNDS AVAILABLE WITH T HE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTERE ST IS ON THE ASSESSEE. S.36(1)(III) OF THE ACT PROVIDES FOR DEDUCTION OF I NTEREST ON THE LOANS RAISED FOR BUSINESS PURPOSE. ONCE THE ASSESSEE CLAIMS AN Y SUCH DEDUCTION IN THE BOOKS OF ACCOUNTS, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS RAISED BY THE ASSESSEE, THE SAME WERE USED FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAM INATION OF GENUINENESS OF SUCH DEDUCTION, IF IT TRANSPIRES THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERNS, THERE WOULD BE A VERY HEAVY BU RDEN ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO THIS EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON BORROWINGS, STILL THERE IS A JU STIFICATION TO ADVANCE LOANS ITA NO.100/H/2010 M/S VASAVI INDUSTRIES LTD., HYDERABAD TO SISTER CONCERN WITHOUT ANY INTEREST. WITH THIS DIRECTION, WE SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER FOR FRESH CO NSIDERATION. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13. 5. 2011 SD/- G.C. GUPTA SD/- CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED 13 TH MAY, 2011 COPY FORWARDED TO: THE DY. CIT, CIRCLE 3(2), ROOM NO.723, 7 TH FLOOR, IT TOWERS, AC GUARDS, HYDERABAD-4. 1. M/S SRI VASAVI INDUSTRIES LTD., 2 ND FLOOR, SAGAR SOCIETY, ROAD NO.2, BANJARA HILLS, HYDERABAD 2. THE CIT(A) TIRUPATHI. 3. THE CIT, HYDERABAD 4. THE DR, ITAT, HYDERABAD NP